W.T.A. No. 2083/LB of 2000, decided VS W.T.A. No. 2083/LB of 2000, decided, 2002 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2014 (2002)

(a) Wealth tax‑‑‑

‑‑‑‑Reserve‑‑‑Definition and explanation‑‑‑Expression "reserve" has not been defined in the Income Tax Ordinance, 1979‑‑‑Concept of reserve being applicable to companies only, expression has to be understood in its ordinary meaning, which would govern through construction for the purposes of both the enactments, the Income Tax Ordinance, 1979 and the Companies Ordinance, 1984‑‑‑Reserve‑‑‑Surplus‑‑‑Distinction‑‑ Reserve was an appropriation of profits, the asset or assets by which it represented being retained to form part of the capital employed in the business‑‑‑Definition of "reserve" was negative in form and not exhaustive in the sense that it only specified certain amount which were not to be included in the term "reserve"‑‑‑If retention of appropriation of sum was not a provision, i.e. it was not designed to improve depreciation, renewal or diminution in the value of asset or any notional liability the same was not necessarily a "reserve"‑‑‑Question whether a particular amount could be called "reserve" or not will have to be decided by having regard to the true picture and character of the sum appropriated.

(b) Wealth tax‑‑‑

‑‑‑"Reserve"‑‑‑Meaning and import‑‑‑Amount, which was kept for utilization, as a business capital and not to be distributed as dividend, could be called a reserve.

Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53 and 39 Comp. Cas. 410 (SC) rel.

(c) Wealth Tax Rules, 1963‑‑‑

‑‑‑‑R.8(2)(c)(ii)‑‑‑Companies Ordinance (XLVII of 1984), S.235‑‑Break up value of shares‑‑‑Surplus on revaluation of fixed assets‑‑‑Inclusion of for calculating the break‑up value‑‑‑Validity‑‑‑Surplus was neither a "sum" nor an "amount", it. was only a tangible addition in the value of assets that had only increased the notional value and had no effect in actuality‑‑Section 235 of the Companies Ordinance, 1984 gave a picture in which the surplus of revaluation of assets could not be covered within the definition of "reserve"‑‑‑Such provision clearly directs for its separate apportionment in the balance sheet and directs for keeping it aside as separate from reserve and was not to be utilized for giving dividend‑‑‑Surplus on revaluation of assets was not in a tangible 'form hence its distribution into dividend was beyond comprehension and there was no question of its distribution in any manner‑‑‑Share of a company were to be determined by adding up specific items before reducing liabilities‑‑‑For purpose of R.8(2) (c)(ii) of the Wealth Tax Rules, 1963 increase in net book value arising out of revaluation of fixed assets was to be credited under the head of revaluation surplus, which was only a book adjustment and could not be termed as "reserve"‑‑‑Determination for the purpose of break‑up value share surplus calculated on revaluation of assets was not to be added for the simple reason that it was not "reserve" in terms of R.8(b)(c)(ii) of the Wealth Tax Rules, 1963‑‑ Exclusion of the same by the First Appellate Authority was declared fully justified by the Tribunal.

Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53; 39 Comp. Cas. 410 (SC); W.T.A. No.214/LB of 1999; Messrs Sultan Tobacco Co. Ltd. v. CIT ITR 579 (SC); (1981) 44 Tax 148 (HC) and 1983 SCMR 77 rel.

Muhammad Asif, D.R. for Appellant.

Kamran Sial, I.T.P. for Respondent.

Date of hearing: 26th January, 2002.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).‑‑‑This appeal filed by the department is on the issue of exclusion of surplus on revaluation of fixed assets while determining the break‑up value of shares in term of rule 8(2)(c)(ii) of the Wealth Tax Rules, 1963.

