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Petitioner: ADAMJEE INSURANCE CO. LTD., KARACHI VS Respondent: THE CENTRAL BOARD OF REVENUE, JUDGMENT
Court Name: Sindh High Court Judge(s): Saeeduzzaman Siddiqui, Abdul Rasool Agha Title:ADAMJEE INSURANCE CO. LTD., KARACHI vs THE CENTRAL BOARD OF REVENUE,
JUDGMENT
Reported As: 1989 PTD 1090 Result: Petitions dismissed Judgment JUDGMENT ' SAIDUZZAMAN SIDDIQUI, J.--We propose to dispose of the above-noted 12 petitions by a common order as the points of law raised in the petitions are identical. These petitions are filed by different Insurance Companies who are carrying on business of general insurance. In all the above cases after the assessm ents were finalized by the Income Tax Officer concerned in accordance with Section 26 read with Rule 5 of the 4th Schedule of the Income Tax Ordinance 1979, hereinafter to be referred as 'the Ordinance' only for the sake of convenience. Notices were issued to the petitioners under Section 65 of the Ordinance proposing to reopen their income tax assessments for the assessm ent years mentioned in the notices, on the ground that the income derived by them from khas Deposit/Defence Saving Certificates had escaped assessment in the relevant years. Before considering the contentions raised by the learned counsel for the parties we may state here in brief some of the relevant facts in each petition.Petition No,488 of 1988 is filed by Dame Insurance Company challenging the notice dated 3-5-1988 issued to them under section 65 of the Ordinance proposing to reopen cases relating to assessment years 1984-85 to 1986-87. ' Petition No,494 of 1988 is filed by Habib Insurance Company in respect of assessment years 1986- 87 to 1987-88 challenging the notice dated 3-5-1988 issued under Section 65 of the Ordinance. ' Petitions Nos.548 and 549 of 1988 are filed by Hampshire Insurance Company against the notice dated 3-5-1988 issued to them under section 65 of the Ordinance proposing to reopen the assessm ent for the years 1986-87 and the assessment order dated nil for the assessment year
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1987-88 disallowing claim of exemption on Income amounting to Rs,37,11,106 on Khas Deposit Certificates. ' Petitions Nos.536, 537 and 538 of 1988 are filed by New Jubilee Insurance Company challenging the notices issued to them under section 65 of the Ordinance, proposing to reopen the assessm ents for the years 1984-85, 198586 and 1986-87. ' Petition No,539 of 1988 is filed by Commercial Union Insurance Company against the notice dated 28-4-1988 proposing to reopen the assessment of the petitioner for the assessment years 1987-88. ' Petitions Nos.641 and 642 of 1988 are filed by M/s. Central Insurance Company against the two notices dated 3-5-1988 issued by the Income Tax Officer proposing to reopen the income tax assessm ent of the petitioner for the assessment years 1986-87 to 1987-88 under section 65 of the Ordinance. ' Petition Nos.736 of 1988 is filed by Newzealand Insurance Company against the notice dated 15-6- 1988 issued to them under section 65 of the Ordinance proposing to reopen income tax assessm ent for the year 1987-88. ' Petition No,748 of 1988 is filed by Royal Insurance Company against the notice dated 16-6-1988 issued to them under section 65 of the Ordinance proposing to reopen their income-tax assessm ent for the 1986-87. ' The notices issued in all the above cases are identical. We have therefore, for the sake of convenience reproduced here one such notice which reads as follows:-- "OFFICE OF THE INCOME TAX OFFICER COMPANIES CIRCLE A-5, KARACHI, ' No, Cos. Cir. A-5/1987-88 Karachi dated the 3-5-1988. ' To ' The Principal Officer, ' KARACHI. SUB: RE-OPENING OF ASSESSMENT YEAR ' Enclosed herewith please find notice under section 65 of the Income Tax Ordinance, 1979 for the Assessm ent year for compliance after the statutory period of 30 days. In this connection it is stated that your assessm ent for the assessment year has been re-opened because of the fact that income from Khas Deposit/Defence Saving Cartificates had escaped assessment. The income from Khas Deposity Defence Saving Certificates should have been taxed in your hand vide clarification issued by Central Board of Revenue through its Circular No,4 of 1988 dated 194-1988. It is further stated that prior approval of the Inspecting Assistant Commissioner Income Tax, Companies Range-II, Central Zone 'A', Karachi has been obtained before issue of notice u/s. 65, of the Income Tax Ordinance, 1979. Please make the compliance within the statutory period. SD/(A.A. JAFFRI) INCOME TAX OFFICER COMPANIES CIRCLE A-5 KARACHI." ' From reading of the above notice it is quite clear that the action proposed by the Income-Tax Officer to reopen the income tax assessments of the petitioners is based on the ground that during the relevant assessm ent years the income arising to the petitioners from Khas Deposit/Defence Saving Certificates had escaped assessment. It is also evident from these notices that the action for reopening of assessm ents of the petitioners has been taken by the Income Tax Officer on the basis of a clarification issued by the Central Board of Revenue vide its Circular No,4 of 1988 dated 19-4-1988 which reads as follows:- "GOVERNMENT OF PAKISTAN . CENTRAL BOARD OF REVENUE. No, ITJI-13 (50)/73-Pt. Islamabad, the
