Messrs FATEH FOOD (PVT.) LTD., LAHORE VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2002 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 2594 (2002)

(a) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S.12(18)‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.9‑‑‑Assets of the Association of persons taken over by the company‑‑‑Treatment as share deposit money‑‑‑Addition‑‑‑Validity‑‑‑Amount later. shown in the company's balance‑sheet as share deposit money was statedly invested in the Association of Persons before the formation of the company‑‑‑In the case of A.O.P. its assets consisted of ‑fixed capital assets and capitalized expenses which were later taken over by the company at the time of its incorporation‑‑‑Investment taken over by the company was not a "sum" but it represented fixed assets and capitalized .expenses of the Association of Persons‑‑‑Section 12(18),of the Income Tax Ordinance, 1979 applied in the case of a "sum" and since no such "sum" was claimed to have been received by the company, the provisions of S.12(18) of the Income Tax Ordinance, 1979 were clearly not applicable at least to the extent of amount originally invested by the complainant/assessee in the Association of Persons and later taken over by the company.

2002 PTD 63; Black's Law Dictionary 7th Edn. and Concise Oxford Dictionary, 9th Edn. ref.

(b) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss.12(18) & 13‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.9‑‑‑Addition‑‑‑Sum claimed or shown‑‑‑Section 12(18) of the Income Tax Ordinance, 1979 as a whole and particularly its reference, to S.13 of the Income Tax Ordinance, 1979 shows that the situation envisaged in the said section was that if the sum was "claimed or shown" by the assessee himself as a loan or advance or gift while explained an investment (which may attract the provisions of S.13 of the Income Tax Ordinance, 1979).

(c) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S.12(18)‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.9‑‑‑CBR Circular No.3 of 1992, dated 27‑1‑1992‑‑‑CBR Circular No. l of 1992, dated 4‑5‑1992‑‑‑CBR Circular No. 12 of 1992, dated 19‑5‑1992‑‑‑CBR Circular No. l of 1993, dated 11‑1‑1993‑‑‑Addition‑‑‑Share deposit money‑‑‑Amount was invested from foreign currency account in a project in the status of Association of Persons‑‑‑Subsequently, such investment was taken over by ‑the company in the shape of assets without any cash having been received by the company‑‑‑Assessing Officer treated such investment as share deposit money (advance) and taxed the same under S.12(18) of the Income Tax Ordinance, 1979 when neither the said amount had been received in cash by the company nor was it claimed as such‑‑‑Validity‑‑‑In order to properly understand the provisions of S.12(18) of the Income Tax Ordinance, 1979, it was necessary to consider that the intention behind the provisions was to check the introduction of fictitious loans‑‑‑Department did not appear to be right in saying that the original, intention was no longer relevant after the substitution of the old subsection (1.8) by anew subsection containing a reference to "advance of gift" in addition to' "loan"‑‑ Fact, however, was that whereas the old subsection was meant to check only fictitious loans the scope was later expanded and the new subsection applied to fictitious advances and fictitious gifts also‑‑‑In the‑ present case, however, there was no fictitious element in the investment; maladministration had been found particularly with regard to the addition actually invested in the Association of Persons‑‑‑Department's preliminary objections were not accepted by the Federal Tax Ombudsman and it was recommended that the Revenue Division may cause the whole matter to be re‑examined under the provisions of S.138 of the Income Tax Ordinance, 1979 and if it was correct that Rs.8,561,000 were originally invested in the Association of Persons and not in the complainant‑company, such amount at least should be excluded from the amount added under S.12(18) of the Income Tax Ordinance, 1979; with regard to remaining amount also the matter should be re‑examined in the light of the observations and the tax demand in the case be kept in abeyance in the meantime.

Mirza Muhammad Wasim Adviser, Dealing Officer.

FINDINGS/DECISION

This is a complaint regarding an addition of Rs.11,338,570 made to the complainant's income under section 12(18) of the Income Tax Ordinance in the assessment for the year 2000‑2001. The main points in the complaint areas under:‑‑‑

(i) Ch. Naeem Ahmad entered into an agreement with a Canadian national, Mr. Zaheer‑ul‑Haq Chaudhary on 20‑7‑1999 for establishing a fruit and vegetable processing plant at Hattar by the name of Fateh Food.

