I.T.A. No.2097/LB of 2002, decided on 28th February, 2004. VS I.T.A. No.2097/LB of 2002, decided on 28th February, 2004.
2004 P T D (Trib.) 2087
[Income‑tax Appellate Tribunal Pakistan]
Before Ehsan‑ur‑Rehman, Judicial Member and Muhammad Sharif Chaudhry, Accountant Member
I.T.A. No.2097/LB of 2002, decided on /01/.
th
February, 2004. (a) Income Tax Ordinance (XXXI of 1979)‑‑‑--
‑‑‑‑S. 12 (9A) & Second Sched., Part IV, Cl. (59)‑‑‑Income deemed to accrue or arise in Pakistan‑‑‑Bonus shares‑‑‑Distribution of bonus shares, in no way fulfils the conditions laid down under Cl. (59) of Part IV of the Second Schedule of the Income Tax Ordinance, 1979‑‑‑Bonus shares were not dividend as defined in the Income Tax Ordinance, 1979.
(b) Income Tax Ordinance (XXXI of 1979)‑‑‑--
‑‑‑‑S. 2 (20)‑‑‑Definition‑‑‑Dividend‑‑‑Bonus shares‑‑‑Income Tax Ordinance, 1979 defines dividend in its S.2(20) and dividend did not include bonus shares.
(c) Income Tax Ordinance (XXXI of 1979)‑‑‑--
‑‑‑‑S. 12(9)‑‑‑Income deemed to accrue or arise in Pakistan‑‑‑Bonus shares‑‑‑Income of company or shareholder‑‑‑According to Scheme of Income Tax Ordinance, 1979 (as it existed during the period under consideration) bonus shares were treated as income of the shareholders rather the same were treated as income of the company under S.12(9) of the Income Tax Ordinance, 1979.
(d) Income Tax Ordinance (XXXI of 1979)‑‑‑--
‑‑‑‑S.12(9A)‑‑‑Income deemed to accrue or arise in Pakistan‑‑‑Purpose‑‑‑Purpose of enacting .subsection (9A) of S.12 of the Income Tax Ordinance, 1979 was to ensure payment of cash dividend to the share holders (who were complaining against the attitude of the companies and their demand was also voiced by the Stock Exchanges of the Country that companies were not issuing dividend to them) and also to ensure 10% tax to the Government of Pakistan which was levied on dividend in the hands of the shareholders‑‑‑Both of these purposes could not be solved by issuance of bonus shares.
(e) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑S. 12(9A) & Second Sched., Part I, Cl. (108)‑‑‑Income deemed to accrue or arise in Pakistan‑‑‑Bonus shares‑‑‑By issuing bonus shares, a company capitalizes the profit and issues merely papers to the shareholders which might have or might not have ready buyers in the stock market and shareholders did not receive dividend in cash‑‑ Government was also deprived of tax because bonus shares were treated as income in the hands of the company under S.12(9A) of the Income Tax Ordinance, 1979 but such income was exempt from tax under Cl. (108) of Part 1 of the Second Schedule to the Income Tax Ordinance, 1979.
(f) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑S. 12(9A) & Second Sched: Part‑IV, Cl. (59)‑‑‑Income deemed to accrue or arise in Pakistan‑‑‑Bonus shares‑‑‑Contention of the assessee that "by issuing bonus shares the company had fulfilled the condition laid down under clause (59) of the Second Sched., Part IV of the Income Tax Ordinance, 1979 and so S.12(9A) of the Income Tax Ordinance, 1979 was not applicable" was rejected by the Appellate Tribunal.
(2003) 87 Tax 524 (Trib.) distinguished.
(g) Precedents‑‑‑
‑‑‑‑Observations in the nature of obiter dicta recorded by Supreme Court of Pakistan have legal force.
(h) Income Tax Ordinance (XXXI of 1979)‑‑‑--
‑‑‑‑S. 12(9A)‑‑‑Income deemed to accrue or arise in Pakistan‑‑‑Reserves for the purpose of subsection 12(9A) of the Income Tax Ordinance, 1979 were those amounts which had been set out of revenues or other surpluses excluding capital reserve, share premium reserve and reserve required to be created under any law, rules and regulations.
(i) Income Tax Ordinance (XXXI of 1979)‑‑‑--
‑‑‑‑Ss. 12(9A) & 66A‑‑‑Income deemed to accrue or arise in Pakistan‑‑‑Reserve of bonus shares created out of profit accumulated and profit for the preceding years, for the purpose to issue bonus shares to the shareholders, was neither in the nature of capital reserve nor it was share premium reserve nor it was any other reserve required to be created under any law, rules or regulations‑‑‑Contention of assessee that bonus shares reserve was capital reserve and should be excluded from the amount of reserves for the purpose of S. 12(9A) of the Income Tax Ordinance, 1979 was not correct‑‑‑Inspecting Additional Commissioner was justified to include such reserve with other reserve for the purpose of S.12(9A) of the Income Tax Ordinance, 1979‑‑‑Computation of reserve made by the Inspecting Additional Commissioner for subjecting the assessee to tax under S.12(9A) of the Income Tax Ordinance, 1979 was maintained by the Appellate Tribunal.