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CIRCULAR NO. 4 OF 1988 (INCOME TAX) ' SUB:APPLICABILITY OF SECOND SCHEDULE TO INCOME-TAX ORDINANCE, 1979, IN THE CASES OF ASSESSEES CARRYING ON INSURANCE BUSINESS CLARIFICATION REGARDING: ' Several queries have been received in the Board seeking clarification as to whether income exempted from tax under the Second Schedule to Income Tax Ordinance, 1979 will be exempt from tax in the hands of assessees carrying on insurance business. 2. Section 26 (a) of the Income Tax Ordinance, 1979 envisages that 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 to the said Ordinance. 3.Rule 1 of the said Fourth Schedule provides that profits of life insurance shall be chargeable under the head "income from business or profession" and shall be computed separately while rule 5 relates to general insurance which lays down, inter alia, 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 adjustments under rule 5 (a) and (b) ibid. Rule 8 of the Fourth Schedule specifically mentions that the provisions of this Schedule shall apply notwithstanding anything contained in this Ordinance or any other law for the time being in force. 4. 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 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. Sd/- (MOHAMMAD ARIF ASIM) Secretary (Income Tax-I)" ' Learned counsel for the petitioners jointly contended before us that income arising to petitioners from Khas Deposit Certificates is specifically exempted from payment of income tax thereon under the Second Schedule to the Ordinance and as such the notices issued by the Income Tax Officer proposing to reopen the assessm ent on the ground that such income had escaped assessment in the relevant assessm ent years is wholly without jurisdiction and mala fide. The second contention of the learned counsel jointly is, that the income tax assessments of the petitioners having been finalised in accordance with law and exemptions claimed by them on income arising to them from Khas Deposit Certificates having been granted by the concerned L-T.O. After conscious application of mind, in the relevant assessm ent years, the subsequent change of opinion of the successor Income Tax Officer, could not be a valid ground for reopening of these assessments. It is jointly urged that action under Section 65 of the Ordinance must be based on definite information which may come in possession of Income Tax Officer after finalization of assessment and on an independent application of mind. It is accordingly submitted jointly, that reopening of finalized assessm ents on the basis of instruction received from C.B.R. Is wholly without jurisdiction. ' Learned counsel for the Department on the other hand very vehemently contended that the provisions contained in the Second Schedule were not applicable to the cases of petitioners, as the assessm ent of income tax on Insurance Companies carrying on business of General Insurance other than life, is governed entirely under section 26 of the Ordinance read with Rule 5 of the IV Schedule ibid. It is urged by the learned counsel that in terms of section 26 read with Rule 5 of the
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IV Schedule of the Ordinance, the balance of the profits declared in the returns filed by the petitioners under the provisions of the Insurance Act before the Controller of Insurance was to be treated as the balance of the profit of petitioners irrespective of its source and the same was to be taxed accordingly in accordance with the provisions contained in the First Schedule of the Ordinance. The learned counsel for the respondents went on to argue that a special provision having been made in the Ordinance for the assessment of the tax on the income of the insurance companies, the general provisions contained in the Ordinance in the Second Schedule were not applicable to them. With regard to objection of the learned counsel for the petitioners that issuance of notices under section 65 of the Ordinance is bad in law as it was on the basis of mere change of opinion of the Income Tax Officer, learned