1988 PLP (Trib (PTD)

3. The Department now feels that the exclusion was wrongly made granted because tax payable could not be called as retained earnings. The learned Authorised representative for the Assessee, on his turn submitted that Part III of the Finance Ordinance 1977 (As amended vide Ordinance No. II of 1978) prescribed Surcharge at 10% of "the Income Tax and super-tax on total income as reduced by so much of the income as has been retained for the purposes of capitalisation, or for meeting working capital requirements". The learned Authorised Representative was at pains to explain that "working capital", according to the established accounting principles, represents "Current Assets" minus "Current Liabilities". Current Liabilities in their turn included liability for taxes. Therefore, payment of tax was covered under the operation of "working capital requirements". It was further pleaded that taxes were paid after the accounts were closed and hence during the previous year. The amount which finally become due as 'tax' was utilized as working Capital throughout the previous year and thus fulfilled the conditions envisaged for exclusion. For the assertion that "working capital" is the net amount by which the current assets exceed current liabilities, reliance was placed on Ericle L. Kolher's "A Dictionary of Accountants".

4. After having heard the two Representatives and perusing the record, we are of the view that, to decide the issue in dispute, it is -essential to analyse the provisions of Ordinance dated 11-8-1979. These are reproduced hereunder for facility of consideration. [See Section 4] In the case of every company:- "10 percent of the Income Tax and Super Tax payable on total income as reduced by so much of the income has been retained for the purpose of capitalisation or for meeting working capital requirement:- Provided that, if the income so retained is distributed in any subsequent year, the surcharge shall be payable on the income so distributed as the same rates in that year

" This Ordinance levies a Surcharge of 10% on total Income as reduced by (i) the extent of the Income which is retained for purposes of capitalisation or (ii) the extent of the Income which is retained for meeting working capital requirements. If we examine this enactment together with S.R.O. 856(1)/77 dated 13-9-1977 whereby companies were exempted under section 60 of the Income Tax Act, from tax on issues of Bonus Shares declared by them, between the period from 1-9-1979 to 30-6-1982; we would have no difficulty to infer the desire of the legislature that Bonus Shares should be handed out instead of cash payment of Dividends. To encourage this, companies were granted exemption from Tax on Bonus Shares (vide SRO referred to above) and at the same time, they were made liable, in terms of Ordinance No. II of 1978 to surcharge at 10% of Income Tax and Super Tax, in case cash Dividend was paid out. It is well-settled that capitalization is generally done through the issue of Bonus Shares. Another course open to a company to avoid levy of surcharge was to retain Income to meet the 'working capital requirements' instead of raising loans or increasing the subscribed capital. The working capital, as was rightly pleaded before us, is the "excess of current assets over current liabilities". The requirements of working capital are too numerous to mention, but all authorities on Accountancy are unanimous that payment of tax would amount to meeting the requirement of working capital. This general principle is not to be lost sight of, while levying the surcharge, as prescribed by Ordinance II of 1978. Looking from another angle we find that if surcharge is levied on tax payments, it would be a disincentive for (quick disbursement of Govt. dues because having paid the tax for having arranged for its prompt payment) an Assessee would be exposing himself to an extra Surcharge. This without doubt, is an highly unbelievable situation, but this particular phenomena does exist in the case before us. We, therefore, see no error in the decision of the learned Appellate Assistant Commissioner and agree that the assessing officer clearly went wrong in not excluding the tax payable at Rs.44,85,537 from the total income while levying the Surcharge. The appeal in consequence FAILS on this issue.

5. In the grounds of Appeal the Department has protested against the relief granted by the learned Appellate Assistant Commissioner, by deleting the disallowance of Rs.24,000 under the head "Travelling Expenses" . It is significant that the order appealed against profit and loss account. The add-back was made in the original order passed by the learned Appellate Assistant Commissioner on 10-10-1978 (vide Appeal No.771/1620) against which no appeal has unfortunately been filed by the Department. We, therefore, refuse to adjudicate. M.B.A./444/T Order accordingly.