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Petitioner: COMMISSIONER (LEGAL)/ VS Respondent: Messrs EFU GENERAL INSURANCE LTD.
Court Name: Sindh High Court Judge(s): Irfan Saadat Khan, Muhammad Ather Saeed Title: COMMISSIONER (LEGAL)/ vs Messrs EFU GENERAL INSURANCE LTD. Case No.: I.T.R.As. Nos. 158 to 160 of 2010 Date of Judgment:2011-06-06 Reported As: 2011 CLD 1300 Result: Applications dismissed
JUDGMENT
JUDGMENT ' IRFAN SAADAT KHAN, J.---On 15-4-2011, vide our short order, we have dismissed the present Income Tax Reference Applications (ITRAs) by observing as under:-- ' These reference applications have been filed against the common order of the Tribunal dated 24-10-2009 in ITA No,643 to 645/ KB/2008, whereby the following common questions said to have arisen from the order of the Tribunal have been proposed for the opinion of this Court. (i) Whether under the facts and circumstances of the case, the learned Tribunal was justified to uphold the order of the Commissioner (Appeals) annulling the order under section 122(5A) without giving its own reasons, as required under section 24A of the General Clauses Act, 1897? (ii) Whether under the facts and circumstances of the case, the learned Tribunal was justified in upholding the order of the Commissioner (Appeals) relying upon the concept of single basket income to annul the order, when insertion of Rule 5A in the fourth Schedule has itself done away with the concept of single basket income, by extending exemption to capital gains from sale of shares? (iii) Whether under the facts and circumstances of the case, the learned Tribunal was justified in upholding the order of the Commissioner (Appeals) which has relied upon the erroneous concept that fourth Schedule does not sanction application of section 67 of the Income Tax Ordinance, 2001; whereas section 99 of the Ordinance is not a non obstante clause? (iv) Whether under the facts and circumstances of the case, the learned Tribunal was justified to uphold the order of the Commissioner (Appeals) annulling the order under section 122(5A), without considering the provisions of section 67 read with sections 7 and 8 of the Ordinance?
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' We have heard Mr. Kafeel Ahmad Abbasi, the learned Counsel for the appellant and Mr. Arshad Sim/ Memon, learned Counsel for the respondent. ' Mr. Kafeel Ahmad Abbasi has initially taken us to the provisions of section 3 of the Income Tax Ordinance 2001 to point out that the provisions of this Ordinance override the other laws and shall apply notwithstanding anything contrary contained in any other law for the time being in force. He then took us to the provisions of section 99 of the Ordinance 2001 and compared it with the provisions of section 26-A of the Income Tax Ordinance 1979 and pointed out that whereas section. 26-A starts with a non obstante clause, no such non obstante clause has been provided under section 99 and according to the learned Counsel this is a very significant exclusion and means that besides the provisions of fourth Schedule, which is provided by section 99 for the computation of the profit and gains of the Insurance Company all other provisions including the provisions of section 67 of the Ordinance shall apply for computation of the profit and gains of the business of Insurance Company. The learned counsel then compared the provisions of fourth Schedule of the 1979 Ordinance to the provisions of fourth Schedule of Ordinance 2001 and pointed out that there was Rule 8 in the 1979 Ordinance, which provided that the provisions of the Schedule shall apply notwithstanding anything contained in this Ordinance and provisions of any other law for the time being in force and this clause is also conspicuous by its absence in the fourth Schedule of the 2001 Ordinance and this exclusion leads to the conclusion that the Fourth Schedule of 2001 Ordinance will not apply exclusively that the other provisions of the Ordinance can also apply. He further submitted that where there is a deviation from the earlier law it signifies that the legislature has a definite intention to deviate from the earlier law and according to the deviation pointed out above leads to the conclusion that the taxability of the profit and gains of the Insurance Company is not exclusively to be computed in accordance with the provisions of the Fourth Schedule but the other provisions of the Ordinance can also be applied. He, therefore, prayed that his appeal may be allowed and the questions may be answered in his favour. ' Mr. Arshad Siraj Memon, learned Counsel for the respondents strongly opposed the arguments of the learned Counsel for the appellant and supported the order of the Tribunal. He submitted that there is no material and significant difference between the provisions of the 2001 Ordinance and the provisions of Ordinance 1979 as regards the taxability