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Petitioner: C.I.T., L.T.U., LAHORE and others VS Respondent: ALLIED BANK OF PAKISTAN LIMITED, KARACHI (NTN-07-11-1710523) and others
Court Name: Appellate Tribunal Inland Revenue Judge(s): Javed Iqbal, Khawaja Farooq Saeed, Abdul Rauf, Ikram Ullah Ghauri Title:C.I.T., L.T.U., LAHORE and others vs ALLIED BANK OF PAKISTAN LIMITED, KARACHI
(NTN-07-11-1710523) and others Case No.:I.T.As. Nos.4063/LB, 4064/LB 997/IB, 6023/LB, 6024/LB, 6106/LB of 2004, 6022/LB of 2003, 6029/LB, 5005/LB, 5006/LB, 4997/LB, 5000/LB to 5002/LB, 7141/LB, 7142/LB of 2005, 1146/LB, 1294/LB, 1209/LB, 1292/LB, 471//IB, 81/IB, 82/IB, 472/IB, 1067/IB, 1127/IB, 883/LB, 800/LB, of 2006, 654/LB of 2007, 651/LB, 710/LB, 439/IB, 424/IB to 427/IB, 367/IB, 368/IB of 2008, 305/LB, 914/LB to 916/LB of 2009, Date of Judgment:2011-02-10 Reported As: 2012 PTD (Trib.) 1139 Result: Order accordingly Judgment ORDER This Larger Bench was constituted to decide the controversy which had arisen with regard to dis- allowance of bad debts claimed by adopting mercantile system of accounts by the various banks. Since it is only the above issue which is to be decided by this Larger Bench, the counsels of the taxpayers were asked to prepare a common question in order to restrict the finding by this Bench to the said extent only. The Bench therefore, shall decide the following common question framed by the taxpayers as well as the revenue while other issues shall be disposed by the respective Division Benches before whom the same shall be placed by the respective Rosters. The question in issue is as follows:-- "Whether on facts and in the circumstances of the case the receivable amount could be written of by debiting it in the Profit and loss Account as expenditure, with the nomenclature `provision for bad debts' or not." The taxpayers counsel Dr. Ikram-ul-Haq taking the lead at the very outset commented that this Tribunal has decided this issue in a long line of judgments among which the one which in his opinion is more comprehensive and has thken care of all the respective arguments is reported 2006 PTD 1784 (Trib.). This judgment is in the case of Soneri Bank and was
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recorded in a Reference Application filed by the Revenue. This Tribunal while declining to refer the question of law has dilated upon each and every aspect with regard to the issue under discussion. The new controversy emerged when a judgment decided by the Hon'ble High Court of Sindh came to the knowledge of the Revenue wherein the Hon'ble Court has refused to admit a question of law proposed by a taxpayer bank. The A.R. Says that the department has not only mis-understood the ratio decidendi of the referred judgment but has also started ignoring the clear ratio of the judgments of this court as well as the other superior courts. He commented that although the said judgment is no more in field as there is again a very clear and unequivocal finding by the same Hon'ble High Court which has now been recorded as 2006 PTD 1400, the revenue is still taking an incorrect stand. The learned counsel further elaborated that the order which is now being followed by the Revenue officer in terms of I.T.A. No.565 of 2000 dated 1-3-2006 is neither a judgment in terms of Article 201 of the Constitution being a Kacha order nor it has come out with a ratio decidendi. In any case there being another judgment which has decided the issue with clarity and is required to be followed in terms of the Article referred supra there is no question of any exception. The arguments advanced by the learned counsel were adopted by Mr. Naveed A. Andrabi, advocate. Besides, he further pointed out that it is only the Hon'ble Supreme Court of Pakistan whose `obiter dicta' is binding on all subordinate courts and administrative authorities and not of the other courts of the country. Still further it is a decided principle of law that in revenue Cases it is the substance of the thing which is to be looked into and not on the basis of the nomenclature. It is true that Banks as per the requirement of the Prudential Banking Regulations of the State Bank of Pakistan project it as 'provision of bad debts', but in actual form the same is a reduction from the profit. The use of nomenclature for the same as 'provision' does not restrict the actual substance of the claim. He remarked that in the prime and landmark judgment of the Hon'ble High Court Sindh in the case of National Bank of Pakistan reported as 1976 PTD 237 this matter has been dilated thoroughly and, in fact, after the said judgment as well as the other judgments in field including 2006 PTD 1784 (Trib.) referred supra the matter should have come to an end. He commented that this judgment referred by the Tribunal has attained finality in the manner that there is no issue pending with the regard