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صرف 1000 روپے میں 10 وکلاء تک کی براہِ راست رابطہ تفصیلات حاصل کریں اور کال یا واٹس ایپ کے ذریعے موزوں قانونی ماہر سے رابطہ کر کے اپنا معاملہ پورے اعتماد کے ساتھ آگے بڑھائیں۔
I.T.As. Nos. 1516-A to 1518/KB of 1982-1983, decided on 11th January, 1986.
---"Working capital"--Definition--Various stages of working capital required at the initial stage of a business and its subsequent year to year requirement--Liquid and near liquid assets--Current liability Taxability--Terms defined and explained.
Working capital is that capital which is readily available to a business concern to keep itself in state of stabilized solvency necessary to meet all contingencies arising in the process of profit earning.
The working capital is equal to current assets minus current liabilities.
Working capital may be defined as the excess of current and liquid assets over current liabilities requisite in a business, having regard to reasonable provisions for contingencies so as to enable it to conduct its operations normally and free from financial embarrassment and to avoid losses consequent upon incurring commitment beyond its capacity in the ordinary course of events.
The definition of working capital is, in any case, subject to variation according to the facts and circumstances of each case.
Working capital is required for financing the estimated level of stock to be held, to enable supply according to requirements without hindrance or bottlenecks, on any point for financing work-in-progress required for sustaining the tempo of expected level of production, for financing finished stocks 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 remitted. However, the credit to be received from creditors 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.
The requirements of working capital from year to year basis are also to be foreseen on the same basis.
Liquid assets have some times been described as sundry debtors, stocks bills receivable, cash in hand and cash at bank.
Current liabilities are liabilities under the head of Sundry Creditors, bills payable, liabilities for expenses and provision for taxation.
Creditors, bills payable, bank over-drafts, current expenses and tax payable are within the definition of current liabilities.
The tax liability, therefore, is working capital requirement.
1979 P T D (Trib.) 37; William Pickles in his celebrated book "Accountancy (4th Edition); Hrishikesh Chakraborty at page 1551 of his book, "Advanced Accountancy"; Pages 3117 and 3118 of his book "Accountancy, Fourth Edition" and Page 1455 of his Advanced Accountancy ref.
---S.10 & Sched. I, Part III, para. 4--Surcharge--Retained income of only a resident company is to be excluded while working out the amount of surcharge--Only that much retained income is to be excluded which is retained either for the purpose of capitalization or for meeting working capital requirement-- Assessee who is a non-resident and maintains no balance-sheet cannot retain its income for purposes of capitalization--Such assessee cannot retain any income for meeting its working capital requirement.
---S.10 & Sched. I Part III para. A & S. 54--Surcharge--Non-resident assessee deriving income from dividend and interest--Working capital- Deduction of tax at source--Payment of tax is a current liability--Where in a case of non-resident tax has already been deducted at source, there could not still remain any working capital requirement as far as amount of tax deducted at source is concerned--Requirement of current assets to meet some current liabilities--Tax which is deducted at source cannot be treated as working capital requirement-- Assessee, if pays some additional tax under S. 54 it would have to explain to Income-tax Officer that it was his retained income for meeting working capital requirement, hence exempt from levy of surcharge.
Payment of tax is a current liability, but where in a case of non-resident the tax has already been deducted at source, there could not remain any working capital requirement as far as amount of tax deducted at source is concerned. Under various provisions of Income-tax Ordinance the tax once deducted at source cannot, indeed, even notionally be said to be an asset muchless a current asset. The concept of working capital envisages a running business where current liabilities are to be met out of current assets. However, a non-resident has no running business whatsoever. It is deriving income from dividend and interest. As such it could have conceivably some requirements of current assets to meet some current liability but the tax, which is deducted at source cannot, by any stretch of imagination, be treated as working capital requirement. However, if it pays some additional tax under section 54, it would have to explain to the Income-tax officer that, it was its retained income for meeting working capital requirement, hence exempt from levy of surcharge.
---S. 10 & Sched. I, Part III, para. A--Surcharge--Working capital--Tax deducted at source is not available to meet any working capital requirement as such neither be liquid or near liquid asset so as to be included within fold of working capital.
The amount of tax once deducted though for ultimate discharge of tax liability remains out of reach and control of an assessee. Such amount of tax deducted at source is ultimately adjusted against the tax liability of the same assessee at the time of framing of the assessment and if in excess the refund is ordered. Although the deduction of tax at source is to be treated as payment of tax on behalf of the assessee, yet the deduction does not amount to assessment of tax. Even though the deduction at source may be more than the tax finally determined, the assessee would, not, be entitled to any interest on excess amount deducted. The amount of tax deducted at source is not available to an assessee for any purpose muchless to meet its working capital requirement. Working capital is that which belongs to an assessee and which is readily available to meet any liability at a particular point of time.
