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Official Citation: 1993 SCMR 1232
Court / Jurisdiction: Supreme Court of Pakistan
Year of Decision: 1992
Decision Date: 1992-12-31
Parties: Messrs CENTRAL INSURANCE CO. and others vs THE CENTRAL BOARD OF JUDGMENT
This judicial decision was delivered by the Supreme Court of Pakistan on 1992-12-31. The matter involves proceedings between Messrs CENTRAL INSURANCE CO. and others and THE CENTRAL BOARD OF JUDGMENT, officially reported as 1993 SCMR 1232. The court reviewed applicable Pakistani statutes, procedural requirements, and governing case-law authorities. The full text below contains the complete facts, arguments, and legal reasoning rendered by the honorable bench.
Case cited as 1993 SCMR 1232
Court Name: Supreme Court of Pakistan Judge(s): Nasim Hasan Shah, Ajmal Mian, Muhammad Afzal Lone Title:Messrs CENTRAL INSURANCE CO. and others vs THE CENTRAL BOARD OF
JUDGMENT
Reported As: 1993 SCMR 1232 Result: Order accordingly Judgment JUDGMENT ' AJMAL MIAN, J.---By this common judgment, we intend to dispose of the above seven appeals, which have been filed with the leave of this Court and are directed against a common judgment dated 20-7-1989 passed by a Division Bench of the High Court of Sindh in Constitution Petitions, filed by the appellants against the issuance of notices under section 65 of the Income Tax Ordinance, 1979, hereinafter referred to as the Ordinance, dismissing the same, except that in Civil Appeal No,12-K of 1991, there is a separate judgment of another Division Bench of the above High Court passed in Constitution Petition No,D-348 of 1989 following the above earlier decision of the Division Bench. Leave to appeal was granted for the reasons that the contentions advanced by the learned counsel for the appellants raised substantial questions of law which might affect a large number of cases and also appeared to be a first impression. 2. The brief facts are that the appellants are Insurance Companies and are carrying on the business of general insurance. Their income-tax assessments were finalized by the Income Tax Officer concerned in accordance with Section 26 read with Rule 5 of the Fourth Schedule to the Ordinance. It appears that the Central Board of Revenue issued Circular No,4 of 1988 dated 19-4- 1988, whereby inter alia the following interpretation was placed on the provisions of the Ordinance:- "It is thus evident that special provision has been made in the Ordinance for the computation of the profits and gains of insurance business. This means that whatever may be constituents of the receipts of an insurance company, the balance disclosed in the annual accounts constitutes
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insurance income. Thus in the case of insurance company all the receipts whether from property, business, interest on securities, capital gains on sale of stocks and shares, dividends, yield of National Saving or Defence Certificates, etc. Will constitute insurance income and will be liable to tax. In such cases provisions of the Second Schedule to Income Tax Ordinance, 1979, will not be applicable to the individual receipts credited to the accounts." ' Upon receipt of the above circular, the Income Tax Officer concerned issued above notices under section 65 of the Ordinance, proposing to re-open the appellants' income-tax assessments for the assessm ent years mentioned therein on the ground that the income earned by them from Khas Deposit/Defence Savings Certificates had escaped assessment in the relevant assessment years. Thereupon, inter alia the above appellants filed above Constitution Petitions. 3. Before the High Court, it was urged by the appellants that the income arising from Khas Deposit Certificates was specifically exempted from the payment of income-tax thereon by virtue of section 14 read with Item No,(72) of the Second Schedule to the Ordinance and thus the impugned notices were wholly without jurisdiction and mala fide. It was also urged by them that the income- tax assessm ent of the appellants having been finalized in accordance with law and exemption having been granted by the Income Tax Officer concerned after conscious application of mind, the subsequent change of opinion could not be a valid ground for re-opening of the assessment, as there was no definite information received by the I.T.O. After the finalization of the assessment and re-opening of the assessm ent was sought on the material already on record. 4. However, the learned Judges of the Division Bench, through the judgment under appeal, dismissed 12 Constitution petitions filed by various Insurance Companies, which included the Constitution petitions filed by the present appellants, except that appellant's Constitution petition in Civil Appeal No,12-K of 1991 was disposed of by a separate judgment by another Division Bench of the same High Court. After that, the appellants filed petitions for leave to appeal, which were granted for the above reasons. 