(2003) 87 Tax 524 (Trib.) distinguished
I. T. A. No. 1117/LB of 2002 ref.
I.T.A. No. 4304/LB of 2001 per incuirum.
(j) Income Tax Ordinance (XXXI of 1979)‑‑‑--
‑‑‑‑S. 25(e)‑‑‑Word "Pay"‑‑‑Meanings‑‑‑Word "pay" means to discharge a debt or to give compensation for the goods supplied or services rendered in cash or in kind, in other words, "pay" means to pay in money or money's worth‑‑‑Payment can be made in cash or in kind, for example in the form of handing over some goods or shares or property or land or building according to the satisfaction of a creditor or a person to whom payment is due.
Oxford Dictionary; New Webster's Dictionary; Chambers 20th Century Dictionary and Volume LXX by Corpus Juris Secundum at p.70 ref.
(k) Income Tax Ordinance (XXXI of 1979)‑‑‑-
‑‑‑‑S. 25 (c)‑‑‑Amounts subsequently recovered in respect of deductions, etc.‑‑‑Trading liability‑‑‑Conversion of such liability into medium term loan‑‑‑Taxation‑‑‑Validity‑‑‑Liability due from the assessee to the Government of Pakistan had neither been paid in money or in money's worth or in form of any property or goods‑‑‑Merely conversion of such liability in medium term loan with enhanced rate of interest was not the discharge of assessee's trading liability as it had not been paid in terms of S.25(c) of the Income Tax Ordnance, 1979‑‑Change of nomenclature of the liability or rescheduling of loan or extension of period of payment did not mean that the liability had been paid.
(l) Interpretation of statutes‑‑‑
‑‑‑‑ Interpretation of law has to be strictly made within the premises or contours prescribed by law and ‑ suppositions or presumptions or assumptions or its ands and buts do not have any, relevance while interpreting the law.
(m) Income Tax Ordinance (XXXI of 1979) --
‑‑‑‑S. 25(c)‑‑‑Amounts subsequently recovered in respect of deductions, etc. ‑‑‑Trading liability‑‑‑ Conversion of such liability into medium term loan‑‑‑Taxation‑‑‑Validity‑‑‑Under S.25(c) of the Income Tax Ordinance, 1979 the assessee was required to pay the trading liability within three years of the expiration of the income year in which it was allowed but the same had not been paid either in cash or to terms of property or goods or in any form of money's worth‑‑‑Liability had not been paid and Inspecting Additional Commissioner was right in charging the same to tax a deemed income of the assessee‑‑‑Appeal filed by the assessee on the issue of trading liability under S.25(c) of the Income Tax Ordinance, 1979 was rejected and action of the Inspecting Additional Commissioner on the issue was maintained by the Appellate Tribunal.
2000 PTD (Trib.) 1328 distinguished.
(n) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑Ss. 66A & 65‑‑‑Powers of inspecting Additional Commissioner to revise Deputy Commissioner's order‑‑‑Change of opinion ‑‑‑Bar‑‑ Change/difference of opinion was the biggest bar against action under S.65 of the Income Tax Ordinance, 1979 but it was not the bar in terms of application of S.66A of the Income Tax Ordinance, 1979‑‑‑Under S.65 of the Income Tax Ordinance, 1979 action is taken by an Assessing Officer against order passed by himself/Assessing Officer and such change of opinion or difference of opinion is not allowed to be made basis for such an action‑‑‑Under S.66A of the Income Tax Ordinance, 1979 action is to be taken by a higher authority i.e. by an Inspecting 'Additional Commissioner against order passed by his subordinate i.e. an Assessing Officer and difference of opinion is essential for taking action under S.66A of the Income Tax Ordinance, 1979 because if an Inspecting Additional Commissioner agrees with the opinion of an Assessing Officer then there is no ground for taking action‑‑ ‑Difference of opinion between the Inspecting Additional Commissioner and the Assessing Officer leads as Inspecting Additional Commissioner to hold that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of Revenue.
(o) Income Tax Ordinance (XXXI of 1979)‑‑‑--
‑‑‑‑S. 23, Third Sched., R.8(8)(e) & S.66A‑‑‑Deductions‑‑‑Exchange risk coverage fee‑‑‑Capitalization of ‑‑‑Assessee claimed an expense incurred on account of exchange risk coverage fee relating to foreign currency loan used for import of plant and machinery‑‑‑Assessing Officer capitalized only 30% of the claimed amount while the Inspecting Additional Commissioner capitalized whole amount under R.8(8)(e) of the Third Schedule of the Income Tax Ordinance, 1979‑‑‑Validity‑‑Exchange risk fee incurred by the assessee was a revenue expense and not an expense of capital nature and the same was deductible under the law ‑‑‑Application of R.8(8)(e) of the Third Schedule of the Income Tax Ordinance, 1979 by the Inspecting Additional Commissioner was absolutely unjustified because said Rule applied to a situation where an assessee had imported any plant and machinery from a foreign country for installation in Pakistan for his business and due to fluctuation of rate of exchange, his liability to repay the loan in Pak Rupee increases or decreases‑‑‑Payment of fee to State Bank as sort of security or insurance to safeguard against loss due to adverse exchange fluctuation was not relevant to R.8(8)(e) of the Third Schedule of the Income Tax Ordinance, 1979.
