2008 P T D (Trib.) 1175
[Income-tax Appellate Tribunal Pakistan]
Before Javid Iqbal, Judicial Member and Liaqat Ali Khan, Accountant Member
I.T.A. No.28(PB) of 2004, decided on 08/10/2007.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss.12(9A), 66A & Second Sched., Cl. (118C)---Economic Reforms Act (XII of 1992), S.6---C.B.R. Circular No. F.12 (9A) I.T.P./99 dated 16-6-2001---Income deemed to accrue or arise in Pakistan---Inspecting Additional Commissioner directed the Assessing Officer to invoke the provisions of S.12(a) of the Income Tax Ordinance, 1979 considering the assessment framed under S.62 of the Income Tax Ordinance, 1979 as erroneous and prejudicial to the interest of Revenue on the ground that after-tax profits had not been worked out properly---Assessee contended that income being exempt from taxation under Cl. (118C) of the Second Schedule of the Income Tax Ordinance, 1979, he was exempt from other provisions of income tax as per protections of S.6 of the Economic Reforms Act, 1992 and for non-distribution of mandatory dividend he was not liable to action under S.12(9A) of the Income Tax Ordinance, 1979---Validity---Plea of assessee with regard to protection under S.6 of the Economics 'Reforms Act, 1992 was not correct---Clause 118C of the Second Schedule of the Income Tax Ordinance, 1979 provided that income only from the process manufacturing was exempt from the taxation---Section 12(9A) of the Income Tax Ordinance, 1979 was a quite different levy, the said section of law had been inserted to protect the interest of share-holders to pay them their dividend well within time---Question of exemption from levy under S.12(9A)of the Income Tax Ordinance, 1979 did not arise at all in the circumstance---Assessee was supposed to distribute the dividend as per the provision of law---Assessee having failed to do so, action under S.12(9A) of the Income Tax Ordinance, 1979 was justified and reserved of the year under appeal only be subjected to action of taxation under S.12 (9A) of the Income Tax Ordinance, 1979.
I.T.As. Nos. 116 to 120/PB of 2002; 2004 PTD (Trib.) 1062; I.T.As. Nos. 2256 and 223(KB); 2004 PTD 1135; Kadnath Jute Manufacturing Co. Ltd. v. C.I.T. 82 ITR 363 SC 1; Kerala Arecant Co. v. C.I.T. 43 ITR 445; C.I.T. v. Royal Boot House 75 ITR 507; Garesh Lal Ram Kumar v. C.I.T. 77 ITR 974; C.I.T. v. New Jehangir vabil Mill Co. Ltd Hancok v. General Reversionary & Co. Ltd. 37 ITR 136; C.I.T. v. Hira Lal-Mittal 7 TC 358, 375; C.I.T. v. Jai Bajrang Nail Industries 86 ITR 463; (19b0) 2 Tax (V-405) 95 ITR; (2004) 89 Tax 342 (Trib.); Seward v. Vera Cruz 1884 to AP. Ca 59; 2004 PTD 2087; 49 Tax 34; 1976 PTD 11; Messrs Tuticorn Alkali Chemicals and Fertilizers Ltd. 1998 PTD 900; S.S.C. Footwear Ltd. v. Ridghay (Inspector of Tax) (1970) 77 ITR 857, 860 (CA); C.I.T. v. Mahashtra Electrosmlt Ltd. (1995) 214 ITR 489 ref.
2004 PTD 1135; I.T.A. No. 51/LB of 2002; Writ Petition No.665 of 2001 and 2000 PTD 2737 rel.
(b) Income Tax---
----Income---International accounting standard---For determination of income for income tax assessment purpose under the Income Tax Law, the pattern suggested by IAS had no binding force on the income tax law, because income tax law is independent and the purpose of said law is entirely different.
