I.T.A. No. 1526/KB of 2002, decided on 30th June, 2003. Versus I.T.A. No. 1526/KB of 2002, decided on 30th June, 2003.

ORDER

1. The assessee in this appeal has taken objection to the order, dated 28-6-2002 passed by the learned IAC invoking section 66A of the Income. Tax Ordinance, 1979 imposing tax under section 12(9A) at Rs.12,958,300.

2. Further objection is taken to the order working out of tax at 10% of Rs.12,958,300 on the amount of reserves exceeding 50 % of paid up capital under provision of section 12(9A) of the Income Tax Ordinance, 1979 worked out as per the assessment order of the relevant period. The charging of surcharge at Rs.810,753 on increased tax demand against the actual surcharge of Rs.162,838 and order not allowing tax credit at Rs.8,872,067 is also challenged through this appeal.

3. The learned IA.C noted that the Assessing Officer while finalizing the assessment overlooked the provision of section 12(9A) of the Income Tax Ordinance, 1979, rendering the order passed on 9-7-2001 on a total income of Rs.47,025,735 against declared income at Rs.43,067,624 as erroneous insofar as prejudicial to the interest of Revenue. He, therefore, issued a show-cause notice under section 66A vide Letter No. 1027, dated 2-4-2002. The contents thereof are reproduced hereunder: --

2. Paid-up capital

3. 30,834,000

4. 50% of paid up capital

5. 15,417,000

6. General reserves

7. 415,000,000

8. Profit before taxation

9. 48,658,000

10. Less: Provision for taxation (deferred taxation)

11. 3,419,590

12. Less: Taxation

13. 15,576,000

14. Profit after taxation

15. 33,082,000

16. Dividend @ 40%

17. 13,232,800

18. The exact working for the addition under this head is given as per the following schedule.

19. Paid-up capital

20. 30,834,000

21. 50% of paid-up capital

22. 15,417,000

23. Amount of Reserves exceeding 50% of paid capital

24. 219,583,000

25. Profit before taxation

26. 48,658,000

27. Provision for taxation at Rs.15,576,000 not allowed ,

- --

28. Tax as per order & 11-30

29. 3,419,590

30. Profit after actual tax required

31. 45,238,410

32. Dividend @ 40% to be paid to avail exemption Wider clause 159

33. 18,095,364

34. Divided proposed to be paid

35. 15,417,000

36. Short payment of dividend evident.

37. 2,678,364

4. In reply thereof, the assessee furnished a letter referring the representation made to the Member Income Tax, Central Board of Revenue, Islamabad. The contents thereof, are reproduced here under: ---

38. "It is respectfully submitted that under section 12(9A) read with clause (59) of Part IV of the Second Schedule tax is not applicable if the company has distributed 40% of its after tax profits as per the Annual Printed Accounts, of the company irrespective of the actual income assessed or tax imposed in the assessment order. Some of the learned DCITs/IACs are interpreting the word "after tax profit" on the basis of actual income assessed or tax imposed in the assessment order of the relevant year. In our humble view the word `after tax profits' as used in clause (59) of Part IV of the Second Schedule to the Income Tax Ordinance, 1979, will mean `after tax profit' as per Annual Printed Accounts of the company and not as per the assessment order of the relevant period.

39. It is requested that explanation of the words, `after tax profits' used in clause (59) of Part IV of Second Schedule to the Income Tax Ordinance, 1979, may please be issued to avoid unnecessary litigation on the subject. "

5. Since the assessee did not reply any more, although the matter was adjourned from time to time, therefore, the Assessing Officer made the following additions modifying the income originally assessed:--

40. Income as per, original assessment order (after adjustment of losses)

41. 9,868,945

42. Add: Reserves exceeding 50% of paid-up capital Total Income

43. 129,583,000

44. Total income

45. 139,451,945

46. Less: addition under section 12(9A) for separate Consideration

47. 129,583,000

48. Balance income

49. 9,868,945

50. Tax on normal income 3,256,752.

51. Tax on other income @ 10% 12,958,300

52. 16,215,052

53. Surcharge @ 5 %

54. 810,753

55. Total tax

56. 17,025,805

57. Add: WWF

58. 940,515

59. Total

60. 17,966,320

61. Less: Paid under section 50 13,787,387

62. Under section 54 845,679

63. 14,633,066

64. Less: Refunds issued 1,400,894

65. Ref. Adjusted under 10,272,961

66. 4,360,105 section 53 8,872,067

67. Balance Tax payable

68. 13,606.215

6. We have heard the learned representatives of the two parties. During the course of arguments, the learned A.R. furnished complete description of profit before taxation, taxation, profit after taxation, and dividend at the rate of 5 % per share. The details thereof, are hereunder:

69. Description

70. As per printed account

71. As per return

72. Profit before taxation

73. 48,658,000.

