IN THE SUPREME COURT OF PAKISTAN 
(APPELLATE JURISDICTION) 
 
 
PRESENT: MR. JUSTICE MIAN SAQIB NISAR 
 
 
MR. JUSTICE MANZOOR AHMAD MALIK 
 
 
MR. JUSTICE KHILJI ARIF HUSSAIN 
 
 
CIVIL APPEALS NO.1264 TO 1270/2006, 975/2007, 229/2010, 
716, 717, 722, 723/2011, 697/2015 AND C.M.A.NO.793/2008 IN 
CIVIL APPEAL NO.1574/2007 
(Against the judgments dated 27.1.2006/30.3.2006, 30.4.2009/15.4.2011/5.5.2011/ 
12.11.2014 of the High Court of Sindh, Karachi passed in ITA No.178/1999, ITR 
No.102/1991, Ref. Case No.130/1997, ITR No.131/1997. ITA No.177/1999, ITA 
No.217/1999, 
ITA 
No.208/1999, 
ITR 
No.185/1997, 
ITRA 
No.531/2000, 
ITA 
No.295/1997, ITA No.296/1997, ITA No.929/2000, ITA No.930/2000 & ITC 
No.482/2004) 
 
Commissioner of Income Tax  
…in C.A.1264/2006 
Commissioner of Income Tax 
…in C.A.1265/2006 
Commissioner of Income Tax 
…in C.A.1266/2006 
Commissioner of Income Tax 
…in C.A.1267/2006 
Commissioner of Income Tax 
…in C.A.1268/2006 
Commissioner of Income Tax 
…in C.A.1269/2006 
Commissioner of Income Tax 
…in C.A.1270/2006 
Commissioner of Income Tax 
…in C.A.975/2007 
Commissioner of Income Tax 
…in C.A.229/2010 
Commissioner Inland Revenue 
…in C.A.716/2011 
Commissioner Inland Revenue 
…in C.A.717/2011 
Commissioner Inland Revenue 
…in C.A.722/2011 
Commissioner Inland Revenue 
…in C.A.723/2011 
Commissioner Inland Revenue 
…in C.A.697/2015 
Commissioner of Income Tax 
…in C.M.A.793/2008 
in C.A.154/2007 
 
…Appellant(s) 
VERSUS 
Balochistan Concrete and Block Works Ltd. 
…in C.A.1264/2006 
M/s Balochistan Wheels Ltd. 
…in C.A.1265/2006 
M/s Automotive Battery Co., Ltd. 
…in C.A.1266/2006 
M/s Balochistan Wheels Ltd. 
…in C.A.1267/2006 
M/s Bolan Casting Ltd. 
…in C.A.1268/2006 
M/s Automotive Battery Co., Ltd. 
…in C.A.1269/2006 
M/s Automotive Battery Co., Ltd. 
…in C.A.1270/2006 
M/s Allied Garments Industries (Pvt.) Ltd. 
…in C.A.975/2007 
M/s Bolan Casting Ltd. Karachi 
…in C.A.229/2010 
M/s Asia Board Industries Ltd. 
…in C.A.716/2011 
M/s Asia Board Industries Ltd. 
…in C.A.717/2011 
M/s Diamond Food Industries (Pvt.) Ltd. 
…in C.A.722/2011 
M/s Diamond Food Industries (Pvt.) Ltd. 
…in C.A.723/2011 
M/s NP Spinning Mills Ltd. 
…in C.A.697/2015 
Shah Nawaz Textile Mills Ltd. 
…in C.M.A.793/2008 
in C.A.154/2007 
 
…Respondent(s) 
 
For the appellant(s): 
(in all cases) 
Dr. Farhat Zafar, ASC 
Civil Appeals No.1264/2006 etc. 
-: 2 :-
Mr. Muhammad Siddiq Mirza, ASC 
Mr. Shakeel Ahmed, ASC 
Mr. Muhammad Habib Qureshi, ASC 
Raja Abdul Ghafoor, AOR 
 
 
For the applicant(s): 
Nemo 
(in C.M.A.793/2008) 
 
 
For the respondent(s): 
Mian Allah Nawaz, Sr. ASC 
(in C.A.1268/2006) 
Mr. Salman Pasha, ASC 
(in C.As.716 & 717/2011 & 697/2015) 
Ex-parte 
(in C.As.1264, 1270/2006 & 975/2007) 
Not represented 
(in C.As.229/2010, 722 & 723/2011) 
 
 
Date of hearing: 
16.11.2016 
… 
ORDER 
 
 
MIAN SAQIB NISAR, J.- These appeals, by leave of the 
Court, involve the following questions:- 
(i) 
whether the losses incurred by an industrial undertaking 
during the period of tax holiday under the Income Tax 
Ordinance, 1979 (the Ordinance) which could not be fully set-
off against the income earned during such period, can be 
carried forward and set-off against the income earned in the 
assessment years beyond the tax holiday period; and 
(ii) 
whether unabsorbed depreciation allowance can be carried 
forward to the assessment years beyond the tax holiday 
period. 
2. 
 
