I.T.A. No.2336/LB of 2001, decided on 29th September, 2001. VS I.T.A. No.2336/LB of 2001, decided on 29th September, 2001.
2002 P T D (Trib.) 925
[Income‑tax Appellate Tribunal Pakistan]
Before Muhammad Tauqir Afzal Malik, Judicial Member and Amjad Ali Ranjha, Accountant Member
I.T.A. No.2336/LB of 2001, decided on 29/09/2001.
(a) Income‑tax‑‑‑
‑‑‑‑C.B.R.'s circulars issued subsequently to the date of assessment order were not applicable retrospectively.
(b) Income‑tax‑‑‑
Company‑-‑Provision for diminution in value of investment of share‑ Inadmissible ‑‑‑Assessee was liable to distribute dividends i.e. 40% of the profits before the provision for diminution in the value of investment of shares.
(c) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑Ss. 12(9A), 66‑A, (59) & Second Sched., Part I, cl. (176)‑‑‑C. B. R. Letter No.F/12/(9A)/ITP/99, dated 16‑6‑2001‑‑‑Assessee/company declared dividends on the profit calculated after creating a provision of diminution in value of investment in shares which was accepted by the Assessing Officer‑‑‑Inspecting Additional Commissioner modified the assessment by adding such provision in the profit and taxed the excess of reserves over 50% of the paid‑up capital under S.12(9A) of the Income Tax Ordinance, 1979‑‑‑Assessee contended that IAC was not justified to add the provisions for the diminution in the value of investment as the same had been made in accordance with the international accounting standards‑‑‑Validity‑‑‑Decline in the value of shares was not drastic which only appeared for the year 1999‑‑‑Loss for which provision had been made was not actual but a notional loss‑‑‑Provision was created only to reduce the profits in order to avoid proper taxation under S.12(9A) of the Income Tax Ordinance, 1979‑‑‑Order of Inspecting Additional Commissioner was upheld by the Tribunal being in accordance with law.
PLD 1991 SC 857; Jain Bros. v. Union of India 77 ITR 107 (SC); Stevens v. Durban Roodprott Goldmining % TC 402 (407); Laxmipat Singhania v. CIT 72 ITR 291; Corpus Juris Secundum, Vol. 84; Black's Law Dictipnary; Words and Phrases and Commissioner of Income‑tax, ‑West Bengal v. Gangadhar Banerjee & Co. (Private) Ltd. $7 ITR 176 (SC) ref.
(d) Workers Welfare Fund Ordinance (XXXVI of 1971)‑‑‑
‑‑‑‑S. 4‑‑‑Income Tax Ordinance (XXXI of 1979), Second Sched., Part I, cl. (176)‑‑‑Unit being specifically exempt under the Ordinance, thus, application of workers welfare fund made on IT‑30 Form was uncalled for and deleted by the Tribunal.
Jamil Akhtar Baig, F.C.A. for Appellant.
Noor‑ul‑Amin Hotiana, D.R. for Respondent.
Date of hearing: 25th September, 2001.
ORDER
MUHAMMAD TAUQIR AFZAL MALIK (JUDICIAL MEMBER). ‑‑‑The assessee in this case a private limited company deriving income from power generation unit. which also enjoys income under clause 176 of Part‑I of the Second Schedule to the Income Tax Ordinance, 1979 is in further appeal before its against the order of IAC, dated 28‑5‑2001 passed under section 66‑A for the assessment year 1999‑2000.
2. The grounds is in appeal are:‑‑‑
(i) That the order of the IAC is bad in law and against the facts of the case.
That the IAC was not justified to invoke section 66/A on assessment order, dated 13‑5‑2000 and to hold that it was erroneous insofar as it was prejudicial to the interest of the Revenue.
(ii) That section 12(9A) of the Income Tax Ordinance, 1979 was not applicable as the dividend has been paid amounting to Rs.24,450,000 which is more than the 40% of the profits which was accepted by the DCIT at assessment stage.
(iii) That the IAC was not justified to add the provision for diminution in the value of investment to arrive at the after tax profits and to charge further tax of Rs.11,650,000.
