2009 P T D (Trib.) 2046
[Income-tax Appellate Tribunal Pakistan]
Before Khalid Waheed Ahmed, Chairman, Jawaid Masood Tahir Bhatti, Judicial Member and Mazhar Farooq Sherazi, Accountant Member
I.T.As. Nos. 4305/LB and 4916/LB of 2001, decided on 30/05/2009.
(a) Income Tax Appellate Tribunal---
----Powers of---Scope---Income-tax Appellate Tribunal had no authority to interpret the power of Legislature or the provisions of the Constitution.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.12 (9A)---Income deemed to accrue or arise in Pakistan---Methods of distribution of dividends---Provisions of S.12 (9A) of the Income Tax Ordinance, 1979 contain two methods of distribution i.e. to distribute cash dividend within seven months but no minimum requirement has been given, and to distribute dividend (not cash) but no time frame has been given.
(c) Income Tax Ordinance (XXXI of 1979)---
----S.12(9A), proviso---Income deemed to accrue or arise in Pakistan---Proviso to S. 12(9A) of the Income Tax Ordinance, 1979 is restricted to the assessment year commencing on the first day of July, 1999 issued by the Central Board of Revenue whereas in the assessee's case the income year commences from 1-10-1998 which extends to 30-9-1999---Clause (i) of the proviso talks about the income year ending on a date prior to 30th June, 1999 and clause (ii) converses about the income year ended on 30-6-1999 and both clauses did not cover the income year ending on 30-6-1999---Both clauses did not cover the assessee's income year.
(d) Income Tax Ordinance (XXXI of 1979)---
----S. 12(9A) & Second Sched., Part-IV, Cl. (59)---C.B.R. Circular No.26 of 1999 dated 30-9-1999---Income deemed to accrue or arise in Pakistan---Company listed in stock exchange was not hit by mischief of S.12(9A) of the Income Tax Ordinance, 1979 if it distributes 40% of after tax profits.
(e) Income Tax Ordinance (XXXI 1979)---
----S.12(9A)---Income deemed to accrue or arise in\ Pakistan---Reduction of profit by the Assessing Officer---Addition by taking reserve for the previous years---Validity---Allegation of Assessing Officer that company had reduced its profits by showing a provision of Twenty Million of tax liability and it could only be current tax liability and not the deferred tax liability and in case the deferred tax liability had to be included, it should be reasonable---For said reason, assessing officer reduced the said provision from Twenty Million to Rs.1,60,21,587 and in this way he had come to the conclusion that the distribution of reserve was short of 40% and had applied the formula of 50% as per S.12(9A) of the Income Tax Ordinance, 1979 without any legal force---Reserves taken by the Assessing Officer were related to previous years---Section 12(9A) of the Income Tax Ordinance, 1979 was not applicable to the reserves, of previous years and its. applications was only restricted to the reserves of assessment years 2000-2001-Addition made under S. 12(9A) of the Income Tax Ordinance,-1979 was deleted by the Appellate Tribunal--On the issue, assessee's appeal was allowed while the appeal filed by the department was dismissed.
India Industrial Corporation Ltd. v. C.I.T./1963/48 ITR 543; Legal Dictionary, Words and Phrases by Mian Mahbullah Kakahel, on pages 1616-1617 and 1970 76 ITR 656 at pp.660-61 ref.
2004 PTD (Trib.) 1135 rel.
(f) Income Tax Ordinance (XXXI of 1979)---
----S.12(18)---Income deemed to accrue or arise in Pakistan---Business advances---Addition of---Validity---Business advances or the trade advances were not hit by mischief of S. 12(18) of the Income Tax Ordinance, 1979---Addition made under S.12(18) of the Income Tax Ordinance, 1979 was deleted by the Appellate Tribunal and appeal filed by the assessee on the issue was allowed.
Income Tax Appeal No.491/2000 decided on 6-2-2001; 86 ITR 2 SC; 48 ITR 59 SC, 55 ITR 741 SC; Principles of Statutory Interpretation: 6th Edition, by Justice S.P. Singh; 1990 PTD 29 (32); PLD 1969 SC 241; (1989) 178 ITR 31 Andara Pardash High Court; (1991) 189 ITR 741 Orissa High Court; Chapter 10 of Maxwell on Interpretation of Statutes, 12th Edition; 1991 PTD 488 492 SC; 1996 PTD 505 (509); 2002 PTD 877; 2004 PTD 1659; 2007 PTD (Trib.) 139; 2007 PTD (Trib.) 1703; 2007 PTD (Trib.) 776; 2007 PTD HC 178; 2007 PTD SC 1377; 2002 PTD 613 Pesh. HC; 2006 PTD 774, 2007 PTD 1843 and 2006 PTD 2602 ref.
(g) Income Tax---
----Addition on account of Sugarcane 'Department, Anticane pouching and subsidy on transportation---Assessee contended that Assessing Officer had made addition without pointing out any instances of un verifiability of transaction or giving any basis which were illegal and unjustified---Validity---As no basis for additions were given, the addition made under all the heads of account were deleted by the Appellate Tribunal.
(h) Income Tax---
----Profit and Loss expenses---Disallowances of---Previous history---First Appellate Authority confirmed the disallowance made by the Assessing Officer as per history of the case but assessee submitted that Appellate Tribunal had deleted such disallowances made in the same pattern in the previous years---Keeping in view the previous history the disallowances were deleted by the Appellate Tribunal.
