I.T.A. No. 1557/LB of 2000, decided on 18th April, 2002. VS I.T.A. No. 1557/LB of 2000, decided on 18th April, 2002., 2002 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2133 (2002)

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

‑‑‑‑S.12(18)‑‑‑Deemed income‑‑‑Share deposit money‑‑‑Treatment of share deposit money as loan‑‑‑Amount admittedly had been shown as share deposit money and had not been claimed or shown as loan in the balance‑sheet but in reality that may be a loan, the deeming provisions contained in S.12(18) of the Income Tax Ordinance, 1979 were not attracted in such an eventuality‑‑‑No law can be allowed to be circumvented by use of wrong expression or incorrect terminology because that would amount to allowing perpetual fraud on the law with impunity‑‑ ‑Where two interpretations were equally possible, the one favourable to the subject was to be adopted‑ ‑Letter of law in taxing statute had to be interpreted in the sense it had been used and expressed‑ Terminology used as share deposit money in the balance‑sheet could not take place that of a "loan" because the expression "loan" had always inherent characteristic to be repaid or returned after a certain or in some cases uncertain limit of time with or without interest‑‑‑Provisions of S.12(18) of the Income Tax Ordinance, 1979 were not attracted where the assessee had claimed or shown share deposit money in the balance- sheet‑unless otherwise controverted by the department with unequivocal evidence:

(b) Interpretation of statutes‑‑‑‑

‑‑‑.‑Two interpretations possible‑‑‑Principles‑‑‑No law can be allowed to be circumvented by use of wrong expression or incorrect terminology because that would amount to allowing perpetual fraud on the law with impunity‑‑‑Where two interpretations were equally possible, the one favourable to the subject was to be adopted‑‑‑Letter of law in taxing statute had to be interpreted in the sense it had been used and expressed.

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

‑‑‑‑S.12(18)‑‑‑Deemed income‑‑‑Share deposit money‑‑‑Payment was made by the Directors of the company to the suppliers of goods for the creation of the assets of the company‑‑‑Such amount was shown as share deposit money of the Directors in the balance‑sheet‑‑‑Assessing Officer treated the same as loan and addition was made under S.12(18) of the Income Tax Ordinance, 1979‑‑‑Validity‑‑‑Amount in question was share deposit money and not the loan for the simple reason that immediately after introduction of share deposit money in the balance‑sheet, the share capital was increased by passing a resolution in this regard and after making necessary fee for enhancement in share deposit capital‑‑‑Even if such amount was deemed to be advance, the same amount could not be treated as income on account of non‑applicability of S. 12(18) as the word "advance" was brought on statute book on 1‑7‑1998, relevant to assessment year 1999‑2000 in order to expand the operation of the provisions‑‑‑Revenue had nothing to do with the arrangements made by the company for making payments on its behalf to a third party‑‑ Intention and motives of the .person who had made the payment were always to be kept in view and to be seen as to what entry had been incorporated in the company's books of accounts‑‑‑Addition made under S.12(18) of the Income Tax Ordinance, 1979 was deleted by the Tribunal.

I. T. A. T. No. 1206/LB of 1995‑96 ref.

1999 PTD (Trib.) 2315; CIT, North Zone (West Pakistan), Lahore v. Crescent Textile Mills Limited, Lahore 1973 PTD 375; 2001 PTD 1180 and No. TR 33 of 1997 rel.

Azhar Ehsan Sheikh for Appellant.

Javed ur Rehman, D.R. for Respondent.

Date of hearing: 2nd April, 2002.

ORDER

RASHEED AHMAD SHEIKH (JUDICIAL MEMBER).‑‑1. This appeal at the behest of the assessee‑appellant is directed against the order passed by CIT (A), Zone‑II, Lahore dated 19‑1‑2000 in respect of assessment year 1998‑99.

