COMMISSIONER OF INCOME-TAX Versus MESSRS PAKISTAN TOBACCO CO. LTD.

1. AJMAL MIAN, J .--By this common judgment, we intend to dispose of the above 36 Income Tax References which raise common question of law except I.T.R. No. 48 of 1982, which includes the provision of dividend in addition to the provision of income-tax liability. It may be observed that I.T.R. No. 10 of 1985 was treated as the leading case by the learned counsel for the parties and, therefore, it may be advantageous to reproduce herein below Vie-question referred to in the above I.T.R. and also in the aforesaid I.T.R. No.48 of 1982, which has slight variation:

2. I. T. R. No. 10 of 1985

3. "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?"

4. I. T. R. N o.48 of 1982

5. "Whether on the facts and in the circumstances of the case the learned Tribunal is justified in holding that provision for proposed dividend and provision for taxation are retained income as requirement of working capital and not liable to surcharge?".

6. In our view, it is not necessary to state the facts of each case separately as only the opinions of this Court have been solicited on the above questions.

7. It appears that 6% surcharge was levied on jewellery including gold, silver, precious metals, stones and ornaments or other articles made thereof by Finance Ordinance, 1977, which was converted into Act XXX of 1977. However, by Finance Amendment Ordinance, 1978 (hereinafter referred to as the Ordinance No.II of 1978), the above provision which was provided in First Schedule Part III was substituted in the following words:-

"PART III

RATES OF SURCHARGE

(a) In the case of every company ..

8. 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:

9. Provided that if the income so retained is distributed in any subsequent years, the surcharge shall be payable on the income so distributed at the same rates in that year.

(b) In the case of every other

(c) In the case of every person deriving income from the business of manufacture, purchase or sale of jewellery Including gold, silver, precious metals, stones and ornaments or other articles made thereof;

10. Provided that the surcharge shall not be payable by any person (not being a company) whose total income does not exceed Rs,12,000.

(i) In the case of a Company whose free services as on the last day of the income year exceed its paid up capital by more than one and a half.

(ii) In the case of any other company.

11. 10 percent of the income tax and person super tax.

12. In addition to any sum payable under clause (a) or (b), a further sum equal to 6 per cent of such income.

13. The above quoted provision was substituted by Finance Ordinance, 1980 with effect from assessment year 1981- 82. The substituted provision reads as follows:--

14. "A.

15. Ten per cent of the income tax and super tax payable on total income.

16. Ten percent of the income tax and super tax payable on total income as reduced by a sum which bears to the amount of surcharge the same proportion as the retained income bears to the after-tax total income;

17. Provided that, if the retained income is distributed in any subsequent year, the surcharge shall be payable on the income so distributed at the same rate in that year.

18. Explanation:-- As used in this paragraph.-

(a) retained income' means total income as reduced by the aggregate of the amount distri buted as dividends, if any, and the amount of income tax and super tax payable on total income;

(b) 'after tax total income' means total income as reduced by the income tax and super tax payable the reason; and

(c) 'free reserves' means aggregate of unappropriated profits and all reserves, excluding the following reserves namely:--

(i) Reserve creates on revaluation of fixed assets;

(ii) Goodwill Reserve;

(iii) Depreciation Reserve;

(iv) Gratuity Reserve;"

19. A comparison of the above quoted provisions indicate that for the purpose of the present controversy Explanation (a) in the substituted provision has clarified that the term 'retained income' will not include distributed dividend and the amount of income tax and super tax payable on the total income. This Explanation was not in the original provision brought about by Finance Ordinance II of 1978. A It may be stated that all the above cases under discussion relate to the assessment years 1977-78 and 1978-79 except I.T.R. No.78 of 1985 which pertains to the assessment year 1979-1980. However, this variation is not material as the provision quoted hereinabove, of Ordinance No.II of 1978 regulate all the cases for the reason stated hereinabove namely, that the provision substituted by Finance Ordinance, 1980 was effective from the assessment year 1981-82. In the above original quoted provision every company was liable to pay 10 per cent surcharge of the income and super tax on total income after adjusting the income which has been retained for the purpose of capitalization or for meeting working capital requirement, with the proviso that if the income so retained is distributed in any subsequent 1 years, the surcharge shall be payable on the income so distributed at the same rates in that year.