(i) Income Tax Ordinance (XXXI of 1979)---
---Ss. 24(i) & 25(c)---Deductions not admissible---Addition---No interference was warranted by the Appellate Tribunal regarding additions on account of lease rentals, additions made under S. 25(c), under S.24(i) of the Income Tax Ordinance, 1979 and regarding addition on account of depreciation as assessee had not pressed the grounds in -that respect---Appeal regarding such addition was dismissed.
Dr. Ilyas Zafar along with Syed Nasir Ali Gillani for Appellant (in I.T.A. No.4305/LB of 2001).
Shahid Jamil Khan, L.A. for Respondent. (in I.T.A. No.4305/LB of 2001).
Shahid Jamil Khan, L.A. for Appellant (in I.T.A. No.4916/LB of 2001).
Dr. Ilyas Zafar along with Syed Nasir Ali Gillani for Respondent (in I.T.A. No.4916/LB of 2001).
ORDER
The assessee in this case is a Public Limited Company listed with Stock Exchange and derives income from running a Sugar Mill. The cross appeals were filed for the assessment year under review i.e. 2000-2001 against the impugned order of the learned C.I.T. (A) dated 19-9-2001. The appeals were heard on 9-9-2004 and the order was passed by this Tribunal on 7-10-2004. Both the assessee as well as department filed Misc. applications for rectification/recalling of the above referred order of this Tribunal dated 7-10-2004. During the pendency of the Misc. applications the assessee filed a writ petition before the Honourable Lahore High Court bearing Writ Petition No. 547 of 2005 which was heard on 12-1-2005 and the Honourable High Court directed in that writ petition to decide the Misc. application filed by the assessee. The Misc. application filed by assessee was decided vide order dated 10-3-2005 in M.A. No. 567/LB of 2004 and the above referred order dated 7-10-2004 was recalled. In the meanwhile the Honourable Chairman of this Tribunal constituted Full Bench for the hearing of those cross appeals as the complex issues were involved in the matter. Subsequently vide order dated 28-1-2006 passed by this Tribunal the Misc. application filed .by the Department bearing M.A. No.538/LB of 2005 was also allowed regarding request for recalling the order dated 7-10-2004 on the cross appeal filed by the Department which was already recalled vide Miscellaneous Application filed by the assessee.
Following grounds have been framed by the assessee in his appeal:-
1. "That the order of the learned Commissioner of Income Tax (Appeals) is deficient and imperfect in law and adverse to the facts of the case.
2. That, all the observations on the basis of which the Assessing Officer has completed the order are incorrect and untrue and the learned C.I.T.(A) has not cared to consider the submissions of the appellant.
3. That the Commissioner of Income Tax (A) is not justified to set-aside the addition made under section 12(9A) of the Income Tax Ordinance, 1979, when the entire legal position was explained to her and she could decide the issue on the basis of the arguments put before her.
4. That the learned Commissioner of Income Tax (A) is not justified to confirm the addition under section 12(18) of the Income Tax Ordinance, 1979 ignoring and misconstruing the contentions taken before her.
5. That the learned Commissioner of Income Tax (A) is not justified to confirm the addition on account of Lease Rentals by only allowing the depreciation on these asets.
6. That the learned Commissioner of Income Tax (A) is not justified to confirm the addition under section 25 (c) of the Income Tax Ordinance, 1979.
7. That the learned Commissioner of the Income Tax (A) is not justified to fix the additions in the account of Cane Development at Rs.300,000 in the account of Anti-Cane Poaching Account at Rs.200,000 and Subsidy on Transportation Account at Rs.2,500,000 which is without any justification.
8. That the learned Commissioner of Income Tax (A) is not justified to confirm the addition in the following Trading & Profit and Loss A/c.
| (i) Repair & Maintenance to be deleted | Rs.252,071 |
| (ii) Travelling & Conveyance | Rs.340,476 |
| (iii) Other expenses. | Rs.573,284 |
| (iv) Other (selling) | Rs.228,116 |
9. That the learned Commissioner of Income Tax (A) is not justified to set aside the addition under section 24(i) as she should have decided the issue on the basis of submissions taken below her.
10. That the Assessing Officer did not afford the proper opportunity to reply to his Show-Cause Notice under section 62 of the Income Tax Ordinance, 1979 and the learned C.I.T. (A) has not adjudicated the issue properly.
11. That the learned Commissioner of Income Tax (A) is not justified to confirm the addition on account of depreciation, disallowed on the allegation of not using the machinery during the relevant period pertaining to Assessment Year 2002-2001.
While the department in the cross appeal has raised following issues:-
1. That the learned C.I.T. (Appeals) was not justified to set-aside the addition under section 24(i) of the Income Tax Ordinance, 1979 without cogent reason.
2. That the learned C.I.T. (A) was not justified to remand back the case on issue of section 12(9A) of Income Tax Ordinance, 1979 with observation that declaration of dividend amounts to "Distribution" of dividend.
3. That the learned C.I.T. (A) was not justified to reduce the addition made under the head of P & L Account without any reasonable grounds.
During the hearing of the appeals the learned counsel of the assessee has argued the matter at length based on both facts and legal aspects submitting before the Bench two Paper Books containing copies of judgments on which he has placed reliance during arguments and the documents in support of his contentions.
He has contended regarding the addition made under section 12(9A) of the repealed Ordinance 1979 that this addition has been made without going into the merits as spelled in our reply to Show-Cause Notice under section 62, which has been reproduced in the assessment order determinedly misconstruing the legal facts. According to him the subsection (12) of the repealed Income Tax Ordinance, 1979 was introduced through Finance Act, 1999. Under the said subsection, if after-tax profit of the assessee-Company, which are earmarked as reserved of the company, are not paid out as cash dividends and the amount of reserve exceeds 50% of the paid up capital of the company, the excess amount is deemed to be the income of the assessee-Company for that year. The said relevant section 12(9A) is reproduced as under:--
12 (9A)
"Where an assessee, being a public company other than a scheduled bank or a modaraba, derives profits for any income year but does not distribute cash dividends within seven months of the end of the said income year, or distributes dividends 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:--
(iii) 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
(iv) Where the income year ended on the thirtieth day of June, 1999, and the distribution is made within a period of eight months reckoned from the 'first day of July, 1999.
