2004 P T D (Trib.) 1135

[Income-tax Appellate Tribunal Pakistan]

Before Khawaja Farooq Saeed, Khalid Waheed Ahmed, Judicial Members and Muhammad Munir Qureshi, Accountant Member

I.T.As. Nos. 4302/LB to 4304/LB of 2001, decided on 10/07/2003.

Per Khawaja Farooq Saeed, Judicial Member and Muhammad Munir Qureshi, Accountant Member---

(a) Income-tax---

----Profit & Loss account ---Add back---History---Addition was made in deviation from history the history of the case---Validity--Claimed expenses remained more or less the same as was in the previous year-- Add backs in a different proportion to the earlier years was not justified.

(b) Income-tax---

----Profit & Loss expenses--History---Acceptance of accounts---Add back through remarks that "parts of expenses were not open to verification"---Validity---Such remarks could not be supported especially in such cases where the accounts had a history of acceptances and that each and every penny was expended after due approval and was subject to proper administrative and audit control---Company manage ment and staff all were qualified and skillful people---Question of unverifiability in such cases ordinarily would not arise---Requirement of such addition was proper identification of the unvouched and unverifiable expenses---Addition made was deleted by the Appellate Tribunal.

(c) Income Tax Rules, 1982---

----R. 216(3)(a)---Computation of export profits and tax attributable. to export sales ---C.B.R. Circular No.2 of 2000, dated 8-2-2000---FOB value---Commission paid outside Pakistan---Exclusion of commission from sale---Validity---FOB sales were the amount mentioned on the bill of entry as FOB value of the assessee---No question of excluding the commission from the export sales for determining FOB value of the assessee would arise---Claim of exclusion of commission from determination of the FOB value was rejected by the Appellate Tribunal.

(d) Income-tax---

----International Accounting Standard---" Pertaining to accounts"---Connotation---For determination of the word `pertaining to accounts' the definition of the International Accounting Standards would be relevant-- Pattern suggested by the International Accounting Standards could not be made binding for determination of income for assessment purposes under the Income Tax Law---Law of Income Tax was independent and the purpose of the said law was entirely different.

(e) Interpretation of statutes-----

----Terms--Definitions---Where a term is not defined by an enactment, the ordinary dictionary meanings is the best alternative.

(f) Income-tax---

----International Accounting Standard---Terms used in International Accounting Standard has some times been considered as more relevant as the same were based upon normal dictionary meaning.

(g) Income Tax Ordinance (XXXI of 1979)-----

----S. 12(9A)---Income deemed to accrue or arise in Pakistan ---Profit-- Connotation of 'profit', as used in S.12(9A) of the Income Tax Ordinance, 1979 was to be understood keeping in view the Income Tax Law itself.

I.T.A. No.51/LB of 2002 ref.

(h) Income-tax---

----Calculation of profit---Actual transaction---Scheme of Income Tax Law, did not permit calculation of profit or income without actual transaction.

(i) Income-tax---

----Profit---Sale---Profit is the difference between purchases and sale and hypothetical value be that based on market rate or some other formula could not be considered as a substitute of sale.

(i) Income-tax---

----Stocks---Valuation--Loss---Stocks in normal accountancy had always been shown at cost---Not only that in the case of shares but also in the other closing stocks the cost could diminish and decrease in value of such stocks could not be allowed as loss.

(k) Income Tax Ordinance (XXXI of 1979)-----

----S. 62---Assessment on production of accounts, evidence etc.---Loss-- Devaluation of stocks---When income of an organization was calculated it was always based upon trading/manufacturing and profit and loss account of the same---Stocks which had not been transacted did not form part of the trading or manufacturing account of an assessee.--Stocks only come into picture while preparing the balance-sheet and nobody reduces or increases its profits while preparing final statement of its liabilities and assets---Stock was an asset of the company and remains as such on the opening as well as the closing date unless sold out as a part of business transaction.

(I) Income Tax Ordinance (XXXI of 1979)---

----S. 12(9A)---Income deemed to accrue or arise in Pakistan ---Profit-- Definition---Profit is profit for the year and it was not the accumulated profit of earlier years---Section 12(9A) of the Income Tax Ordinance, 1979 had come as charge and a charge was never retrospective.

(m) Income Tax Ordinance (XXXI of 1979)---

----S. 12(9A) & Second Sched., Part IV, Cl. 59---Income deemed to accrue or arise in Pakistan---Retrospective effect---Section 12(9A) of the Income Tax Ordinance, 1979 had been added as a charge and creation of charge could not be permitted retrospectively especially in case of a deemed provision without any clear or unambiguous intention.

(n) Income Tax Ordinance (XXXI of 1979)---

---S. 12(9A)---Income deemed to accrue or, arise in Pakistan---Double taxation---Legislature had come up with provision of S.12(9A) of the Income Tax Ordinance, 1979 with a clear mandate and with full intention to create a charge in special circumstances---Legislature could not be deprived of its inherent jurisdiction of charging tax twice, if it was so intended in unequivocal terms---Such an intention was clear and there was no doubt about language to that extent and it had created a charge on the amount, which had been kept as reserve from the profit of the year, and if the company did not fulfil the requirement this charge came into force.

(o) Income Tax Ordinance (XXXI of 1979)---

----S. 12(9A)---Income deemed to accrue or arise in Pakistan---After tax profit---Connotation---After tax profit connotes "profit for the year" and' the reserves shall be the one created from the date of the insertion of the provision of S.12(9A) of the Income Tax Ordinance, 1979.

(p) Income Tax Ordinance (XXXI of 1979)---

----S. 12(9A)---Companies Ordinance (XLVII of 1984), S. 234 & Sched., 4, Part III-1(C) IIIV---C.B.R. Circular No. F. 12(9A)ITP/99, dated 8-6-2001---Income deemed to accrue or arise in Pakistan---Profit-- Calculation of---Stock---Diminution in value---Scope---Diminution in value of stocks was not to be allowed as a reduction for calculating profit.

