1985 PLP (Trib (PTD)

(1) That the learned I.‑T.O. is not justified in including in the income of the appellant a sum of Rs.25,06,247(actually (2) That the learned, I.‑T.O. is not justified in including a ,sum of Rs. One lakh (actually it is one crore) in the income of the appellant as the amount of bonus shares, which do not and cannot constitute tax on the income of the assessee."

4. The learned D.R. had no record and, therefore, was not in a position to assist us in this case both the issues are separately discussed as under:

5. Free Reserves.‑‑The learned counsel for the assessee though admitted that the amount of Rs.25,33,435 was un appropriated balance of profits, but contended that such an amount could not be treated as a part of free reserves. It may be noted that the word "free, reserves" hitherto was undefined. Consequently in order to define 'free reserves' section 2(6‑BB) was added by the Finance Act No VI of 1968,which received the assent of the President on 30th June, 1968 and came into force at once. Section 2(6‑BB) is reproduced for reference: "free reserves" 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." As stated above, admittedly the amount in dispute is un appropriated profits of the company. It is also conceded by the learned counsel that un appropriated profits are included in the definition of 'free reserves' under section 2(6‑BB). The only objection of the assessee is that the definition of "free reserves" introduced by the Finance Act, 1968 being in the nature. of amendment in the substantive law had no retrospective effect. In support of this contention the learned counsel cited a number of decisions .of the Superior Courts which we do not feel necessary to mention as there is no quarrel with the proposition of law that if any amendment is made in any provision of law which is substantive in nature, then unless the Legislature expressly or by necessary implica tion, gives it a retrospective effect, it has prospective effect. However, notwithstanding this proposition, a Finance Act in its very nature is retrospective in effect as it is for an assessment year, which is in effect applicable, on a previous year. Section 3 of the Income‑tax Act, which is the charging section lays down that Income‑tax shall be charged for any rate "in respect of the income of the pervious year " Similarly section 4 also lays down as to what is included in the total income of any previous year. The whole scheme of the Income‑tax Act is to charge tax for an assessment year as laid down by the relevant Finance Act or Ordinance in respect of Income of the previous year of an assessee. In Pakistan the tax is charged on the income of the previous year. This charge was brought in by the Income tax Act, 1922. Previous to that under the Income‑tax Act, 1918, Income‑ tax was levied on the income of the current year i.e. the year of assessment. Since the income of the current year could not be ascertained till after the expiry of the assessment year, the assessment was made on the basis of the previous year but after the close of the assessment year an adjustment was made on the basis of the actual income of the assessment year. After coming into force of the Income‑tax Act, 1922, tax is paid on the income received or accrued to an assessee in the previous year and therefore; all facts and transactions which existed or took place during a previous year or related to the previous year, are taken into account in accordance with the relevant Finance Act which comes into force after the close of the previous year but is applicable to the income of the previous year. Thus, notwithstanding the fact that a substantive provision of law included in section 2 (6‑BB) is retroactive in nature, it is applicable on the previous year of the assessee which in other words means it is .prospectively applicable on the assessment year of the assessee. The question of operation of Finance Act, came under consideration before the Privy Council in the leading case of Maharaja of Pithapuram v.‑Commissioner of Income‑tax Mad. (1945) 13 I T R

221. Their Lordships of the Judicial Committee in that case observed: "It should be remembered that the Indian Income‑tax Act, 1922 as amended from time to time, is a code, which has no operative effect, except so far as it is rendered applicable for the recovery of tax for a particular fiscal year by a Finance Act. This may be illustrated by pointing out that there was no charge on 1938‑39 income either of the appellant or his daughter, nor assessment of such income, until the passing of the Finance Act of 1939, which imposed t‑he Tax for 1939‑40 in the 1938‑39 income and authorised the' present assessment." The question before the Privy Council was whether 'the provisions of section 16(1)(c) of the Indian Income‑tax Act, as amended by the Amendment Act of 1939, was to be applied, or the law prior to the amendment. The account year was 1938‑39 and the accounting year closed on 31‑3‑1939. The claim of the assessee in that case (as in the present case) was that the law prevailing in the accounting year when the profits were earned by him was the law applicable. The Amending Act came into force with effect from 1‑4‑1939. A Full Bench ‑ of the Madras High Court held that in the year of assessment year 1939‑40 the Amending Act had come into force and the law in force in the year of assessment must govern the assessment and not the law in the previous year in which the income was earned (see Maharaja of Pithapuram V. C.I.T., Madras 1942) 10 I T R

1. On appeal, the Privy Council confirmed this view. . I n another case C . I . T . v . K . S rinivasan & K . Gopalan (1953 ) 23 I T R 87, the.., Supreme Court of India, while dealing with a similar issue observed: "The scheme of the Act is that by the charging section i.e. section 3, income‑tax is levied for a financial year at the rate prescribed by the annual Finance Act on the total income of the previous year of every individual etc. Each previous year income is the subject of separate assessment in the relevant assessment year. Though the year of assessment is the financial year, the previous year of an assessee, need not necessarily be the previous financial year, for this expression is to be understood as defined by section .2(11)(a) of the Act."

