SYED ARSHAD ALI, J.- Commissioner of income Tax legal Regional Tax Office Peshawar has filed this Reference u/s 133 (1) of the Income Tax Ordinance 2001 (Ordinance) seeking advice of this court on the following questions arising out of the judgment of the learned Income Tax Appellate Tribunal dated 08.10.2007. i. Whether Tribunal was justified to offer interpretation of the term reserves on its own whereas reserves has been defined in explanation to Section 12 (9A)? ii. Whether the definition given in the explanation covers the reserves of the earlier orders, being the inclusive definition? iii. Whether Tribunal erred to hold that the statute cannot tax the same amount again in a dif ferent year?
2. Brief but the relevant facts of the present case are that the respondent M/S Chashma Sugar Mills Ltd. D.I.Khan (Company) is a public limited company which according to the record of the case, derives its income from Manufacturing and Sale of Sugar. For the Tax year ending on 30 September, 1998 the income of the Company was assessed through assessment order dated 09.2.2001 u/s 62 of the Income Tax Ordinance, 1979 (hereinafter referred to as Repealed Ordinance) and total/net income of the Company was assessed as Rs.211, 651/-. The company is also enjoying income tax holiday under clause 118-C of the Second Schedule to the Repealed Ordinance. The learned Additional Commissioner of Income Tax subsequently observed that the case of the Company was not properly handled by the Deputy Commissioner of Income Tax while passing the order of assessment for the assessment year 1999-2000 relating to its income u/s 12 (9A) of the Repeal Ordinance, therefore, while invoking his powers u/s 66 A of the Repeal Ordinance, directed the Assessing Officer to invoke section 12(9A) of the Repeal Ordinance after providing an opportunity to the Company of being heard vide order dated 10.1 1.2003.
3. Aggrieved of the said order, the Company filed an appeal before the Worthy Appellate Tribunal, Peshawar Bench, Peshawar, the learned Tribunal accepted the appeal of the Company vide its order dated 08.10.2007.th The revenue has formulated the above referred question for advise of this court u/s 133 (1) of the Income Tax Ordinance, 2001.
4. Arguments heard and record of the case was perused with the valuable assistance of the learned counsels for the parties.
5. All the three questions formulated by the Revenue, indeed involves the interpretation of one and the same question of law therefore, and are taken together for determination of this court.
6. It is evident from the record that for the tax year ending on 30 September 1998, the Company had assessed its total profits as Rs.2,1 1, 651/- the details of which are as following:- Sales. Rs.811,335, 253/- Cost of Sales Rs.719, 697, 287/- Gross Profit. Rs.91, 637, 966/- 11.29% Less Operating & other expenses. Rs.82, 147, 249/- Operating Profit/Loss Rs.9, 490, 717/- Add Other Income Rs.2, 014.814/- Less Excise Duty Rs.11, 293, 880/- (Prior year)
7. Assessing officer vide his order under section 62 of the Repealed Ordinance, accepted the above and thus allowed the amount earmarked for payment of the excise duty of the prior years for its onward payment to the Revenue as its valid expense. The exemption claimed from income tax under clause 118-C of the 2 Schedule to the repealed Ordinance, was also allowed on the income from the manufacturing account. Subsequently the additional Commissioner of Income Tax, from the examination of record, had observed that while making the original assessment u/s 62 of the Repealed Ordinance, the assessing officer had not properly handled the case in the light of provision of 12 (9A) of the Repealed Ordinance
8. The additional Commissioner was of the opinion that if the adjustment (provision) of inadmissible expenses on account of excise duty for the prior years would have not been deducted from the gross profit, the position of the after-tax profit would have been as under: Net profit as per accounts. Rs.211,651/- Addl: Excise duty (Prior years) Rs.11, 293,880/- Net Profit after taxation. Rs.11,505, 531/- 40% Cash dividend due/payableRs.4, 602, 212/- Actual Dividend declared Nil Paid up Capital Rs.191,280,000/- General Reserves. Rs.106, 000,000/- 50% of the paid up Capital Rs.95, 640,000/- Excess reserves to be added to Total income for the year (106,000,000-95,650,000)Rs.10,360,000/-
9. Hence considering the order passed under section 62 of the Repealed Ordinance dated 09.02.2001 being erroneous as well as prejudicial to the interest of the revenue, attracting the provisions of section 66A of the Repealed Ordinance, therefore, with intent to take action u/s 66A issued show cause notice vide No.1201 datedth nd 27.5.2002 and 01.04.2003 to the Comp any. In its response the Company submitted its reply . Ultimately the impugned order dated 10-11-2003 for revise assessment of the Company for the tax year ending on September 1998 was passed.