M.A. Chidambaram v. C.I.T (1957) 31 I T R 405 and ADL, C.I.T. v. Bareilly Corporation Bank (1978) 115 I T R 449 ref.
---S. 10, Sched. I, Part III para. A--Surcharge--Working capital--
Non-resident company which derives its income from dividend or interest and maintains no account books muchless the balance-sheet, concept of income retained for purposes of capitalization or working capital requirement is not applicable as -far as amount of tax deducted at source is concerned--Surcharge is leviable on such amount of tax--Burden of proving that amount of tax which was paid alongwith return was paid out of income retained for working capital requirement is on the shoulders of assessee--When it is proved that tax paid alongwith return was out of retained income to meet working capital requirements, it would be exempt from surcharge but not otherwise.
1979 P T D (Trib.) 37 applied.
M.A. Chidambaram v. C.I.T. (1957) 31 I T R 405; (1978) 115 I T R 449: ADL CU. v. Barely Corporation Bank1979 P T D (Trib.) 37; I.T.A. No.1013/KB of 1980-81; I.T.A.No.252/KB of 1981-82; I.T.A.No.1013/KB of 1982-83 and I.T.A.No.947/KB of 1982-83 ref.
---S. 10, Sched. I, Part III, para. A--Income-tax Act (XI of 1922), Sched. I, Part III, para. A (as incorporated by Finance Act (XXX o 1977) and amended by Finance (Amendment) Ordinance (II of 1978))- C.B.R. Circular Letter No.l(2)IT-1/1979 dated 13-2-1979--Surcharge- Levy of--Legislative history and background of Sched. I, Part II para. A elaborated.
Muhammad Farid, Departmental Representative for Appellant.
F. Alam, F. C. A. and Abdul Matin, C.A. for Respondent.
Date of hearing: 23rd November, 1986.
--These three departmental appeals have been -brought before this Full Bench of the Tribunal to consider the following, question:-
"Whether under the facts and circumstances of these appeals before us a Division Bench's decision of this Tribunal reported as 1979 P T D (Trib.) 37 was applicable "
Mr. Muhammad Farid, the learned Departmental Representative appeared for the Department and Mr. Faiz-ul-Alam, F.C.A. appeared for the respondent. We have heard both the learned Departmental Representative as well as the learned Authorised Representative at length and have also gone through our earlier decisions relied upon and shall be referring to them as and when occasion arises in the body of this order.
2. The brief facts which have led to the constitution of this Full Bench, briefly stated, are that the respondent, admittedly a non-resident company, declared its income in assessment years 1977-78 and 1978-79 from dividends and interest only at Rs.43,00,963 and Rs.46,85,684 and the declared income was accepted by the Income-tax Officer and Rs.6,93,321 and Rs.8,88,430 were determined as amount of taxes payable in each year respectively. The Income-tax Officer treated aforesaid amount as unretained income and further levied surcharge amounting to Rs.88,843 and Rs.69,332 in each year respectively. Let me point out at this very juncture that the tax regarding both dividend and interest income was deducted at source and the balance including surcharge was paid alongwith the return.
3. Having been aggrieved and dissatisfied the respondent went up in appeal and it was canvassed before the learned Commissioner of Income-tax (Appeals) that in view of decision of this Tribunal reported as 1979 P T D (Trib.) 37 the Income-tax Officer fell in error in treating the amount of taxes payable as unretained income and levying surcharge thereon. The learned Commissioner of Income-tax (Appeals) by his decision dated 21st November, 1981, directed the Income-tax Officer not to levy any surcharge on taxes payable in the relevant two assessment years. It appears that he further directed the Income-tax Officer to rectify the two orders under appeal. This time the Department felt aggrieved and came up in second appeal before us. The learned Departmental Representative strenuously argued before a Division Bench of this Tribunal that under the facts and circumstances of the case the decision of this Tribunal 1979 P T D (Trib.) 37 was not applicable and consequently the direction of learned Commissioner of Income--tax (Appeals) was not correct. I, speaking for the Bench, firstly, referred to the other decisions of this Tribunal recorded in I.T.A. No.252/KB of 1981-82 (Assessment year 1978-79) on 12th February, 1985 and I.T.A.No.1013/KB of 1982-83 (Assessment year 1980-81) recorded on 14th November, 1984 (which were also written by me) and then made the following observation:
"In both the cases the respondents were non-residents deriving their income from dividend and interest and remitting the entire amount abroad. Neither they had any Balance Sheet nor they had made any provision for payment of taxes. In fact, they had not retained any income for purposes of their working capital requirement. The same is the case of the respondent before us it is also a non-resident company and it has also no Balance Sheet. It also appears that the entire income, after payment of taxes and surcharge, has been remitted abroad. As such, we agree with the contention of learned Departmental Representative that the learned Commissioner of Income-tax (Appeals) erred in issuing the direction mentioned above. We further agree with Mr. Amin-e-Ajam that our decision reported in 1979 P T D (Trib.) 37 did not apply under the facts and circumstances of this case."
