1988 PLP 277 (PTD)

HAIDER ALI PIRZADA, J.--In these references the following two common questions of law arise for our determination and hence all these are disposed of by this common judgment. "(1)????? On the facts and in the circumstances of the case, was the Tribunal right in holding that the Government of Bangladesh was not a 'Competent Authority' within the meaning of section 10(2)(vii) of the Income-tax Act until its recognition by the Government of Pakistan on 23rd February, 1974? (ii)??????? Whether on the facts and in the circumstances of the case, the Tribunal was right in confirming the order of the Income-tax Rs.49,35,259 claimed by the assessee under section 10(2)(vii) of the Income-tax Act? Since I.T.R. 19/79 (M/s. Asbestos Cement Ltd. case) is comprehensive, it will be sufficient if the facts in this case were not put in detail so as to understand how the questions for determination arise in these matters. 2 Messrs Asbestos Cement Industry Ltd., Karachi was an assessee under the Income-tax Act, 1922 (hereinafter referred to as the Act). For the assessment year 1973-74, for which the relevant accounting period was the year which ended on 30th June, 1973, for the purpose of levy of income-tax under the Act, the assessee-company claimed the written down value of East Pakistan fixed assets amounting to Rs.47,26,965 as revenue loss under section 10(2)(vii) of the Act. The case of the assessee-company was that the fixed assets have either been compulsorily acquired by the Bangladesh Government or 'discarded' within the meaning of section 10(2)(vii) of the- Act. The Income-tax Officer rejected the assessee's contention as in his opinion (i) the expression 'competent authority' as used in section 10(2)(vii) does not include the Government of Bangladesh and (ii) the word 'discarded' refers to plant and machinery which is discarded in the normal course of wear and tear. In his view the loss is not admissible. Against the assessment order, the matter was directly taken -in appeal to the Income-tax Appellate Tribunal. The Appellate Tribunal hold that the Government of Pakistan had recognised Bangladesh on 23-2-1974 and prior to that Bangladesh was part of Pakistan. In its view recognition could not be given with retrospective effect i.e. from date of its existence on 23-3-1971. In the result the appeal was dismissed. The above questions of law with the statement of the case were referred to this Court under section. 66(l) of the Act by the Income-Tax Appellate Tribunal at the instance of the assessee-?companies. 3. (a) ?? I.T.R. 46 of 1982 M/s I.C.I. (Pakistan) Ltd. v. Commissioner of Income-tax. The assessment year involved 1975-76 and the accounting period ending 30-9-1974. The assessee claimed Rs.45,07,717 on account of written income value of assets of East Pakistan which was disallowed by the income-tax Officer. The appeals preferred by the assessee before Appellate Assistant Commissioner an Income-tax Appellate Tribunal, which were dismissed. (b)??????? I.T.R. 68 of 1982 M/s. Kohinoor Chemical Co. Ltd. v. Commissioner Income-tax. The assessment year involved 1972-73 and accounting period ending 31-3-1972. The Income--tax Officer disallowed the claim. The assessee filed appeals before the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal which was dismissed. (c)??????? I.T.R. 97 of 1979 United Bank Ltd. v. C.I.T. This reference under section 66(2) of the Act relates to the assessment year 1972-73. The Income-tax Officer refused to admit the claim for loss of income under section 10 of the Act. On appeal the Appellate Income-tax Commissioner maintained the said disallowance. The assessee went in appeal before the Income-tax Appellate Tribunal was also dismissed. The assessee moved an application for reference under section 66(l) of the Act. This application was also dismissed. (d)??????? I.T.R. 11 of 1983 Commissioner of Income-tax v. M/s. Lipton (Pakistan). Ltd. This relates to assessment year 1974-75, which corresponds to accounting period ending 31-12-1974. The assessee claimed loss under section 10(2)(vii) of the Act amounting to Rs.20,30,