2004 PTD 1135 and I.T.A. No.51/LB of 2002 rel.
(c) Income Tax---
----Mercantile System of Accounting---Fiscal liability---Allowability---Income Tax Law recognize the cash as well as Mercantile System of Accounting---Mercantile system provided that a fiscal liability under statute should be allowed in the year in which the transactions takes place although the precise quantification-of the liability in the form of an assessment in demand may come later; that the assessee may contest the liability in appeal or other proceedings and that the assessee may have made no provision for the liability in his books.
(d) Income Tax---
----Deduction---Claim of deduction in the subsequent years---Assessee may claim a deduction in a subsequent year in which the taxes assessed and the demand is made, although the transaction may pertain to earlier years or he may even postpone his claim of deduction to the year in which he loses an appellate proceedings and the levy becomes final.
Kadnath Jute Manufacturing Co. Ltd. v. C.I.T. 82 ITR 363 SC; Kerala Arecant Co. v. C.I.T. 43 ITR 445; C.I.T. v. Royal Boot House 75 ITR 507; Ganesh Lal Ram Kumar v. C.I.T. 77 ITR 974; C.I.T. v. New Jehangir Vakial Mill Co. Ltd. Hancok v. General Reversionary & Co. Ltd. 37 ITR 136; C.I.T. v. Hira Lal-Mittal 7 TC 358 375; C.I.T. v. Jai Bajrang Nail Industries 86 ITR 463 and (1960) 2 Tax (V-405) 95 ITR rel.
(e) Income Tax---
----Deduction---Demand of sale tax was created relevant to the year under appeal and assessee had rightly claimed the provision of excise duty for the year under appeal.
(1960) 2 Tax (V-405) 95 ITR rel.
Shaukat Amin Shah, FCA and Mehmood Mirza for Appellant.
Tariq Bakhtiar, DR for Respondent.
ORDER
This appeal at the instance of assessee is directed against the impugned order recorded by learned I.A.C. under section 66A of Income Tax Ordinance, 1979 (herein after called R.0). The objections raised by the assessee are reproduced as under:---
(1) That L/I.A.C. has misdirected himself in law by holding that provisions of section 12(9A) of the Ordinance are attracted to the facts of the instant case and that the said provision override the Protection of Economic Reforms Act, 1992.
(2) Without prejudice to the foregoing, the computation of reserves made by the L/I.A.C. is erroneous in law and no tax is leviable upon correct computation.
(3) That no tax is chargeable on the fictional income under section 12(9A) of the Ordinance, as enacted inasmuch as the said fictional income has not been brought within the ambit of total income.
(4) That L/I.A.C. did not take proceedings of his own initiative by examining position of the case. He acted on the advice of somebody else. Assumption of jurisdiction by him, therefore, is improper and illegal (I.T.As. Nos. 116 to 120/PB of 2002 dated 29-5-2002) .
(5) That L/I.A.C.'s exercise of powers contained in section 66A of the Ordinance to cancel order dated 9th February, 2001 passed by the assessing officer under section 62 of the Ordinance were on a wrongful premises and being so were ab initio illegal and liable to be annulled.
2. Briefly, the relevant facts leading to this appeal as per record are assessee is a public limited company, derives income from manufacturing and sale of sugar. Original assessment for the year under appeal was completed under section 62 of the repealed Income Ordinance, 1979 at net income of Rs. 2,11,651 on 9-2-2001. Chain of exemption under clause (118-C) of Second Schedule to the Income Tax Ordinance, 1979 was allowed as such. Subsequently, learned I.A.C. observed that at the time of original assessment D.C.I.T. has not properly handled the case in the light of section 12(9A) of Income Tax Ordinance, 1979 while after-tax profits have not been worked out properly. Thus considering assessment framed under section 62 on 9-2-2001 being erroneous and prejudicial to the interest of Revenue, therefore, took action under section 66A of Income Tax Ordinance, 1979 and directed the assessing officer to invoke the provisions of section 12 (9A) of Income Tax Ordinance, 1979, after providing an opportunity of being heard to the assessees company.