4. Mr. Faiz-ul-Alam, F.C.A. informed us that pursuant to the direction of the learned Commissioner of Income-tax (.Appeals) when the respondent moved an application of rectification for two years under appeal, the Income-tax Officer declined to oblige him for the reason that my above-quoted observation which, of course, had the concurrence of my learned brother, the Accountant Member, was evincing a departure from the Tribunal's earlier reported decision. Mr. Faiz-ul-Alam, therefore, moved an application that these appeals of the respondent for assessment years 1979-80, 1980-81 and 1981-82 be heard and disposed of by a larger Bench so that the doubt lingering in the mind of the Income-tax Officer could be removed. Hence these appeals before us.
5. Before proceeding further let me briefly reproduce the facts of these three appeals also. In all three relevant assessment years the income of the respondent, still a non-resident company, was again derived from dividend and interest. For assessment years 1979-80, 1980-81 and 1981-82 it declared its income at Rs.48,4,6,962; Rs.80,64,192 and Rs.63,47,183 from both dividend and interest which was assessed at the same amount in each assessment year respectively. The Income-tax Officer determined the amount of taxes payable thereon at Rs.8,86,286, Rs.15,46,222 and Rs.9,97;400 and treating this amount of tax payable in each year as unretained income further levied surcharge to the tune of Rs.88,622, Rs.1,54,625 and Rs.99,740 respectively. The respondent having been aggrieved and dissatisfied went up in appeal. It was contended before learned Commissioner of Income-tax (Appeals) that in view of the decision of the Tribunal reported as 1979 P T D (Trib.) 37 and keeping into consideration the earlier decision of the learned Commissioner of Income-tax (Appeals) recorded on 21st November, 1981 relating to assessment years 1977-78 and 1978-79 the order of Income-tax Officer be vacated and the surcharge levied be ordered to be deleted. The Commissioner of Income-tax (Appeals) accepted all the appeals vide his consolidated order dated 5th January, 1983 and ordered deletion of surcharge in the relevant assessment year. The time the Department again felt aggrieved and has come up in second appeal.
6. Now with this background let me now turn to the question referred to the Full Bench. It appears that in assessment years 1979-80 and 1980-81 the surcharge- was leviable under paragraph A of Part III of the First Schedule of the Income-tax ordinance, 1979. It reads as under:-
| "A. In the case of every company. | Ten per cent. of the income-tax and super-tax payable on total income as 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 to any subsequent year the surcharge shall be payable on the income so distributed at the sale rates in that year." |
It further appears that in the decision reported as 1979 P T D (Trib.) 37 the question as to whether surcharge could be levied on amount of taxes payable came up for hearing before a Division Bench of this Tribunal (which consisted of Mr. A. A Dareshani the then President and Mr. A. A. Zuberi, the then Accountant Member). The brief facts involved in that appeal were that the respondent, an assessee, had declared its total income at Rs.1,00,37,893 and the amount of tax determined thereon amounted to Rs.44,85,537. The respondent had also paid dividend to the tune of Rs.34,64,000. Thus, the Income-tax Officer treating both the amounts of dividend and tax payable as unretained income levied surcharge thereon but the balance of Rs.20,88,356 was treated as retained income and was given different treatment. On appeal, however, the Appellate Assistant Commissioner did not levy surcharge on entire amount of Rs.65,73,893 treating it as retained income. In other words, he treated the amount of tax payable as retained income and did not levy surcharge thereon. Thus, the surcharge was levied on amount of dividend only. This time the Department felt aggrieved and brought the matter before the Tribunal. It was contended, before the learned Division Bench of this Tribunal that working capital, according to the established accounting principles, represented current assets minus current liabilities and since current liabilities concluded within their fold, the tax liability, therefore, the amount of taxes payable was working capital requirement. Mr. A.A. Zuberi, the 'learned Accountant Member with whom the then learned President concurred, upheld the above-noted contention and dismissed the departmental appeal accordingly. Mr. Faiz-ul-Alam, the learned authorised representative of the respondent submitted before us that this decision applied with all force in the case of the appellant and our observation, which I have reproduced above, recorded in our order relating to the same respondent for assessment years 1977-78 and 1978-79 required re-consideration. He has, however, admitted that the respondent is a non-resident company and maintains no Balance Sheet. Let me also point out that he has confined himself strictly to the question referred to the Full Bench. I have, therefore, to examine this aspect of the matter in some details.