(2) We may dispose of one of the items of I. T. R. No. 48 of 1982, namely, the provision for dividend.

20. Mr. Shaikh Haider learned counsel for the applicant department is unable to justify the inclusion of a provision for proposed dividend for the purpose of computing the income for levy of 10$ sun-charge of income-tax and super-tax.

21. On the other hand Mr. Iqbal Naeem Pasha has invited our attention to Section 131-A of the Companies Act, 1913 and Regulations 95 and 99 of the First Schedule A to canvass that till the time the general body in general meeting does approve the payment of dividend it cannot be treated as dividend liable to be paid. In this regard reference may be made to the case of The Eastern Federal Union Insurance Company Ltd. v. State Life Insurance Corporation of Pakistan, reported in 1987 C L C 1408 (Karachi), in which a Division Bench of this Court has held that company being a separate legal entity from its shareholders, the latter cannot lay any claim against any assets of the company while it is operating except against declared dividend and that merely showing a particular sum in the account as reserved for dividend, does not give any cause of action to a shareholder to ask for the payment of any amount out of such sum unless and until dividend is declared in the general meeting of the shareholders in accordance with law. Reliance was placed in support of the above conclusion on the cases of Mrs. Bacha F. Guzdar, Bombay v. Commissioner of Income-tax, Bombay A I R 1955 SC 74; The Commissioner of Income-tax Punjab, N.W.F.P. and Bahawalpur v. Mrs. E.V. Miller (deceased) P L D 1959 S C (Pak) 219, Dr. A. Lakshmanaswami Mudaliar and others v. Life Insurance Corporation of India and another A I R 1963 S C 1185 and General Assurance Society Ltd. v. Life Insurance Corporation of India A I R 1964 S C 899

22. In the instant case it is an admitted position that the dividend was not even declared by the respondent company when the above provision was included by the Income-tax Officer for the purpose of levying 10% surcharge of income-tax and super-tax instead of excluding the above amount. The conclusion arrived at by the learned Income-tax Appellate Tribunal that the provision for the proposed dividend should have been excluded for the purpose of computing the above tax and should have been included in the amount retained for meeting the working requirement seems to be correct.

23. Our answer accordingly is that the learned Tribunal was justified in holding that the provision for proposed dividend was 'retained income as requirement. of working capital and was not liable to surcharge.

3. Adverting to the main question, it may be observed that Mr. Shaikh Haider, who has appeared in 27 Income Tax References for the department has argued the case and the other learned counsel M/s. Waheed Farooqui and Nasrullah Awan had adopted his arguments; whereas from the side of the respondents/assessees M/s. Sirajul Haq and lqbal Naeem Pasha have advanced the main arguments. The other counsel appearing for the respondents/assessees adopted their arguments except M/s. Ali Athar, Anwar Mansoor Ahmad Khan, Virjee and Salahuddin have supplemented the main arguments.

(4) The main thrust of the arguments of Mr. Shaikh Haider was that the words "working capital" employed in clause (a) of the above quoted provision of Ordinance No. II of 1978 does not include a provision for tax which is either already paid as advance tax under section 18-A of the Income-tax Act (hereinafter referred to as the Act), or a sum of which is to be paid after the closing of the accounting year. His further submission was that in any case the amount which is already paid as an advance tax in terms of section 18-A of the Act cannot be said to be a part of retained income for meeting working capital requirement as it is no longer available in the hands of the assessee for utilization. Whereas M/s. Sirajul Haq and Iqbal Naeem Pasha have canvassed the converse by contending that any payment under section 18-A of the Act is merely on account in respect of the liability which is to be determined after the coming into force of the new Finance Ordinance or Act for the relevant year and that the mere fact that certain amount of advance tax goes out of the control of an assessee does not change the legal character of the amount as it remains a provision for tax.