(q) Income Tax Ordinance (XXXI of 1979)-----

----S. 12(94) & Second Sched., Part IV, Cl. 59---Income deemed to accrue or arise in Pakistan---Reserves---Previous years reserve-- Taxation of, by adding it in current year's reserve---Validity---Company which in actuality had distributed more dividend than the legal requirement, penalizing it under the garb of a wrong calculation was not appropriate.

Per Khalid Waheed Ahmad, Judicial Member---

(r) Income Tax Ordinance (XXXI of 1979)---

----S.12(9A)---Income deemed to accrue or arise in Pakistan ---Reserve-- Reserves for the purpose of subsection (9A),of S.12 of the Income Tax Ordinance, 1979 were to be taken as the excess of undivided profit earned during ' a year'.

(s) Income Tax Ordinance (XXXI of 1979)---

----S. 12(94)---Income deemed to accrue or arise in Pakistan-- "Reserve"---Connotation---Word 'reserve' used in subsection (9A) of S.12 of the Income Tax Ordinance, 1979 means the excess of the amount remaining undivided out of the profit earned during a particular year which did not mean to include the reserves of earlier years also.

(t) Income Tax Ordinance (XXXI of 1979)-----

----S. 12(94)---Income deemed to accrue or arise in Pakistan-- Application---Section 12(94) of the Income Tax Ordinance, 1979 is applicable in cases where the profit is derived by a public company for any income year; cash dividends are not distributed within seven months of the end of the said income year of the undivided profit for that year is in excess bf 50% of its, paid up capital; the 'reserves' of the company are in excess of 50 % of its paid up capital; and the profit to be considered for the purpose of subsection (9-A) is the profit for the year tinder consideration only.

(u) Income Tax Ordinance, (XXXI of 1979)---

----S.12(9A)--Income deemed to accrue Or arise in Pakistan---Reserve---Meaning---Reserve means the amount being the undivided profit of the relevant year only and does not include the brought forward .'reserves' of the previous years.

(v) Interpretation of statutes---

---- Where more than one interpretation of a provision is possible then one favouring the assessee is to be followed.

(w) Income Tax Ordinance (XXXI of 1979)----

----S. 12(9A)---Income deemed to accrue or arise in Pakistan ---Reserve-- Previous years' reserve was clubbed with the current year reserve for the purpose of taxation under S. 12(94) of the Income Tax Ordinance, 1979---Validity---'Reserve' for the purpose of S.12(9A) of the Income Tax Ordinance, 1979 was the amount of undivided profit of the relevant year only and it did not include the brought, forward reserves of the previous years.

Elahi Cotton Mills Ltd.'s case 76 Tax 5/91; Writ Petition No.9665 of 2001 and 1992 PTD 576 ref.

2003 PTD (Trib.) 2499 distinguished

Iqbal Naeem Pasha, Muhammad Iqbal Khawaja and Faisal Iqbal Khawaja for Appellant.

Muhammad Asif, D.R. for Respondent.

Date of hearing: 5th March, 2003.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).-- Following grounds are agitated by the assessee:---

1998-99

.That the order passed by the learned Commissioner of Income Tax (Appeals) is replete with incorrect/ inaccurate observation/insinuations adverse to the appellant.

.That the learned Commissioner, of Income Tax (Appeals) misdirected himself in law by confirming the order of the learned Assessing Officer whereby "foreign commission" paid outside Pakistan was not directly deducted from the "Export Proceeds".

.That the learned Commissioner of Income Tax (Appeals) was not justified in confirming the following disallowances out of claimed under "Profit and Loss Account":---

(a)Out of Travelling, Conveyance &

Entertainment account.Rs.10,00,000

(b)Under head Repair & Maintenance

A/cRs. 6,00,000

(c)Under head Printing &

Stationery A/cRs. 6,00,000

(d)Under head Communication

expense A/cRs. 9,53,550

(e)Under other chargesRs. 3,00,000

(f)Under head distribution

expenses A/cRs.10,00,000

(g)Under head Advertisement A/cRs. 4,00,000

(h)Other ExpensesRs. 9,00,000

The disallowances confirmed besides being unjustified and unwarranted are also excessive and exorbitant.

1999-2000

.That the order passed by the learned Commissioner of Income Tax (Appeals) is replete with incorrect/inaccurate observation/ insinuations adverse to the appellant.

.That the learned Commissioner of Income Tax (Appeals) misdirected himself in law by confirming the order of the learned Assessing Officer whereby "foreign commission" paid outside. Pakistan was not directly deducted from the "Export Proceeds".

.That the learned Commissioner of Income Tax (Appeals) grossly erred by relying on the "clarification" issued on June 16, 2001 by the Revenue Division of Ministry of Finance and Economic Affairs which was contradictory to the clarification issued by the same "Division of the Ministry" on June 8, 2001 thereby ignoring the observations of the apex Court in the case of Elahi Cotton Mills Ltd. (76 Tax 5/91).

.That the learned Commissioner of Income Tax (Appeals) misdirected himself in law by confirming the orders passed by the learned Assessing Officer whereby it was incorrectly held that the appellant had contravened the provisions of section 12(9A) of the Income Tax Ordinance, 1979 read with clause (59) of Part-IV of the Second Schedule inserted vide S.R.O. No. 969 of 1999, dated 27-8-1999.

.That the Legislature having used, in section 12(9A), the expression "derives profits for any income year" the appellant had duly complied with the provisions of the said section read with clause (59) of Part IV of the Second Schedule.

.That income tax having been assessed on the income of the appellant company, part whereof was treated as "RESERVES" further levy of. tax at 10% on the amount of Rs.671,832,000 representing "Reserves" tantamounts to double taxation of the same amount.

.That the learned Commissioner Income Tax (Appeals) was not justified in confirming the following disallowances made by the learned Assessing Officer out of expenses claimed under the head "Profit and Loss Account":---

(i)Travelling Conveyance & EntertainmentRs.1,200,000

(ii)Repairs and MaintenanceRs. 900,000

(iii)Printing and StationaryRs. 700,000

(iv)Communication expensesRs.1,113,000

(v)Other chargesRs. 300,000

(vi)Distribution expensesRs.2,500,000

(vii)Advertisement expenses.Rs.50,000

The disallowances confirmed besides being unjustified and unwarranted ace also excessive and exorbitant.

