1988 PLP 200 (PTD)

HAIDER ALI PIRZADA, J.--In this reference under section 66(1) of the Income Tax Act, 1922, we are concerned with the following question of law:-- "Whether on the facts and in the circumstances of this case the Tribunal was justified in subjecting to tax a sum of Rs.1,93,457 being excess of free reserves over .the paid up capital under the provisions of the Income-Tax Act, 1922 read with Finance Ordinance, 1969?" The assessment year is 1969-70. The assessee is private limited company mainly acting as shipping agent's to various ship owners and also acing as clearing and forwarding agents through its branches in East Pakistan and the Head Office at Karachi. The income Tax Officer taxed free reserves -amounting to Rs.1,93,

457. The assessee filed direct appeal before the Income tax Appellate Tribunal being appeal No. 'I.T.A. 1879/KB of 1972-73 (Assessment year 1969-70). The assessee's contention before the Appellate Tribunal was that in terms of section 2(6)(c) read with Explanation of section 4 and section 3 of the Income Tax Act free reserves are to be taxable as on the last date of the previous year and according to Finance Ordinance '1969, IV Schedule, Part II the date given is not the last day of the previous year but the date of the filing of return for the relevant assessment year. The departmental representative submitted that this is a concession provided by the Act and does not vitiate the provisions of section 2(6)(C) and Explanation 5 of section 4 of the Income-tax Act. The learned Tribunal accepted the submission of the departmental representative observing "that in view of the clear wordings of the Act given in the Section quoted above we hold that the taxing free reserves amounting to Rs.1,93,457 was correct which accordingly sustained." On the above facts, the above question of law has been referred to us for our decision. It is advantageous to reproduce section 2(6)(c), Explanation 5 of section 4, Section 3 of the Act and Para "D" of Part II of the Finance Ordinance IV, 1969, Schedule Part II, as they were at the relevant time: "2(6C) "income" includes anything included in "dividend" as defined in clause (6-A) perquisites (whether convertible into money or not) which, under subsection (1) of section 7, are due or are paid to any assessee in lieu of or in addition to, any salary or wages and anything which under Explanation 2 to subsection (1) of the said section 7 is a profit received in lieu of salary for the purposes of that subsection the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession and any sum deemed to be profits under ****clause (vii) of subsection (2) of section 10, any sum chargeable to tax under subsection (6) of section 12 and any capital gain chargeable according to the provisions of section 12-B and, in the case of a company having its registered office in Pakistan, the amount representing the face value of any bonus shares or the amount of any bonus declared, issued' or paid to its shareholders with a view to increasing the paid up capital and the profits of any business of insurance carried on by a mutual insurance association computed in accordance with 'rule 9 in the first schedule and. in the hands of a purchaser, the difference between the market value and the purchase price of any assets, excluding scrips and stock-in-trade, sold by company to the purchaser and any amount which under Explanation 6 to subsection (1) of section 4 is to be deemed to be income. Section 4, Explanation 5.--So much of the amount by which the free reserves of any company exceed the 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 1st day of July, 1966, shall be deemed to be income accruing or arising to the company during that year." "

3. Where any Central Act enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate of those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income, of the previous year or the previous years, as the case may be, of every person. Provided that where by virtue of any provision of this Act-- (a) Income-tax is to be charged in respect of the income of a period other than the previous year or previous years, as the case may be, income-tax shall be charged accordingly; (b) Income-tax is to be deducted at source or paid in advance it shall be so deducted or paid, as the case may be."