2. Crux of the learned A.R.'s arguments was that the learned Assessing Officer was not justified in treating the share deposit money amounting to Rs.27,50,000 as loan and adding the same under section 12(18) of the Income Tax Ordinance, 1979 and confirming that treatment by the Appeal Commissioner is based on inaccurate assumption as well as against the ratio decidendi by the higher Appellate Courts in their judgments. Facts leading for disposal of the issue in hand are that the assessee‑appellant is a private limited company which had filed its tax return declaring "nil" income as no business whatsoever was conducted during the year under appeal. However, the Assessing Officer, on scrutiny of the statement of accounts, noticed that authorized capital of Rs. one Million was fully subscribed by way of 10,000 shares, of Rs.100 each whereas an amount of Rs.27,50,000 was being reflected as share deposit money therein. The said amount statedly received from the directors of the company. The Assessing Officer was of the opinion that since the authorized capital was fully subscribed and there was "nil" balance for further allotment of shares, hence there was no room for further allotment of shares. The assessee was accordingly confronted by issuing a notice under section 62 stating therein that the Amount reflected as share deposit money in the circumstances of the case was to be treated as loan and provisions of section 12(18) were duly attracted to such eventuality. Following was the reply which was submitted by the appellant:

"Directors Mr. Haider Raza and Mrs. Sofia Raza made cash payment of Rs.27,50,000 directly for the creation of assets of the company and the same amount in the books of company on the closing date was appearing as share deposit money. Plea of the assessee that directors did not make cash payment to the assessee but made payments directly to the suppliers of Messrs Global Information System (Pvt.) Ltd., and thus provisions of section 12(18) were not attracted, is not too convincing to be accepted for the following reasons:‑.‑‑

(1) Liability in question belonged to Messrs Global Information System (Pvt.) Ltd.

(2) Directors made cash payment directly to the suppliers on behalf of Messrs Global Information System Pvt. Ltd. hold equally good that cash payments have been made to the Global Information System (Pvt.) Ltd."

3. The Assessing Officer, after considering the submissions of the appellant observed that the appellant by not taking the amount paid by the directors in its cash books or making general entry only had tried to avoid the application of section 12(18) under the guise of accounting process. The contention of the assessee that cash loan was not obtained directly and, as such the provisions of section 12(18) were not attracted, were discarded in view of the intention of the legislation of the provisions which take into account the transaction which is claimed or shown is of the nature of a loan. It was further observed by the Assessing Officer that it were the facts and bare facts which determined the application of law and not what was depicted or reflected on the face of it. The Assessing Officer further supported his conclusion in view of provisions of subsection (1) of section 94 of Companies Ordinance, 1984 which clearly provided that in case the capital was to be increased beyond the authorized capital, the Registrar of Companies was to be approached within 15 days on the basis of resolution and on his notification under subsection (2) of section 94, the shares could be issued. Since the due process under the Companies Law was not observed the Assessing Officer felt justified that the amount did not represent share deposit money. The Assessing Officer also relied upon ITAT judgment bearing No.1206/LB of 1995‑96, dated 24‑11‑1997 whereby the matter of "claimed or shown" had been discussed in detail. It was thus concluded by the Assessing Officer that since the amount in question has been received otherwise than a crossed cheque meaning thereby that was a cash money which was duly caught by mischief of provisions of section 12(18). Accordingly the amount in question was treated to be income of the assessee under section 12(18) of the Income Tax Ordinance, 1979.

5. When this assessment order was assailed before the Appeal Commissioner who maintained the action of the Assessing Officer by treating the amount of Rs.27,50,000 as income of the assessee in terms of the provisions of section 12(18) being lawfully made.