1999-2000

.That the order passed by the learned Commissioner of Income Tax (Appeals) is replete with incorrect/inaccurate observation/ insinuations adverse to the appellant.

.That the learned Commissioner of Income Tax (Appeals) misdirected himself in law by confirming the order of the learned Assessing Officer whereby "foreign commission" paid outside Pakistan was not directed deducted from the "Export Proceeds".

.That the learned Commissioner of Income Tax (Appeals) grossly erred by relying on the "clarification" issued on June 16, 2001 by the Revenue Division of Ministry of Finance and Economic Affairs which was contradictory to the clarification issued by the same "Division of the Ministry" on June 8, 2001 thereby ignoring the observations of the apex Court in the case of Elahi Cotton Mills Ltd. (76 Tax 5/91).

.That the learned Commissioner of Income Tax (Appeals) misdirected himself in law by confirming the orders passed by the learned Assessing Officer whereby it was incorrectly held that the appellant had contravened the provisions of section 12(9A) of the Income Tax Ordinance, 1979 read with clause (59) of Part-IV, of the Second` Schedule inserted vide S.R.O. No. 969 of 1999, dated 27-8-1999.

.That the Legislature having used, in section 12(9A), the expression "derives profits for any income year" the appellant had duly complied with the provisions of the said section read with clause (59) of Part-IV of the Second

.That income-tax having been assessed on the income of the appellant company, part whereof was treated as "RESERVES" further levy of tax at 10% on the amount of Rs.681,667,000 representing "Reserves" tantamounts to double taxation of the same amount.

.That the learned Commissioner of Income Tax (Appeals) was not justified in confirming the following disallowances made by the learned Assessing Officer out of expenses claimed under the head "Profit and Loss Account": --

(i)Travelling Conveyance & EntertainmentRs.1,500,000

(ii)Repairs and MaintenanceRs. 800,000

(iii)Printing and StationaryRs. 600,000

(iv)Communication expensesRs.1,294,000

(v)Other chargesRs. 300,000

(vi)Distribution expenses Rs. 100,000

(vii)Advertisement expensesRs. 50,000

The disallowances confirmed besides being unjustified and unwarranted arc also excessive and exorbitant.

Brief facts leading to the appeals are that the assessee filed return declaring income from business which was accepted by the department subject to additions in various heads. Against assessment completed by the Assessing Officer an appeal was filed which was decided by the learned CIT(A) vide his order, dated 8-10-2001. The grounds now filed before us mentioned supra are after the said order of First Appellate Authority. As apparent from them the main issues now before us are in respect of foreign commission paid outside Pakistan and various add backs in profit and loss account for the assessment year 1998-99. For 1999-2000 and 2000-2001 the first issue is again that of disallowance of foreign commission paid outside Pakistan, than is application of the provisions of section 12(9A) of the Income Tax Ordinance, 1979 and disallowance and its confirmation in certain heads from profit and loss account.

Learned AR started his arguments by remarking that it is a case of acceptance of accounts. Not only that its export sales have been accepted but local sales as well as entire purchases have been held to be as correct and verifiable. He said that all aspects of this case therefore, may be seen froze the angle that the assessee by habit is disclosing true particular of his income. Coming directly to the ground learned AR remarked that the Chairman Penal has not directly deducted foreign Commission paid outside Pakistan from the sales and consequently working of export income vis-a-vis income from local sales is not correct. He produced before us the computation of export and local sales, which in his opinion was correct appreciation of the concerned provision. He says that the Assessing Officer has not deducted Commission while prorating export and local income. This way his export income has been considered as 75.68% and local has been considered as 24.32% which if had correctly been calculated would have resulted in 75% and 25% an export and local income respective. Thus it has ended in disadvantage to the assessee.

Regarding other expenses of P&L. he repeated his earlier arguments that the assessee incurs expenses after due verification and each and every penny is vouched and verifiable. The entire system is administered by the qualified people, the company is being run in a very professional manner and no question of either excessive or irregular expense lies. On a question as to whether in earlier year there have been such add backs or not the learned AR conceded that certain adjustments have been made in the accounts of the assessee. He, however, strongly challenged the additions. Comparative Chart of P&L was also produced which is in respect of all the years impugned before us.

The main argument of the assessee, which is in respect of 1999-2000 and 2000-2001, is- in respect of diminution in equity investment made for purchase of shares of certain companies while working out the income under section 62. It was argued that the assessee is maintaining his accounts under mercantile system hence the provisions as claimed are as per regular practice employed in such system. It was argued that the Panel misdirected itself by not allowing the diminution of the value and have also violated the instructions of the C.B.R. issued vide Circular No. F. 12(9A)/ITP/99, dated Jun 8, 2001. This diminution in value had resulted in reduction in income hence provisions of section 12(9A) were not attracted at all.

The learned AR further said that at the end of day when income of assessee is calculated it is the company law which comes into operation and the assessee being governed by the Company Ordinance, 1984 is legally bound to do what the said ordinance says. He referred section 234 (3)(i) which imposes restriction upon companies to follow the international accounting standards being guideline for preparation of accounts. Referring to international accounting standard he said that the same directs for providing provisions for diminution in value of investment at the end of the year. This he says is further controlled by the Company Ordinance, 1984 in itself wherein Sched., 4 Part III 1 (G) IIIV speaks as follows:---

PART III REQUIREMENTS AS TO PROFIT AND LOSS ACOUNT.

(1)The profit and loss account shall be so made out as to disclose clearly the operating results of the company during the financial year covered by the account and shall so, arranged under the most convenient heads, the gross income and the gross expenditure of the company during the financial year disclosing every material feature and in particular the follow:--

(viii)Provision of diminution in value of investments.

He further remarked that the company being bound in showing diminution in value of the investment, its actual profit shall be the one which results after the adjustment demanded by the Company Ordinance, 1984 vis-a-vis International Accounting standard. The provisions of section 12(9A) having been added to support the Company Law therefore, are to be governed by its provisions.

