1990 PLP (Trib (PTD)

ABRAR HUSSAIN NAQVI (JUDICIAL MEMBER).‑‑‑These are seven appeals; three by the assessee and four by the department. Two appeals have been filed by the assessee for the assessment year 1984‑85 while the third appeal relates to the assessment year 1987‑

88. The departmental appeals are for the assessment years 1978‑79, 1979‑80, 1983‑84 and 1987‑

88. All the seven appeals are being disposed of together with this consolidated order.

2. Assessee's Appeals. The assessee is a Public Limited Company deriving income from manufacture and sale of Sugar. Assessment Year 1984‑

85. The first grievance of the assessee in this assessment year is against disallowance of interest written off by the assessee amounting to‑Rs. 1,08,72,

673. The brief facts under which this issue has arisen are that before 1976 there was a group of companies of one family. However, on mutual agreement this group of companies was bifurcated and under this arrangement certain debits and credits were made and an amount of Rs. 1,85,37,879 became the liability of a sister concern, namely, Messrs Kohinoor Cotton Mills Limited. The assessee had been charging compound interest on this amount calculated month-wise, a detail of which has been supplied to us by the learned counsel for the assessee. The year-wise interest is detailed below:‑‑ Year ended Interest charged Rs. 30‑9‑1977 28,81,360 30‑9‑1978 81,61,607 30‑9‑1979 14,18,182 30‑9‑1980 8,56,744 30‑9‑1981 17,23,530 30‑9‑1982 23,09,280 108,72,673 It appears that subsequently a dispute arose between the assessee and Messrs Kohinoor Cotton Mills Limited in regard to the charging of interest. The claim of the assessee was that Messrs Kohinoor Cotton Mills Limited was liable to pay compound interest while the contention of the other side was that only simple interest was to be charged. As a consequence, an Arbitrator was appointed who gave the Award on 7‑3‑1983 in favour of Messrs Kohinoor Cotton Mills Limited holding that only simple interest was chargeable and not compound interest. This Arbitration Award was made rule of the Court by Civil Court on 28‑3‑1983. It may be stated here that since the assessee was under impression that compound interest was chargeable, it had been calculating compound interest as detailed above and had been showing as income of the assessee. It may further be pointed out that the interest charged by the assessee from the debtor company was reduced in each year from the interest payable to the banks by the assessee. This arrangement was not objected to by the department and had been continued. The assessee's case before the ITO as well as before the learned CIT (Appeals) was that in view of the Arbitration Award, made rule of the Court by the Civil Court, compound interest charged by the assessee had to be converted into simple interest and the difference amounted to Rs. 30,18,838 which had to be written off as a consequence of the Award. The balance amount of Rs. 78,53,835 out of the total claim of Rs. 1,08,72,675 was written off in view of the fact that the debtor company went into financial difficulties and ultimately applied to the Lahore High Court for voluntary liquidation on 15‑6‑1983. Since the debtor company owed considerable loans to some other financial institutions, such as National Bank of Pakistan, Habib Bank Limited, BCCI and Allied Bank Limited, these banks referred the matter to Banking Council on 21‑11‑1983. As a consequence, a meeting was arranged between the Senior Executives of the various banks, the Directors of the debtor company and the Directors of the assessee company and it was decided that if 1/3rd of the loans were written off, the debtor company would withdraw its application of liquidation from the High Court. As a consequence, the debtor company withdrew its application. It was in these circumstances that the assessee also wrote off the amount of Rs. 8,53,835 which was the interest amount up to 30‑9‑1982 and was roughly 1/3rd of the total outstanding loan against the debtor company amounting to Rs. 2,36,78,945.

3. The assessing officer rejected the assessee's claim on the ground that the amount of Rs. 1,85,73,579 had not been advanced to the debtor company as a business loan; the interest had been charged to tax in the earlier years and, thus, cannot be written off; proper resolution of the Board of Directors had not been made available; the principal amount has not been considered as doubtful of recovery; the award has only recommended to charge simple interest but has not mentioned that it was doubtful of recovery; and that the liquidation proceedings were at too early a stage.

