I. T. A. NO. 815-KB OF 1978-79, DECIDED ON 5TH MARCH, 1979. Versus I. T. A. NO. 815-KB OF 1978-79, DECIDED ON 5TH MARCH, 1979.
ORDER
A. A. ZUBERI (MEMBER).‑ The assessee‑Company acts as an exhibitor of films. The Appeal is directed against the learned Appellate Assistant Commissioner, Range, No. 6580/77‑78, relating to assessment year 1977‑78. The following issues came up for adjudication:‑
2. Telephone.--‑Out of a claim of Rs. 4,861, a sum of Rs. 2,000, was disallowed which the learned Appellate Assistant Commissioner confirmed. The learned counsel argued, in a half‑hearted manner, that the disallowance was excessive considering the fact that it came to 41% as against a disallow ance of 33% in 1976‑77 and 28% in 1975‑76. We do not see any merit in this argument because the disallowance was made in the past on the basis of estimated ad hoc sums and no percentage was ever evolved. It would, be therefore, unnecessary to interfere.
3. Surcharge.-‑The Total Income of assessee was determined at Rs. 1,96,958. The assessing Officer excluded a sum of Rs. 82,240, as `appropriated profit' and subjected the balance of Rs. 1,14,718, to a Surcharge at 10 % as per clause `a' of Part III of the Finance Ordinance, 1977, (Order No. II of 1978). The learned Appellate Commissioner confirmed this statement with the brief observation that the calculations by the assessing Officer were in accordance with the provisions of the Act. The learned Authorised Representative for the Assessee explained that the entire book -profit at Rs. 1,65,240, was taken to Appropriation Account, whereafter, on amalgamation with the profits brought forward from earlier years, in the sum of Rs. 7,93,143, and adjustment of a provision of Rs. 83,000 for the purpose of tax, the balance of Rs. 8,75,384, was carried to the Balance Sheet and shown under the head Reserves & Surpluses. Therefore, the learned Authorised Representative expressed surprise, wherefrom the Assessing Officer extracted the figure of Rs. 82,240, which he treated as "appropriated profit". It was emphasised by the learned counsel that the Finance Ordinance excluded from Surcharge the amounts retained for capitalisation and amounts retained to meet working capital requirements which in simple words meant that surcharge was to be levied on that part of the Total Income which was "not retained in business and was given out as Dividend to the share-holders". With reference to their own case the learned Authorised Representative pleaded that the entire profit of the year was transferred to Reserves & Surpluses and the whole amount was retained in business. Therefore, no Surcharge could be levied. An argument was developed that the Reserves & Surpluses in the Balance Sheet aggregated Rs. 8,96,856, while Advance Tax payments, appearing on the Assets side stood at Rs. 11‑42,543, hence as and when pending assessments were to be completed and the Advance Taxes adjusted, the Assessee would be left with no fund in the Reserves & Surpluses. This precisely was the reason why Reserves & Surpluses were separately shown and were not capitalised. The learned Authorised Representative insisted, with vehemence, that the payment of taxes being an item of current liabilities, was a requirement of tire working capital and, therefore, the entire profit for the year was retained for meeting working capital requirements and hence fell out of the ambit of Part III of the Finance Ordinance for levy of Surcharge. The Departmental Representative on his turn pleaded that the Total Income was to be reduced only by expenses having two characteristics specifically men tioned in clause `a' of Part III, thus all other considerations were extraneous and the two Officers below were correct in levying surcharge on that part of the Total Income which was neither retained for capitalisation, nor for meeting working capital requirements. The Departmental Representative however, expressed his inability to pin down the head from where the assessing Officer picked up an amount of Rs. 82,240, which he treated as an `appropriated profit'.
We have given our anxious consideration to the pleadings before us In recent months we have come across many appeals where the bone of contention was scope of the words "capitalisation" and "working capital requirements". These terms have unfortunately not been defined in the Income‑tax Act or in the Finance Ordinance, nor the Central Board of Revenue has been empowered to lay down principles in this behalf; hence, the difficulty. As far as the accounting concerned and as the terms are generally understood in business circles, "income retained for the purpose of capitalisa tion represents profits of the company which are not distributed to shareholder but are set apart with the intention to convert these into `paid‑up share capital'. This is generally done through issue of bonus shares. So far as the "working capital requirements" is concerned it may vary from company to company, depending on the nature of trading activities or business policies followed. Speaking in general terms, "working capital" represents the amount available for day‑to‑day expenses of running the business, or as an Accountant would say: excess of current assets over current liabilities. The authorities on Accountancy are unanimous that there is difference between "working capital" and "working capital requirements", the latter may be higher or lower than the former. The "requirements of working capital", all Accountants agree, depend on such factors as average period of credit allowed by the business; stock required to feed the business; running expenses and credit worthiness of tile business. With these principles in mind, we are of the view that facts and circumstances of each case are to be a claim for `working capital requirement' is reasonable or genuine. Unless that is done it would not be easy to accept any amount as representing `working capital requirements' which the assessee chooses to claim, or to totally reject the claim in a sweeping manner, without any valid basis. Similar is the position with regard to the amounts retained for the purpose of "capitalisation". Capitalisation is recommended by the Board of Directors, approved by the General Body of the shareholders and formalities prescribed by various laws are to be complied with. Here also the concern of the Assessing Officer should be to ascertain whether the amount claimed as "retained for capitalisation" is really being withheld for that purpose and what steps, if any, have been taken in this behalf. This precisely is the reason why a proviso has been added to clause `a' of Part III, authorising levy of Surcharge at a later stage if the sum retained is subsequently distributed. No such exercise was made in the present case the conclusion is relatively clear that the assessing Officer from nowhere picked up the amount of Rs. 82,240, and treated it as 'appropriated profit' `but did not say a single word when discarding Assessee's stand that the entire profit of the year was retained to meet the "working capital requirements". We, therefore, deem it fit to vacate the order of the learned Appellate Assistant Commissioner and to remit the case back to tile Assessing Officer for sc reutilising the matter on principles repelled out above.
The Appeal stands adjudicated as above .
Case remanded.