(5) Mr. Shaikh Haider in furtherance of his above submission has referred to the definition of the words "working capital" given in the following books, which read as follows:--

(i) Accounting, The Basis for Business Decisions, Fourth Edition, by Walter B. Meigs and two others: at pages 738 and 739 "Funds" defined as working capital In ordinary usage, the term funds usually means cash. Accountants and financial executives, however, think of "funds" in a broader sense. They view the funds available to a company as its working capital--the difference between current assets and current liabilities.

24. 'Sources and uses of working capital:

25. Any transaction that increases the amount of working capital is a source of working capital. For example, the sale of merchandise at a price greater than its cost is a source of working capital, because the increase in cash or receivables from the sale is greater than the decrease in inventories.

26. Any transaction that decreases working capital is a use of working capital. For example, either incurring a current liability to acquire a non-current assets or using cash to pay expenses represents a decrease in working capital.

27. On the other hand, some transactions affect current assets or current liabilities but do not change the amount of working capital. For example, the collection of an account receivable (which increases cash and decreases an account receivable by an equal amount) is not a source of working capital. Similarly, the payment of an account payable (which decreases cash and decreases an account payable by an equal amount) does not change the amount of working capital."

(ii) Macmillan Dictionary of Accounting, by R.H. Parker; page 182.

28. Working capital. The short-term assets and liabilities of a business, i.e. Current Assets Less Current liabilities. In a statement of source and application of Funds (US: Statement of changes in Financial position) working capital is often defined implicitly as current assets less current liabilities other than those for taxation and proposed dividends. On the management of working capital see Cash Management, Credit Management, Inventory control."

(iii) Management of Company Finance, Third Edition by J.M. Samuels and another 268:

29. "Working capital can be defined as the excess of current assets over current liabilities. It is the same as net current assets. It represents the investment of a company's medium and longer-term funds in assets, which are expected to be realised within the years' trading. It is not a permanent investment but as the name implies is continually in use, being turned over many times in a year. It is used to finance production, to invest in stock and to provide credit for customers its three main items being stock debtors and cash. These assets are needed for the day to day manufacturing and/or trading activities of a business. They can be funded either by short-term finance, that is current liabilities, or by medium and long-term finance."

(iv) A Dictionary for Accountants, fourth edition by Eric L. Kohler page 453:

30. "Working capital: Capital in current use in the operation of a business: the excess of current assets over current liabilities; net current assets. See current assets; current liabilities; balance sheet; statement of sources and applications of funds. The amount of working capital, supplemented by the ratio of current assets to current liabilities (known as working-capital ratio), has long served as a credit test and often as the measure of debt-paying ability. One attempting to apply such a test, however, recognizes that other factors, equally and not infrequently more important, remain to be considered before the meaning of working capital in any given situation can be comprehended. The example at the top of the next column will illustrate. "

(v) Advanced Accountancy, 3rd Edition 1978 by Hrishikesh Chakraborty; page 1551.

31. The need for initial Working Capital must be estimated. It is required for financing the estimated level of stock to be held to enable supply to factory according to requirements without any hindrance or bottlenecks on any point, for financing work ing-progress required for sustaining the tempo of expected level of production, for financing finished stock to be held for sustaining the expected sale etc. for gestation or take-off period. When sales start, the average Book-debts (as such or Bills Receivable Account) should be considered having regard to expected sales and average credit allowed. Similarly, average expenses to be incurred during the take-off period should be estimated. However, the credit to be received from creditor for purchases is to be taken up in reduction of Working Capital. Similarly, the time-lag in payment of expenses should be considered in determination of Working Capital requirement. These are shown in initial Working Capital Forecast.

32. The Working Capital requirements from year to year are also to be foreseen on the above basis. The preparation of Cash Budget is very much helpful in determining the periodical position regarding liquid funds.

33. In industries with low Proprietary Ratio (to fixed Assets), slow Stock-Velocity, longer production-lag, longer period of average credit allowed and shorter credit received, the need of Working Capital will be greater. In expanding units also the need of Working Capital is greater to fill up the gap in the cycle of Circulating Capital i.e., Raw Materials-Work - in - Progress -- Finished Goods - Debtors - Cash - Creditors -Raw Material cycle."