(ii) As per Article 3(c) of the said agreement Mr. Zaheer‑ul‑Haq agreed to pay the entire expenses amounting to Rs.14.0 million in connection with the construction, installation and commissioning of the said unit. In accordance with the terms of the agreement Mr. Zaheer‑ul‑Haq began transferring the expenses incurred on the processing unit from his foreign currency account which had been frozen by the Government and was converted into Pak rupees, Rs.8,561,000 (figure later slightly modified) were spent on the said project from 20‑7‑1999 to 15‑1‑2000 which was transferred by Mr. Zaheer‑ul‑Haq into the account of Fateh Food through banking channels.

(iii) In accordance with Article 3(h) of the agreement, the AOP, Fateh Food was incorporated as a company by the name of Messrs Fateh Food (Pvt.) Ltd. w.e.f. 15‑1‑2000.

(iv) The entire work done prior to the incorporation of the company was taken over by Fateh Food (Pvt.) Ltd. and in this way Rs.8,561,000 were taken over in the shape of assets without any cash having been received by the company. After 15‑1‑2000 a further sum of Rs.2,777,570 was spent by Mr. Zaheer‑ul‑Haq on the processing unit by transferring Pak Rupees from his frozen currency account through banking channels.

(v) The complainant‑company filed its income‑tax return for the assessment year 2000‑2001 declaring Nil income as the unit was still being established.

(vi) The Assessing Officer, however, in a capricious, arbitrary and injudicious manner finalized the assessment at an income of Rs.11,338,570 by treating this investment of Mr. Zaheer ul‑Haq as share deposit money (advance) and by taxing it under section 12(18) of the Income Tax Ordinance when neither the said‑ amount had been received in cash by the complainant company nor was it claimed as such. In this way the huge tax demand of Rs.5,119,364 was created in the case of the complainant company.

(vii) The basic purpose of section 12(18) is to check the fictitious and back dated loans as was stated in the following CBR Circulars:

(a) Circular No.3 of 1992 dated 27‑1‑1992.

(b) Circular No.11 of 1992 dated 4‑5‑1992.

(c) Circular No. 12 of 1992 dated 19‑5‑1992

(d) Circular No. of 1993 dated 11-1‑1993

The above Circulars are binding on the DCIT and the same fact has been endorsed by the Peshawar High Court in its judgment reported as 2002 PTD 63.

(viii) The complainant‑company neither claimed nor received the said amount in cash, rather it was the capitalization of expenses incurred on the establishment of the processing unit by its Director. The DCIT's action in this regard was, therefore, quite illegal.

(ix) The DCIT has issued a notice to the complainant according to which coercive measures are contemplated for recovery of the illegal demand of Rs.5,119,364.

In view of the above it has been prayed that:

(i) Disciplinary proceedings be initiated against the DCIT and the complainant's version be accepted by declaring the addition under section 12(18) as illegal; and

(ii) The DCIT be restrained from adopting coercive recovery measures against complainant.

2. The respondent's reply has been received and the representatives of the complainant and the respondent have attended and have been heard. The main points in the respondent's reply are as under:

Preliminary Objections :

(i) No act of maladministration has been committed. The assessment has been finalized as per law as amended by the Finance Act, 1998 and by relying on .the judgments of superior Courts and after providing the complainant a proper opportunity of being heard.

(ii) The complaint is against assessment regarding which legal remedies are available and thus the matter is outside the jurisdiction of this Office in view of the provisions of section 9(2)(b) of the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000.

(iii) The President of Pakistan has held in C.No.979‑K/2000, that the jurisdiction of this Office is confined to cases of mal administration and it does not involve the decision of appeals on merits. This Office thus has no jurisdiction in the matter.

On Merits

(i) The complainant failed to prove that advance for share deposit was received in the bank account Messrs Fateh Food (Pvt.) Ltd. through cross cheque and addition was, therefore, rightly made under section 12(18).

(ii) The complainant has not stated the facts correctly as per para. 1(vi) above. The company had declared nil income for the assessment year 2000‑2001 but the accounts attached with the return showed Rs.11,338,570. as share deposit money. The complainant failed to prove that the amount had been received through cross cheque from Mr. Zaheer‑ul‑Haq who does not have a National Tax Number.

(iii) Section 12(18) of the Income Tax Ordinance reads as under:

"Where any sum claimed, or shown, to have been received as loan or advance or gift by an assessee during any income year commencing on or after the first day of July, 1998, from any person, not being a banking Company, or a financial institution notified by the Central Board of Revenue for this purpose, otherwise than by a crossed cheque drawn on a bank, or through a banking channel from a person holding a National Tax Number, the said sum shall be deemed to be the income of the assessee for the said income year chargeable to tax under the Ordinance."

