SALEEM AKHTAR, J.-The appellant is a Statutory Corporation created under the Provincial Industrial Corporation (West Pakistan). Ordinance (Ordinance No. XXXVIH of 1962). It has challenged the following amendments made in the Income-tax Act, 1922, by Finance Act, 1967 and Finance Act, 1968 as ultra vires the late Constitution of 1962.
The amendments challenged by the appellant are as follows:- "Income-tax Act, 1922 section 2(6C). Income includes anything included in 'dividend'--------- ........-...-.........--------- .And, in the case of a company, the amount bv which its free reserves exceed the paid-up ordinary share capital of the company as on the last day of the previous year."
The underlined portion was added by Finance Act (Act XII of 1967). Tax was levied on the free reserve as provided by para. 4 of Part 11A of the Fifth Schedule of Finance Act, 1967 which reads as follows:-- "(4) On the whole of the amount by which the free reserves of any company, not being a Banking or an Insurance Company, exceed the paid-up ordinary share capital of the company as on the last day of the relevant previous year."
The Finance Act, 1968, made the following amendments by adding: In section 6(2) "(6-BB) '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 unappropriated profits of a company".
In 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."
(This explanation was added with retrospective effect from 1-7-1967).
2. The effect of these amendments was that Free Reserve of any company which exceeded the paid-up ordinary share capital of the company was deemed to be income accruing or arising to the company and was also charged to tax. The assessments for the year 1968-69 and 1969-70 were completed before the assessm ent of the year 1967-68. The appellant was assessed to tax on Free Reserves as follows:- 'Year of Amount of taxable Tax payable assessm ent free reserves 1068-69 6,54,61,541 65,46,154 1969-70 10,10,996 10,10,996 {{TABLE}} The appellant challenged the above assessments before the Income Tax Appellate Tribunal without any success. The petitioner filed application for reference to the High Court under Section 66(1) of the Act raising the question whether a Government owned organisation is liable to tax. The appellant, However, did not press the plea and the application was accordingly disposed of. As the tax on Free Reserves was not paid by the appellant, the Income Tax Officer levied penalty for its non-payment in respect of assessm ent year 1968-69 and 1969-70 and also issued orders under section 46(5-A) of the Act freezing operation of the bank accounts maintained by the appellant.
The appellant filed Constitution Petition No.981 of 1979 challenging the aforestated orders but during the pendency of this petition an agreement was arrived at between the appellant and the Income Tax Authorities whereby the latter agreed to withdraw the order on condition of withdrawal of Petition No.981 of 1979 by the appellant. After the petition was withdrawn the appeal filed by the appellant before the Appellate Assistant Commissioner was, dismissed. The appellant then filed Constitution Petition challenging assessment orders for these two assessment years which was dismissed by the impugned judgment.
3. Leave was granted to consider the following questions:- "(I) Whether the Free Reserve of a company constitutes income within the meaning of entry No.43, Third Schedule of the Constitution.
(ii) If it does not, whether Finance Acts 1967 and 1968 are not ultra vires in so far as they tax what is not income."
4. The appellant has challenged the vires of the aforestated amendments made in the Act by Finance Act of 1967 and Finance Act of 1968 on the ground that the power to tax the income was derived from item 43(c) of the Third Schedule of the late Constitution of 1962 which did not permit levy of tax on free reserves as it cannot be treated as income. Before referring to the provisions of law which call for interpretation, the stand taken by the appellant may be first ascertained. In the impugned judgment reference has been made to paragraph 20 of the petition which spells out the basis for challenging the tax levied on Free Reserves. It would be proper to reproduce, the same as follows:- "20. That in the case of free reserves, the submission of the petitioner is that they cannot be treated as income on the basis of any conceivable definition which is relatable to the ordinary or dictionary use of the said term. What the legislature is purporting to tax is profit which have already been taxed in the hands of the company and then retained as reserves instead of being distributed in the shape of dividends. The submission of the petitioner is that the profits, once they have been taxed, cease to be income when they are merely retained as reserves. Thus, the Federal Legislature by artificially defining the word 'income' in the Income Tax Act to purportedly cover such reserves has quite clearly exceeded its constitutional authority and the resulting legislation is, in the submission of the petitioner, liable to be struck down on the ground of an ultra vires exercise in legislative power."