(p) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑S. 66A (1A)‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order‑‑‑Section 66A (1A) of the Income Tax Ordinance, 1979 did not permit an Inspecting Additional Commissioner to take action under said section against order of Assessing Officer on an issue which had been decided in appeal by the First Appellate Authority or by Appellate Tribunal because the order of the Assessing Officer merges with the order of First Appellate Authority or Appellate Tribunal‑‑‑Issue of capitalization of exchange risk fee was, decided by the First Appellate Authority against the Department' so the Inspecting Additional Commissioner was debarred from taking action on this issue under S.66A (1A) of the Income Tax Ordinance, 1979.
(q) Words and phrases‑‑‑
‑‑‑‑"Pay"‑‑‑Meaning.
Asim Zulfiquar Ali, A.C.A. and Shahzad Hussain, F.C.A. for Appellant.
Zulfiquar Ali, D.R. and Shahid Jamil Khan, L.A. for Respondent.
Date of hearing: 14th February, 2004.
ORDER
MUHAMMAD SHARIF CHAUDHRY (ACCOUNTANT MEMBER).---‑‑‑Appeal has been filed by a limited company for the assessment year 1999‑2000 to challenge order passed by the Range IAC under section 66A of the Income Tax Ordinance, 1979. Following grounds of appeal have been raised:
(1)The invocation of the provisions of section 66A of the Income Tax Ordinance, 1979 by the learned IAC is not warranted in the circumstances of appellant's case.
(2)The learned IAC has erred in treating the reserve for issue of bonus shares Rs.566,185,000 as of revenue nature and consequent thereto applying the provisions of section 12(9A) of the Ordinance to the appellants.
(3)The learned IAC has erred in applying the provisions of section 25(c) of the Ordinance to the outstanding balance of medium term loan Rs.2,800,000,000.
(4)Without prejudice to the ground No.4 above, the IAC erred in invoking the provisions of section 66A and substituting the Assessing Officer's finding with that of his own based on her interpretation and understanding. of the same facts, regarding the treatment of medium term loan balance of Rs.2,800,000,000 as a trading liability under section 25(c) of the Ordinance which matter also came for similar decision by the Assessing Officers for the assessment years 1997‑98 and 1998‑99. The CIT, RCIT and the C.B.R. were involved in deciding the issue for those years, by not applying the provisions of section 25(c) to the aforesaid loan balance. The application of the provisions of section 25(c) to the loan balance through invocation of section 66A tantamounts to change of opinion which is not permissible.
(5)The learned IAC has erred in capitalizing the exchange risk coverage fee of Rs.320,518,100 under Rule 8(8)(e) of the Third Schedule to the Ordinance, such action by her under section 66A not being permissible, the entire claim having already been allowed as a revenue expense by the learned CIT(A) through her appellate order, dated January 22, 2002.
2. We have heard the Authorized Representatives of both the parties and have perused the case‑law produced by them in support of their respective view points. We have also gone through the assessment order passed under section 62 and the impugned order passed under section 66A: Issues raised by the assessee in the grounds of appeal are discussed and decided in the light of the facts and law as under.
Tax under section 12(9A) of the Income Tax Ordinance, 1979:‑‑
3. In her order under section 66A the learned IAC has held the order passed by the Assessing Officer under section 62 as erroneous and prejudicial to the interest of Revenue because the Assessing Officer had failed to levy tax under section 12(9A) of the Income Tax Ordinance. According to IAC, the assessee did not pay any cash dividend for the income year ending on 30‑6‑1999 and the reserves of the company were also in excess of 50% of its paid‑up capital as on .30‑6‑1999. So in the view of the IAC, tax was leviable under section 12(9A) on excess reserves. The explanation of the assessee that bonus shares had been issued and thus the condition laid down under section 12(9A) regarding issuance of cash dividend had been fulfilled and moreover bonus shares reserve was not a revenue reserve were rejected by the IAC who proceeded to apply section 12(9A) and worked out tax on the excess reserves over 50% of capital which was calculated at Rs.7,45,83,000. Against this treatment of the IAC the present appeal has been filed by the assessee.