L/ARs and DR submitted their arguments/comments which are reproduced as under:--
(1) Section 66A of the Ordinance can be invoked by calling for and examining record of any proceedings under repealed Ordinance. The invocation cannot be on account of finding or conclusions or observations given by any authority. It was stated that in the instant case the learned I.A.C. did not initiate the proceedings on its own accord but on the directions of concerned Commissioner. While order passed under section 66A of the Ordinance is similar circumstances was annulled by Peshawar Bench in I.T.As. Nos. 116 to 120 of 2002 dated 17-6-2002.
4(sic). There was justification for add-back of accrued liability of excise duty of the purpose of computation of after tax profits. The appellant has fully complied with international accounting standard, strictly followed the provision contained in para. 25 of IAS which requires that a liability should be adjusted for events occurring after the balance sheet date for providing additional evidence to assess the estimation of amounts relating to conditions existing at the balance sheet date. The learned AR referred a reported judgment of 2004 PTD (Trib.) 1062 wherein a Division Bench of the Tribunal held that 40% of after tax profits are to be concluded on the basis of assessee's after tax profits as declared in its final account. He also referred an unreported judgment in I.T.As. Nos. 2256 and 223 (KB) wherein it was clarified that expression after tax profits as used in clause (59) of Part-IV of the Second Schedule to the Income Tax Ordinance refers to profits computed in accordance with generally accepted and understood account and audit principles. To this effect the judgment reported as 2004 PTD 1135 was also referred by AR in which the impact of judgment of Honourable High Court on the issue of charge of tax under the provision of section 12 (9A) has been discussed. Also various cases-law, of Indian Courts have been referred to, about the statutory liability and their admissibility on accrual basis. The details of the above cases-law are under:-
| 1. Kadnath Jute Manufacturing Co. Ltd. v. C.I.T. | 82 ITR 363 SC |
| 2. Kerala Arecant Co. v. C.I.T. | 43 ITR 445 |
| 3. C.I.T. v. Royal Boot House | 75 ITR 507 |
| 4. Ganesh Lal Ram Kumar v. C.I.T. | 77 ITR 974 |
| 5. C.I.T. v. New Jehangir vakial Mill Co. | 37 ITR 136 |
| Ltd. Hancok v. General Reversionary & Co. Ltd. | 7 TC 358 375 |
| 6. C.I.T. v. Hira Lal-Mittal | 86 ITR 463 |
| 7. C.I.T. v. Jai Bajrang Nail Industries | 95 ITR |
| 8. (1960) 2 Tax (V-405) | |
The L/AR also contested that the term as used in section 12 (9A) of the R.O. means the amount of undivided reserves of the relevant year and not the accumulative reserves of the earlier years and this provisions of section 12 (9A) of the Ordinance has been interpreted by a Full Bench of the honorable Tribunal in a case reported as (2004) 89 Tax 342 (Trib.), wherein it has been held so while the inclusion of previous years would result in charging of tax under the provisions of section 12 (9A) of the Ordinance on the same amount again and again that is not permissible under the law. The Tribunal also referred to a settled principle of law that in case of fiscal statutes where more than one interpretation of a provision is possible then one favouring the assessee is to be followed.
3. Net effect of the above judgment is that reserves of the relevant year only i.e. Rs. 211, 651 have to be compared with 50% of paid-up capital to ascertain excess reserves for the purpose of section 12 (9A) of the Ordinance. Application of section 12 (9A) of the Ordinance in appellant's case in the light of the above judgment would be as follows.
| Reserves (Profit after tax) | Rs .211,651 |
| Paid-up capital | Rs. 191,280,000 |
| 50% of paid-up capital | Rs. 95,640,000 |
4. The accrued liability of Rs. 11,293,880 in respect of excise duty could not be added back in the computation of `After Tax Profits".
5. Further plea of the appellant is that the provisions of section 12(9A) of the Ordinance are not applicable to the appellant on the grounds mentioned hereafter.
