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Petitioner: Messrs PAKISTAN RE-INSURANCE CO. LTD., KARACHI VS Respondent: The COMMISSIONER INLAND REVENUE, ZONE-III, LTU, KARACHI
Court Name: Appellate Tribunal Inland Revenue Judge(s): Muhammad Jawed Zakaria, Syed Ayaz Mehmood Title:Messrs PAKISTAN RE-INSURANCE CO. LTD., KARACHI vs The COMMISSIONER
INLAND REVENUE, ZONE-III, LTU, KARACHI Case No.: I.T.A No.204/KB of 2016 Date of Judgment:2018-08-15 Reported As: 2020 PTD (Trib.) 63 Result: Order accordingly Judgment ORDER MUHAMMAD JAWED ZAKARIA. JUDICIAL MEMBER:- This appeal arises out of the order No.20, dated 10.10.2015 passed by the learned Commissioner Inland' Revenue (Appeals-II), Karachi, for the tax year 2010 passed under section 122(5A) of the Income Tax Ordinance, 2001. The taxpayer/ appellant has agitated the following grounds of appeal: "1. That the order passed of the Commissioner Inland Revenue, Appeals [CIR(A)] is bad in law and on facts. 2. That the order of the CIR(A) is illegal, ultra vires, void and without any justification. 3. That the CIR(A) has erred in confirming the action of ACIR in treating the heads of income as single basket income. It is contended that the action of the CIR(A) is bad in law and on facts. I. Dividend Income Rs. 307,376,841 2. Property Income Rs. 54,665,226 4.That the CIR(A) has erred in not giving the decision with regards to chargin g of Workers Welfare Fund at Rs.10,780,628/-. It is contended that the action of the CIR(A) is bad in law and on facts. 5. That the Appellant craves leave, to add to amend, to alter or to substitute the above grounds of appeal before or at the time of hearing." BRIEF F ACTS / Background of the instant case 2. The background of the case is that the taxpayer/ appellant was incorporated in Pakistan on March 30, 2000 as a Public Limited Company under the Companies Ordinance, 1984. Its shares is quote d on Pakistan Stock Exchange. The object of the Company is the development of insurance and reinsurance business in Pakistan and to carry on reinsurance business. The return of income for the tax year 2010 was e-filed on 19.10.2010 declaring loss for the year at Rs.494,962,469/-, dividend income at Rs. 307,376,841/- and property income at Rs.54,665,226/- both offered at reduced rate of tax and thereby claimed refund at Rs. 41,014,495/-. The return of income was amended
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under section 122(5A) of the Ordinance which was invoked vide amended order No. D.C. No.08/46 and taxable income of Rs. 528,250,773 was assess ed with tax payable at Rs. 97,552,964.Additional Commissioner Inland Revenue (ACIR), in the amended assessment order , had taxed dividend income and property income at standard rate of 35% for companies, on the grounds that all incomes of insurance companies are "one basket income", taxable at standard rate of tax, and that reduced rates of tax for Dividend income and Income from property under First Schedule to the Ordinance are not applicable to profits and gains of insura nce companies. ACIR had also levied federal Workers Welfare Fund (WWF) of Rs. 10,780,628 in the amended assessment order . Being aggrieved from the order , the taxpayer filed an appeal against the amended assessment order before CIR(A), who vide appellate order dated October 10, 2015 affirmed the treatment meted out by the ACIR, in respect of taxation of dividend income and property income, hence the instant appeal before this Tribunal. 3. On the date of hearing, Mr. Atif Mufassir , FCA and Safdar Imam, ACMA appeared on behalf of the taxpayer/ Appellant as AR and argued the case while Mr . Abdul Salam represented the Department as DR. ARGUMENTS A.R's Arguments 4. Before us, the learned counsel vehemently assailed the findings of officers below that the rate of taxation for companies given under First Schedule to the Ordinance differs from that of repealed Ordinance, due to the reason that a separate rate of tax is prescribed for dividend under section 5 of the Ordinance which starts with wordings "Subject to this Ordinance", which means that if any other treatment is prescribed for taxation of Dividend income such as for insurance companies under the Fourth Schedule to the Ordinance, then in that case, the said treatment would apply rather than section 5 of the Ordinance. The learned counsel for the Taxpayer has also referred the findings of the learned CIR(A) that judgment of Hon'ble Supreme Court reported as 1997 PTD 1693 as referred by the Appellant would not be applicable in the present case, as the said decision relates to the repealed Ordinance. The learned counsel submitted that the following issues arise in this appeal: (i) Treatment of dividend income and property income as single basket income and taxing the same at general corporate tax rate of 33% instead of reduced tax rate of 10% prescribed in Division III of Part I of First Schedule to the Ordinance; and (ii) Levy of federal WWF . 