Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: PAKISTAN SERVICES LIMITED VS Respondent: COMMISSIONER OF INCOME TAX (REVISION), JUDGMENT
Court Name: Supreme Court of Pakistan Judge(s): Nasim Hasan Shah, Muhammad Afzal Zullah, Shafi-ur-Rehman Title:PAKISTAN SERVICES LIMITED vs COMMISSIONER OF INCOME TAX (REVISION),
JUDGMENT
Reported As: 1993 PTD 1047 Result: Order accordingly Judgment JUDGMENT SHAFIUR RAHMAN, J.---Leave to appeal was granted in Civil Appeal No,60-K/1987 to the assessee of Income-tax to examine the question whether the High Court had not erred in taking too restricted meaning of the word "discarded" used in section 10 (2) (vii) of the Income-tax Act, 1922 so as to exclude abandoned property and thereby to deprive the assessee of the trading losses suffered on account of it. This question was to be examined alongwith others arising in the case. ' The question on which leave to appeal was granted to the assessee (in Civil Appeal No,60-K/1987) is also involved in the following appeals filed by the Commissioner of Income-Tax:-- (1) Civil Appeal No, 523-K of 1987, arising out of judgment of High Court dated 12-10-1987; (2) Civil Appeals Nos. 573-K, 247-K to 252-K and 254-K to 258-K of 1990, arising out of judgment dated 4-11-1987; (3) Civil Appeal No, 253-K of 1990, arising out of judgment dated 8-12-1987; (4) Civil Appeal No, 568-K of 1990, arising out of judgment dated 20-4-1988; (5) Civil Appeal No, 710-K of 1990, arising out of judgment dated 26-9-1988; (6) Civil Appeal No, 711-K of 1990, arising out of judgment dated 30-11-1988;
---
## Page 2
(7) Civil Appeal No, 613-K of 1990, arising out of judgment dated 15-8-1989; (8) Civil Appeal No, 225-K of 1991, arising out of judgment dated 2-5-1991. ' In the first instance, we will deal with Civil Appeal No,60-K of 1987 filed by the assessee, arising out of judgment dated 24-4-1986, and then the others mentioned above filed by the Commissioner of Income Tax. 2. The assessee/appellant in CA. No, 60-K/87 is a public company limited by shares and owned Intercontinental Hotels throughout Pakistan including one in Dacca in East Pakistan in the year 1971. As a result of the disturbances followed by war in December, 1971, the appellant was forced to discard or abandon its Dacca Intercontinental Hotel which was subsequently acquired under the Bangladesh Abandoned Property Control, Management and Disposal Order, 1972 (President's Order No,16 of 1972 -- hereinafter referred to as the P.O. No, 16 of 1972) on the 28th of February, 1972 by the Bangladesh Government. The written down value of this Hotel including the buildings, machinery, plant and furniture was at the relevant time Rs,4,33,44,772. In the accounting year 1973 and the Income-tax year 1974-75, the appellant claimed a trading loss of this amount from its profits and gains under section 10 (2) (vii) of the Income-tax Act. The Income-tax Officer by a very short order rejected this claim observing as hereunder:-- 'This is not admissible in law and the claim is disallowed." 3. An appeal was taken to the Appellate Assistant Commissioner who also rejected the claim observing as hereunder:-- "Having considered the facts and circumstances of the case, I am of the opinion that the disallowance has properly been made by the Assessing Officer and this view gets support from several decisions of the learned Income-tax Appellate Tribunal. The issue stands decided elaborately by the Tribunal vide I.TA. No, 4593/KB/1973-74, dated the 30th June, 1976, and I.TA. No, 662/KB/74-75, dated 1-10-1976. Following the decision of the learned. Income-tax Appellate Tribunal, the disallowance made by the Assessing Officer is upheld in respect of the loss of fixed assets in East Pakistan." 4. A revision under section 33A (1) was thereafter filed which too failed. The Revising Authority/Commissioner of Income-Tax (Revision) held as hereunder:-- "I have considered the merits of the case and hold that the loss in question is a capital loss." 5. The appellant thereafter filed a Constitution Petition in the High Court. The two grounds taken up in the Constitution Petition were that the fixed assets like the building, the machinery, the plant and-the furniture stood discarded or abandoned on account of the circumstances beyond the control of the assessee and also that it was compulsorily acquired by the President of Bangladesh without payment of any compensation and both these events entitled the assessee to the benefit of section 10 (2) (vii) of the Income-tax Act. ' It appears that in the arguments only one ground was pressed before the High Court and that was of discarding of the fixed assets on account of circumstances beyond the control of the assessee. This was examined by the High Court and the plea was rejected observing as hereunder:- "The abandonment of hotel and assets was therefore, clearly due to reason over which the petitioner had no control whatsoever. Such abandonment of assets by the petitioner, cannot be construed as their discarding and as such, the same cannot fall within the purview of clause (vii) of section 19 (2) of the Income Tax Act so as to entitle the petitioner to claim deduction as aforesaid. It is, therefore, clear that the petitioner did not discard its asset in Dacca, within the meaning of clause (vii) of section 10 (2) and as such it is not entitled to claim any deductions thereunder." ' The writ petition was consequently dismissed. 6. Mr. Fakhruddin G. Ebrahim, Senior Advocate, the learned counsel for the appellant in an attempt to make out a clear case of concession under clause (vii) of section 10 (2) of the Income Tax Act referred to the following decisions of various Courts and Tribunals:--