10. Indeed, through revised assessment order , the amount of excise duty of the prior year i.e. Rs.11,293, 880/- claimed by the Company payable to FBR was added back towards its income u/s 12 (9A) of the Repeal Ordinance.
It is evident from the judgment of Worthy Tribunal that the said liability had arisen through the order of Additional Collector Customs (Excise) dated 13.2.1998. As per the said order, for payment of the excise duty an amount of Rs.7,295,295/- was earmarked in the tax year ending on 30.9.1995 and the balance amount of Rs.11,293,880/- was earmarked for payment of excise duty in the tax year ending on 30 September, 1998. Indeed this amount is the subject of the dispute between the parties and the learned Additional Commissioner in his order dated 10.11.2003 has held that the Company could not earmark this amount for the payment of excise duty and thus had added back the said amount towards the income of the Company for the purpose of section 12 (9A) of the repealed Ordinance.
11. Since the issue revolves around the application and interpretation of section 12 (9A) of the Repeal Ordinance, therefore, it would be appropriate to reproduce the section 12 (9A) of the Repeal Ordinance:- Sec. 12 (9A) Where an assessee, being a public company other than a scheduled bank or a modaraba, derives profits for any income year but does not distribute cash dividends within seven months of the end of the said income year, or distributes dividends to such an extent that its reserves after such distribution, are in excess of fifty per cent of its paid up capital, so much of its reserves as exceed fifty per cent, of its paid up capital shall be deemed tobe the income having accrued to such company during that year: Provided that in respect of assessmen t year commencing on the first day of July, 1999, the cash dividend distribution made within the following period shall be treated as distribution for the purposes of this subsection:-
(iii) Where the income year ended on a date prior to the thirtieth day of June, 1999, and the distribution is made within a period of three months reckoned from the first day of July , 1999; or
(iv) Where the income year ended on the thirtieth day of June, 1999 and the distribution is made within a period of eight months reckoned from the 'first day of July, 1999.
Explanation- For the purposes of this subsection, the expression "reserves" shall have the meaning as may be prescribed."
12. To further explain the applicability of Section 12 (9A) of the Repealed Ordinance, clause 59 was inserted in Part IV of the Second Schedule to the Repealed Ordinance through S.R.O 969 (1) /99 dated 27-08-1999 which is reproduced as under: Clause (59) .---"The provisions of subsection(9A) of section 12 shall not apply to---
(i) a company listed on Stock Exchange which distributes prof equal to either forty per cent of its after-tax profits or fifty per cent of its paid up capital, whichever may be the less;
(ii) a public company not listed on the stock exchange;
(iii) a trust or a company in which not less than fifty per cent shares are held by the Government; or
(iv) a leasing company as defined in the leasing Companies (Establishment and Regulation) Rules, 1996"
Section 12 (9A) of the Repeal Ordinance was enacted through Finance Act 1999 ( effective from 01-07-1999) and its plain reading in juxtaposition with clause 59 ibid would imply that the public limited companies which are registered on Stock Exchange should ensure the disbursement of dividends to its members on its profits and any amount of profits which it reserves, without distribution to its share holders within seven months of the end of the said year, will be a deemed profit of the assesse and as such will be subject to the incident of income tax.