5. During the course of hearing, the learned ARs argued that the order of the Com missioner IR (A) is illegal, ultra vires, void and without any justification. Following issues were raised and discussed during the hearing and are decided by this Court as follows: i) Dividend income and Income from property 6. The learned AR has vehemently argued that the CIR(A) has erred in confirming the action of ACIR in treating the heads of income as single basket income. The learned A.R. has submitted that section 99 of the Ordinance clearly states that provisions contained in Fourth Schedule to the Ordinance are for the purpose of computation of profits and gains of insurance business and not for the purpose of computation or imposition of tax. As such, the benefit of reduced rate of taxation to Dividend income and Income from property given under First schedule cannot be denied to the Appellant being an insurance Company unless the law is suitably amended. Case laws relied by the learned AR 7. In support of contention, the learned AR placed reliance on the judgment by the Hon'ble Supreme Court of Pakistan vide judgment in the case of EFU General Insurance Company Limited reported as 1997 PTD 1693 . The relevant part of the judgment is reproduced below; "Section 26(a) of the Ordinance, inter alia, provides that notwithstanding anything contained in the Ordinance, the profits and gains of any business of insur ance and the tax payable thereon shall be computed in accordance with the rules contained in the Fourth Schedule. Computation of profits and gains and computation of tax payable are two different concepts altogether . In rule 5 of the Fourth Schedule special provisions exist for computation of income from general insurance business, but there are no provisions at all in the rule for computation of tax on such income. This could lead to two interpretations. There being no provision in the Fourth Schedule for computation of tax, such income cannot be subject to tax or, in the absence of taxing provisions, general taxing
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provisions contained in the First Schedule for business income of companies with apply . The intention of the legislature is clear and that is that income from general insurance shall be subje ct to tax under the Income Tax Ordinance. The interpretation that such income will be tax free is, therefore, to be rejected. Special provisions are, however , silent regarding computation of tax on such income. To give effect to the intention of the legislature and to harmonize different provisions of the Ordinance, the interpretation will be that for taxing such income the general provisions contained in the First Schedule providing for computation of tax or income of companies from business shall apply , and, while applying the provisions of the First Schedule for computation of tax on such income, if any benefit in the rate of tax is provided on any kind of income, general insurance companies cannot be deprived of such benefit in the absence of any provision that such benefit shall not be extended in respect of income from general insurance business. Admittedly , no such special provision appears in the First Schedule or in any provision of the Income Tax Law to deny the said benefit to the general insurance companies. There is not provision in the Ordinance or the Schedules that only one part of the First Schedule shall apply and the other shall not in the case of general insurance companies. Benefit in the rates of tax available under First Schedule of the Ordinance can be denied to general insurance companies by suitably amending the law . (Emphasis is ours) Reference was also made to the judgment of Hon'ble Lahore High Court in the case of Muslim Insurance Co. Ltd. reported as 2002 PTD 577, wherein relying on the above judgment of Hon'ble Supreme Court, it was held that concessional tax rate given under First Schedule to the repealed Ordinance would be applicable for taxation of Dividend income of insurance companies. The learned A.R. also referred to the Department's appeal for subsequent assessm ent years in the case of Muslim Insurance Company Limited, wherein Hon'ble Lahore High Court through judgment reported as 2004 PTD 2707 took a similar position on this issue. The learned AR humbly submitted that althoug h the above referred judgments related to the repealed Ordinance, howe ver, the principle enunciated therefrom are squarely applicable for the purposes of the Ordinance and in respect of Income from property . The above stance is also affirmed by Hon'ble Tribunal in its full bench decision in the case of Security General Insurance Company Limited reported as 2017 PTD 495 . The relevant portion of the decision is reproduced below: "As is obvious from the above, while in section 26(a) of the repealed Ordinance, 'tax on income' was also prescribed to be determinable under the Fourth Schedule, in section 99 of the 2001 Ordinance, with exclusion of phrase 'tax payable thereon', it has been made clear by the legislature that Fourth Schedule would only be referred to for computation of 'profit and gains' of an insurance