(iv) The provision has been made in the line with the international Accounting Standards keeping in view the decline in the value of the investment as permanent nature and there was no intention to reduce the profits for dividend purpose. .
(v) That the JAC was not justified to charge the WWF amounting to Rs.999,694 on the exempt income.
3. Arguments heard. Record perused.
4. Brief facts giving rise to the present appeal are that the assessment in the case of the appellant under section 62 was finalized on 13‑5‑2000 for the years under appeal. On requisition of the record of assessee and its examination was found by the IAC to be erroneous and prejudicial to the interest of Revenue for the following reasons:‑‑‑
While finalizing the assessment of the company for the year under consideration the DCIT, Circle‑17 Coys. Zone‑I, Lahore has failed to take cognizance of applicability of provision of sec tion 12(9A) of the Income Tax Ordinance, 1979. The working below indicates that reserves of the company as on 30‑6‑1999 exceed 50% of the paid‑up capital and the dividend declared by the company, is less than 40% of the after tax profit of the company:‑‑‑
| Profit after taxation as declared by the assessee50,177 328 company in its accounts. (i) Add: Provision for diminution in value of investment44,400,000 Total94,577,328 40% of the above:37,830,931 Dividend declared24,450,000 Difference:-----13,380,931 Paid‑up capital:‑‑163,000,000 50% of the paid‑up capital81,500,000 Reserves:198,000,000 Excess of reserves over 50% of the paid‑up116,500,000 capital Tax @ 10% (As per Para. F Part V of the First Schedule to the Income Tax Ordinance, 1979)11,650,000 |
As is evident from the above working the case of the company is hit by the provisions of section 12(9A) of the Income Tax Ordinance, 1979 but the DCIT failed to charge tax under this provision.
5. On the basis of above facts show‑cause notice under section 66A was issued bearing No. 1049/R‑III, dated 5‑5‑2001 confronting the assessee with the same. The A.R. of the assessee attended the office of the IAC and filed a written reply bearing No. T‑240/KGL/AO, dated 14‑5‑2001 and contended as under:‑‑‑
"1. That the assessment order, dated 13‑5‑2000 is not erroneous in so far as it is to prejudicial to the interest of Revenue thus should not be revised. The Assessing Officer did specifically confront about the application of section 12(9A) in his notice under section 62 vide Letter No.0848101 / 17, dated 6‑5‑2000 which was properly explained and the Assessing Officer was satisfied to our reply and thus no adverse inference was drawn. Our reply on this issue as quoted in the assessment order and relevant parts of the assessment order are reproduced hereunder for your ready reference.
Our Reply:
"In response the AR of the assessee furnished his explanation vide his office Letter No.T‑97/KGL/PS, dated 13‑5‑2000 as under:
For the assessment year 1999‑2000 the assessee has proposed dividends at 15% at Rs.2,44,50,000. The withholding tax under section 50(6A) has duly been deducted while making payments. The copy of challans is enclosed for perusal. The paid dividend is more than 49% of the net profit of the assessee, therefore, section 12(9A) cannot be attracted."
Assessment order:
After going through the explanation of the AR of the assessee the same has not been convincing on the point of taxability of interest income under section 30. Whereas explanation on the point of application of section 12(9A) is satisfactory, hence no adverse inference is drawn on this score.
(2) In the show‑cause notice the working of taxable profit provided by you is not correct, and therefore, we feel that show‑cause notice is being issued without going through the assessment order which is intended to be revised. We may draw your kind attention that the taxable profit as assessed are Rs.2,502,842 and the rest of the income of the assessee is exempt from tax under clause 176 of Part 1 of the Second Schedule of the Income Tax Ordinance, 1979 as confirmed by the assessment order. In the show‑cause notice .you have shown the taxable profit Rs.94,577,328 which means that you have not ignored upon the exempt income for the application of section 12(9A) and that you have tried to treat all the profit including exempt income as taxable profit which is against the law and the facts of the case."
