NASEER MUGHIS LTD., LAHORE VS C.I.T., LAHORE ZONE, LAHORE
2001 P T D 772
[Lahore High Court]
Before Nasim Sikandar and Jawwad S. Khawaja, JJ
Messrs NASEER MUGHIS LTD., LAHORE
versus
C.I.T., LAHORE ZONE, LAHORE
C.T.R. No. 31 of 1973, heard on 25/09/2000.
Income-tax Act (XI of 1922)--
----S. 23A---Assessment---Undistributed dividend or bonus---Double taxation---Income-tax Authorities imposed tax on the assessee-company on the basis of undistributed profits, as income under the provisions of S.23A of Income-tax Act, 1922---Contention of the assessee was that the undistributed profits should have first been made part of the total income and then brought to tax---Validity---Provision of S.23D, Income-tax Act, 1922 did not create any fictional income inasmuch as S.23(1) had only defined the undistributed income for previous years while S.23(2) of Income-tax Act, 1922, proceeded to show as to how undistributed income was to be calculated--No dispute existed regarding computation made by the Assessing Officer---Income of the assessee accrued in the previous years and in the process of assessment of profits already earned were found liable to a higher rate by reference to expiry of certain period---Where no income tar receipt accruing to the assessee-company after the end of the previous year was even brought into the circle of total income or subjected to tax the same was against the rule of double taxation---High Court refused to interfere in the assessment and reference was answered accordingly.
Laxmipat Singhania v. Commissioner of Income-tax, U.P. (1969) 72 ITR 291; Ishwarlal Girdharilal Parekh v. State of Maharashtra and others (1968) 70 ITR 95; Commissioner of Income tax, Bombay City-I v. Khatau Makanji Spinning and Weaving Co. Ltd (1960) 40 ITR 189/194 and Pakistan Industrial Development Corporation v. Pakistan through the Secretary, Ministry of Finance 1992 PTD 576 distinguished.
Commissioner of Wealth Tax, Haryana H.P. and Delhi-III v. Gurdhari Lal (1975) 99 ITR 79 and Zeenat Textile Mills (E.PAL) Ltd. v. Commissioner of Income-tax, Dacca Zone and another 1969 PTD 405 ref.
Syed Ibrar Hussain Naqvi for Petitioner.
Muhammad Ilyas Khan for Respondent.
Date of hearing: 25th September, 2000.
JUDGMENT
NASIM SIKANDAR, J.---A private limited company engaged in managing agency business prays for answer to the following common question of law said to have arisen cut of .the order of the Income-tax Appellate. Tribunal, dated 8-9-1972:
"(1) Whether on facts and in the circumstances of the case that in view of the finding that the assessee-company was neither a share dealer nor carried on any adventure in the nature of trade, is the Tribunal right in holding that the investment of the assessee did not constitute 'assets' held and whether the order has been vitiated on that score?
(2) Whether on the facts and in the circumstances of the case the finding of the Appellate Tribunal that the acquisition of shares by the petitioner was made in its capacity as an investment holding company and that the petitioner has perforce to make change in its investment holding from time, to time which would be a normal incidence of petitioner's business likely to recur from time to time is vitiated as a result of misreading of evidence, disregard of the real nature of transaction and absence of material in its support?
(3) Whether, on the facts in the circumstances of the case the Tribunal was right in holding that the surplus of Rs.15,284 arising on the sale of Shares of National Security Insurance Co. Ltd. and Ismail Cement Industries Ltd. was a revenue gain liable to Income Tax?
(4) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the tax sought to be imposed by section 23-A was a tax on the total income of the Company for the charge year 1971-72 which could be properly levied under section 3/4 of the Income-tax Act?
(5) Whether on the facts and circumstances of the case the Tribunal was right in holding that the provisions of section 23-A do not seek to impose tax on the appropriation of income in the year subsequent to the year of accrual or receipt and that the impugned tax was within the legislative competence of the Central Legislature under Item 43 of the 3rd Schedule read with Article 131 of the 1962 Constitution?"
Admittedly questions Nos.1 to 3 already stand covered by the judgment of this Court in T.R. No.147/71 and C.T.R. No.93/91. It is only questions Nos.4 and 5 which need to be considered and answered:
For the two years under review the Assessing Officer while invoking section 23-A of the late Income-tax Act, 1922 subjected the undistributed income of the company to enhanced rate of tax. The assessee failed before the Tribunal which was of the view that the said provisions added in the late Act 1922 by Ordinance No. XIV of 1971 were fully applicable to the facts in hand and that no possible legal or factual exception to the same could be taken: The provisions of section 23-A added in the Act of 1922 in the years, 1971 and which remained on the statute book for only one year are reproduced below for reference:--
Section 23-A
(1) Where in respect of any previous year a company has not, up to the period of six months immediately following the expiry of that previous year, distributed as dividend or paid as bonus to the shareholders at least sixty per cent of the net income of such previous year, the amount calculated in the manner laid down in subsection (2) shall be deemed to be the undistributed income of the company for such previous year.