13. The word "reserves" occurring in the afore said section of law has not been defined in the Repealed Ordinance as evident from explanation at the end of the section . However , through SRO No.1100 (1)/99 dated 30 September , 1999 Rule 203-AA was inserted in the erstwhile Income Tax Rules, 1982 which defines the expression "reserves" for the purpose of sub-section (9A) of section-12 of the Repeal Ordinance as following:-th th "reserves" includes amounts set-aside out of revenue or other surpluses excluding capital reserves, share premium reserves and reserves required to be created under any law , rules or regulations.
14. In the aforesaid rule, the scope of the word " reserves" has been enlarged from the concept which we gather from the plain reading of section 12 ( 9 A) of the Repealed Ordinance. In Section 12 (9 A) the word "profit" if reserved by a public limited company in an income year has been used for the purpose of its distribution to the shareholders whereas in the rule ibid the "amount set aside from the revenue" has been used. Both the words i:e profit and revenue have different connotation and application. The word profit according to the Black's law dictionary (Ninth edition ) means the excess of revenue over expenditure in a business transection, the word "revenue" in the same dictionary is defined as " gross income or receipt" and the word "reserve" is defined as "something retained or stood for future use" Since, as stated above, section 12 (9 A) envisages in very categorical terms that if a public limited company derives profits and does not distribute the same to its shareholder the same shall be the income of the public limited company for the purpose of section 12 (9 A) of the Repealed Ordinance, hence the scope of the profit cannot be enlarged to revenue of the company for the purpose of the aforesaid section. Indeed it is settled law that the rules framed under a statute cannot enlarge the scope of the parent statute more particularly when the parent statute is either penal in nature or it creates liability. Pakistan through Secretary Finance Islamabad and 5 others Versus Aryan Petro Chemical Industries (PVT) limited Peshawar 2003 SCMR 370 and National Electric Power Regulatory Authority Versus Faisalabad Electric Supply Company limited 2016 SCMR 550. Admittedly the company has shown/earmarked an amount of Rs.11,293,880/- payable towards the excise duty determined by the competent authority vide order dated 13-02 -1998 and payable under the command of a statute and no law prohibits the assessee company to earmark the said amount out of its income in a particular year or claim the said amount as expense for the tax year ending on September, 1998 i:e the income year in which the order was passed by the competent authority regarding the payment of the said excise duty. Therefore, the said amount was an admissible expense of the Company, which may constitute its revenue but is obviously not its profit available for the distribution of cash dividend to the shareholder of the company. Therefore, in the context of section 12 (9A) of the Repeal Ordinance, the word reserve would mean the amount of money out of the profit ( minus all liabilities accruing or legally payable) as reflected in the account statement of a public limited company registered on stock exchange, which the said company does not distribute to the shareholders with in the period prescribed through section 12 (9A) of the Repealed Ordinance and not the amount out of the revenue of the company.
15. There is yet another aspect of this case. Section 12 (9A) of the Repealed Ordinance is indeed charge on the fictional income of the Company which was inserted on first July, 1999 cannot be given retrospective effect to any income year which has ended on September, 1998. Indeed the company had claimed this amount as an expense for the tax year ending in September, 1998 and the newly added section 12 (9A) of the Repeal Ordinance created a liability in form of Deeming Income can neither be given any retrospective effect nor the language of section 12(9A) of the Repealed Ordinance gives any impression that it also applies to the companies for their income year ending on 30 September 1998. Wisdom can be drawn from Commissioner of Income Tax Vs. Messrs ELI LILLY PAKISTAN (Pvt) Ltd. 2009 SCMR 1279), Government of KPK and others Vs. Khalid Mehmood (2012 SCMR 619), Additional Commissioner Inland Revenue, Audit Range, Zone-I and others Vs. Messrs Eden Builders Limited and others (2018 SCMR 991), Shaukat Khan and Company through Shaukat Ali Vs. Commissioner Inland Revenue Zone-II, Regional Tax Office, Peshawar (2015 PTD 630) and Muhammad Ilyas Oureshi Vs. Federal Board of Revenue through Member Legal and others ( 2017 PTD 1528 ).
Consequently for the aforesaid reasons, this Tax Reference is accordingly dismissed while the questions of law formulated are answered in negative. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.