6. Provisions of section 12 (9A) of the Ordinance aim to force public companies to declare dividend to promote stock market or else tax will be levied on its reserves by treating them as fictional income. The provisions of section 12(A) of the Ordinance are apparently in conflict with the provisions of section 6 of the Protection of Economic Reforms Act, 1992 (the Act) with aim at promotion of industries referred to in its schedule. The apparent conflict of the two provisions disappears as soon as we take into consideration the prohibition laid down in the Act that tax incentive will not be altered to the disadvantage of assessees during the period enjoy the incentives.
7. Reading the two legal provisions referred above, the word `profit' appearing in the subsection will not mean profits that are protected from income tax by the provisions of section 6 of the Act. This matter is elaborated below.
8. The appellant enjoyed tax holiday during the relevant income year under Clause (118C) of Part-I of Second Schedule of the Ordinance. The said Clause was inserted in law through S.R.O. 1283(I)/90 dated13th December, 1990 which was protected by section 6 of the Act as follows:--
"Protection of fiscal incentives for setting up of industries:
The fiscal incentives for investment provided by the Government through the statutory orders, listed in the schedule or otherwise notified shall continue in force for the term specified therein and shall not be altered to the disadvantage of the investors."
9. The aforesaid section, 6 of the Act prohibits any enactment or amendment that has mentioned in the above schedule during the term for which the incentive was originally allowed. In appellant's case the tax incentive (tax holiday) was available for the period relevant to assessment year 1999-2000. The amendment enacted in the year 1999 inserting section 12 (9A) in the Ordinance, therefore, cannot apply to the appellant for the assessment year 1999-2000..
10. The aforesaid section 6 states the purpose for which it was enacted which was to provide fiscal incentive for setting up of industries, while the provisions of section 12 (9A) of the Ordinance was to the country objective i.e. it pushes funds away from investment by a company. If the legislature intended to take away the fiscal incentive, in that case section 12 (9A) of the Ordinance would have specially laid down that the incentive provided in Clause (118C) or the protection given under section 6 of the Act will be disregarded. There being no specific provision to this effect the said Act will hold the ground.
11. It is humbly submitted that the rights conferred under the Act cannot be taken away by the provisions of section 12 (9A) of the Ordinance except by express words or by necessary implication. Lord Selborne, Lord Chancellor, refers to this canon of construction in Seward v. Vera Cruz [(1884 to AP. Ca 59]. Where he observed:---
"If anything be certain it is this, where there are general words in a later Act capable of reasonable and sensible application without extending them to subjects specially dealt with by earlier legislation, you are not to hold the earlier and special legislation indirectly repealed, altered, or derogated from merely by force of such general words, without any indication of a particular intention to do so."
14(sic). Section 12(9A) of the Ordinance does not override the tax incentive (which is right enjoyed by the appellant) as it is not a non-obstante provision. The provisions of the above two laws have to be interpreted harmoniously. The term "profits" appearing in section 12 (9A) of the Ordinance, therefore, cannot be said to be referring to tax exempt profit protected by section 6 of the Act.
Department rebutted the arguments of L/AR in the following manner:---
(1) Order passed by the Additional Commissioner of Income Tax, Range-II, Companies Zone, Peshawar under section 66A of the Income Tax Ordinance, 1979 is as per law and facts of the case.
(2) The plea of taxpayer is not correct, as the provisions of section 12 (9A) being subsequent in time has precedence over the protection available to the taxpayer under Protection of Economics Reform Act. Moreover, the issue of 12 (9A) has already been settled and decided in favour of department by learned Tribunal in following cases. (however no case-law has been recorded along with the written comments).
(3) The plea of the taxpayer is not correct, and all the computations made by the Inspecting Additional Commissioner are correct and lawful.
(4) The plea of the taxpayer in the para. is not clear, however, again it is to be submitted that order passed under section 66-A is as per law and facts of the case.
(5) The Inspecting Additional Commissioner has applied his own mind and detected certain legal defects in the order of assessing officer, which were erroneous insofar as it is prejudicial to the interest of Revenue, so he has rightly used his jurisdiction and has committed no illegality.