6. Mr. Azhar Ehsan the learned counsel for the appellant vehemently argued that share deposit money had been received during the year under appeal from the existing shareholders and was as such meant as share deposit money. According to him since the amount reflected in the balance‑sheet is share deposit money, therefore, that has wrongly been treated as loan and was subjected to tax as deemed income of the assessee under the provisions of section 12(18) of the Income Tax Ordinance, 1979. Also argued that the share deposit money was never utilized for any other purposes during the year under appeal rather the shares were subsequently issued to the directors against such amount after complying with all the requirements of the Companies Ordinance such as passing resolution and after paying dues/fees. To support the contention that in such eventuality, the Tribunal has held that the share deposit money cannot be treated as loan, reference has been made to a reported decision as 1999 PTD 2315 (Trib.). Reliance has also been placed on another case cited as 1973 PTD 375 (H.C. Lhr.) in re: CIT North Zone (West Pakistan, Lahore v. Crescent Textile Mills Limited, Lahore whereby it was observed that on offer of new share to the existing shares-holders and acceptance of offer by the later, the contract was complete and issuance of share certificates was not necessary. Thus, the amount was held to be proper share deposit capital and not mere the deposit for advances. It was accordingly held that the impugned addition may be deleted as the Assessing Officer had fallen in grave error of law making such addition under section 12(18) of the Income Tax Ordinance, 1979.

7. On the other hand the learned D.R. vehemently contended that since there was no resolution passed by the Directors of the Company in terms of section 94 of the Companies Ordinance, 1984 for increase in share capital, therefore, the contention or the condition that the share deposit money received remained intact till the shares were issued, was not fulfilled. Also contended that on the basis of distinct character of payment, the assessee's case remains distinguishable from the cases adjudicated upon by the Hon'ble Lahore High Court and the Income Tax Appellate Tribunal cited supra. The learned D. R. further stated that as neither any resolution was adopted nor any offer of acceptance of shares is made in the present case, the Assessing Officer was fully justified in treating the said amount as deemed income of the assessee. Even if the acceptance is taken to be a matter of fact the first part of resolution and on that basis an offer is missing in the instant case. Also argued that similarly the issue before the learned Tribunal which was remanded was identical if compared to the appellant on the basis of admitted facts and utilization of funds/loans. According to him in this case cash funds were being utilized and not deposited as share deposit money. Thus, the action of the Assessing Officer in treating the amount of Rs.27,50,000 as deemed income' of the assessee under section 12(18) of the Income Tax Ordinance, 1979 was legally justified and may be upheld.

8. We have given anxious thought to the rival arguments and also pondered on the facts of the case available on record. We find that a question as to whether the amount shown as share deposit money in the balance‑sheet can be treated as deemed income of the assessee in terms of section 12(18) of the Income Tax Ordinance, 1979 also came up for adjudication before the Hon'ble Lahore High Court, Lahore in re: Micro Pak (Pvt.) Limited v. Income Tax Appellate Tribunal, Lahore cited as 2001 PTD 1180. It was accordingly held therein that the provisions of section 12(18) are not attracted unless two conditions are answered. First that a "loan" has been received by an assessee and secondly that it is so claimed or shown by him. Where any of the two requirements are not answered, the provisions are not attracted. While doing so it was observed by the Judges of the Hon'ble High Court Lahore in the following words:‑‑‑

