1. NASIM HASAN SHAH, J.---The question arising in the above cases is whether the amount provided by a Company in its accounts for discharging its income tax liability payable for the relevant assessm ent year can be treated as retained income for levy of surcharge under Part-III of the Finance Ordinance of 1977 (as amended vide Ordinance II of 1978)?
2. The relevant provision, which requires interpretation, reads as under: PART III (See Section 4)
3. Rates of Surcharge
(A) In the case of every company;10 per cent of the income tax and super tax payable on total income as reduced by so much of the income as has been retained for the purpose of capitalization or for meeting working capital requirement; Provided that if the income so retained is distributed in any subsequent years, the surcharge shall be payable on the income as distributed at the same rates in that year."
4. The main judgment dealing with this question, which was subsequently followed by the tax authorities in all these cases, was delivered by the Income Tax Tribunal in the case of Commissioner of Income Tax v. M/s. Facto Sugar Mills Ltd., Karachi (which is also the subject- matter of appeal before us namely CA. No,651-K of 1990).
5. Briefly stated the facts of this case were as follows: The assessing officer (I.T.O.) in his order imposed surcharge under section 4 of the Income Tax Act on the Company and in doing so calculated its retained income by deducting from the total income following two amounts:---
1. Dividends = Rs, 34,64,000.00
2. Tax payable =Rs, 44,85,537.00 Total Rs, 79,49,537.00 Accordingly, after deducting this amount from the total income computed at Rs,1,00,37,993 the retained income was determined at Rs,20,88,350 and surcharge levied on the balance of Rs,79,49,537.
6. On appeal, the learned Appellate Assistant Commissioner held that the amount of tax payable Rs,44,85,537.00 being retained income should not have been deducted and treated accordingly.
7. Before the Income Tax Tribunal, it was contended by the Department that the exclusion of the amount earmarked towards the tax payable could not be treated as retained earnings as found by the I.T.O.
8. The Tribunal, however, did not accept this submission observing that as working capital meant the excess of current assets over current liabilities, the exclusion of the amount of Rs,44,85,537 (on account of the tax payable being a current liability) was a justified exclusion, as this amount was retained to meet the working capital requirements.
9. Be that as it may on the application of the Commissioner of Income Tax the Tribunal, however, agreed to refer the matter for the decision of the High Court as it felt that the following important question of law did arise in this case for the decision, namely--- "Whether on the facts and circumstances of the case, the Tribunal was justified in holding that income tax liability payable for the relevant assessment year could be included for purposes of working out retained income for levy of surcharge?"
10. The High Court after a thorough examination of the question referred to it, concluded that the Tribunal was justified in considering the amount provided for discharging the income tax liability for the relevant assessm ent year did fall in the category of "retained income" for calculating the amount Liable to the levy of the surcharge.
11. Leave to appeal was granted by this Court as the interpretation placed on the expression "retained income" by the High Court for calculating the amount subject to the levy of surcharge involved a question of law of public importance which required an authoritative decision by this Court.
12. We have heard Mr. Shaik Haider, learned counsel for Income Tax Department, M/s. Sirajul Haq, W.F.
13. Vellani, Mansoor Ahmad Khan and all other learned counsel representing the respondents Companies and who wished to be heard and have carefully considered all aspects of the matters.
14. We find that although a great deal has been said on the value of balance-sheets, methods of account keeping, concepts of working capital etc. Basically the question involved in all these cases is whether the assessee companies despite having paid considerable amounts of money in advance to the Income Tax Department, under section 18-A of the Income Tax Act are still entitled to separately provide in their balance-sheets another amount in respect of their true liability in relation to the tax payable for the relevant assessment year and claim the same as "income retained" for meeting their working capital requirements?
15. The answer to this question depends upon the determination of the exact character of the payment made by an assessee under section 18-A namely whether it is payment of tax or payment on some other account.
16. The relevant portion of section 18-A is as under:- "18-A.---(1) In the case of Income other than income in respect of which provision is made under subsections (2) and (2B) of section 18 for deduction of income-tax at the time of payment, an assessee shall pay quarterly to the credit of the Central Government on the fifteenth day of March and the fifteenth day of June in each financial year, respectively, an amount equal to one-quarter or the income-tax and super-tax payable on so much of such income as is included in his total income of the latest previous year in respect of which he has been assessed under section 23.
