P L D 1975 Karachi 924 (PLP)

JAMALUDLIN H. AHMED, J.‑The following question has been referred to this Court under section 66(2) of the Income‑tax Act, 1922 by the Income. tax Appellate Tribunal: "Whether the amount of Rs. 1,05,13,609.00 paid by the Government t the assessee under section 26 of the Pakistan International Airline Corporation Act, 1956 for making good the loss sustained by the A assessee is in the nature of income receipt liable to tax under the Income‑tax Act, 1922."

2. Briefly stated the facts of the case as shown in the statement submitted by the Tribunal are, that the Pakistan International Airlines Corporation, Karachi the assessee in the present case, was created by the Pakistan International Airlines Corporation Ordinance (Ordinance I of 1955) which was subsequently replaced by the Pakistan International Airlines Corporation Act (Act No. 19 of 1956). Under section 26 of the said Act, the Central Government under took to make good any losses sustained by the Corporation during the three years next after 30th September 1953. In the account period relevant to charge year 1956‑57 the Central Government paid a sum of Rs. 1,05,13,609.00 in terms of the said section 26 of the P.

1. A. C. Act, 1956. The assessee claimed this payment as a replenishment of its capital which, according to the assessee stood reduced to the extent of the amount received by the assessee from the Central Government. This plea of the assessee was rejected by the Income‑tax Officer, who treated the receipt of the said amount as a revenue amount and brought it to tax. The assessee filed direct appeal before the Tribunal against the decision of the Income‑tax Officer and the Tribunal upheld the order of the Income‑tax Officer, holding that :- "There would be little doubt that if the payment had been made from time to time towards running expenses, that would be revenue receipt ; the fact that the payment was made after the loss had been ascertained will make no material difference. In the instant case the working expenses were more than the receipts earned by the Corporation and that is the reason why the Corporation suffered a loss. In effect the payment by Government was made to supplement the receipt so that the loss may be wiped out. Any receipt which has the effect of increasing the capital need not be of capital nature. In the present case reimbursement has been made of revenue loss : the paid‑up capital remains , the same. The object of the Government in making the payment was to assist the Corporation in carrying on its business without a loss, and this has been the nature of the payment." The assessee thereupon moved the Tribunal to refer the question to the High Court but the Tribunal declined to do so on the ground that the question involved is a pure question of fact. In these circumstances the assessee filed an application under section 66(2) of the Income‑tax Act, 1922 in this Court which was allowed and the Tribunal was directed to refer this question to this Court for opinion.

3. Now it is an admitted position that the assessee‑Corporation had shown the amount in dispute, as credited in its revenue account, the paid‑up capital remaining the same. But the mere manner of keeping the accounts would not decide the question, which will have to turn on the interpretation of section 26 of the P. I. A. C. Act, 1956, and the other facts of this case. Section 26 of the P. I. A. C. Act, 1956 reads as under :‑ "The Central Government shall make good any losses sustained by the Corporation during the three years next after 30th September 1953 but not thereafter unless otherwise determined, by the Central Government." and Mr. Ali Athar, the learned counsel for the applicant/assessee contended that as on a plain reading of this section, the replenishment of the losses could take place only after the loss had actually accrued, and been determined as such, the capital of the assessee by that time had already diminished. According to him, a loss always results in diminishing the capital, and the Corporation while running its business at a loss, could incur expenditure only by utilising its capital. He contended that making‑good of a loss was even different from the subsidy, which in the case of the P.

1. A. C. also was being paid by the Central Government at that time, on every ticket for Karachi to Dacca at Rs. 50 and for Lahore to Dacca at Rs.