counsel for the Department contended that there was an obvious error/mistake in the framing of assessments of the income of the petitioners for the relevant years, as the petitioners were allowed exemption from tax in respect of income arising to them from Khas Deposit Certificates which was inadmissible under the law and as such the I.T.O. Rightly issued notices for correcting the above error in the assessment of the income of petitioners. Replying to the objections of petitioners that the issuance of notices to petitioners under section 65 of the Ordinance was not based on any definite information or independent application of mind but on the instructions of C.B.R., the learned counsel contended that the instructions issued by the C.B.R. Could be considered by I.-T.O. As a definite information and on that basis notices under Section 65 of the Ordinance could be issued validly. In addition to above submissions, learned counsel for the Department also raised a preliminary objection to the maintainability of above petitions on the ground that petitioners are not entitled to file the above petitions under Article 199 of the Constitution against issuance of notice by the Income Tax Officer as they have efficacious and alternate remedy available to them under the Ordinance, which they should have exhausted before invoking the constitutional jurisdiction of this Court. We will first of all deal with the preliminary objection raised by the learned counsel for the Department with regard to the maintainability of above petitions. It is true that normally a petition under Article 199 of the Constitution will not be entertained by this Court against mere issuance of a notice by the authority which is competent under the law to issue the same, if the aggrieved person has a remedy available to him under the relevant statute which is equally efficacious and speedy. However, where it is alleged that the authority which issued the notice lacked jurisdiction or where remedy against the order of the authority which issued the notice, is provided under the statute in the hierarchy of department before the authority at whose instruction or behest the proceedings were initiated or where the appellate or revision authority under the statute has already expressed its views on the controversy which is subject-matter of proceedings, in such cases existence of a remedy by way of appeal or revision under the relevant statute will not be considered as a bar for filing of a petition under Article 199 of the Constitution. In the cases before us the main controversy relates to the interpretation of the provisions relating to the assessment of income of Insurance Companies, doing business of General Insurance (other than life insurance). It is quite clear from reading of the notices issued to the petitioners by the I.-T.O. Under section 65 of the Ordinance, that the same were issued on the basis of Circular No, 4 of 1988 of the Central Board of Revenue which is the highest authority in the hierarchy of Income-tax Department. From a bare reading of the above-referred circular of Central Board of Revenue, it is clear that it has already expressed its opinion finally on the controversy which is the subject-matter of the notices issued to the petitioners in the above cases. Therefore, the result of the proceedings initiated by the I.-T.O. Against the petitioners under section 65 of the Ordinance, is almost a foregone conclusion and no different result in this regard could be expected from the appellate and revisional proceedings prescribed under the Ordinance. In these circumstances, in our view, the existence of an alternate remedy under the Ordinance, cannot be treated as a bar to the filing of the petitions under Article
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199 of the Constitution by the petitioners. We therefore, overrule the preliminary objection raised by the learned counsel for the Department relating to the maintainability of these petitions and hold that in the above circumstances, the petitioners are entitled to maintain the above petitions uncle:. Article 199 of the Constitution, without exhausting the remedies provided under the Ordinance. ' The main controversy which requires determination in the above petitions is, whether the provisions contained in the Second Schedule to the Ordinance, which provides for exemption from payment of income tax on the income derived by an assessee from investments made in the Government Securities (Khas Deposit Certificates), is applicable to an assessee engaged in the business of General Insurance (other than life). The contention of the learned counsel for the petitioners jointly is that the income derived by an assessee from investments made