As the amount was received otherwise than through cross cheque or through normal banking channel from a person holding an NTN the same was treated as an advance in the light of the judgment of the Supreme Court dated 29‑10‑2001. The complainant had to receive the advance either through cross cheque or through pay order or other normal banking channel from a person holding a NTN in order to avoid the mischief of section 12(18) which was not done.

(iv) The CBR Circulars quoted by the complainant are no longer relevant as the law has been changed through Finance Act, 1998. This change in law has also been noted by the Supreme Court in its judgment dated 29‑10‑2000.

(v) As regards the plea that the relevant amount in the accounts represented the capitalization of expenses incurred by the Director on the establishment of the processing unit no such details were provided at the time of assessment nor was any plea taken during the assessment proceedings that any pre -incorporation expenses were involved. Furthermore the Income Tax Ordinance does not exclude the pre‑incorporation expenses from the mischief of section 12(18).

(vi) The demand notice was served on the complainant on 28‑1‑2002 and the complainant is thus obliged to pay the tax demand.

It has thus been stated by the respondent that the complaint is not only outside the jurisdiction of this Office but is also devoid of any merits and it may, therefore, be rejected.

3. In the context of the respondent's reply the assessment order for the year 2000‑2001 has also been seen. In this order it has been observed that no business was statedly, done during the year but the balance‑sheet attached with the return showed share deposit money of Rs.11,338,570 which was 'received from Mr. Zaheer‑ul‑Haq (not an existing taxpayer) out of proceeds from his frozen currency accounts. The Assessing Officer then reproduced the provisions of section 12(18) of the Income Tax Ordinance in which the words "or advance or gift" were added after the word "loan" in the new subsection inserted by the Finance Act, 1998. It was observed that the share deposit money constituted advance. for purpose of section 12(18) in the light of‑the Lahore High Court judgment in ITA No‑677 of 1999 dated 6‑2‑2001 as upheld vide the Supreme Court of Pakistan order dated 29‑10‑2001 in which it was held that since the words "advance" and "gift" were added in section 12(18) w.e.f. 1‑7‑1998, share deposit money received before this date could not attract the provisions of section 12(18). It was noted in the ,assessment order that it was thus clear from the judgment of Lahore High Court that share deposit money received after 1‑7‑2001 constituted an "advance" and was hit by the provisions of section 12(18) regardless of the fact that the amount of share deposit money was within the limits of authorized capital. The Assessing Officer also referred to the dictionary meaning of the word "advance" statedly given in "Blackwell's Law Dictionary, Edition IV" as follows:

"Money paid before or in advance of the proper time of payment; money or commodity furnished or credit, a loan or gift, or money advanced to be repaid conditionally."

He pointed out in the assessment order that shares are issued on payment of certain money whereas in the case of share deposit money, the money is paid before the time of issuance of shares (proper time) and is therefore, covered by the meaning of "advance" as provided in the law dictionary. The Assessing Officer also observed in the assessment order that the question of any verification of the source of investment made by Mr. Zaheer‑ul‑Haq was not involved in the case and the question simply was whether the advance made by him to the complainant company was hit by the provisions of section 12(18) in the hands of the company. Since the Assessing Officer held that the said provisions were attracted in the complainant's case, the amount of Rs.11,338,570 was treated as the complainant's, income under section 12(18) and tax of Rs.5,119,364 was accordingly levied.

4. In the context of the respondent's reply and the assessment order, the complainant reiterated during the hearing that actually no "sum" had been advanced by Mr. Zaheer‑ul‑Haq to the complainant -company and that he had in fact made investment in the processing unit both before and after the incorporation of the company as practically the sole investor as per the agreement with Ch. Naeem Ahmad. In the balance‑sheet of the company this investment by the complainant in the purchase of plant and machinery etc. was shown as share deposit money pending the actual issue of shares. It was also pointed out that the funds for the investment were transferred in Pak rupees from Mr. Zaheer‑ul‑Haq's foreign currency account through banking channel and the condition of holding an NTN could not be considered as applicable in the case of this expatriate Pakistani. It was further pointed out that the action of the tax department amounted to sabotaging the Government policy to attract investment from Pakistani's residing abroad and that through misapplication of Law the Department was trying to expropriate the investment made in the unit by the expatriate Pakistani. It was thus contended that the tax demand was totally illegal and invalid and that no appeal had been filed because the complainant was not in a position to pay the requisite 15 % of the invalid demand.