He argued that the use of word "Profit" as against "income" is also very particular. In the Company Ordinance, 1984 the profit of a company is determined while the Income Tax Ordinance deals with net income. In his opinion therefore, the income declared by the assessee was the correct income and section 12(9A) was not applicable on the facts and circumstances of this case.

Without prejudice to his earlier arguments the learned AR said that section 12(9A) read with clause 59 of The Fourth Schedule even otherwise 'does not apply as the assessee has distributed dividend in excess of the required limit. He produced before us following calculation:-- --

EXAMPLE--OF TAX ON RESERVES

(A) BASIS; PROFITS FOR THE YEAR ONLY

Mln. Rs.

(a)Paid up capital of the company80.00

(b)Profit for the year.100.00

(c)Dividend paid (30 %)30.00

Undistributed profits available for

transfer to the reserves70.00

50% of paid up capital of Rs.80.0040.00

Excess Reserves (undistributed profits)

for the year under section 12(9A)30.00

Tax @ 10 %3 .00

(B) BASIS; ACCUMULATED RESERVES.

Reserves at opening of Income Year1,500.00

ADD: Undistributed Profit transferable

to reserves (as above)70.00

1,570.00

50% of paid up capital.40.00

Excess Reserves for the year a/s 12(9A)1,530.00

Tax @ 10%153.00

excess tax on old reserves.150.00

He remarked that the assessee having paid more dividends as per the calculation required, there is no reason for further charge-on the profit.

The AR presented another limb of his argument by saying that section 12(9A) has come as a new charge. This being part of substantive law cannot be considered as to be retrospective. The reserves of the assessee shown in the balance-sheet prior to this amendment, out of the profits shown earlier therefore, does not form part of the taxable reserves under section 12(9A). The word `Profit' as already argued has been used advisedly and term `after tax profit' in clause 59 of the Fourth Schedule clearly means profit for the year.

The learned DR on his turn argued the case and first of all made his rebuttal in respect of issue pertaining to the issue of application of section 12(9A). He said that the word `after tax profit' means the profit as is available with the company on 30th of June including surplus of the earlier years. He said that had the Legislature intended a different view, it would have always mentioned the same in the language of the above section. There was obviously no restriction on use of the words impliedly so as to apply the provisions only for the impugned years profits. It was remarked that the law is clear in its interpretation and the words have been used without any doubt. He referred famous principle with regard to interpretation of fiscal statutes that the law should be read in its true spirit and the words should be given their literal meanings. Further that no one can extend its arms by importing something from outside not intended by the language of law.

It was further argued that the word `profit' has not been explained in any Income Tax Ordinance, 1979 hence its meanings should be gathered in the sense that it includes the one which comes as a result' of the preparation of the balance-sheet. In fact the assessee himself has added earlier years incomes while calculating distributeable dividend. Now at this stage the assessee cannot change his stance and say that the word `after tax profit' does not include the profit of the earlier years. He remarked that this is like defeating the purpose of Legislature. The companies had kept in its reserve millions of profits but had deprived the petty shareholders. The amendment had come as a rescue in respect of earlier defaults and as a guideline for future profit.

On the other issues the AR said that the stock held by the company were not stock in trade. These stocks were their long-term investment and diminution in their market value is not the actual loss for the year unless formal transaction of sale of the same is not made. The term `profit' he remarked has recently been decided by a judgment in the case of Messrs Noon Sugar Mills. This company having not transacted any sale cannot reduce its income by only estimating that the value of the stock on the 30th of June in the market was less than the purchase value. A loss, therefore, can only be determined where the sale and purchase transaction has completed. An asset in custody even if considered, as stock cannot lead to a loss determined provisionally on the basis of its notional value. He further remarked that he agrees with learned AR that word profit has been used intendedly and it is a different connotation that of income.

Before dilating upon other issues it will be worthwhile to dispose the First Common Issue which is "Disallowance out of Profit and Loss Account Expenses". The AR says that in all the assessment years solitary reason for disallowance is "alleged unverifiability of expenses".

It was argued that since not a single instance of alleged "unverifiability" has been cited in any of the three assessment orders, disallowances confirmed by the learned Commissioner of Income Tax (Appeals) are liable to be deleted.

Further that quantum of disallowances under the following heads are not only excessive but also against the history of the case as is manifest from the following chart:

	Traveling Conveyance & Entertainment	Repair and Maintenance Expenses	Printing and Stationery Expenses	Advertisement Expenses	Distribution Expenses
Asst Year	Claimed	Disallowed	Claimed	Disallowed	Claimed	Disallowed	Claimed	Disallowed	Claimed	Disallowed
		Reduced In appeal
1997-98	5,060,000	450,000	6,870000	500,000	4,404,000	350,000	1548,000	100,000	32,189,000	2600,000
		8.89%		7.28 .		7.95%		6.46%		Deleted in Appeal.
UNDER APPEAL
1998-99	5,468,000	1,000,000	4,489,000	600,000	4177000	600,000	1,369,000	400,000	18,937,000	1,000,000
		18.30 %.		13.50%		14.30%		29.20%
1999-00	6,797,000	1,200.000	5,653,000	900,000	4,795,000	700,000	401,000	50,000	28,788,000	25,00,000
		18 %		16 %		14.80%		12.47%
2000-01	7,740,000	1,500,000	4,739,000	800,000	4,557,000	600,000	433,000	50,000.	8.170,000	100,000.
		19.30%		16.80%		13.10% .		11.55 %

It was prayed that the "disallowances" in respect of "Distribution expenses" may be deleted and disallowance in respect of other "four heads of expenses" be reduced in accordance with the treatment meted out in respect of the assessment year 1997-98.

The DR has called the additions as reasonable as the company had failed to produce necessary details. He referred the order of the Assessing Officer and said that the claims were excessive and not verifiable. However, he could not satisfactorily reply as to why the additions have been made in deviation to the history. The claim of expenses remained more or less the same as was in 1997-98 hence add backs in a different proportion to the earlier years was obviously not justified. Learned CII(A) has also ignored this aspect of the additions. The facts of the case and objections raised being of identical nature the add backs are reduced in the following manner:--

1988-19991999-20002000-2001

Travelling,

Conveyance &

Entertainment.5,00,0006,00,0007,00,000

Repair and

Maintenance

Expenses.350,000450,0004,00,000

Printing and

Stationery Expenses350,000350,0003,00,000

Advertisement

Expenses.100,00030,00030,000

Regarding distribution claim the objection of the ITO is as follows:--

SELLING EXPENSES OF TEXTILE.