4. On appeal the learned CIT (Appeals) maintained the order of the ITO. In regard to the claim of the assessee for writing off the amount of Rs. 30,18,838 which was written off as a consequence of the award by the Arbitrator, the learned CIT (Appeals) held that the Arbitrator had given the award to charge simple interest in the year under appeal and the same could not be given retrospective effect. It was, therefore, concluded that the assessee was not entitled to write off the amount of interest charged in the earlier years.

5. The learned counsel for the assessee, however, contended that the dispute in regard to the charge of interest was for the entire amount of loan payable by the debtor company right from the year 1976 when the bifurcation took place and the liability was created. In support of his contention, he has produced a copy of the Award of the Arbitrator and the order of the Civil Court making it rule of the Court. On perusal of the Award, we find that the dispute on the basis of which the matter was referred to the Arbitration was not in regard to the future charging of interest alone. The dispute referred to the Arbitrator was in regard to the charging of interest right from the beginning. In para. (2) of the Award, pinpointing the nature of dispute, the learned Arbitrator has stated:‑‑ "Para.

2. That the dispute arising between the parties is that Kohinoor Cotton Mills Limited from the year 1976 was not having good financial condition and requested the other company, i.e. Kohinoor Sugar Mills Limited for advancing loans from time to time. It was agreed by Kohinoor Cotton Mills Limited that the loans will be returned from time to time on the improvement of financial condition of the company and simple interest on the loans taken will also be payable by Kohinoor Cotton. Mills Limited to Kohinoor Sugar Mills Limited. In the past period of 7 years many transactions have been taking place and Kohinoor Cotton Mills Limited have been receiving loans and repaying back the same and the point of controversy between the parties is that Kohinoor Cotton Mills Limited says that the interest payable to Kohinoor Sugar Mills Limited is simple and not compound. The other company, i.e. Kohinoor Sugar Mills Limited is of the view that the loan was advanced on the understanding that the interest payable. will be compound interest with quarterly rests." After discussing various aspects of the case and hearing both points of view, the learned Arbitrator observed: "Moreover, the respondent comp any has been receiving repayments of loans with simple interest without any protest for such a long time." Then finally the learned Arbitrator held that the respondent company was not entitled to charge compound interest with quarterly rests. In para 6 of the Award the Arbitrator concluded as under: "Para.

6. In the light of what has been discussed above, I make this award that the petitioner‑company is not liable to pay compound interest with quarterly rests to the respondent‑company for the loans advanced by the respondent‑company to the petitioner‑company for the year 196 onward." By its order dated 28‑3‑1983 the Civil Court made the Award a rule of the Court. From the perusal of the; Award and its final conclusion quoted above, it is evident that the dispute between the parties which had been referred to the Arbitrator was in regard to the charge of interest right from the inception and advancing of loans. It is for this reason that the learned Arbitrator has specifically and categorically stated that the assessee was not entitled to compound interest from the debtor company "from the year 1976 onward". In the face of this categorical award, the learned CIT (Appeals)' view that the award had no retrospective effect, does not hold water. We are really surprised as to how the learned CIT (Appeals) has given such an observation. As for the objection of the assessing officer that once an income has been treated as income in the earlier years, it cannot be reversed subsequently, is not supported by any provision of law. The substance of the assessing officer's detailed arguments was that the assessee's action of writing off the interest was for avoidance of proper tax. The assessing officer is oblivious of the fact that there was no compulsion on the assesses to charge interest at all simple or compound if the assessee wanted to avoid the tax. In such a case the assessing office‑ could charge simple interest either under Explanation 8 of Section 4 of the repealed Income‑tax Act, 1922, or under section 12(7) of the Income Tax Ordinance, 1979, in which case only a simple interest would have been charged. This has not been the allegation either by the assessing officer or by the learned CIT (Appeals) that the award was collusively obtained by the assessee. This is a legal document which has been made rule of the Court and, thus, has judicial confirmation. We have seen above that the award was effective from the year 1976 onwards. Therefore, what the assessee has done is that he has only complied with the order of the Court. The compound interest, which has been wrongly charged by the assessee under some misconception, has been written off. Again, there is not dispute that the amount' has not been actually written off by the assessee. We, therefore, hold that the amount of Rs. 30,18,838 had rightly been written off by the assessee as a consequence of Award which had been made the rule of the Court by the Civil Court.