708. This loss was not allowed by the Income-tax Officer. On appeal the Appellate Assistant Commissioner dismissed the appeal. The assessee went in appeal before the Income-tax Appellate Tribunal which was allowed vacating the order of the Appellate Assistant Commissioner and also setting aside the assessment and directing the Income-tax Officer to re-examine the portion and to consider the loss on the basis of written income value. (e)??????? I.T.R. 18 of 1979 M/s Siemens Pakistan Engineering Ltd., Karachi. The assessment year involved 1973-74 and the accounting period ending 30-9-1972. The written down value of the assets lost in East Pakistan is Rs.1,12,880 against its book value of Rs.1,61,

130. The Income-tax Officer disallowed this loss. In the appeal preferred by the assessee against the assessment, the Appellate Assistant Commissioner uphold the assessment order. In the further appeal preferred by the assessee, Income-tax Appellate Tribunal accepted the Department's contention and held that East Pakistan was part of Pakistan till 23-2-1974 and the assessee being ordinarily the resident of Pakistan, the question of discarding would not arise. The assessee filed reference application, which was allowed and the learned Appellate Tribunal referred the question to this Court for opinion. (f)??????? I.T.R?? 1979, M/s United Liner Agencies of Pakistan Ltd. Karachi v. Commissioner of Income-tax. The assessment year involved 1973-74 and the account period ending, 31-12-1972. The Income-tax Officer disallowed the losses. The assessee preferred appeal before the Income-tax Appellate Tribunal, which was declined. (g)??????? I.T.R. 6 of 1980 Pakistan Petroleum Ltd. v. Commissioner Income-tax. The assessment year involved 1973-74 and the account period ending 31-12-1972. The Income-tax Officer disallowed the loss. The assessee preferred appeal before the Income-tax Appellate Tribunal, which was declined. (h)??????? I.T.R. 15 OF 1981 M/S PAKISTAN RADIO HOUSE LTD. V. COMMISIONER OF INCOME-TAX. The assessment year involved 1972-73 and the account period ending 30-6-1972. The Income-tax Officer disallowed the amount. The appeal: before the Appellate Assistant Commissioner and the Income-tai: Appellate Tribunal were dismissed. (i)???????? I.T.R. 24 of 1981, M/s. Electronics Industries Ltd. v Commissioner of Income-tax The assessment year involved 1972-73 and the account period ending 30-6-1972. The Income-tax Officer disallowed the amount. The appeal before the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal were dismissed. (j)???????? I.T.R. 45 of 1982 1.C.1 (Pakistan) Ltd. v Commissioner of Income-tax. The assessment year involved 1975-76 and the account period ending 30-9-1974. The assessment claimed a loss of Rs.2,04,424 under section 10(2)(vii). The Income-tax Officer did not allow the claim. The assessee preferred appeals before the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal, which were dismissed. (k)?????? I.T.R. 22 of 1983 Commissioner of Income-tax, Zone 'A' v. Lucas Services Pakistan Limited. This reference related to assessment year 1973-74, which corresponds to the accounting period ending 31-3-1972. The assessee claimed loss of Rs.12,075 which was disallowed by the Income-tax Officer. The assessee filed an appeal before the Appellate Assistant Commissioner, which was dismissed. The assessee preferred appeal before the Income-tax Appellate Tribunal, which was allowed and the order of the Appellate Assistant Commissioner was vacated and set aside the assessment order quo ad hoc directing the assessing officer to re-examine the position and consider the loss on the basis of the written down value and in the light of the direction contained therein. The Commissioner of Income-tax moved an application under section 66(1) before the Income-tax Appellate Tribunal which was allowed and the following question of law was referred to this Court for its opinion:-- "Whether or the facts and in the circumstances of the case, the Tribunal was right in confirming the order of income-tax in regard to disallowance of loss of Rs.49,35,249 ???????? claimed by the assessee under section 10(2)(vii) of the Income-tax Act." It is necessary first to find out what is meant by words "is compulsorily acquired by a competent authority under any law for the time being in force, or of the word "discarded" as occurring in section 10(2)(vii) of the Act, which reads as follows:-- "10(2)(vii), in respect of any such building, machinery or plant which has been sold, transferred by way of exchange, or is compulsorily acquired by a competent authority under any law for the time being in force, or discarded or demolished or destroyed in the previous year, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant is actually sold, transferred of compulsorily acquired, as the case may be, or its scrap value: Provided that such amount is actually written off in the books of the assessee: Provided further that where the amount for which such building, machinery or plant is sold, transferred or compulsorily acquired, whether during the continuance of the business or after the cossation 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 o: the previous year in which the sale, transfer of compulsorily acquisition, as the case may be, took place and the business, profession or vocation in which such building, machinery or plant has been used, shall, for the purposes of subsection (1), be deemed to be carried on by the assessee in the year in which the sale, exchange or acquisiting, as the case may be, took place: Provided further that, for the purpose of this clause, any such machinery or plant which is exported or transferred outside Pakistan shall be deemed to have been sold and the sale value of such machinery or plant shall be deemed to be its original cost less all depreciation allowed excepting the further sum referred to in clause (vi); and the business, profession or vocation in which such machinery or plant has been used, shall, for the purposes of subsection (1) be deemed to be carried on the assessee in the year in which such export or transfer took place: Provided further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant which has been discarded or demolished or destroyed, and the amount of such moneys does not exceed the written down value, the amount allowable under this clause shall be the amount, if any, by which the difference between the written down value and the scrap value exceeds the amount of such moneys: Provided further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant as aforesaid, and the amount c)f such moneys exceeds the difference between the written down value and the scrap value no amount shall be allowable under this clause and so much of the excess as does not exceed the difference between the original cost and the written down value less the scrap value shall be deemed to be profits of the previous year in which such moneys were received: Provided further that for the purposes of this clause, the original cost of a building, the written down value of which is determined in accordance with the first proviso to subsection (5), shall be deemed to the written down value so determined as at the date of its being brought into use for the purposes of the business, profession or vocation." The words "compulsorily acquired by a competent authority under any law for the time being in force and discarded" have not been defined in the Act.