(vi) Advanced Accounts by M.C. Shukla and T.S. Grewal page 1352 and 1353:

34. No less important is the amount of funds required as working capital, that is, for day-to-day requirements of the firm. In a previous chapter we have seen the mechanics of estimating the requirements of working capital. It will be seen that normal working capital is required for maintenance of inventories, i.e., stocks of raw materials, work in-progress and finished goods, for extending credit to customers and for maintaining a cash balance. The total requirement is met partly by the credit that the suppliers of goods and services extend to the firm. The remaining part must be provided by the firm itself. Usually, working capital lends itself to expert management and a company would do well to pay good attention to the amount, which is kept invested in various forms of current assets. It may be noted here that if an excess amount is invested as working capital, the loss is not only the interest which the company pays to the bank, or loses which it would have earned by keeping the money in the bank, but the profit which it would have earned by using the funds alternatively--this is the concept of opportunity cost. A firm must always see whether funds invested as working capital earn at least as much as they would have earned if invested somewhere else. Of course, this does not mean that the company should starve itself of working capital since, without working capital, fixed assets would be quite useless. (In fact, when the question of acquiring a fixed asset is considered, the total investments that should be considered is not only the cost of the fixed asset but also the additional working capital which will be needed for keeping that asset in operation. We consider below the various forms of working capital."

(vii) Advanced Accounts, A Manual of Book-keeping and Accountancy for Students, edited by Roger N. Carter and W. Roger Carter, third edition revised, pages 1 and 2:

35. Working Capital is the amount that remains for the working or running of a business after the purchase price of the fixed assets has been paid. Thus, if a trader started with a capital of . 20,000 and expended .12,000 of it in the purchase of buildings and plant, then the balance of . 8,000 would constitute the working capital. This term is also applied to the excess of floating assets over current liabilities."

(viii) Corpus Juris Secundum, Volume XII by William Mack and Donald J. Kisar, pages 1125 and 1126:

36. Working capital: The ordinary meaning of the term is a fund to be devoted to the development of a corporation's property, a sufficient amount of money to pay employees and pay for the necessary equipment for repairs; "cash" money that is instantly available for any corporate need; money to be put into the business and to stay there; the amount of cash and supplies necessary to be kept on Band to meet current expenses and contingencies as they arise in the proper conduct of the business; the amount of cash necessary for the safe and convenient transaction of a business, having regard to the owner's ordinary outstandings, both payable and receivable, the ordinary condition of his stock or supplies in hand, the natural risk of his business, and the condition of his credit; the money that must be used for carrying on the business of the corporation, represented by its cash on hand and its inventories. The phrase has been distinguished from "capital used or employed," although it has been said that where an investment was not capital employed in a business, it resulted therefrom that it was not necessary as a working capital. "

(6) He has also referred to the book named "Readings In Financial Analysis" by Qaiser Mufti, in which he has inter alia dealt with the question of working of current liabilities as in terms of the present practice which read as follows: at page 216.

37. "Present Practice

38. These competing considerations have led to the adoption in many countries of a position whereby items are included in current assets on the basis of whether they are expected to be realised within one year or within the normal operating cycle of the enterprise, whichever is the longer; items are included in current liabilities if they are payable at the demand of the creditor or are expected to be liquidated within one year. Even when this approach is used as the general rule, there are instances of the inclusion or exclusion of individual items based on different criteria. Hence, the classification of items as current or non-current in practice is largely based on convention rather than or any one concept."

39. He has further referred to the book "Accountancy" by William Pickles, Fourth Edition on the working of Tax Reserve Certificates, which are issued in England by the Treasury to enable tax payers to set aside funds for the payment of future taxation and has pointed out that the above Certificates can be encashed by the purchaser /assessee at any time but whereas advance tax paid under section 18-A is irretrievable and remains vested in the Federal Government. On the basis of the above distinction, it was submitted by him that the tax Reserve Certificates may be included within the ambit of provision for meeting working capital requirement but not the payment already made under section 18-A. He has further pointed out that if an amount is borrowed from a financial institution for re-enforcing the requirement of working capital the amount of interest paid thereon is in admissible expense under the Income Tax Act but if the amount is borrowed for making the payment of income tax the interest paid thereon cannot be claimed as an admissible business expense. In furtherance of his above submission, he has referred to the following case:

(i) Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income Tax, Patna, 1961, Vol. 42, I T R page 774, in which a Division Bench of the Patna High Court has, inter alia, held that interest on money borrowed for payment of tax is not a legitimate deduction in computing business profits.