7. In regard to the amount of Rs. 78,53,835 the learned CIT(A), as stated above, held that such bad debts could not be allowed to be written off under section 23(x) of the. Ordinance as bad debts can only be allowed to be written off if the income is to be computed as business income under section 22 of the Income Tax Ordinance. This conclusion has been drawn by the learned CIT(A) on the assumption that the interest income was assessable in the earlier years as income from other sources. The learned counsel for the assessee argued at length to contend that firstly the amounts of loan advanced were part of the business transactions of the assessee. In support of his contention lie has filed details of the transactions of receipts and payments with Messrs Kohinoor Cotton Mills and the receiving back of certain amounts alongwith the interest. He has further given the details of the interest originally charged as compound interest as well as the revised amounts on the basis of the calculation charging simple interest From this chart it appears that the compound interest in the assessment year 1976‑77 was Rs. 26,81,360.39 which was reduced in the assessment year 1979‑80 to Rs. 8,56,743.87 and calculating on the basis of simple interest the original interest in the assessment year 1976‑77 was Rs. 25,38,696.91 which was reduced in the assessment year 1979‑80 to Rs. 1,78,896.44. It again increased in the assessment year 1980‑81 to Rs. 17,23,530.11 calculating as compound interest and Rs. 6,52,375.16 calculating as simple interest. Similarly, in the intervening assessment years 1977‑78 and 1978‑79 there was constant variation of interest. This shows that this was not a static amount on which the calculation of interest was made. The receiving and payment and making fresh advances is a continuing process from 1976‑77 onwards the detail of which has been filed by the assessee. In this detail there were some of the amounts which also indicate that these were business transactions. For instance, charges on account of freight and octroi had been received by the assessee, cost of POL had been paid, cost of cloth had been received and truck loading charges have been paid by the assessee. It has further been contended by the learned counsel for the assessee that advancing of loans was one of the businesses of the assessee as is evident from clause 115 of the Articles of Registration. In sub‑clause (aa) of this clause it has been provided that the directors can make advances, deposits or loans of any money of the company this sub‑clause reads as under:‑‑ "(aa) To make advances, deposits or loans of any money of the company to such persons upon such security or without security as they may think fit and generally to direct, manage and control the moneys and funds of the company and the keeping of accounts of the company." From reading of this sub‑clause it is evident that the company had authorised the Directors to make advances to the other companies and therefore, that was one of the purposes of the company to advance loans. In any case the entire reasoning of the learned CIT (A) that the income of the assessee can possibly be charged as income from other sources and, therefore deductions could be allowed under section 31, is misconceived. The question which requires consideration in this assessment year is as to whether the interest written off by the assessee can be allowed as a bad debt to the assessee while computing the income of the assessee from business. In this assessment year there is no question that the assessee's income is not being computed under section