6. The reply of the assessee was considered by the `IAC and found unsatisfactory for the following reasons:‑‑‑
The assessee‑company by creating a provision of diminution in value of investment of Rs.44,400,000 has shown a lesser book profit before taxation. The act of the assessee‑company is in fact an attempt to defeat the provisions of section 12(9A) and deceive the department on this issue. The contention of the AR that exempt income has not been ignored for application of section 12(9A). The plea of the AR is incorrect that exempt income can only be excluded, while taxing the income of the company. While finalizing the order under section 62 the DCIT could not understand this manoeuvring in accounts and failed to invoke the provisions of section 12(9A) of the Income Tax Ordinance, 1979."
7. Therefore, the assessment already finalized under section 62 as having been found erroneous and prejudicial to the interest of Revenue was modified as under:‑‑‑
| Tax as per rectified IT‑30, dated 27‑2‑2001.Rs.299,187 (i) Profit after taxation as declared by50,177,328 the assessee company in its accounts Add: (ii) Provision for diminution in value of.44,400,000 asstt. Total:‑‑‑94,577,328 40% of the above:37,830,931. Dividend declared24,450,000 Difference:‑‑‑13,380,931 Paid‑up capital:‑‑163,000,000 50% of the paid‑up capital81,500,000 Reserves:198,000,000 Excess of reserves over 50% of paid up capital116,500,000 Tax @ 10% 11,650,000 Total Tax payable:‑‑‑Rs.11,949,187 |
8. The AR of the assessee has argued as under:‑‑‑
(1) That the section 12(9A) has been applied by the Inspecting Additional Commissioner on the ground that the Company has not paid the dividend upto 40% of its after tax profits whereas the Company has paid the dividend amounting to Rs.24.450 Million which is more than 40% of its after tax profits.
(2) That the Inspecting Additional Commissioner was of the view that the provision for diminution in the value of investment should not be considered while declaring the dividend, therefore, by adding that provision he held that the dividend is less than 40 % of the profit, therefore, section 12 (9A) is invokeable and by revising that he imposed the tax @ 10% of the reserves exceeding 50% of the capital.
(3) Before advancing further arguments, he also challenged the vires of the section 12/9A the taxation on reserves would be a double taxation and the double taxation is not permitted in the law. He relied upon the judgment of Supreme Court of Pakistan (PLD 1991 SC 857).
The relevant part of the judgment is reproduced as under:
It is, thus clear that unless there is any prohibition or restriction' imposed on the power of legislature to impose a tax twice on the same subject‑matter double taxation though a heavy burden and seemingly Oppressive and inequitable cannot be declared to be void or beyond the power of legislature. It may, however, be noted that double taxation can be clear or specific by implication such levy cannot be permitted. According to Palkhiwala & Kanga:‑‑‑
"broadly stated the principle of Income Tax Act is to charge all income with tax, but in hands of the same person only once."
There could be double taxation if the legislature distinctly enacted it, but upon general words of taxation, and when you have to interpret a taxing Act, you cannot so interpret it as to tax the subject twice over to the same tax. Reference can be made to:
(1) Jain Bros. V. Union of India 77 ITR 107 (SC); (2) Stevens v. Durban Roodprott Goldmining %TC 402 (407); (3) Laxmipat Singhania v. CIT, 72 ITR 291 (294) and In Corpus Juris Secundum, Volume 84 it has been said:‑‑‑
"Double Taxation should not be permitted unless the legislature has authority to impose on it. However, since the Taxation power is exclusively a legislative function as discussed supra and since, except .as it is limited or restrained by Constitutional provisions, it is absolute and unlimited, as considered supra 4, it is generally held that there is nothing in the absence of any express or implied Constitutional prohibition against double taxation, to prevent the imposition of more than one tax once. In such case whether or not there should double taxation is a matter within the discretion of legislature.
Double taxation is not favoured by the Courts. It has frequently been held that it is against public policy, except where the legislative body has clearly declared to the contrary, and it is to be avoided when ever possible, although if there is a clear legislative intent that a double tax shall be imposed such legislative intent will prevail ............