74. 4,30,67,624

75. Taxation

76. 1,55,76,000

77. 1,57,36,163

78. Profit after taxation

79. 3,30,82,000

80. 2,73,31,461

81. Dividend @ Rs.5 per share (1999 Rs. 2.50)

82. 1,54,7,000

83. 154,17,000

84. Percentage

85. 46.60%

86. 56.40%

87. Note: Tax deductions under section 50 Rs.1,47,21.679

1. Tax paid under section 54 alongwith return Rs.8,45,679

2. Tax charged on assessment under section 62 due to brought forward loss. Rs.34,19,590.

7. The learned A.R. argued that the learned IAC has erred in imposing tax under section 12(9A) of the Income Tax Ordinance, 1979 working out tax at 10 % on amount of reserves exceeding 50 % of paid-up capital i.e. Rs. 129,583,000 under the provisions of section 12(9A) of the Income Tax Ordinance, 1979 which is to be worked out on the basis of annual printed account of the company and not as per the assessment order of the relevant period. He urged that the meaning of the term, "after tax profit" for the purpose of clause (59) of Part IV of the Second Schedule to the Income Tax Ordinance, 1979 has been discussed in detail in C.B.R. letter, dated 8-6-2001 and letter/directive, dated 16-6-2001 that for the purpose of tax under section 12(9A), 40% after tax deposits are to be computed on the basis of assessee's declared final account and not on the basis of assessed profit. The- details thereof are hereunder:--

88. "Government of Pakistan

89. Ministry of Finance, Economic Affairs,

90. Statistics and Revenue Division,

91. (Revenue Division)

92. No. F. 12(9A) ITP. 99 Islamabad June 8, 2001

93. Messrs .M. Yousuf Adil Saleem & Co.,

94. Chartered Accounts.

95. 1st Floor, Rasheed Plaza, 24-D

96. Blue Area, Islamabad.

97. SUBJECT: CLAUSE (59) OF PART IV OF SECOND SCHEDULE TO THE INCOME TAX ORDINANCE, 1979 DEFINITION OF "AFTER TAX PROFITS"

98. Please refer to your Letter No.557 of 2001, dated May 29, 2001 on the above subject. The Board has issued necessary instructions clarifying that for the purposes of tax under section 12(9A) 40% after tax deposits are to be computed on the basis of assessee's declared final accounts and not on the basis of assessed profits.

99. (Sd.)

100. (Abdul Hamid)

101. Secretary (IT Policy)

102. Tel: 9203993

103. "Government of Pakistan

104. Ministry of Finance, Economic Affairs,

105. Statistics and Revenue Division,

106. (Revenue Division)

107. No. F. 12(9A) ITP. 99 Islamabad June 16, 2001

108. To. Regional Commissioners of Income Tax Corporate/ Southern Central Eastern Northern Regions, Karachi/ Multan/Lahore/ Islamabad.

109. The undersigned is directed to draw your attention to clarification bearing even number, dated June 8,2001 and to that it has beets brought to the Board's notice that the said clarification is being misinterpreted by some assessee's with a view to obtain an unfair advantage. As the said clarification was obtained without disclosing the actual facts of .the case, the matter has been reconsidered and it is clarified that Board's clarification under reference, did not allow, in any way, any reduction on profits through charging inadmissible expenses provisioning.

2. It is further clarified that the expression `after tax profit' as used in clause (59) of Part-IV of Second, Schedule to the Income Tax Ordinance, 1979 refers to profits computed in accordance with the generally accepted and understood accounting audit principles and standards and the Income Tax Ordinance. The instructions referred to above, also do not permit or endorse any scheme or arrangement or presentation or declaration intended to manipulate profit which ought to be declared under the Income Tax Ordinance either by deduction expenses or making provision of deductions inadmissible under the said Ordinance, either by deducting expenses or making provision for deduction inadmissible under the said Ordinance. The ultimate purpose of which is to avoid company's obligations under section 12(9A).

110. The above clarification may please be brought to the notice-of all concerned.

111. (Sd.)

112. (Abdul Hamid)

113. Secretary (IT Policy)

114. Tel: 9203993"

8. The learned counsel for the assessee also relied upon an unreported judgment passed in I.T.As. Nos. 2256 and 223/KB, wherein it is clarified that the expression "after-tax profits" as used in clause (59) of Part IV of the Second Schedule to the Income Tax Ordinance, 1979 refers to profits computed in accordance with the generally accepted and understood accounting of audit principles and standards.

9. In the circumstances supra, and in view of the order already passed by the learned Bench in the above referred cases and clarification issued by the Ministry of Finance. Economics Affairs, and circulation of direction by the learned RCIT, there remains no other course except to maintain the position that/for the purpose of section 12(9A), 40% of "after-tax profits" are to be computed on-the basis of assessee's after tax profit as declared in its final accounts and not on the basis of its assessed profits as the term after tax profits refers to profits computed, in accordance with the generally accepted and understood accounting audit principles and standards of Income Tax Ordinance, 1979.

10. We, therefore, find that the learned IAC has jurisdiction to examine and verify the genuineness of the assessment order to arrive at "after tax profits" of assessee, however, order under section 66A imposing tax under section 12(9A) of the Income Tax Ordinance, 1979 on the basis of assessment order of the relevant period, is apparently unjustified and contrary to the findings recorded above. In the circumstances supra, the learned IAC is directed to compute the after tax profits in accordance with the generally accepted and understood accounting, audit principles and standards of Income Tax Ordinance, after verifying the genuineness of the various deductions claimed by the assessee to arrive at its "after tax profits".

11. The remaining issues are outcome of main issue discussed and decided above, besides remedy is also available in this context by way of rectification, hence the appeal in respect of remaining issues, charging surcharge on increased tax demand, and not allowing tax credit for tax paid, stands dismissed being infructuous.

115. C.M.A./1009/Tax (Trib.) Order accordingly