Explanation-For the purposes of this subsection, the expression "reserves" shall have the meaning as may be prescribed."
Learned counsel has argued that vide S.R.O. No. 969(1)/99 dated 27-8-1999, issued under section 14(1) of the Ordinance, clause (59) was inserted in Part-IV of the Second Schedule to the late Ordinance, 1979. Under clause (59), exemption is granted from the impugned section 12(9A) of the late Ordinance 1979. A listed-Company qualifies for an exemption under clause (59), if it distributes 40% of its after-tax profits of the relevant year. While public limited company (unlisted) is totally exempt from the operation of the impugned section. According to learned counsel the assessee-Company took the shelter of the above referred Circular No. 26/1999 dated 30-9-99 which was issued on the basis of Clause (59), Part-IV of the second schedule to the Income Tax Ordinance, 1979 inserted through S.R.O. 969(I)/99 dated 27-8-99. The relevant clause (59) and the said Circular No. 26 are reproduced hereunder: --
Clause (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 or 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 in 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."
Circular No. 26/1999
"Subject: TAX ON RESERVES UNDER SECTION 12(9A) OF THE-INCOME TAX ORDINANCE, 1979
Through the Finance Act, 1999, a' new subsection (9A) has been inserted in section 12 of the Income Tax Ordinance, 1979 which provides for taxation of reserves in excess of fifty per cent of the paid-up capital of a public company @ 10% if such company derives profit for an income year but does not distribute cash dividend. This provision,' which is applicable from assessment year 1999-2000 onwards, allows, in relation to assessment year 1999-2000, that the companies whose income year ended on 30th June, 1999, may distribute such dividend within eight months reckoned from 1st July, 1999. Similarly, companies whose income year ended on a date prior to 30th June, 1999, can make the distribution within three months reckoned from 1st July, 1999 in order to comply with the cash dividend distribution requirement. The aforementioned provision, however, does not apply to:-
(i) a company listed on a stock exchange which distributes at least forty per cent of its after-tax profits of the relevant income year;
(ii) a public company not listed on the stock exchange;
(iii) a trust or a company in which not less than fifty per cent shares are held by the Government;
(iv) a leasing company as defined in the Leasing Companies (Establishment and Regulation) Rules, 1996;
(v) a scheduled bank;
(vi) a modaraba.
2. A new clause (59) has accordingly been inserted in Part-IV of the Second Schedule to the Income Tax Ordinance, 1979, through S.R.O. 969 (I)/99 dated 27th August, 1999.
3. Through S.R.O. No.1100(I)/99 dated 30th September, 1999 a new rule 203AA has been inserted in the Income Tax Rules, 1982, which defines the expression "reserves", for the purposes of subsection (9A) of section 12 of the Income Tax Ordinance, 1979, as follows:--
"reserves" includes amounts set-aside out of revenue or other surpluses excluding capital reserves, share premium reserves and reserves required to be created under any law, rules or regulations.
4. Consequently, if due to any legal restrictions on distribution of any particular income, profit or gain, which cannot be distributed and has to be set apart or placed in a reserve, such a reserve, like the one created in pursuance of section 248 of the Companies Ordinance, 1984 would be treated as a "reserve required to be created under the law:"
According to learned counsel section 12 (9A) inserted by Finance Act, 1999 levies tax-on excess reserve of companies, where a company levies profits in any year but does not declare cash dividends and its reserves exceed 50% of its paid-up capital, or if it declares cash dividend but its balance reserves still exceed 50% of its paid up capital, such excess reserves shall be deemed to be the income of the company under subsection (9A) of section 12 and tax shall be payable thereon @ 10% in accordance with paragraph "F" of Part-V of the First Schedule. The said subsection further provides that the companies should distribute cash dividends within seven months of the end of the relevant income year. However, the companies whose income year ended on 30th June, 1999 can distribute the dividends within eight months. He has contended that a special provision has been made for the assessment year 1999-2000 for companies whose accounting year ended on a date prior to 30th June, 1999 and such companies may distribute cash dividend within a period of three months reckoned from the 1st day of July, 1999 i.e. by 30th September, 1999". He has contended that the said provision, speaks of the word `distribute' and not the `payment' and the assessee company declared the Dividend well in time and also made the payment prior to 30-6-2000. According to him some of the Shareholders did not care to receive the payments and preferred to have the money in subsequent months and the entire amount was hence paid by 10-8-2000. Learned AR has argued that the proviso to section 12(9A) restricts the application of the provision of Assessment Year 1999-2000 only and applied where income year ends prior to the 30th day of June 1999. According to learned counsel since the assessee's income year ends on 30th September, 1999 therefore, the assessee's case is not covered by above cited two categories as in the 1stparagraph of this provision two aspects have been emphasized by the legislature:
(i) "The company does not distribute "cash dividend" within seven months of the end of the income year, or
(ii) The company distributes "dividend" to the extent that it leaves residual reserves in excess of 50% of the paid up capital of the company."