4. On the whole of the amount by which the sum free reserves of any company not being a Banking or any Insurance Company, exceeds the paid up Ordinary share capital of the company as on the date of filing return for the relevant assessment year under section 22 of the Income-Tax Act, 1922 (XI of 1922). Explanation.--For the purposes of this sub-paragraph and of clauses (iv) and (v) of sub-paragraph (1) of paragraph A, the expression "free 'reserves" has the meaning assigned to it in clause (6-B) of section' 2, of the Income-tax Act, 1922 of 1922)." The Fourth Schedule of the Finance Ordinance, 1969 consists of the three parts, out of which we are only concerned with Part II. Part II which is called "Rates of Super-tax" consists of paragraphs A, B and C out of which we are concerned with paragraph 'A' only. Clause (4) of Paragraph A provides that "on the whole of the amount by which the sum the free reserves of any company, not being a Banking or an Insurance company, exceeds the paid-up ordinary share capital of the Company as on the date of filing return for the relevant year under section 22 of the Act." The grievance of the assessee, which appears to have been pressed before the learned Appellate Tribunal is that the tax levied upon it exceeds its taxable income. Mr. Naseem Ahmad Khan has contended that no part of the income exempted from income-tax and super tax under the Income-tax Act can be brought to tax by the finance Ordinance. His submission is that on the whole of the amount by which the sum of the free reserves of any company exceeds the paid up ordinary share capital of the company as on the last date of the assessment year subjects to taxation but the Finance Ordinance, 1960 subjects as on the date of filing return for the relevant assessment year. In order to appreciate the contention of the learned counsel for the assessee one must bear in mind two basic facts about the Income Tax Act. The first is that the Income Tax subjects to tax not the income of the assessee in the year of assessment but in the previous year and the other basic fact is that the liability to tax arises not by reason of the provisions of the Act but by reason of the fact that a Central Act fixes the rate at which the assessee is liable to pay tax and it is by reason of the Central Act that the income of the previous year of the assessee becomes liable to tax. If these two basic facts are borne in mind, then the position in law becomes very clear and very simple. The Income-tax Act or Income Tax Ordinance is a permanent Act or Ordinance while the Finance Acts are passed every year and their primary purpose is to prescribe the rate at which the income tax will be charged under the Income-tax Act or Ordinance. But that does not mean that a new and distinct charge cannot be introduced, under the Finance Act. We are of the view that exigencies of the financial year determine the scope and Vii, nature of its provisions. If the Parliament has the legislative competence to introduce a new charge of tax, it may exercise that power either by incorporating that charge in the Income Tax Act, or by introducing it in the Finance Act or for the matter of that in any other Statute. This is generally determined by the consideration whether the new charge is intended to be more or less of a permanent nature or whether its introduction is dictated by the financial exigencies of the particular year. Therefore, what is not income under the Income Tax Act can be made income by a Finance Act, an exemption granting by the Income Tax Act can be withdrawn by the Finance Act or the efficacy of that exemption may be reduced by the imposition of a new charge. A bare reading of section 2(6-C) of the Act would show that the free reserves in excess of the paid-up capital as on the last day of the previous year in case of a common fictionally treated as income of the company Explanation 5 of.' section 4 fictionally lays down that this artifidal income determined in the manner laid down under section 2(6-C), shall be deemed to be income accruing or arising to the company during that year. Section 3 of the Act is the charging section and after this process the function of section 3 is to charge this artificial income for the fictional year is tax at the rates prescribed by the relevant Finance Act. Finance Ordinance, 1969, paragraph A of Part II of Schedule prescribes 10 percent of the notional income determined in the above manner. The grievance of the assessee before the Income-tax Authorities was that the rate of 10 per cent prescribed by the Finance Ordinance relates only to such Free Reserves as exceed the paid up ordinary share capital of the company on the date of the filing of return for the relevant assessment year, whereas no rate has been prescribed to charge the excess of the Free Reserves of the Company which exceeds the paid up ordinary share capital of the company as on the last date of previous year. The submission of the learned counsel was and is that only such excess of the free Reserves as is determined with reference to Section 2(6-C), that is, the excess of the Free Reserves exceeding the paid up capital on the last day of the previous year alone, has been made fictionally the income of the assessee is liable to tax as a result of the combined operations of Explanation 5 of section 4 and section 3, but for this income no rate has been prescribed by the provisions of the Finance Ordinance. Therefore his notional income cannot be charged under the Finance Ordinance, 1969. We are unable to accept this contention. Under the charging provisions the entire fictional income as computed under section 2(6-C) was liable to tax as a result of cumulative operations of section 2 (6-C), Explanation 5 of section 4 and section 3 and the rate mentioned in that clause on the whole of the amount by which the sum the free reserves of any company exceeds the paid up ordinary share capital of the company as on the date of filing return for the relevant assessment year. Thus the date is different from those of income tax Act. In certain cases a concession has been given by the Finance Ordinance and the chargeability of the notional income has been restricted only to that part of the fictional income as may be arrived at with reference to the date of the filing of the return and not with reference to the last date of the accruing year. In our view the Tribunal is right in holding that in view of the clear wordings of the Ordinance the tax on free reserves amounting to Rs.1,93,457 was correct. In the circumstances, we are unable to agree with the submission of Mr. Nasim Ahmed Khan that in terms of section 2(6) read with Explanation 5 of section 4and section 3 of the Act, free reserves are to be taxable as on the last date of the previous year. For all these reasons our answer to question is in the affirmative and against the assessee. In the circumstances of the case the parties shall bear their own costs. M.B.A./U-21/K Reference answered in affirmative.