After referring to various judgments the learned Judges observed as follows:- "We are in respectful agreement with the above observation of the. Indian Supreme Court and after examining the case set up in para. 20 of the petition in the light of the above observations we are of the view that the Finance Acts, 1967 and 1968 by which the impugned amendments were introduced in the Income Tax Act providing for levy of income tax on 'free reserves' are intra vires. It is stated in para. 20 of the petition that the amount lying in 'free reserves' of the company were in fact profits of the corporation on which income-tax was already paid but this fact is not sufficient to render the levy of tax on such sums ultra vires of the powers of legislature under the Constitution.
On a fair reading of para. 20 of the petition we are convinced that the amount lying in 'free reserves' of the petitioner were nothing but unappropriated profit which could legitimately be taxed by the legislature as 'income' in exercise of its power under Entry No.43(c) of the Third Schedule to the Constitution of 1962."
According to the appellant once an income has been taxed and thereafter retained as Free Reserve, it loses its character of being income and cannot be treated as such for the purposes of imposing further tax. The learned counsel for the appellant has referred to the following judgments which were cited before the learned Judge of the High Court for interpreting the meaning and connotation of the word 'income':-
(1) Maharajkumar Gopal Saran v. Commissioner of Income Tax (1935 Vol, 3, ITR Page 237).
(2) Navinchandra Hafatlal, Bombay v. Commissioner of Income Tax (1954 Vol. 26 Page 758).
(3) K.P. Varghese v. Income Tax Officer AIR 1981 SC 1922.
(4) Mst. Samino Shoukat Ayub Khan v. Income Tax Officer (PLD 1981 SC 85).
In this regard reference can be made to a recent judgment of our Court in the Commissioner of Income Tax, Rawalpindi, v. M/s. Haji Moula Bux Corporation, Sargodha, PLD 1990 SC 990 in which the following observation from Samino Shukat v. Commissioner of Income Tax, PLD 1981 SC 85 was quoted and relied upon:- "It will be seen that the term 'income' as used in the Income Tax Act is, indeed, a term of wide significance and generally and ordinarily it connotes a periodical monetary return, coming in with some sort of regularity or expected regularity, from a definite source; but, as observed by the Privy Council, the multiplicity of forms which income may assume is beyond enumeration; and income need not necessarily be the recurrent return from a definite source; though it is generally of that character. It may consist of a series of separate receipts, as for instance happens in the case of professional earnings. In the last analysis, the question whether a particular kind of receipt is income or not would depend for its answer on the peculiar facts and circumstances of the case. If the nature of the receipt and its source are not satisfactorily explained by the assessee, fact which are generally within his peculiar knowledge, the Income-tax Officer may legitimately presume that the amount in question is an income of the assessee from an undisclosed source.
Once a finding is recorded that the amount in question could be treated as income within the meaning of the charging section, section 3 of the Income Tax Act, the burden of proving that the income qualified for exemption under any of the clauses of section 4 of the Act was on the assessee. Subsection (1) of section 4 of the Act provides that 'subject to the provisions of the Act, the total income of any previous year of any person includes all incomes, profits and gains from whatever source derived". Subsection (3) of the same section then enumerates exemptions, and the operative words are 'any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them........ " It was for the appellant to show that she was covered by the exemption granted by clause (vii) of subsection (3). This she clearly failed to do, for the reason that she could not satisfactorily explain the source of the entire amount of cash found in her hands, nor of the total accretions thereto in subsequent years.