22. Therefore, there is no reason why section 23(x) could not be applied. The computation of income of the assessee is not being done under section 30 of the Income Tax Ordinance. When the assessee's income is admittedly being computed from business under section 22 of the Income Tax Ordinance, all the provisions of Section 23 are applicable. This is absolutely besides the point as to how the income in the earlier years could possibly be computed. Moreover, both the learned ITO as well as the learned CIT (A) are under the wrong impression that only those bad debts can be allowed to be written off which are relatable to the business or profession etc. It appears that both the officers have the wrong impression because of the provision as was available in the repealed Income Tax Act where these restrictions were provided. Under clause (xi) of Section 10(2) of the repealed Income‑tax Act, it was provided that the "bad and doubtful debts, due to the assessee in respect of that of his business, profession or vocation", could be written off provided the amount was actually written off as irrecoverable in the books of the assessee. The relevant clause is reproduced below:‑‑ "(xi) When the assessee's accounts in respect of any part of his business, profession or vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the assessee in respect of that of his business, profession or vocation and in the case of an assessee carrying on a banking or money lending business, such sum in respect of loans made in the ordinary course of such business as the Income‑tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the gooks of the assessee."

8. However, there has been a drastic change in the Income Tax Ordinance where in the corresponding clause (x) of Section 23 of the Ordinance the framers of the new law thought fit to omit the restrictions placed by the repealed Income -tax Act. Clause (x) of Section 23 of the Income Tax Ordinance is reproduced below:‑‑ "(x) In respect of bad debts, such amount (not exceeding the amount actually written off by the assessee) as may be determined by the Income Tax Officer to be irrecoverable;" It would be noted that the words "in respect of bad and doubtful debts, due to the assessee in respect of that of his business, profession or vocation" are conspicuously omitted by the new law. Under the new provision all the bad debts which had been actually written off by the assessee could be claimed as deduction if the ITO has determined it to be irrecoverable. In the present case the aforesaid amount has been actually written off by the assessee as bad debts and only point which was required to be determined was as to whether in the circumstances of tae case this amount was irrecoverable or .not. Here it may be noted that the word "irrecoverable" does not mean that the amount is impossible to be recovered. This word only means that prime facie the amount with all probability, is irrecoverable. This interpretation is supported by the fact that in the subsequent provision it has been provided that if such amount which has been written off as bad debt and has been allowed as deduction, is subsequently recovered, then that amount has to be treated as income of the assessee. Therefore, it is evident that the law presumes that such an amount is not absolutely irrecoverable but there was always a possibility of recovery. Section 25 of the Income Tax Ordinance takes care of such a situation where an amount is written off as bad debt and, thus, allowed as deduction under section 23 of the Ordinance, then if it is recovered subsequently, it is to be treated as income of the assessee and such income would be treated as income from business or profession for that year.

