MESSRS AL-HILAL AGENCIES LTD., KARACHI Versus INCOME-TAX OFFICER, COMPANIES CIRCLE XI, KARACHI AND ANOTHER
I. MAHMOOD, J. ‑This Constitutional Petition under Article 98 of the Constitution (1962) is directed against the imposition of penal interest by the Income‑tax Officer for the alleged default in payment of due instalment of advance tax in time under section 18‑A(l) of the Income‑tax Act, 1922 (hereinafter referred to as the Act) in respect of the assessment year 1968‑69 as being illegal and without lawful authority.'
2. Briefly, the facts are that the petitioner, A1‑Halal Agencies Ltd., carried on the business, inter alia, as managing agents of Pan‑Islamic Steamship Company Limited of Karachi (hereinafter referred to as the managed company) on an agreed managing agency commission. Under section 18‑A(1) of the Act, in assessee is required to pay advance‑tax in quarterly instalments on the basis of the last completed assessment on or before the specified dates. As required under section 18‑A (4), the assessee informed the Income‑tax officer by its letter dated 2nd August 1967 that as the assessee would be receiving the managing agency commission from the managed company "at the end of the financial year when Pan‑Islamic Steamship Company's accounts are settled", namely on 31st December 1967, payment of the advance tax under section 18‑A(1) of the Act would be made within 15 days from the receipt of the said commission. The assessee received the said managing agency commission for the account year ending 31st December 1967 on 9th July 1968 and accordingly the assessee paid the advance tax on 13th July 1968, within 15 days from the receipt of the commission. The Income‑tax Officer assessed the accounts of the petitioner for the assessment year 1568‑69 on 31st 1i 1969 and passed the following order:-
"Impose penal interest. Action under section 28 is being taken separately for non‑compliance of subsection (1) of section 18‑A."
Action under section 28 was, however, not taken. On receipt of the assess ment order and the demand notice for payment of penal interest of Rs. 14,465 for non‑payment of advance tax during the period from 1‑4‑1968 to 12‑7‑68, the petitioner applied to the Income‑tax Officer under section 35 of the Act for rectification of the order imposing penal interest contending that as in the past the agency commission was always received long time after the closing of the accounts of the managed company and that the advance tax under section 18‑A (1) of the Act was paid within 15 days of receipt of the commission. The application was refused by the Income‑tax Officer en the ground that the penal interest was correctly imposed. Being aggrieved thereof the petitioner filed a Revision Application under section 33‑A (2) of the Act before the Commissioner of Income‑tax, Karachi (East), who, by the impugned order dated 30th September 1969. rejected the application of the petitioner. He held that as both the petitioner as well as the managed company maintained their accounts on the mercantile system and not the cash system, the late receipt of the commission was not relevant and that as the amount of the commission due to the petitioner had been shown in Profit & Loss Account of the managed company as at 31st December 1967, that date should be taken to be the date on which the commission was "adjusted" by the prayer in the assessee's account under subsection (4) of section 18‑A of the Act. That as the commission in question had been paid beyond 15 days from such date of adjustment, the petitioner was rightly held by the Income‑tax Officer as an assessee in default. The petitioner has, therefore, filed this constitutional petition to challenge the imposition of the penal interest as being without lawful authority and of no legal effect.
3. The relevant subsection (4) of section 18‑A of the Act reads as follows:-
"(4) Where part of the income to which subsection (1) .applies consists of any income of the nature of commission which is receivable periodically and is not received or adjusted by the payer in the assessee's account before any of the quarterly instalments of tax become due, he may defer payment of tax on that pact of his income to the date on which such income would be normally received or adjusted and if he does so he shill communicate to the Income‑tax Officer the date to which such payment is deferred.
Provided that, if the tax of which the payment is deferred is not paid within fifteen days of the date on which such income or part thereof is received or adjusted by the payer in the assessee's account, he shall, without prejudiced to any other consequences which may follow, be deemed to be an assessee in default in respect of such tax and shall pay an additional amount of tax thereon at the rate of two per cent per mansem from the date of such receipt or adjustment to the date of payment of tax."
4. The submission of Mr. Ali Athar, learned counsel for the petitioner, was that the advance tax on the commission was paid within 15 days of the date of receipt in compliance with section 18‑A (4) and that the petitioner had not committed default. He submitted that the word "received" in section 18‑A (4) meant actual receipt and not "acc; used" even though the petitioner was maintaining mercantile system of accounting. An assessee cannot be required to pay advance tax on commission which had accrued or arisen but which had not been received. The Commissioner was, therefore, wrong in holding that the system of accounting was material under sec tion 18‑A (4) of the Act. Mr. Mansoor Ahmad Khan, however, repeated the argument which prevailed with the Commissioner that the receipt was not relevant in the case of the petitioner who maintained a mercantile system of accounting. We have considered this submission and are inclined to agree with the submission of Mr. Ali Athar that the 'question of the system of accounting is immaterial for the purpose of determining the date, to which payment of advance tax may be deferred under section 18‑A (4) of the Act. It is true that actual receipt of income is not material in a mercantile system of accounting. But, subsection (4) of section 18‑A deals with a different subject, that is of date for making deferred payment of advance tax and the word "received" must be given its ordinary meaning of actual receipt.
5. We also find force in the next submission of Mr. Ali Athar that the learned Commissioner erred in treating the date of 31st December 1967, the date mentioned in the Profit and Loss Account of the managed company, as the date on which the commission was "adjusted" by the managed company in the petitioner's account. The word "adjust" ordinarily means "to settle and ascertain the amount due" after balancing debits and credits. The word adjust" has been defined in Stroud's Judicial Dictionary. 4th Edition, Volume I, page 66, as follows: ‑
" Adjustment', is a word in common use. It is commonly applied to the settlement among various parties of their several shares in respect of claims liabilities, or payments relating to a General Average claim. That is not its only application; it is a word which is applied to other matters in the same manner in which it is commonly applied in marine insurance. When there are matters which require re‑arranging, regulating, or equalising, so as to restore the true balance the process of so re‑arranging, setting right, regulating, or equalising may be described as adjusting'."
It is well‑known, and indeed the Commissioner has candidly not denied, that some time is taken to finalise the accounts after the close of the accoun ting year. The accounts of the managed company for the year ending 31st December 1967 were not issued to the share‑holders until some six months later and were not adopted until 20th July 1967 at the annual general meeting. The respondent has not shown, and there is no evidence, that the account of commission was mutually settled and adjusted between the parties on 31st December 1967. In the circumstances, it cannot be said that the mere crediting of the commission amount of the petitioner in the balance-sheet amounts to "adjustment".
6. In the view we have taken of the matter, it is not necessary to discus at length the submission of Mr. Ali Athar that the order for levy of penal interest was bad in the absence of a separate order. We may, however, observe that from the words used "for non‑compliance of subsection (1) of section 18‑A" it will appear that the Income‑tax Officer has applied his mind to the alleged default in payment of advance tax in question.
7. For the foregoing reasons, we declare that the imposition of the penal interest of Rs. 14,465 on the petitioner for the assessment year 1968‑69 is without lawful authority and of no legal effect. The petition is accordingly allowed with no order as to costs.
Petition accepted.