It does not need much reasoning to see that if the source of income is not disclosed or satisfactorily explained, then it is not possible to hold that the income was not from business or from the exercise of a profession, vocation or occupation;"
The meaning and connotation of the word 'income' as used in Income Tax Act has clearly been spelt out in the aforestated observation and needs no further illucidation.
5. From the assessm ent orders for the assessment, years 1968-69 and 1969-70 it seems clear that wh6n the appellant filed its returns in the books of account Rs. 699,61,541 and Rs.145,19,960 had been shown as free reserve for the respective years. To begin with these amounts were part of the total income assessed under section 23(3) of the Act. Thereafter, the Free Reserve was in excess of the paid-up capital in addition to income-tax, further tax @ 10% was assessed on the excess amount of Free Reserve. According to the learned Advocate for the appellant after income-tax had been assessed the same amount or part of it could not again be treated as income. The learned counsel has not cited any authority to substantiate the contention that after an income has been assessed to tax it ceases to be income. All the judgments cited define what is the meaning of income. This contention calls for interpretation of the provision of the Constitution particularly item 43(c) of the Third Schedule of the Constitution of 1962. Under Article 131 of the said Constitution the Central Legislature had exclusive power to make laws in respect of any matter enumerated in the Third Schedule. Item No.43(c) reads as follows:- "(a).........................
(b) ........................
(c) Corporation taxes and taxes on income other than agricultural income."
The principles of interpretation of the provisions of Constitution are well settled. In this regard the learned counsel for the appellant has relied on Navinchandra Mafatlal, Bombay v. Commissioner of Income Tax, Bombay City (1954) 26ITR 758, where it was observed:- The cardinal rule of interpretation, however, is that words should be read in their ordinary, natural and grammatical meaning subject to this rider that in construing the words in a constitutional enactment conferring legislative power the most liberal construction should be put upon the words so that the same may have effect in their widest amplitude."
Reference has also been made to L.P. Varghese v. Income Tax Officer. Ima Ghulam and others AIR 1981 SC 1922 in which principles of interpretation of Statutes have been set out. It quoted Judge Learned Hand that:- ....It is true that the words used even in their literal sense, are the primary and ordinarily the most reliable, source of interpreting the meaning of any writing, be it a Statute, a Contract or any thing else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that Statutes always have some purpose an object to accomplish whose sympathetic and imaginative discovery is the surest guide to their meaning."
We would, however, like to mention the following judgments of our Supreme Court in which principles of interpretation of Constitution have been laid down:~
(1) In Special Reference No. 1 of 1957, PLD 1957 SC (Pak.) 219.
(2) The State v. Ziaur Rehman and others PLD 1973 SC 49.
(3) Federation of Pakistan v. Saeed Ahmed Khan and others PLD 1974 SC 151, in which the principles enunciated in Ziaur Rehman's case have been summarised at page 165.
(4) Shireen Munir and others v. Government of Punjab PLD 1990 SC 295.
The Constitution provides governance to the country, confers rights, privileges and liabilities on the citizens and also controls the working in all fields of life. It is a living document and is to be interpreted in a widest possible manner to ensure continuity and balance in the several constituents and organs of the State. The item in the list in respect of which power of taxation can be exercised should not be interpreted in a restricted and pedantic manner. In this regard Mr. AA.
Fazeel, the learned ASC, has pointed out that the appellant's counsel had referred to United Provinces v. Mst. Atiqa Begum and others AIR 1941 Federal Court 16, where it was observed that:-- "None of the items in the list is to be read in a narrow or restricted sense, and that each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended in it."
