1982 PLP 294 (PTD)

K. A. GHANI, J.‑‑This is an application made under section 66 (1) of the Income‑tax Act (hereinafter referred as the said Act) moved by the applicant company registered outside Pakistan, but has its offices in Karachi.

2. Following questions have been raised as questions of law arising out of the orders of the Tribunal passed on 5‑1‑1973 in I. T. R. No. 157 of 1973 :‑ "(1) Whether in the facts and circumstances of the case the Tribunal is right in holding that the applicants' losses determined for assessment year 1955‑56 in the status of "Resident & Ordinary Resident" cannot be set off under section 24 (2) of the Income‑tax Act against profits determined for Assessment year 1956‑57 and later years only because the applicant's residential status in assessment year 1956‑57 and later years was determined as "Non‑Resident "? (2) Whether the Tribunal is right in interpreting its order dated 19th June, 1962 in I. T. A. No. 241 of 1961‑62 to the effect that "losses, if any, to be carried forward should be duly set off against income or profit computed" as meaning that what was legally permissible should be done ?

3. The statement of facts of the above case giving rise to this application and the questions raised is reproduced hereinbelow :‑ "(1) The applicant is a Company registered in United Kingdom and carrying on the business of banking throughout the world including Pakistan. (2) That for the assessment year 1955‑56 the appellant filed return in Pakistan showing profit from Pakistan business and loss in business done outside. The Income‑tax Officer, however, made the assessment in the status of "Non‑Resident" and subjected the Pakistan Income to tax. (3) The applicant filed a direct appeal to the Income‑tax Appellate Tribunal which was registered as I. T. A. No. 272 of 1960‑

61. The Tribunal, by its order dated 19th June, 1962 allowed the appeal "with direction that on the basis of all available material the income outside the taxable territories should be properly worked out and the residential status of the applicant should be determined correctly". (4) The Income‑tax Officer then made a fresh assessment and by his order dated 26th of September, 1968 determined the loss outside Pakistan at Rs. 67,60.306, and the income in Pakistan at Rs. 3,53,

064. There was income in Pakistan but loss outside Pakistan, so the Income Tax Officer determined the status of the applicant for assessment year 1955‑56 as "Resident And Ordinary Resident". The assessment was, thus made at a net loss of Rs.64,07,

242. The applicant has no grievance against this assessment and the assignment of the status for the assessment year 1955‑56. (5) For the assessment year 1956‑57 the original assessment was made on 17th of June, 1961 at an income of Rs. 8,87,700 in the status of "Non‑Resident". The Income‑tax Officer, however completely ignored the brought forward loss of assessment year 1955‑56 as originally he had made the assessment for the year in the status of Non‑Resident". The applicant filed a direct appeal to the Income‑tax Appellate Tribunal which was registered as I. T. A. No. 241 of 1961‑

62. The Tribunal, by its order dated 19th of June, 1962 set aside the Income tax Officer's order "with the direction that computation should be made afresh, liability should be determined properly and losses, if any, should be duly set off against income or profit computed." (6) The Income‑tax Officer made fresh assessment for the assessment years 1956‑57 and 1957‑58 by orders dated 26th of September, 1968. The assessment was made again on the same figure as in the original assessment. But the Income‑tax Officer refused to set off the brought forward loss of assessment year 1955‑56 against the profits of this year on the following grounds (i) As profits earned in branches outside Pakistan are not liable to taxa tion in Pakistan because the status of the assessee‑for the year under consideration 1. e. 1956‑57 is that of "NON‑RESIDENT", the loss of the preceding year from those branches cannot be carried forward and set off against the Pakistan profits. (ii) That in the case of Malwa United Mills v. C. I. T. 45 I T R 210 it has been held that the provision of section 24(1) has reference only to such profits or gains as are assessable in Pakistan. (7) Against this assessment the applicant filed an appeal to the Appellate Assistant Commissioner of Income‑tax. Before the Appellate Assistant Commissioner could decide the case. the post of Appellate Assistant Commissioner was abolished and all appeals pending before Appellate Assistant Commissioner stood transferred to the Income‑tax Appellate Tribunal. (8) That the Income‑tax Appellate Tribunal by order dated 5th January, 1973 dismissed the appeal on the ground that in an earlier case decided and reported as 1972 P T D (Trib.) 42 it has been laid down that in determining matters like carried forward and unabsorbed depreciation ere. residence of the tax‑payer plays an effective role and that on the change of the residential status in a subsequent year, unabsorbed losses incurred in the previous years against Pakistan profits or against foreign profits cannot be allowed as set off and that they will continue to be carried forward to be set off against profits in the year in which the residential status again is determined as Resident and Ordinary Resident. (9) The applicant had further urged before the Income‑tax Appellate Tribunal that in their decision given in I. T. A. No. 241 of 1961‑62 dated 19th of June, 1962 there was clear direction that losses, if any, to be brought forward should be duly set off against income or profit com puted and that this direction was not challenged by the Department at any time and for this reason so far as the applicant's case is con cerned, the losses should be allowed. The Tribunal, however, did not accept this contention and observed that the observation made in that decision meant that what was legally permissible should be done. (10) The applicant submits that the questions mentioned in the accom panying application are questions of law arising out of the Tribunal's order which the applicants referred to this Hon'ble Court for decision."

