1979 PLP 405 (PLC)

(e) Bounties or subsidies received from any Government or a public body ; (f) Profits by way of premium of sold shares ; (g) Profits of sale proceeds of forfeited shares ; and (h) Profits from the sale of whole or part of the undertaking. The subsection places specific bar against any deduction, for the purpose of calculation of profits, on following accounts :‑ (a) Income‑tax ; (b) Super tax (c) Any other tax or duty on income or revenue ; (d) Expenditure by way of interest on debentures ; (e) Expenditure by way of interest on capital account ; and (f) Expenditure on account of contribution to

(i) Reserved fund, or (ii) Special fund The emphasis in the subsection is on the word 'calculation' as used for determining the net profits. That means that a fresh calculation has to be made for arriving at net profits and that the calculation has to take into account only the factors listed therein and detailed above. This is the con tention of Mr. Mansoor Ahmed, who states that no extraneous factor, other than those listed in the subsection itself, can be imported for the purpose of calculating the net profits. It is a fair interpretation of these provisions. Mr. Jafry contends that adjustment of losses incurred in East Pakistan is not accountable to any of the heads listed in subsection (3) of section 87‑C of the Companies Act. On the other hand, Mr. Mansoor Ahmed's case is that `usual working charges' is an item which would cover an adjustment on account of losses. Plain meaning of the phrase 'usual working charges' would be those charges which are usually incurred in working or running an institution, a business, an establishment or an industry etc. or are incidental thereto. But the question would be if losses on account of destruction of assets, or their shortage due to other reasons, would amount to charges incidental to the running of a trading establishment. Subsection (2) of section 10 of the Income‑tax Act, 1922 lists items for which allowance is to be made for computing profits. Item (xvi) of this subsection makes an allowance for expenses incurred on account of a business etc. It reads as follows :‑

"Any expenditure not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation." The language used in this provision is more restrictive than the phrase "usual working charges," used in subsection (3) of section 87‑C of the Companies Act. Item (xvi) came under examination in Pohoomal v. Commis sioner Income‑tax (34 I T R 64), a case from Indian Jurisdiction. The question involved was, if a loss, to stock‑in‑trade caused due to destruction by enemy occupation would amount to an expenditure laid out wholly or exclusively for the purpose of business, profession or vocation. In answering the question in the affirma tive, and while relying upon Green v. Gliksten ((1929) 14 Tax Cas. 354) and Strong & Company of Romsey Limited v. Woodifield ((1906) 5 Tax Cas. 215), their Lordships of the Bombay High Court came to the conclusion that such loses were not capital losses but were trading losses which the assessee was entitled to claim as a deduction. Following observations in case of Strong & Company referred to above, was quoted with approval in Phoomal's case :‑

"In my opinion, however, it does not follow that if a loss is in any sense connected with the trade, it must always be allowed as a deduction ; for it may be only remotely connected with the trade or it may be connected with something else quite as much as or even more than with the trade. I think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation, or fall on the trader in some character other than that of trader." The meaning of the phrase "usual working charges" is fairly wide and it would be quite legitimate to include, under this head, all expenses which according to normal accounting practice are shown as such. But even if restrictive meaning were to be given to this phrase it would be proper to extend the principle followed in the case of Strong & Company, to the facts of this case. The losses in West Pakistan were losses directly incidental to the business of the Petitioner Company. Using the argument followed in Motamal Jethumal case ((1947) 15 I T R 155) if the assets in West Pakistan had been sold away and the purchaser bad failed for make any payments, rendering the amount irrecoverable, the losses thus sustained would become trading losses. The loss of assets, in East Pakistan has come about due to factors, no doubt, not in the control of the petitioner‑Company. But the risk of such losses is a natural incident of trading. Next contention of Mr. Mansoor Ahmed is that prior to 1974 these losses could not be shown in the statement of accounts. His contention is that it was only in 1974 that the State of Bangla Desh was recognized by the Government of Pakistan. In the absence of such recognization the status of Bangla Desh was no more than that of Pakistan territory, under enemy occupation. Legally speaking it continued to be a part of Pakistan. This fact was duly recognised by 1973 Constitution in clause (3) of Article 1, as originally enacted. It was through the 1st Amendment of the Constitution that this clause was dropped. In such circumstances any assets pertaining to that part of the country could not be shown as losses prior to the recognition of Bangla Desh. No exception on that account can, therefore, be taken for not having adjusted the losses during the period prior to 1974. Learned counsel for the respondent finally contended that the amount of Rs. 4,41,696.48 could be reasonably adjusted towards the reserved fund of the Company. According to Mr. Mansoor Ahmed, the burden thrown on the reserved funds had already been to the tune of Rs. 851,227 and any other further burden, apart from the fact that it was not called for, would strain the reserves of the Company to unreasonable extent. This is evident from the entry in the statement of accounts of the Petitioner Company for 1974 at page No. 33 of the file. Under the heading 'Reserve for Exceptional losses' the figure of 1973 shows an amount of Rs. 17,51,227 while the balance at the end of 1974 is Rs. 9,00,

000. This is indicative of the fact that about fifty per cent of the reserves of exceptional losses had been injected into the finances of the Company to support its financial viability. It would be correct to assume that any further strain on these reserves, would have jeopardized the financial strength of the Company. No exception, therefore, could be taken for not having injected an additional amount of Rs. 44.1 lacs from the reserve funds. In view of the above discussion, I have come to the conclusion that the adjustment of losses incurred by the petitioner firm in East Pakistan have been rightly shown as revenue losses and adjusted in the year 1974. In view of the non‑recognition of Bangla Desh prior to 1974 this figure could not be adjusted during the earlier years. There was no justification for spreading out an amount of about 4.41 lacs over a number of years because being a revenue expense it bad to be shown in the year when it fell due i.e. 1974. However, the deduction of Income Tax, while calculating the net profit is violative of the provisions of section 87‑C (3) of the Companies Act Adjusting that amount to total losses of Rs. 2,156 the amount of profits in terms of Standing Order 10‑C of the Ordinance, comes to Rs. 41,

844. The workers of the petitioner‑Company would, in these circumstance be entitled to the statutory bonus. In case this amount is less than the aggregate of one month's wages of the workers employed with the petitioner‑Company during 1974, the bonus payable would be in terms of para. (2) (b) of Standing Order 10‑C of the Ordinance. Otherwise, the amount of bonus may be governed by para. 2(2) of S. O. 10‑C. Orders accordingly. The parties should bear their own costs. Order accordingly.