7. In this background we have to consider Entry No.43(c) which authorised the Central Legislature to levy tax on income and Corporations. The definition of the word 'income' in the Act is inclusive in nature and is not exhaustive. In this state of Statutory affairs the word 'income' has not to be given its literal and dictionary meaning but it is to be expanded to all possibilities and amplitude which may be covered by it in a wider and liberal sense particularly to save the purpose for which the statute has been enacted. According to the judgments referred above income is a receipt in the hands of assessee not necessarily a recurrent return from a definite source but generally in the light of the Act it is a periodical monetary return from known or unexplained source. But the determination of receipt as income depends upon the facts and circumstances of the case.
8. Section 4 makes the Act applicable to the total income of the assessee received or deemed to be received in Pakistan during the previous year by or on behalf of the assessee or accrues or arises or deemed to accrue or arise in Pakistan during the previous year if he is a resident or accrues or arises to such person outside Pakistan. The fact remains that Free Reserve is a part of total income which has been assessed to income-tax. Free Reserve is that part of total income which represents profit earned by the appellant but not distributed among the shareholders. Such income has been made subject to a further tax mainly for the reason to discourage the practice to accumulate profit without distributing it among the shareholders.
9. It is only if the income is received, arises or accrues or is deemed to receive, arise or accrue when an assessee is subjected to tax. The deeming provision presupposes accrual of income to the assessee but by fiction of law shifts the 'locale of accrual of the income'. A deeming clause makes a thing to be as provided by Statute though in reality it is not so. According to Privy Council in C.I.T, v. Bombay Trust Coportion 4 I.T.C. 312, the term "deemed to receive or accrue"' conveys the meaning that in reality it is not so but the Statute treats it as if it were'. According to Kanga. And Palkhiwala in Income-Tax, Volume I, VII th edition:- "Thus, the phrase 'deemed to accrue or arise to him in India during such year' and the corresponding phrase with reference to receipt in this section, involve four possible concepts; (a) artificial accrual or receipt, (b) artificial place of accrual or receipt, (c) artificial chargeability of a person other than the actual owner of the income, and (d) artificial year of taxability." '
Thus, the deeming provision in section 4 of the Act relates to the aforestated possibilities in relation to receipt or accrual of income. By this provision any thing which is not income cannot be treated as income. It, therefore, follows that Receipt is not the sole test of chargeability. Any income may not have been actually received but if it is deemed to arise, accrue or receive then it is chargeable to 'tax'. See Kesharu Mills Limited v. C.I.T. 23 I.T.R. 230 and C.I.T. v. Thiagaraje Chetty 24 I.T.R. 525. The material words 'receive, accrue or arise' play important role in fixing the chargeability to tax. The words 'accrue and arise' convey the same meaning but as pointed out by Fry, J. In Colquloun v.
Brooks (1882) 21 Q.B.D. 52, 59..) that both the words are used in contradistinction to the word 'receive' and indicate the right to receive.' Reference can be made to C.I.T, v. Ahmed bhai Umer bhai, 18 I.T.R. 472(SC). Therefore, unless during the previous year income has been received, accrued or arisen or deemed to be so income tax cannot be charged. Before charging tax an assessee must be shown to have received income or it has arisen and accrued or deemed to be so under the Statute. Any amount which is not an income cannot be subjected to tax. In Corpus Juris Secundum, Volume 89, at page 731, it has been observed: "Income for any given period of time is the amount of gain so derived during the designated period. That which is not income cannot be made taxable by calling it income."
10. We have discussed above various authorities referred by the learned counsel for the appellant but no judgment has been cited to establish that after an income is received and assessed to tax it ceases to be income. We have, however, given considerable thought to this proposition and have been able to lay hands on few judgments which deal with this aspect of the case. In Keshav Mills Ltd. v. Commissioner of Income Tax (1953) 23ITR 230 it was observed:-- "It is true that the words used in section 41 (a) relate to the first receipt after the accrual of the income. Once it is received by the party entitled to it, in respect of any subsequent dealing with the said amount it cannot be said to be 'received' as income on that occasion. (Per Kania, J. In P. H.