Double taxation, not only is not presumed or inferred, but there is a presumption against the intention of legislature to impose double taxation on the same property which prevails unless overcome by the express words of the status. Double taxation is permitted only where it has been clearly imposed.
Any construction of taxing statute which result in taxation of the same property twice is to be avoided if possible, or if the statute is ambiguous, uncertain of its construction doubtful, or if it may be reasonably interpreted so as to avert that result, or if the intent to impose double taxation is not clearly expressed and such construction should never be adopted unless necessary to effect the manifest intent of the" legislature. Double as to whether double taxation has been imposed should be resolved in favour of taxpayers. However, at least in jurisdiction where double taxation is not unconstitutional, are discussed Supra 40, where the language of the statute is clear, the fact that double taxation results there from will not justify the Court in disregarding the language.
In the above judgment Their Lordships accepted the arguments of assessee, that once an income hag been taxed and thereafter retained as free reserve, it lost its character of being income and could not be treated as such for 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.
That the Inspecting Additional Commissioner was not justified to add the provisions for the diminution in the value of investment. The provision has been made in accordance with the International Accounting Standards keeping in view that the decline in the investment was not of temporary nature. The relevant Paras of IAS 25 are reproduced hereunder;‑‑
24. Long‑term investments are usually carried at cost. However, when there is a decline, other than temporary, in the value of long‑term investment, the carrying amount is reduced to recognize the decline. Indicators of the value of an investment may be obtained by reference to its market value, the investees assets and results and the expected cash flows from the investment. Risk and type and extent of the investor's stake in the investee are also taken into account. Restriction on distributions by the investee.
26. Reduction for others than temporary decline in the carrying amounts of long‑term investments are charged in the income statement unless they offset a previous revaluation (see paragraph 32). Reductions in carrying amount may be reversed when there is a rise in the value of the investment, or if the reasons for the reduction no longer exist. However, in some countries reductions in the carrying amount are not reversed
That the Inspect-Additional Commissioner has no jurisdiction to add the provision that the clause 59 of Part IV to the Second Schedule says that section 12(9A) shall not be applicable to the Company which distributes at least 40% of its after tax profits of the relevant income year, but the Inspecting Additional Commissioner by adding the provision is trying to make the assessment of the Company. Even with that how could the Company visualize that its valid deduction is going to be added back and dividend should not be less than 40% of its assessed profits.
That the spirit of the law is to enforce the management of the Company to distribute the dividend out of the profits. The dividend is declared by the Board of Directors at the stage‑ of approval of accounts. The procedure of payment of dividend is being governed by sections 248 and 249 of the Companies Ordinance, 1984. Therefore, the Inspecting Additional Commissioner was not justified to form an opinion conflicting to the Companies Ordinance, 1984 that the provision for diminution in the value should have been added for the purpose section 12(9A). The copy of relevant section is as under:‑‑‑
That we are pleased to enclose therewith the copy of Letter No.12(9A) ITP/99, dated June 8, 2001 in which it is being confirmed that the section 12(9A) would be attracted in the case where the dividend is not being distributed @ 40% after tax profit as declared by the assessee.
However, the D.R. produced the copy of C.B.R. Letter No.F/12/ITP/99, dated June 16, 2001. The said letter desired that the accounts should have been prepared according to accounting/audit principles and Standards, which have been followed strictly. As far as manipulation of profit is concerned, we may clarify that there is no manipulation of accounts. The income of assessee is exempt from tax vide Clause 176 of Second Schedule, therefore, the question of manipulation does not arise. However, the said letter has been issued after the date of order under section 66/A, therefore, has no bearing on this case. It is not out of place to mention that both these letters are after the order hence, not applicable retrospectively) (Observation is ours).
The section 12(9A) envisages that if the assessee derives, the profits for any income year but does not distribute the cash dividend, the amount as exceed fifty per cent. of its paid up capital shall deemed to be the income, but the IAC was confused the words "Income" and "Profits".