7. Let me start with the provision of law under which the surcharge is leviable. It appears from its perusal that if a company retains its income for purposes of capitalization or for meeting working capital requirement then such amount of retained income will be deducted from total income and (then) 10% surcharge would be levied on Income-tax and Super-tax payable on such reduced total income. It further appears that if the retained income, which was excluded from total income for the purposes of working out the amount of surcharge is distributed in subsequent Year, it shall be exposed to surcharge. In the appeals before us, the issue of capitalization is not involved. The only dispute pertains to the interpretation of words "working capital requirement". Let me, therefore, firstly explain ns to what the concept of working capital is according to the established accounting principles.
8. Briefly speaking, the working capital is equal to current assets minus current liabilities. However, I think that this is not enough to resolve the issue involved before us I will, therefore, examine it in some details.
9. William Pickles in his celebrated book "Accountancy (4th Edition) has defined the working capital in the following words:
"Working capital may be defied as the excess of current and liquid assets over current liabilities requisite in a business, having regard to reasonable provisions for contingencies so as to enable it to conduct its operations normally and free from financial embarrassment and to avoid losses consequent upon incurring commitment beyond its capacity in the ordinary course of events."
The learned author, however, has warranted that the definition was, in any case, subject to variation according to the facts and circumstances of each case. Hrishikesh Chakraborty at page 1551 of his book, "Advanced Accountancy" has discussed tile need and various stages of working capital requirement at the initial stages of a business and its subsequent year to year requirement in the following words:
"It is required for financing the estimated level of stock to be held to enable supply to factory according to requirements without hindrance or bottle necks, on any point for financing work-in-, progress required for sustaining the tempo of expected level of production, for financing finished, stocks 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 remitted. However, the credit to be received from creditors 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."
The learned author has further observed that the requirements of working) capital from year to year basis are also to be foreseen or, the same basis.
9. Keeping into consideration the two passages reproduced above, I am of the view that working capital is that capital which is readily available to a business concern to keep itself in state of stabilize solvency necessary to meet all contingencies arising in the process of profit earning.
10. However, the question would arise as to which assets could be included in working capital. William Pickles in his aforesaid book has mentioned liquid and near liquid assets, which could be included in working capital. According to him, the liquid assets consist of cash in hand, cash at bank and readily and realisable investment. On the other hand, bank deposits where longer notice of withdrawal is required, investments which arc not so readily realisable and other current assets like bills receivables and stocks etc., are called near liquid assets by him. Please sec pages 3117 and 3118 of his book "Accountancy, Fourth Edition". Chakraborty has mentioned such assets are sundry debtors, stocks bills receivable cash in hand and cash at bank. Please see; page 1455 of his Advanced Accountancy.
11. Similarly, we will have to further find out as to what current liabilities could possibly be. Chakraborty has mentioned such current liabilities are under the head of Sundry Creditors, bills payable liabilities for expenses and provision for taxation at page 1455 of his same book. William Pickles has also mentioned creditors, bills payable, bank over-drafts, current expenses and tax payable within the definition of current liabilities. Please see page 3118 of his same book- Thus, both the learned authors have mentioned the tax liability therefore is working capital requirement. However, this is not the end of the matter. We have further to see as to whether the same principles of Accountancy would apply in the case of the respondent as well who is admittedly a non-resident.
12. If we examine once again the provisions of paragraph A of Part III of the Finance Act, 1977 as amended by the Finance (Amendment) Ordinance of 1978, it appears to us that retained income of only a resident company is to be excluded while working out the amount of surcharge. As we have discussed above, only that much retained income is to be excluded which is retained either for the purpose of capitalisation, or for meeting working capital requirement. The appellant, which is admittedly, a non-resident and which admittedly maintains no Balance Sheet cannot retain its income for the purposes of capitalisation. The question however remains as to whether it could retain any income for meeting its working capital requirement. Mr. Faiz-ul-Alam answers this question in the affirmative whereas the answer of Mr. Muhammad Farid, the learned Departmental Representative is in an emphatic "No". I think that contention of Mr. Muhammad Farid, the learned Departmental Representative is correct.