The brief facts are that the respondents, industrial 
undertakings involved in the manufacturing of different goods, claimed 
exemption from charge to tax under various clauses (particularly Clauses 
118D, 119, 122 and 125) of the Second Schedule of the Ordinance for various 
assessment years. However they suffered losses which could not be fully 
set-off against the income earned by them during the period of tax 
holiday and therefore claimed that such losses be carried forward and 
set-off against the income earned in the assessment years beyond the 
tax holiday period (note:- in Civil Appeals No.716 and 717/2011 the respondents sought 
Civil Appeals No.1264/2006 etc. 
-: 3 :-
carrying forward of unabsorbed depreciation allowance). This claim was declined by 
the Assessing Authority. The matters came before the Commissioner of 
Income Tax, the Income Tax Appellate Tribunal (the Tribunal) and finally 
the learned Division Bench of the High Court of Sindh which, while 
deciding the tax references, held that the losses (and the unabsorbed 
depreciation allowance) sustained during the tax holiday could be carried 
forward 
against 
income 
earned 
thereafter. 
Aggrieved, 
the 
appellant/department approached this Court. Leave was granted 
through numerous orders to consider the questions highlighted in the 
opening paragraph of this opinion. 
3. 
 
Learned counsel for the appellant/department submitted 
that losses incurred during the tax holiday period which remained 
unabsorbed could not be carried forward and set-off against the profits 
and gains earned by the respondents in the assessment years beyond 
such period; the learned High Court of Sindh in the impugned 
judgment(s) has erred by relying upon precedents regarding set-off of 
unabsorbed depreciation of plants, buildings, machinery etc. which was 
not relevant to losses sustained during the tax holiday period; the use 
of the word ‘loss’ in the definition of ‘income’ means that it cannot be 
carried forward and is confined to that particular year; and that there is 
no law that allows losses incurred in tax holiday period to be adjusted 
in the tax period. Reliance was placed upon Commissioner of Income 
Tax Vs. Messrs Anwar Textile Mills Ltd (1989 PTD 1016), In the 
matter of the Income-Tax Assessments of Messrs Sheikco Ltd., 
Ismailabad, Multan (PLD 1962 Lah 870), Commissioner of Income 
Tax, Companies Zone-I, Lahore Vs. Messrs Grays Leasing Company 
Limited (2005 PTD 2093), Messrs Pioneer Bank Ltd. in liquidation 
Official Liquidator, State Bank of Pakistan, Dacca Vs. The 
Civil Appeals No.1264/2006 etc. 
-: 4 :-
Commissioner of Income-Tax, East Pakistan, Dacca (1968 PTD 520) 
and The Commissioner of Income-Tax, East Zone, Karachi Vs. 
Messrs Iqbal Engineering Works and another (PLD 1986 SC 556). 
4. 
 
Contrarily, learned counsel for the respondents contended 
that the purpose of tax exemptions was to promote and encourage 
certain industries; Sections 34 and 35 of the Ordinance specifically 
excludes carrying forward of speculation losses under Section 36 but 
nowhere have losses incurred during the tax holiday been excluded 
from being carried over; once the tax holiday period is over, the normal 
law comes into play on which basis assessments are to be made, and 
such law provides that if an assessee suffers losses he would be entitled 
to adjustment, irrespective of whether there were tax holidays or not; 
the definition of ‘income’ in Section 2(24) of the Ordinance includes 
‘loss’ and hence the Assessing Officer erred in finalizing the assessment 
at ‘nil’ income without giving any findings regarding the quantum of 
income or loss. Reference was made to Commissioner of Income Tax, 
Lahore and Chairman FBR, Islamabad and others Vs. Messrs 
Prosperity Weaving Mills (Pvt.) Ltd. and others (2011 SCMR 177). 
5. 
 