9. Now we examine cite circumstances of the case under which the amount has been written off. As stated above, Messrs Kohinoor Cotton Mills was admittedly in financial difficulties. The debtor company owed considerable amount of money to other companies including the National Banks and the debtor company had already filed application for liquidation. The Board of Directors in its meeting held on 8th May, 1981 made certain decision and an extract from the minutes of that meeting have been placed on our record. Regarding state of affairs, of Messrs Kohinoor Cotton Mills the minutes read as under: "Regarding Kohinoor Cotton Mr. Farooque Saigol informed that unfortunately the company had to apply for liquidation in the High Court and, therefore, charging interest meant only creating a fake income and, therefore, interest was not charged. Regarding the state of affairs of Kohinoor Cotton, he further informed the Board, that although the company was technically in liquidation as at 30‑9‑1983, but subsequently, on intervention of the Banking Council of Pakistan (who had accepted the Cotton Mill's case for consideration and recommending to Sick Mills Committee for relief and restarting the operation) the company had applied in the Court for withdrawal of the liquidation application. He continued that the considered opinion was that the Banking Council would consider relief to the tune of 33% in the bank loans, provided the Kohinoor Sugar also gave the same treatment to their recoverable from the Cotton Mills. Keeping this in view it was proposed to write off the interest element included in the total outstanding in our books, which in any case was unsecured " In its Annual General Meeting held on 31st May, 1981, the company decided to write off the aforesaid amount. From the above circumstances it is evident that the circumstances did warrant to write off the interest by the assessee. The ITO's objection that the principal amount has not been written off in the circumstances of the case seems to be ridiculous. Similarly, the ITO's objection that writing off the interest has not been decided by the Board of Directors through a proper resolution is also belied by the facts stated above. Firstly, the Board of Directors did pass a resolution and the share‑holders in the Annual General Meeting have also approved this resolution. The objection of the ITO that it is too early a stage to write off a bad debt also seems to be without any merit keeping in view the peculiar circumstances of the present case. It will not be out of place, to mention here that in spite of efforts of Messrs Kohinoor Cotton Mills as well as the assessee company, the financial position of Messrs Kohinoor Cotton Mills could not be improved with the result that its business operation stopped on 28‑6‑1982 and liquidation proceedings had been taken again before the Lahore High Court Consequently, by its order dated 18‑4‑1989 the High Court passed an order for winding up the company. The High Court after hearing all the concerned parties observed as under:‑‑ "Mills had stopped its business since 28‑6‑1982. The total liability of the company presently is more than, Rs. 16 crores, which is more than the value of its assets. The liability is mounting every day due to addition of interest, on the loans advanced to the company. In these circumstances, I am of the considered view that it is just and proper at this stage to pass order for winding up of the company" It is true that this order by the High Court has been passed subsequent to the assessment order but at the same time since a copy has been placed on our record we cannot close our eyes to the subsequent development which has taken place in this case. This order only shows and proves that the apprehension and the decision of the assessee company to write off the bad debts was correct though it has been proved by the subsequent events culminating in the order of the High Court who ultimately wound up the company. In these circumstances, we are of the considered view that the assessee company was fully justified in writing off the interest which roughly amounted to 1/3rd of the total liability of the debtor company and the decision was taken in the peculiar circumstances of the case which are subsequently proved to be correct. As stated above, even otherwise we see no reason why the department should not allow such a deduction in such circumstances of the case which are subsequently proved to be correct. As stated above, even otherwise we see no reason why the department should not allow such a deduction in such circumstances of the case when in the face of the clear provision provided by Section 25 of the Income Tax Ordinance according to which if subsequently the amount is recovered that would be treated as income of the assessee, the department is not going to suffer a loss on this account. In the present circumstances it would be unjust and unfair to charge tax on notional income which is not available to the assessee nor there is apparent possibility of recovery. As quoted above the High Court had observed that the total liability of the assessee was more than Rs. 16 crores which was more than the total value of the assets of the assessee. The liabilities owed to the National Bank alone are more than Rs. 6 crores. There are liabilities to the other Banks as well. It is common knowledge that the amount owed to the banks must be secured loans which have preference to the unsecured loans and the assessee's loan being unsecured loan does not have any preference. Thus, the assessee had no chance of recovery at least of interest and even for the principal amount there are meagre chances of recovery of the entire amount. In such circumstances, we feel that the amount of interest has rightly been written off by the assessee as irrecoverable.

10. Profit and loss account. The assessee has objected to the following disallowances out of the profit and loss account:-- Claimed Disallowed Rs. Rs. (1) Travelling & conveyance 3,95,934 30,000 (2) Telecommunication 4,89,75 73,463 (3) Rent, rates and taxes 1,40,982 10,000 (4) Vehicle running 11,84,806 1,20,000 (5) Staff welfare 12,38,290 50,000 (6) Repair and maintenance 2,47,110 15,000 (7) General Charges 1,35,177 20,000 The disallowance, under Items Nos. 1, 3, 5, 6 and 7 were made as un-detailed and un-vouched expenses. No further details have been produced before us either. Therefore, the disallowances made by the ITO are reasonable and maintained. In regard to the Telecommunications the disallowance has been made by the ITO at 15% of the claim. The learned counsel for the assessee, however, contended that these expenses being of a company, there is no personal element involved. There is a force in this contention of the learned counsel for the assessee. The addition under this head is directed to be deleted. Under the head Vehicle running and maintenance the ITO disallowed the part of the expenses on the ground that these were excessive and the disallowance has been made keeping in view the number of working days. The claim was, not also fully vouched. The disallowance is therefore maintained.