(2) For the purposes of this section--
(a) "net income" shall be the total income as reduced by--
(i) the amount of income tax and super tax chargeable on the total income excluding the amount of income tax chargeable in respect of the undistributed income; and
(ii) any bonus or bonus shares declared, issued, or paid to the shareholders of the company and included in the total income under the provisions of Explanation 4 of subsection (1) of section 4: and
(b) "undistributed income" shall be the net income as reduced by
(i) any amount distributed as dividend or paid as bonus to the shareholders and
(ii) ten per cent of the total income;
Heard the learned counsel for the parties.
According to Mr. Ibrar Hussain Naqvi, Advocate, learned counsel for the petitioner section 23-A at the relevant time was not a charging section nor it was supported by the charging section and therefore, levy of tax with reference to these provisions was totally illegal. He explains that undistributed income of the company was not covered by section 3 of the late Act which was a charging provision and that both section 23-A as well as section 3 of the Act together could not make the charge in question. The undistributed dividend not being either total income of the company itself nor being a part of the total income was not liable to the impugned levy. Particularly in view of the fact that the charging provision of section 3 restricted itself to the total income of the previous year. On the other hand, according to the learned counsel, the undistributed income remaining so far a period of six months did not satisfy various tests prescribed by the charging provision of section 3 to become income and therefore, a subject-matter of the tax. Further that undistributed profits of the previous years cannot by any stretch of imagination be taken to be the income for the previous years. Also submits that provisions of section 23-A in fact amounted to a penalty for not distributing dividend during a particular time and that in absence of a deeming provision expressly declaring undistributed dividend as income these could not have been taken as income and subjected to tax. The liability to Income-tax Department, according to the learned counsel, crystallized at the end of the previous year and therefore, neither any income accrued nor one already accrued could be brought to tax for the second time with reference to any incident which happened six months after the end of the previous year. It is claimed that if at all the legislature intended to deem the undistributed profits as income then it should have first been made a part of total income and then brought to tax.
Learned counsel for the petitioner/applicant also claims that it is a case of double taxation and though provisions of section 23-A could not be declared void on that score only yet these need to be disapproved with all possible strength. To support his contention that the provisions of section 23-A amounted to double taxation, learned counsel refers to re: Laxmipat Singhania v. Commissioner of Income-tax U.P. (1969) 72 ITR 291. The contention that unless an amount represents total income of a person assessable under the said Act it could not be subjected to tax by reference to a provision of Finance Act, learned counsel relies upon re: Commissioner of Wealth Tax Haryana H.P. and Delhi-III v. Gurdhari Lal (1975) 99 ITR 79. Also refers to re: Ishwarlal Girdharilal Parekh v. State of Maharashtra and others (1968) 70 ITR 95 to stress that liability to pay income tax arises only on accrual of income and not from the computations made by the taxing authorities. A judgment of the Dhaka High Court reported as Zeenat Textile Mills (E.PAL) Ltd. v. Commissioner of Income? tax Dacca Zone and another 1969 PTD 405 is also cited at the bar to support the claim that section 3 and section 55 of the late Income-tax Act did not permit levy of tax on any other total income and that undistributed dividend was neither directly made part of total income nor through any deeming provision. A judgment of the Supreme Court of India in re: Commissioner of Income-tax Bombay CIT-I v. Khatau Makanji Spinning and Weaving Co. Ltd. (1960) 40 ITR 189/194 is also relied upon to press the same point. Learned counsel for the applicant also relies upon a judgment of the Supreme Court of Pakistan in re: Pakistan Industrial Development Corporation v. Pakistan through the Secretary Ministry of Finance 19.92 PTD 576 in which certain provisions of the Finance Act, 1967 were declared ultra vires of the Constitution whereby super tax was levied on free reserves.
Mr. Muhammad Ilyas Khan, Advocate, learned Legal Advisor of the Revenue, however, supports the impugned order of the Tribunal which, as noted earlier, looked at the proposition from an entirely different angle. They interpreted the provisions of section 23-A to be merely a different rate of tax for a certain portion of total income in cases certain conditions were answered. He repeats that it is a simple case wherein the aforesaid provisions of section 23-A provided that total income of the company was to be taxed at 30% and the other portion of the total income which was equal to the undistributed income to yet another charge of 25%. He explains that this charge of tax was on total income and not on undistributed income. Also he disagrees with the claim of the learned counsel for the petitioner/applicant that subsection (2) of section 23-A providing basis for calculation of the amount was impracticable. To make his point he supports the computation of income subjected to enhanced rate of 25% as earlier done by the Assessing Office in the two years involved.