Irrespective of the factual position as to the extent of the authorized capitals of the assessee/companies the revenue had no business to pick up faults with the intention and motive of a company to increase its capital and the reasons therefore. A joint stock company is at liberty to increase and subject to certain conditions prescribed by law, to decrease its paid‑up capital. As far the increase in the authorized capital is concerned, for a private limited company, as all the assessees before us are, there is hardly any difficulty and in fact it is almost a declaration made to the Registrar of Companies subject to payment of certain fees. It is correct that an Assessing Officer can always probe look into and judge the exact nature of a receipt or an entry in the books of accounts. The reliance of the learned counsel in this regard on the aforesaid judgments of Delhi High Court in re: Duggal & Co. (supra) and K.A. Ramaswamy Chettiar (supra). is certainly pertinent and relevant. The ratio settled in re: Chairman, Evacuee Trust Property (supra) declared by the Bombay High Court also supports the contention of the revenue that entries made by an assessee in books of accounts are not determinative of the question whether the amount was paid as capital asset or a stock‑in‑trade. However, it is equally correct that letter of law in taxing statute has to be interpreted in the sense it had been used and expressed. The provisions of section 12(18) at the relevant time did not attract unless two conditions were answered.' First that there was a "loan" received by an assessee and second that it was, so claimed or shown by him. Where any of the two requirements were not answered, the provisions were not attracted. Subsequently amendment in the year 1998 rather supports the case of the assessee/appellant that at the relevant time an advance irrespective of its nature could not be deemed as income of the assessee. Mr. Ibrar Hussain Naqvi, Advocate, learned counsel, for one of the assessee has relied upon a Full Bench Judgment of the Allahabad High Court in re: CIT, Kanpur v. Nathimal Gaya Lal (1973) 89 ITR 190. In that case it was inter alia held that the provisions creating a legal fiction had to be interpreted in such a manner as it did not cause in justice to a party. According to the learned Judges even when the Courts step into the world of legal fantasy the principle of equity and justice cannot be lost sight of. For a strict and narrow interpretation of the word "loan" learned counsel has also relied upon as re: Commissioner of Wealth Tax v. Abid Hussain (1999) 80 Tax 89 (H.C. Kar.) = (1999 PTD 2895). The mean ings of the word "loan" in the aforesaid three dictionaries as also the view of this Court in re: Gurcharan Das (supra) makes it absolutely certain that share deposit money can never be or amount to a "loan" which is necessarily a sum to be returned after a certain or uncertain period with or without interest.

9. We have also come across a judgment of the Peshawar High Court bearing No. TR 33 of 1997 dated 26‑7‑2001 whereby it was held that any amount received through cross cheque, cash or any other banking channel is not liable to tax under section 12(18) of the Income Tax Ordinance, 1979.

10. Admittedly in the present case the impugned amount has been shown as share deposit money and has not been claimed or shown as loan in the balance‑sheet but in reality that may be a loan, the deeming provisions contained in section 12(18) are not attracted in such eventuality. It is true that no law can be allowed to be circumvented by use of wrong expression or incorrect terminology because it amounts to allowing perpetual fraud on the law with impunity. But we should not forget that where two interpretations are equally possible, the one favourable to the subject is to be adopted. It is equally correct that letter of law in taxing statute has to be interpreted in the sense it had been used and expressed. In this background the terminology used as share depose money in the balance‑sheet cannot take place that of a "loan" because this expression "loan" has always inherent characteristic to be repaid or retuned after a certain or in some cases uncertain limit of time with or without interest. We therefore observe that the provisions of section 12(18) are not attracted where the assessee had claimed or shown share deposit money in the balance‑sheet unless otherwise controverted by the department with unequivocal evidence.

11. In view of foregoing discussion and the ratio decidendi in the legal pronouncement cited supra it is held that the payment made by the directors to the suppliers of goods for the creation of the assets of the company and subsequently showing that amount as share deposit money of the directors in the balance‑sheet certainly falls outside the scope of section 12(18) of the Ordinance, 1979. We are convinced that the amount in question was share deposit money and not the loan for the simple reason that immediately after introduction of share deposit money in the balance‑sheet the share capital was increased by passing a resolution in this regard and after making necessary fee for enhancement in the share deposit capital. Therefore, even if the impugned amount was deemed to be advance the same amount cannot be treated as income on account of non‑applicability of this section as the word "advance" was brought on statute book on 1‑7‑1998, relevant to assessment year 1999- 2000 in order to expand the operation of the provisions. It is also pertinent to mention that the revenue has nothing to do with the arrangements made by the company for making payments on its behalf to a 3rd party. It is always intention and motives of the person who had made the payment and it is always to be seen as what entry has been incorporated in the company's books of accounts in this regard. In the circumstances of the case the addition made under section 12(18) of the Income Tax Ordinance, 1979 amounting to Rs.27,50,000 is hereby deleted.

12. In the result, the assessee's appeal succeeds.

C. M. A. /M. A. K./344/Tax(Trib.)Appeal accepted.