In this regard elaborating his point of view he has submitted that there is a comma between the above conditions, that demonstrate that both the conditions are independent and absolute from each other. The comma is followed by an "or" which shows that two conditions are to be read exclusively and solely, of each other. In (i) above "cash distribution" is a must and a time frame has been fixed, whereas the extent to minimum, required has not been defined. In (ii) above, the legislature has used the term "dividend" and not the term "cash dividend as in (i) above. He has argued that reading (i) and (ii) referred above would logically conclude that in Para (ii) above the reference has been made to other than cash distribution. Here the minimum amount of dividend distribution has been fixed whereas no time frame has been given which should under the provision of Companies Ordinance, 1984. According to learned counsel this interpretation is also strengthened by S.R.O. # 969(I)/99 dated 27th August, 1999 which demonstrate that the provision, of section 12 (9A) may be applied as under:--
| "Nature of dividend | Minimum distribution required | Time frame within which dividend is to be distributed |
| Cash Dividend | No restriction (may be as low as 0.1%) | Within seven months of end of the income year, or |
| | | For an income year ended on a date prior to the thirtieth day of June 1999, within a period of three months reckoned from the first day of July, 1999; or |
| | | For an income year ended on the thirtieth day of June, 1999 within eight months from the first day of July 1999. (Assessee's income year ends on 30-9-1999 and is not covered by both categories) |
| Cash and or knd. (specie) Dividend | To such an extent that the balance reserves do not 50% of paid-up capital or 40% of after tax profit for the year. | No time frame given-dividend may be distributed at any time within a reasonable time". |
Learned counsel is of the view that from the above it appears that in the case of the assessee, the addition under section 12 (9-A) of the Income Tax Ordinance is not justified as the assessee's case is not covered by any of the above conditions.
He has contended that section 12 (9A) is not applicable in the instant case having its Income Year ending on 30-9-1999, whereas the provision only applies to the Companies having income year ending prior to 30-6-1999, whereas the provision only applies to the Companies having income year ending prior to 30-6-1999 or on 30-6-1999. According to learned AR under the late Ordinance, 1979, income tax is levied once on the total income of the income year of the assessee. Under section 12 (9A) of the Ordinance, income tax is being imposed twice on the same amount of income held in the hands of the assessee, which is outside the scope of the Ordinance: The Revenue Reserves/ General Reserves are made after the payment of tax, therefore, the tax on these reserves is a double taxation. He has contended that the double taxation is bad in law unless specifically allowed by legislation in clear and specific terms. According to him section 12(9A) of the Ordinance does not carry any such mandate of law and has the effect of taxing the same income of the assessee twice which is blatant violation of Articles 4,23 and 24 of the Constitution. He has argued that total income as explained in section 11 of the Ordinance contains income from whatever source derived which is received in Pakistan or which is deemed to accrue in Pakistan. If 'the income actually is received in Pakistan, the same income cannot also be considered to have deemed to have been accrued. Deeming clause under law is implied to bring under the net, any income which otherwise does not tangibly exist. He has submitted that in the present case the income has actually 'been received by the assessee and then taxed. To label actual income as deeming income cuts through the concept of a deeming provision and is, therefore absolutely illegal. According to learned AR the regime of presumptive taxation under the Ordinance, nowhere brings under the net the amount which already stands taxed. Once the total income is taxed it loses the character of total income and cannot again be brought under the tax net. He has contended that the Ordinance is a taxing statute and can only impose tax. Income Tax cannot be used as a tool to pressurize listed-Companies to pay cash dividends. According to him such a provision falls outside the mandate of a taxing statute and cannot be introduced through a money bill. He is of the view that section 12. (9A) is contrivance on the statute. He has contended that under the Companies Ordinance and under the Articles of Association of the assessee company, there is no legal requirement declaring dividends. A company may not declare dividends, or instead, issue bonus shares or restrict the amount of dividends to be declared. He is of the view that section 12(9A) of the Ordinance is indirectly doing which cannot be done directly. He has contended that the Ordinance can impose tax and cannot achieve other oblique ends through the tool of taxation. According to him impugned legislation is not only mala fide but is also in stark violation of the Constitution and entry 47 of the Federal Legislature List. He has contended that clause (59) of Part-IV of the 2nd Schedule grants exemption under section 14(1) of the Ordinance from section 12(9A) which does not apply to a listed-Company if 40% of its after-tax profits are distributed by 10-8-2000. In the present case, more than 40% after tax profits have been distributed by 10-8-2000 and according to learned counsel the impugned addition is absolutely illegal. He is of the view that the exemption under Clause (59) for a listed company, does not mention of cash dividends or gives any timeframe for distribution of after-tax profits of a relevant year. These two important aspects have been totally brushed aside in the impugned order. He has contended that the exemption itself is discriminatory, in as much as it creates a distinction between a public listed and a public company. Firstly, there is no intelligible differentia and secondly, the classifications are not required under the law as in this way Article 25 of the Constitution stands offended. According to him the section 12(9A) deals with a public company. The exemption of the said section cannot further create classifications within public company. The listed public company is entitled to enjoy the same benefits as the public limited company be fully exempt from the rigours of section 12(9A) of the Ordinance. He has contended that the Supreme Court of Pakistan has already settled this issue and has disallowed the charge of income tax of free reserves of the company under the Income Tax Act, 1922. He has submitted that the assessee fully qualified under the exemption granted under the above referred clause (59). According to learned counsel the said exemption is being blatantly misread by the department which reflects of malice in law, malice in fact, and the treatment meted out to the best tax payer in the country is deplorable. He has submitted that the discretion of the Assessing Officer has been swayed by irrelevant considerations of revenue recovery targets. He has submitted that the assessee is being deprived of his lawful benefit under the exemption clause. According to learned AR the impugned order is colourable and tainted with irrelevant considerations.