5. Messrs lqbal Naeem Pasha, Muhammad Naeem Khan, Sirajul Haq and S. A. Sarwana, Advocates appearing on behalf of the assessee Companies contended that the Bangladesh Government acquired the properties of the assessee Companies on 26-3-1972 under the Bangladesh Banks (Nationalization) Order, 1972 and the Bangladesh Abandoned Property (Control, Management and Disposal) Order, 1972. The Government of Pakistan recognized Bangladesh Government on 23-2-1974 as de facto Government. Their submission is that according to the practice of British and American Courts retrospective effect must be given from the date of its existence, that is, 25-3-1971.

6. Messrs Sheikh Haider, Waheed Farooqui, Mrs. Rashida Pate and Narrullah Awan, Advocates appearing on behalf of the revenue submitted, on the other hand, that the words "compulsorily acquired by any law for the time being in force" means that the property is to be acquired under the provisions of the Land Acquisition Act, 1894. The further submission was that the Bangladesh was part of the Pakistan till 22-2-1974 and it was for the first time recognized as Bangladesh Government on 23-2-1974. Their submission is that the Income-tax Authorities have correctly held the recognition can be effective from 23-2-1974. The arguments of the learned counsel for the Revenue cannot be accepted. The words "compulsorily acquired by the competent authority under any law for the time being in force" have not been defined in the Act.

7. According to the Short Oxford Dictionary the words "to acquire" mean to gain or to get as one's own (by one's own exertions or qualities). Its secondary meaning is to receive or to come into possession of. The use of the word "acquire" necessarily postulates, a change of relationship vis-a-vis thing or property, which is said to be acquired and which was not existing before. The notion of ownership of property implies various component rights, viz. that of possession, enjoyment, destruction, alienation, exclusion and others incidental toy the right of ownership. We are of the view that a person or competent authority who acquires a thing or property gets this right for the first time from someone else otherwise the use of the word "acquire" is inappropriate and will not convey the correct meaning. We notice that the words "compulsorily acquired by under any law, were not used to qualify the words "Land Acquisition Act". According to learned counsel for the Revenue these words "under Land Acquisition Act of Pakistan" are to be read after the words "compulsorily acquired". If the submission raised by learned counsel for the Revenue that property is compulsorily acquired under Land Acquisition Act, is accepted so as to exclude the property acquired by any competent authority clause (vii) would become redundant and mere surplusage. Clauses (vii) applies to property acquired by any competent authority.