40. Mr. Shaikh Haider also pointed out that in India section 80(v) has been incorporated in the Income Tax Act, 1961 (Act -No. XLIII of providing that in computing the total income of an assessee there shall be allowed by way of deduction any interest paid by him in the previous year of any money borrowed for the payment of any tax due from him under the said Act. It was, therefore, submitted by him that the cases of the superior Courts of Indian jurisdiction pertaining to the period subsequent to the incorporation of the above new provision could not be relevant for the purpose of deciding the present cases as there is no parallel provision in the Act.

(7) On the other hand Mr. Sirajul Haq has submitted that liability to pay advance tax under section 18-A of the Act is a current liability and, therefore, is a part of provision for meeting working capital requirement. He has referred to section 234 of the Companies Ordinance, 1984 relating to the contents of balance sheet and the requirements as to the balance sheet and profit and loss account contained in the IVth Schedule part I as serial No. (vi) mentioned liability as to include all liabilities in respect of expenditure contracted for all and contingent liabilities. He has also referred to part (xii) from the Book of the Companies Ordinance, 1984 & Allied Matters, by Najib A. Choudhry, First Edition, which under the caption "Current Liabilities" has given provision for taxation, showing separately excise duties, customs duties, sales-tax, income-tax etc.

41. He has also referred to the definition of the "working capital" provided in the celebrated Book "Words and Phrases" Permanent Edition, Volume 46 which provides as follows at page, 274.

42. "Working Capital" is not the excess of assets over liabilities but sum which business needs to supply from its own funds to be able to meet its current obligations and to operate efficiently. Alaska S.S. Co. v. Federal Maritime Commission, C. A. Wash., 344 F. 2d 810, 823."

43. He has further referred to the case of Department v. Assessee reported in (1979) 40 Tax 47 (Tribunal), in which a Bench of the learned Income Tax Tribunal has pointed out the object of providing exemption from the payment of surcharge of 10 per cent in respect of the retained income and has also referred to SRO.856(I)/77, dated 13-9-1977, whereby the Companies were exempted under section 60 of the Act from tax on issues of Bonus shares declared by them, between the period from 1-9-1979 to 30-6-1982. The Tribunal also referred to the definition of the "working capital" as excess of current assets over current liabilities.

(8) Mr. Iqbal Naeem Pasha has referred to the definition of the words 'retained profits' given in Macmillan Dictionary of Accounting by R.H. Parker, referred to hereinabove, which provides that "profits not distributed to shareholders but reinvested in a company". He has also referred to para 3 at page 3118 from the Book "Accountancy" by William Pickles, Fourth Edition which include tax as the expenses, which reads as follows:--

44. "Provision for meeting the peak load of expenses, having regard to the amount of cash in hand or at bank, or other credit facilities available. In this connection the differential period of credit given and allowed is an important factor. In certain parts of the year heavy expenses, e.g. tax, will have to be paid (out of proportion to the average expenses) so that the marginal credit position cannot be ignored. If, for instance, debtors are allowed three months credit, but creditors allow only fourteen days, the gap must be provided for, particularly if at the same time heavy expenses coincide with payments for goods bought in a 'buying season' i.e. where the purchase of goods cannot be spread evenly. This gap will be even wider if a period of time must elapse before these heavy purchases are translated into actual sales, e.g. because of time required in manufacturing the finished product, and even more so if extended credit is given to customers."

45. He has also pointed out that in order to keep the business in tact in operation the tax liability is to be discharged otherwise the assets of the company can be proceeded with for the recovery of the taxes, inter alia, under section 93 of the Income Tax Ordinance.

