P L D 1968 Karachi 95 (PLP)

The Tribunal later observed: "Since in the present case no business was done in the relevant year of account, and the machinery and plant, etc. were not used during any part of the year, the main section and clause would have no application and, therefore, the proviso cannot possibly apply. That being so, no part of the disputed amount falls to be assessed as income in the relevant year. The assessee's appeal must, therefore, succeed."

6. Before considering the case on merits, it is necessary to give brief history of section 10 of the Act. It is divided into two parts. The first part provides that subject to the provisions of the Act, the tax shall be payable by an assessee under the head `Profits and gains of business, profession provocation in respect of the profits or gains of any business, profession or vocation carried, on by him, subsection (2) provides that the profits or gains mentioned in the first part in its subsection (i), shall be computed after making allowances for machinery, building, plant etc., described in clauses it to (vii). It may be pointed out that the second proviso to cause (vii), which is the subject -matter of controversy in the present case, as it stood in its original form, was as under: "Provided further that where the amount for which any such building, machinery, or plant is sold exceeds the written down value, so much of the excess as does pot exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place." This was later on amended by the Finance Act of 1956 (Amend ment taking effect from the 1st of April 1955) in order to meet certain complications which had arisen out of the certain decisions made in the Indian Jurisdiction. In 1962, the second proviso to section 10k'2)(vii), referred to above, was amended by the Finance Act of 1962, which still holds the field. In the present case, however, we are not concerned with this last amendment. We have only to consider the scope of the amendment made by the Finance Act of 1956 in the second, proviso to clause (vii) of subsection (2) of section 10 of the Act. This amendment reads as under: "Provided further that where the amount for which any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the, written down value shall be deemed to be profits of the previous year in which the sale took place."

7. Mr. S. A. Nusrat, the learned counsel for the Department, has contended that this proviso is a substantive provision of law and has no relation whatsoever with the other clauses preceding it and that it is a charging provision and stands by itself. In support of his contention, the learned counsel has placed reliance on a decision of a Division. Beach of tats Court at Lahore in Commissioner of Income‑tax v. Messrs West Punjab Factories Ltd., Okara (P L D 1966 Lah. 236). In that case, their Lordships have taken the view that the second proviso, referred to above, is an independent provision, having no relation whatsoever with the use of machinery or plant in the relevant accounting period. This view is contrary to that taken by the Income‑tax Appellate Tribunal in the matters, referred to above. The reasoning of the Division Bench can be summarised as under : , (1) That the second proviso to clause (vii) is an independent provision, having no relation whatsoever with the use of machinery or plant in the relevant accounting period. By this proviso, the revenue, in fact takes back what it bad given by way of depreciation allowance in preceding years and not only in the previous year, for otherwise the assessee would receive allowance in excess of his original cost. (2) That grammatically `such' refers to 'building; machinery and plant' used for the purposes of the business, profession or vacation as provided in clauses .(iv) and (vi), but it will be noticed that no specific accounting period is mentioned in these clauses. The result that the 'building', etc. must have been used in the previous year is, therefore, achieved by reading section 10(1) along with section 3 of the Act which provides that tax shall be charged in respect of the total income of the `previous year'. There is thus no warrant for the proposition that `building, machinery or plant' must have been used in the relevant accounting period to attract the second proviso to clause (vii) of section 10(2). Another reason cited in support of the Tribunal's view is that a proviso cannot travel beyond the scope of the main enactment. This, of course, is a well estab lished rule of interpretation, but apart from the use of the word `such' to which reference is made above, there are no words in the clause to the effect that the building, machinery or plant must have been used for the purposes of the business during the 'previous year'. (3) That the proviso does not travel beyond the scope of the main enactment or seeks to control it. In fact, as stated above, there is no true relationship between the main clause (vii) and the second proviso to it. The clause deals with an allowance and the proviso takes back what was given as an allowance in the preceding years.

8. Except for the above case, Mr. Nusrat did not place before us any other decision to support his contention. On the other hand Mr. Ali Athar, the learned counsel for the assessee, has contended that the second proviso to clause (vii) of sub section (2) of section 10 is directly connected with it. He has further contended that even if there is a lacuna, its benefit should go to the assessees rather than to the taxing authorities. In support of his contention the learned counsel has referred us to the decision of the English Court in Cape Brandy Syndicate v. Inland Revenue Commissioners ((1921) 1 K B 64). Rowlatt, J. has enunciated the law on this point as under: "In a Taxing Act one has to look merely at what is clearly said. There is no room for any amendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used." This proposition of law has also found favour in the Lahore decision which supports the view of the Department.

