Law: Income Tax Ordinance, 1979

Section: 17,17(1),17(1)(a),32,32(1),34,65

Law: Income Tax Ordinance, 2001

Section: 34(1),34(2)

`THIS JUDGMENT DELIVERED BY: MUNIB AKHTAR, JUSTICE:---.--- These appeals arise under the Income Tax Ordinance, 1979 ("1979 Ordinance"), and relate to assessment years 1991-92 and 1992-93. The question raised has been agitated before, including at least twice before this Court. It is this: was the interest earned by financial institutions on Government securities liable to be taxed on accrual or on receipt basis? The Department contends for the former, the respondent assessee for the latter, answer. The learned High Court in the impugned judgment answered in favor of the assessee-bank, and leave was granted to the Department vide order dated 29.06.2010 to consider whether this was "in conformity with the relevant provisions of the Income Tax Ordinance or otherwise". 2. It is convenient to set out the relevant statutory provisions at the outset: "17. Interest on securities.- (1) The following income shall be chargeable under the head "Interest on securities", namely:- (a) interest on any securities of the Federal Government or a Provincial Government receivable by an assessee in any income year; and (b) interest on debentures or other securities for money issued by, or on behalf of, a local authority or a Pakistani company receivable by an assessee in any income year. 32. Method of accounting.- (1) Income, profits and gains except income from dividends, shall be computed for purposes of sections 17, 19, 22, 27 and 30 in accordance with the method of accounting regularly employed by the assessee." 3. Learned counsel for the appellant-Department submitted that it was well known that two methods of accounting were adopted in this country. One was the mercantile system, in which receipts (and expenses) were recorded as accrued. This was also known as the accrual basis of accounting. In terms of the other system receipts were recorded when actually received, and expenses when so incurred. This was the receipt basis of accounting. Financial institutions including banks adopted the accrual basis of accounting. That was the method regularly employed by them, and hence their income and profits and gains for purposes of the 1979 Ordinance had to be computed on such basis.…

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