13. From the facts of assessment years 1977-78 and 1978-79 it appear that the tax was deducted at source and some was paid alongwith the return. When the appeals came up before us the entire tax was already paid by the respondent. As far as assessment years 1979-80 and 1980-81 are concerned it is also clear that the tax at source has already been deducted and the balance of Rs.10,835 and Rs.99,475 were paid alongwith the return. As such the question, which we are squarely required to answer is that under these circumstances could it be held that the payment of taxes amounts to working capital requirement of the respondent
14. I have already quoted above passages from two celebrated authorities on Accountancy that payment of tax is a current liability but, with due respect, I do not think that where is a case of non-resident the tax has already been deducted at source, there could not still remain any working capital requirement as far as amount of tax deducted at source is concerned. In our country under various provisions of income-tax Ordinance the tax once deducted at source cannot indeed, even notionally be said to be an asset much less a current asset. The concept of working capital as we have discussed earlier envisages a running business where current liabilities are to be met out of current assets as discussed above. However, the respondent a non-resident has no running business, whatsoever. It is deriving income from dividend and interest. As such; it could have conceivably some requirements of current assets to meet some current liability but the tax, which is deducted at source cannot, by any stretch of imagination be treated as working capital requirement. However, if it pays some additional tax under section 54, it would have to explain to the Income-tax Officer that, it was its retained income for meeting working capital requirement, hence exempt from levy of surcharge.
15. Before parting with this case, let me also point out that William Pickles in his above-noted book on Accountancy has observed at page 3118, as under:-
"- - - -Tax Reserve Certificates are quite properly regarded as part of the working capital, since in effect so much of the tax liability as is covered by these Certificates can be regarded as having been discharged."
I do not think that this observation, in any way, has any bearing on the merits of appeals before us. Tax Reserve Certificates are issued in England to both the individuals as well as companies. They are for certain period and bear interest at certain rate. The tax liability could be adjusted against them. But, it is to be kept in mind that they could be encashed at any time with the only difference that the rate of interest given is low. (Please see pages 2110 to 2111 of 'Accountancy' 4th Edition by William Pickles). On the contrary, in Pakistan the tax deducted at source, does not come to the coffer of the assessee and is never available to meet any working capital requirement as discussed above. As such, it would neither be liquid nor near-liquid asset so as to be included within the fold of working capital. Thus, in the case of Tax Reserve Certificates, a holder company can encash them if it requires to meet any working capital requirement. But, on the contrary, the amount of tax once deducted though for ultimate discharge of tax liability remains out of reach and control of an assessee. Under the Pakistan Income-tax Law, such amount of tax deducted at source is ultimately adjusted against the tax liability of the same assessee at the time of framing of the assessment and if in excess the refund is ordered. Let me, however, point out that although the deduction of tax at source is to be treated as payment of tax on behalf of the assessee, yet the deduction does not amount to assessment of tax. Please see (1957) 31 I.T.R. 405, M.A. Chidambaram v. C.I.T. It is also pertinent to note that even though the deduction at source may be more than the tax finally determined, the assessee would not be entitled to any interest on excess amounts deducted. Please see (1978) 115 I.T.R. 449, A.D.L. C.I.T. v. Bareilly Corporation Bank. The amount of tax deducted at source is not available to an assessee for any purpose much less to meet its working capital requirement. I am, therefore, of the view 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.
16. I would, therefore, in the light of discussion, made above, answer the question referred to this Full Bench in the negative and once again reiterate my observation made in our order relating to assessment years 1977-78 and 1978-79 that a decision of this Tribunal reported as 1979 P T D (Trib.) 37 did not apply in the case of the respondent.
17. Before parting with this appeal, I would like to discuss the relevant case-law also on the point under discussion before us, which was either cited before us or we ourselves discovered it. I start with the decision of a Division Bench of this Tribunal recorded in I.T.A. No.363/K.B of 1980-81 decided on 18th January, 1983. In this case a non-resident company had derived its income in assessment year 1978-79 from dividend and interest on Income-tax Bonds amounting to Rs.13,00,318. The Income-tax Officer worked out tax on income from interest amounting to Rs.4,318 at Rs.2,159 and treating it as unretained income levied surcharges amounting to Rs.216. He further levied tax on income from dividend amounting to Rs.12,96,000 at Rs.1.94,400 and levied surcharge thereon to the tune of Rs.19,440. The respondent having been aggrieved and dissatisfied came up in second appeal and the learned Appellate Assistant Commissioner directed the Income-tax Officer to re-calculate surcharge "as per case reported as 1979 P T D (Trib.) 37". On further appeal a Division Bench of this Tribunal dismissed the appeal with the following observation:
"We feel sorry to observe that the learned Appellate Assistant Commissioner has passed the impugned order in this behalf without taking into consideration the facts of the case. He seems to be under misapprehension that wherever the question of payment of surcharge arises, it can be decided in terms of the above referred decision of the Tribunal without ascertaining whether the facts are identical or not.