of profits and gains of an Insurance Company and submitted that the word 'notwithstanding' may not have been included in section 99 because of the earlier judgment of the honourable Supreme Court of Pakistan holding that for the purposes of computing the tax on the profit and gains of an Insurance Company First Schedule has to be applied. As far as the provisions of Rule 8 of Schedule fourth of the Ordinance 1979 are concerned he submitted that the question of application of the provisions of the other laws is para materia with section 3 of the Ordinance 2001 and section 3 has now been incorporated in the Ordinance to extend the non-applicability of the other laws in respect of the entire Ordinance and not in respect of Fourth Schedule only. He submits that Rule 5 of the Fourth Schedule, which is the provisions which provides for the computation of the profit and gains of the Insurance Company is the same in both the Ordinances except that it has been modified to include certain other disallowances, which were not provided under section 24 of the 1979 Ordinance, which provided for various disallowances while computing the business income. He conceded that all the allowances, which are not allowable under section 21 of the Ordinance, will not be allowed for computation of the profit and loss of Insurance Company as it has been specifically provided in Rule 5. He then referred to Rule 9 of Seventh Schedule, which has been incorporated in accordance with section 100-A of the 2001 Ordinance for providing specific procedure for computation of profit and gains of the Banking Company. He pointed out that this Schedule provides for the computation of profit and gains of the Banking Company and Rule 9 has been specifically incorporated to provide for the applicability of the provisions of the
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Ordinance, which have not specifically been dealt in the rules and applied them mutatis mutandis to the Banking Company. The learned Counsel then referred to Rule 6-A of the Fourth Schedule of Income Tax Ordinance 2001 to point out that although capital gains are exempted from the levy of tax under the Second Schedule of the Ordinance also but it has specifically been provided in the Schedule as according to the earlier judgments of the Honourable Supreme Court the provisions of Second Schedule does not apply to the Insurance Company. He filed a comparison statement of Rule 6-A with the clauses under Second Schedule to the Income Tax Ordinance 2001 under which capital gains on sale of shares are exempt and pointed out that under Clause 6-A the exemption has been granted to capital gains being income on sale of shares while computing income under this Schedule whereas income exempted under clause 110 is under the head 'capital gains'. The learned Counsel submitted that the computation of income under profit and gains of Insurance Company under Fourth Schedule is a special law and it is a trite law that Special law prevails over the general law. On this point, he relied on following judgments:- (1) 2004 SCMR 130--- FEDERAL BANK FOR COOPERATIVES, ISLAMABAD v. AHSAN MUHAMMAD (Relevant Page 134 MI) (2) 1993 SCMR 1635---GODELN ORPHIES (Pvt.) LTD. v. DIRECTOR OF VIGILANCE, CENTRAL EXCISE, CUSTOMS AND SALES TAX (3) A.P. MOLLER v. TAXATION OFFICER OF INCOME TAX AUDIT V (ITRA NO,2050/ 2007 and others) ' The learned counsel then read out section 67 of the Income Tax Ordinance 2001 and pointed out that by its very wordings section 67 does not apply to the Fourth Schedule because it provides initially that it is subject to this Ordinance and since Fourth Schedule, which provides for computation of profits and gains and section 99 are part of the Ordinance and section 99 provides that the profit and gains of an insurance company will be taxed in accordance with the provisions of Fourth Schedule in which no mention is made of applicability of section 67, therefore, section 67 will not apply. In this connection he once again relied on the unreported judgment of this Court in A.P. Moller's case quoted supra. ' The final ground argued by the learned Counsel was that no material change has been made in the scheme for the computation of the profit and gains of the Insurance Company under the 1979 Ordinance by the 2001 Ordinance and there is no deviation and, therefore, the old judgments will continue to apply. In this connection he relied on the following judgments, which have been passed by the honourable Supreme Court on the basis of Fourth Schedule of the repealed Ordinance. (1) 1991 SCMR 2485---COMMISSIONER OF INCOME-TAX CENTRAL ZONE, 'A' KARACHI v. Messrs PHOENIX ASSURANCE CO. LTD. (2) 1997 PTD 1693---Messrs E.F.U. GENERAL INSURANCE CO. LIMITED v. THE FEDERATION OF PAKISTAN and others (3) 1993 PTD 766 = 1993 SCMR 1232 CENTRAL INSURANCE CO. AND OTHERS v. CENTRAL BOARD OF REVENUE, ISLAMABAD, ETC. ' The learned