Regarding the addition under section 12(18) learned counsel for the assessees has argued that the assessee during the year under reference received certain sum as advance from Mustafa Khan of Quetta, and Muhammad Bilal Peshawar. The Assessing Officer availing the benefit of amendment in section 12 (18) vide Finance Act, 1998 effective from 1st July, 1998 made addition of advance money as according to him the same was not received through cross cheques. He has contended that the Assessing Officer made the addition under section 12(18) against the advances received from two customers pertaining to the supply of sugar. This addition has been made without discerning the facts of the case and disregarding the reply made to Show-Cause Notice under section 62. He has contended that the addition has been made wilfully misinterpreting the legal aspects. According to learned counsel section 12(18) of the Income Tax Ordinance, 1979 was substituted by Finance Act, 1998 and the words "Advance or Gift" were added along with the word "Loan", irrespective of amount claimed or showed, to have been received from any person otherwise than by a Crossed Cheque or through Banking Channel from a person holding NTN, to be deemed to be the income of the claimant or receiver. There is an exemption if the amount is received from a Banking Company or C.B.R. Notified Financial Institution. The transaction through a Banking Channel is undefined and may include a demand draft, pay-order, telex transfer etc., along with the requirement .of the NTN of the person paying the amount. He has argued that the interpretation of this provision in different modes has created many difficulties, as there may be several genuine transactions, which can be hit by this provision. These situations may include transfer through journal entries, transfer amongst family members and sister concerns, advance received for supply of goods, even through Banking Channels but without NTN payers. According to learned A.R. the last situation has mainly hit the business community, which transact their business by receiving advances before supply of goods. He has contended that this situation is very common in the business sector that the advances are received prior to the supply of goods. If all these advances are made chargeable to tax under section 12(18), it means to tax the entire supplies (Sales) treating them as income and again by application of G.P. rate, to tax the Income so arrived. This may create the colossal hardship, as once the entire sales can be treated as deemed income to be taxed at 33% and secondly the income can be arrived by application of G.P. rate, and taxed again at the same rate. A question has arisen regarding the interpretation of word "advance" used in section 12(18). Some assessing officers are of the view that the same covers all types of "advances" including advance from the customer in respect of stock-in-trade. The said interpretation is incorrect and is a crude attempt to make arbitrary 'additions. He has argued that the "advances" contemplated under section 12(18) are non-business advances. The advances from customers pertaining to stock in trade are outside the ambit of section 12(18). This is evident from the word "loan" used before "advance" and word "gift" used after "advance". He has argued that all these three denote non business financial transactions and do not pertain to business transaction pertaining to stock-in trade. According to learned AR as per principle of interpretation of statute, the use of word "advance" in between words of "loan" and "gift" clearly indicate the intention of the legislature that word advance in this context means financial transaction and not business transaction. The words loan and gift clearly reflect non-business transaction and placing of advance in between them cannot be given any other meaning. He is of the view that as per settled principle of taxing statute where two interpretations are equally possible then the one favourable to the subject is to be adopted. This principle has been retreated by a Division Bench of the Honourable Lahore High Court in Income Tax Appeal No. 491/2000 decided on 6-2-2001 pertaining to question that whether share deposit money exceeding the authorized capital is liable to addition under section 12(18) in respect of loan. The Honourable Court has observed that "the above principle can also at times be extended to factual situation, warranting application of deeming provision. It means where the transaction can equally be placed within or outside the dividing taxing line, the one falling outside should be preferred against the one falling inside".
Learned A.R. has argued that from legislative history it is evident that intention and object of enactment of section 12(18) is to check fictitious loans and other similar or equivalent terms that is "advance" and "gift". This is evident from the analysis of the following ingredients of purposive approach of interpretation:
What was the law before the each enactment?
What was the mischief or defect for which the law did not provide
What is the remedy the law has provided? What is the reason of the remedy?
He has contended that the Honourable Lahore High Court in its aforesaid judgment pertaining to "share deposit money" had held that "it was only fictitious loan which were intended to be curbed". In this regard C.B.R.'s Circular No. 6 of 1987 has also been referred by the Honourable Court wherein the provision of section 12 (18) was explained when the same was introduced. The Circular explained that the provision has been introduced to check, back-dated fictitious loans. The scope of the provision was enlarged in 1998 by adding similar terms of advance and gift within its ambit. So all the three transactions of loan, advance and gift are non-business financial transactions. He has contended that the section 12(18) is a deeming provision and as per principle of interpretation, deeming provision creating legal fiction have to be strictly constructed. According to learned A.R. in another settled principle that provision creating a legal fiction had to be interpreted in such a manner as it did not cause injustice to a party. He has referred another principle according to which the legal fiction created for a definite purpose should be limited for the purpose and cannot be extended beyond their legitimate needs. In this regard reliance has also been placed on the following Indian reported decisions.
86 ITR 2 (S.C.), 48 ITR 59 (S.C.), 55 ITR 741 (SC)
Learned counsel for the assessee in this respect has also been referred following extracts from the book "Principles of Statutory Interpretation: 6th Edition, by Justice S.P. Singh:
"In case of doubt, it is always safe to have an eye on the object and purpose of the statute, or reason behind it". [page-10]
"Words and phrases occurring in a statute are to be taken not in an isolated or detached manner, disassociated from the context, but are to be read together and construed in the light of the purpose and object of the Act itself" [page 26]
"When the context makes the meaning of a word quite clear, it becomes unnecessary to search for and select a particular meaning out of the diverse meanings a word is capable of, according to lexicographers." [page-26]
"Where the language of a statute in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence." [page-90]
Learned AR has contended that the interpretation of Assessing Officer stretching the advances from customers pertaining to stock-in- trade as liable to addition under section 12(18) has not been heard by the trade and industry in the country. The said interpretation would bring unrest and a chaotic condition in the business activity. Learned counsel has contended that it is now well settled that even tax legislation or its interpretation must stand the scrutiny of the fundamental rights guaranteed by the Constitution. The item taxed should rationally be capable of being considered as the income of a citizen. Law is bad, if it transgresses or impinges upon a Fundamental Right. In this respect the case reported as 1990 PTI7 29 (32) has been referred.