In the result, the order of the Appellate Assistant Commissioner is vacated and the order of the Income-tax Officer is restored "
If the aforesaid observation of the Division Bench of the Tribunal is read in the light of the fact that the assessee in that case was a non-resident company, which derived its income from dividend only, the conclusion arrived at by me appears to be fortified by it. The second case cited before us is recorded in I.T.A No.1013/ KB of 1980-81 recorded on 14th November, 1984. This order is written by me and it has been concurred with by the then learned Accountant Member. In this case, the assessee was again a non-resident company earning its income in Pakistan from dividend and interest on Bonds. Speaking for the Bench I made the following observation in this case:
"If the concept of working capital is interpreted with reference to the sections mentioned above, and in context of the scheme of Income-tax, we are left in no doubt that the expression means that working capita; which is used in Pakistan. Since admittedly aforesaid amount is not used in Pakistan as the respondent is not carrying on any commercial activity, therefore, despite, the fact that the whole of it is retained would not, in our view, be exempt from levy of surcharge for the simple reason that it would not be deemed to have been retained for purposes of working capital of the respondent."
In this case, I had taken the same view, which I have discussed in rather some details in these appeals.
18. The next case cited before us was recorded in I.T.A.No.252/K.B of 1981-82 regarding yet another non-resident company deriving its income from dividend and interest on tax Bonds. This order was again written by me and the learned Accountant Member concurred with my conclusion. This decision was based on the decision recorded in I.T.A. No.1013/K.B. of 1982-83, mentioned above.
19. Our attention has also been invited to yet another decision of a Division Bench of this Tribunal recorded in I.T.A. No.947/K. B of 1982/83 recorded on 19th November, 1985. In this case the assessee was a non-resident banking company, which derived its income from securities. In this case the following observation has been relied upon by Mr. Faiz-ul-Alam, F.C.A.
"There is nothing on the record that any part of the income was distributed or spent or was not retained by the respondent. The Appellate Tribunal has, consistently following the ratio decidendi of its earlier decision reported in 1979 P T D (Trib.) 37, laid down that the surcharge has to be levied on that part of the total income which was no; retained in the business and was given out to the shareholders. Therefore, in absence of any evidence to the contrary, the income, including the tax liability, which was not distributed and were shown in the books of accounts shall be deemed to be an income retained. Consequently, only the unretained income shall be subject to levy of surcharge."
With this conclusion the departmental appeal was rejected. Mr. Faiz-ul-Alam, F.C.A. contended before us that the observation reproduced above, reflected a departure from earlier decisions of the Tribunal, as it is latest in point of time. With due respect to the learned Authorised Representative of the respondent and the learned Members of the Bench, I think that the question involved before us was neither canvassed before the learned Bench nor the attention of the learned Members was invited to the earlier decisions of other Division Benches. With profound respect, I am of the view that all the decisions reproduced above, applied with full force in this case also except the last decision which is distinguishable for the reasons given above.
20. Now to conclude, I sum up that in case of non-resident company which derives its income from dividend or interest and maintains no account books much less the Balance Sheet, the concept of income retained for the purposes of capitalisation or working capital requirement is not applicable as far as the amount of tax deducted at source is concerned. In my humble view, the surcharge is leviable on such amount of tax. However, as far as that amount of tax which is paid alongwith the return is concerned, the burden of proving that it was paid out oil income retained for working capital requirement is on the shoulders of an assessee. If it is proved that the tax paid alongwith the return was, out of retained income to meet working capital requirements, it would be exempt from surcharge but not otherwise.
21. This takes us now to the third appeal relating to assessment year 1981-82. Here, the Finance Ordinance 1980, substituted para A of Part III of Finance Act, 1977 as amended by Finance (Amendment) Ordinance, 1978. It reads as under:-
| "A(i) In the case of a company whose free reserves as on the last day of the income year exceed its paid-up capital by more than one and a half. | Ten per cent of the income-tax and super tax payable on total income. |
| (ii) in the case of any other company. | Ten per cent 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: 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. Explanation--As used in this paragraph.-- (a) 'retained income' means total income as reduced by the aggregate of 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 thereon; and (c) 'free reserves' means aggregate of unappropriated profits and all reserves, excluding the following reserves, namely:- (i) Reserves created on revaluation of fixed assets; (ii) Goodwill reserve; (iii) Depreciation Reserve; (iv) Gratuity Reserve; (v) Workers Participation and welfare funds; (vi) Reserve for taxation to the extent of actual tax liability of the company and (vii) Any other reserve to meet any specific liability existing on the date of the balance sheet." |
From its perusal it appears that the legislature has made a departure from earlier provision of law inasmuch as the amount of Income-tax and Super-tax payable has been specifically included within the definition of retained income. Let me repeat here that earlier the retained income was that which was retained for the purposes of capitalisation or for meeting working capital requirement. However, now the concept of retained income for meeting working capital requirement has been changed. Now retained income is that from which the tax liability has been deducted. Since the legislature has expressly made this departure, therefore, we have to take notice of it. I would, therefore, answer the question referred to us again in the negative for assessment year 1981-82 as well for the simple reason that the surcharge in this year would be worked out according to the law as applicable in this year.