It has been argued on behalf of the department that the finding of the First Appellate Authority is not justified. Rule 8(2)(c)(ii) has provided for inclusion of reserves for calculating the BUV. The learned D.R. brought our attention to the relevant rule and said that it speaks of addition to the paid‑up capital, the debentures, reserves and the balance as per Profit and Loss Account. The reserve in his opinion includes the surplus amount that emerges on revaluation of assets. He, therefore, argued that the order of the Assessing Officer should be restored and that of the CIT(A) should be reversed.

The learned A.R. started his arguments by reverting to section 235 of the Companies Ordinance, 1984. He said that it directs for keeping a separate entry for the surplus that emerges on revaluation of assets. This surplus he said is neither reserve nor a part of the accumulated profit as no dividend can be distributed from such a surplus. This he said is only a facility provided by the Banks for obtaining further loans. Corresponding increase in surplus on revaluation of assets is basically a notional reserve and does not have a physical shape. The section he remarked further directs not to adjust this amount even against the losses incurred by the company earlier. He, however, said that this amount can be added in the share value if the assets are actually sold on profit.

We have heard both and we are also conscious that this Tribunal has given few judgments on the subject in favour of the assessee. However, none of them has since been reported we would like to dilate upon the issue for further assistance. It, therefore, would be more appropriate if relevant provisions are gone through again rule 8(2)(c)(ii) speaks as follows:‑‑

"(ii) The break‑up value shall be determined in the following manner namely:‑‑

The total wealth of the company shall first be determined. This shall be done by adding to the paid‑up capital, the debentures, reserves and the balance as per profit and loss account, the provision for liabilities in the balance‑sheet being carefully scrutinized with a view to excluding therefrom items, which should really form part of the reserves. From the total so arrived at, the paid value of the preference shares and the debentures shall be deducted. The resulting balance shall be divided by the amount of the paid‑up ordinary share capital to arrive at the value of each rupee of paid‑up capital. The value of shares held by assessee shall then be determined by multiplying the sum so arrived at by the paid‑up value of such shares. "

It is correct to the extent that for determining B.U.V. paid‑up capital, debentures, reserve and balance as per Profit and Loss Account are to be added before deducting the liabilities but whether the surplus on revaluation of assets can be termed, as reserve requires further discussion:

We, therefore, revert to the provisions of Companies Ordinance and for this purpose mention here section 235 that speaks as follows:‑‑‑

"235. Treatment of surplus arising out of revaluation of fixed assets.‑‑‑(1) Where a company revalues its fixed assets, the increase in, or sums added by writing up of, the value of such assets as appearing in the books of accounts of the company shall be transferred to an account to be called Surplus on Revaluation of Fixed Assets Account' and shown in the balance sheet of the company after Capital and Reserves.

(2) Except and to the extent actually realised on disposal of the assets which are revalued, the surplus on revaluation of fixed asserts shall not be applied to set off or reduce any deficit or loss, whether past, current or future, or in any manner applied, adjusted or treated so as to add to the income, profit or surplus of the company, or utilized directly or indirectly by way of dividend or bonus:

Provided that the surplus on revaluation of fixed assets may be applied by the company in setting off or in diminution of any deficit arising from the revaluation of any other fixed asset of the company‑

(3) The requirement of subsections (1) and (2) shall also apply to any account representing any increase in or addition to the value of any asset as a result of any revaluation of any fixed assets done before the commencement of this Ordinance. However, described, to the extent of the amount thereof appearing in the bank of account of the company on such commencement.

(4) After revaluation as aforesaid, depreciation on the assets so revalued shall be provided with reference to the value assigned to such assets on revaluation.

(5) If default is made in complying with any requirements of this section, the directors of the company who are knowingly and wilfully in default shall be punishable with fine not exceeding twenty thousand rupees and shall also be jointly and severally liable to the company for any loss sustained by the company of such default."

