CONTROVERSIAL PROVISIONS OF INCOME TAX ORDINANCE, 2001 AND COMPANIES ORDINANCE, 1984

CONTROVERSIAL PROVISIONS OF INCOME TAX ORDINANCE, 2001 AND <!--[if gte mso 10]> CONTROVERSIAL PROVISIONS OF INCOME TAX ORDINANCE, 2001 AND COMPANIES ORDINANCE, 1984 By Zahid Ur Rehman, Manager Ijaz Tabussum & Co., Chartered Accountants, Peshawar Office Subsection (18), was inserted in section 12 of the repealed Ordinance, through Finance Act, 1987. The provisions of this section were held in abeyance by virtue of clause (7) of Part IV of the 2nd Schedule to the repealed Ordinance. The said clause (7) was later amended, making the provisions of section 12 (18) operative for cash loan received on or after July 1, 1990. The Tax Department harassed the taxpayers by treating Share Deposit Money received in cash as cash loan, and then levying tax thereon in accordance with the provisions of section 12(18) of the repealed Ordinance. The taxpayers fought against this illegal treatment of the Department for almost 11 years and after this lengthy and expensive process of litigation, it was finally held by the Honourable Supreme Court in a judgment reported as 2002 PTD 877 that, since the expression "advance" was added to section 12 (18) of the repealed Ordinance by Finance Act, 1998, which became effective from 1-7-1998. Therefore, if these amounts (Share Deposit Money) were deemed to be advances, the same cannot be treated as "income" on account of non-applicability of the aforesaid amendment. The question before the Apex Court in this judgment was regarding the receipt of Share Deposit Money in cash, in the assessment year prior to amendments in section 12 (18) of the repealed Ordinance. In another case reported as Vol.7 No.2 TAX Forum 63, wherein the question before Honourable Lahore High Court Lahore, was regarding the receipt of Share Deposit Money in cash received in the assessment year after the date of amendment in section 12 (18) through Finance Act, 1998, the Honourable High Court held that, the impugned receipt in that behalf was proper share capital and not mere deposit of advances. To counter the effect of the judgment of the Upper Courts the legislature through Finance Act, 2003, inserted the phrase "for issuance of shares" after the word "Deposit" in subsection (3) of section 39 of the Income Tax Ordinance, 2001, thereby meaning that from now onward the Share Deposit Money received from a person not being a Banking Company or Financial Institution, otherwise than by a crossed cheque drawn on a Bank or through Banking Channel from a person having National Tax Number Card shall be treated as income chargeable to tax under the head "income from other sources", for the tax year in which it was received. In contrast to the above provision of the Income Tax Ordinance, 2001, the Companies Ordinance, which governs the receipt of Share Deposit Money and issuance of shares in respect thereof envisages, that the Share Deposit Money must be received in cash. Relevant provisions of the Companies Ordinance, 1984, regarding the receipt of Share Deposit Money are given hereinbelow: 1. Section 68 of the Companies Ordinance, 1984 restricts the allotment of shares until certain conditions laid down in the Companies Ordinance are fulfilled. In this regard relevant subsections of section 68 are reproduced as under: (1) No allotment shall be made of any share capital of a company offered to the public for subscription unless the amount stated in the prospectus as the minimum amount, which in the opinion of the directors must be raised by the issue of shares capital in order to provide for the matters specified in clause 5 of section 1 of Part I of the Second Schedule has been subscribed, and the full amount thereof has been paid to and received in cash by the Company. (2) The amount referred to in subsection (1) as the amount stated in the prospectus shall he reckoned exclusively of any amount payable otherwise than in cash and is in this Ordinance referred to as the minimum subscription. (3) --------------------------------------------------------- (4) --------------------------------------------------------- (5) --------------------------------------------------------- (6) --------------------------------------------------------- (7) --------------------------------------------------------- (8) In the case of the first allotment of share capital payable in, cash of a company which does not issue any invitation to the public to subscribe for its shares, no allotment shall be made unless the minimum subscription, that is to say, - (a) ---------------------------------------------------------- (b) if no amount is so fixed and specified, the whole amount of the share capital other than that issued or agreed to be issued as paid up otherwise than in cash has been subscribed and the full nominal amount of each share payable in cash has been paid to and received by the Company. 2. Section 146 imposes restrictions on commencement of business until and unless certain conditions laid down in the Companies Ordinance, 1984 are fulfilled. In this regard relevant portion of section 146 which is subsection (1) is reproduced hereinbelow: (1) A company shall not commence any business or exercise any borrowing powers unless‑ (a) shares held subject to the payment of the whole amount thereof in cash_ have been allotted to an amount not less in the whole than the minimum subscription; (b) every Director of the Company has paid to the Company full amount on each of the shares taken or contracted to be taken by him and for which he is liable to pay din cash: (c) --------------------------------------------------------- (d) --------------------------------------------------------- (e) --------------------------------------------------------- 3. Declaration is required to be filed with the Registrar of Companies, before commencement of business in case of Company issuing prospectus. in compliance with the conditions of section 140 01 the Companies Ordinance. 1984 on prescribed form "Form 22". Relevant portion of Form 22 in this regard is reproduced as under: To The Registrar of Companies --------------------------- I/We ---------------------------------------of -----------------------being the Chief Executive */Director and the Secretary-----------of solemnly and sincerely declare as follows:‑ 1. ------------------------------------------------------------------ 2. ------------------------------------------------------------------ 3. That shares held subject to the payment of the whole amount thereof in cash have been allotted to the amount of Rs.----------------- 4. That every Director of the Company has paid to the Company full amount on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash. The above provisions of the Companies Ordinance, 1984, particularly the underlined portions thereof, explicitly- reveals that the amount of Share Deposit Money must be received in cash, whereas the Income Tax Ordinance, 2001, prohibits such receipts and in case of failure on the part of the taxpayer, he will have to pay heavy penalties in. the shape of levy of tax at the prescribed rates on such amount. Though the amendment made in section 39 (3) is subsequent in time and prevails over the Companies Ordinance, 1984 and in accordance with the judgment of Apex Court reported as 1997 PTD 1555, the legal fictions are only for definite purpose. They are limited to the purpose for which they are created and its legitimate field should not be extended, but despite that as in the matter under consideration the Companies Ordinance 1984, governs the receipt of Share Deposit Money and issuance of shares in respect thereof, therefore on this basis it can be argued before any Court of law. The taxpayer community should also approach the Ministry of Finance through FPCCI for removal of these controversial provisions and to convince the Ministry t delete the phrase "for issuance of shares" inserted in subsection 3 of section 39 by Finance Act, 2003 or keeping in view the intention of legislature at the time of insertion of parent subsection (18) of section 12 of the repealed Ordinance, i.e. to check fictitious loans and to preclude back dated introduction of Creditors in the Books of Accounts, at least add a proviso to the said subsection to the effect that "this section is not applicable to bona fide transactions specially to those cases where the payer of such amount is taxpayer and has declared the said amount in his wealth statement duly reconciled with his sources".