As regards to the legal standing of the provision of 12(18), and section 12(9A) the learned AR submitted that these provisions are neither covered by "Total Income" under section 15 of the repealed Income Tax Ordinance, 1979 nor under "Non Obstante Clause". He has in this respect referred section 15 ibid and submitted that the total income of a person is only chargeable to tax which comprises, salary, interest on securities, income from house property, capital gain and income from other sources. To elaborate income from other sources, he referred section 30(2) and submitted that it covers only dividend, interest etc., ground rent, hiring of machinery, building etc. and income to which sections 12(12) and 13 apply. He therefore added that sections 12(18) and 12(9A) is neither covered by section 15 (total income) nor covered by section 30(2) (other sources). For rest of the charging provisions the term "Notwithstanding anything contained in the Ordinance" has been used, and in that case these provisions have become independent of section 15 or 30 (2). Section 12(18) and section 12(9A) is not supported by "Non Obstante Clause" even, hence not independent and should be covered either by section 15 or 30(2), which is not the situation in the case of these sections. It is neither any deemed income under any head. He added that the examples of use of "None Obstante Clause" are 79 in the whole Ordinance but section 12(18) and section 12(9A) is neither covered by it nor by any head of income. He has submitted that every subsection of section 12 is covered by any head of income. He has in this regard furnished the list as under:--
| Section 12 | Covered by head of Income |
| Section 12(1) | Salary Income |
| Section 12(2) | Income from business |
| Section 12(3) | Interest Income |
| Section 12(4) | Royalty |
| Section 12(5) | Salary Income |
| Section 12(6) | 12(3), (4) and (5) Includes Govt. |
| Section 12(7) | Interest Income |
| Section 12(8) | Business Income |
| Section 12(9) | Bonus |
| Section 12(9A) | |
| Section 12(10) | Dividend Income |
| Section 12(11) | Dividend Income |
| Section 12(13) | Income from House Property |
| Section 12(14) | House Property |
| Section 12(15) | House Property |
| Section 12(16) | Income from other sources |
| Section 12(17) | Subsections (13) to (16) |
| Section 12(19) | Lease Income |
| Section 12(12) | Income from other sources under section 30(2)(e) |
| Section, 12(18) | |
Learned AR has referred the reported decision of the Honourable Supreme Court of Pakistan PLD 1969 SC 241 and stated that Court can read down or read in, to remove anomalies created by unhappy language of law. He has in this respect referred (1989) 178 ITR 31 (Andara Pardash High Court) wherein it is stated that when a provision offends a Fundamental Right, reading down is permissible. In another case referred by the learned counsel reported as (1991) 189 ITR 741 (Orissa High Court) it is held that if provision is arbitrary it can be read down. Learned counsel in this regard also referred Chapter 10 of Maxwell on Interpretation of Statutes, 12th Edition, and submitted that the construction must be agreeable to justice and reason. He has submitted that the people of Pakistan have the right to order their lives in accordance with the fundamental principles and basic concepts of Islam as giving of Qarza Hasna is basic element in it and according to him the provision of section 12 (18) is against Articles 2A, 31 and 227 of the Constitution of Islamic Republic of Pakistan. Arguing further he cited 1991 PTD 488 (492) (SC) wherein it has been held that so long the laws are not made Islamic their interpretation and enforcement to be adopted in accordance with Islamic Philosophy and its common law. He has referred 1996 PTD 505 (509) and stated that tax laws are not civil laws, it is not essential to follow in all circumstances even there is harsh treatment. The tax proceedings should not be harsh and be relaxed. He further referred the case in which advance share deposit money was not taken as a loan or advance. He has in this regard referred decision of the Honourable Lahore High Court which has been confirmed by the Honourable Supreme Court of Pakistan vide 2002 PTD 877. He has referred the ITAT's decision reported as (2004) 89 Tax 295 2004 PTD 1659, pointing out the following head notes:---
"Whether nature of advance in fact is not advance in cash other than ordinary business transaction which is not caught by mischief of provisions of section 12(18) and amount received against, purchase of tickets cannot be treated as advance in terms of provision of section 12(18)-Held Yes."
He has also pointed out that the present Return of Income Tax as framed by the C.B.R. which is Form Annex. VI from where item 7 has excluded an advance payment for the sale of goods or supply of services from the ambit of loan, advance and deposits which reads as under:--
"Loan, Advance (other than advance against sale of goods or supply of services), deposit for issuance of shares or gift received otherwise than by a crossed cheque drawn on a bank or through banking channel from a person holding NTN card."
