I.T.A. No.51/LB of 2002, decided on 14th May, 2002. VS I.T.A. No.51/LB of 2002, decided on 14th May, 2002., 2003 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 938 (2002)

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

‑‑‑‑S. 12(9A) & Second Sched., Part IV, Cl. (59)‑‑‑C.B.R. Circular No.F.12(9A) ITP/99, dated 8‑6‑2001‑‑‑C.B.R. Letter, dated 16‑6‑2001‑ Payment of dividend ‑‑‑Assessee is supposed to pay 50% dividend of his reserves at the end of the year or 40% of his profits earned during the year whichever is less, by way of dividend.

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

‑‑‑‑S. 12(9A)‑‑‑"Profit"‑‑‑Meaning and scope‑‑‑General definition of profit is that it is the difference between receipts and the expenditure‑‑ Regarding expenditure, its genuineness and reliability towards receipts obviously is the greatest test for allowance‑‑‑Result of receipt and genuine expenditure is profit‑‑‑Word "profit" used is S.12(9A) of the Income Tax Ordinance, 1979 is to be defined in actual and normal sense.

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

‑‑‑‑S. 12(9A) & Second Sched., Part IV, Cl. (59)‑‑‑C.B.R. Circular No.F.12 (9A) ITP/99, dated 8‑6‑2001‑‑‑Income deemed to accrue and arise in Pakistan‑‑‑Deemed income‑‑‑Dividend‑‑‑Calculation of net profit by deducting provision of previous year excess tax and paid 40% dividend on such calculated profit‑‑‑Tax was charged under S.12(9A) read with CI. (59), Part IV of the Second Sched. of the Income Tax Ordinance, 1979 on the ground that previous year excess should be added in the profit and expenses not allowable were also claimed; hence the ratio of 40% fell below the prescribed limit‑‑‑Validity‑‑‑Declared profit was subject to scrutiny and the same could be increased or reduced which meant that assessee could still remain entitled to certain expenses which were allowable to him under law but the same had not been claimed in books but in the Income Tax Return‑‑‑Simple example of such a claim was depreciation of machinery for working in double shifts or in triple shifts‑‑‑Figure on which the assessee had distributed 40% dividend was subject to allowance of depreciation on the basis of number of shifts‑‑‑By taking ail such things into account the dividend distributed was more than 40% of the profit‑‑‑Distribution of the same by the assessee was well within parameters fixed under S.12(9A) read with Cl. (59), Part IV of the Second Sched. of the Income Tax Ordinance, 1979‑‑‑Tax charged by the Department was against the law and practice and the same was deleted by the Appellate Tribunal.

John Smith & Sons v. Moore 12 TC 266; Commissioners of Inland Revenue v. Frere 42. TC 125 and Writ Petition No.9665 of 2001 ref.

Syed Aftab Hamid and Fayyaz Siddique, F.C.As. for Appellant.

Mian Ashiq Hussain and Mrs. Sabiha Mujahid, D.R. for Respondent.

Date of hearing: 2nd May, 2002.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).‑‑‑This appeal has been filed by the assessee. It is against charge of tax under the provisions of section 12(9A) read with clause (S9) Part IV of the 2nd Schedule.

The brief facts of the case are that the assessee was under legal obligation to distribute cash dividend @ 40% of its after tax profits of the relevant income year so as to avoid the rigours of section 12(9A). The Assessing Officer from the accounts of the assessee found that profits of the assessee were Rs.26,799,332 while the amount distributed as dividend in their opinion was les than 40% of the profit during the year. At the time of hearing both the contenders in principal agreed that the profit, to be distributed during the year, should not be less than 40% of the Income of the same year. However, the AR claims that the dividend distributed by the company is more than 40% hence section 12(9A) does not apply. While the learned LA says that while calculating income for the year the assessee has claimed certain expenses which are not allowable; hence the ratio of 40% falls below the limit prescribed therein. The assessee in favour of its claim produced before us following figures;

Per Tax

under clause (59) of the

2nd Schedule

On the basis of above calculation, the assessee urges that the tax charged under section 12(9A) should be deleted while the department says that the calculation is incorrect. In their opinion the previous year excess tax provision amounting to Rs.1,04,31,429 should be added in the profit for the impugned year. This would result in an addition of Rs.50,62,733 which should be added to the profit of the year for the purposes of distribution. This (figure comes to Rs.2,67,99,332 and the amount distributed being Rs.77,56,171 falls short from the prescribed limit of 40%.

Before giving a finding it will be in the fitness of things to go through the relevant provisions of law:‑‑

"S.12. [(9A) Where an assessee, being a public company other than a scheduled bank or a Modaraba, derives profits for any income year but does not distribute cash dividends within seven months of the end of the said income year, distribute dividend to such an extent that its reserves, after such distribution, are in excess of fifty per cent of its paid up distribution capital, so much of its reserves as exceed fifty per cent of its paid up capital shall be deemed to be the income having accrued to such company during that year:

Provided that in respect of assessment year commencing on the first day of July; 1999, the cash dividend made within the following period shall be treated as distribution for the purposes of this subsection:‑‑‑

(i) When the income year ended on a date prior to the thirtieth day of June, 1999, and the distribution is made within a period of three months reckoned from the, first day of July, 1999; or

(ii) where the income year ended on the thirtieth day of June, 1999, and the distribution is made within a period of eight months reckoned from the first day of July, 1999.