---
## Page 3
(i) C.I.T. v. National Bank Limited (S.C.) India (1965) 55 I.T.R. Wherein loss on account of dacoity was allowed under clause (vii) of section 10 (2). (ii) (1964) 54 I.T.R. (Sh. N.) 14, where loss on account of war was allowed under this provision of law. (iii) PLD 1963 Karachi 48 upheld by the Supreme Court in PLD 1966 SC 510 where loss on account of robbery of cash was allowed under this provision of law. (iv) PLD 1962 Lahore 779 (Case of Australia Bank Ltd.). (v) Case of Chitnvis (AIR 1932 Privy Council 178). (vi) 59 Indian Appeals 290. 7. The learned counsel for the appellant has also filed copies of certain decisions of the Tribunal where a contrary view has been taken on the same subject in the income-tax hierarchy. For example, in Income Tax Appeal No,287/KB/1975-76 (M/s. Avery Scales Ltd., Karachi v. The Income Tax Officer, Company Circle-VII, Karachi), the Tribunal came to the following conclusion:-- "A reading of the above provisions shows that this allowance is admissible even in respect of the assets which are discarded and "discard" in the dictionary meaning includes "abandonment" as well. ' Therefore, the acquisition of the assets by a competent authority is not the sole criterion for the application of this provision. The assesse appellant had, in its letter dated the 5th November 1974 clearly intimated to the Income Tax Officer in para. (5) thereof that the business in East Pakistan had remained abandoned. In these circumstances the assessee-appellant's claim would very well be covered by this provision. Therefore, there is no reason why the appellant assessee's claim should have been thrown out summarily and in the manner the officers below had done. The Income Tax Officer would re-examine the position on the basis of the written down value and allow the claim now." ' In another case I.T.A. No, 4593/KB of 1973-74 (M/s. United Liner Agencies of Pakistan Ltd., Karachi v. The Income Tax Officer, Company Circle-IV, Karachi), the Tribunal has interpreted the word "discard" in the following manner not beneficial to the assessee:-- "The word 'discard' means a voluntary abandoment. It shows a volition and is not the result of an act of God or of a usurper. In this case admittedly no volition was exercised by the assessee. Therefore section 10(2)(vii) could not be pressed into service. The appellant did not press ground No,2." ' In yet another appeal, I.T.A. No, 273/KB of 1978-79 M/s. Glaxo Laboratories (Pakistan) Limited, Karachi v. The I.T.O., the view taken by the Tribunal on the same question was as hereunder:-- "Therefore the recognition of Bangladesh Government by the Government of Pakistan had turned an illegal authority into a juridical and legal authority and the date of recognition would determine the date of acquisition by a competent authority. We, therefore, cannot escape from the conclusion that the property did stand acquired by a competent authority on 22-2-1974." 8. The learned counsel for the appellant has further contended that having accepted that the word "discard" has also the meaning of "abandonment", the High Court could not have given a restricted interpretation to the provision of law with a view to exclude the meaning of "abandonment" from the word "discard". 9. No doubt the extended meaning of "discard" given in the dictionary includes "abandonment". However, all abandonment of property cannot and does not amount to discarding of the property. The word "discard" entails a choice, a selection, a voluntary act of leaving behind, causing of, leaving or abandoning. Without such a choice, selection or volition, the word "discarded" would be inappropriate to use. For example, if one was made to forcibly leave his house, that would not amount to discarding the house. 10. The learned counsel for the appellant, however, is on a stronger footing in contending that taking a general view of what happened in East Pakistan and Bangladesh in respect of this or such
---