9. In deciding the two cases in hand, therefore, the most important question for consideration is whether on the language of the second proviso to clause (vii) of subsection (2) of section 10 of the Act it can be held to be a substantive provision of law, independent of the main enactment, or, in other words, can it be treated as a charging provision by itself? It will be convenient to mention here that the case of the Department that the second proviso is a substantive provision of law can only be accepted if its language expresses such an intention in an unambiguous manner. In its absence, the law is quite clear and the rule is well established that the proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment a portion which, but for the proviso, would fall within the main enactment. In this connection, the Supreme Court of Pakistan, in East and West Steamship Company v. Pakistan (P L D 1958 S C (Pak.) 41), while dealing with the question as to how a proviso may .be construed, observed: "The effect of a proviso is to except something out of the preceding portion of the enactment or to qualify something enacted therein which, but for the proviso, would be within it, .The words of a proviso are to be construed strictly and confined to the special case which its words enact." Similarly, in the Indian Jurisdiction in the case of Income‑tax Commissioner v. Ajax Products (A I R 1965 S C 1358) at page. 1363, the Indian Supreme Court observed as under: "Ordinarily, it is foreign to the proper function of proviso to read it as providing something by way of an addendum or dealing with a subject which is foreign to the main enactment. It is a fundamental rule of construction that a proviso must be considered with relation to the principal matters to which it stands as a proviso. Therefore, it is to be construed harmoniously with the main enactment." It may, however, be added that there may be cases in which the language of the statute is so express and clear that a proviso may be construed as a substantive clause.

10. It is, therefore, for consideration whether the language of the second proviso to clause (vii) of subsection (2) of section 10 of the Act is such that it should be construed as a substantive clause, as has been held by the Lahore Division Beach. After carefully considering the arguments advanced on behalf of the parties, we are of the view, with respect to the learned Judges, that the ground on which the decision of the Lahore Division Bench is based cannot be sustained on the language of the second proviso to section 10(2)(vii). In coming to this conclusion we have taken into consideration various factors. In the first place, section 10 itself is a charging section. Subsection (1) of section 10 provides that the profits and gains of business, profes sion or vocation carried on by the assessee during the accounting period are to be taxed after giving certain allowances enumerated in subsection (2). These allowances are mentioned in clauses beginning from clause (iv) onwards. Clause (fv) of the said section reads as under: "(2) Subject to the provisions of this Act, such profits or gains shall be computed after making the following allowances, namely: (iv) in respect of insurance against risk of damage, or destruction of building, machinery, plant, furniture, stocks or stores, used for the purposes of the business, profession or vocation, the amount of any premium paid;" This is followed by other clauses, important among them being clauses (vi) and (vii). Clause (vii) is followed by two provisos. The first proviso provides that in order, to claim the allowance it is necessary that the amount by way of written down value should have actually been written off in the books of the assessee. Then comes the second proviso. It provides that where the amount for which any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written drown value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place. It will be noticed that some very significant phrases have been used in this proviso. The first is: "any such building, machinery or plant", the second is: "whether during the continuance of the business or after the cessation thereof" and the last is "shall be deemed to be the profits of the previous year in which the sale took place". Mr. Nusrat was unable to satisfy us that the phrase "any such building, machinery or plant" does not relate to those mentioned in clause (vii) of section 10(2). Further, he was unable to explain the idea and reason behind the retention of the words "previous year" in the said proviso. In the absence of any cogent explana tion, there should have been very compelling ground to accept the contention that this proviso is a substantive provision of law or that it is a charging provision by itself and has nothing to do with the main enactment.

11. The contention of the Department that the above proviso gives power to the taxing authorities to tax the surplus amount, though the assessee did not in fact conduct any business during the previous year or that the machinery in fact was not used in the said business during any part of the whole accounting year has not impressed us. In our opinion, the key words for the interpretation of the proviso under consideration are "any such building, machinery or plant". There can be no two opinions that the adjective "any such" clearly refers back to that property which is mentioned in clauses (iv), (vi) and (vii) of subsection (2) of section 10 of the Act. On examining clause (iv) it will be found that the basic idea is to grant allowances in respect of an amount of premium paid on account of insurance against risk of damage or destruction of building, machinery, plant, etc., use for the purposes, of the business, profession or vocation. Similarly, under clauses (vi) and (vii) the allowance is permissible only in respect of such building, machinery, plant, etc., as have been used for the purposes of business, profession or vocation in the previous year. It is in this context and background that the use of the above words in the second proviso are to be interpreted.