11. ITA No. 1894/LB/1987‑

88. This appeal for the assessment year 1984‑85 has been filed by the assessee against the order of the learned CIT(A), dated 24‑5‑1988. What happened in this case was that the assessee had sold sugar to the tune of 3,938.8 Metric Ton of free sale quota of sugar in the open market in consideration of Rs. 29,850,4

920. On appeal the learned CIT(A) set aside the order of the ITO on this issue. Before the learned CIT(A) it was pleaded that the assessee had not been confronted and the assessee had made the sale of sugar at the controlled rate to its employees and to the growers to the tune of 912 Metric Ton and that in the parallel cases quoted by the ITO it was not clear as to whether the sugar sold to the growers anti employees at fixed rate was included or not whip working out the average sale rate and that the average sale rate of the assessee after excluding the sales to the growers and employees worked out to Rs. 7,823 per Metric Ton. On re‑assessment the assessing officer, though accepted the contention of the assessee that sugar to the tune of 912 Metric Ton was sold at the controlled rate to the growers and employees but average sale rate was still adopted at Rs. 8,000 per Metric Ton for the balance of the sugar sold. He; therefore, maintained the addition of Rs. 5,35,

035. This addition has been maintained by the learned CIT(A). The grievance of the assessee in this appeal is that the ITO has not complied with all the instructions of the learned CIT(A) while setting aside the original assessment order. It was contended that the assessee's sales were to the verifiable parties and the assessing officer had not given any finding that the assessee's sales were unverifiable no such addition could be made merely on the ground that in some other parallel cases higher average sale rate has been shown. It was submitted that the ITO had not compared the parallel cases to find out as to whether the average sale rate declared in the other parallel cases was inclusive of the sales to the growers or it was worked out after excluding the sale rate to the growers at controlled rate. On perusal of the original assessment order as well as the re assessment order, we find, that the assessing officer has not given any finding whatsoever as to whether the assessee's sales in the open market were unverifiable or not. Unless the assessee's accounts have been rejected and it could be found that the assessee's sales were made to unverifiable parties and without making attempt as to whether the assessee's contention to have made sales on the given rates, was incorrect, there was hardly any justification for adopting the higher sale rate merely on the basis of parallel cases. The question of comparison with the parallel cases could only arise, when it was found that the assessee's sales were to unverifiable parties or that on verification it was found I ‑that the assessee had not made sales to parties on the given rates. We might have set aside the issue and remitted the case back to the ITO but in the circumstances when the assessing officer has not complied with the entire instructions of the learned CIT(A) when he had originally set aside the order, we deem it fit not to provide another opportunity to the ITO. Consequently, we direct that addition of Rs. 5,35,035 should be deleted as the assessing officer had not first held that the assessee's sales were to unverifiable parties. Mere fact that the assessee's sale rate on average was slightly lower than in other parallel cases, is not sufficient ground to reject the assessee's account version unless these accounts are held to be defective. Even otherwise, the sale rates in the market are subject to fluctuation. Unless the sale rates on one particular date are compared; it can not be said that in one case the sale rate is lower on average rate basis.

12. Assessment year 1987‑

88. In this assessment year the first grievance of the assessee is in regard to the addition of Rs. 1,61,223 under the head Social Security. The assessee had incurred an expenditure on account of penalty on arrears of social security. The ITO had disallowed the claim on the ground that penalties could not be allowed as necessary business expenditure. This addition has been maintained by the learned CIT(A). The learned counsel for the assessee appearing on behalf of the assesses has not two able to show as to how a penalty imposed on the assessee could be a necessary business expenditure. We, therefore, see no reason to interfere in the orders of the officers below and this addition is maintained.