5. We have heard Messrs Fazle Ghani Khan, Nasim A. Farooqui, Mansoor Ahmad Khan and M.G. Hasan, learned counsel for the appellants, and Mr. Shaikh Haider, learned counsel for' the respondent-department. We have also heard Sardar Sikandar Hayat, Advocate, as amicus curiae who appeared with the special permission of this Court. 6. Before proceeding with the contentions of the learned counsel for the parties, it may be advantageous to refer to the relevant provisions of the Ordinance, namely, sections 14, 17, Item No, (72) of the Second Schedule, section 26 and Rule 5 of the Fourth Schedule to the Ordinance, which are pertinent for the purpose of deciding the question, whether the interest earned by the appellants on Khas Deposit Certificates/Defence Saving Certificates was exempted from payment of income-tax or not. Section 14 of the Ordinance: "14. Exemptions.---(1) Notwithstanding anything contained in this Ordinance, the incomes or classes of incomes, or persons or classes of persons specified in the Second Schedule shall be--- (a) exempt from tax under this Ordinance, subject to the conditions and to the extent specified therein; or (b) liable to tax at such rates, which are less than the rates specified in the First Schedule, as are specified therein; or (c) allowed a reduction in tax liability, subject to the conditions and to the extent specified therein; or (d) exempt from the operation of any provision of this Ordinance, subject to the conditions and to the extent specified therein. (2) The Federal Government may, from time to time, by notification in the official Gazette, make such amendment in the Second Schedule by-- (a) adding any clause or condition therein;
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(b) deleting any clause or condition therein; or (c) making any change in any clause or condition therein, as it may think fit, and all such amendments shall have effect in respect of any assessment year, as may be specified in this behalf, including any such year beginning on any date before or after the commencement of the financial year in which the said notification is issued." ' Section 17 of the Ordinance: 17. Interest on securities.--(1) The following incomes shall be chargeable under the head "Interest on securities", namely:--- (a) interest on any securities of the Federal Government or a Provincial Government receivable by an assessee in any income year; and (b) interest on debentures or other securities for money issued by or on behalf of a local authority or a Pakistani company receivable by an assessee in any income year. (2) Notwithstanding anything contained in subsection (1),--- (a) where any security of the Federal Government is issued with the condition that the interest thereon shall not be liable to tax, the interest receivable on such security shall be exempt from tax in accordance with such condition; and (b) tax payable on the interest receivable on any security of a Provincial Government issued with the same condition as aforesaid shall be payable by that Provincial Government. ' Item (72) of the Second Schedule to the Ordinance: (72) The yield of National Savings or Deposit Certificate including Defence Savings Certificate, issued under the National Saving Schemes: ' Provided that exemption under this clause shall not apply in respect of any profit received on the reinvestment of Khas Deposit Certificates made under the National Saving Scheme on or after the tenth day of November, 1991." ' Section 26 of the Ordinance: 26. Special provisions regarding business of insurance and production of oil and natural gas and exploration and extraction of other mineral" deposits.--Notwithstanding anything contained in this Ordinance,--- (a) the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Fourth Schedule; (b) the profits and gains from the exploration and production of petroleum (including natural gas) and the tax payable thereon shall be computed in accordance with the rules contained in Part I of the Fifth Schedule: ' Provided that nothing in this clause shall apply to the profits and gains attributable to the production of petroleum (including natural gas) which was discovered before the twenty-fourth day of September, 1954; and (c) the profits and gains of any business which consists of, or includes, the exploration and extraction of such mineral deposits of a wasting nature (not being petroleum and natural gas) as may be specified in this behalf by the Federal Government carried on by an assessee in Pakistan shall be computed in accordance with the rules contained in Part II of the Fifth Schedule." ' Rule 5 of the Fourth Schedule to the Ordinance: "5. General Insurance.-- The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts required under the Insurance Act, 1938 (IV of 1938) to be furnished to the Controller of Insurance, subject to the following adjustments namely:--- (a) any expenditure or allowance or any reserve or provision for any expenditure or the amount of any tax deducted at source from any dividends or interest received which is not deductible in