After considering the arguments from both the sides we are persuaded to agree that the learned Income-tax Appellate Tribunal rightly concluded in favour of the revenue that the provisions of section 23-A of the Income-tax Act were neither charging provisions nor these were required to be so. Also that there was absolutely no question of double taxation inasmuch as it was only one income earned till the end of the previous year which was assumed though while calculating the tax liability a certain portion of income equal to undistributed profits was subjected to a higher rate of tax. It is certainly correct that provisions in question neither created a new levy nor deemed any sum to be income of the assessee which otherwise did not fall within its purview. Learned counsel for the revenue is also correct in pointing out that section 23-A does not create any fictional income inasmuch as subsection (1) only defines as to what will be deemed to be undistributed income of a company for previous year while subsection (2) proceeds to show as to how that undistributed income is to be calculated. Also he rightly points out that no dispute as to the meaning of calculation' could now be entertained inasmuch as before the Tribunal the assessee did', not dispute the computation made by the Assessing Officer.
We are also very clear in our mind that the provision in question is not at all a case of double taxation though Mr. Ibrar Hussain Naqvi, learned counsel has admitted that legislature is very much competent to make a provision to tax twice one and the same amount received as income. However, he wishes us to disapprove the same. In our view even that disapproval is not warranted as far as the said provisions are concerned. The judgment of Supreme Court of Pakistan in re: P.I.D.C. v. Pakistan (Supra) is clearly distinguishable. In that case the provision in question provided that free reserve of any company which exceeded the paid up ordinary share capital of the company will be deemed to be income accruing on arising to the company and to be charged to tax. Their Lordships accepted the argument of the assessee in that case that once an income had been taxed and thereafter retained as free reserve, it lost its character of being income and could not be treated as such for the purpose of imposing further tax. Their Lordships agreed that where the assessee kept whole or part of the income for some purpose in his own control such as by creation of free reserve, such monies did not amount to income which had arisen, accrued or were received by the assessee. Therefore, it was found. clearly that such amount could not be classified as income or subjected to tax on income.
In section 23-A, however, no such situation was contemplated nor an amount already subjected to tax in an earlier year was again subjected to tax with reference to section 23-A. As already observed, in the process of framing of assessment for the same previous year only a part of the same income retained for the period stated in the provision was subjected to a higher rate of tax. Obviously, the intention being to discourage non-payment of dividend and ploughing back profits by Companies. The judgment of the Supreme Court of India re: CIT v. Khatau Makanji Spinning & Weaving Co. (Supra) is also not applicable to the said provision. In that case additional income tax charged in respect of dividends distributed in excess of the specified limit under clause (ii) of the proviso to paragraph-B of Part-I of the First Schedule to the Finance Act, 1951 was found to be an invalid charge. Their Lordships of the Supreme Court of India opined that the Finance Act failed in its purpose inasmuch as the additional tax was not properly laid upon the total income as what was actually taxed was never a part of the total income of the previous year. That issue is not relevant in the facts in hand inasmuch as neither an additional levy was provided for by section 23-A nor there was a finding that the amount on which the levy was made was not a part of the total income in the previous year.
The other facet of the proposition that a levy had to be supported by charging provisions of sections 3 and 55 of the late Act can hardly be said to be a moot point. Therefore, the two cases CIT v. Khatau Makanji Spinning and Weaving Co. (Supra) and Zeenat Textile Mills (E. PAK) v. CIT (Dacca (Supra) do not call for any detailed discussion. So, is the case with the proposition sought to be supported by re: Ishwarlal Girdharilal Parekh v. State of Maharashtra and others (Supra) which relates to a settled proposition that under the late Income-tax Acct, liability to pay income arises on the accrual of income and not from the computations made by the taxing authorities. In the case of the present assessee the income accrued in the previous year and in the process of assessment of the profits already earned were found liable to a higher rate by reference to expiry of certain period stated in the provision. No income or receipt accruing to the petitioner after the end of the previous year was ever brought into the circle of total income or subjected to tax. The rule against double taxation as explained by the Supreme Court of India in re: Laxmipat Singhania v. Commissioner of Income-tax U.P. (1969) 72 ITR 291) is also not attracted to the case of the assessee.
Therefore questions Nos. 1 to 3 are not answered on account of their pressed. The questions Nos.4 and 5 are answered in the affirmative.
The Registrar shall send a copy of this judgment under the seal of the Court and his signature to the concerned Bench of the Income-tax Appellate Tribunal.
Q.M.H./M.A.K./N-56/L????????????????????????????????????????????????????????? ?????????? Order accordingly.