Explanation.‑‑‑For' the purposes of this subsection, the expression "reserves" shall have the meaning as may be prescribed].

Subsequently through amendment in 2nd Sched. clause (59) was inserted in part‑IV. Clause (59) reduced the limit of distribution of dividend in the manner that the section was made in‑applicable if the profit distributed by the company is equal to either 40% of its after tax profits or 50% of its paid up capital whichever is less.

This way the Legislature has further provided relief to the companies. This law has been introduced in 1999 for the first time in substitution of another provision the purpose of which was also the same but the language is different. Certain explanations were desired from the C.B.R. the C.B.R., therefore, explained that the Assessing Officer shall compute 40% after tax profits for the purposes of section 12(9A) read with clause (59) of Part‑IV of the 2nd Schedule of the Income Tax Ordinance. 1979 on the basis of assessee declared final accounts and not on the basis of assessed profits. This instruction was given through Circular No. F. 12(9A) ITP/99, dated June 8, 2001. Another explanation was released by a letter, dated 16‑6‑2001 in the following manner:‑‑‑

"To

Regional Commissioner of Income Tax,

Corporate/Southern/Central/Eastern/Northern Regions,

Karachi/Multan/Lahore/Islamabad.

SUBJECT: TAX ON RESERVES UNDER SECTION 12/(9A) READ WITH CLAUSE (59) OF PART‑IV OF SECOND SCHEDULE TO THE INCOME TAX ORDINANCE, 1979 CLARIFICATION.

1. The undersigned is directed to draw your kind attention to clarification bearing even number, dated June 8, 2001 and to state that it has been brought to the Boards notice that said clarification is being misinterpreted by some assessee with a view to obtain an undue advantage. As the said clarifica tion was obtained without disclosing the actual facts of the case the matter has been reconsidered and it is clarified that Board's clarification under reference not allow in any way, any reduction in profits through charging inadmissible expenses/provisions.

2. It is clarified that the expression after tax profit' as used in the clause (59) part‑I of Second Schedule to the Income Tax Ordinance, 1979 refer to profits computed in accordance with the generally accepted and understood accounting/audit principles and standard and the Income Tax Ordinance. The instruction referred to above also do not permits or endorse any scheme or arrangement or presentation or declaration intended to manipulate profits Which ought to be declared under the Income Tax Ordinance either by deducting expenses or making provision for deductions inadmissible under the said Ordinance, the ultimate purpose of which is to avoid company's obligation under section 12(9A).

The above clarification may please be brought to the notice of all concerned."

From the above provisions of law and the circular referred, the net position which emerges is that the assessee is supposed to pay 50% dividend of his reserves on the end of the year or 40% of his profits 4 earned during the year whichever is less, by way of dividend. In the present case, the assessee claim being that he has paid more than 40 % of his after tax profits during the year; we need to dilate upon the issue from the same angle.

The terms used for determining as to whether a company has fulfilled its obligation under section 12(9A) is "after tax profits of the relevant income year". This expression has been explained by the C.B.R. in its two circulars already mentioned and ultimately has said that the term does not permit to enforce any scheme or arrangement or presentation or declaration intended to manipulate profits which ought to be declared under the Income Tax Ordinance either by deducting expenses or making provision for deduction inadmissible under the said Ordinance, the ultimate purpose of which is to avoid company's obligation under section 12(9A). The explanation given by the C.B.R. are quite surprising'

The word profit has to be understood in its ordinary sense. The same has not been defined in the Income Tax Ordinance; hence it is be construed in their ordinary significance. I can see no reason for suggesting that this last mentioned principle should not apply to this word when used in this statute. In this regard one can refer Lord Halsbury definition who says that the word `profit' is to be understood in its natural and proper sense in a sense which no commercial man would misunderstand. Further in John Smith & Sons v. Moore, 12 T.C. 266, .it is held as under:‑‑‑

"In determining the amount assessable to the tax, deductions are to be made from the gross profits of all the expenses incurred by the owner for the time being for the purpose of earning the profits. This indeed is involved in the very idea of profits. "

Further Viscount Radeliffe in Commissioners of Inland Revenue v. Frere 42. T. C. 125 at p.147, it is held as under:

"No doubt, the assessment of profits under Schedule D has come to require a rather different approach, since in that case the basis figure for assessment is the balance between receipt and expenditure; but even there it is plain that the code is intended to keep a control over the forms of expenditure that can appear in the profit account. "

The general, definition of profit, therefore, is that it is the difference between receipts and the expenditure. Regarding expenditure, its genuineness and reliability towards receipts obviously is the greatest test for allowance. The result of receipt and genuine expenditure as per Income Tax law, therefore, is profit and on this there apparently seems to be no difference, between C.B.R. or that of the petitioner. However, for the purpose of this section the Legislature has further permitted deduction of tax as per paid profit; hence it is not of the receipt less genuine expenditure less tax which is to be calculated for the purposes of applying above provision. Generally, as in the present case the dispute is on the point that which figure should be included which should be ignored.