4. It has been contended in the grounds of appeal that the IAC, has erred in treating the reserve for issuance of bonus shares created at Rs.566,185,000 as of revenue nature and consequent thereto has erred in applying the provisions of section 12(9A) of the Ordinance. It has been submitted by the learned AR that the assessee‑Company earned net profit during the year under consideration at 8,425,534,000. It transferred another amount of Rs.140,000,000 from revenue reserve and thus it created a reserve for issuance of bonus shares at Rs.566,185,000. The bonus shares were issued within eight months of the end of the income year i.e. before end of February, 2000 and thus the condition laid down under section 12(9A) regarding issuance of cash dividend has been fulfilled. Since the prescribed condition under section 12(9A) read with clause (59) of Part IV of Second Schedule to the Income Tax Ordinance has been fulfilled, no tax is leviable on the assessee in respect of any so called excess reserve over 501% of paid‑up capital. The learned AR has submitted that the objection of the IAC about non‑issuance of cash dividend becomes irrelevant because condition laid down regarding issuance of cash dividend under section 12(9A) was relaxed by Clause (59) of Part IV of Second Schedule to the Income Tax Ordinance. According to this clause, if a company distributes 40% of its after tax profit then section .12(9A) would not be applicable to it. In support of this contention the learned AR has quoted judgments of the ITAT reported as (2003) 87 Tax 524 (Trib.) and I.T.A. No. 1117/LB of 2002, dated 24‑2‑2003. It has been submitted that the learned ITAT in these judgments has discussed in detail the provisions of law contained in section 12(9A). Clause (59) of Part IV of Second Schedule to the Income Tax Ordinance etc. and has held that if a company distributes 40% of its after tax profit in the form of bonus shares then it fulfills the prescribed condition and hence no tax would be leviable under section 12(9A). The learned AR has also pointed out that the ITAT in its latest decision, dated 10‑7‑2003 in I.T.A. No, 4304/LB of 2001 in the case of Messrs Crescent Textile Mills Faisalabad has declared that section 12(9A) would not apply to ,reserve created .up to .30‑6‑1999. Since the assessee Company created reserves in its balance‑sheet relating to income year ending on 30‑6‑1999 so according to this judgment of the ITAT section 12(9A) could not be applied to the reserves of the assessee.
On the controversy relating to the question whether bonus shares reserve is a capital reserve or a revenue reserve it has been submitted by the learned AR that it is capital reserve because bonus shares are controverted into the capital of the company. According to the learned AR, reserve created for bonus shares is a capital reserve notwithstanding that it was created out of profit because it is classified as such. On the basis of these contentions the learned AR has pleaded that the action of the learned IAC treating the bonus shares reserve as revenue reserve and working out tax under section 12(9A) is absolutely illegal.
5.On the other hand the learned DR has submitted that the IAC is justified to subject to tax the excess reserves of the assessee over 50% of capital because the assessee had not declared cash dividend. According to the learned D.R., reserve created for issue of bonus shares is a revenue reserve and has rightly been included in the total amount of reserve of the assessee by the IAC. In the view of the learned DR, this kind of reserve is revenue reserve and not capital reserve because it has been created out of the profit earned by the assessee. It has been further pleaded by the learned DR that issuance of bonus shares does not tantamount to issue of cash dividend and since the cash dividend as required in law has not been paid by the assessee, so section 12(9A) of the Income Tax Ordinance would be applicable to assessee's case.
Supporting the contentions of the Revenue and the view of the learned DR, it has been pleaded by the learned Legal Advisor, of the Income Tax Department that section 12(9A) has rightly been invoked by the IAC. The learned L.A. has submitted that it is a trite law that a thing should be done as law required. Not a quama should be added nor any letter and word of the law should be deleted. Section 12(9A) requires issuance of cash dividend but the assessee has issued bonus shares instead of cash dividend. Issuance of bonus shares does not amount to payment of cash dividend and so the condition laid down under section 12(9A) has not been fulfilled by the assessee. Clause (59) of Part IV of Second Schedule, in the view of the learned L.A., has not relaxed the basic condition of payment of cash dividend although it has relaxed some rigors of law as contained in section 12(9A) relating to percentage/level of dividend etc. Regarding the judgment of the ITAT, dated 10‑7‑2003 wherein it has been held that section 12(9A) would not be applicable to reserves created up to 30‑6‑1999, the learned L.A. has submitted that this judgment of the ITAT is per incurium and is not binding on the Bench. Elaborating this point further the learned L. A. has submitted that section 12(9A) sets time frame for assessment year 1999‑2000 regarding taxation of excess reserves but the ITAT says that reserve created up to 30‑6‑1999 would not be charged to tax 'under section 12(9A) which clearly means that the judgment of the ]TAT is against the letter and spirit of statutory law. Regarding other judgments of the ITAT were quoted by the AR, the learned L.A. pleads that assessee's case is distinguishable from the facts dealt in the said judgments. However, the learned L.A. has not been able to point out any difference of facts or law between assessee's case and the case decided by the ITAT.
6. We have gone through the impugned order of the IAC and have considered the arguments of both the parties. The real controversy before us is whether assessee has fulfilled the condition laid down under section 12(9A) or under clause (59) of Part IV of the Second Schedule or not and if not then how reserve of the assessee‑Company would be computed for the purpose of tax under section 12(9A). The assessee says that section 12(9A) is not applicable because the company has distributed more profit than the prescribed limit under clause (59) of Part IV in the form of bonus shares. On the other hand the Revenue says that assesses has not issued cash dividend as required under section 12(9A) and therefore, assessee would be chargeable to tax on its excess reserve under this section. Let us decide this controversy in accordance with statutory law and the judgments of the ITAT and superior Courts relevant to the controversy. Statutory law as it existed during the period under consideration i.e. assessment year 1999‑2000 would be kept in view and applied.