8. It is trite that a term used by the legislature must be understood in the sense, which the context indicates, the kind of authority it refers to the authority is one, which is competent to acquire. We are of the view that the property can be acquired by any competent authority.

9. East Pakistan was part of Pakistan. A Secessionist regime in the East Pakistan under the leadership of Shaikh Mujeebur Rehman and with a considerable degree of external support declared its independence. The Government of Pakistan did not recognise Bangladesh Government till 23-2-1974. If a new state is created by the regime, it will in the plain language be an authority within the meaning of this provision. Any legal entity or juristic personality constituted by law for this purpose would be an authority within the meaning of clause (vii). The Bangladesh has been established under) the Constitution of Bangladesh. ???????????

10. In pursuance of the proclamation of independence Bangladesh read with the Provisional Constitution of Bangladesh Order, 1972, the President promulgated the Bangladesh (Nationalization) Order, 1972 on 26-3-1972 and the Bangladesh Abandoned Property (Control, Management and Disposal) Order, 1972 on 28-2-1972. The properties were acquired by the Bangladesh Government in pursuance of the above orders. The Bangladesh Government is the competent authority and is covered by the expression "competent authority"

11. The argument of learned counsel for the Revenue cannot be accepted. The words "any law" have to be interpreted in the sense they have acquired in law. It appears to us that if the intention had not been to include that the property- is acquired under any law, which had been law in East Pakistan before it became independent, it was unnecessary to add the words "any law for the time being in force." This appears to have been done with the deliberate intention of acquiring by competent authority tinder any law, even though this was not acquired under a law of Pakistan but' by competent authority) under a law of a exceeding state.

12. We have come to the conclusion that the Bangladesh Banks (Nationalization) Order, 1972 and the Bangladesh Abandoned Property (Control, Management and Disposal) Order, 1971 are within the words "any law for the time being in force" in clause (vii) of subsection (2) of section 10.

13. The International Community is not a static body. New states come into existence. Revolutions occur and new Governments establish themselves. Of these changes the members of the International community have the choice of approving or disapproving. Recognition is the process whereby a state acknowledges its approval of the change that has occurred. Mr. Iqbal Naeem Pasha invited our attention to Article 75 of International Law by L. Oppenheims. We may, with advantage, quote here a passage from Oppenheims Classic Treatise on International law. The learned author has observed at page 149: "According, at least, to the practice of British and American Courts recognition is retrospective in the sense that Courts treat as valid the acts of the newly recognised state or Government dating back to the commencement of the activities of the authority thus recognised. That rule, for which there appears to be no direct international authority, is one of the convenience rather than of principle. Convenience and good understanding between nations would seem to demand that once a foreign State or Government has been recognised, none of its acts, including those prior to recognition, should be regarded as mere nullity. In principle there is little to be said for treating as legally effective legislative acts performed at a time when the authority in question was, in the view of the non-recognising state, a mere instrumentality of power."

14. It is advantageous to reproduce paras 1429 and 1434 of Halsbury's Laws of England, Volume 18 (4th edition) pages 734 and 738. "1429. Recognition of de facto Government.

It is the practice of the United Kingdom Government to accord recognition to a new regime as the de facto Government of a state if it has in fact effective control over most of the territory of the state and its inhabitants, and this control seems likely to continue. Such recognition does not constitute a judgment upon the legality of the Government concerned, still less does .it imply approval of it. "1434. Recognition of de facto and de jure.-- A Government which is recognised by the Crown as exercising de facto Government authority in the territory, or the relevant area of the territory, of a foreign state, will be treated by the English Courts on the same footing for most purposes as a Government recognised as the de jure Government in respect of such territory over which it exercises actual authority since it has full responsibility there. Thus, its legislative and executive acts which affect property situated or companies incorporated in that territory will be given effect in the English Courts."