Distribution expenses claimed at Rs.1,89,37,000. Last year this expense was claimed at Rs.3,21,89,000. Part of the expense is not open to verification hence added Rs.10,00,000.

The assessee claim remained that it is a case of acceptance of accounts and every thing should be seen from this angle. The assessee by habit discloses true particulars of his income, which are subject to audit at various stages being of a Public Limited Company quoted on Stock Exchange.

The add backs therein just through remarks that part of the expenses are not open to verification has never been supported by the Higher Courts especially in such cases where the accounts have a history of acceptances and-that each and every penny is expended after due 'approval and is subject to proper administrative and audit control. The Company management and staff all are qualified and skillful people. Question of unverifiability in such cases ordinarily does not arise. The requirement of such addition is proper identification of the unvouched and unverifiable expenses.

Above facts coupled with the earlier decision of the higher Courts of deletion of such this addition does not make this add back as justified. Furthermore the claim for the impugned years as against claim of 1997-98 is quite modest. There was, therefore, no reason for addition on this account. This addition therefore, is deleted as a whole. The facts for the other two years also being identical, the above discussion applies on the same also. The addition therein being in the same fashion is also hereby deleted.

The other common issue involved in these three appeals is the proration of expenses to export sales and local sales. As have already been mentioned earlier the assessee claim remained that Rule 216 of the Income Tax Rule, 1982 on one hand says that profit of business other than export shall have the same proportion as the export sales of goods manufactured in Pakistan bears to the total sales of goods. Further the word `export sales' has been defined in Rule 216(3)(a) which says that "Export Sales" means the FOB price of the goods exported. The referred Circular No.2 of 2000 also says that Rule 216 of the Income Tax Rules 1982 should be applied in such circumstances.

The FOB price is argued to be as C&F minus

(1)Shipping freight

(2) Foreign Commission

So the issue in dispute is that whether Commission paid outside Pakistan is to be deducted while determining the amount of FOB pr not. In fact this issue has been 'dilated upon by the Assessing Officer as well as the First Appellate Authority properly. The argument before the CIT was also that the assessee is receiving in its account the amount, which is after deduction of Commission, and shipping freight hence its FOB value should be the receipt as per accounts. This claim of the AR is not supported by any valid argument. The, FOB value of assets as per documents obviously is inclusive of Commission payable outside Pakistan. It may be correct that the receipt of the assess is after deduction of. Commission and shipping fright, but the same cannot change the settled definition of `FOB value'. FOB sales therefore, are the amount mentioned on. the bill of entry as FOB value of the assessee. There is therefore, no question of excluding Commission from the export sales for determining FOB value of this assessee.

The claim of exclusion of Commission for determination of the FOB value therefore, is hereby rejected.

This now leaves us to major issue in the appeal. The interesting part of the discussion remains that both the contestants use the same orders in their favour. We have also gone through the relevant judgments and we agree that for determination of the words `pertaining to accounts' the definition of the International Accounting Standards would be relevant. However, we do not agree that the pattern suggested' by the International Accounting Standard can be made binding for determination of income for assessment purposes under the Income Tax law. It hardly needs any mentioning that law of Income tax is independent and the purposes of the said law are entirely different. It is true that different judgments have created different impressions and the judgments, which are in favour of the department, does not dilate the issue in its actual spirit. However, the law of interpretation is clear in its application i.e. where a term is not defined by an enactment, the ordinary dictionary I meanings is the best alternative. Resorting to other enactments have always been considered as unsafe. The terms used in International Accounting Standard have sometimes been considered as more relevant F as the same are based upon normal dictionary meanings. Moreover, preparation of accounts is a part and parcel of determination of income/profit/loss in a case. But as already mentioned these are not strictly applicable in the scheme of income-tax. The connotation `profit' as used in section 12(9A) is to be understood keeping in view the income Tax law itself. We, therefore, consider all such judgments to be as per incurium and take supports from the following judgments:--

I.T.A. No. 51/LB of 2002, dated 14-5-2002 it says:--

"Above discussion makes its clear and word 'profit' used in section 12(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 objection 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 in admissible, hence should be added in profit. We have ignored these entries, as the same does 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 in double shifts or in triple shifts."

This is under reference to the famous and landmark judgment by Mr. Justice Nasim Sikandar in writ petition No. 9665 of 2001 becomes relevant. Learned J. while deciding said appeal has given following comments:--

"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 doubtful provisions in any taxing statutes should be invoked as rarely as possible".

The test, therefore, is that such invocation should be free of any doubt. In the present case the assessee is involved in business of textile. He has made investment in stocks and notwithstanding the principles of accounting with respect to valuation of stock on the end of the year, the same are custody of the company. No sale transaction has been made so as to, determine as to whether there is any loss or profit from that transaction. Even if we allow such a transaction for the purpose of preparation of accounts the scheme of Income Tax does not permit calculation of profit or income without actual transaction the profit is the difference between purchases and sale and hypothetical value be that based on market rate or some other formula cannot be considered as a substitute of sale. Stock market has remained dormant in our country for a long time. If at the end of the day the value of a stock increases, which continued happening in some earlier decades, the same has never been shown as 'profit taxable under the Income Tax law. It was specifically asked from learned AR during the course of the arguments that has the company ever offered such an increase for tax, to which he replied that International Accounting Standards does not have any such requirement. He however, did not categorically reply as to whether this had ever been done or not. Meaning thereby that stocks in normal 'accountancy have always been shown at cost. Not only that in the case of shares but also in the other closing stock, the cost can diminish. Will the decrease in value be allowable to the assessee as loss corresponding to the rate on that day? The answer is obviously an empathetic. No. Similarly no business 'I house has ever shown increase in its profits if its stocks have increased on the end of the day by virtue of some market inflation. It is only on actual sale of said stocks that the differential between purchase and sale is shown as gross profit or loss as the case may be Another example is in the case of exporters. In many cases on the last date of the year ending the value of the Dollar had increased. The exporters were never asked to increase-their profit on the basis of differential in the Dollar rate from the date of export to the date they closed the accounts. It was only on realization of such amount that the differental and increase was shown as part of the trading or the manufacturing account as the case was. The issue can be seen from another angle. The recent tendency of sharp increase in stock market in some case may result in fabulous increase in value of stocks. Are companies ready to distribute dividend on the basis of value of their stocks on the, last date of accounts? This will result in quite an awkward position because in actuality the companies shall neither be having any actual profit nor liquid funds to the extent of the requirement of distribution on the basis of expected profit based upon the value of stocks in stock market.