Heard. According to Section 14 of the Ordinance, incomes 
or classes of income, or persons or classes of persons specified in the 
Second Schedule shall be exempt from tax, under the Ordinance, 
subject to the conditions and to the extent specified therein, provided 
that, where any income which is exempt from tax under any provision 
of the Second Schedule, such income, as may be specified in the said 
Schedule and subject to such conditions as may be specified therein, 
shall be included in the total income, so however that the tax shall not 
be payable in respect of such income. Clauses 118D, 119, 122 and 125 
of the Second Schedule all provide that industrial undertakings (which 
Civil Appeals No.1264/2006 etc. 
-: 5 :-
fulfil the conditions enumerated therein) set up during various time periods were 
exempt from paying tax upon their profit and gains. It is undisputed 
that the respondent/industrial undertakings were entitled to such 
exemption, rather the only issue is whether they were entitled to carry 
forward the losses they incurred during the tax holiday period and have 
it set-off against the income earned in the assessment years beyond the 
tax holiday period. Section 34 of the Ordinance provides that:- 
 
“34. 
Set-off of losses.- Where an assessee sustains a 
loss (not being a loss to which section 36 or section 37 
applies) in any assessment year under any head of 
income specified in section 15, he shall, subject to 
clause (v) of sub-section (1) of section 23 be entitled to 
have the amount of the loss set-off against his income 
(other than income to which sub-section (7) or (9) of 
section 12 applies), if any, under any other head 
assessable for that assessment year.” 
 
Although Section 34 ibid restricts the set-off of loss to the income of 
that particular assessment year, Section 35 of the Ordinance allows for 
business losses to be carried forward, the latter of which reads as 
under:- 
 
“35.  Carry forward of business losses.- Where an 
assessee sustains a loss in any assessment year under 
the head `Income from business or profession’ (not 
being a loss to which section 36 applies) and the loss 
cannot be wholly set-off under section 34, so much of 
the loss as has not been set-off, or the whole of the loss 
where the assessee has no income under any other 
head, shall be carried forward, subject to clause (v) of 
sub-section (1) of section 23, to the following 
assessment year and set-off against the profits and 
Civil Appeals No.1264/2006 etc. 
-: 6 :-
gains, if any, of such business or profession assessable 
for that year if such business or profession continues to 
be carried on by the assessee for that assessment year; 
and if the loss cannot be wholly set-off in this manner, 
the amount of the loss not so set-off shall be carried 
forward to the following assessment year, and so on, 
but no loss shall be carried forward to more than six 
assessment 
years 
immediately 
succeeding 
the 
assessment year for which the loss was first computed: 
 
Provided that…” 
 
Thus the conditions of the right to carry forward business losses for the 
purposes of set-off are as follows:- 
(i) 
The loss should fall under the head ‘income from business 
or profession’ defined in Section 22 of the Ordinance; 
(ii) 
It should not be a loss to which Section 36 of the Ordinance 
applies, i.e. speculation losses; 
(iii) 
The loss shall be carried forward to the following 
assessment year and set-off against the profits and gains of 
such business or profession assessable for that year. In 
other words, the loss being carried forward cannot be set-
off against a source other than the profits and gains of such 
business or profession; 
(iv) 
The business or profession in which the loss was originally 
sustained should continue to be carried on by the assessee 
for the assessment year in which carried forward loss is 
sought to be set-off; 
(v) 
A loss cannot be carried forward for more than six years 
from the assessment year for which the loss was first 
computed; 
(vi) 
A loss cannot be carried forward unless it has been 
determined in pursuance of a return filed under Section 55 
Civil Appeals No.1264/2006 etc. 
-: 7 :-
of the Ordinance. In order to be entitled to carry forward a 
loss, the assessee must submit a return under Section 55 
ibid and have an assessment made for the year in which he 
has incurred the loss. The Assessing Officer has to notify to 
the assessee by an order in writing the amount of the loss 
as computed by him which the assessee is entitled to have 
carried forward.  
 
Therefore under the Ordinance, losses of assessees can be carried 
forward and subsequently set-off according to the provisions of Section 
35 of the Ordinance. No exception has been created vis-à-vis tax 
holidays, whereby such periods have been excluded for the purposes of 
carrying forward and setting off of losses. While it is clear, upon a 
perusal of the Ordinance, that it does not preclude losses incurred 
during tax holidays from being carried forward and set-off subsequently 
as per Section 35 thereof, nevertheless if the interpretation adopted by 
the learned counsel for the appellant/department was also possible, or 
there existed an ambiguity, in such a situation an interpretation 
favourable to the tax payer should be preferred as settled by this Court 
in Pakistan through Secretary Finance and others Vs. Messrs Lucky 
Cement and another (2007 SCMR 1367). Regarding the case of Iqbal 
Engineering Works (supra) relied upon by the learned counsel for the 
appellants, it involved an interpretation of Section 24 of the Income Tax 
Act, 1922 and the issue was regarding set-off of losses in the context of 
a registered firm and therefore is not relevant to the instant matter. 
  