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computing the income chargeable under the head "Income from business or profession" shall be excluded; (b) any amount either written off or taken reserve to meet depreciation or loss on the realisation, of investments shall be allowed as a deduction, and any sums taken credit for in the accounts on account of appreciation, or gains on the realisation, of investments shall be treated as part of the profits and gains: ' Provided that the Income Tax Officer is satisfied about the reasonableness of the amount written off or taken to reserve in the accounts to meet depreciation, or loss on the realisation, of investments, as the case may be." 7. A perusal of above-quoted section 14 indicates that it provides that notwithstanding anything contained in the Ordinance, the incomes or classes of incomes, or persons or classes of persons specified in the Second Schedule, shall be exempt from tax under the Ordinance subject to the conditions and to the extent specified therein, or liable to tax at such rates which are less than the rates specified in the First Schedule as are specified therein, or the above Second Schedule may provide reduction in tax liability subject to the conditions and to extent specified therein, or it may exempt from the operation of any provision of the Ordinance subject to the conditions and to the extent specified therein. It may further be noticed that by virtue of subsection (2) of section 14, the Federal Government has been empowered by notification in the official Gazette, to make such amendment in the Second Schedule in terms of clauses (a), (b) and (c) quoted hereinabove. ' It may be pertinent at this juncture to point out that above-quoted Item (72) of the Second Schedule, in terms of above section 14 of the Ordinance, exempted the yield of National Saving Certificates or Defence Saving Certificates issued under the National Saving Scheme. The proviso, which was added by SRO No,1135(1)/91 dated 7-11-1991, is not pertinent for the case in hand, as it was added after the assessm ent years in issue. ' It may also be noticed that section 17 of the Ordinance provides that the incomes shall be chargeable under the head "Interest on securities" from the items mentioned in clauses (a) and (b) thereof. It may also be pointed out that subsection (2) of section 17 lays down that notwithstanding anything contained in subsection (1), where any security of Federal Government is issued with the condition that the interest shall not be liable to tax, the interest receivable on such security shall be exempt from tax in accordance with such condition. It may further be pointed out that clause (b) of subsection (2) contemplates that tax payable on the interest receivable on. Any security of a Provincial Government issued with the same condition as aforesaid shall be payable by that Provincial Government. ' It may be noticed that section 26 provides inter alia, that notwithstanding anything contained in the Ordinance, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with rules contained, in the Fourth Schedule. Clauses (b) and (c) of the above section are not relevant for the purpose of the present controversy and, therefore, need not to be dealt with. ' It may be pointed out that Rule 5 of the Fourth Schedule quoted hereinabove lays down that the profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts required under the Insurance Act, 1938, to be furnished to the Controller of Insurance subject to the adjustment of the items mentioned in clauses (a) and (b) thereof. 8. The learned Judges of the Division Bench of the High Court, after referring and quoting the extracts in extenso from the judgments in the case of The Commissioner of Income Tax v. R.G. Chapman PLD 1985 SC 329, the case of Life Insurance Corporation of India v. Commissioner of Income-tax, Delhi and Rajasthan (1964) 51 I.T.R. 773, the case of Assessee v. Department (1964) 10 Taxation 95, the case of Pandyan Insurance Co. v. Commissioner of Income-tax, Madras 1965 PTD
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475, the case of Lakshami Insurance Co. Ltd. v. Commissioner of Income-tax, New Delhi 1972 PTD 233 and the case of Commissioner of Income-tax, Bombay City II, Bombay v. New India Assurance Co. Ltd. 1972 PTD 458, have concluded as follows:--- "From the above discussion it clearly emerges that in determining the profits and gains of an insurance business and the tax payable thereon under the Ordinance only section 26 and the rules contained in the Fourth Schedule ibid are applicable and other provisions of the Ordinance do not apply. It, therefore, follows that the balance of profit declared by an insurance company in its annual account which is submitted to Controller of Insurance under the Insurance Act, 1938, is to be accepted by the Income Tax Officer as the profits and gains of insurance business for the relevant year without any further probe or enquiry, except to the extent permitted by sub-clauses (a) and (b) of Rule 5 ibid. Accordingly, the interest income on securities derived by an insurance company which is included in the balance of profit declared by it in it annual account submitted to Controller of Insurance under the Insurance Act, 1938, loses its character as `interest' income on securities and become part of profits and gains of insurance business, and as such is liable to charge of the tax under the Ordinance accordingly. In our view as soon as the profits and gains of insurance business are computed in accordance with the provision of section 26 read with rule 6 of the IV Schedule ibid, it becomes one unit of income which is not capable of being bifurcated for the purposes of charging to tax into different heads of income categorised in section 15 of the Ordinance." 