## Page 4
properties it cannot but be said to be compulsory acquisition of the property by a competent authority After the Bangladesh unilaterally declared its independence of Pakistan, there followed in 1972 P.O. 16 of 1972. By this such properties were compulsorily acquired by the Government of Bangladesh. This was followed by recognition of Bangladesh as an independent country by the Government of Pakistan on 4-5-1974 vide Constitution (First Amendment) Act, 1974 (Act XXXIII of 1974). 11. The High Court of Sindh while dealing with the very same question in various Income Tax References, as distinguished from a Constitution Petition, held by its judgments dated 12-10-1987, 4-11-1987, 8-12-1987, 20-4-1988, 26-9-1988, 30-11-1988, 15-8-1989 and 2-5-1991 that such acquisition of assets amounted to compulsory acquisition by the competent authority and the loss was admissible under section 10(2)(vii) of the Income Tax Act. It is these orders which have led to other appeals which are under consideration alongwith the appeal arising out of the Constitution Petition i,e,, Civil Appeal No,60-K/1987. 12. The President of Peoples Republic of Bangladesh promulgated on the 28th February, 1972, the Bangladesh Abandoned Property (Control, Management and Disposal) Order, 1972 (President's Order No,16 of 1972). `Abandoned property' was defined in a manner to include "any property owned by any person who is a citizen of a State which at any time after the 25th day of March, 1971, was at war with or engaged in military operations against the Peoples Republic of Bangladesh". It also included "any property owned by any person who is not present in Bangladesh" and the Explanation extended the presence in Bangladesh to "any body of persons or company constituted or incorporated in the territory or under the laws of a State which at any time after the 25th day of March, 1971, was at war with or engaged in military operations against the People's Republic of Bangladesh". 'Company' was defined to include "a banking company and insurance company". 'Property' was defined to include "property of any kind, movable or immovable" and inclusive of "any right or interest in such property and any debt or actionable claim, any security or negotiable instrument, any right under a contract and any industrial or commercial undertaking". 'Security' included "share, scrip, stock, bond, debenture, debenture stock or other marketable security of a like nature in or of anybody corporate and Government securtiy". By its Article 4, P.O. No, 16 of 1972 provided that "on the commencement of this Order, all abandoned properties in Bangladesh shall vest in the Government and shall be administered, controlled, managed and disposed of, by transfer or otherwise, in accordance with the provisions of this Order". ' This Order (P.O. No, 16 of 1972) had the effect of compulsory acquisition of the assets of the assessee-companies -- whatever its form or nature. The subsequent recognition of the Bangladesh State by the Government of Pakistan in 1974 had the effect of retrospectively recognizing it from the date of its creation and on that score, making the acquisition of such properties by authority competent and recognized so by the Government of Pakistan to acquire it. 13. The fact of recognition of Bangladesh as an independent State has more than one implication. The general law on the subject as contained in Corpus Juris Secundum is as hereunder:-- 'Recognition is a political act which, when accorded by the authorized political department, will be accepted as conclusive by the Courts. Recognition as a de facto Government is sufficient... ... ...Recognition is retrospective, dating from the original assertion of sovereignty, so as to validate the acts of the recognized Government. In this respect it is all one whether the foreign Government has been recognized as a Government de jure or de facto. Recognition by the United States Government of a foreign Government operates to validate from the beginning the decrees of the foreign Government confiscating and nationalizing property, including property within the United States where such property is embraced by the foreign decree. In such case the national policy is paramount and overrides any contrary local public policy of the individual States, and the foreign
---
## Page 5
decrees will be fully recognized and enforced as to local assets, at least where no local creditors have an interest." 14. The British law on the subject is found in Volume 18 of Halsbury's Laws of England (Fourth Edition) in paragraph 1433 as hereunder:-- "1433. Legal effects of recognition.