13. Another addition of Rs. 17,33,506 had been made on account of provision for cane equality premium to be paid to the growers. This liability has been provided by the assessee in the assessment year under consideration on account of Government instructions. The assessing officer as well as the learned CIT(A) has disallowed this claim solely on the ground that the assessee had filed Writ Petition before the Lahore High Court and the matter being sub judice no such expenditure could be allowed. The learned counsel for the assessee contended that the Punjab Government has, through various notifications, directed to all the Sugar Mills to allow a premium of 11 paisas per maund of cane for each 0.1% of excess recovery on account of higher sucrose contents over and above 8.55% than the recovery assumed in the official price formula, should be allowed to the cane growers and paid at the end of the season. According to the assessee, on the basis of the directions of the Government the quality premium to be paid to the growers in the assessment year 1987‑88 worked out to Rs. 17,33,

506. It was submitted that it was an ascertained trading liability and, therefore, could not be disallowed on the ground that it was merely a provision. It was submitted that mere fact that the Writ Petition is pending with the Lahore High Court would not debar the assessee to claim deduction of this ascertained liability created on the directions of the Government.

14. We note that under clause (xviii) of Section 23 (1) of the Income Tax Ordinance it has been provided that any expenditure laid out or expended wholly and exclusively for the purpose of such business or profession is an allowable expenditure. The officers below have not disputed that this is not an ascertained liability under the directions of the Government. The only objection was that the matter being sub judice it would be paid after the decision of the Court. However, under the aforesaid clause (xviii) of Section 23(1) of the Ordinance any expenditure which has been expended or laid out is an allowable expenditure provided it is wholly and exclusively for the purpose of such business or profession. Again there is no dispute that such an expenditure is not wholly and exclusively for the purpose of business of the assessee. The officers below have not considered the word laid out What the assessee has done in the assessment year under consideration is that the expenditure has been laid out. The expenditure being ascertained and being provided in the accounts on the directions of the Government, has to be allowed to the assessee when admittedly the expenditure is wholly and exclusively for the purpose of business of the assessee and the system of accounting is mercantile. Mere fact that the matter is sub judice in the Court would not disentitle the assessee to claim this expenditure as the assessee has merely laid out the expenditure and has not paid it. The expenditure has been `laid out' because of the pendency of the Writ Petition, otherwise it would have been paid. In Calcutta Co., Limited v. C.I.T. reported as (1959) 1 Tax p. 159 (part III) an estimated accrued liability which was to be discharged at a future date was held to be an allowable expenditure. In the present case the liability has been exactly calculated. Similarly, in Metal Box Company Ltd.'s case reported as (1969) 73 ITR p. 53, the Supreme Court of India held that estimated liability in respect of gratuity, though contingent, amounts to an ascertained liability and as such an allowable expenditure. It may be noted that any expenditure which is to be incurred by an assessee on the directions of the Government is an admissible expenditure. This principle was laid down in 1980 h P T D 210 by the Peshawar High Court. In another recent decision the Karachi High Court in Tanveer Textile Mills v. C.I.T. reported as 1989 P T D 1137, it was t held that statutory liabilities are the trading liabilities

15. Talking from another angle it may be noted that, as stated above, these are admittedly trading liabilities and these trading liabilities have been disallowed only for the reason that a Writ Petition has been pending before the High Court. Had the Writ Petition not been pending the assessee would have paid the liabilities and the assessing officer would have allowed it. Now suppose this disallowance is maintained and the assessee's Writ Petition is subsequently dismissed and the assessee will have to pay these trading liabilities as required by the Government then whether the assessee would be allowed these liabilities in the year in which it is paid. Obviously the objection would be that this trading liability being not relatable to the assessment year in which it is paid is not allowable. Thus, the assessee will have to suffer for no default of his. The trading liability is disallowed in the year under consideration because the Writ Petition is pending. In the subsequent year if it is paid it would be disallowed because it is not relatable to that year. It, therefore, follows that the course adopted by the assessee was the course which is reasonable and in accordance with law. What the assessee had done is that it has not paid because it has to yet to he decided by the High Court and it has just laid out the expenditure. If the assessee's Writ Petition is dismissed it naturally would be paid in the subsequent year. If it is accepted then the department again is not going to suffer because under section 25 read with clause (b) of the Income Tux Ordinance the same will he treated as income of the assessee. In that section where any allowance or deduction is made under section 23 in respect of a trading liability incurred by the assessee and subsequently the assessee derives any benefit in respect of such trading liability the value of such benefit shall be deemed to he income of business or profession of that year. Therefore, it is the only reasonable method which has been adopted by the assessee. The assessee has laid out the liability already incurred by him which will be treated as income of the assessee if ultimately the assessee fails in the High Court.

