1982 PLP 370 (PTD)

NASIR ASLAM ZAHID, J.‑This is an application by the applicant/assesses, Pakistan Gum Industries Limited, under section 66(1) of the Income‑tax, 1922. Two questions were referred in this application for our opinion. However, with the consent of both the learned counsel, we have reframed the questions, which is as follows :‑ Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that un-appropriated profits of the assessee for the assessment year 1967‑68 were "free reserve" and as such liable to super‑tax ?

2. In this case the Income‑tax Officer, who made the assessment for 1967‑68 in respect of the applicant/assesses, treated un‑appropriated profits of the assessee for the yea:. in question as free reserve, which was then subjected to super‑tax. The applicant filed an appeal, which was dismissed by the Appellate Assistant Commissioner. A further appeal was filed before the Income‑tax Appellate Tribunal which was also dismissed by their order dated 26‑7‑197I. The applicant/assesses then filed the present application.

3. We have heard Mr. Ali Athar, Advocate for the applicant and Mr. Nasrullah Awan, Advocate, who represented the Respondent, Commis sioner of Income‑tax (East), Karachi. The point for our determination is whether during the assessment year in question i.e. 1967‑68, un-appropriated profits of the assessee could be treated as "free reserve" and then subjected to Super‑tax. Finance Act, 1967, made provisions for levy of income‑tax on free reserves but did not define the term "free reserve." However, by Finance Act, 1968, a new clause 6‑BB was added after clause 6‑B in section 2 of the Income‑tax Act, 1922 and "free reserve" was defined therein as follows :‑ "(6‑BB) free reserve, in relation to a company means such reserves of a company as the Central Board of Revenue may by notification in the official Gazette, declare to be free reserves of a company and includes any un-appropriated profits of a company ;" It was contended by Mr. Ali Athar, learned counsel for the applicant/assesses, that the definition of "free reserve" in the Finance Act, 1968, is not retrospec tive and did not apply to the assessment year in question i.e. assessment year 1967‑68 of the assessee and that prior to 1‑7‑1968, the term "free reserve" was not defined and the term then should have been given its ordinary meaning which would not include unappropriated profits of a company. Learned counsel relied upon the case of Commissioner of Income‑tax v. Lyallpur Cotton Mills (P L D 1960 S C 48,), in which the Supreme Court of Pakistan, while interpreting the term "reserve" in Schedule II of the Business Profits Tax Act of 1947, held that profits lying unutilised and not specifically set apart for any purpose on the crucial date did not constitute "reserve" within the meaning of the rule in question and that the word "reserve" should be given its plain and dic tionary meaning that is there must be some setting apart of the amount for some special or general purpose by a person or by a body authorised under the articles of association of the company to allocate the funds for particular purposes and where this was not done, the unappropriated balance would not be a "reserve" within the meaning of the rule in question. The principle laid down in applies to the point raised in the instant case. In the instant case, unappropriated profits of the applicant/assesses, cannot be treated as a "reserve" or "free reserve" if these terms are given their ordinary dictionary meaning. Mr. Nasrullah Awan, learned counsel for the respondent/Department, was not able to refer to any other judgment where the word "reserve" has been interpreted to include unappropriated profits of a company.

4. If the definition of free reserve introduced through the Finance Act, 1968, can be given retrospective effect, the unappropriated profits of the applicant/assessee would have amounted to a "free reserve" and subjected to super‑tax for the assessment year in question. However, we find from reading of the Finance Act of 1968 that this provision has not been given retrospective effect, and, therefore, for the assessment year in question there is no statutory definition of "free reserve," which term is to be given it ordinary dictionary meaning for the period in question. We have already observed that the ordinary dictionary meaning of the term "free reserve" will not include unappropriated profits of a company.

5. In the circumstances the refrained question in the present case is answered in the negative. There will be no order as to costs. Reference answered in the negative.