1989 PLP 178 (PTD)

(d) International law

When a country recognizes a new State it relates back retrospectively to the date when the new State was created. United Liner Ltd. Agency v. Commissioner of Income-tax 1988 P T D 277 ref. Sirajul Haque for Appellant. Shaikh Harder for Respondent. Date of hearing: 26th September, 1988. SALEEM AKHTAR, J.--The assessee/applicant is a non-resident company incorporated at and having its registered office in U.S.A. In Pakistan it was carrying on business in marketing petroleum and petroleum products and exploration of oil with its office at Karachi and Chittagong. It was being assessed at Karachi with its annual account ending on 31st December every year. For the assessment year 1972-73 ending on 31-12-1971 the applicant submitted its return of income on the basis of trading result from its operation in West Pakistan. In the financial statement it included Rs. 19,75,568 as income earned in East Pakistan upto 25-11-19'

71. The Income Tax Officer estimated it at Rs. 21,96,180 on proportionate basis for the whole year. The applicant filed -appeal before the Appellate Assistant. Commissioner challenging the aforestated addition of income from East Pakistan. The appeal was rejected and a further appeal was filed before the Tribunal which was also dismissed. The applicant then filed application under section 66(1) of the Income Tax Act 1922 and the following questions have been referred: (1) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the Appellant/Assessee, a non-resident company was liable to be subjected to income tax in respect of profits accruing or raising to it in the erstwhile East Pakistan for the previous year ending 31-12-1971? (2) Whether in the facts and circumstances of the case the Tribunal was right in holding that erstwhile East Pakistan continued to be a part of Pakistan till the date of its recognition by Pakistan? Mr. Sirajul Haq the learned counsel for the applicant contended that the applicant is a non-resident company maintaining accounts on mercantile system and as such profits accrued on 31st December each year. He further contended that before 31-12-1971 East Pakistan had ceased to be the territory of Pakistan, therefore, the income which accrued in East Pakistan during the year ending 31-12-1971 could not be ascertained nor subjected to tax in Pakistan. It was further contended that Income Tax Officer could not have ascertained the income from 16-11-1971 to 31-12-1971- and the addition is based on surmises. A non?resident company in Pakistan can be taxed only for the income which accrues within the territorial limits of Pakistan. It is also admitted that from 16-12-1971 East Pakistan separated from Pakistan and new territory of Bangladesh was created. The Government of Pakistan recognised Bangladesh by Notification dated 8-5-1974 and such recognition according to the well-settled principles of domestic as well as international law relates back to the date when the new State was born. Therefore, any income which may have accrued upto 15-12-1971 was an income accrued within the territory of Pakistan and was liable to tax. Merely because the whole year upto 31-12-1971 could not be completed for the purpose of accrual of profit it cannot be said that for the rest of the, period of 11-1/2 months the profit cannot be ascertained nor can be subjected to tax. The tax can be levied on such income which has accrued upto the date when the territory of East Pakistan was a part of Pakistan. Under section 13 the computation of assessee's taxable income is determined by its regular mode of accounting but it does not affect the ambit of taxation. The method of accounting cannot be an instrument to avoid the chargeability of tax According to Kanga and Palkivalla in the Law and Practice of Income-tax, 4th Edition at page 448 "The chargeability of income received in India under section 4 (1) (a), cannot be escaped on ground that the assessee's regular mode of accounting is mercantile". Reliance has been placed on Keahar Mills Ltd. v. C.I.T. (1963) 23 I T R 230 (S.C.) The applicant has mentioned the income earned in East Pakistan upto 25-11-1971 in the Financial statement. But was not declared in the return of income as full one year had not completed. From the facts it can be inferred that from 26-11-1971 the applicant discontinued business in East Pakistan. For such a situation the principles enunciated in section 25 of the Income Tax Act can be applied. It provides that where the business is discontinued in any year the Income Tax Officer can make assessment during that year for the period from the end of the previous year and the date of discontinuance of business: This section is an exception to the rule that the income taxed is that of the previous year. Therefore, if the business has been discontinued before the expiry of a year, the income earned upto the date of discontinuance cannot escape assessment. It has to be charged to tax. In C.I.T. v. Serinivasan and Gopalan (1958) 23 1 T R 87 (S.C.) it was observed that "all that the section authorises the Income Tax Officer to do is that it gives him an option to make a premature assessment on the profits earned upto the date of discontinuance in the year of discontinuance itself instead of in the usual financial year". Therefore, as for all practical purposes business has been discontinued in Bengladesh it would be proper that income from East Pakistan which had accrued upto 25-11-1971 could be included in the taxable income for the year which would have normally ended on 31-12-1971. The answer to the first question is that the applicant's income in East Pakistan upto 25-11-1971 was chargeable to income tax. The Tribunal has held that East Pakistan continued to be a part of Pakistan till 31-12-1971 as it was recognised by Pakistan after that date. This is an erroneous view. It is well-settled that once a country recognises a new State it relates back retrospectively to the date when the new State was created. Reference can be made to United Liner Ltd. Agency v. Commissioner of Income Tax 1988 P T D

277. Our answer to the second question is in the negative. M.B.A./22-E/K ?????????????????????????????????????????????????????????? Reference answered accordingly.