4. The learned counsel for the applicant submitted that in the relevant assessment year 1955‑56, the applicant was initially assessed in the status of non‑resident by the Income‑tax Officer. However by an order passed on 19th of June, 1962 the Tribunal, remanded the matter to the Income‑tax Officer with following observations :‑ "In view of what has been stated above the assessment for the year 1956‑57 and the two Business Profit Tax assessments stated above also cannot be sustained. These too, are set aside with the directions that computation should be made afresh, liabilities should be determined properly and losses, if any, to be brought forward should be duly set off against income or profit computed. Since however the income within Pakistan after remand, was determined by I. T. O. at Rs. 3,53,064 only, as against the loss of Rs. 67,60,306 outside Pakistan, the status of the applicant was found to be that of a resident and ordinary resident. This loss was to be set off against Pakistan income and the net loss of Rs. 64,07,242 was left to be carried forward to the next year. This loss‑pertained to the territories outside Pakistan. On the reassessment made pursuant to the orders dated 19‑6‑1962 fo assessment years 1955‑56 and 1956‑57, for the reason that status of applicant was determined as resident and ordinary resident for the year 1955‑56 and a that of non‑resident for 1956‑57, the mentioned losses which were left to be carried as claimed were ignored from consideration against income determined for the year 1956‑

57. For the assessment year 1957‑58, for the same reason the above‑mentioned foreign losses were again ignored while determining the taxable income under the Act, and were not allowed too be set off against income accruing in Pakistan.

5. This led to the filing of the present application reference.

6. The submission of Mr. Ali Ather, the learned Advocate for the applicant, is that in the re‑assessment that was completed for the above two years, the applicant's status was correctly determined as that of non‑resident but the losses which accrued outside Pakistan and remained unabsorbed while giving set off in the assessment year 1955‑56 (in which year the status of the applicant was that of resident and ordinary resident) were illegally ignored from consideration against the income determined for the year 1956‑57, and that the same treatment was given in the year 1957‑58 which was also erroneous as the brought forward loss from the assessment year 1955‑56 was not considered in the assessment year 1956‑57 and thereafter in 1957‑

58. On the ground that since the residential status of the applicant in 1956‑57 and 1957‑58 was that of a non‑resident and the departmental authorities relying on sections 4(1) (a) and 4 (1) (b) of the aforesaid Act took into con sideration that portion of income and profits which arose in Pakistan and the losses which arose outside Pakistan were not taken into account. Mr. Athar Ali, submitted that the Tribunal ought to have given set off to the brought forward losses of the assessment year 1955‑56 though these losses had arisen outside Pakistan, Mr. Ali Athar, the learned counsel, submitted that after giving such set off income should have been determined for the above two years (1956‑57 and 1957‑58) The learned counsel referred to the provisions of section 24 (2) and contended that this would be so, notwithstanding the fact that in the year 1955‑56 the status of the applicant was that of resident and ordinary resident‑and in the next assessment years 1956‑57 and 1957‑58 the status of the assessee changed and became that of a non‑resident.