9. In support " of the above appeals, the learned counsel for the appellants, have vehemently urged that there is no conflict between the provisions of sections 14 and 26 and Item (72) of the Second Schedule and Rule 5 of the Fourth Schedule to the Ordinance and, therefore, the appellants were entitled to the benefit granted by item (72) of the Second Schedule pursuant to section 14 of the Ordinance on the amount of interest received by them on the Khas Deposit Certificates/Defence Saving Certificates. Reliance was placed particularly by them on the following judgments:--- (i) Commissioner of Income-tax, Bombay City H, Bombay v. New India Assurance Co. Ltd. (1969) 71 I.T.R. 761; ' in which a Division Bench of the Bombay High Court held that in computing the profits and gains of any insurance business and the tax payable thereon, Rule 6 of the Schedule to the Indian Income-tax Act, 1922, would govern and prevail over sections mentioned in the non obstante clause in section 10(7) of the Act, but it could not be taken to mean that the exemption under sections 15B and 15C and under the Notification No,39 issued under section 60 or the deductions under section 4(1), could not be allowed or were, in any way, excluded from operation. In the above case, the Income Tax Officer denied the exemption of the following items:- (a) donations for charitable purposes under section 15B; (b) dividends from new companies under section 15C(4); (c) interest on loans of the Mysore Government which were exempted by the Central Government under Notification No,39 dated July 5, 1954, under section 60, and (d) exclusion of income to the extent of Rs,4,500 under the third proviso to section 4(1) in respect of its business in foreign countries. ' However, the Tribubal allowed the assessee's claim in respect of three items but rejected the claim pertaining to the fourth item. Upon references filed by the assessee as well as by the Commissioner of Income Tax, the High Court held that the assessee was entitled to all the exemptions claimed by him. (ii) Lakshmi Insurance Co. Ltd. v. Commissioner of Income-Tax, New Delhi, (1969) 72 I.T.R. 474; ' In the above case, the facts were that Finance Department, through Notification No,878-F Income- tax dated 21-3-1922 issued under section 60 of the Indian Income-tax Act, 1922, exempted certain classes of income specified therein from the tax payable under the Act and provided that they
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shall not be taken into account in determining the total income or the salary of an assessee for the purposes of the Act. It may be stated that item (27) in the Notification was interest on Mysore Durbar securities. The question arose, whether interest on securities issued by the Mysore Durbar received by the assessee, a company which was carrying on the business of life insurance and whose income had to be computed under section 10(7) of the Act read with the Schedule, was exempt from taxation in its hands. It was held by a Division Bench of the Delhi High Court that exemption under section 60 was an overall exemption from the levy of the tax under the Act itself governing all other provisions in the Act including the provisions in the Rules in the Schedule and, consequently, the provisions of rule 2(b) of the Schedule did not come into operation at all, inasmuch as excluding the amount exempted under section 60 from taxable surplus, the Income Tax Officer could not be said to alter or change in any manner the actuarial valuation. It was further held that the amount of interest of Mysore Durbar securities received by the assessee insurance company was exempt from tax under the Act and could not be included in computing the taxable surplus. (iii) Lakshmi Insurance Co. Ltd., Lahore v. Commissioner of Income-tax, Punjab, Delhi and N.