75. The whole object of the Government, according to the learned counsel, was that as the Corporation was expected to run at a loss in the initial stage, the object of the section was that the capital of the Corporation should not be diminished and that it should be kept intact, and a guarantee to make good the losses, already accrued, was in effect, to make the payment towards reduction of capital that took place during the three years. In his submission the working expenses of the Corporation were more than the receipts earned, and the Corporation had of necessity to depend on its capital and in effect, the Government by making good the losses only supplemented the deficiency in capital. To support his contentions, the learned counsel relied mainly upon the case Seaham Marbour Dock Co. v. Crook (16 T C 333), decided by the House of Lords of England. In that case the assessee wanted to extend their Docks and for that purpose had obtained parliamentary power to increase their debenture issue by about 75,000, but they later on found that there was at least as much again, that would be required to enable them to carry out their work. In those circumstances they wrote to the Unemployment Grant Committee asking that assistance might be rendered through the medium of that Committee. The grant (not exceeding 1,52,000) was made and money was accordingly paid by the Committee. This money was sought by the authorities to be included in the receipts of the assessee as part of the revenue, for purposes of assessments to income‑tax which was challenged. The matter, was fully decided by the House of Lords and it was unanimously held that the monies received by the Dock Company from the Unemployment Grants Committee were not profits or gains of the trade carried on by the Essessee within the meaning of the income‑tax Acts. In the submission of Mr. Ali Athar this case supported him fully. He also contended that it could never have been possible for the Central Government to have intended to give an amount to save the Corporation from loss, but at the same time to have charged tax on that amount, which in effect would mean that the total amount of loss incurred would never be in fact given to the Corporation. If the Government gave an amount which was loss ascertained, but simultaneously allowed one of its departments to take back a substantial part of that amount by way of tax, the compliance of section 26 of the Act would not be properly made. The learned counsel referred to the observations of Lord Atkin in the same case to support his arguments: "It would appear to me to be remarkable proposition that Parliament assented to that sum being appropriated for that purposes, but intended, in certain events at any rate, only fifteen shillings in the pound to be appropriated for that purpose, five shillings in the pound of the full amount coming back in the way of Income‑tax:' The contentions of the learned counsel though prima facie quite attractive, are yet not applicable to the facts of the present case, as the facts in the Seaham Marbour Dock Co. case were distinguishable upon the interpretation of the very correspondence carried on by the Company with the employment Grants Committee. It was observed by Slesser, L. J. in this respect :‑ "Now if that is the correct view of these letters, it seems to me that that determines this case ; because it becomes no more than this ; a grant for an extension of a dock which is in itself in respect of a capital expenditure. This company does not trade in dock construction, it trades in docking ; they are not dock engineers engaged in building docks, they are engaged in the utilisation of docks and they need this extension to cope with their trade." Obviously, therefore, their Lordships were dealing with a case of assessee who wanted capital for the purpose of construction of docks which was to extend their business of docking. their business was not the construction of docks. The amount, therefore, was raised by way of capital investment; and this conclusion was based on the interpretation of the letters, which the assessees had addressed to the Unemployment Grants Committee. Now in the judgment of the High Court in this case (Seaham Marbour Dock Co. v. Crcok the following three cases that supported a contrary view were also considered and distinguished (1) Nizam's Guaranteed Railway v. Wyatt (2 T C 584). (2) Blake v. Imperial Brazilliam Railway Co. (L T C 58). (3) Pretoria‑Pietersburg Railway Company v. Elwood (6 T C 508). and it was observed by Lord Hanworth, M. R. "Lastly, there is the case of the Pretoria‑Pietersburg Railway Company v Elwood (6 T C 508). The facts of that case prevent it being of any value as a guide to the present case. A sum was paid there by the British Government in consequence of their undertaking to pay all arrears on interest due under the guarantee and they did pay this sum. Lord Justice Fletcher Moulton, who gave the judgment, says quite definitely, "it is, therefore, in our opinion, fundamentally incorrect to talk of the payment of 97,000 as being part of the price of the Railway. It was a liability under which the Government lay equally, whether or not it elected to expropriate the Railway under Article 42 of the Concession." In other words, it was a sum paid under a promise given during the South African War to the Railway Company, and it was a sum paid over to them in order that they should have the money to pay the interest and for no other purpose. Once one has got the facts of that case clearly in mind it is plain that it could not be contended that the sum received was a capital sum or the price of purchase ; it must be put to revenue account and so induce the fall of the tax upon it." The distinction was further explained in the words of Lord Manworth at page 347 (16 T C 342) "Those three cases to my mind are really quite plain. They are appropriate to and govern cases in which the facts are analogous, but they have no bearing upon a case like the present, in which, interpreting the letters and the facts which; are before us and applying the true rule of law to the construction of those letters, it appears that this sum was a sum paid out and out by the Unemployment Grants Committee for the purpose of adding to and completing the capital sum of which there was an sufficient subscription before it was received ; and the mere