46. He has also referred to the case of John Smith and Son v. Moore reported in 12 Tax Cases, at page 266 wherein inter alia discount Haldane, while sitting as one of the Lords on judicial side of the House of Lords of England refers to the definition of the words 'circulating capital' and 'fixed capital' given in celebrated book wealth of Nations" by Adam Smith and observed:

47. "Was it circulating capital? My Lords, it is not necessary to draw an exact line of demarcation between fixed and circulating capital. Since Adam Smith drew the distinction in the Second Book of his "Wealth of Nations", which appears in the chapter on the Division of Stock, a distinction, which has since become classical, economists have never been able to define much more precisely what the line of demarcation is. Adam Smith described fixed capital as what the owner turns to profit by keeping it in his own possession, circulating capital as what he makes profit of by parting with it and letting it change masters. The latter capital circulates in this sense. My Lords, in the case before us the Appellant, of course, made profit with circulating capita:, by buying coal under the contracts he had acquired from his father's estate at the stipulated price of fourteen shillings and reselling it for more, but he was able to do this simply because he had acquired, among other assets of his business, including the good-will, the contracts in question. It was not by selling these contracts, of limited duration though they were it was not by parting with them to other masters, but by retaining them, that he was able to employ his circulating capital in buying under them. I am accordingly of opinion that, although they may have been of short duration, they were none the less part of his fixed capital. That he had paid a price for them makes no difference."

48. 9 Mr. Anwar Mansoor Ahmad Khan has referred to the definition of the words, current asset, current liability and working capital given in the Dictionary of Accounting Terms by Derek French at pages 78, 79 and 279 which read as follows:--

49. "Current asset" In British company law, an asset of a company not intended for use on a continuing basis in the company's activities (Companies Act, 1985, Schedule 4, para 77). In this context, any asset that is not a current asset is a fixed asset."

50. "Current liability" In British company law, a financial obligation of a company falling due within one year (Companies Act 1985, Schedule 4, balance sheet formats). The same definition is used generally in accounting. However, if an accounting entity has an operating cycle that is longer than one year or is indeterminate then its current liabilities may be regarded as any liability due to be met within one operating cycle--see the entry for 'current asset'.

51. Also called 'short term obligation.' "working capital." The money and other assets available for conducting the day-to-day operations of an accounting entity, normally, the amount by which current assets exceed current liabilities. Also called 'funds'. The term 'net working capital' is sometimes used for the excess of current assets over current liabilities if the term 'gross working capital' is used for the total value of current assets."

52. He has also referred to Exhibit 15-7, an example in the Book under the caption "Introduction to Financial Accounting" Second Edition, by Kirkland A. Wilcox and Joseph G. San Miguel, at page 636, which under the heading of "Liabilities and Stockholders Equity, taxes payable are shown.

10. M/s Shaikh Haider, Sirajul Haq and Anwar Mansoor Ahmad Khan have also referred to an order of a Full Bench of the learned Income Tax Appellate Tribunal in the case, namely, 1987 P T D (Trib) 347, in which after referring to the definition of the working capital given in some of the above books, it was inter alia observed that working capital is that which belongs to an assessee and which is readily available to meet any liability at a particular point of time.

(11) Mr. Virjee has referred to the above cited case of (1979) 40 Tax 47 (Trib). He has also referred to the definition of the words current liability given in the book namely, Accounting Terms and Book keeping procedure explained by Diane Honghton 1980 Edition which read as follows:-

53. "Current Liabilities:

54. Current liabilities are debts, which a business must pay in the near future--not later than 12 months from the date of the last balance sheet.

55. Current liabilities include:

56. Trade creditors (amounts which, the business ownes to suppliers for goods and services).

57. Other creditors. Accrued expenses.

58. Tax.

59. Current liability. A Liability, which is expected to have been paid within one year from the date of the balance sheet. The U K balance sheet formats refer to current liabilities as 'creditors' amounts falling due within one year. They include trade creditors, bills of exchange payable, amounts owned to group and related companies, taxation and social security creditors, proposed dividends, accruals and deferred income, payments received on account, and, to the extent that they are due for repayment within one year, bank overdrafts, bank loans and debenture loans.