Moreover, section-66A in this instant case was not invoked for change of opinion, rather it was invoked because the order of assessing officer was suffering from deviation of law and so it was erroneous insofar as it is prejudicial to the interest of Revenue.
Without prejudice to the above the Learned ITAT in its judgment cited as 2004 PTD 2087 has clearly held, difference of opinion is essential for taking action under section 66A of the Income Tax Ordinance, 1979 because if an Inspecting Additional Commissioner agrees with the opinion of the assessing officer then there is no ground for taking action. It is the difference of opinion between the Inspecting Additional Commissioner and ITO, which leads an Inspecting Additional Commissioner to hold that the order passed by the ITO, is erroneous and prejudicial to the interest of Revenue. Moreover even the judgment quoted by the taxpayer as 49 Tax 34 in the case of Premier Sugar Mills, even it supports the version of department as it has held in the said judgment that the "Power of section 66A can be invoked when an order of Income Tax Officer is found deviating from law." This is exactly what has happened in the case.
(6) The plea of the taxpayer, that order was initiated on wrong premises is not correct as 66A conferred vide power to Inspecting Additional Commissioner. He may revise orders both on points of law and facts. The jurisdiction thus vested in him is one of his superintendence and correction. One of the main functions of the Inspecting Additional Commissioner for which he is appointed is to detect tax evasions. Under this section of the Inspecting Additional Commissioner may call for and examine the record of any proceedings and if he considers that any order passed therein by the Income Tax Officer is erroneous in so far as it is prejudicial to the interest of the Revenue, he may after giving the assessee an opportunity of being heard and after making, or causing to be made such inquiry as he deems necessary pass such order thereon as the circumstances of the case justify. In doing so he may enhance or modify the assessment or cancel the assessment made by the Income Tax Officer and direct him to make a fresh assessment.
Moreover, the only restriction imposed on his jurisdiction as held by the Hon'ble High Court in its judgment cited as 1976 PTD 11.
"Under this section he cannot interfere:--
(4) Unless he considers that the order passed by the Income Tax Officer is erroneous in so far as it is prejudicial 'to the interest of revenue.
(5) Without affording the assessee a reasonable opportunity of being heard.
(6) After the expiry of four years of the date of order of under revision.
Moreover, the above judgment has farther held that "there is nothing in this section to warrant the conclusion that at this stage of the case he must confine himself solely to the examination of the record of the Income Tax Officer called by him or in other words in deciding to entertain the revision, he is not permitted to rely on any other material or information not forming part of the record. Any such narrow interpretation on the opening part of subsection (1) of this section is bound to unnecessarily curtail the power of superintendence and control vested in the Inspecting Additional Commissioner to sit in revision against the order passed by the Income Tax Officer. This power is liable to be rendered almost nugatory and meaningless if indeed its exercise is confined only to the correction of errors on the face of the record."
Therefore in the light of the above, the order passed by the Inspecting Additional Commissioner is strictly in accordance with the provisions of section 66A of the Income Tax Ordinance, 1979 which empowers the I.A.C. to pass an order enhancing or modifying the assessment.
We have heard the arguments of the parties and gone through the relevant order of the officers bellow, the cases Flaw and the other material made available before us, it has been seen that to arrive at total profits of Rs. 2,11,651 assessee has declared the following results.
| Sales | Rs.811,335,253 |
| Cost of Sales | Rs. 719,697,287 |
| Gross Profit | Rs.91,637,966 |
| 11.29% Less Operating & Other Expenses | Rs.82,147,249 |
| Operating Profit/Loss | Rs .9,490,717 |
| Add Other Income | Rs.2,014,814 |
| Less Excise Duty (Prior Year) | Rs.11,293,880 |
Assessing officer accepted the above results and allowed the provision made for the excise duty of the prior years. The exemption claimed from taxation under clause 118-C of the 2nd Schedule to the repealed Income Tax Ordinance, 1979, was allowed on the income from the manufacturing account. Subsequently the L/I. A. C. from the examination of assessment record observed that while framing the original assessment under section 62, the assessing officer has not properly handled the case in the light of provision of 12 (9A) of the Income Tax Ordinance, 1979, as after-tax profits of the year have been worked out properly.