-W.F.P. Provinces, Lahore AIR 1950 Lah. 234; ' in which a Division Bench of the Lahore High Court comprising Munir, C.J. And Muhammad Sharif, J. (as their Lordships then were) held that in computing the total income of an assessee, whether it be a company carrying on insuraance business or not, the interest received on any security of the Central Government which is income-tax free must be included and since under section 55 of the Income-tax Act, super-tax had to be levied on the total income, it was obvious that interest on securities of the, Central Government which were free from income-tax were subject to the incidence of super-tax. (iv) Commissioner of Income-tax v. National Insurance Co. Ltd. (1986) 159 I.T.R. 314; (v) In the above case, a Division Bench of the Calcutta High Court held that even though in the case of an insurance company, the different classes and categories of income, namely, income from house property, capital gains or income from other sources were not separately computed in accordance with the computation sections for the respective heads of the income in view of section 44 of the Income Tax Act, 1961. The different classes or categories of income which were shown in Form No,F of the Third Schedule to the Insurance Act, 1938, did not lose their character or quality and that an assessee, who carried on business in general insurance and was assessable under section 44 of the above Act, was entitled to the special deduction under section 80M. 10. There is no doubt that the above three judgments of the Indian jurisdiction directly support the appellants' claim and the fourth judgment of the Lahore High Court, also to some extent, lends support as it proceeded on the assumption that the interest on the Government securities was free of income-tax. However, the view found favour with the learned Judges of the Division Bench in the judgment under appeal, is also sustainable because of the following judgments of this Court, though the controveisy in issue was not directly the subject-matter of any of the above judgments. (i) Commissioner of Income-tax, Central, Karachi v. Messrs. Alpha Insurance Co. Ltd. And another PLD 1981 SC 293; in which this Court, while construing the provisions of section 10(7) of the late Income-tax Act, 1922, read with Rule 6 contained in the First Schedule to the Act, which correspond to section 26(a) read with Rule 5 of the Fourth Schedule to the Ordinance, concluded as under:--- "14. Our conclusions therefore are that: (i) the rules contained in the First Schedule to the Income Tax Act completely, exhaustively and to the exclusion of every other provision not expressly incorporated, govern the computation of the Profits and Gains of insurance business, (ii) the power of the Assessing Authority under rule 6 of the First Schedule to the Income Tax Act does not, like rule 2 of the same Schedule, or on'the strength of section 40-C of the Insurance Act or
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rule 40 of the Insurance Rules, extend to disallowance of the excess management expense, (iii) the power of the Assessing Authority under first part of rule 6 (ibid) to readjust the balance of the profits disclosed by the annual accounts required to be furnished under the Insurance Act, 1938 is restricted to "exclude from it any expenditure, other than expenditure" which may under the provisions of section 10 of the Income-tax Act be allowed for in computing the profits and gains of a business. The Assessing Authority has to apply an independent mind uncontrolled by Insurance Act to arrive at such a re-adjustment, (iv) the expense of management incurred in excess of the limit prescribed under section 40-C of the Insurance Act and rule 40 of the Insurance Rules are not in the nature of penalty, fine or forfeiture for the purposes of their admissibility for deduction as business expenses under section 10 of the Income-tax Act." (ii) Messrs Habib Insurance Co. Ltd. v. Commissioner of Income-tax (Central), Karachi PLD 1985 SC 109; ' In the above case, this Court, while construing the above section 10(7) and the First Schedule to the late Act, held as follows:--- "It, therefore, follows that the assets, incomes, gains of the appellant-Company which is doing no other business except that of Insurance are all relatable to Business of Insurance and consequently on the strength of subsection (7) of section 10 of the Income-tax Act, the computation of tax has to take place in accordance with First Schedule. Provisions of First Schedule are self-contained and complete. It is true as contended by the learned counsel for the appellant that in Revenue cases one must look at the substance of the thing and not at the manner in which the account is stated. Rule 6 is in three parts. The first part provides as follows:--- "The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required to be furnished to the Controller of Insurance." ' The second part provides and actually defines the limits of the powers of the Taxing authorities to- -- "adjusting such balance so as to exclude from it any expenditure other than expenditure which may under the provisions of section 10 of this Act be allowed for in computing the profits and gains of business." ' The third part which has a direct relevance to the case of the appellant provides:--- "Profits and losses on the realisation of investments, and depreciation and appreciation of the value of investments shall be dealt with as provided in rule 3 for the business of life insurance." ' The relevant portion of rule. 3 so made applicable provides:--- "Any sums taken credit for in the accounts or actuarial valuation balance-sheet on…
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