60. In the USA, current liabilities include amounts payable, short-term notes payable, interest payable, dividends payable, accrued expenses, income and other taxes payable, and the current portion of long-term debt."

(12) Mr. Salahuddin learned counsel for the respondent assessee has emphasised that the word tax payable is indicative of the fact that the liability has not yet been determined and, therefore, any payment in advance under section 18-A in law is not a payment of tax. He has further submitted that factually the payments made under section 18-A are kept by the Government under suspense a/c and they are adjusted after the tax liability of the year in respect of which advance tax was paid is determined after the filing of the return and after the enactment of the Finance Act or Ordinance.

(13) From the above quoted passages from the various books on accounting the following deductions can be deduced with reference to .the terms "working capital, current liability and current assets".

(i) That working capital is the amount that remains for the running or working of a business after the purchase price of the fixed assets has been paid.

(ii) That the difference between the current assets and current liabilities is also called working capital.

(iii) Working capital can also be defined as the money which has put into business and which to stay there, the amount of cash and supplies necessary to be kept in hands to meet current expenses and contingencies as they arise for the proper, safe and convenient conduct of the business having regard to the owner's ordinary outstanding both payable and receivable

(iv) That the working capital represents the investment of the company's medium and longer term funds in assets which are expected to be realised within the year of trading. It is not a permanent investment but turn over many times in a year. It is required for maintenance of inventories i.e. stocks of raw materials, work-in-progress, and purchased goods, for extending credit to customers and for maintaining a cash balance. The total requirement is met partly by the credit that the suppliers of goods and services rendered to the firm and the remaining by the firm itself.

(v) That according to Macmillan Dictionary of Accounting working capital is current assets less current liabilities other than those for taxation and proposed dividends.

(vi) Current liability is a financial obligation of a company falling due, within one year or within a operating cycle if it is longer than one year.

(vii) Current liabilities are debts which business must pay in near future not after than 12 months from the date of the last balance-sheet which includes inter alia taxes.

(14) From the above inferred definition of the words, "working capital" "current liability" and "current assets", it is evident that Macmillan Dictionary of Accounting by R.H. Parker has excluded provision for taxation and proposed dividends from the ambit of current liabilities. The other books have not referred to the above aspect. It may be observed that the exclusion of the above two items may be justified in a case of a new set up, in which working capital could not require any provision for the taxation and for the proposed dividends as till the time the factory goes into production or a business operates profitably the question of payment of any income tax or dividend would not arise. The other reason may be that the learned author had in mind only the items which are either in liquid form or are readily liquidable and can be used for earning profit in day to day business, But there seems to be consensus among the learned authors as to the definition of the words "working capital", namely, that is the difference between current assets and current liabilities. In some of the above cited definitions of the term "current liabilities" the provision for taxation has been included. We are also inclined to hold that the current liabilities will include a liability to pay inter alia advance tax, and, therefore, falls within the ambit of working capital requirement. As pointed out hereinabove, Mr. Shaikh Haider, Advocate for the applicant department has put too much emphasis on the factum that at least the amounts of advance tax paid under section 18-A before the closing of an accounting year cannot be treated as working capital requirement in terms of above proviso relating to 10 per cent surcharge, as it is no longer in the coffer of the company. The question whether a particular amount is available or is not available depends on the treatment of that amount in the books of account. If any payment is shown on account, technically and in accounting parlance it remains vested in a company. The provision of Section 18-A read with sections 21, 22, 22-A, 23 and 23-B clearly indicate that any amount of tax payable under section 18-A remains on account payment till the time the assessment order for the relevant year is passed by the Income Tax Officer and the tax liability is adjusted partly or wholly against the amount of income-tax paid in advance. In this behalf reference may be made to subsections 5 and 5-A, which provide for payment of interest by the Government to an assessee and subsections 7 and 8 of Section 18-A, which empower the Income Tax Officer to levy additional tax at the rate of 2% per mensem on the short amount of income tax not paid. It may also be pointed out that subsection 9(a) of section 19-A gives an option to an assessee, who does not pay on the specified date any instalment of tax which he is required to pay under subsection (1) to file an estimate or revised estimate of the tax payable by him. This provision also re-enforces the conclusion that any amount payable under Section 18-A is merely on account payment and for the purpose of account this is to be shown as such.