If the section 12(9A) was applicable on the income of the assessee, the income of the assessee is exempt from tax as there is no income, then how the section 12(9A) would be applicable. But the word "profits" is being used and it is further explained in the clause 59 of Part IV of Second Schedule that the "after tax profits" of the relevant year. The profits have not been defined in the Income Tax Ordinance, 1979. To explain the said word, we have to reply upon the Dictionary meanings. The reference of Black's Law. Dictionary and Words and Phrases are reproduced as under;
Black's Law
Most commonly, the gross proceeds of a business transaction; i.e. net proceeds. Excess of revenues over expenses for a transaction; sometimes used synonymously with net income for the period. Gain realized from business or investment over and above expenditures.
Word and Phrases
The word "profits" usually signifies gain realized from business or investment over and above expenditures.
`Profits' and `income' are sometimes used as synonymous terms' but, strictly speaking, `income' means that which comes in or is received from any business or investment of capital, without reference to the outgoing expenditure, while `profits' generally mean the gain which is made upon any business or investment when both receipts and payments are taken into account."
In the light above definition of the profit, gain or loss on investment is an integral part of the profit of the company. But the IAC tried to make the assessment work and disallowed the expenses and then charge the tax in the pursuance of section 12(9A). The IAC has also failed to refer the section in which the provision for diminution in the value of investment is not allowable. Nothing has been provided in the law that such kind of expenses would not be allowed to work out the profits under section 12(9A). From the law, it is very clear that profits are declaimed profits not the assessed income of the assessee.
To explain profit he relied upon the Indian Supreme Court Judgment i.e.
(571 TR 176 SC)
COMMISSIONER OF INCOME‑TAX, WEST BENGAL
GANGADHAR BANERJEE & CO. (PRIVATE) LTD.
The relevant parts of the order are repeated hereunder:‑‑‑
What does the expression `profit' mean? Does it mean only the assessable income or does it mean commercial or accounting profit? If the scope of the section is properly appreciated the answer to the said question would be apparent. The Income Tax Officer, acting under this section is not assessing any income to tax: that will be assessed in the hands of the shareholders. He only does what the Directors should have done. He put himself in the place of the Directors, Thought the object of the section is to prevent evasion of tax, the revisions must be worked not from the stand point of the tax collector but from that of businessman.
The yardstick is that of a prudent businessman. The reasonableness or the unreasonableness of amount distributed as dividends to judge by business consideration such as previous loss, the present profit, the availability of surplus money and the reasonable requirements of future and similar others. He must take an overall picture of the financial position of the business. It is neither possible nor advisable to lay down any decisive tests of the guidance of the Income‑tax Officer. It depends on the facts of each case. The only guidance is his capacity to put himself in the position of prudent businessman or the Director of company and his sympathetic and objective approach to the difficult problem that arises in the each case. We find it difficult to accept the argument that Income‑tax Officer cannot take into consideration any circumstances other than losses and smallness of profits. This argument ignores the expression "having regard to" that preceded the said words.
The assessment orders passed by Income‑tax Officers are not before the Court. The balance sheet shows a net profit of Rs.1,28,112‑7‑5 whereas the Income‑tax Officer has computed the assessable income at Rs.266,766, which was later reduced in appeal by Rs.80,925. There is no evidence on the record that the real commercial profits were artificially reduced in the balance sheet. Nor is there evidence to show that part of the income assessed represents commercial profits, and what part the national income. In the circumstances it must be assumed that the amount mentioned in the balance sheet correctly represented the commercial profits.
He further contended that the treatment adopted by the IAC is not practical as well. The section 12(9A) has provided that the dividend should be paid within seven months from the end of the Income year which is very obvious that it is based on the declared profit not assessed income as the within seven months, the assessment could not be completed. It normally takes 2 years to issue the Assessment Order.
In view of above submission, he prayed that the application of section 66/A may please be cancelled.,
In response to the arguments of the A.R. of the assessee the D.R. has replied in view of the paras of appeal as under:‑‑‑
Not admitted. The order of the Inspecting Additional Commissioner is strictly in accordance with the provisions of section 66A of the Income Tax Ordinance, 1979 which empowers the IAC to pass an order enhancing or modifying the assessment.