Thus if we accept the preposition proposed by- learned AR before us conversely the companies will have to distribute the expected profit by deeming that increase in market value of stocks held by them is their real profit, which obviously is not justified.

Before concluding we wish to add another argument. When income of an organization is calculated it is always based upon trading/ manufacturing and profit and loss account of the same. Stocks which have not been transacted does not form part of the trading or manufacturing account of an assessee. They only come into picture while I preparing the balance-sheet and nobody reduces or increases its profits while preparing final statement of its liabilities and assets. The stock is an asset of the company and remain as such on the opening as well as the closing date unless sold out as a part of business transaction.

One point where we will readily agree with learned AR is that the profit is profit for the year and it is not the accumulated profit of I earlier years. Section 12(9A) has come as a charge and a charge is never retrospective. Learned DR who made some efforts by interpreting the provision quite intelligently said that it deals with the reserves and the same has to be for the earlier years hence it is accumulation of the reserves which is to be distributed but, however, we cannot agree with that. The provision has come as a rescue in addition to the Company Law already in field. However, section 12(9A) has been added as a charge and we cannot permit creation of a charge retrospectively especially in the case of a deemed provision without any clear or unambiguous intention. Our finding finds further support from the addition in clause 59 of Part IV which says:--

59. The provisions of subsection (9A) of section 12 shall not apply to---

(i)A company listed on Stock Exchange which distributes profit equal to either forty per cent of its after tax profits off fifty per cent of its paid up capital, whichever may be the, less;

(ii)A public company not listed on the stock exchange;

(iii)A trust or a company it which not less than fifty per cent shares are held by the Government; or ,

(iv)A leasing company as defined in the Leasing Companies (Establishment and Regulation) Rules, 1996.

So far as the argument regarding double taxation is concerned it is the Legislature which has come up with this provision. It has been brought into the Income Tax Ordinance with a clear mandate and with full intention to create a charge in special circumstances. The Legislature cannot be deprived of its inherent jurisdiction of charging tax twice, if it is so intended in unequivocal terms. In the provision under, discussion this intention is clear and there, is no doubt about language to that extent. It has created a charge on the amount, which has been kept as reserve from the profit of the year, and if the company does not fulfill the requirement this charge comes into force. The same also is of no help under the circumstances of this case. Regarding definition of reserve and the calculation produced before us to say that even if the diminution is not to be allowed for method of preparing/calculating profit, in actuality the company has distributed more amount than required under law, the indulgence of the Assessing Officer shall be required. As already said by us on the basis of our earlier judgment in the case of Noon Sugar Mills that after that profit connotes "profit for the year" and the reserves shall be the one created from the date of the insertion of the provision, we feel suggest that the calculation with regard thereto should be made by the Assessing Officer. So while we hold that diminution in the value of stocks is not to be allowed as a reduction for calculating profits, we feel that if the company in actuality have distributed more dividend than the) legal requirement; penalizing it under the garb of a wrong calculation is not appropriate.

So far the purpose of actual calculation of the distribution in view of the requirements of law i.e. section 12(9A) as well as clause 59 of Part-IV of the Second Schedule and our finding supra we set aside this case.

These appeals, therefore, are decided in the manner and to the extent as mentioned above.

(Sd.)(Sd.)

(MUHAMMAD MUNIR QURESHI)(KAHAWAIA FAROOQ SAEED)

Accountant MemberJudicial Member

MUHAMMAD MUNIR QURESHI (JUDICIAL MEMBER)---I have gone through the orders written by my learned bother.

I endorse the views expressed on the various issues in the order as written for assessment year 1998-99.

I respectfully disagree with my learned brother on the views expressed in the context of addition made under section 12(9A) in the assessment years, 1999-2000 and 2000-2001. The points of disagreement is as follows:--

1.On page 27 of the (consolidated) order, it is stated by the Learned Judicial Member that .

....the reserves shall be the one created from the date of insertion of the 'provision ' ...."[i.e. section 12 (9A)].

2.Prima facie, this is a "special definition" of "reserves" and is not consistent with its ordinary, generally accepted meaning.

3.According to Yorston, Smyth and Brown, reserves ....Include amounts set aside out of profits and other surpluses which are not intended or necessary to meet any liability, contingency etc. known to exist of the date of the Balance-sheet.

4.In my considered judgment, such reserves accumulate from the time that an amount is set apart out of company profits and is credited to 'reserves' and this is the position that is relevant in the context of the provisions of section 12(9A). Thus in the case of the assessee company, the 'reserves' as these have accumulated from the "inception" of the company are to be considered in the context of the provisions of section 12(9A). Section 12 (9A), in my opinion, neither envisages nor otherwise warrants a `special definition' of 'reserves' and there is no justification to consider only such `reserves.' as have accumulated from the date of enactment of section 12 (9A). The Tribunal in its judgment cited as 2003 PTD (Trib.) 2499 has considered `reserves' from the date of inception of the company, i.e. in their ordinary parlance.

5.Any judgment that purports to 'put forth a special definition of 'reserves', distinct from the ordinarily accepted meaning is, to this extent, an order 'per incurium' and must be so treated by the department for the purposes of section 12(9A).