17. (Underlining is ours)
18. A careful reading of the above provision indicates that the amount which is paid quarterly to the credit of the Central Government by the assessee has not been described in the text of the provision, as advance payment of tax (although these words appear in the marginal note of section 18-A) but are called payments made to the credit of the Central Government. Under the provisions of the Act, tax is charged in pursuance of the provisions of section 3 thereof. Herein rates at which income tax is to be charged is provided. There is no direct nexus between the payment made under section 18-A and the payment which is made under section 3. The nature of the payment made under section 18-A becomes clearer when, in addition to the provision of subsection (1) of section 18-A (providing for quarterly payments) the provisions of subsections (5) and (5A) are considered. These provisions show that the payment being made under section 18-A is a payment made merely on account, to be adjusted against the charge of income tax as finally ascertained and determined on completion of the regular assessment by the I.T.O. For the relevant assessm ent year. This is manifest from the C circumstance that simple interest at the rate of 4% per annum is to be paid by the Central Government on the amount paid under section 18-A from the date of the payment to 30th June 6f the financial year in which the amount was paid. This fact indicates that the amount payable under section 18-A is not a tax but merely a pre-payment of an amount towards the tax due. The said amount does not become the property of the Central Government but remains vested in the assessee company. Undoubtedly, it is an amount which must be paid in advance, in respect of tax, before it becomes due. But it (the tax) becomes due only after regular assessm ent and if on regular assessment nothing or a lesser amount is found due and payable; the Government, in that event, shall have to return the amount paid or the sum paid in excess with interest from the date of payment to the date of such assessment. Accordingly, in our opinion the amount paid under section 18-A is not a payment of the "income tax" in advance but merely the credit of an amount with the Central Government, which can be utilised and adjusted to the extent necessary towards the ultimate liability of income tax found due after it has been determined. Hence, the amount retained to meet the income tax liability payable for the relevant assessm ent year in the account books can legitimately be categorised as "retained income". Accordingly, its inclusion for purposes of working out the income retained for meeting the working capital requirements of the assessee company for purposes of levy of surcharge would be justified.
19. It is interesting to note that in the analogous section in the 1979 Ordinance (Income Tax Ordinance XXXI of 1979) whereby the earlier law on the subject viz. Income Tax Act, 1922 was repealed describes the payment as advance tax reads as under:- "53. Advance payment of fax:-
(1) Where the total income of any assesee (excluding income to which section 27 or subsection (1) of section 50 applies for the latest assessment year in respect of which the tax payable by him has been determined under section 59, 59A, 60, 62, 63 or 65 is in the case of a company not less than twenty-five thousand rupees, and in other cases, not less than fifty thousand rupees, he shall pay.
20. By way of advance tax to the credit of the Federal Government, on or before the fifteenth day of September, the fifteenth day of December, the fifteenth day of March and the fifteenth day of June, in each financial year, an amount equal to one-fourth of the full amount of income-tax and super- tax so determined to be payable in respect of that assessment year (without making any adjustment for any tax already paid by way of advance tax or otherwise), as reduced by the tax, if any, already collected or deducted and paid under section 50 in the said financial year."
21. (Underlining is ours)
22. It will be noted that the payment under section 53 of the present law expressly stated to be by way of "advance tax". This change made in law, which has replaced the earlier law (namely the Income Tax Act of 1922) confirms our opinion that the payment required to be made under section 18-A of the said Act to the Central Government was a payment on account towards the payment of a tax which is determined after regular assessment to be payable in the future assessment year.
23. In view of the foregoing discussion we are in agreement with the answer returned by the High Court to the question referred to it by the Tribunal that the income tax liability payable for the relevant assessm ent year could be included for purposes of working out "retained income" for levy of surcharge. At the conclusion of the hearings on 19-4-1992 it was announced that all these matters were being dismissed, for reasons to be given separately; herein above are our reasons for the aforesaid short order announced on that date.