Preferred Accounting Approach To Ascertain Accrued Salary Not Considered In Panama Case

Preferred Accounting Approach To Ascertain Accrued Salary Not Considered In Panama Case

A lot can be said by many, for and against the judgment passed by Supreme Court, on the Review Petitions filed by ousted Prime Minister Nawaz Sharif and his family against the judgment of Supreme Court passed in the Panama Papers Case on 28 July, 2017. The rhetoric part of the judgment has caught the maximum attention so far, for reasons that are different for different people, however, the reasoning part seems to have been completely ignored, especially the reasoning for upholding the view for disqualification.

The Supreme Court in its judgment, having quoted and accepted Nawaz Sharif’s stance during the hearings of original petitions that “when his son showed his decision to wind up the company in January 2013 he (Nawaz Sharif) categorically stated that he did not intend to nor would claim any salary from the company”, has concluded and observed that it was a waiver of the salary accrued and accumulated till 2013, hence the accumulated salary was his asset until January 2013, when it was waived in favour of the company. Since a candidate is required to declare the assets owned by him till the preceding 30th June under section 12(2)(f) of the Representation of Peoples Act, the said accrued and accumulated salary was, therefore, an asset of Nawaz Sharif on 30th June, 2012 and he was under an obligation to declare it in his nomination papers filed for the 2013 general elections. The Supreme Court further observed that when such a fact (of accrual of the salary) was admitted by a person himself in the proceedings under Article 184(3) of the Constitution, no trial was required nor could the court ignore it. The court also remarked that had there been no such admission, the court would not have stepped in as it did, when the documents showing Maryam Nawaz as a beneficial owner were denied by her. This reasoning by the court as to the consequences of an admission made in the proceedings under Article 184(3) of the Constitution, broadly speaking, seems fair and makes complete sense, provided that there is a direct and clear admission and not an inferred one. However, the real and the most crucial question raised in the review petition, relating to the definition of salary as given in the Income Tax Ordinance 2001, has not been properly dealt with in the judgment and seems not to have been properly considered and answered in the review despite being categorically pointed out and emphasized in the review petition. Section 12(1) of the Income Tax Ordinance 2001 provides the definition of “salary” as “any salary received by an employee in a tax year…”. The relevant part of the judgment is reproduced below for a better understanding as to how the court has dealt with the said question:

“The expression salary as defined by section 12 income tax ordinance,2001 would be just irrelevant for the purposes of this case when the salary having already accrued and accumulated could be withdrawn at any stage without any hindrance before January 2013. Even if we ignore the expression “asset” as given in Black’s Law dictionary for a while, the very admission of the petitioner that he waived the salary so accrued and accumulated in January 2013 in favour of the company speaks for itself.”

One can conveniently examine and analyze the above-mentioned stance of Nawaz Sharif to see if it was really a waiver of accrued and accumulated salary as perceived by the court when he said that he did not intend to nor would claim any salary from the company. However, even if it is taken as such a waiver, should it have entailed the same conclusion as drawn by the court by making the definition of salary as given in income tax ordinance irrelevant (which otherwise is the most relevant law in the country to determine what is income and asset)? If so, why? Unfortunately, there was no answer in the review judgment. The most relevant law should not have been termed irrelevant without giving convincing reasons.

We need to understand that a waiver is not a return or refund, it is the surrendering of something which was never received. Had there been an admission as to return/refund of the salary to the company which was received in the past, then it could lead to the conclusion by the court to be defendable. But here the case is totally different. To me, Nawaz Sharif’s stance makes the definition of salary as given in the Income Tax Ordinance even more relevant. When exactly a salary or an asset should be recognized as belonging to someone is a question pertaining to the recognized principles of accounting.

I, being not an accounting expert, have relied upon a simple study of accounting as available at which provides that when talking about the timing of revenue or expense recognition, two methods of accounting exist: Cash basis accounting and accrual basis accounting. Under cash basis accounting, revenues are recognized when cash is received. Under the accrual basis accounting, the revenues are recorded/recognized when earned (for providing services or selling and delivering products), but not received in the current period. Irrespective of my earlier argument (provided in the analysis of 28th July’s judgment) that salary under question was not even accrued, as undisputedly no service was rendered by Nawaz Sharif to the company. This argument was not raised by the petitioners in their review petition, and even if it was accepted that the salary was accrued but not received, it would not become a recognized asset under the cash basis accounting method. Since the Income Tax Ordinance, for the purposes of salary, has clearly adopted the method of cash basis accounting instead of accrual basis accounting, I therefore emphasize that in such circumstances the definition of salary as provided in the Income Tax Ordinance becomes even more relevant and its relevance should not have been conveniently brushed aside without convincing reasons. If we rely on accrual basis accounting, the Supreme Court’s reasoning seems to be very well founded, but if the law, the most relevant one on the subject, adopts the very opposite concept or method i.e. cash basis accounting, then the question arises as to whether a court of law can lawfully adopt an opposite method in total disregard to an express provisions of law and deprive a person of a concession expressly given by the law. The jurisprudential strength of such adoption may become clearer in the coming days if we get an opportunity to hear more about it from known jurists and experts.

As far as the other parts of the judgment are concerned, I think the impression of partiality and bias could be dispelled by avoiding certain words, phrases and lines, as have been provided in the judgment. For example, the judgment at one place needlessly chides Nawaz Sharif for defending a trust deed written in 2006 in a font becoming commercial in 2007, when factually the matter of said trust deed did not pertain to Nawaz Sharif nor did he defend it. Similarly, the Supreme Court has deliberately left unattended the argument of the petitioner that where a rise in assets has been explained by the relevant documents, including the returns filed by the petitioner, the issuance of a direction to the National Accountability Bureau (NAB) authorities to file a reference against him does not appear to be well-founded. The Supreme Court has remarked about the said argument that it need not be commented upon at this stage as it would prejudice the case of the petitioner before the Accountability Court. The point is that when the petitioner, by way of raising this argument himself, wants it to be commented upon, why should the Supreme Court not do so on the apprehension that it would prejudice the case of the petitioner in the trial court? It seems a little unusual on part of the court, especially when such care has very visibly not been shown in the other parts of the judgment.

Like the questions explored above, the mystery relating to the Dubai based company FZE also remained unanswered as to how that company came on judicial record even before the constitution of the joint investigation team (JIT) as it was not put on record by any of the petitioners or respondents.

I fully understand that the Supreme Court cannot possibly meet everyone’s expectations in a politically divided society but the preservation of judicial reputation of the highest judicial forum of the country is extremely important in order to save people from getting frustrated and keep their hopes alive. The basic rights and fair and equal dealings as provided under the Constitution should not be denied even to the person accused of high treason or being tried under Article 6 of the Constitution which is one of the most heinous crimes as provided under Pakistan’s legal framework.


The views expressed in this article are those of the author and do not necessarily represent the views of or any organization with which he might be associated.

Shahid Bhatti

Author: Shahid Bhatti

The writer is an Advocate of the High Court and is currently rendering legal support to an industrial group, Master Group of Companies. He is interested in writing about democracy, human rights and the rule of law. He can be reached at [email protected]