16. We, therefore, accept the assessee's contention and direct that the expenditure laid out by the assessee for the purpose of payment to the growers as quality premium which is the trading liability of the assessee may be allowed as an admissible expenditure. However, it is directed that if the assessee's Writ Petition is accepted then the same liability shall be treated as income of the assessee as required by clause (b) of Section 25 of the Income Tax Ordinance. In case this trading liability remains unpaid for a period of three years of the expiration of the income year under consideration the same liability shall be deemed to he income from business of the assessee of the year in which such finding is made as required by clause (c) of Section 25 of the Income Tax Ordinance.

17. Departmental appeals for the assessment years 1978‑79 and 1979‑

80. In these two assessment years the department is aggrieved against the directions of the learned CIT(A) to revise the calculation of the surcharge payable for the each year by treating the tax payable by the assessee‑company as retained income. On perusal of the order of the learned CIT(A) we find that he has followed the decision of the Tribunal reported as (1979) 40 Tax

47. In numerous other cases as well the Tribunal has followed the earlier decision of the Tribunal and we have no reason to disagree with the earlier order of the Tribunal. The departmental appeal for these two years, are therefore, dismissed.

18. Assessment year 1983‑

84. In this departmental appeal the department is aggrieved against the allowing of claim of loss at Rs. 4,86,955 to the assessee on disposal of its assets. The circumstances of the case are that the assessee had discarded certain assets the written down value of which was Rs. 6,20,755 and the scrap value of the sold assets was Rs. 1,33,800 which resulted in a loss of Rs. 4,86,

955. The claim was disallowed by the ITO on the ground "These assets having been extinguished not as a class because they were dismantled scrap and sold loss cannot be allowed". The learned CIT(A), however, accepted this claim on the ground that such a claim was admissible as deduction under rule 7(b)(ii) of the Third Schedule. The learned D.R. has not been able to displace the finding of the learned CIT(A). On perusal of the relevant clause we find that if any class of assets is disposed of by the assessee then if the sale proceeds are less than the written down value the deficit shall be deemed to be an expenditure deductible from the profits and gains of the business or profession of that year. In view of this clear provision of the law, no exception can be taken to the order of the learned CIT(A). Hence, for this year as well the departmental appeal is dismissed,

19. Assessment year 1987‑

88. The only grievance of the department in this assessment year is against the deletion of addition of Rs. 7,40,654 on account of reduction of Tax credit from the cost of the new assets. The learned ITO had made the disallowance only for the reason that depreciation on the amount of tax credit of Rs. 21,33,288 was admissible and that department had filed references on this issue in large number of .cases before the superior Courts. On appeal the learned CIT(A) accepted the claim following the decision of the Tribunal reported as (1987) 56 Tax 25 and directed not to exclude the amount of tax credit from the cost of assets, as it cannot be excluded under clause (b) of such‑rule(8) of rule 8 of Third Schedule of the Income Tax Ordinance. Respectfully following the earlier decision of the Tribunal cited above, we have no reason to interfere in the order of the learned CIT(A) on this issue. Consequently, the departmental appeal for this year is also dismissed. M.B.A./885/T Order accordingly.