12. The view expressed in the Lahore case has received our anxious consideration. The object of clause (vii) and the second proviso to it are quite different. Clause (vii) grants allowance in respect of property which is discarded, demolished or destroyed, whereas the object of the second proviso is to bring to charge by fiction the excess of the sale price over the written down value. They apply to different situations, though they are in respect of the same property, namely, the one which was used in the previous year. It is further difficult to hold that the words "an such" have no reference to the property mentioned in the earlier clauses. Had that been the intention of the Legislature it would not have used the words "any such" or "Previous year"

Thus on the phraseology of the proviso, it cannot be treated as an independent provision of law because it relates to the same property which is referred to in the main enactment and it is only by fiction that profits have been created for the purposes of taxation even in cases where the sale takes place after the close of the business. The object of the amendment was only to avoid the condition that the machinery must have been sold before the business was closed down, otherwise this limited fiction was in existence even when the second proviso was amended. This seems to be the only plausible explanation of the incorporation of the words "whether during the continuance of the business or after cessation thereof" in it. The amendment does not in the least carry the fiction further. It only provides that whenever a sale takes place after the cessation of the business, the surplus must be deemed to have been the profits of the business conducted by the assessee during the previous year. We are fortified in this view by a recent decision of the Supreme Court of India in the case of Income‑tax Commissioner v. Ajax Products. In this connection, their Lordships observed as under: "To put it in other words, the subject is not to be taxed unless the charging provision clearly imposes the obligation. Equally important the rule of construction is that if the 'words of a statute are precise and unambiguous, they must be accepted as declaring the express intention of the Legislature. Giving a close scrutiny to the second proviso it will be clear that by giving the natural meaning to every word used therein, it clearly fits in within the scheme of the entire section. The key expressions in the proviso are (1) such building, (2) whether during the continuance of the business or after the cessation thereof and (3) `deemed to be the profits of the previous year'. The words `such building' have already been given an authorita tive interpretation by this Court in the aforesaid two decisions. In the latter decision (Express Newspaper's case (1964) 53 I T R S C 250 at p. 254): (A I R 1965 S C 33 at p. 36), it is observed thus: `The adjective `such' refers back to clauses (iv), (v), (vi) and (vii) of section 1.0 (2). Under clause (iv) an allowance is allowed in regard to any premium paid in respect of insurance against risk of damage or destruction of buildings, machinery; plant, etc., used for the purpose of the business, profession or vocation. Under this clause allowance is allowed only in respect of the machinery used for the purpose of the business. Clauses (v), (vi) and (vii) refer to such buildings, machinery, plant, etc., used for the purpose of the business. The result is that the second proviso will only apply to the sale of such machinery which was used for the purpose of the business during the account year.' The words `whether during the continuance of the business or after the cessation thereof' were not present in the unamended proviso. In the two decisions cited earlier, in the absence of such words, this Court held that to attract the said proviso the machinery shall have been sold before the business was closed down. This clause omits that condition for the exigibility of the tax. The third expression `shall be deemed to be profits of the previous year' in its ordinary connotation, carries a natural meaning with it. Though the surplus contemplated by the proviso is not in the technical sense of the term profits of the previous year, it is deemed to be the profits of the previous year. It is a limited fiction, for a specific purpose. What are not profits in commercial practice are treated as profits for the purpose of the proviso. This fiction was in existence even before the amendment. The two decisions of this Court cited earlier laid down the scope of the fiction. In the Express Newspaper's case, it was held that having regard to section 10(1) of the Act, the main condition which attracts all the other subsections and clauses of the section is that the tax shall be payable by an assessee in respect of profits or gains of the business carried on by him. If the business was carried on by him during the accounting year, this Court held that the said surplus, if the other conditions laid down by the proviso were complied with, would be deemed to be the profits of the previous year. One of the important expressions in the proviso is `previous year'. Previous year is defined in section 2(11)(6) to mean in the case of any person, business or company or class of persons, business or company, such period as may be determined by the Central Board of Revenue or by such authority as the Board may authorise in this behalf. In the present case, the previous year is the calendar year preceding the assessment year. Deemed profits must, therefore, relate to the calendar year preceding the assessment year. By giving the natural meaning to every expression used in the proviso, we reach‑ the result, namely, that the surplus mentioned in the said proviso is not exigible to tax unless the assessee did business: during the accounting year preceding the assessment year and, unless such buildings or machinery yielding surplus were used for the business in the said year, or at any rate part of the year, though they were sold after the cessation of the business. To illustrate an assessee did business doting some part of the accounting year 1955 but closed it in October of that year. He used the machinery during some part of the year for the business. He sold it in December. The price realised yielded a surplus within the meaning of the proviso. During the assessment year 1956‑57, the said surplus could be brought into charge notwith standing the fact that the machinery was sold after the cessation of the business. Before the amendment, the said surplus could not be taxed as the sale was subsequent to the cessation of the business. By giving the natural meaning to every expression in the proviso, the proviso serves the purposes intended by the Legislature."

13. In the light of the above discussion, it seems to us that the main enactment and the second proviso are reconcilable with each other. In our opinion, the condition precedent laid down in section 10 (1) that the business must be carried on in the year of account before any item is treated as income is implicit in the second proviso. Its very language supports this conclusion. We would, therefore, hold that the view of the Tribunal that since in the present cases no business was done by the assesses in the relevant years of account and the machinery or plant were not used during any part of the year, the main section and clause would have no application and the above second proviso would also have no application is correct.

14. In the result, the above two questions referred to this Court are answered in favour of the assessee. Parties to bear their own costs. S. Q. Reference answered.