The L/I.A.C. was of the opinion that if the adjustment (provision) of inadmissible expenses on account of excise duty for the prior years would have not been deducted from the gross profit the position of the after-tax-profit would have been as under:--
| Net Profit as per accounts | Rs.211,651 |
| Add: Excise duty (Prior years) | Rs. 11,293,880 |
| Net Profit after taxation | Rs. 11,505,531 |
| 40% Cash Dividend due/payable | Rs.4,602,212 |
| Actual Dividend declared | Nil |
| Paid-up Capital | Rs. 191,280,000 |
| General Reserves | Rs. 106,000,000 |
| 50% of the paid-up Capital | Rs.95,640, 000 |
| Excess reserves to be added to | |
| Total income for the year | Rs.10,360,000 |
| (106,000,000-95,640,000) | |
Hence considering the order passed under section 62 dated 9-2-2001 erroneous as well as prejudicial to the interest of the Revenue attracting the provisions of section 66A of the R.0, therefore with intent to take action under section 66A issued notices vide No. 1201 dated 27-5-2002 and 1-4-2003. In its response the L/AR of assessee submitted his reply the contents of which have been incorporated in the impugned order. Before us the L/AR of assessee delivered the identical arguments as have been recorded supra. The arguments and comments of assessee did not satisfy the L/I.A.C, therefore he passed the impugned order by recording the following reasons:--
(a) There is a contradiction in the assessee's statement, as assessee itself admit that as per judgment of Additional Collector, Customs dated 13-2-1998 they were ordered to deposit an amount Rs. 18, 589, 175 and assessee pleaded that the company against the said demand made provision of Rs. 7, 295, 295 during the year ending on 30-9-1995 and the remaining amount was provided during the current year the question is that how can a provisioning be made in the year ending on 30-9-1995, when the order to deposit the amount is made on 13-2-1998. Similarly the assessee statement that tax law also allows the liability to be charged in the accounts when it is. crystallized is also contradictory as the perusal of record reveals that the assessee-company has filed appeal against the decision of - Additional Collector before the Collector, Custom Central Excise & Sales Tax, however, the appeal is pending. Thus the creation of the provision for the Excise Duty of Prior year is an attempt on the part of the assessee to reduce its profitability for avoiding payment of dividends, as prescribed under the Income Tax Ordinance, 1979.
(b) Regarding the International Accounting Standard/Generally accepted accounting principles. This matter stands resolved by the appellate forums also and in principles it has been decided that the principles of accountancy cannot override the Income Tax law, in this regard the decision in the case of Messrs Tuticorn Alkali Chemicals and Fertilizers Ltd. 1998 PTD 900 [227 ITR 172] of Indian Supreme Court where reference was made to the judgment of English jurisdiction "in the case of S.S.C. Footwear Ltd. v. Ridghay (Inspector of Taxes) 1970, 77 ITR 857, 860 (CA) which was upheld by the House of Lords on appeal. Similarly the decision of Bombay High Court in C.I.T. v. Mahashtra Electrosmlt Ltd. (1995) 214 ITR 489 also refers.
The contention of the assessee that provisions of section 12(9A) do not confer any power under the Ordinance to question the statement of accounts and that the terms used by the legislature is "after-tax profits" and not "after tax assessed profit". The plea of the assessee is incorrect as detailed clarification in this regard has been provided through C.B.R. Circular No. F.12 (9A) I.T.P./99 dated 16-6-2001. So in the light of above and from the pleading of the parties; the contentions could be summarized as follows:
Assessee's point of view:
(a). assessee income being exempt from taxation under clause (118C) of the Second Schedule to the Income Tax Ordinance, 1979, he is also exempt from other of the Income Tax Ordinance as per protections of section 6 of Economic Reforms Act, 1992 and for none. Distribution of mandatory dividend he is also not liable to action under section 12 (9A) of the repealed Ordinance.