thereto either before the High Court or the Supreme Court of Pakistan. Since it is more comprehensive and well reasoned judgment in addition to the fact that no adverse order has been passed by the superior courts to demolish the ratio settled therein the deviation by the Revenue is un-called for, the A.R. Remarked. Needless to say that now with the latest judgment of the High Court Sindh no additional argument would be required. He further produced various judgments in support of his other arguments with regard to the principles of interpretation. His main arguments are as follows:-- (i) That accounts of the banks are maintained strictly under International Accounting Systems read with S.E.C.P. Laws as well as Prudential Banking Regulations of the State Bank of Pakistan. (ii) That 'provision for bad debts' is only a nomenclature. However, it does not convey the substance. The entry in fact amounts to actual 'written of' as the same amount has actually been reduced from the accounts. (i.e) That there is no bar in law to maintain hybrid system of accounts i.e. a part Mercantile and the other part in cash receipt basis. (iv) That the Kacha judgment of the Hon'able Sindh High Court in terms of I.T.A. No.565 mentioned supra is not a judgment; hence does not have any binding effect. (v) That principle of stare decisis clearly envisages that the judgment which is late in sequence has a more binding force. (vi) That it is only the ratio decidendi of the Hon'ble High Court which is binding.
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(vii) Even otherwise the referred judgment being in ignorance of the relevant provision as well as the settled ratio of the judgment of the High Court of Pakistan in terms of 1976 PTD 237 supra is a judgment per in curium. Mian Ashiq Hussain, the learned counsel adopted the earlier arguments. He submitted for other cases in support of the above contentions. However, he has argued the case from another angle. In his opinion this aspect has not been discussed in the earlier judgments. The jist of his claim is that the business of the taxpayers being of Banking the money is a stock in trade. It is in strict observation of the laws of the land in terms of Prudential Banking Regulations that the debt is shown as irrecoverable. The loss of the bank in fact is much more than what it is gaining by reducing this amount from its income. This, therefore, is a trade loss and no embargo has been imposed on the claim of the assessee being a trading loss. Further explaining his case he pointed out that in the case of his bank i.e. Al-Baraka Islamic Bank the amount is reduced from the outstanding loan in the very accounts itself and has not been claimed either under section 22 of the erstwhile Income Tax Ordinance. 1979 or the corresponding provisions in the Income Tax Ordinance, 2001. He remarked that since it is not a revenue claim, hence the departmental objections with regard to lessor efforts for its collection etc. Becomes irrelevant. In support of his claim that the money is stock in trade he has placed reliance on 1982 PTD 20 re: Dawji Dada Bhai and Lo v. The Commissioner of Income Tax (West) Karachi, (1985) 55 ITR, 707 (SC of India), 2006 PTD 1400 and 2006 PTD 1784 (Trib.). The other counsel advanced some arguments, however, the same being more or less on the same as above are not separately added.. The Revenue case, on the other hand, remains that the referred judgment of I.T.A. 565 of 2000 of the Sindh High Court supra is a clear cut direction and needs to be followed in the interest of the Revenue. Their emphasis was that the department is being deprived of its well deserved revenue through mis-use of the discretion and without making any real effort to collect the same from the defaulters. It was further commented that it amounts to providing benefit to the indolence of the assessee. Having heard the concerned parties and after going through the record, going through the relevant provisions shall be of help. The comparable provision of law in various Income Tax Laws is as follows:-- "A. SECTION 10(2)(XI) OF INCOME TAX ACT, 1922 S. 10. Business.---(1) Subject to the provisions of this Act, the tax shall be payable by an assessee under the head Profits and gains of business, profession or vocation in respect of the profits or gains of any business or vocation carried on by him. (2) Subject to the provisions of this Act such profits or gains shall be computed after making the. Following allowances, namely:-- (xi) when the assessee's accounts in respect of any part of his business, profession or vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts; due to the assessee in respect of that part of his business, profession or vocation and in the case of an assessee carrying on a banking or money -lending business, such sum in respect of loans made in the ordinary course of such business as the Income-tax Officer may estimate to be irrecoverable but not exceeding the amount actually written of as irrecoverable in the books of assessee: Provided that where any such debt or loan or part thereof has already been written of as irrecoverable in the accounts of the assessee for an earlier previous year and it was not allowed to be deducted on the grounds that it had not become irrecoverable in that year, the Income-tax Officer shall, on being satisfied that it became irrecoverable in a subsequent previous year, allow It to be deducted in that previous year:
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Provided further that where any such debt, or loan or part thereof is written of as irrecoverable in the accounts of the assessee for a previous year and the Income Tax Officer is satisfied that such debt or loan or part thereof became ' irrecoverable in an earlier previous year not falling beyond a period of four years immediately preceding the previous year in which it was written of, the Income Tax Officer may, notwithstanding anything contained in this Act, allow such debt, loan or part thereof as a deduction for such earlier previous year if the assessee accepts such finding of the Income Tax Officer and recomputed the total income of the assessee for such earlier previous year and make the necessary amendment; and the provisions of section 35 shall, so far as may be, apply thereto, the period of four years referred to in subsection (1) of that section being reckoned from the end of the year in which the assessm ent relating to the previous year in which the debt or loan or part thereof is written of was made: Provided further that if the amount ultimately recovered on any such debt or loan is greater than the difference- between the whole debt or loan and the amount so allowed, the excess shah be deemed to be a profit of the year in which it is recovered and if less, the deficiency shall be deemed to be a business expense of that year. (B) SECTION 23(1)(x) OF INCOME TAX ORDINANCE, 1979 (23) Deductions.---(1) In computing the income under the head "Income from business or profession", the following allowances and deductions shall be made, namely:-- (x) in respect of bad debts, such amount (not exceeding the amount actually written of by the assessee) as may be determined by the Deputy Commissioner to be irrecoverable; (C) SECTION 29 OF INCOME TAX ORDINANCE, 2001 (29) Bad debts.---(1) A person shall be allowed a deduction for a bad debt in a tax year if the following conditions are satisfied, namely:-- (a) The amount of the debt was-- (i) previously included in the person's income from business chargeable to tax; or (ii) in respect of money lent by a financial institution in deriving income from business chargeable to tax; (b) the debt or part of the debt is written of in the accounts of the person in the tax year; and (c) there are reasonable grounds for believing that the debt is irrecoverable. (2) The amount of the deduction allowed to a person under this section for a tax year shall not exceed the amount of the debt written of in the accounts of the person in the tax year. (3) Where a person has been allowed a deduction in a tax year for a bad debt and in a subsequent tax year the person receives in cash or kind any amount in respect of that debt, the following rules shall apply, namely:-- (a) where the amount received exceeds the difference between the whole of such bad debt and the amount previously allowed as a deduction under this section, the excess shall be included in the person's income under the head "Income from Business" for the tax year in which it was received; or (b) where the amount received is less than the difference between the whole of such bad debt and the amount allowed as a deduction under this section, the shortfall shall be allowed as a bad debt deduction in computing the person's income under the head "Income from Business" for the tax year in which it was received. (D) SECTION 36(2) OF INDIAN INCOME TAX ACT, 1961 36. Other deductions (2) In making any deduction for a bad debt or part thereof, the following provisions shall apply- (i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of