7. It may further be noted that an amount of Rs.25,33,435 exceeded paid‑up ordinary capital of the assessee. The Finance Act, 1968 had also added Explanation 5 to section 4(1) of the Income‑tax Act, which reads as follows: "Explanation so much of the amount by which the free reserves of any company exceed the said paid‑up ordinary share capital of the company as on the last day of the previous year not, being a previous year ending earlier than the Ist July,. 1966, shall be deemed to be' income accruing or arising to the company during the year."

8. If there was any doubt left in regard to the application of the Finance Act it has been removed as this Explanation had been mad applicable from the Ist of July, 1967. Since amount of free reserves exceeded the paid‑up ordinary share capital of the company as on the last day of the previous year i.e.. 31st March 1968 the amount was rightly added by the assessing officer as income accruing or arising to the company during the previous year.

9. The learned counsel has relied upon the case of Pakistan Govern ment Industries v. C.I.T. Karachi reported an, 1982 P T D 370 in support of his contention that section 2(6‑BB) added by the Finance Act, 1968 had no retrospective application. This case has no application on the facts and circumstances of this case. That was a case relating to the assessment year 1967‑68 and we have already stated that the amendment brought in by the Finance Act, 1968, was applicable to the assessment year 1968‑69 and not retrospectively to the, earlier charge years. Their Lordships of the High Court have also made a reference to the Finance Act, 1967 while considering the applicability. `of the amendment brought in .1968 in the assessment year 1967‑68 it is in that context that the High Court held that the definition of free reserves given by section 2(6‑BB) had no application for the assessment year 1967‑68 and with respect, we entirely agree with their Lordships. The question before us is as to whether the amendment brought in by the Finance Act, 1968, is not applicable to the assessment year 1968‑

69. The answer is obviously 'NO', as the Finance Act is for the relevant assessment year but in respect of the previous year.

10. The learned counsel also made an attempt to challenge the computation of the free reserves made by the assessing officer. However we find that no specific, ground of appeal has been taken by the assessee in this regard and, therefore, we do not allow this ground to be urged at this late stage.

11. Taxability of Bonus Shares.‑‑The assessee‑ issued bonus shares of Rs.1,00,00,

000. This amount was included in the income of the assessee by the assessing officer. It may be noted that under section 2(6‑C) the income has been defined which includes bonus shares in the case of the company having its registered office in Pakistan as follows. "If the amount representing the face value of any bonus shares or the amount of any bonus declared, issued or paid by a company to its shareholders with a view to increasing the paid‑up. Capital learned counsel conceded that the bonus shares issued by the company were included in the definition of income given by section 2(6‑C) on the Income‑tax. However his contention was that the definition was ultra virus of the Constitution of 19622 inasmuch as the Legislature was, competent to legislate on income but‑ had no power to define the word "Income" so as to extend the ordinary dictionary meaning of income. In support of this contention the learned counsel relied upon the case reported as (1964) 26 Tax.

29. This contention cannot be accepted for two reasons. Firstly, this is debatable whether the Tribunal can go into the question of vires of an Act of which it is the creature. Secondly, the case cited by the learned counsel is of sales tax. In that case the word 'sale' was defined ‑but its meaning was extended even to ‑ transactions which were not in fact sales. It was in that context that the High Court observed that the Legislature was not competent to extend the meaning of the word 'Sale'.

12. The effect of the argument advanced by the learned counsel would be that a Legislature, though competent to make a law on th subject mentioned in the list of the constitution, but has no power t define the various words used in the law. If such an interpretation accepted it would lead to absurdity in that all the definitions given in various laws had to be held as ultra vires of the constitution unless they are in accordance with .the ordinary dictionary mean'' g' of the words. In other words a dictionary meaning would have to be accepted and in that sense a dictionary becomes super‑constitutional book. Legislature, which has power to legislate on a subject has also power t define the various ‑words used in that law. Even otherwise it is accepted principle of interpretation that it is the author who knows in. what context and for what object a word is used in a document it is with this object that the Legislature defines various words in order to inducement its intention and for that object the words are defined in a particular law to make it clear as to in what sense various words have been used.

13. For the foregoing reasons we do not find any force in this appeal, which is dismissed. M.B.A. Appeal dismissed.