In this respect learned counsel has placed before us the copies of ledger accounts, Invoices and Sales Tax Payments in order to prove the genuineness of the Trade Transaction and has also placed before us the following reported decisions:--
2007 PTD (Trib.) 139 wherein it has been held that. business advance not an advance under section 12(18)
2007 PTD (Trib.) 1703 wherein it has been held that Trade Advance not hit by mischief of section 12(18)
2007 PTD (Trib.) 776m wherein it has been held that cash payments by Directors not loan under section 12(18)
2007 PTD (HC) 178 sum not claimed as loan-Can't or ruled that if used in business, is a loan.
2007 PTD (SC) 1377 Word "Cash" not expressly used in section. 12 (18),
2002 PTD 613 (Pesh. HC)
2006 PTD 774 Trade transactions are 'not covered by section 12(18),
2007 PTD 1843
2006 PTD 2602 2002 PTD 877 (SC)
2004 PTD 1659 2006 PTD 774
Reading the additions made on account of\Lease Rentals, /25(c) Sugarcane Development, Anticane Pouching and Subsidy on Transporta tion account which has been upheld by the learned C .1. T. (A) has contended that these additions are without any basis. Learned counsel has also objected against disallowances out of profit and loss accounts.
On the other side, the learned L.A. representing the department is supporting the treatment meted out by the officers below. He has contended that the matter in respect of applicability of clause (59) of Part-IV of Second Schedule of late Income Tax Ordinance, 1979 has been discussed by the Assessing Officer with the help of figures. According to him Assessing Officer has very rightly arrived at the conclusion that after-tax profit as per IAS 12 deferred taxation is liable to be calculated on the basis of "liability method". The assessee had always been charging deferred taxation at liability method. For, the reasons discussed by the Assessing Officer the allowance of current year tax liability for determination of after-tax profit for application of provision of section 12(9A) has rightly been made. Learned L. A. has contended that the main stress of the learned AR is on the word "distribution" as according to him "distribution" does not mean the actual payment of cash. He has in this respect referred an Indian judgment cited as Central India Industrial Corporation Ltd. v. C.I.T. 1963/48 ITR 543 wherein it has been held as follows:--
"The short question that arises for consideration is whether the word "distribution" as used in the above subsection means "actually paid to the shareholders" or "declared as dividends by the company". The ordinary meaning of the word "distribute" is "divide" or "apportion". Distribution in general is the act of dividing or making an apportionment. No doubt, in relation to distribution of publications or periodicals the term may mean delivery to persons. But when one speaks of distribution of a sum of money amongst a number of persons, what is connoted isthe division or apportionment of the amount amongst the persons and not actual payment of the amount of their shares. A declaration of dividend by the company is nothing but a declaration of the distribution of the profits as dividends. On the declaration of dividend, the shareholders get 'a right to use the company for the amount of the dividend."
According to learned L.A. definition of the word "distribution" appears in the following terms in a legal dictionary, Words and phrases by Mian Mahbullah Kakakhel, on page 1616-1617. It may be noted that the definition is from a judgment of an Indian High Court:---
"Distribution and payment---The expression "distribution" and "payment" as used in the Income Tax Act, 1922, as it stood prior to the introduction of Finance Act, 1956 connotes different meanings. "Distribution" is division among several persons. It connotes the idea of apportionment among more than one person. In the case of "distribution" the recipients would be more than one, while in the case of "payment" the recipient may be a single person. Where two different expressions with two different meanings have been used in a statute, unless there is clear indication to the contrary, such construction should not be made as to make the two expressions synonymous. (1970) 76 ITR 656 at pp 660-61 (Cal.)
Learned LA has contended that the contentions made by the learned AR of the assessee-Company are of civil nature and don't relate to Income Tax. .He has submitted that the tax laws are to be strictly construed in accordance with the language of the statute and no equity is germane of relevant. He also added that the Tribunal being creature of Income Tax Ordinance, cannot hold whether certain provision is against Constitution. He has asserted that the word distribution also include payment and sections .12(9A) and 12(18) of the Ordinance are deemed provisions and are not subject to "non obstante clause".
In reply Dr. Ilyas Zafar learned AR of the assessee-company submitted that the case-laws referred by him pertain to income tax law and not the civil law. The word distribution does not include payment as held in case laws, already referred. He also pointed out that the Tribunal being creature of Income Tax Statute cannot hold any provision against Constitution but should interpret every law in conformity and in compatibility of Constitution. He also stressed that the present trend of the international Courts is to interpret the law in accordance with the object of law instead of its language.
Regarding addition made under section 12(18) learned LA has contended that the legislature has introduced the word "advance" received otherwise than by Crossed Cheque for documentation of the economy. According to him it is for a definite purpose which must be followed in letter and spirit. Regarding the cross appeal filed by the department learned L.A. has argued that the learned C.I.T. (A) has remanded back the addition made under section 24(i) without any justification and has also allowed excessive relief in the P&L accounts.
We have heard the learned representatives from both the sides and have also perused the impugned orders of the learned C.I.T. (A), the assessment order, the case-laws referred from both the sides and the other relevant record placed before us from both the sides. Regarding the issue of section 12 (9A) which has been agitated in cross appeals from both the sides we have found that the learned C.I.T.(A) has remanded back the matter with the following observations:'-
"After going through the arguments of the appellant and reported judgments, I feel no hesitation in holding that declaration of dividend by company fulfils the conditions of distribution of dividends. The important thing in this case is to see the date of declaration of dividend and that whether declaration of dividends was according to provision of section 12(9A). The case is silent on the issue which needs further probe the case is remanded back to the Assessing Officer to ascertain:--
(1) Whether the declaration of dividend falls within the prescribed time period.
(2) Whether the declaration by the appellant was in accordance with the provisions of section 12(9A).
The Assessing Officer shall confront the appellant on the issues and then finalize the matter in accordance with law."