Section 12(9A) of the Income Tax Ordinance, 1979 leads as under:‑‑
"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, 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 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.
Thus according to section 12(9A); if a public company does not distribute cash dividend or distributes dividend to such an extent that its reserves after such distribution are in excess of 50% of paid‑up capital so much of its reserve in excess 50% of its paid‑up capital shall be deemed to be the income having accrued to such company during that year. The rigors of this section were later on relaxed by the legislature by adding Clause (59) to Part IV of the Schedule to the Ordinance which reads as under. (as it existed during the period under consideration):
"The provisions of subsection (9A) of section 12 shall not apply to;
(i)a company listed at the Stock Exchange which distributes at least 40% of its after tax profit of the relevant income year"
7. If we read the above mentioned clause (59) it becomes abundantly clear that if a public company distributes at least 40% of its after tax profit of the relevant income year then section 12(9A) would not be applicable to it. But clause (59) does not say anything about the form in which the profit should be distributed and about the time within which the said profit should be distributed. For the form of distribution of profit and for the period of distribution we will have to look to section 12(9A). This section says that cash dividend should be issued to the shareholders and it would be issued within eight months from the end of the income year in case of a company which closed its accounts on 30‑6‑1999. So, in order to escape tax chargeable under section 12(9A), the assessee should have distributed dividend equal to 40% of its after tax profit before 29‑2‑2000. But, unfortunately this thing has not been done.
The contention of the learned AR of the assessee that by issuing bonus shares to its shareholders the Company has fulfilled the condition laid down under clause (59), in our view, is nor correct. Distribution of bonus shares, in no way fulfils the conditions laid down under clause (59) read with section 12(9A) of the Income Tax Ordinance. Bonus shares are not dividend as defined by Income Tax Ordinance, 1979. The said Ordinance defines dividend in its section 2(20) and dividend does not include bonus shares. According to Scheme of Income Tax Ordinance, (as it exited during the period under consideration) bonus shares are not treated as income of the shareholders. Rather the same are treated as income of the Company under section 12(9) of the C said Ordinance. Moreover, the purpose of bringing subsection (9A) in section 12 of the Income Tax Ordinance was to ensure payment of cash dividend to the shareholders (who were complaining against the attitude of the companies and their demand was also voiced by the StockExchanges of the Country that companies were not issuing dividend to them) and also to ensure 10% tax to the Government of Pakistan which is levied on dividend in the hands of the shareholders. We are afraid to say that both of these purposes are not solved by the issuance of bonus shares. By issuing bonus shares, a company capitalizes the profit and issues merely papers to the shareholder which may have or may not have ready buyers in the stock markets. Thus the shareholders do not receive dividend in cash. The Government is also deprived of tax because bonus shares are treated as income in the hands of the Company under section 12(9A) but this income is exempt from tax under Clause 108 of Part I of the Second Schedule to the Income Tax Ordinance, 1979. So we reject the contention of the learned AR that by issuing bonus shares the company has fulfilled the condition laid down under clause (59) and so) section 12(9A) is not applicable.
The learned AR of the assessee has relied on the judgment of the ITAT reported as (2003) 87 Tax 524 (Trib.) in support of his contention that bonus shares can also be issued instead of cash dividend in order to escape the rigors of section 12(9A). The learned AR of the assessee has especially referred to para. 51 of this judgment wherein the Tribunal says that distribution of dividend through mix of cash distribution and issue of bonus shares will enable the assessee to qualify for an, exemption. We have gone through the judgment of the ITAT. Point of bonus shares was never involved in the case before it. The question before the ITAT was whether the three dividend declarations made by the assessee fell in the period relevant to year under consideration or not. So these observations of the learned ITAT regarding mix of cash dividend and bonus shares are in the nature of obiter dicta and' the same have no binding force. It is trite law that observations in the nature of obiter dicta recorded by only the Supreme Court of Pakistan have legal force. So the said ITAT judgment cannot be relied upon for deciding the issue before us.