Counsel, therefore, prayed that the appeals may be dismissed and the questions answered in his favour. ' We have examined the case in the light of the arguments and for the reasons to follow we answer the questions referred above to us in the following manner: - (i) We have already decided the question No,1 in a Judgment in I.T.R.A. No,116 of 2010 dated 26-8- 2010, whereby we have held that whenever the Tribunal uphold the order of the C.I.T. Appeals by endorsing the reasons given by the C.I.T. (Appeals) for passing such order the case does not fall under section 24-A. Following the above judgment we answer the Question No,1 in affirmative. (ii) As far as Questions Nos.2, 3 and 4 are concerned, as stated above, for the reasons to follow we answer the questions in affirmative in favour of the respondent and against the appellant and,
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therefore, these Reference Applications are dismissed in limine. 2. Briefly stated the facts of the case are that the respondent is a Public Limited Company engaged in the business of General Insurance. The returns of total income for the Tax Years 2005, 2006 and 2007 were filed by declaring income of Rs,425,411,502, Rs,332,160,644 and Rs,240,147,792, respectively. The respondent derives income from the following sources:- (a) Net premium revenue (b) Investment income (c) Rental income (d) Profit on sale of assets (e) Exchange rate difference 3. The returns filed by the respondent were considered deemed assessments under the provisions of section 120 of the Income Tax Ordinance, 2001, (the Ordinance). Thereafter record of the cases were examined and the department came to the conclusion that the assessments so framed were erroneous insofar prejudicial to the interest of revenue, hence, the respondent was intimated under the provisions of section 122(9) of the Ordinance as to why the assessments may not be amended under the provisions of section 122(5A) of the Ordinance. Detailed reasons were thereafter communicated to the respondent for reopening the cases vide letter dated 18-12-2007 which were duly complied with by the counsel of the respondent vide his letters dated 12-1-2008 and 28-1-2008 by explaining that the issues on the basis of which the department proposes to reopen the cases were not in accordance with law and submitted that income of the assessee /respondent may be accepted as declared in their returns of total income. The Taxation Officer (T.0.) thereafter rejected the contentions raised by the respondent and finalized the assessments of all the three years under consideration on 31-1-2008, at the incomes of Rs,433,974,937, Rs,367,052,561 and Rs,303,354,658, respectively. 4. Being aggrieved with the above orders appeals thereafter were filed before the Commissioner of Income Tax ICIT(A)] who vide his order dated 28-6-2008 allowed the appeals by observing as under:-- 'I have carefully considered the rival arguments, the case record and the case-law and provisions of the Income Tax Ordinance 2001. I agree with the arguments of the learned AR of the 3 appellant that ratios of decision of Hon'ble Superior Courts in case of Insurance companies still hold the field on issue of income being treated as one unit/one basket. The Hon'ble High Court at Karachi in case recent reported as 2003 PTD 1321 has discussed various case decision cited above has held that in case of insurance companies, the assessing officer has to compute profit and gain and tax payable under the Fourth Schedule of the Income Tax Ordinance I979(R) and the jurisdiction of the assessing officer is not extended to any other provision contained in the Ordinance until and unless included in the Fourth Schedule itself. The said decision of Hon'ble High Court is binding on me. I note that the Rule 6-A of Fourth Schedule of IT Ord. 2001 starts with the words "In computing income under the schedule, " hence even after introduction of Rule 6A in Fourth Schedule the ratio of the decision still holds the field as the said Rule 6A mandates that income be computed under the said Fourth Schedule. ' As per Rule 6A in Fourth Schedule to I.T. Ord. 2001 has done is to extend the exemption that was available to other tax payer under clause 110 of Part 1 of Second Schedule to I.T. Ord., 2001 to insurance companies. This was also clarified by CBR vide Circular No, 1 of 2005. What the Rule 6-A effective is directing is that while computing income under Fourth Schedule, capital gain on sale of modaraba certificate or any instrument, of redeemable capital as defined in the Companies Ordinance 1984 which is listed on stock exchange shall not be included in income under the said Fourth Schedule. It would not be out of place to mention that similar provision i.e. Rule 6-A was