company ." Regarding assertions of the learned CIR(A) that Hon'ble Supreme Court's judgment relating to the repealed Ordinance referred to above is not relevant under the Ordinance due to separate taxation mechanism for Dividend income and use of words "Subject to this Ordinance" under the Ordinance, AR referred to the aforesaid decision of the learned Appellate Tribunal's full bench, in the case of Security General Insurance Company Limited reported as 2017 PTD 495 wherein the above position of learned CIR(A) has been rebutted and it is held that Dividend income of insurance companies remain chargeable to tax at reduced rate as specified in Division III of Part I of First Schedule to the Ordinance. The relevant part of the decision is quoted below: "The reliance of Revenue on expressio n "subject to this Ordinance" as used in section 5 of the Ordinance, to support their contention is seriously flawed for more than one reasons. Firstly , the provisions of section 5 of the Ordinance contained this expression even at time when a specific reduced rate for insurance companies, as aforesaid, was prescribed in Divisions III of Part I of the First Schedule to the Ordnance. This position amplifies that even by use of the expression in section 5 of the Ordinance the applicability .of Division III of Part I of the First Schedule could not be denied to the insurance company ." DR'S ARGUMENTS 8. On the other hand, the learned DR opposed the contention made by the learned AR. He argued that the order passed by the learned CIR(A) is well within the framework of law and there is no illegality , irregularity and infirmity . He contended that the earlier judgments of the Tribunal as well as the Hon'ble superior courts relied upon by the learned counsel are distinguishable in as much as they relate to Insurance Companies but the instant taxpayer is
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indulged in reinsurance business. The learned D.R. submitted that in the earlier years though the issue was decided in respect of insurance yet neither any issue of reinsurance was decided nor raised. The learned DR further argued that the decision of CIR(A) is totally justified in stating that the aforesaid judgment of Hon'ble Supreme Court is related to the repealed Ordinance and is not relevant under the Ordinance due to separate taxation mechanism for Dividend income and use of words "Subject to this Ordinance" under the Ordinance. He further argued that it is a public compa ny and not fully owned Government entity . He submitted that declared dividend income of Rs.307,376,841/- with tax payable at 10%. Similarly , the taxpay er had declared property income of Rs.54,665,226/- with tax payable at 5%. Thus the taxpayer had declared both dividend income and property income as separate block of income and subjected these income to reduced rate of tax. However , as per Fourth Schedule to the Ordinance, profits and gains as per Audited Accounts are to be taken as income from business subject to some adjustments of expenses which are inadmissible as deduction in computing income from business. Hence, in terms of section 99 read with Fourth Schedule of the Ordinance the income of the insurance company is to be computed as "one basket income" without bifurcation of the income into other "Heads of Income". The Hon'ble Supreme Court of Pakistan in the case reported as 1993 PTD 766 = 1993 SCMR 1232 and Hon'ble High Court of Sindh in the case reported as 2011 PTD 2042 held this view. Therefore, the dividend income declared by the appellant insurance company does not fall under section 5 of the Ordinance and similarly property income declared does not fall in the head "Income from property" under section 15 of the Ordinance. Instead, entire income is covered under Fourth Schedule of the Ordinance as "Income from business". The total income as per accounts after adjustments of admissible/inadmissible expenses is, therefore, required to be taxed at the rate of 35% instead of reduced rates applied on dividend and property income. He therefore, prayed for upholding the orders of the officers below . REJOINDER / REBUTT AL BY THE LEARNED A.R 9. In rebuttal of learned DR's above contention, the learned AR urged that the recent decision of full bench of this Tribunal, as referred supra as reported as 2017 PTD 495 has already resolved the issue and held that Dividend income of insurance companies remain chargeable to tax at reduced rate as specified in Division III of Part I of First Schedule to the Ordinance. The learned AR further submitted that changes were made in Rule 6B of Fourth Schedule to the Ordinance through the Finance Act, 2016, which are applicable from Tax Year 2017 and onwards, whereby , inter-alia Dividend income derived by insurance companies from listed companies are taxable at standard corporate tax rate. The learned A.R. further went to say that it is settled princ iple that any change in law is applicable prospectively unless it is specifically stated so or if the amendment is of rectificatory nature. Rule 6B