in Government Security is generally exempted from Income-tax and as such there is no reason why this exemption should also be not available to the petitioners. ' The learned counsel for the Department on the other hand submitted that special provisions having been made in the Ordinance for assessing the profits and gains and the tax payable thereon of an assessee engaged in the business of Insurance, the general provision contained in the Ordinance for assessm ent of income of general body of assessee is in-applicable to them. Number of decided cases have been cited at the Bar in support of respective contentions of the parties but before considering these cases we would like to examine first, the relevant provisions of the Ordinance. The first relevant provision is section 26 (a) of the Ordinance which reads as follows:- "26. Special provisions regarding business of insurance and production of oil and natural gas 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) ............................................... (c) ............................................... A careful analysis of the above provisions will show that the profits and gains of any business of insurance and the tax payable thereon is to be computed in accordance with the rules contained in the Fourth Schedule to the Ordinance. Rules 1 to 4 of the Fourth Schedule which apply to companies doing business of life insurance are not relevant here as the petitioners are engaged in the business of general insurance (other than life) to which Rule 5 of the Fourth Schedule of the Ordinance applies which is as follows:-- "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 (IV of 1938) to be furnished to the Controller of insurance subject to the following adjustments, namely:- (a) any expenditure or allowance or reserve or provisions for any expenditure, or the amount of any tax deducted at source from any dividends or interest received which is not deductible in computing the income chargeable under the "income from business or profession" shall be excluded: (b) any amount either written off or taken to reserve to meet depreciation or loss on the realization, 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 realization, 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 realization, of investments, as the case may be."
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The above rule clearly states that the profits and gains of any business of insurance (other than life insurance), shall be taken to be balance of profits disclosed by the assessee in the annual accounts submitted by it before the Controller of Insurance under the provisions of Insurance Act of 1938, which means that no further enquiry or probe with regard to the above declared profits and gains of the assessee is permitted by the I.-T.O., except to the extent as provided in sub-rules (a) and (b) of Rule 5 ibid. Mr. Mansoor Ahmed Khan, the learned counsel for some of the petitioners in the above cases, however, contended before us that under section 9 of the Ordinance tax is levied/charged on the total income of the assessee and as such mere fact that section 26 and rule 5 of the Ordinance provided that the balance of the profit declared by the petitioners in their returns filed before the Controller of Insurance under the Insurance Act of 1938, will be deemed to be the profits and gains of business of insurance, could not change the basis of the tax. The learned counsel urged that the scope of total income is defined in section 11 of the Ordinance which includes all income from whatever source derived by an assessee. The learned counsel contended that "all income" contemplated under section 11 ibid has been divided into six different heads for the purposes of charge of tax under section 15 of the Ordinance. The learned counsel referred in detail various provisions contained in Chapter IV of the Ordinance which separately dealt with the income arising to an assessee under each head of income specified in section 15 ibid. The learned counsel accordingly submitted that income arising from 'interest on securities' is dealt with under section 17 of the Ordinance which clearly provides that where any security of the Federal Government is issued with the condition that interest thereon shall not be liable to tax, the interest receivable on such security shall be exempt from tax in accordance with such condition. On the above premises, the learned counsel argued that the income derived by the petitioners from "Khas Deposit Certificates" could not be subjected to charge of tax under the Ordinance as the same is exempted under the Second Schedule ibid. To support his above contention the learned counsel relied on the cases of Commissioner of Income