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also introduce vide Finance Suppl (Amendment) Act 1997 in Fourth Schedule to I.T. Ord. 1979 (R) Section 99 of I.T. Ord. 2001 which reads; "Special provision relating to insurance business:- ' The profit and gains of any business shall be computed in accordance with rules in the Fourth Schedule", (underlining provided to emphasis). As is clear from(sic.) section 99 of I.T. Ord. 2001 the law mandates that profit and gains from insurance business shall be computed as per Fourth Schedule to I.T. Ord. 2001 which is self contained. The Fourth Schedule does not sanction application of section 67 of the Income Tax Ordinance 2001 and Rule 13 to I.T. Rules 2002 relating to prorating expenses allegedly attributable to capital gain and dividend income to profit and gains of Insurance business. The learned AR has also relied on number of decisions of superior Court of Pakistan on interpretation and on Insurance business, the said decisions are binding on me and I respectfully agree with them. Based on the above, I agree with the arguments of the learned AR for the appellant and I hold that income in case insurance companies is to be computed as per Fourth Schedule to I.T. Ord. 2001 and all incomes treated as one basket and specific exemption granted in Fourth Schedule is to be allowed to insurance Companies while computing their profit and gains from Insurance business. As such I hold that on facts and circumstances of the case and Fourth Schedule being self-contained, the Additional Commissioner was not justified of facts and circumstances of the case and in law to hold that the order passed under section 120 of the Income Tax Ordinance 2001 was erroneous and prejudicial to interest of the revenue. As such the Additional Commissioner was not justified in invoking provision of section 122(5A) of the Income Tax Ordinance 2001 and the same being illegal are annulled. Having held that Fourth Schedule in self contained law for computing profit and gains of Insurance business and that all incomes treated as one basket/ one unit and specific exemption granted in Fourth Schedule is to be allowed to Insurance Companies while computing their profit and gains from Insurance business and that the Fourth Schedule does not sanction application of section 67 of the Income Tax 'Ordinance 2001 and Rule 13 to IT Rules 2002 relating to prorating expenses allegedly attributable to capital gain and dividend income to profit and gains of Insurance business, the alternate argument also stand decided in favour of the appellant. 5. Being aggrieved with the consolidated order passed by the CIT(A), appeals thereafter were filed by the department before the Income Tax Appellate Tribunal (ITAT) which were allotted I.T.A Nos.643 to 645/KB/2008 pertaining to the Tax Years 2005, 2006 and 2007, respectively. The said appeals were heard by the learned ITAT on 17-10-2009 and vide its consolidated order dated 24- 10-2009, after reproducing the above order of the CIT(A), dismissed the appeals filed .By the department after noting that no infirmity, irregularity, impropriety or illegality in the orders passed by the CIT(A) was found. It is against the said consolidated order passed by the ITAT that the present ITRAs have been filed by raising the questions of law, which have already been reproduced supra. 6. We have heard both the learned counsel at some length and have perused the record and decisions relied upon by them. The contentions of both the learned counsel have quite elaborately been discussed in our short order, which are not repeated here for the sake of brevity. 7. It would be in the fitness of things if the law relied upon by both the learned counsel is first discussed:- SECTION 24 OF THE ORDINANCE, 1979. 24. Deductions not admissible.---Nothing contained in section 23 shall be so construed as to authorize the allowance or deduction of- (a) any sum paid on account of any cess, rate or tcvc levied on the profits or gains of any business or profession or assessed as a percentage, or otherwise on the basis, of any such profits or gains;
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(b) any sum paid to a non-resident on account of interest, fees for technical services, brokerage or commission or any other sum chargeable under the provisions of this Ordinance, unless tax thereon has been paid or deducted and paid under section 50, as the case may be; (c) any sum paid to any person on account of salary, interest or profit, services rendered, brokerage or commission or rent of house property on which tax is deductible under section 50, unless such tax has been paid or deducted and paid under section 50, as the case may be; (cc) any expenditure or allowance which results directly or indirectly in the provision of salaries of directors of a domestic company, not being a public company as defined in the First Schedule, which exceeds forty per cent of total income of the company before the charge of such expenditure or allowance: ' Provided that the deduction