of the Fourth Schedule and amendments therein through the Finance Act, 2016 are clearly substantive provisions relating to enhancement of taxation of insurance business instead of clarificatory / benevolent amendments. The learned AR also referred to judgment of Hon'ble Lahore High Court reported as 2016 PTD 910 wherein it was held that law is always applicable prospectively unless specifically stated otherwi se. Relevant part of which is reproduced below: "5. .............The notification is dated 29.6.2013 and the Act came into force on 01-07-2013. The question that arises is whether the Respondents can recover agricultural income tax on the strength of Section 38 of the Act for the assessment years 2012, 2013 and 2014 given that it came into effect On 01.07.2013. A tax statute Operates prospectively and nor retrospectively unless clearly intended and it is only where the legislative intent is clearly provided to give retrospective effect to a statutory provision, then the tax can apply with retrospective effect. Reliance is placed on the cases titled "Zila Council, Sialkot through Administrator v. Abdul Ghani Proprietor lqbal Brothers, Sialkot and others" (PLD 2004 SC 425) and "Muhammad Ilyas v. The State" (2009 SCMR 1042 ). In this case there is no such intent. Hence the provisions of the Act will apply prospectively ." (Emphasis is ours) 10. The learned AR further submitted that the issue is recently decided by Tribunal in favour of Appellant in its own case for Tax Years 2009 and 2011 through separate appellate orders. Relevant parts of the decisions for Tax Years 2009. and 201 1 are reproduced below: I.T.A. No. 101/KB of 2016 dated April 13, 2017-T ax Year 2009
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"After perusal of above detailed decision of learned Full Bench ATIR Lahore, we are of the clear opinion that this decision squarely applicable on the issue in hand. Order of ADCIR, for application of rate of 35% on dividend income earned by the appellant and confirmation thereof by the CIR(A) is not sustainable in law. Hence the impugned order of CIR(A) is annulled and appeal of the appellant is allowed." M.A. (Rect.) No. 868/KB/2017 in I.T .A. No. 101/KB of 2016 dated June 16, 2017-T ax Year 2009 "The principles laid down for dividend income in order dated 13.4.2017 will be applicable on the income from a property because section 99 of the Ordinance, special provision applicable to insurance companies, deals with the computation of income and no rates of tax has been prescribed there, accordingly , the interpretation could either be that income insurance companies would either go un-taxed are for computation' of tax, general tax rate provided in first schedule has to be adopted. The tax rate for property income provided in division-5 Part-Ill of first schedule therefore, the Assessing Officer is directed to work out liability under the said provision." I.T.A. No. 102/KB of 2016 dated June 12, 2017-T ax Year 201 1 "After hearing both the parties and perusing the material record, we observe that in the case of dividend income, the matter stands decided in favour of the appellant in the above quoted decision of the Full Bench. Following the decision of ATIR Lahore vide I.T.As. Nos. 1274 to 1278, we have no hesitation in holding that this decision squarely applies to the issue at hand regarding the tax rate applicable on dividend income in the case of insurance companies. More recently this Tribunal, relying on the decisions of higher forums, again decided the issue in favour of the tax payer in LT.A. No 101/KB of 2016. The order of ACIR for application of rate of 35% on dividend income of the appellant and confirmation thereof by the CIR(A), is therefore not sustainable in law ." On the basis of the above arguments, the learned counsel prayed that the orders of the officers below may be vacated. 11. We have heard both the learned representatives and have perused the records of the case as well as case laws cited at bar and so also the amendment made in the Fourth Schedule vide Finance Act, 2016. Elongate concept of Reinsurance v . Insurance 12. The mute point involved, as contended supra, in this appeal as to whether Insurance and Re-insurance may be treated differently and different (Taxation) treatment may be accorded, therefore, before proceed further we have to look at the elongate definition of Reinsurance and Insurance as provided in the Insurance Law which is being discussed hereunder: ANAL YSIS OF REINSURANCE VIS-A-VIS INSURANCE : Definition of Reinsurance : It is a process whereby one entity (the reinsurer) takes on all or part of the risk covered under a policy issued by an insurance company in consideration of a premium payment. In other words, it is a form of an insurance cover for insurance companies. Under sub-clause (lii) of section 2 of the Insurance Ordinance, 2000 the reinsurance has been defined as under: 2(lii) "reinsurance" means a contract of insurance under which the event, specified in the contract, contigent upon the happening of which, payment is promised to be made to the policy-holder there under , is payment by the policy holder of a claim or claim made against that policy holder under another contract or contracts of insurance issued by that policy holder ." Arrangement of Reinsurance has been described in the Part VI under section 41 of Insurance Ordinance, 2001 as under: 41". Requirement to effect and maintain reinsurance arrangements .