22. Before turning to merits let me hastily add that all these appeals have nothing t0 do with the concept of retained income vis-a-vis the dividend income of a non-resident as Mr. Alam conceded at the very outset of his submissions that the law on this subject was rightly stated in our decision recorded in I.T.A. No.1013/ KB of 1982-83 dated 14-11-1984 .
23. Now as far as the merit of the appeal is concerned, Mr. Muhammad Farid, the learned Departmental Representative contended before us that the department had not reconciled itself with the view of the Tribunal that no surcharge could be levied on amount of taxes payable and several Reference Applications were pending in High Court. According to learned Departmental Representative these appeals have been filed as a matter of principle and in order to safeguard the revenue interest. It is true, that the department had gone to the High Court. However, as far as this Tribunal is concerned it has been consistently taking the view that the amount of taxes payable is retained income on which no surcharge could be levied. This finding of the Tribunal, however appears to be confined to the resident companies which have account books including the Balance Sheet and lei me mention specifically, is not the subject-matter of these appeals. As far as the non-resident companies earning their income from dividend and interest are concerned, we have already discussed at length the law applicable to them regarding assessment year 1981-82 as well as earlier assessment years.
24. Consequently, I allow the departmental appeals for assessment years 1978-79 and 1980-81 and direct the Income-tax Officer to levy surcharge on amount of taxes deducted at source, but not on amount of taxes paid alongwith the return till he comes to the conclusion, on the basis of evidence before him, that it was not paid out of income retained for payment of taxes. But for assessment year 1981-82 he is directed to follow the law as applicable in this year and not the law as laid down in our decision reported as 1978 P T D (Trig.) 37.
.--I agree.
.--I agree subject to my explanatory note.
-After perusal of the judgment of my learned brother, the Judicial Member, I unhesitatingly subscribe to his view regarding the levy of surcharge on the taxes paid or payable by a non-resident who does not maintain any Balance Sheet and that the ratio laid down by the Tribunal reported as 1979 P T D (Trib) 37 is not applicable in the case of a non-resident. However, I feel it advisable to elaborate certain points in greater details and with this object the following lines are appended as an explanatory note to the judgment.
Firstly, referring to the para 'A' of Part III of the First Schedule to the Income-tax Ordinance or the corresponding provisions which were first incorporated vide Paragraph 'A' of Part III of the Finance Act of 1977 as amended by Finance Amendment Ordinance of 1978 in the Repealed Income-tax Act, we have to interpret the following provisions incorporated therein irrespective whether the assessee is a resident or a non-resident.
"A. In the case of every company.
Ten 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 capitalisation or for meeting working capital requirement:
Provided that, if the income so retained is distributed in any subsequent year, the surcharge shall be payable on the income so distributed at the same rates in that year."
The provisions under the Ordinance are identical to the provisions in Para. 1 of Part III "rates of surcharge" of the First Schedule to Finance Ordinance, 1978, and were interpreted by the C.B.R. as for levy of surcharge was concerned. The C.B.R. had explained in Circular letter No.l(2) I.T--1/79, dated 13th February 1979 wherein the term "total income" was interpreted by them to mean the total income as determined under section 23, further clarifying it that surcharge will be levied on total income as assessed and not the income as per profit and loss account of the assessee or income as declared by the assessee under section 22. The C.B.R. further had given their view that:
"The words "so much of the income as has been retained for the purpose of capitalisation or for meeting working capital requirement" refer to that part of the "accounting income" (income as per P & L account) that has not been paid or appropriated to be paid as dividends or taxes. The problem arises where no appropriation is made for payment of taxes or the appropriation is less than the taxes payable under section 22-A or where appropriation for taxes is not made from the current year's profit but from Taxation Reserve or other such Reserve."