The assessment order, dated 13‑5‑2000 passed by the DCIT was erroneous in so far as it was prejudicial to the interest of the Revenue because DCIT could not take cognizance of maneuvering made in the accounts by the assessees by creating provision for diminishing in value of shares of Maple Leaf Cement Co. Limited to the extent of Rs.44,400 (M).
Incorrect: The profits declared by the assessee‑company were not correct as an inadmissible provision of Rs.44.400 (M) (reduction in value of shares) was made in order to reduce the profits. Before this inadmissible provisions profits of the company were Rs.94,577,328, on this profit‑ the assessee was liable to distribute dividend i.e. 40% of the profits which comes to Rs.37,830,931 whereas the assessee‑company had declared dividend of Rs.24,450,000.
The Inspecting Additional Commissioner of Income Tax has rightly added the provision for diminution in the value of investment keeping in view the instructions contained in C.B.R. Circular No.F‑12(9A) ITP/99, dated 16‑6‑2001 in order to arrive at the profits computed in accordance with the generally accepted and understood accounting/audit principles and standards and the Income Tax Ordinance, 1979.
Incorrect. The investment in the value of shares of Messrs Maple Leaf 'Cement Company is appearing in the accounts at Rs.6,09,00,000 since 30‑6‑1997 and no provision for diminution in the value of investment was made in the years 1997 and 1998. The decline in‑ the value of shares is not drastic which is only appearing *for the year 1999. The loss for which provision has been made is not actual but a notional loss. The provision was created only to reduce the profits in order to avoid proper taxation under section 12(9A).
The Inspecting Additionaf Commissioner of Income Tax has rightly charged the WWF amounting to Rs.9,99,664 under section 4 of the Worker Welfare Fund Act.
After going through the rival arguments; we come to the following conclusions:
That the C.B.R. Circular referred by both the parties subsequent to the date of the impugned order. They are applicable retrospectively. Therefore, they are simply to ignored. We agree with the contentions of the FR that the profits declared by the assessee‑company were not correct as an I admissible provisions of Rs.44,400 (M) (reduction in value of shares) was made in order to reduce the profits. Before this inadmissible provisions profits of the companies were Rs.94,577,328. On this profit, the assessee was liable to distribute dividend i.e. 40% of .the profits. which comes to Rs.37,830,931 whereas the assessee‑company had declared dividend of Rs.24,450,000.
The contention of the DR also lends support that the investment in the value of shares of Maple Leaf Cement Co. Limited was appearing in the accounts at Rs.6,09,00,000 since 30‑6‑1997 and no provision for diminution in the value of investment was made in the years 1997 and 1998. The decline in the value of shares is not drastic which, is only appearing for the year 1999. The loss for which provision has been made is not actual but notional loss. The provision was created only to reduce the profits in order to avoid proper taxation under section 12(9A) of the Income Tax Ordinance, 1979.
It will not be out of place to mention that the makers of law have already given a latitude of keeping them the profit by the company to the tune of 60% and only 40% is to be distributed as dividend to the shareholders. The chunk of profit i.e. 60% out of the total profit had already been waved off .in favour of the company which shows that while framing the law, suchlike situation has been covered.
Citations and provisions advanced by the AR of the assesses have, no bearing on the case. This provision is only created as an inception to an incident which is to happen subsequently. Therefore, there is no question of any double taxation also. The contents of profit which has been ordered to be distributed as dividend has been worked out in the order under section 66‑A. It is the difference in distributed and should have been distributed of profit of 40%. Therefore, we uphold the order passed under section 66‑A to be in accordance with law.
The application of WWF made on IT‑30 Form is uncalled for. The unit being specifically, exempt under the law. Therefore, the IT‑30 in consequence of the order passed under section 66‑A is modified in order to delete the application of WWF to the tune of Rs.999,664.
The appeal is partially accepted as above.
C. M. A. /M. A. K./211/Tax(Trib.); Appeal partly accepted.