---The recognition of a foreign Government by the Crown reverses the consequences of nonrecognition. A recognised Government may sue, and may claim sovereign immunity if sued, in an English Court. Acts of a recognised Government are generally recognised as valid and are given effect in accordance with the rules of the conflict of laws. Thus, contracts made with and by a foreign recognised Government are valid and enforceable, and legislative and executive acts such as decrees affecting property within the State whose territory is administered by a recognised Government and legislation winding up or affecting a company incorporated there will be given effect in the English Courts, so long as they conform to international law and public policy. A recognised Government may claim the public property of the State and the records and State archives deposited in England by a previous Government. Further, the acts of a recognised Government will not be treated as the acts of a usurped authority within the meaning of a general insurance policy, even though the Government has some to power by revolutionary means;' 15. The International law on the subject of recognition of a State is found in Article 75 of Oppenheim's International Law (Volume I) as hereunder:- "Among the more important consequences which flow from the recognition of a new Government or State are these: (1) it thereby acquires the capacity to enter into diplomatic relations with other States and to make treaties with them; (2) within limitations which are far from being clear, former treaties (if any) concluded between the two States, assuming it to be an old State and not a newly- born one, are automatically revived and come into force; (3) it thereby acquires the right, which, at any rate according to English law, it did not previously possess, of suing in the Courts of law of the recognising State; (4) it thereby acquires for itself and its property immunity from the jurisdiction of the Courts of law of the State recognising it and the ancillary rights which are discussed later -- an immunity which, according to English law at any rate, it does not enjoy before recognition. (5) It also becomes entitled to demand and receive possession of property situate within the jurisdiction of a recognising State, which formerly belonged to the preceding Government at the time of its supersession. (6) Recognition being retroactive and dating back to the moment at which the newly-recognised Government established itself in power, its effect is to preclude the Courts of law of the recognising State from questioning the legality or validity of the acts both legislative and executive, past and future, of that Government; it therefore validates, so far as concerns those Courts of law, certain transfers of property and other transactions which before recognition they would have treated as invalid." 16. The particular argument that when P.O. No,16 of 1972 was passed, the Bangladesh Government was not recognised and the retrospective effect of recognition cannot make competent something which was ab initio incompetent was taken note of in Aksionairnoye Obschestvo Dlia Mechanicheskoyi Obrabotky Diereva v. James Sagor and Company (1921) 3 K.B. 532 at page 549 as hereunder:-- "But then it is said that at the time when the legislative or executive acts were done the persons assuming to act as the Government of Russia had not been recognized by this country, and those acts therefore are not entitled to the respect due to the acts of an independent sovereign State. This contention raises the question whether recognition is retroactive to any and what extent. Assuming that the acts in question are those of the Government subsequently recognized I should have thought that in principle recognition would be retroactive at any rate to such date as our Government accept as that by which the Government in question in fact established its authority. It
---
## Page 6
appears from the letter of the Foreign Office dated April 22, 1921, that that date is anterior to any of the events material to the present case. "Recognition is the act through which it becomes apparent that an old State is ready to deal with a new state as an international person and a member of the family of nations". If this is so then provided the act in question was an act of the State so recognized it must, in my opinion, be entitled to the same respect as the act of a sovereign State, whether done before or after recognition." 17. This subject has been dealt with in two American cases also. In United States of America v. Morgan Belmont and Eleanor R. Belmont (301 U.S. 324 =81 Led. 113) it was held that judicial notice can be taken of the recognition of a foreign Government, and the effect of recognition is to validate all acts of such Government from the commencement of its existence: In the other case, United States of America v. Louis H. Pink (315 US 203 =86 L ed 796) it was held that recognition of a foreign Government was a political question and judicial notice of it can be taken and the laws of that country so recognised given effect to. 18. The effect of the law so far discussed is that the acquisition of the properties of the assessee will be taken to be compulsory and by the competent authority, and the cause of action for claiming relief in respect of such properties will arise not retroactively from the date Bangladesh declared independence or the P.O. No,16 of 1972 was promulgated but from the date it was recognized by the Government of Pakistan. On that view of the matter, the High Court judgments on this point would appear to be correct notwithstanding the technical objections that one of the conditions of the proviso namely, that the written down value