in respect of the aggregate of such expenditure or allowance in respect of any director shall not exceed, - (i) where such expenditure or allowance relates to a period exceeding eleven months comprised in an income year, the amount three hundred and sixty thousand rupees; and (ii) where such expenditure or allowance relates to a period not exceeding eleven months comprised in an income year, an amount calculated at the rate of thirty thousand rupees for each month or part thereof comprised in that period: ' Provided further that nothing contained in this clause shall apply in respect of any assessment year commencing on or after the first day of July, 1991. (d) any sum paid, on account of interest, brokerage, commission, salary or other remuneration, by a firm or an association of persons to any partner of the firm or any member of the association of persons, as the case may be; (e) any expenditure in the nature of head office expenditure, in the case of an assessee, being a nonresident, in excess of such limits as may be prescribed. ' Explanation.---As used in this clause, "head office expenditure" means executive and general administration expenditure incurred by the assessee outside Pakistan for the purposes of the business or profession, including expenditure incurred in respect of- (a) any rent, local rates and taxes (excluding any, foreign tax corresponding to any tax leviable under this Ordinance), current repairs or insurance against risks of damage or destruction of any premises outside Pakistan used for the purposes of the business or profession; (b) any salary paid to an employee employed by the head office outside Pakistan for the purposes of the business or profession; (c) any travelling by such employee for the purposes of business or profession; and (d) such other matters connected with executive and general administration as may be prescribed; U) any allowance in respect of expenditure on entertainment in excess of such limits and in contravention of such conditions as may be prescribed; (ff) any payments, made on or after the first day of July, 1998, on account of expenditure under a single account head which, in aggregate, exceed fifty thousand rupees made otherwise than through a crossed bank cheque or by a crossed bank draft except transactions not exceeding five hundred rupees or payments on account of postage or utility bills. (fff1 Notwithstanding anything contained in clause (ff), any payment made on or after the first day of July, 1998, on account of salary if- (i) it exceeds five thousand rupees, through a crossed cheque or transfer to the employee's bank account, or (ii) it does not exceed five thousand rupees, made through a bearer cheque. (g) any sum paid to any provident fund, superannuation fund or gratuity fund, not being a recognised provident fund, an approved superannuation fund or an approved gratuity fund;
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(h) any sum paid to any provident fund or other fund established for the benefit of employees of the assessee, unless the assessee has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are chargeable to tax under the head "Salary"; (i) any expenditure incurred by an assessee on the provision of perquisites, allowances ar other benefits to any employee, in excess of fifty percent of his salary excluding perquisites, allowances or other benefits: Explanation.---As used in this clause- (i) "salary" means remuneration or compensation for services rendered paid, or to be paid, at regular intervals, and includes dearness or cost of living allowance and bonus or commission payable to an employee in accordance with the terms of his employment as remuneration or compensation for services but does not include the employer's contribution to a recognised provident fund or an approved superannuation or gratuity fund or any other sum which does not enter into the computation for pensionary or retirement benefits; (ii) "perquisite", "employee", and "employer" have the same meaning as in subsection (2) of section 16; and (iii) "other benefits" does not include employer's contribution to a recognised provident fund or an approved superannuation or gratuity fund; or (j) any expenditure incurred on account of payment of a fine or penalty for the violation of any law or rule or regulation for the time being in force. ' SECTION 26 OF THE ORDINANCE, 1979. 26. Special provisions regarding business of insurance and production of oil and natural as and exploration and extraction of other mineral deposits, etc.- ' 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 from refineries to be set up at Dhodak and Bobi fields; income of exploration and production companies from pipeline operations, and manufacture and sale of liquefied petroleum gas or compressed 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…
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