7. It may be noted here before we proceed further, that Mr. Ali Athar the learned counsel admitted that in the assessment years 1956‑57 and 1957‑53 the profits and losses of the applicant company were not disclosed. To a pointed question put to the learned counsel that the foreign losses might have been completely wiped out against foreign income in 1956‑57 and later years (which income was not taxable in Pakistan in the above two years) Mr. Ali Ather, stated that the same was irrelevant. In order to appreciate the arguments of the learned counsel reference may here be made. to the provisions of sections 4(1)(a), 4(l) (b) and 4(1)(c), which we have reproduced in para. 9 herein below. In the assessment year 1955‑56 the status of the applicant was that of resident and ordinary and accordingly the income (profits and losses) which fell within the territories of Pakistan, as well as outside Pakistan are to be considered for the purpose, of the taxation in Pakistan to determine the world income under sections 4(1) (a) and 4(1)(b) and this would also attract the provisions of section 24(1) of the Act because of his status as a resident and ordinary resident. However, for the subsequent assessment years 1956‑57 and 1957‑58 the status of the applicant admittedly changed to that of non‑resident as its profit outside Pakistan territories were in excess to that of income within Pakistan. This would mean that the right to carry forward and set‑off the foreign unabsorbed loss against income accruing in Pakistan would no longer be available within the meaning of sections 4(1) (a) and 4(1)(b) of the Act and section 24(1) would also not be attracted. It is obvious that if section 24(l) does not apply, the‑applicability of section 24(2) upon which Mr. Ali Athar the learned counsel attempted to rely, would also be not attracted. Conse quently in the subsequent years 1956‑57 and 1957‑58 the loss suffered outside Pakistan territories and which remained to be carried forward was rightly not considered against income within Pakistan. A similar question arose in In come Tax Appeals (I. T. A. No. 7456 of 1970‑71, and others) reported in 1972 P T D 42, to which reference may usefully be made here. It was observed in that case as follows :‑ "From the scheme of the Act it is patent that the liability to tax in Pakistan would be dependent on two factors, namely (a) the residence of tax‑prayer and (b) the place of accrued of the income which of course, includes losses as well. Now section 1 (2) of the Income‑tax Act lays down that the Income‑tax Act, 1922 extends to the whole of Pakistan. In effect, therefore, it should have no extra territories from the combined reading of sections 53 and

4. The former sections create a charge of tax for any year, of course subject to the other provisions of the Act in respect of the total income of the previous year. The application of the Act itself, therefore is confined to the total income of each previous year and the determination of this total income is dependent on the various provisions contained in subsections (1) (a) (b) and (c) of section 4." We find ourselves in agreement with the above observations. In order to determine the total world income of a resident under section 24(1) the assessee shall have the right to set off losses against income accruing or arising anywhere in the world as without these considerations, his total world income cannot be determined as laid down by section 4 (1) (a) and 4(1)(b) of the Income‑tax Act. In case of non‑resident however these provisions would have no application and his income which term includes loss outside Pakistan will have to be excluded and the application of the Act will remain confined only to income in Pakistan.

9. We would at this stage like to reproduce hereinbclow section 4(1) of the Act .‑ "Residence in taxable territories.‑For the purpose of this Act‑ (a) any Individual is resident in taxable territories in any year if he‑ (i) is in taxable territories in that year for a period amounting in all to one hundred and eighty‑two days or more ; or (ii) maintains or has maintained for him a dwelling place in taxable territories for a period or periods amounting in all to one hundred and eighty‑two days or more in that year, and is in taxable territories for any time in that year ; or (iii) having within the four years preceding that year been in taxable territories for a period of or for periods amounting in all to three hundred and sixty‑five days or more, is in taxable territories for any time in that year otherwise than on an occasional or casual visit; or (iv) is in taxable territories for any time in that year and the Income‑tax Officer is satisfied that such individual having arrived in taxable territories during that year is likely to remain in taxable territories for not less than three years from the date of his arrival ; (b) a Hindu undivided family, firm or other association of persons is resident in taxable territories unless the control and management of its affairs is situated wholly without taxable territories ; and (c) a company is resident in taxable territories in any year (a) if the control and management of its affairs is situated wholly in taxable territories in that year, or (b) if its income arising in. taxable territories in that year exceeds its income arising without taxable territories in that year (account not being taken in either case of income chargeable under the head "Capital gain")."