Therefore, in our candid view, the respondents/industrial 
undertakings were entitled to carrying forward and setting off of the 
losses they incurred during the tax holiday period in accordance with 
the provisions of Section 35 of the Ordinance. In light whereof, Civil 
Appeals No.1264 to 1270/2006, 975/2007, 229/2010, 722 and 
Civil Appeals No.1264/2006 etc. 
-: 8 :-
723/2011 and 697/2015 are dismissed. Regarding Civil Appeal 
No.1574/2007 dismissed for non-prosecution vide order dated 
27.2.2008, for the reasons stated in C.M.A.No.793/2008, the same is 
allowed and the main appeal (C.A.No.1574/2007) is restored to its original 
number and is dismissed for the reasons enumerated above. 
7. 
 
As regards Civil Appeals No.716 and 717/2011, the issue 
involved 
therein 
is 
regarding 
carrying 
forward 
of 
unabsorbed 
depreciation allowance. Section 38(6) of the Ordinance provides that:- 
 
“Where, in making an assessment for any year, full 
effect cannot be given to the allowances referred to in 
clause (v) of sub-section (1) of section 23 owing to 
there being no profits or gains chargeable for that year 
or such profits or gains being less than the allowance, 
then, subject to clause (v) of sub-section (1) of section 
23 and the provisions of sub-section (7), 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 and be 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 years.” 
(Emphasis supplied) 
 
While Section 38(6) of the Ordinance allows for carrying forward of 
unabsorbed depreciation allowance, an exception has been provided 
under Rule 3A of the Third Schedule of the Ordinance which (rule) reads 
as under:- 
 
“(3A) Where any building, furniture, machinery or 
plant is used for the purposes of business or profession 
during any income year for which the income from 
Civil Appeals No.1264/2006 etc. 
-: 9 :-
such business or profession is exempt from tax, 
depreciation admissible under sub-rule (1) shall be 
deemed to have been allowed in respect of the said 
income year and after expiration of the exemption 
period written down value of such assets shall be 
determined in accordance with sub-clause (ii) of 
clause (b) of sub-rule (7) of rule 8.” 
(Emphasis supplied) 
 
Rule 3A ibid provides for depreciation allowance to be deemed to have 
been allowed, which in turn means that it has been given due effect for 
the purposes of Section 38(6) of the Ordinance and therefore cannot be 
carried forward to subsequent assessment years. Unlike the case with 
carrying forward of losses under Section 35 of the Ordinance, there 
exists a clear exception in the form of Rule 3A of the Third Schedule to 
carrying forward of unabsorbed depreciation allowances under Section 
38(6) of the Ordinance. In the case of Anwar Textile Mills (supra) relied 
upon by the learned counsel for the appellants, the question that arose 
before the learned High Court of Sindh was whether the assessee was 
entitled to carry forward the unabsorbed amount of depreciation after 
the expiry of the tax holiday period and the Court held that the right to 
carry forward unabsorbed depreciation to the following year was 
conferred by proviso (b) of Section 10(2)(vi) of the Income Tax Act, 1922 
and the applicability of such provision was not excluded, therefore the 
assessee was allowed to carry forward the unabsorbed depreciation 
amount. However, in the instant matter, as mentioned above, 
undoubtedly an exception has been provided to carry forward 
unabsorbed depreciation allowance by virtue of Rule 3A of the Third 
Schedule to the Ordinance.  
Civil Appeals No.1264/2006 etc. 
-: 10 :-
Therefore, we opine that the respondent/industrial undertaking 
(in Civil Appeals No.716 and 717/2011) is not entitled to carry forward to the 
post-tax holiday period, the unabsorbed depreciation allowances that 
arose during the tax holiday period. In light whereof, Civil Appeals 
No.716 and 717/2011 are allowed and the impugned judgments are set 
aside. 
 
   
JUDGE 
 
 
 
 
JUDGE 
 
 
 
 
JUDGE 
Announced in open Court 
on 25.11.2016 at Islamabad 
Approved For Reporting 
Ghulam Raza/*