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such debt or part thereof is written of or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee; (ii) if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made; (i.e) any such debt or part of debt may be deducted if it has already been written of as irrecoverable in the account of an earlier previous year (being a previous year relevant to the assessm ent year commencing on the 1st day of April, 1988, or any earlier assessment year), but the Assessing Officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year; (iv) where any such debt or part of debt is written of as irrecoverable in the accounts of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessm ent year) and the Assessing Officer is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written of, the provisions of subsection (6) of section 155 shall applly; (v) where such debt or part of debt relates to advances made by an assessee to which clause (viia) of subsection (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause. An analysis of above sections show that conditions laid down for allowability of bad debt as deduction in the case of banks and other money-lending institutions are the same as envisaged in section 10(2)(xi) of Income Tax Act, 1922 and section 23(1)(x) of Income Tax Ordinance, 1979." This has been observed by this Tribunal in its judgment reported as 2006 PTD (Trib.) 2784. This court in the judgment reported supra has also held that "Bad Debts" and "Doubtful Debts" are synonymous. Its meanings and effects, are also similar. It has further been held in Hong Kong and Shanghai Banking Corporation v. CIT (1955) 28 ITR 199, that the two words 'bad' and 'doubtful' are always applied adjectively to the same class of debts, meaning debts of which the chance of recovery is 'nil' or slender." The C.B.R. In its Circular No.13(26)-IT/1/74 dated 2-7-1975 also has endorsed this view in the following manner:-- "It may, however. Be noted that as held in the case cited as Hong Kong and Shanghai Banking Corporation v. CIT (1955) 28 ITR 199 the expression 'bad and doubtful debts' do not contemplate two kinds of debts but refers to the same class of debts viz., debts of which the chance of recovery is nil Or slender." This court in the judgment referred supra reported as 2006 PTD (Trib.) 2784 has observed as follows:-- "It is pertinent to mention that expression 'bad debt' or 'doubtful debts' were held to be contemplating the same kind of debts and hence interchangeable in Hong Kong and Shanghai Banking Corporation v. CIT (1955) 28 ITR 199. The Central Board of Revenue itself accepted this legal position in letter No.13(26) IT/I/74 dated 2-7-1975 as under:-- "It may, however, be noted that as held in the case cited as Hong Kong and Shanghai Banking Corporation v. CIT (1955) 28 ITR 199 "the expression 'bad and doubtful debts' do not contemplate two kinds of debts but refers to the same class of debts viz., debts of which the chance of recovery is nil or slender." Now we shall come to the judgment in J.T.A. No.565 of 2000 which has vehemently been challenged to be as distinguishable by the tax payers. In our opinion this judgment is wrongly relied upon by the Department, and three judgments of the learned Tribunal, namely Standard Chartered Bank Ltd. (I.T.As. Nos.1302 to 1304, 1595 to 1598/KB/2003 and I.T.A. No.131/KB/2005 dated 14-1-2009),
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Jahangir Siddiqui Investment Bank Ltd. (I.T.As. Nos.861 and 862/KB/2009 dated 2-6-2010 and Bank Al-Falah Ltd. (I.T.As. Nos.502 to 506/KB of 2009 dated 1-7-2010), based on it, were reached per incuriam due to lack of assistance by the Department and representatives of the taxpayers. Tribunal for adjudication. The Chairman Panel observed in order passed under section 62 of the repealed Income Tax Ordinance, 1979 for the assessment year 1988-1989 as under:-- "During the year under consideration, the assessee claimed provisions for bad and doubtful debts and provisions for loss on account of frauds and forgeries aggregating to Rs.8,I33,926. The amount has been deducted in the computation sheet. The provisions relate to various years starting from assessm ent years 77-78 to 87-88." "Assessee claimed them in the past but the same were disallowed during the course of assessm ents for the relevant year. These disallowances of specific provisions were confirmed in appeal by the learned Income Tax Appellate Tribunal." The observation of learned Commissioner (Appeals) in his order dated 13-2-1990:-- "This debt was disallowed in the assessment year 1977-1978 and has been claimed by the appellant during the year under consideration. After the expiry of 11 years the appellant could not recover the debts. This alone proves that there is no ray of hope of recovery of such debts. Considering these facts the disallowances out of specific provision for bad and doubtful debts which were disallowed in the assessment years 1977-1978 to 1982-1983 and claimed afresh during the year under consideration are being allowed to the appellant." Observation of learned Tribunal in order dated 21-12-1999. From the above quotation it is obvious that in the said case claim of the same 'bad debt' for earlier years was pending before appellate forums while it was again claimed in the year under appeal. It was again claimed twice hence its allowance was obviously not possible. The department's reliance on the above judgment of Sindh High-Court in Grindlays Bank (I.T.A. No.565 of 2000 dated 2006) is without realizing that it is distinguishable not only on facts but also being not a valid authority for the reason cited in Trustees of the Port of Karachi v. Muhammad Saleem 1994 SCMR 2213 as under:-- ................ a case is only an authority for what it actually decides. I entirely deny that it can be quoted for a proposition that may seem to follow logically from it." The above judgment of honourable apex Court was followed by the honourable Lahore High Court in Shahtaj Sugar Mills Ltd. Through Chief Executive v. G. A. Jahangir and 2 others 2004 PTD 1621 with the following observations:-- "In re: Trustees of the Port of Karachi v. Muhammad Saleem (1994 SCMR 2213) the Hon'ble Supreme Court of Pakistan referred to the dictum settled in (1898) AC 375 and Quinn v. Leathern (1901) AC 495 to affirm the basic principle of law of precedent, as we understand it in common law, that every judgment must be read as applicable to the peculiar facts proved, or assumed to be proved., Further that generality of the expressions which may be found in the judgement are not intended to be expositions of the whole law, that governed and qualified by the particular facts of the case in which such expression are to be found. In view of their Lordships a case was only an authority for what it actually decided and that it would not be quoted for a proposition that may seem to follow logically from it." It is worth mentioning here that in the above judgment, three reported judgments, namely CIT v. National Bank of Pakistan 1976 PTD 237, CIT' v. Grindlays Bank Ltd. 1991 PTD 569 and CIT v. Agricultural Development Bank of Pakistan 1992 PTD 39 of honourable Sindh High Court are conspicuous by their absence. Under the established principle of stare decisis, the honourable Sindh High Court could not take adifferent view in the presence of these judgments as held by the honourable Supreme Court in PLD 1995 Supreme Court 423.
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The fact is that honourable Sindh High decided the matter in view of circumstances bf the case where the provisions were reclaimed when the claim was still alive in the year of write of before Tribunal. In view of this particular situation the question was answered in favour of the Revenue by the Sindh High Court. This aspect escaped the attention of this learned Tribunal when deciding the cases of Standard Chartered Bank Ltd. (I.T.As. Nos.1302 to 1304, 1595 to 1598/KB/2003 and I.T.A. No.131/KB/2005 dated 14-1-2009), Jahangir Siddiqui Investment Bank Ltd. (I.T.As. Nos.861 and 862/KB/2009 dated 2- 6-2010 and Bank AlFalah Ltd. (I.T.As. Nos.502 to 506/KB of 2009 dated 1-7-2010). The correct position of law is again reiterated by the honourable Sindh High Court in I.T.R.A. No. 219 of 2008 re: CIT v. Security Leasing Corporation Ltd. (i) Whether on the facts and in the circumstances of the case, the learned ITAT was justified to hold that the amount of receivable could be written of by only creating the provision without actually crediting the accounts of debtors? (ii) Whether on the facts and in the circumstances of the case, the provision for receivables is an admissible deduction under section 29 of the Income Tax Ordinance, 2001 without crediting the said provision to the individual debtor's account? The honourable Sindh High Court has reaffirmed its earlier judgment re: CIT v. National Bank of Pakistan, Karachi 1976 PTD 237. It also quoted Manual of Instructions issued by FBR on the issue and answered both the questions in affirmative. i.e. Against the Revenue and in favour of the taxpayer. Relevant part of the judgment is reproduced below:-- "A perusal of the judgment, specially para 5 of the judgment in Jwala Prasad Tinwari's case, leads to the conclusion that for the purpose of writing of, as mentioned in section 29, and the pari materia statute of the other Statutes it has been defined. This para is reproduced for the sake of convenience: "(5) "Writing of" is a technical term used by financiers and auditors. There are two methods of dealing with a debt which has been written of in the books of account, (1) by giving the corresponding credit to the debtor's account, and (2) by giving the corresponding credit to the bad and doubtful debts account. The first method is only employed where it is desired to close the account of the debtor. The second method is employed where there are some chances of recovery, howsoever remote they may be. When we talk of "writing of" we are not concerned with the credit to be given to an account. "Writing of" means the raising of a debit entry. This can only be to the debit of the profit and loss account. This is the only debit which can possibly be raised as a result of writing of a bad debt." We also consider it relevant to reproduce the instruction given by the CBR in sub-para. (2) of Para. 23.8 of its Manual of Instructions:--…
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