10. We may now note hereinbelow the provisions of section 24 (1) and (2) of the Act to which also reference has been made above :‑

24. Set‑off of loss in computing aggregate income.‑(1) Where any assessee sustains a loss of profits or gains in any years 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 the year: Provided, 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 the 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 being a previous year not earlier than the previous year for the assess ment for the year ending on the 31st day of March, 1940 under the head "Profits and gains of business, profession or vocation", and the loss cannot be wholly set off under subsection (1), the portion not so set‑off shall be carried forward to the following year and set off against the profits and gains, if, any, of the assessee from the same business, profession or vocation for hat year ; and if it cannot be wholly so set off, the amount of loss not so set‑off shall be carried forward to the following year, and so on‑; but no loss shall be so carried forward for more than six years, and a 1 oss arising in the previous years for the assessment for the years ending on the 31st day of March 1940, the 31st day of March, 1941, the 31st day of March, 1942, the 31st day of March 1943 and the 31st day of March, 1944, respectively, shall be carried forward only for one, two, three, four and five years, respectively." In the light of the above provisions of law, we find that in case of residents and ordinary residents "world income" is to be determined while in case of non‑,residents it is confined to "total income" consequently on the change of status from resident and ordinary resident (1955‑56) to non‑resident (in 1956‑57 and 1957‑58), the "income" which falls outside the purview of section 4(1)(a) and 4(1)(b), the provisions of section 24(1) would not be applicable and thus the benefit of losses left to be carried forward under section 24(2) would also nut be permissible, as its applicability depends upo the applicability of section 24(1). The above observations find support from the judgment of the learned Judges of the Supreme Court of India in the case of Indore Mal was United Limited v. Commissioner of Income‑tax ((1959) 35 1 T R 271) where the following observations in circumstances which can be referred as similar, were made :‑ "Now, the whole of Mr. Kolab's argument is that in 1950‑51 the assessee- Company has made profits. which are liable to tax. He had incurred losses in 1948‑49 and under section 24(2) there is a mandatory provi sion that those losses shall be carried forward. He says that it is not for him to carry those losses forward, it is not for him to make any claims it is the statutory obligation of the Department that these losses shall be carried forward ; and if he is in a position to satisfy the Department that there are. profits made in the same business is which the losses were incurred, he is entitled to set‑off those losses against the profits of that business. The argument on the face of it seems very plausible. But the fallacy in the argument is this that before you come to section 24(2), before you can claim to carry forward .losses, must be such as could have been set off initially under section 24(1). because section 24(2) says `and the loss cannot be wholly set off under subsection (1), the portion not so set off shall be carried forward'. Therefore, not any they have not been set off in fact under section 24(1) but they could not have been set off under section 24(1). Admittedly these losses could not have been set off under section 24(1) because of the proviso in 1948‑49 if they could not have been set off, no right to carry forward under section 24(2) can arise." In the above‑mentioned case while repelling the contentions raised that in spite of the change of the status of assessee from resident to non‑resident and that in view of the law prevailing in 1948‑49, the assessee was not entitled to set off the loss which had arisen outside the then British territories of lndin and that the claim of assessee that under section 24(2) he was entitled to carry forward the loss up to six years and only two years had elapsed, and that there was nothing in section 24(2) to prevent him from making this claim, the learned Judges of the Supreme Court of India further observed as follows :‑ "The answer is what is there to prevent it from making this claim is the absence of the very condition under section 24(1) which permits an assessee to carry forward the losses under section 24(2) and that con dition is that these losses must be such losses as could have been set off under section 24(1). If they could not have set off at all, no question of carrying them forward under section. 24(2) arises." In the circumstances of the present case and in view of the above discus sion, our answer to the first question that the finding of the Tribunal holding that the appellant's loss determined, for the assessment years 1955‑56 in the status of Resident and Ordinary Resident cannot be set off under section 24 of the Act, against profits determined for Assessment years 1956‑5 r and later years because of the applicants residential status in assessment year 1956‑57 and later year was determined as non‑resident.

12. The answer to the second question under consideration depends upon the terms of the order of remand passed earlier by the Tribunal on 19‑6‑1962 the material portion whereof reads as follows : " . . . . . computation should be made afresh, liabilities should be deter mined properly and losses. if any, to be brought forward should be duly set off against income of profit computed." A perusal of the aforesaid order shows that while remanding the case, the Tribunal placed no limitations on the powers of the I. T. O. while making computation of the income of the a5sessee. It was therefore rightly held by the Tribunal that the above observations in the order of remand "clearly meant that what was legally permissible should determination of the liabilities and computation of income to be made 'afresh after determining the proper residential status of the applicant.

13. We would therefore answer the questions raised in the application in the following manner :-- (1) Question No. 1 in affirmative. (2) Question No. 2 in affirmative. In the result the application stands disposed of as above with no order as to costs. Appeal dismissed