Having decided that the assessee has not issued cash dividend/dividend in order to escape the mischief of section 12(9A) we now come to the question as to how the "reserve" of the assessee should be computed for the purpose of taxation. Section 12(9A) says that so much of its reserve as exceed 50% of its paid‑up capital shall be deemed to be the income having accrued to such company during the said year if the Company does not distribute cash dividend. In Explanation the section says: "For the purpose of this subsection the expression "reserve" shall have the meaning as may be prescribed". income Tax Rule 203AA defines the expression reserve as: "for the purpose of subsection (9A) of section 12 the expression reserve shall include amounts set out of revenue or other surpluses excluding capital reserve share premium reserve and reserve required to be created under any law, rules or regulations". Thus the reserve, for the purpose. of subsec tion (9A) of section 12 are those amounts which have been set out of H revenues or other surpluses excluding capital reserve, share premium reserve and reserve required to be created under any law, rules and' regulations. The reserve of bonus shares which has been created by the assessee in its balance‑sheet as on 30‑6‑1999 has been created out of its profit (out of its profit accumulated and profit for the preceding years). The purpose of this reserve is to issue bonus shares to the shareholders. Thus this reserve is neither in the nature of capital reserve nor it is share premium reserve nor it is any other reserve required to be created under any law, rules or regulations. Therefore, the view of the learned AR of the assessee that bonus shares reserve is capital reserve and should be excluded from the amount of reserves for the purpose of section 12(9A) is not correct. In our view the leaned IAC is justified to include this reserve with other reserve for the purpose of section 12(9A). Thus the computation of reserve made by the IAC for subjecting the assessee to tax under section 12(9A) is maintained. The reliance of the learned AR of the assessee on judgment of the ITAT, dated 10‑7‑2003 in support of the contention that reserves created up to 30‑6‑1999 are not to be charged to tax is also unjustified. We agree with the learned Legal, Advisor that this judgment of the ITAT is per incurium This judgment is not only a split verdict but it is also contrary to the section 12(9A) of the Income Tax Ordinance. If reserves created up to to 30‑6‑1999 are not to be accounted for and only the reserve created during the relevant year u to be accounted for, then there was no idea that the legislature should have made section 12(9A) applicable to the companies whose income year ended on a date prior to 30‑6‑1999 and whose income year ended or 30th June, 1999.
In view of the foregoing discussion we dismiss the appeal filed by the assessee on the issue of application of section 12(9A) and we uphold the order passed by the learned IAC.
Issue of Addition under section 25(c) of the Income Tax Ordinance:--
8. In the accounts of the appellant, an amount of Rs.2.8 billion under the head Gas Development Surcharge was found payable to the Government of Pakistan on 30‑6‑1994. This amount had been claimed and allowed as business expense in the preceding years and therefore, it constituted trading liability under the law. However, this amount was not paid by the assessee until 30‑6‑1999. During the assessment proceedings the point of non‑payment of this trading liability within period prescribed under section 25(c) was confronted to the assessee under section 62 but in the assessment order passed under section 62 on 27‑6‑2001 the DCIT did not add‑back this amount to assessee's income as unpaid trading liability under section 25(c). The IAC in the impugned order passed under section 66A has charged this amount to tax in. the hands of the assessee as according to the IAC the amount was not paid within three years after the expiry of the income year in which the liability was allowed and hence it is chargeable as deemed income under section 25(c). The assessee is now in appeal before us against this action of the IAC on the issue under consideration.
9. It has been submitted by the learned AR of the assessee that the liability in question was converted by the Government of Pakistan on 30‑6‑1994 into a medium term loan arid so the conversion of liability into a loan constitution constructive discharge of the said liability. According to the learned AR, the issue was also raised by the Assessing Officer in the assessment years 1997‑98 and 1998‑99 but the matter was brought to the notice of the C.B.R. by the Company through Ministry of Petroleum and Natural Resources of Pakistan. The C.B.R. asked the RCIT and discussions were held by the assessee with the RCIT and CIT and so the issue was dropped. It has been contended by the learned AR that in view of this situation, the rejection of assessee's contention by the IAC amounts to a change of opinion which is not permissible under section 66A. In support of his contention that the conversion of liability into medium term loan amounts to constructive payment of the liability the learned AR has relied upon judgment of the ITAT reported as 2000 PTD (Trib.) 1328. Thus the Assessing Officer, in the view of the AR, had correctly followed the law and therefore, his assessment order was neither erroneous nor prejudicial to the interest of Revenue but the same was wrongly revised by the IAC. According to the learned AR, the amount in question is not hit by section 25(c) and therefore it cannot be brought to tax.
10. On the other hand the learned DR has submitted that the conversion of liability into medium term loan does not amount to discharge of the liability under the law. Section 25(c) is very clear on this issue. This section uses the word paid and not deemed to have bean paid or constructively paid. Since no payment was actually made by the assessee to the Government so the liability outstanding in the balance sheet of the assessee cannot be termed as to have been discharged. The judgment of the ITAT quoted by the learned AR of the assessee as pleaded by the learned DR is not applicable to the case of the assessee as the facts of the case of the assessee are distinguishable.
11. We have considered the view point of both the parties on this issue. Let us look at section 25(c) of the Income Tax Ordinance, 1979 and decide the issue in the light of law keeping in view the facts of the case. This section reads as under::‑‑
(25) "Amounts subsequently recovered in respect of deduction etc.------ Notwithstanding anything contained in this Ordinance, where an allowance or deduction has been made under section 23 for any year in respect of any loss, bad debts, (interest credited to suspense account, expenditure or trading liability incurred by the assessee, and subsequently,
(a) ..
(b) .