(15) Mr. Sirajul Haq, learned counsel for some of the respondents has also invited our attention to the factum that Finance Ordinace, 1980 inter alia substituted the provision relating to surcharge with effect from assessment year 1981-82 and in explanation (a) to it, the definition of" the retained income" has excluded inter alia aggregate amount of income-tax and super-tax payable on total income, which fact has also been highlighted hereinabove in the discussion. On the basis of the above change in the provision, it was urged that before tire change the amount of income-tax and super-tax payable were part of retained income and the above change in law in fact accord recognition to the above fact. In this behalf reliance was placed on the following observations of A.R. Cornelius C.J. in the Full Bench case of the Hon'ble Supreme Court, namely, Hirjina & Co. (Pakistan) Ltd., Karachi v. Commissioner of Sales Tax, Central, Karachi 1971 PTD 200.

61. "Apart from this we are unable to read the earlier definition in the manner suggested by the Department. It was said in the course of argument that notwithstanding the amendment it must be assumed that the previous definition of "sale price" included Provincial Excise Duty. The previous definition however, does not expressly say so we may here observe that interpreting the taxing statute the Courts must look to words of the statute and interpret it in the light of what is clearly expressed. It cannot imply anything, which is not expressed, it cannot import provisions in the statute so as to support assumed deficiency. On the other hand the fact that the Legislature made an express provision for including the excise-duty indicates that the unamended definition of the "sale price" did not include the Provincial Excise Duty."

62. The above quoted observations, particularly the last portion clearly support the submission made by Mr. Sirajul Haq.

63. However, Mr. Shaikh Haider learned counsel for the applicant department has referred to the following cases:-

(i) Commissioner of Income Tax, West Bengal v. Isthmian Steamship Lines. 1951 Vol 20 Income Tax Reports, page 572, in which Indian Supreme Court while construing the provision of section 10(2)(vii) of the Income Tax Act, 1922 which was amended in 1939 and further in 1940, held that the amended proviso was applicable to the assessment year and not to the accounting year because in income tax matters the law to be applied is the law it force in the assessment year unless otherwise stated or implied.

(ii) Maneklat Vallabhdas Parikh and Sons v. Commissioner of Income Tax, Gujrat II, reported in 1969, Volume 72 Income Tax Reports page 637. In the above case a Division Bench of the Gujrat High Court in an income tax reference held that though the subject of charge is the income of the previous year, the law to be applied is that in force in the assessment year unless otherwise stated or implied and that any amendment which is it force at the beginning of the assessment year must govern the case, though the amendment is made after the income under assessment is earned.

64. There cannot be any cavil to the legal proposition propounded in the above two cited cases. The legal position is very obvious, namely, that accounting year is different from assessment year. The law applicable to a particular assessment year will be the law which is in fore in that year and not the law which was in fornce during the accounting year unless otherwise stated or implied. As a matter of fact contrary to this was not canvassed by the learned counsel for the respondent s assessees. It was not contended that the above substituted proviso pertaining to surcharge, which was effective from assessment year 1981-82 was applicable to the present cases, which pertain to the assessment years prior to the above year but what was contended and referred to hereinabove is that the factum that the legislature thought it fit it provide definition of the words 'retained income' in explanation (a) and to exclude tax and super tax payable, indicate that the law prior to it did include the amount of tax and super-tax payable within the ambit of the definition of 'retained income"' which submission is supported by the above Supreme Court case.

(17) For the aforesaid reasons, our answer to the question referred to hereinabove in para 1 is that the Tribunal was justified in holding that income-tax liability payable for relevant assessment year be included for purposes of working out 'retained income' for levy surcharge.

65. The above reference stand disposed of in the above terms there will be no order as to costs.

66. M. B. A./ C-29/ K Order accordingly.