P L D 1973 Lahore 381 (PLP)

M. S. H. QURESHI, J.‑

The Income‑tax Officer had, for the assessment year 1962‑63, treated as profit under section 10 (2‑A) of the Income‑tax Act, liabilities amounting to Rs. 5,52,174.00 for goods and expenses, which had been shown in the books of account of the assessee, as outstanding for over three years but had not been paid. In the appeal preferred by the assessees the Income‑tax Appellate Tribunal, however, relying on its own decision in I.T.A. No. 2986 of 1968‑69, held that "there was no justification for treating these amounts as profits within the meaning of section 10 (2‑A). " Aggrieved, the Department referred the following question of law said to arise from the order of the Tribunal, for the opinion of this Court:‑-- Whether on the facts and in the circumstances of the case the Tribunal was right in holding that Rs. 5,52,174 could not be included in the total income of the assessee under the provisions of section 10 (2‑A) of the Income‑tax Act in respect of the charge year 1962‑63?:"

2. Before us it was argued on behalf of the assessee as had been argued before the Tribunal, that the Income‑tax Officer had applied the provision of section 10(2‑A) as it stood amended in 1966 and not the one in force in the year, 1962‑

63. The provisos before it amended in 1966 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 assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the 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. The above was substituted by the following in 1966 :‑ "(2‑A) Where for the purposes 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‑

(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 or expenditure; (ii) the assessee, 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 has 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 in 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 in clause (iii): Provided that where a trading liability referred to in clause (iii) or a portion thereof is paid in a subsequent year, a deduction of such amount as has been paid shall be made it: computing the profits and gains under this section In respect of that year." It Is true that there is no express mention in the earlier provision, of non‑payment within three years, but it is clear that by use of the words "obtained some benefit in respect of such trading liability by way of remission or cessation thereof." the intention was to treat as profit the benefit accruing on account of the A liability having become time‑barred for recovery. Since the period of limitation for such recovery is three years, the Income tax Officer cannot be said to have applied the amended provision and not the earlier provision merely because of his mention that payment had not been made for over three years.

3. Mr. Javaid Hashmi, learned counsel for the assessee, then urged that a liability once created was to remain always a liability and that as such the income‑tax Officer had erred in treating the liability as profit by mere efflux of time, particularly when a fresh period of limitation could be created by acknowledg ment of the liability. In support he cited the case of Morley (Inspector of Taxes) v. Tattersall (7 I T R 316) in which it had been held: .. . . . . . the quality and nature of a receipt for income‑tax purposes were fixed once and for all when the subject of the receipt was received; consequently, as the unclaimed balance, when first received, were obviously liabilities, no subsequent operation could turn them into trading receipts. They were not, therefore, assessable to income‑tax." He also referred to the following appearing on page 478 of Salmond's Jurisprudence, Eleventh Edition:-- "Perfect prescription is the destruction of the principal right itself, while imperfect prescription is merely the destruction of the accessory right of action, the principal right remaining in existence. In other words, in the one case the right is wholly destroyed, but in the other it is merely reduced from a perfect and enforceable right to one which is imperfect and unenforce able. In the case of the mere limitation of actions the still subsisting right may act as a defence though not as a ground of action ; and subsequent events such as a later promise to pay the "barred" debt, may revive the right of action . . . . . An example of imperfect prescription, on the other hand, is the case of the creditor. He loses in six years his right of action for the debt but the debt itself is not extinguished, and continues to be due and owing."

4. The proposition that what is once a liability is always a liability cannot be said to hold the field in Pakistan particularly in view of the Supreme Court's decision in Ashfaq‑ur‑Rehman v. Chaudhry Muhammad Afzal (P L D 1968 S C 230) wherein the term "all the rent due" was held to carry the connotation of all the rent due in law or recoverable in an action at law. Following this principle it cannot be urged that a liability after the expiry of the period prescribed for action for its recovery would remain liability in law. The contention that a fresh liability could be created by acknowledgment is merely hypothetical and does not arise from the facts of the case.

5. Learned counsel for the assessee then assailed the vires of subsection (2‑A) itself, on the ground that a law which took account of the liability alone without the corresponding credit, was bad law and ought not to have been legislated. It was urged that the Income‑tax Officer should not have treated the entire liability without making adjustment for such corresponding credit as had lapsed on account of limitation or otherwise. For this, reliance was placed on Commissioner of Income‑tax, Burma v. Bengalee Urban Co‑operative ((1934) 2 I T R 121) wherein it was held that " 'Profits', on the other hand, are the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those profits". We are afraid the question of the vires of subsection (2‑A) does not arise from the question referred to us. Moreover, the subsection expressly lays down that the amount of trading liability, which is received by way of cessation, or the value of the benefit so accruing shall be deemed to be profits and gains of business. The Income‑tax Officer was, therefore, not required by the law to ascertain the net balance of such profits after making deductions for corres ponding credit, which had since become irrecoverable. In any case, no such plea of a corresponding credit having become barred for recovery having been taken before the Income‑tax authorities, the point raised is merely hypothetical and we are not called upon to advert to the same.

6. It was lastly urged on behalf of the assessee that the entire amount had not been assessable to tax and that as such the assess ment itself must fail. Reliance for this was placed on Bennett & White (Calgary) Ltd. v. Municipal District of Sugar City No. 5 (P L D 1951 P C 78) and Provincial Government of Madras v. J. S. Basappa (A T R 1964 S C 1873). We must reject this contention too, because the question of the assessment having included legal and illegal items had never been taken before the Income‑tax authorities nor does the same directly arise from the question under reference to this Court.

7. In the result we answer the question in the negative. This reference is disposed of accordingly. The parties shall bear their own costs. K.E.A. Reference answered.