5. The contentions of the two sides have been considered and the complainant's plea has been found to have definite merit. In this context it would be useful to consider the contents of section 12(18) which has been reproduced in para.2 above in the context of the respondent's arguments on the merits of the case. The first condition for attracting the provisions of section 12(18) is that it should be a "sum" which is "claimed or shown", to have been received as "loan" or "advance" or "gift" by an assessee. The complainant seems to be right in stating that in fact the share deposit money of Rs.11,338,570 did not represent a "sum" claimed or shown to have been received by the complainant. In this context the meaning of "sum" in Black's Law Dictionary (7th Edition) is "a quantity of money". Similarly according to the 'Concise Oxford Dictionary' (9th Edition) the word means "a particular amount of money". In the instant case, however, a major portion of the amount later shown in the company's balance sheet as share deposit money i.e. Rs.8,561,000 was statedly invested: in the AOP before the formation of the company. In the case of the AOP its assets consisted of fixed capital assets and capitalized expenses which were later taken over by the company Fateh Food (Pvt.) Limited at the time of its incorporation on 15‑1‑2000. So obviously the investment of Rs.8,561,000 taken over by the company was not a "sum" but it represented fixed assets and capitalized expenses of the AOP. Since, however, section 12(18) applies in the case of a "sum" and since no such "sum" was claimed to have been received by the company, the provisions of section 12(18) were clearly not applicable at least to the extent of Rs.8,561,000 originally invested by Mr. Zaheer‑ul-Haq in the Association of Parsons and later taken over by the company. .

6. Another point which needs to be considered is that a perusal of section 12(18) as a whole and particularly its reference to section 13 shows that the situation envisaged in the said section is where the sum is "claimed or shown" by the assessee himself as a loan or advance or gift while explaining an investment (which may attract the provisions of section 13). In the instant case the assessee/complainant has obviously not claimed or shown that a sum was received as a loan or advance or gift but has all along maintained that the amount shown as share deposit money was in lieu of investment made by Mr. Zaheer‑ul‑Haq in the project both before and after the incorporation of the company. In this context the Lahore High Court judgment in I.T.As. Nos.677 of 1999 and 2000 etc. received to by the respondent in fact supports the complainant's case insofar as the cases before the Lahore High Court involved a situation where the amount of share deposit money was more than the authorized capital and in this context it could perhaps be argued that although the amount in excess of authorized capital was not a loan as held by the High Court in the pre‑Finance Act 1998, situation, it was an "advance" in terms of the new section 12 (18). Such an argument can, however, not be taken in the instant case where the share deposit money is not in excess of the authorized capital and it has not been claimed or shown as an advance by the complainant. It is added that the meaning of "advance" quoted in the assessment order is again not quite relevant in the case of shares issued by a company for which down payment is not normally made to the company at the time of purchase of shares but is usually made before the issuance/purchase of the shares.

8. The complainant is also justified in pointing out that in order to properly understand the provisions of section 12(18) it is necessary to consider that, as explained by the CBR itself at that time, the intention behind the provisions was to check the introduction of factitious loans. The respondent does not appear to be right in saying that the original intention is no longer relevant after the substitution the old subsection (18) by a new subsection containing a reference to "advance" or "gift" in addition to "loan". The fact, however, is that whereas the old subsection was meant to check only fictitious loans the scope was later expanded and the new subsection applies to fictitious advances and factitious gifts also. In the instant case, however, there is obviously no factitious element in the investments.

9. In the light of the above, maladministration has been found particularly with regard to the addition of Rs.8,561,000 actually invested in the AOP. The respondent's preliminary objections are therefore not accepted. It is thus recommended that:

(i) The Revenue Division may cause the whole matter to be re examined under the provisions of section 138 and if it is correct that Rs.8,561,000 were originally invested by Mr. Zaheer‑ul‑Haq in the AOP, Messrs Fateh Food and not in the complainant‑company, this , amount at least should be excluded from the amount added under section 12(18). With regard to the remaining amount also the matter should be re examined in the light of paras. 4 to 7 above.

(ii) The tax demand in the case be kept in abeyance in the meantime.

(iii) A report on the final action taken be furnished within 60 days.

C.M.A./M.A.K./401/FTO

Order accordingly.