---(1) An insurer shall effect and shall at all times maintain such reinsurance arrangements as are, in the opinion of the directors (or such other person or body responsible for conducting the management and business of the insurer), formed on reasonable grounds, having regard to the exposures of the insurer in respect of individual contracts accepted and in respect of aggregate losses arising out of individual events, adequate to ensure continuing compliance by the insurer with the provisions of this Ordinance relating to solvency . (2) Every insure shall submit to the Commission, in the manner prescribed by the commission and not less than one month prior to the coming into effect, or as soon as practicable therea fter, of any treaty reinsurance
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arrangement entered into by the insurer as cedant, such features of that reinsurance arrangement as may be prescribed by the Commission. (3) Where any reinsurance treaty the particulars of which have been submitted to the Commission under subsection (2) is altered or any new treaty reinsurance arrangement is made after the submission of the information under subsection (2), the insurere concerned shall submit to the Commission, in the manner prescribed by the Commission, particulars of such alteration in the treaty or such new treaty reinsurance arrangement within one month of such alteration or arrangement and shall submit such further information or clarification as the Commission may require. (4) The Commission may at any time and after giving the insurer an opportunity of being heard, for reasons to be recorded in writing, direct the insurer to make such modifications in his reinsurance arrangements as the Commission may specify . (5) The Federal Government may make rules, not inconsistent with subsection (1), governing the reinsurance outside Pakistan, other than on a treaty basis, of insurance business underwritten by an insurer in Pakistan." It is mandatory upon every insurer to offer reinsure with the company as envisaged under section 42 ibid which is also reproduced hereunder: "42. Compulsory cession.--- (2) The Federal Government may by notification in the official Gazette, direct that every insurer shall offer to reinsure with the Company such proportio n as is determined on such basis as may be specified in such notification of this direct non-life insurance business which is in excess of the aggregate of: a) The insurer's net retention; b) The sum insured required to be reinsured under subsection (1); and c) The sum insured otherwise reinsured with the Company or with any other insurer in Pakistan but excluding any part reinsured outside Pakistan. (3) The reinsurance set out in subsection 4(2) shall for the purposes of this Ordinan ce constitute a treaty contract of reinsurance between the insurer and the company , operating on a risks attaching basis. (4) Whoever contravenes the forgoing provisions of this section shall be punishable with a fine which may extend to ten thousand rupees and with a further fine which may extend to one thousand rupees for every day after the day on which the contravention continues. (5) The Federal Government may be notification in the official Gazette and on reasonable grounds, exempt any insurer and the Company from the preceding requirements of this section so far as concerts any part of any class or subclass of business" Description: 13. Unlike co-insurance where several insurance companies come together to issue one single risk, reinsurers are typically the insurers of the last resort. The insurance business is based on laws of probability which presupposes that only a fraction of the policies issued would result in claims. As a result, the total sum insured by an insurance company would be several times its net worth. It is based on this same probability of loss that insurance companies fix the insurance premium. The premiums are fixed in such a manner that the total premium collected would be enough to pay for the total claims incurred after providing for expenses. However , there is a possibility that in a bad year, the total value of claims may be much more than the premium collected. If the losses are of a very large magnitude, there is a chance that the net worth of the company would be wiped out. It is to avoid such risks that insurance companies take out policies. Secondly , insurance companies take the support of reinsurers when they do not have the capacity to provide a cover on their own. Broadly , reinsurance can be classified under two heads - treaty reinsurance and facultative…
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