6.The learned Judicial Member has, in my opinion, arbitrarily allocated a time frame to the quantification of `reserves' in the case of the assessee company by directing that these be considered from the date of enactment of section 12(9A). There is clearly no sanction-in law for such determination of 'reserves' in the case of the assessee company.

7.The order of the CIT(A) for assessment years, 1999-2000 and 2000-2001, is hereby vacated on matter pertaining to liability under section 12(9A) and the Assessing Officer is directed to reappraise same in the light of observations recorded above.

(Sd.)

(MUHAMMAD MUNIR QURAISH)

Accountant Member

In view of the observations recorded Supra, a difference of opinion has arisen and the following question is required to be referred:--

"Whether in the facts and circumstances of the case, in assessment years, 1998-99 and 1999-2000, reserves of the assessee company are to be quantified from the date of enactment of section 12(9A) of from the inception of the company?"

(Sd.)(Sd.)

(KHAWAJA FAROOQ SAEED)(MUHAMMAD MUNIR QURASHI)

JUDICIAL MEMBER ACCOUNTANT MEMBER

I.T.A. No.4302 to 4304/LB of 2001

(Assessment Years 1998-99 to 2000-01)

Crescent Textile Mills Limited Faisalabad

Versus

Chairman, Panel-02, Special Zone, Lahore

Date of Hearing: 16-9-2003Date of Order: 20-11-2003

KHALID WAHEED AHMED (JUDICIAL MEMBER)---The following question has been referred for the opinion of the Third Member by the Learned Chairman, ITAT, because of the difference of opinion between the Members of the Bench on the issue:--

"Whether in the facts and circumstances of the case, in assessment years, 1998-99 and 1999-2000, reserves of the assessee company are to be quantified from the date of enactment of section 12(9A) or from the inception of the company?"

2. Learned L.A. Mr. Shahid Jamil Khan, Advocate and learned D.R. Mr. M. Umer Farooq represented the Department while Mr. Iqbal Naeem Pasha and Khawaja Muhammad Iqbal, Advocate appeared on behalf of the assessee who have been heard.

3. At the time of hearing of the case, it was pointed out by the Learned representatives of the parties stating, that the words "Assessment Years, 1998-99 and 1999-2000" were written in the posed question instead of "income years, 1998-99 and 1999-2000" which according to them was due to some inadvertent mistake. Learned A.R. of the assessee stated that section 12(9A) of the Income Tax Ordinance, 1979 (hereinafter called the' Repealed Ordinance) was inserted through Finance Act, 1999 as such the question proposed could be relevant for the income years, 1998-99 and 1999-2000 i.e. assessment years 1999-2000 and 2000-2001 and was not relevant to the Assessment Year, 1998-99.

4. Learned A.Rs. of the assessee, Mr. Iqbal Naeem Pasha and Khawaja Muhammad Iqbal, Advocates in their arguments supported the viewpoint expressed by Learned Judicial Member in the foregoing paragraphs whereby it has been held "that after tax profit connotes "profit for the year" and the reserves shall be the one created from the date of insertion of the provision". Mr. Iqbal Naeem Pasha, Learned AR in his arguments vehemently contended that the provisions of law on the issue were very much clear and explicit. Learned A.R. argued that in subsection (9A) of section 12, the words `derives profit for any income "year' were meant for that particular year only and the word `profit' used therein does not include the profit derived during the previous years also. It was the contention of the Learned A.R. that the `reserves; for the purpose of subsection (9A) of section 12 for a year was the excess amount of profit after distribution for that relevant year only. According to the Learned A.R. the reserves of the previous years were not to be added in the reserves of a subsequent year for the purpose of section 12(9A). Learned A.R. contended that the language used in subsection (9A) of section 12 being very much explicit and clear no other meanings could be given to word "(reserves)" used therein except that the same was meant for the after tax profit of that particular year only. Learned A.R. further contended that the use of words appearing as `any income year' and `during that year' in the said subsection was significant which also supported the interpretation of the said subsection put forth by him. Learned A.R. contended that the. ingredients of the subsection (9A) which according to him were obvious from its language were that profit derived is 'for a specific `income year' out of which distribution of dividend is made and the remaining amount of such undistributed profit is to be taken as `reserves' for the purpose of the said subsection.

It was the contention of the Learned A.R. of the assessee that the intention of the Legislature to mean from the word `reserves' used in the subsection as the excess of the undistributed profit earned during the year becomes more clear when all the three ingredients of the said section as specified by him were taken up jointly. Learned A.R. of the assessee also contended that the Judgment of the Tribunal reported as 2003 PTD (Trib) 2499 had no nexus with the facts of the instant case. According to the Learned A.R. the issue under consideration i.e. whether the reserves of a company were to be quantified from the date of enactment of section 12(9A) or from the inception of the company was neither before the Tribunal nor decided in the above-referred case. Learned A.R. further submitted that the intention of the Legislature for incorporation of the said subsection (9A) was to effect the distribution of the profit amongst the shareholders and according to him it 'was not introduced for the purpose of charge of tax. In this context, learned A.R. referred to the decision of Lahore High Court in W.P. No. 9665 of 2001 decided on 6-12-2001. To substantiate his contention that the amount representing the free reserves on which tax at the rate provided by the law has been charged cannot in the subsequent years be again treated as income and subjected to tax, learned A.R. also cited the decision of Hon'ble Supreme Court of Pakistan reported as 1992 PTD 576. Learned A.R. submitted that although it was held by the Honourable Supreme Court in the quoted case that levy of super tax on the total income determination for the purpose of income-tax cannot be struck down even if it amounted to double taxation but according to him, the case law cited by him supported the viewpoint expressed by him in the manner that the reserves on which super tax has been charged in a year cannot be subjected to super tax in the subsequent years. Learned A.R. also referred to Rule 203AA of the Income Tax Rules, 1982 inserted through S.R.O. No. 1100(1)/99, dated 30-9-1999, with the submission that from the definition of "reserves" provided therein for the purpose of subsection (9A) supra, it was explicit that the same was relevant to the income of the relevant year and does not include the reserves of the previous years. Learned A.R. further contended that had there been any intention of the Legislature to include the reserves of the previous years, it could have been easily defined by including the same in said rule 203(AA). Learned A.R. further submitted that even otherwise it was now a settled principle that if there was any ambiguity in a provision of law, the interpretation favouring the assessee was to be adopted:

5. Learned L.A. in his arguments, however, supported the departmental view-point. According to the learned LA. the 'reserves' for the purposes of section 12(9A) were to be considered as those including the reserves of previous years also. It is the contention of the learned L.A. that the intention of the Legislature behind the incorporation of the said provisions was to charge tax on the undivided amount of profit which escaped chargeability of tax because of the non distribution of profit. Thus, according to him, the charge of tax under section 12(9A) was in lieu of tax to be charged on the distribution of profit. In this regard, learned A.R. submitted that there were very few chances of the undivided profit for a specific year being more than 50% of the paid up capital of the company and in case the viewpoint of the learned A.R. of the assessee was accepted, it will render the provisions of section 12(9A) as almost redundant. Learned LA. further submitted that the word "reserves" used in subsection (9A) of section 12 meant the total of the reserves including those of the previous years. According to the L.A., section 12(9A) was a special provision inserted through the Finance Act, 1999, therefore, meanings of general nature could not be attributed to the terms used therein. Learned L.A. contended that subsection (9A) specifically provided the taxation of excess reserves which could not be made ineffective by giving a restricted meanings to the terms "reserves" used therein. Learned L.A. referred the clause 59 of Part-I of the Second Schedule to the Ordinance wherein the provisions of subsection (9A) of section 12 were made inapplicable in cases of certain class of companies specified therein. It was the contention of the learned L.A. that the said clause 59 was added by the Legislature to reduce the rigours of subsection (9A) of section 12 because according to him the tax was to be charged on the total of reserves including those of previous years. However, in rebuttal, Learned A.R. contended that the word "reserves" used in subsection 9A was to be given its ordinary meanings because according to him the provisions of law were explicitly clear as was obvious from the language used therein. According to the Learned A.R., the said provision, of the Income Tax Ordinance was not meant for the purpose of Companies Ordinance, therefore, it should be given the meanings keeping in view the scheme of Income Tax Ordinance, 1979.

6. Arguments of learned representatives of both the parties have been heard and the orders of the authorities below as well as the case law cited by the learned representatives of the parties have also been perused. Learned representative of the parties have rightly pointed out the discrepancy in the question proposed for the opinion of the Third Member because, in any opinion, it appears to have been inadvertently written as assessment years, 1998-99 and 1999-2000 instead of income years, 1998-99 and 1999-2000. Since the issue under consideration related to the period of the income years, 1998-1999 and 1999-2000 and not the assessment years 1998-99 and 1999-2000, therefore, it is accordingly being considered as relevant to the income years, 1998-99 and 1999-2000 i.e. the assessment years, 1999-2000 and 2000-2001 only and not for the assessment year, 1998-99. As per the question posed for the opinion of the Third Member, the issue is that whether the reserves of the assessee company for the purpose of subsection (9A) of section 12 of the Ordinance are to be quantified from the date of enactment of said section or from the inception of the company? In my considered opinion, the `reserves' for the purpose of subsection (9A) of section 12jR are to be taken as the excess of undivided profit earned during `a year'. II agree with the viewpoint expressed by Mr. Iqbal Naeem Pasha, Sr. Advocate/learned A.R. of the assessee whereby he interpreted the meanings of words `reserves' used in subsection (9A.) of section 12 as the excess of the amount remaining undivided out of the profit earned during a particular year which does not mean to include the reserves oil earlier years also. Before concluding, we would like to analyse the, relevant provisions of law vis-a-vis section 12(9A) of the Income Tax Ordinance, 1979 which is, reproduced as hereunder:--

S. 12(9A)

[(9A) Where an assessee, being a public company other than a scheduled bank or a Modaraba, derives profits for any income but does not distribute cash dividends within seven months of the end, of the said income year, or distributes dividend to such an extent that its reserves, after such distribution, are in excess of fifty per cent of its paid-up 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 distribution made within the following period shall be treated as distribution for the purposes of this subsection:--

(i)where 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 clay 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 hay, the meaning as may he prescribed.

7. The perusal of the above-quoted provisions of law reveals that subsection (9A) of section 12 of the Ordinance is applicable in the case where:

(i)The profit is derived by a public company for any income year;

(ii)cash dividends are not distributed within seven months of the end of the said income year or the undivided profit for that year is in excess of 50% of its paid-up capital;

(iii)the 'reserves' of the company are in excess of 50% of its paid up capital; and

(iv)the profit to be considered for the purpose of subsection (9A) is the profit for the year under consideration only.

8. When the above ingredients of the subsection (9A) are taken up jointly and considered in their entirety it becomes easier to interpret the term 'reserves' appearing in the said subsection (9A). In my opinion, as per most plausible interpretation of the term 'reserves' used in the above mentioned subsection (9A) it means the amount being the undivided profit of the relevant year only and does not include the brought forward 'reserves' of the previous years. Even otherwise, it is not plausible to include the Brought Forward Reserves of previous years in the undivided profit of a, subsequent year for the purposes of subsection (9A) of section 12 because in such a case the same amount shall be again and again charged to under the same provision which is not permissible under the law. The definition of word 'reserves' provided in Rule 203-AA of Income Tax Rules, 1982 is also not exhaustive and does not provide a direct answer to the question under consideration. Since it is a settled principle-of law that in case of fiscal statute where more than one interpretation of a provision is possible then one favouring the assessee is to be followed. Under the circumstances, it is held that the 'reserves' for the purpose of subsection (9A) supra is the amount of undivided profit of the relevant year only and it does not include the Brought Forward Reserves of tire previous years. In view of my viewpoint expressed above. I do not agree with findings of the learned Accountant Member on the issues under consideration, thus the same stands decided in favour of the assessee. As a result, the appeals of the assessee for the two years under consideration i.e. Assessment Years 1999-2000 and 2000-2001 succeed in the manner as indicate above.

C.M.A./24./Tax (Trib.)Appeals accepted.