Tax v. R.G. Chapman (PLD 1985 SC 329), Life Insurance Corporation of India v. Commissioner of Income Tax Delhi (1964) 51 I.T.R. 773), Assessee v. Department (Appellate Tribunal of Income Tax Case) (1964) 10 Tax 95), ' Pandyan Insurance Co. v. Commissioner of Income Tax Mad. 1965 PTD 475; Lakshmi Insurance v. C.I.T. Delhi (1972) PTD 233; Commissioner of Income Tax Bombay v. New India Assurance Co. Ltd. (1972) PTD 458. Learned counsel for the Department on the other hand contended that under section 26 read with rule 5 of the IV Schedule of the Ordinance the balance of the profits declared by an insurance company in its annual account filed before the Controller of Insurance under the Insurance Act, is treated its total income for the relevant year and liability of tax is determined thereon in accordance with the provisions of the First Schedule. It is argued by the learned counsel that an insurance company may derive profits and gains from various sources but when it declares the same in its annual accounts it is treated as one income e.g. Arising from the business of insurance and as such it becomes taxable strictly in accordance with the provisions of section 26 (a) and rule 5 of the Fourth Schedule of the Ordinance. In support of the above argument the learned counsel relied on the cases of Habib Insurance Co, Ltd v. Commissioner of Income-Tax (PLD 1985 SC 109), Commissioner of Income Tax v. Habib Insurance Co. Ltd. PLD 1975 Kar. 848 Vanguard Fire and General Insurance Co. Ltd. v. Commissioner of Income Tax, Madras (1966) 60 I.T.R. 496 and; Commissioner of Income Tax v. Asian Assurance Co. Ltd. 1962 (46) I.T.R. 560. We have heard the learned counsel for the parties at length and our conclusions are as follows:- ' It is not disputed before us that for assessment of profits and gains and tax payable thereon in respect of Insurance Companies, special provisions have been made in the Ordinance and same is given overriding effect over other provisions of the Ordinance. No doubt, under the Ordinance, the charge of the tax is on total income of an assessee, which is divided into six different heads under
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section 15 ibid. It is also correct that 'interest derived by an assessee on securities, which is one of the heads of income under section 15 ibid, is dealt with under section 17 ibid. The combined effect of section 17 read with item 72 of the Second Schedule of the Ordinance is that the interest on Khas Deposit Certificates' derived by an assessee is totally exempted from charge of tax under the Ordinance. The point for consideration before us, however, is whether the interest income of Khas Deposit Certificates received by the petitioners and included in the balance of profit declared by them in the annual accounts submitted to the Controller of Accounts under the provisions of Insurance Act is to be treated as "interest income on securities" or same is to be deemed to be the "profits and gains of business of Insurance", to be dealt with accordingly under the Ordinance. If, it is held to be the former, it will be exempted from tax under the Ordinance, but in case it is treated as the latter it will not be so exempted from the tax. In the case of Habib Insurance Co. Ltd v. Commissioner of I T C (PLD 1985 SC 109), the Humble Supreme Court while pointing out difference between the assets, income and gains of a Company doing insurance business and an ordinary trader `(individual or company) observed as follows at page 113 of the report:-- "Once it is conceded that the appellant-Company was doing no other business except that of Insurance, it follows that all its assets, income gains become relatable to the business of insurance. The only question is whether the disputed income arises directly from the business of Insurance or for the purposes of tax can be treated outside it. In this matter the distinction between an ordinary trader (individual or company) and a banking or Insurance Company, which the learned counsel for the appellant, ably tried to obliterate must be kept clearly in view. It is well brought out in British Tax Encyclopeadia at page 1244 in following word s:- "A trader who has money in hand and temporarily invests it in shares is nor regarded as performing a trading operation, if he later wants the money and realizes his investment at a profit, such profit is not taxable. But if he carries on a trade in which investing money is a normal part of that trade, then any profits or losses he makes on investments will be brought into his tax computation. Thus an insurance company and a bank have been held taxable on profits made on realizing investments as the buying of…
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