15. In the case of .4ksionairnoye Obschestre Dlis Mechamicheskoyi Obrakotky Dierevs (1) A.M. Luther v. James Sagar and Company, (1921) 3 K.B. 532, the facts are that in 1920 the defendant Company bought a quantity of birch, elder and aspen ply-wood from the representative of new Soviet Government of U.S.S.R. The plaintiff Company claimed title to wood on the ground that it had come from a factory in the U.S.S.R. that had been owned by it before being nationalised by a decree of June 20, 1918 of the Soviet Government. The plaintiff argued, inter alia, that the decree should not be recognised by an English Court because the Soviet Government had not been recognised by the United Kingdom, Roche, J. held that "I am not satisfied that the Majesty's Government of a Russian Federative Republic of any sovereign state or power. I, therefore, am unable to recognize it, or to hold it as sovereignty, or is able by decree to deprive the plaintiff of its property". The defendant preferred appeal against the judgment to the Court of Appeal. During the pendency of the appeal before the Court of Appeal, His Majesty's Government recognized the Soviet Government as the de facto Government on 20-4-1921.

16. The question before the Court of Appeal was "what is the effect of the recognition by His Majesty's Government in April 1921 of the Soviet Government as the de facto Government of Russia upon the post acts of that Government and how far back, if at all, does that recognition extend. Bankes L.J. after referring to a passage in the case of Underhill v. Herenandez (168 U.S. 250) wherein Fuller C.J. observed:-- "If the party seeking to dislodge the existing Government succeeds, and the independence of the Government it has set up is recognized, then the acts of such Government from the commencement of its existence are regarded as those of an independent nation. On principle the views put forward by these learned Judges appeal to me to be sound though there maybe cases in which the Courts of a country whose Government has recognized the Government of some other country as the cue facto Government of that country may have to consider at what stage in its development the Government so recognized can, to use the language to which I have already referred of those learned judges be said to have 'commenced its existence'. No difficulty of that kind arises in the present case, because, upon the construction which I place upon the communication of the Foreign Office to which I have referred this Court must treat the Soviet Government, which the Government of this country has now recognized as the de facto Government of Russia, as having commenced its existence at a date anterior to any date material to the dispute between the parties to this appeal. For some purposes no doubt a distinction can be drawn between the effect of the recognition by a sovereign state of the one form of Government or of the other, but for the present purpose in my opinion no distinction can be drawn. The Government of this country having, to use the language just quoted, recognized the Soviet Government as the Government really in possession of the powers of sovereignty in Russia, the acts of that Government must be treated by the Courts of this country with all the respect due to the acts of a duly recognized foreign sovereign state. Warington L.J. held:-- "The question then is whether the Court has any power to question the validity of the proceedings under which the property in the goods has prima facie been transferred to the defendants. The letter of the Secretary of State is clearly conclusive as to the status of the Soviet Government- namely that it is an independent sovereign Government: see Mighell v. The Sultan of Johore, per Lord Esher M.R. (1) It is well-settled that the validity of the acts of an independent sovereign Government in relation to property and persons within its jurisdiction cannot be questioned in the Courts of this country: 'Every sovereign State is bound to respect the independence of every other sovereign state, and the Courts of one country will not sit in judgment on the acts of the Government of another done within its own territory': Assuming that the acts in question are those of the Government subsequently recognized I should have thought that in principle recognition would be retrospective at any rate to such date as our Government accept as that by which the Government in question in fact established its authority. It appears from the letter of the Foreign Officer dated April 22, 1921, that that date is enterior to say of the events material to the present case. 'Recognition is the act through which it becomes apparent than an old state is ready to deal with a new state as an international person and a member of the family of nations'. (3) If this is so then provided the act in question was an act of the state so recognized it must in my opinion be entitled to the same respect as the act of a sovereign State, whether done before or after recognition." Scrutton L.J. observed that it appears to me:-- "In the present case we have from the Foreign Officer a recognition of the Soviet Republic in 1921 as the de facto Government and a statement that in 1917 the Soviet Authorities expelled the previous Government recognized by His Majesty. It appears to me that this binds us to recognize the decree of 1918 by a department of the Soviet Republic, and the sale in 1920 by the Soviet Republic of property claimed by them to be theirs under that decree, as acts of a sovereign State the validity of which cannot be questioned by the Courts of this country, unless it is possible to do so for the second reason argued before us, incompatibility with the moral and political policy of the United Kingdom." The Court of Appeal held that when a Government which originates in revolution or revolt is recognized by the political department of the Government as the de jure Government of the country in which it is established, such recognition is retroactive in effect and validates all the actions and conduct of the Government so recognized from the commencement of its existence.