was not scored off in the books of account or that the assessm ent year relevant for claiming concession was 1972-73, the independence of Bangladesh having been declared in 1971. With these general observations it has become necessary to examine the facts of each of the other appeals individually. CA. No, 523-K/90 CIT v. MIs. Ali Muhammad H.K. Dada: 19. For the assessm ent year 1972-73 (the year ending on 30th March, 1972) the respondent- assessee claimed capital loss in the shares and bad debts written off in respect of the nationalized companies incorporated in Burma and East Pakistan. These were not allowed by the Income-Tax Officer and by the Appellate Assistant Commissioner. The Tribunal, however, allowed these losses by an order dated 9-2-1976 as hereunder:-- "In our opinion the appellant was in possession of sufficient evidence to entitle him to claim these losses of capital and we do not find any justification for the Income-tax Officer's observations that the appellant could not produce any evidence. After all what other evidence could be produced for the assets lost in an alien country in the circumstances in which the appellant is placed. The action of the Income-tax officer at the same time is not consistent with the action of his counterpart i,e, the Wealth Tax Officer who has accepted this loss and we shall accordingly vacate the Income-tax Officer's order in this behalf and direct him to scrutinize the evidence that has been discussed above and allow the loss that the appellant is able to establish in Burma. ' The appellant also claimed a loss of Rs,1,220 being the cost of shares of the companies registered in East Pakistan. The Income-tax Officer disallowed the same on the simple plea that these were dormant assets and could not be allowed in view of the instructions contained in the Central Board of Revenue's Circular No,11 dated 28-11-1972. The appellant's plea is that the Central Board of Revenue's circular, referred to above by the Income-tax Officer does not contain any such instructions. It is stated that no value has to be assigned to these shares even for the Wealth tax purposes. So far as the assessee is concerned, he has lost these assets. We agree with the appellant's contention that these assets have also been lost and, therefore, these should be treated as capital case." ' The Tribunal refused to refer the question of law arising therein whereupon the Commissioner of Income Tax sought directly reference of the following question of law:--
---
## Page 7
"Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in holding that a sum of Rs,7,396 being cost of shares of a company registered in East Pakistan (now Bangladesh) should be treated as capital loss and be allowed accordingly?" ' The High Court, as in other cases, allowed the claim agreeing with the Tribunal's decision. CA. No, 573-K11990 CIT v. M/s. United Bank Limited. : 20. For the assessm ent year 1973-74 the assessee, a Banking Company claimed depreciation allowance under section 10 (2) of the Income Tax Act on assets lying in East Pakistan. It was denied to it by the Income-Tax Officer as well as by the Appellate Assistant Commissioner. The Income Tax Appellate Tribunal also upheld that decision observing as hereunder:- "The appellant pressed grounds Nos.4 and 5 only. The assessee claimed depreciation allowance under section 10 (2) on assets lying in East Pakistan, without declaring any income or loss from its Branches in East Pakistan. The accounting year of the assessee was calendar year 1972 for the assessment year 1973-74. As no income from business was declared by the appellant or considered by the department the question of allowing depreciation on the assets lying in East Pakistan could not arise." 21. On an application by the assessee to refer the question of law, the Tribunal declined it treating the matter to be time-barred whereupon an application was filed directly in the High Court. In the statement of the case the only point of law formulated was as hereunder:-- "Whether on the facts and in the circumstances of the case the Tribunal was justified in not allowing the loss under section 10(2)(vii) of the Income Tax Act in respect of the assessee's business assets lying in East Pakistan?" ' The High Court decided the question of law in assesee's favour. C.A. No,247-K/1990. CIT v. M/s. Asbestos Cement Industries Ltd.: 22. For the assessm ent year 1973-74 (year ending 30-64973) the respondent-assessee claimed Rs,49,35,259 for loss of fixed assets in East Pakistan under section 10(2)(vii) of the Income Tax Act. The Income Tax Officer disallowed it. So did the Appellate Assistant Commissioner. The Appellate Tribunal also upheld this disallowance. Nevertheless, the Tribunal referred the following questions of law to the High Court: "(0 On the facts and in the circumstances of the case was the Tribunal right in holding that the Government of Bangladesh was not a `Competent Authority' within…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.