Ramdar). The 'receipt' of income refers to the first occasion when the recipient gets the money under his own control. Once an amount is received as income, any remittance or transmission of the amount to another place does not result in 'receipt' within the meanings of this clause at the other place. This was definitely established by the Privy Council in Pondichery Railway Co. v.
Commissioner of Income Tax and in Commissioner of Income Tax v. Mathias. If therefore, the income profits or gains have been once received by the assessee even though outside British India they do not become chargeable by reason of the moneys having been brought in British India, because what is chargeable is the first receipt of the moneys and not a subsequent dealing by the assessee with the said amount. In that event they are brought by the assessee as his own moneys which he has already received and had control over and they cease to enjoy the character of income, profits or gains."
Relying on Keshav Mills Limited's case Kanga and Palkhiwala in their book Income Tax, Volume ((I)), Seventh Edition, said that "income, after the first receipt, moves merely as money". Although in section 4(1) the words 'first receipt' have not been used, term 'receipt' had to be interpreted in the same manner otherwise it may result in unjust and absurd results and income in the hands of the assessee on the basis of the first receipt may be subjected to income-tax more than once which unless specifically provided in a clear and unambiguous language, is disapproved.
11. In re: Kamdar 14 ITR 20, Kania, J. Observed:- "It cannot be disputed that the words used relate to the first receipt after the accrual of income.
Once it is received by the party entitled to it, in respect of any subsequent dealing with the said amount it cannot be said to be received as income on that occasion."
At this stage it may be clarified that under the Income-tax Act, 1922, as well as the Income Tax Ordinance, 1979, receipt of income is not the sole test of chargeability. Tax can be levied on income which, accrues, arises or is deemed to accrue or arise without being received. Such deduction is manifest from sections 7, 8 and 9 of Income Tax Act. Under Section 7 salary, and perquisites etc which are due to an assessee whether paid or not are taxable. Under section 8 interest on securities receivable is charged to tax. Section 9 provides that tax shall be payable in respect of the bona fide annual value of the property subject to conditions specified therein. Even in case of income from business or profession if the assessee follows mercantile system of accounting, he will be liable to pay tax on the profit accrued though may not have been received. Therefore, under the Act , chargeability depends on when and where the income has been received, accrued or 'arisen' or if income is deemed to have been received, accrued or arisen. The deeming clause is the artificial way by legal fiction to charge income to tax.
12. Applying the aforestated principles to the facts of the case we find that out of its total income chargeable to income-tax the appellant transferred in the books of account a certain amount as free reserves instead of paying it to the shareholders in the form of dividend. Such transaction can hardly be termed as income received, accrued or arisen or deemed to be so in the hands of the assessee. Where an assessee keeps the whole or part of the income, transfers or reserves it for some other purposes in his own control such money will not be an income which has arisen, accrued or, received by the assessee. Under item No.43(C) of the Third Schedule of the late Constitution of 1962 the Central Legislature had exclusive power to make laws in respect of 'Corporation taxes and taxes on income other than agricultural income'. Any money which is not an income cannot be classified as income and subjected to tax on income. Thus, after income-tax has been assessed on the income of a company and part of it is treated as free reserve the same cannot again be subjected to tax on income for the second time because such free reserve is not an income.
13. Mr. AA. Fazeel has contended that the levy may amount to double taxation which is not prohibited by law. He has referred to M/s. Jain Bros, and others v. Union of India and others AIR 1970 SC 778. In this case an amendment made in section 23, subsection (5) of the Income Tax Act was under consideration. The effect of the amendment was that a registered firm was liable to pay income-tax independently of the tax payable by the individual partners of the firm on their share of profit. Prior to the amendment if the firm was registered it was not liable to pay tax but the partners were to pay on their individual shares. The assessee challenged that the firm and its partners do not constitute separate entity and either the firm or the partner can be taxed but the same income in the hands of both cannot be simultaneously subjected to tax. It was observed as follows:-- "It is not disputed that there can be double taxation if the Legislature has distinctly enacted it. It is only when there are general words of taxation and they have to be interpreted they cannot be so interpreted as to tax the subject twice over to the same tax (vide Channel, J. In Stevens v. The Durban-Rodde Poort Gold Mining Co. Ltd. (1909) 5 Tax Cas. 402.) The Constitution does not contain any prohibition against double taxation even if it be assumed that such a taxation is involved in the case of a firm and its partners after the amendment of section 23(5) by the Act of 1956. Nor is there any other enactment which interdicts such taxation.................... If any double taxation is involved the legislature itself has by express words, sanctioned, it is not open to anyone therefore to involve the general principle that the subject cannot be taxed twice over."