(c)such treading liability or a portion thereof is found not to have been paid within three years of the expiration of the income year in which it was allowed, such liability or portion thereof, as the case may be, shall be deemed to be income from business or profession of the year in which such finding is made or any other year (not being a year commencing after the expiration of five years from the end of the said three years) as the (Deputy Commissioner) may think fit.
Section 25(c) as reproduced above uses the word "paid". The word "paid" has not been defined by this section. So, we will have to look at the Dictionaries for understanding the meaning of the word "paid" or "pay". According to Oxford Dictionary "pay" means "to give a person what is due in discharge of debt or for services done or goods received". New Webster's Dictionary defines word "pay" as; "to discharge a debt or obligation by giving or doing something, to recompense as for goods supplied or services rendered, to satisfy claims of a person by giving money due". Chamber 20th Century Dictionary gives the following meaning of the word "pay"; "To satisfy, to gratify, to give what is due in satisfaction of a debt, in exchange, in compensation, in remuneration. To settle or discharge a claim, bill, debt, duty by having over money for, or other equivalent, compensation, etc."
The word "pay as a verb is also defined in Volume LXX by Corpus Juris Secundum at page 70 as meaning "to deliver the creditor the value of the debt, either in money or in goods, to his acceptance or satisfaction, by which the obligation of the debt is discharged; to discharge the debt in money, goods or other things of value", and at page 71 "to transfer or deliver money, or other agreed medium for the debt to the creditor"
In nutshell the word pay means to discharge a debt or to give compensation for the goods supplied or services rendered in cash or in kind. In other words, "pay" means to pay in money or money's worth. Payment can be made in cash or in kind, for example in the form of handing over some goods or shares or property or land or building according to the satisfaction of a creditor or a person to whom payment is due.
12. Section 25(c) of the Income Tax Ordinance uses the word "paid" and not the word constructively paid or deemed to have been paid. The learned AR of the assessee has submitted that the amount representing liability on account of Gas Development Surcharge payable to the Government of Pakistan was controverted in the medium term loan with effect from June 30, 1994. The aforesaid conversion was decided by the Economic Coordination Committee of the Cabinet vide letter No. ECC 341(18/94, dated November 21, 1994. The letter addressed to the Managing Director Sui Northern Gas Pipelines Limited, Lahore reads as under:‑‑
"The outstanding gas development surcharge as of 30th June, 1994 should be converted into medium term loan with grace period up to 30th June, 1997. SNGPL should pay interest @ of 17.5 % per annum to Government on the loan. The arrears owed to SNGPL by WAPDA and other defaulting public sector agency should also be subjected to an interest of 17.5 % per annum".
Thus the liability due from the assessee to the Government of Pakistan has neither been paid in money or in money's worth or in form of any property or goods. The same has been merely controverted into the medium term loan with enhanced rate of interest. We feel no hesitation to say that this is not the discharge of assessee's trading liability as it has been paid in terms of section 25(c) of the Income Tax Ordinance. The change of nomenclature of the liability or rescheduling of loan or extension of period of payment does not mean that the liability has been paid. The argument of the learned AR of the assessee, that if the assessee had obtained loan from the Government and then paid the liability of gas development surcharge then the Income Tax Department would have been satisfied, is not relevant. The interpretation of law has to be strictly made within the premises or contours prescribed by law and suppositions or presumptions or assumptions or ifs and buts do not have any relevance while interpreting the law. According to section 25(c) the assessee was required to pay the trading liability within three years of the expiration of the income year in which it was allowed but the same has not been paid either in cash or in terms of property or goods or in any form of money worth. Therefore, we are justified to hold that the liability in question has not been paid and so the IAC is right in charging the same to tax as deemed income of the assessee.
13. In support of his contention that the law as contained under section 25(c)admits constructive payment the learned AR has quoted a judgment of the ITAT reported as 2000 PTD (Trib.) 1328. However, the facts of the case decided by the ITAT in this judgment are totally different from the facts of the case of the assessee. In the quoted case the assessee had obtained loans from financial institutions and had defaulted in the repayment of loans and financial charges. To satisfy the claims of the financial institutions the assessee issued fully paid ordinary shares to them When the case was brought to the ITAT it held that since the liability of the financial institutions has been paid by the assessee there was no justification to uphold the disallowance made by the Assessing Officer under section 25(c) of the Income Tax Ordinance, 1979. The case of the assessee is distinguishable from the quoted case. In the case of the assessee, as we have discussed above, the assessee has not made any payment in cash or in kind to the Government of Pakistan in discharge of its liability on account of gas development surcharge. Rather the liability has been controverted into medium term loan with a higher rate of interest. In this situation, we regret to say, the demand of the learned AR of the assessee cannot be accepted and the quoted case cannot be applied.