It has been contended on behalf of the assessee that reserves are Post Tax Profit and income tax cannot be levied twice which is violation of Articles 13 of the Constitution of Islamic Republic of Pakistan as the profits once taxed retained as reserves ceases to be income and according to learned counsel of the assessee the legislature has no authority to assess cumulative income in one year. In this respect a maxim from Brooms legal maxims. "Nemo debet Pro edams cause" has been referred which means that "it is a rule of law that man shall not be twice vexed for one and the same cause". We do not want to comment on these arguments of the learned counsel as this Tribunal has no authority to interpret the power of Legislature or the provisions of the Constitution. Regarding the methods of distribution of dividends we are of the view that the provision of Section 12 (9A) contains two methods of distribution:--
(i) to distribute cash dividend within seven months but no minimum requirement has been given.
(ii) to distribute dividend (not cash) but, no time frame has been given.
It has been contended by the learned representative of the assessee that in the instant case assessee is -not covered by any of the above conditions. We have found force in the contention of representative of assessee that Proviso to section 12(9A) is restricted to the assessment year commencing on the first day of July, 1999 issued by the C.B.R. whereas in the present assessee's case the income year commences from 1-10-1998 which extends to 30-9-1999. We have further noted that clause (i) of this Proviso talks about the income year ended on a date prior to 30th June, 1999 and clause (ii) converses about the income year ended on 30-6-1999 and both clauses do not cover the income year ended on 30-9-1999 therefore both clauses do not cover the assessee's income year. Learned counsel of the assessee referred Circular No. 26/1999 dated 30-9-1999 explaining the Clause (59) of Part-IV of Second Schedule to the repealed Ordinance, 1979 wherein it has been clarified that the company listed in stock exchange is not hit by mischief of section 12(9A) if it distributes 40% of after-tax profits. In the present case as .per the contention of the learned representative of the assessee company has' been distributed. The allegation of the Assessing Officer is that the company has reduced its profits by showing a provision of 20 Millions of tax liability and according to him it can only be current tax liability and not the deferred tax liability and in case the deferred tax liability has to be included, it should be reasonable. For this reason he has reduced the said provision from 20 Millions to Rs.1,60,21,587 and in this way he has come to conclusion that the distribution of reserve is short of 40% and has applied the formula of 50% as per section 12(9A) without any legal force. We find no reason not to accept the contention of the learned representative of the assessee that the reserves taken by the Assessing Officer are related to previous years. In this regard complete detail of Revenue Reserves for the last ten years has been placed before us which shows that no reserve pertained to assessment year, under review i.e. 2000-2001, the detail is reproduced hereunder:
| | | For the year | Up to the |
| | | Rs. (000) | Years BalanceRs. (000) |
| | Position Upto A/Y 1990-91 | | 52.000 |
| 1. | 1991-92 | 15.000 | 67.000 |
| 2. | 1992-93 | - | 67.000 |
| 3. | 1993-94 | 16.000 | 83.000 |
| 4. | 1994-95 | 10.000 | 93.000 |
| 5. | 1995-96 | 7.500 | 100.500 |
| 6. | 1996-97 | - | 100.500 |
| 7. | 1997-98 | 14.500 | 115.000 |
| 8. | 1998-99 | - | 115.000 |
| 9. | 1999-00 | - | 115.000 |
| 10. | 2000-01 | (19.000) | 96.000 |
From the above figures it is apparent that for the year under review there is a minus entry and the entire reserves amounting to Rs.96 Million pertained to previous years. We are of the view that section 12(9A) is not applicable to the reserves of previous years and its application is only restricted to the reserves of assessment year 2000-2001. In this regard the view taken in the decision of this Tribunal reported as 2004 PTD (Trib.) 1135 is upheld.
In view of these facts, circumstances and legal position the addition made under section 12(9A) is deleted. The appeal on this issue filed by the assessee is allowed while the cross appeal filed by the Department is dismissed.
Regarding the addition made under section 12(18) we are of the view that although the learned counsel for .the assessee has argued the matter on different aspect but we do not want to stretch the matter further as the issue has already been thrashed out in many cases by this Tribunal as well as by the Honourable Superior Court holding that the business advances or the Trade advances are not hit by mischief of section 12(18). Cases referred in this regard has already been reproduced in the above paras of this order. The addition made under section 12(18)' of the late Ordinance 1979 is therefore also deleted. The appeal filed by the assessee on this issue is allowed.
The assessee has agitated against the additions on account of Sugarcane Development, Anticane Pouching and Subsidy on Transportation. Although the learned C.I.T.(A) has reduced the addition in all the above accounts but it has been contended by the learned AR that the Assessing Officer has made the addition without pointing out any instances of unverifiability of transaction of giving any basis which are therefore illegal and unjustified. We find force in the contention of the learned AR as no basis for additions are given therefore the additions made under all the above referred three heads of accounts are deleted.
Likewise, the disallowance made in the P&L accounts under the head repair and maintenance, travelling and conveyance, other expenses and other (selling), we have found that the learned C.I.T. (A) has confirmed the disallowance made by the Assessing Officer as per history of the case but learned representative of the assessee has submitted that this Tribunal has already deleted the disallowances made in the same pattern in the previous years. So keeping in view the previous history the disallowances under the above referred heads of account are deleted. We however find no warrant for interference regarding additions on account of Lease Rentals, additions made under section 25(c), under section 24(i) and regarding addition on account of depreciation as the learned counsel has not pressed the grounds in this respect. The appeal filed by the assessee regarding these additions is therefore dismissed.
Consequently the cross appeal filed by the Department regarding all the issues i.e. the addition under section 12(9A) and disallowances out of P&L account and regarding addition made under section 24(i) is dismissed. While the cross appeal filed by the assessee is partially allowed to the extent and in the manner supra.
Both the cross appeals are decided in the manner referred above.
C.M.A./102/Tax (Trib)Order accordingly.