Above section has termed the increase on revaluation of assets to be a surplus while learned D.R. has insisted that it is a reserve. The expression reserve, has not been defined in the Income Tax Ordinance. However, since it is applicable on Companies only the expression has to be understood in its meaning, which would govern through construction for the purposes of both the enactments the Income‑tax Ordinance and the Companies Ordinance, 1984. The reserve is an appropriation of profits, the asset or assets by which it represents being retained to form part of the capital employed in the business. The definition of 'reserve' is negative in form and not exhaustive in the sense that it only specifies certain amount which are not to be included in the term 'reserve'. If any retention or appropriation of sum is not a provision, i.e. it is not designed to, improve depreciation, renewal or diminution in the value of asset or any notional liability the same is not necessarily a reserve. The question whether a particular amount can be called as reserve or not will have to be decided by having regard to the true picture and character of the sum appropriated. Regarding how the true picture and character of the appropriation can be determined the guideline has been provided in the case of Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53, 39 Com. Cas. 410 (SC). It says:‑‑‑

"(a) a mass of undistributed profits cannot automatically become a reserve and somebody possessing the requisite authority must clearly indicate that portion thereof has been earmarked or separated from the general mass of profits with a view to constituting it either a general reserve or specific reserve, (b) the surrounding circumstances should make it apparent that the amount so earmarked or set apart is in fact a reserve to be utilized in future for a specific purpose and on a specific occasion, and (c) a clear conduct on the part of the directors in setting apart a sum from out of the mass undistributed profits avowedly for the purpose of distribution as dividend in the same year would run counter to any intention of making that‑ amount a reserve."

Keeping above guideline, an amount, which is kept for utilization, as a business capital and not to be distributed as dividend, can be called a reserve. The position before us is that this surplus, is neither a 'sum' nor 'an amount'. It is only a tangible addition in the value of assets that has only increased notional value and has no effect in actuality. Section 235 above gives us a picture in which the surplus 'on revaluation of assets cannot be covered within the definition of 'reserve'. The provision clearly directs for its separate apportionment in the balance sheet and directs for keeping it aside as separate from reserve. Furthermore, this amount as a reserve is kept separately and is not to be utilized for giving dividend. In fact, surplus on revaluation of assets is not in a tangible form hence its distribution into dividend is beyond comprehension. There is, therefore, no question of its distribution in any manner. In an earlier judgment vide W.T.A. No.214/LB of 1999, dated 18‑8‑1999 the Tribunal has held that the surplus arising on revaluation of fixed assets is not part of equity of a company.

A similar finding was given in the case of Messrs Sultan Tobacco Co. Ltd. v. CIT ITR 579 (SC) wherein it was held that the surplus that emerges as a result of revaluation of assets in the balance sheet does not belong to the shareholder till the time it is realized in (1981) 44 Tax 148 (H.C.), which was subsequently approved by Supreme Court, reported as 1983 SCMR 77 the facts were slightly different, however, the 'finding of the Honourable Supreme Court is quite relevant. It has been held that even if the auditors go behind the Profit and Loss Account and deduct depreciation not claimed nor valued earlier in the accounts, it would not affect the method of calculation of the shares. The Legislature in its wisdom has left out all these exercises and laid down a uniform formula for determining the break‑up. The shares of a company are to be determined by adding up specific items before reducing liabilities. The result of this finding is that/for the purposes of Rule under discussion increase in net book value arising out of revaluation of fixed assets is credited under the head of revaluation surplus, which is only a book adjustment. Thus, therefore, cannot be ' termed as 'reserve'.

Another important argument that simplifies this issue is that this revaluation surplus is not credited to the Profit and Loss Account and is taken to the balance sheet directly and is capitalized. This, therefore, by no stretch of imagination can be termed as a part of profit. The profit would actually accrue and arise on actual disposal of said revalued assets.

The result of above discussion is obvious. For the purpose of determining BUV share surplus calculated on revaluation of assets is not to be added for the simple reason that it is not 'reserve' terms of rule 8(b)(c)(ii) of the Wealth Tax Rules. The action of the CIT(A), therefore, is fully justified.

Appeal is accordingly decided.

C.M.A./294/Tax (Trib.) Order accordingly.