Besides, the C.B.R. while expressing the difficulty to enumerate the different forms of capitalization mentioned a few common forms of capitalization with which we are not concerned in adjudication of the issue before us. As for the above provisions are concerned the most important question, which we have to subject to scrutiny is what is the income which has been retained for meeting working capital requirements. In order to appreciate the term working capital requirement my learned brother, the Judicial Member has already incorporated in his order the opinion of two highly respected and celebrated authors William Pickles and Chakaraverti. In his famous book of accountancy which is followed 'as a text book by the professional accountants the learned author William Pickles has defined it to be the excess of current and liquid assets over current liabilities requisite in a business with due regard to reasonable provision for contingencies conducive in the normal carrying on of the operation free from financial embarrassment as well as being capable to avoid losses resulting from commitments beyond its capacity in the ordinary course of the events. The learned author himself had advised that the definition of "working capital" should be construed very broadly and that the facts and circumstances of each case must be considered. He further elaborated it by illustrating it that it would be possible to carry on business with a small margin or even with a deficiency in a case where goods are sold for cash whilst goods are purchased on credit or the sale credit period is shorter than the purchase credit period, while in the other case a reverse position would be in existence and unfavourable circumstances may exist and in that case the higher deficiency gap is covered up by short term financing, bank overdrafts and bills of exchange etc. The learned author then enumerated the following three classes of assets which should be included in calculation of working capital:---
(i) Liquid--Cash in hand, cash at bank readily realizable investments.
(ii) Near liquid--Bank deposit where long notice of withdrawal is required, investments which are not so readily realizable as those in (i)
(iii) other current assets which may be classified under (i) and (ii) according to the particular facts--debtors, bills receivable stocks.
The further advice of the learned author was with reference to the exclusion of any investment or cash which was held for specific purpose like sinking fund or pension fund. Secondly, the investment should be such which are easily convertible into cash like shares dealt in stock exchange and enjoy reasonably good market but investment in private companies trade investments, investment in subsidiaries etc. should not be included in arriving at the "working capital". The next step would be deduction from these working assets, the current liabilities and commitments of short-terms nature including creditors, bills payable, bank overdrafts, current expenses and tax including P.A.Y.E.
It may further be pointed out that in order to correlate or connect the opening or closing "working capital", the examination into details of not only of the balance sheet but of the trading Account and profit and loss account and appropriation account is a prerequisite. As has been explained by the renowned author, Pickles, it will be arrived at as under:
The opening working capital plus ......
(a) Profit, before the debits of a non-financial nature, such as depreciation, loss on sale of fixed assets and transfers to General Reserve and before credits of a similar nature such as profit on sale of fixed assets and transfer from General Reserve to Profit and Loss Account.
(b). Increase of loans, debentures, share capital and realizations of fixed assets, from which will be deducted.
(c) Reductions of items indicated in (b) .
Now coming to the question of tax there could be least doubt that during the year what had been deducted or paid was nothing but current liability which had to be deducted from current assets in order to arrive at the working capital. If there is any unpaid liability of tax then that liability having remained undischarged falls in the category of "requirement of the working capital". In case of the assessee firstly the tax having been deducted at source under a statutory obligation there remains no liability on the part of the appellant to pay any tax unless a demand is created over and above the deduction in case the total income for the relevant year of the assessee attracts such higher) amount of tax. Secondly, in this case no balance sheet has been prepared and as such there could be no question of retention of any income out of the total income earned during the year to enable the assessee to meat the working capital requirements. Thirdly, the words "working capital" as discussed supra do contemplate certain activities, which require money in the carrying on of the business or profession or vocation, which is totally absent in the case of the appellant. Lastly, pursuant, of the proviso appended if in any subsequent year the amount out of the total income even if retained is distributed and not retained to meet requirement of working capital, then such distribution attract, the levy of surcharge. In the case of non-resident the absence of the balance sheet render- everything obscure and nothing is known about the relative proportions of fixed and liquid assets anything about, appropriation of profits or provision for taxation by appropriation or existence of or alteration to general reserve either for purposes of capitalization or otherwise etc. Lastly in the absence of the balance sheet the Assessing Officer is always in the dark about whether the money has been kept in Pakistan or remitted outside Pakistan and the provisions of the income-tax Act or the Income-tax Ordinance, 1.979 being applicable to Pakistan, the only logical way is to bring such amount within the orbit of taxation for purposes of surcharge ignoring the ultimate late of such taxed income. Hence, I have no hesitation in placing reliance on the observation made in I.T.A. No.1013/K.B, of 1980-81 recorded on 14th November, 1984, which has been quoted by my learned brother, the Judicial Member.
For the reasons mentioned above I fully subscribe to the views expressed by my learned brother on this issue.
M.B.A./370/T Order accordingly.
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