mode of payment or method of accounting does not alter the character of the sums received ; they were paid in order to advance a capital expenditure to be made by the Seaham Marbour Dock Company." And it is this distinction on which Mr. S. A. Nusrat the learned counsel for the Department relied to support his case before us. His contention in short is that the amount in question was paid by the Central Government to the assessee in order to offset the trading losses of the assessee and, thus, . . . the receipts are in the nature of revenue receipts and, therefore, liable to be considered for tax purposes. Besides the three cases referred to above, he also cited before us a number of cases which lend support to his contention. In Smart v. Lincolnshire Sugar Co. Ltd. (20 T C 543), the facts under consideration were that during the year 1931‑32 the assessee‑Company received advances under the provisions of the British Sugar (Subsidy) Act of 1931 and these advances were shown in the balance‑sheets of the assessee as liability. In fact it was admitted that in the events that happened no part of the advances so received was repayable by the company. In this case also, the cases, Blake v. Imperial Brazilian Railway (2 T C 58), The Nizam's Guaranteed State Railway Co. v. Wyatt (2 T C 584) were cited for the Crown, but the main reliance was placed upon the case of the Pretoria‑Pietersburg Railway Company Limited v. Elwood (6 T C 508). After fully considering the above cases, it was observed by Lord Wright M. R. at page 659 (20 Tax Cases) :‑ "As between these two contentions the decision must turn upon the particular facts of the case. This case is clearly in its nature quite anamolous ; it is not an ordinary mercantile transaction, of loan ; it is in truth a statutory bargain, and all the circumstances have to be borne in mind. These advances were made to help to tide over the companies who became parties and agreed to come into the scheme embodied in this Act and who are named in the Schedule ; those companies were to be helped in their trading operations, that is to say, in carrying on their business, their trade of making sugar, by the moneys which were to be given to them over and above the subsidy which they have were receiving from the Government then. That money was paid in respect of a limited period, and it was only to be repaid if the difficulty which led to its being paid in the first instance, namely, the fall in the price of sugar, was surmounted during the remaining years of the currency of the Act of 1925. The two things were bound up together, and under those circumstances the repayment which was provided was not such as one would expect in any case of a loan, nor were the terms of the Act such as one would have expected in the case of a loan. There was to be a very limited payment by the reimbursements in a very limited state of things, namely, if the need for this additional assistance during the period up to 1934 had ceased to operate. Now as far, to my mind, this very peculiar and anamolous state of things bears no resemblance to a loan at all. I think it is a payment of money subject to a contingent liability in certain events to repay, or perhaps more strictly, to submit to a deduction, in the very limited circumstances which I have specified of an amount which might or might not, if it ever eventuated, come in any way within the same sums as the amounts which were paid. It is quite clear in the events that happened that no amounts ever became repayable ; that is to say, there was no occasion to deduct any amounts from the Company's subsidies, because the price of sugar never did rise, but quite apart from that there was no obligation on the Company to carry on their business after they had received the sums under the 1931 Act, and if they did not carry on their business there would not be even the possibility of any repayment made of the sums advanced under the 1931 Act." The case was taken up to the House of Lords, but the view that the assessee was liable to tax in this case was upheld and not disturbed. In the case In re: Ahmedpur Kama Railway Co. Ltd. again the cases Blake v. Imperial Brazilian Railway Co. and Nizarn's Guaranteed State Bail" ay v. Wyatt were considered and followed by their Lordships of the Calcutta High Court. In this case under an agreement between the Secretary of State for India and the assessee, the latter agreed to find a certain sum of money and to hand it over to the former for constructing and operating the Railway. The agreement provided, inter alia, that if the net profits of the Company shall not be sufficient to pay interest on the paid‑up capital to the Company at the rate of 3J per cent. per annum, the Secretary of State will pay the Company in addition to the net profits of the Company for such year, such a sum as shall, with the net profits make up an amount equal to interest for such year, at the rate of 3J per cent. per annum. The Income‑tax authorities levied income‑tax not only upon the earning of the Company, but also upon the subsidy received from the State. The Company claimed that they were not assessable in respect of the subsidies. On a reference by the Department it was held by their Lordships of the Calcutta High Court that the subsidy was income of the Company and was liable to be taxed in spite of the fact that it was intended to be paid automatically to the shareholder. The facts of this case are very similar to the instant case and support Mr. Nusrat's submission. Apart from the above case, the contention of the learned counsel for the Department, also receives support from Miggs v. Wrightson (26TC73), C. I. T., Madras v. Madras and Southern Mahratta Railway Company Limited ((1940) 8 1 T R 280) and C. I. T., Madras v. The Madras and Southern Mahratta Railway Company Limited ((1943) 9 1 T R 388). The view canvassed by the learned counsel for the assessee cannot be sustained upon consideration of the facts of this case and the interpretation of section 26 of the P. I. A. C. Act, and in the result, the amount of Rs. 1,05,13,609 paid by the Government to the assessee for making good the B loss sustained by the assessee is found to be in the nature of income receipts) liable to tax under the Income‑tax Act, 1922. The reference is replied in the affirmative. DORAB PATEL, J.‑I agree. S. A. H. Reference answered in affirmative.