(b) As per International Accounting Standard (IAS) it has binding force over the other laws.
(c) The L/I.A.C. has not taken action on its own but on complaint of any one and on the directive of the Commissioner of Income Tax hence the action taken by I.A.C. is illegal.
(d) These are the reserves or gross profits of the year which could be subjected to taxation at 10% as per the provision of the section 12 (9A) of the repealed Ordinance.
Departmental view:
(a) Assessee income from manufacturing is exempt only while action under 12 (9A) is not protected under the provision of Protection of Economic Reforms Act, 1992, which is a separate levy to protect the interest of share-holders to receive their dividend well within time.
(b) Assessee has defaulted the distribution of dividend, hence liable to action under section 12 (9A) of R.O.
(c) These are the accumulative reserves which are to be taxed under section 12 (A) of the R.O.
(d) The L/I.A.C. has not initiated the action under section 66A of the repealed Ordinance on a complaint or on the directive of the Zonal Commissioner Income Tax, rather I.A.C. after examination of evidence and on application of its own mind has taken he action under section 66A.
Our finding is as under:
As regards the protection under section 6 of Economic Reforms Act, 1992 the plea of assessee is not correct. As per clause 118C it is the income only from the process manufacturing which is exempt from the taxation. Section 12 (9A) is a quite different levy, the said section of law has been inserted to protect the interest of share holders to pay them their dividend well within time. Therefore, the question of exemption from levy under section 12 (9A) does not arise at all. Therefore, on this score the impugned finding is endorsed by us. Assessee under the law was supposed to distribute the dividend as per the provision of law, he has failed to do so, hence action under section 12 (9A) is justified.
Regarding binding force of IAS force over the income tax law, this aspect of the matter has been discussed and dilated upon in a case reported as 2004 PTD 1135 wherein it has been held that for determination of income for income tax assessment purpose under the Income Tax Law, the pattern suggested by IAS has no binding force on the income tax law, because income tax law is independent and the purpose of said law is entirely different. To serve useful purpose the relevant portion of the aforementioned judgment is reproduced as under:--
89 Tax 342-2004 PTD 1135 relevant portion is reproduced as under:--
"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 Standards can be made binding for determination of income for assessment purpose 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 meaning is the best alterative. Resorting to other enactments has always been considered as unsafe. The terms used in International Accounting Standard have some times been considered as more relevant 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 in curium and take supports from the following judgments;
I.T.A. No. 51/LB of 2002 dated 14-5-2002 it says:
Above discussion makes it clear and word `profit' used in section 12 (9A) is to be defined in actual and normal sense. Keeping in view the provisions of I.T. 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 Standard 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 a declared and the assessee shall be entitled to all standard accounting and Audit principle and admissible expenses as per J.T. Ordinance, 1979. This observation finds support from the action of the assessing officer presuming the same as income for the impugned year. It further finds support from the arguments of learned L/AR who was referring some more figures from the accounts of this assessee to say that the same are inadmissible hence should be added in profit. We have ignored these entries, as the same 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. 665 of 2001 becomes relevant. Learned J. while deciding said appeal has given following comments:
"Before ending I would like to record that provision 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 status should be invoked as rarely as possible."