17. In United States of America v. Morgan Relmont (301 U.S. 324=81 led 1134), the Supreme Court of America held that "the effect of this was to validate, so far as this country is concerned, all acts of the Soviet Government here involved from the commencement of its existence. This principle was followed in the case of United States of America v. Louies B. Pink (1942) 315 U.S. 203-86 Led 766.

18. The principles laid down in the above decision and the passage reproduced from a treatise of International Law and Halsbury's Laws of England lay down that the true effect of the doctrine of retrospectivity is that it applies to validate only those acts done by the newly recognised de jure Government at a time when it was the de facto Government and which were done within its own jurisdiction.

19. It is also clear that this Court, can take judicial notice of the fact that Bangladesh was recognised by Pakistan and normal diplomatic relations were established between the two Governments followed by an exchange of Ambassadors. According to the principles laid down by the British and American Courts recognition is retroactive, that is, recognition is retrospective in the sense that the Courts treat as valid the acts of the recognised States or Government falling back to the commencement of the activities thus recognised. In this view of, the matter it seems that learned Tribunal has not correctly held that the recognition can be from 1974.

20. Coming to the question, section 10(2)(vii) of the Act, which is already reproduced in the earlier part of this judgment. The properties were acquired by Bangladesh Government under the Bangladesh Banks (Nationalisation) Order, 1972 and the Bangladesh Abandoned Property (Control, Management and Disposal) Order, 1972 by the competent authority In these circumstances, we think it appropriate to hold that section 10(2)(vii) of the Act applies to all cases where the properties were acquired by the Bangladesh Government.

21. The learned counsel for the parties placed reliance on the case of Pakistan Services Ltd. v. C. I. T. (1986) 54 Tax 150, wherein a Division Bench of this Court interpreted the term 'Discard'. The learned Bench observed that "abandonment of assets by the petitioner cannot be construed as their discarding and as such the same cannot fall within the purview of clause (vii) of section 10(2) of the Act so as to entitle the petitioner to claim deduction` as aforesaid. It is, therefore, clear that the petitioner did not discard its assets in Dacca within the meaning of clause (vii) of section 10(2) and as such it is not entitled to claim any deduction thereunder". In our opinion, this represent the correct position in law. We are in respectful agreement with the proposition of law.

22. Under the circumstances, it must be held that the finding made by the Tribunal in regard to disallowance of losses claimed by the assessee under section 10(2)(vii) was not correct. The language of section 10(2)(vii) supports the view that the expression "acquired by competent authority" in the sense where it was intended to convey that the properties were acquired by competent authority under any law and the properties have ceased to exist so far the assessees were concerned or the assessees have completely divested themselves of all interests and rights in the properties concerned. The words used are discarded or acquired. This shows that the assessees in order to claim allowance under this subsection were required to show that they had severed all connections between themselves and the properties concerned which were either discarded or acquired by competent authority.

23. In the result it can be said that the properties were acquired by the competent authority within the meaning of section 10(2)(vii) of the Act. It was, therefore, entitled to claim under that section the deduction of the loss from the income. Answer to the questions as framed, therefore, must be in the negative, in favour of the assessees and against the Revenue. There shall, however, be no order as to costs. M. B. A./ U-22/ K?????????????????????????????????????????????????????? Reference answered in the negative.