Above discussion makes its clear and word `profit' used in section 2(9A) is to be defined in actual and normal sense. Keeping in view the provisions of Income Tax Ordinance, 1979 and C.B.R. Circular, saying that it should be adopted as declared is not a correct view. This is so proved by the subsequent Circular that says, that "after tax profit" refers to profits computed in accordance with the generally accepted and understood accounting/Auditing principles and standards and the Income Tax Ordinance. This way declared profit has been subjected to some scrutiny and test which apparently means that the profit shall be taken as declared and the assessee shall be entitled to all standard accounting and Audit principle and admissible expenses as per Income Tax Ordinance, 1979. This observation finds support from the action of the Assessing Officer who has added excess tax of earlier years by presuming the same as income for the impugned year. It further finds support from the arguments of learned L.A. who was referring some more figures from the accounts of this assessee to say that the same are inadmissible hence should be added in profit. We have ignored these entries as the same do not find part of the orders of the subordinate officers. However, this gives an obvious conclusion that the declared profit is subject to scrutiny and the same can increase or reduce the profit. It means the assessee can still remain entitled to certain expenses which are allowable to him under law but the same have not been claimed in books but in Income Tax Return. A simple example of such a claim is depreciation of machinery for working double shifts or in triple shifts.

There is still another angle of applying section 12(9A) which has been explained by Mr. Justice Nasim Sikandar in Writ Petition No.9665 of 2001. The relevant para. is as under:‑‑‑

"Before ending, I would like to record that provisions of section 12(9A) like rest of them, should be invoked only where such invocation is absolutely free of any doubt. Such like deeming provisions in any taxing statute should be invoked as rarely as possible. The reason simply being that those are penal in nature and are extra burden on a subject after payment of normal tax. I will be unjustified on the part of the State to extract more money from a subject by pertaining its arm and unnecessarily stretching the deeming clauses of a taxing statute. The purpose of section 12(9A) is only to 'persuade' corporate assessee to distribute dividends to the shareholders. The provision is certainly not meant to generate more revenue for the State. An over zealous collector is as undesirable as a meek conniver. "

In above referred Judgment the 'learned Judge has very correct appreciated the purpose of this legislation. This Tribunal has also made similar comments while deciding an issue regarding application of section 52. Behind every legislation there is a purpose. Any interpretation beyond the purpose would mean entering into the sphere of Legislature which obviously cannot be supported.

The accumulated effect of above discussion is that in the present case the assessee profit as per books is Rs.217,36,599. The law has permitted deduction from the same the tax payable or paid on this profit. The assessee claims Rs.57,68,696 deduction on account of provision for taxation. The figure on the basis of normal rates of tax on Rs.217,36,599 is apparently a correct figure; hence its reduction for the purpose of calculating after tax profit is fully justified. The profit in this year, therefore, for determining the amount under section 12(9A) is Rs.15,967,903 on which distribution of dividend amounting to Rs.77,56,171 is correct appreciation of the facts. This amount is more than 40% of the amount of further tax profit.

In this regard the observation of the learned IAC which needs mentioning is that for determination of profit the excess tax paid in earlier years should be recognized as an asset. He has, therefore, added the excess tax provision of the prior years in the profit for the year and has opined that it was in accordance with the relevant accounting standard. His suggestion, therefore, was that in the profit shown the sum, of Rs.1,04,31,241 being excess of tax in the earlier years, was to be added in the profit of this year under discussion. This reasoning cannot find support from us as the language of the section leaves no room for addition of any previous amount. It is for the reason that clause (59) of part‑I of the Second Schedule clearly speaks that the provision of section 12(9A) shall not apply to a company which distributes at least 40% of its after tax profit of the relevant income, year. The excess tax of the earlier years neither in accounting standards nor in the Income Tax Ordinance becomes a profit of the year in appeal. Another factor that goes to favour this assessee is that while making the regular assessment the department has assessed the assessee at loss. Furthermore, even the present figure on which the assessee has distributed 40% dividend as per department own point of view and instructions of the C.B.R. was subject to allowance of depreciation on the basis of number of shifts. All such things taken into account leaves no doubt that the dividend distributed was more than 40 % of the profit for the year. The distribution of the same by the company, therefore, is well within' parameters fixed under section 12(9A) read with clause (59) part IV of the Second Schedule.

The result is obvious, the tax charged by the department is against law and practice; hence is hereby deleted.

The assessee appeal is accepted in the manner and to the extent as mentioned above.

C.M.A./600/Tax (Trib.)Appeal accepted.