As regards the provision of excise duty the deduction made as expense from the -total income tax case law relied upon by the Revenue reported as 2000 PTD 2737 (ITR) about the liability it was rebutted by L/AR that the facts of the present case are distinguishable from it, viz. in that case contractual liability was disputed between the parties and matter was awaited for final disposal of appeal in the Court of justice. In the instant case the liability of Excise duty is a statutory liability, which has been arisen through the order of Additional Collector Custom/Excise dated 13-2-98. As per impugned order about the amount of Rs.7,295,295 the provision was made for the year ending on 30-9-1995 while for the balance amount of Rs. 11, 293, 880 the provision has been made in the year under appeal. The L/IAC observed that the assessee has disputed the demand created by the Additional Collector before the Appellate Authority, while till the disposal of appeal provision could not be made. The L/AR argued that duty, taxes or other levies e.g. Sale Tax or Excise Duty payable by the assessee does not become contingent merely because the assessee disputes the liability in future proceedings. It may be allowed as an ascertained liability under the mercantile system of accounting to this effect the judgments of Indian Courts have been referred by the L/AR of the assessee:
We are of the considered opinion that income tax laws recognize the cash as well as Mercantile System of Accounting. As per the mercantile system a fiscal liability under statute should be allowed in the year in which the transaction takes place, although:--
(i) The precise quantification of the liability in the form of an assessment in demand may come later.
(ii) The assessee may contest the liability in appeal or other proceedings and:
(iii) The assessee may have made no provision for the liability in his books.
(iv) Alternatively, assessee may claim a deduction in a subsequent year in which the taxes assessed and the demand is made, although the transaction may pertain to earlier years or he may even postpone his claim of deduction to the year in which he loses an appellate proceedings and the levy becomes final. This factor has been explained by the following case-law.
1. Kadnath Jute Manufacturing Co. Ltd. v. C.I.T. 82 ITR 363 SC.
2. Kerala Arecant'Co. v. C.I.T. 43 ITR 445
3. C.I.T. v. Royal Boot House 75 ITR 507
4. Ganesh Lal Ram Kumar v. C.I.T. 77 ITR 974
5. C.I.T. v. New Jehangir Vakial Mill Co. 37 ITR 136
6. Co. Ltd. Hancok v. General Reversionary-07 TC 358 (371)
7. C.I.T. v. Heralal 86 ITR 463
8. C.I.T. v. Jai Bajrang Nail Industries 5 ITR (sic).
In a reported case of (1960) 2 Taxation (V-405), the assessee's system of accountancy was mercantile. At the time of income tax assessment the assessee claimed Sales Tax liability as inadmissible deduction. The liability was not questioned but the claim was not allowed by income tax officer on the ground that the amount in question was neither debited in the account of relevant year nor paid in fact during the year in question. Before the Tribunal the point for decision whether the alleged claim for Sale Tax could be remitted back to the proper year or should be considered only when payment of sale tax was made. The Tribunal held that the claim should be allowed in the relevant year to which it actually related. In the present case demand of sale tax was created on 18-3-1998, hence it is related to the year under appeal. Therefore, in the light of above discussed facts we are inclined to accept the contention of assessee and to hold that assessee has rightly claimed the provision of excise duty for the year under appeal.
As regards the taxation of reserve whether be the accumulative or of the year concerned in which the required distribution of dividend has not been made, the issue has been dealt with in a case reported as 2004 (89) Tax (342) (Trib.) in which it has been held that the profits of the subject year and not accumulative profits of the earlier years which could be subjected to action under section 12(9A) of the repealed Ordinance. The relevant portion of the said judgment is reproduced as under:
"The perusal of the above quoted provisions of law reveals that subsection (9-A) 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.
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 sub-section (9A). In my opinion, as per most plausible interpretation of the term `reserves' used in the above mentioned sub-section (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 tax under the same provision which is not permissible under 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 (9-A) (supra) is the amount of undivided profit of the relevant year only and it does not include the brought forward reserves of the previous year. In my view as expressed above, I do not agree with findings of the learned Accountant Member on the issue under consideration, thus the same stands decided in favour of the assessee. As a result, the appeal of the assessee for the year under consideration i.e. Assessment year 1999-2000 succeeds in the manner as indicated above."
So in the light of above judgment in the instant matter too the reserves of the year under appeal only be subjected to action of taxation under section 12(9A) of the repealed Ordinance 1979.
In this way appeal is disposed of accordingly in the above indicated manner.
C.M.A/34/Tax (Trib)Order accordingly.