1985 PLP 389 (PTD)

(v) Income from other sources. (vi) Capital gains.

8. Sections 7,8, 9, 12 and 12‑B relate to playability and computation of tax under the various Heads of Income. Section 12 is as follows: S.12‑1 "The tax shall be payable by an assessee under the Head Income from other sources in respect of income or profits and gains of every kind which may be included in his total income if not included under any of the proceeding heads". S.10(2) "Such income, profits and gains all shall be computed after making allowances for the amount of interest paid in respect of money borrowed for the purpose acquisition of part of the share capital of a company and for any expenditure not being on the nature of capital expenditure incurred solely for the purpose of making or earning such income, profits or gains: (a) any personal expenses of the assessee; or (b) an interest chargeable under this Act which is payable without (Pakistan) not being interest on a loan issued for public subscription before the Ist day of April 1938, or not being interest on which tax has been paid or from which tax has been deducted under section 1 or; (c) any payment which is chargeable under the Head "salaries", if it is payable without (Pakistan) and tax has not been paid thereon nor deducted there from under section 18". S.10 (vi)(b) "Where in the assessment of the assessee or, if the assessee as a registered firm, in the assessment of its partner, full effect cannot be given to any such allowance in any year not being a year which ended prior to the Ist day of April, 1938, owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions/of clause (b) of the proviso to subsection (2) of section 24 of the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following year in respect of the same asset or assets and deemed to be part of that allowance, or, if there is no such allowance for that year, be deemed to be the allowance for that year, and so on for succeeding year". S.24(2) "Where depreciation allowance is under clause (b) of the proviso to clause (vi) of subsection (2) of section 10 also to be carried forward, effect shall first be given to the provisions of this subsection." S.24(2‑B) "Where an assessee sub stains a loss such as is referred to in subsection (2‑A) and the loss cannot be wholly set off in accordance with the provisions of that subsection, the portion not so set off, shall be carried forward to the following year, and set off against capital gains for that year, and if it cannot be so set off, the amount thereof not so set off shall be carried forward to the following year and so on, so however that no such loss shall be so carried forward for more than six years."

9. Section 2 (6‑C) proves that "income" "includes among other (v) from other sources.

10. Section 6 of the Act classifies that taxable income under the several Heads but the scheme is that income‑tax is one tax and section 6 classifies the taxable income under different Heads for the purposes of computation of the net income of the assessee. Section 24 (1) provides for set off the loss under one of the Heads mentioned in section 6 against the profits under a different Head in the same year.

11. From the charging provisions of the Act it is discernible that the words "income" or "profits" and "gains" should be understood as including losses also, so that in one sense "profits" and "gains" represent plus income whereas losses represent minus income. Both positive and negative profits are of a revenue character. Both must enter into computation. The learned counsel for the Department has contended that divided income being deemed income and in order to determine profits depreciation has to be deducted from the profits. The Tribunal misdirected itself by accepting appeal of the respondent assessee and directing that the income from bonus shares of the respondent assessee should be taxed separately and should not be set against business loss.

12. The profits of a company can be capitalised in accordance with the Articles of Association of a Company and the law. On the capitalization of the profits they cease to be profits in the hands of the company. The nature of the asset is changed although it does not make any difference in the total assets of the company.

13. Under Finance Act, 1967, mode of calculation of super tax payable by companies is set in paragraph 3(a) of Part‑II of the V Schedule of that Act which applies to the assessment‑year. There is no dispute that under the Finance Act in calculating the Super Tax payable at the rate of 12.5 per cent as such amount of any bonus shares issued by the company to its share‑holders is to be included.

14. The Income‑tax Officer deducted Rs. 51,92,856 being the loss from Rs. 55,05,500 being bonus income and taxed the balance income of Rs. 3,12,

644. The contention of the respondent /assessee before the Income‑tax Officer as well as before the Tribunal was that the said amount of Rs.55,05,500 should not be taken in to account while determining the income. The Tribunal held that the amount should not be taken into consideration.

15. The bonus shares declared, issued or paid by the assessee company cannot be treated as income but it was a deemed income. It was, therefore, wholly erroneous on the part of the Income‑tax Officer to deduct the amount from the income. This could not be intention of B the Legislature in enacting Explanation

4. While still on this point, we may state here that a Circular No. 9C No. 48 (5) I.I.R. dated 15‑4‑1959 explained the implication as under: "Explanation 4 to this section which appears as a new provision of law, does not in fact imply any fresh change in law. It is only clarificatory. The Finance Act of 1968 provided that bonus or bonus shares issued by a company to its share‑holders would be deemed to be income of the company issuing it and it was made liable to super tax in the hands of the company. This object was secured by an amendment section 55 of the Income‑tax Act (rather say insertion of a new section 56‑A in 1958). It is not considered advisable to express this liability of companies in respect of bonus share issued by them in clearer terms. The first part .of the amendment clause 6 (c) of section 2 and this Explanation I V aim at this clarification." The above circular fully supports the view taken by the Tribunal, which was also find in accord with law.

16. In the Finance Act of 1967 the levy of super tax was regulated by Part‑II A(3) (a) of the V Schedule.

17. Explanation 4 to section 4 of the Act creates a fiction that it should be treated as income accruing to the company during that year. It shall be so treated only to the extent that the company declared bonus shares. This is a fiction created only for the purposes of super tax explanation creates a fiction and the fiction cannot be extended further or so interpreted as to go beyond the Legislature's intention in creating the fiction. Explanation 4 clearly reveals the intention.