Mr. A A. Fazeel has also referred to Arvinder Singh etc. v. State of Punjab AIR 1979 SC 321, where it was observed that:-- "There is nothing in Article 265 of the Constitution from which one can spell out the constitutional vice called Double Taxation if on the same subject-matter the Legislature chose to levy tax twice over. There is no inherent invalidity in the physical adventure here other provisions exist."
It is, thus, clear that unless there is any prohibition or restriction imposed on the power of Legislature to impose a tax twice on the same subject matter double taxation though a heavy burden and seemingly oppressive and inequitable cannot be declared to be void or beyond the powers of the Legislature. It may, however, be noted that double taxation can be imposed by dear and specific language to that effect. Where the language is not dear or specific by implication such levy cannot be permitted. According to Palkhiwala and Kanga:-- "broadly stated the Principle of Income Tax Act is to charge all income with tax, but in the hands of the same person only once."
There could be double taxation if the Legislature distinctly enacted it, but upon general words of taxation, and when you have to interpret a taxing Act, you cannot so interpret it as to tax the subject twice over to the same tax. Reference can be made to:--
(1) Jain Bros. v. Union of India 77 ITR 107 (SC).
(2) Stevens v. Durban Roodprott Goldmining 5 TC 402 (407).
(3) Laxmipat Singhania v. C1T12 ITR 291 (294).
In Corpus Juris Secundum, Volume 84 it has been said:- "Double taxation should not be permitted unless the Legislature has authority to impose it. However, since the taxing power is exclusively a legislative function, as discussed supra and since, except as it is limited or restrained by constitutional provisions it is absolute and 'Unlimited, as considered supra 4, it is generally held that there is nothing, in the absence of any express or implied constitutional prohibition against double taxation to prevent the imposition of more than one tax on property within the jurisdiction as the power to tax twice is as simple as the power to tax once. In such case whether or not there should be double taxation is a matter within the discretion of the legislature....... Double taxation is not favoured by the Courts. It has frequently been held that it is against public policy, except where the legislative body has clearly declarad to be contrary, and it is to be avoided whenever possible, although if there is a clear legislative intent that a double tax shall be imposed such Legislative intent will prevail. ---------------------------------------- Double taxation, not only is not presumed or inferred, but there is a presumption against the intention of the Legislature to impose, double taxation on the same property which prevails unless overcome by the express words of the statute. Double taxation is permitted only where it has been clearly imposed.
Any construction of a taxing statute which results in taxation of the same property twice is to be avoided if possible, or if the statute is ambiguous, uncertain of its construction, doubtful, or if it may be reasonably interpreted so as to avert that result, or if the intent to impose double taxation is not clearly expressed and such construction should never be adopted unless necessary to effect the manifest intent of the Legislature. Doubts as to whether double taxation has ben imposed should be resolved in favour of the tax-payers. However, at least in jurisdictions where double taxation is not unconstitutional, as discussed supra 40, where the language of the (Statute is clear, the fact that double taxation results therefrom will not justify the Court in disregarding the language.
A statute providing relief from double taxation should be liberally construed".
14. In the light of the above discussion we have now to examine the levy challenged by the appellants. The entire argument has centered round the point.