14. The learned AR of the assessee, in his submissions mentioned supra, has also stated that on the request of Ministry of Petroleum tie C.B.R. instructed the RCIT to hear the case on the issue of its trading liability with reference to section 25(c). Long deliberations were held between the assessee and the Income Tax Department at Lahore and so the matter of liability was dropped in the years, 1997‑98 and 1998‑99. No details of these deliberations have been produced before us as these deliberations have not been statedly put into black and white. Moreover, such deliberations and such decisions have no legal force and the same are not binding for the ITAT when a matter is brought to it in appeal. ITAT has to decide the matter according to the Statute keeping in view the precedents set by Courts of law. So far as the plea of the learned AR of the assessee regarding change/difference of opinion is concerned we do not find ourselves in a position to subscribe to it. Although change of opinion is the biggest bar against action under section 65 of the Income Tax Ordinance, it is no bar in terms of application of section 66A. Under section 65 action is taken by an ITO against order passed by Income Tax Ordinance and so change of opinion or difference of opinion is not allowed to be made basis for, such an action. Undersection 66A action is to be taken by a higher authority i.e. by an IAC against order passed by his subordinate i.e. an Income Tax Officer. And difference of opinion is an essential for taking action under section 66A because if an IAC "agrees with the opinion of an ITO then there is no ground for taking acting. It is the difference of opinion between the IAC and the ITO which leads an IAC to hold that the order passed by the ITO is erroneous and prejudicial to the interest of Revenue. So this plea of the learned AR of the assessee is also rejected.
15. In view of the foregoing discussion appeal filed by the assessee on the issue of trading liability under section 25(c) is rejected and action of the learned IAC on this issue is maintained.
Issue of Exchange Risk Coverage Fee:
16. The third issue raised by the assessee in its grounds of appeal relates to exchange risk coverage fee. The IAC examined the annual report of the assessee and came to know that the assessee had claimed an expense of Rs.457,823,000 incurred on account of exchange risk coverage fee relating to foreign currency loan used far import of plant and machinery. According to the IAC the whole amount was to be capitalized under Rule 8(8)(e) of the Third Schedule to the Income Tax Ordinance whereas the Assessing Officer had capitalized only 30% of the claimed amount. So the IAC added an amount of Rs.320,518,100 to assessee's income treating it as. capital expenditure under this head.
17. It has been submitted by the learned AR of the assessee that the IAC has erred in capitalizing the exchange risk coverage fee under Rule 8(8)(c) of the Third Schedule to the Income Tax Ordinance as such action under section 66A was not permissible. According to the learned AR the assessee had filed appeal on the issue of capitalization of 30% exchange risk coverage fee by the Assessing Officer before the CIT who is her appellate order, dated 22‑1‑2002 had accepted assessee's claim and deleted the addition. When appeal is decided by an appellate authority on an issue then the IAC cannot take action on the same issue under section 66A because subsection (IA) of the said section debars application of this section. The learned AR has further submitted that the ITAT in its judgments for assessment years 1981‑82 to 1987‑88, dated 17‑1‑1991, for 1988‑89 to 1991‑92, dated 10‑6‑1997, for 1992‑93 and 1993‑94, dated 26‑2‑2002 and for 1994‑95 to 2001‑2002, dated 19‑6‑2003 in the case of the assessee has already held that exchange risk fee is a revenue expense and is allowable under the law.
18. Learned DR and LA have opposed arguments of the learned AR of the assessee. According to them, the amount in question is a capital expenditure and hence it cannot be allowed as expense under the provisions of section 23 of the Income Tax Ordinance.
19. We have appreciated the view point of both the parties. Action taken by the IAC cannot be maintained for the following reasons:‑‑
(i)It has been held by the ITAT in previous years that exchange risk fee incurred by the assessee is a revenue expense and not an expense of capital nature and hence the same is deductible under the law. Judgments of the ITAT, dated January 17, 1991; June 10, 1997; February 26, 2002 and January 17, 2004 can be referred to on this issue.
(ii)Application of Rule 8(8)(e) of the IAC is absolutely unjustified because this Rule applies to a situation where an assessed has imported any plant and machinery from a foreign country for installation in Pakistan for his business and due to fluctuation of rate of exchange, his liability to repay the loan in Pak Rupee increases or decreases. But in the case of the assessed, payment of fee to State Bank has been made as sort of security or insurance to safeguard against loss due to adverse exchange fluctuation. Thus Rule 8(8)(e) is not relevant to assessee's case.
(iii)Moreover, section 66A(1A) does not permit an IAC to take action under this section against order of a DCIT on an issue which has been decided in appeal by CIT or by ITAT because the order of the DCIT merges with the order of CIT (Appeals) or ITAT. As pointed out by the learned AR, the CIT had R decided the issue of capitalization of exchange risk fee against the Department in her order, dated 22‑1‑2002 for the year under consideration so the IAC was debarred to take action on this issue under section 66A(1A) in her impugned order which was passed on 4‑2‑2002.
In view of this situation we feel no hesitation to accept the appeal of the assessee on the issue under consideration and order the deletion of the addition made by the IAC.
20. Appeal filed by the assessee succeeds on the issue of capitalization of exchange risk coverage fee, but it fails on the other two points i.e. on the issue of application of section 25(c) and application of section 12(9A). So invocation of section 66A by the IAC is justified to the same extent and is, therefore, maintained on the said two points.
C.M.A./89/Tax (Trib.)Order accordingly.