18. It is contended on behalf of the assessee the right to carry forward unabsorbed depreciation is given by proviso (b) to section 10(2) (vi) and by the very terms of section 10(2) (vi) the depreciation which has remained unabsorbed had to be taken into account before the income for the year in question of the company was computed. It cannot be disputed that for a determination of the profits under the "Income from business" all allowances permissible under section 19(2) must be deducted when the profits and gains from the business, profession or vocation carried on by an assessee are to be computed for the purpose of determining the tax which is payable by the assessee. In a given case it is possible that on account of there being no profits or gains chargeable for that year or on account of the profits or gains chargeable for being less than the allowance, full effect cannot be given to any such allowance. In such case, the proviso contemplates that the allowance or part of the allowance to what effect has not been given, as the case may be, is to be added to the amount of the allowance of depreciation for the following year, and it is deemed to be part of that allowance, or if there is no such allowance for that year, it is to be deemed to be allowance for that year and so on for succeeding years. This is made subject to the provisions of clause (b) of the proviso to subsection (2) of section 24, which provides that where depreciation allowance is under clause (b) of he proviso to clause (vi) of subsection (2) of section 10 also to be carried forward, effect shall first be given to the provisions of subsection (2) of section 10 also to be carried forward, effect shall first be given to the provisions of subsection (2) of section

24. Now, it is clear from the provisions of subsection (2) of section 24 that no loss is permitted to be carried forward for more than six years. There is no imitation for carrying forward depreciation allowance and clause (b) of the proviso to subsection (2) of section 24, therefore, fixes a priority that before unabsorbed depreciation is to be set‑off, the losses contemplated by subsection (2) of section 24 must be set‑off first.

19. It appears to us from the words used in the proviso (b) to section 24(2) that depreciation allowance is treated differently from the carried forward losses and is not regarded as being of the same category as the carried forward losses. The main provisions of section 24(2) deal with the carried forward losses. Then the proviso says that where there are not only carried forward losses but also depreciation allowance, which is carried forward, priority will be given to the carried forward, losses and not to the depreciation allowance. The language used in the proviso appears to us to indicate that section 24(2) is a provision which deals with carried forward losses while carried forward depreciation does not come within section 24(2), but flows through an entirely different channel which is provided under section 10(2) (vi), proviso (b). The subject of depreciation allowance has been dealt with in section 10(2) (vi). The provision permitting it to be carried forward and the consequence of its being carried forward is also contained in section 10(2) (vi) proviso (b). It is only because both the carried forward losses under section 24(2) as well as carried forward depreciation allowance under section 10(2) (vi) proviso (b) are capable of being adjusted against the profits and gains of business of the year to which they are carried forward that a provision has been made fixing the order in which they will be absorbed. The fixing of the priority also does not appear to be without purpose. The carried forward losses are, under section 24(2) capable of being adjusted up to a maximum of six year. The depreciation allowance, which is permitted to be carried forward is, however, allowed to be carried forward without any time limit until it is totally absorbed.

20. It may be remembered that the concept of carry forward loss does not stand in vacuum. It involves the notion of set off the loss against the profits of a subsequent year. It presupposes the permissibility and possibility of the carry forward loss being absorbed or set off against the profit and gains if any, of the subsequent year, set off implies that the tax is exemptable and the assessee wants to adjust the loss against profit to reduce tax demand.

21. Section 24(1) provides that where any assessee sustains a loss of profits or gains in any year under any of the Heads mentioned under section 6, he shall be entitled to have the amount of loss set off against his income, profits on gains under any other Head in that year.

22. Section 24(2) deals with carrying forward and setting off losses. Subsection (2) of section 24 provides that where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment year for the year ending on the 31st March, 1940, in any business, profession or vocation, and the loss cannot be wholly set off under subsection (1) so much of the loss is not so set off or the whole loss where the assessee had no other Head of Income, shall be carried forward to the following year.

23. Mr. Naeem Pasha, the learned counsel for the respondent /assessee has contended that section 10(2) (vi) proviso is applicable to the facts of this case as there is Rs. 51,92,856 as an unabsorbed depreciation. This unabsorbed depreciation has to be carried forward as provided by proviso to section 10(2) (vi) of the Act, and .the Income‑tax Officer has no right to adjust the same as provided by section 24(1) of the Act. It was contended by Mr. Naeem Pasha that if the Income‑tax Officer allowed the unabsorbed depreciation to the succeeding year then it could have got an adjustment against this unabsorbed depreciation towards an income from business, which would have been otherwise taxable at 60%. The learned counsel for the respondent /assessee also contended that the depreciation for the assessment year remained unabsorbed and that the assessee was entitled to its benefit in the subsequent years. Under the Act, it was incumbent to compute the depreciation and actually allow the same to the assessee.

24. After giving our thoughtful consideration to the entire matter, we are of the view that losses amounting to Rs. 52,04,540 could not be adjusted against the fiction income and the respondent /assessee is entitled to its carrying forward and set‑off in the subsequent years. The net result, therefore, is that the respondent /assessee has in the total effect suffered the loss of saving 60$ of his future tax. We are afraid that the same is against the spirit as well as clear words of section 10(2) (vi) proviso of the Act. Our answer to the question is, thus, in favour of the respondent/ assessee. In the circumstances of the case, the parties will bear their own costs. M. B. A. Reference answered in affirmative.