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Petitioner: Messrs SECURITY GENERAL INSURANCE COMPANY LTD., LAHORE VS Respondent: The CIR, ZONE-III, LTU, LAHORE
Court Name: Appellate Tribunal Inland Revenue Judge(s):Javed Iqbal, Masood Akhtar Shaheedi, Muhammad Asif, Ch. Nazir Ahmad,
Muhammad Waseem Ch. Title:Messrs SECURITY GENERAL INSURANCE COMPANY LTD., LAHORE vs The CIR, ZONE-III, LTU, LAHORE Case No.: I.T.As. Nos. 1274/LB/2015 Date of Judgment:2015-09-28 Reported As: 2016 PTD (Trib.) 2695 Result: Appeal allowed Judgment ORDER MUHAMMAD ASIF, ACCOUNTANT MEMBER.---The titled five income tax appeals have been filed, at the instance of the appellant/taxpayer, against the order passed by the learned Commissioner Inland Revenue (Appeals-I), Lahore against the Order Nos.28, 29, 26, 27 and 25 all dated 25.05.2015 pertaining to tax years 2009, 2011, 2012, 2013 and 2014 respectively. All the appeals are disposed of through this consolidated order as common issue is involved. 2. The appellant is an unquoted public limited company engaged in general (non-life) insurance business. The appellant/company filed returns of income for the tax years under reference declaring income at Rs.365,827,245/-, Rs.396.223,904/-, Rs.517,932,795/-, Rs.127,270,589/- and Rs.618,562,492,/- for the tax years 2009, 2011, 2012, 2013 and 2014 respectively. The returns so filed were treated as the assessm ent order in terms of section 120(1) of the Income Tax Ordinance, 2001. The learned Commissioner Inland Revenue, Zone-III, LTU, Lahore [the CIR] found that deemed assessm ents were erroneous in so far as prejudicial to the interest of revenue, in terms of . Section 122(5A). This view was mainly based on the offer of tax on dividend earned by the Company at reduced rate of 10% whereas in his opinion it should have been offerred at the normal rate applicable to the business income of the appellant/company. He made reference to Rule 5 of Fourth Schedule that is reproduced for the sake of convenience as under:- "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
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Ordinance, 2000 to be furnished to the Securities and Exchange Commission of Pakistan". (emphasis supplied) 3. He, therefore, confronted the appellant with the proposition that his entire income dividend income was liable to be determined as profits and gains of insurance business except for capital gain. 4. In response the appellant submitted that the provisions contained in Fourth Schedule were for the purposes of computation of profits and gains of general insurance business only and not for computation/ imposition of tax, therefore. The dividend income would be subjected to tax in accordance with the tax rates provided in the First Schedule. He placed reliance on the case law reported as PLD 199.7 SC 700 = 1997 PTD 1693 in the case of EFU General Insurance Limited [to be discussed later in this order] 5. The learned CIR was ntt impressed-with this reply. He opined that the Honorable Supreme Court of Pakistan had held that other provisions of the Ordinance would not be applicable in case of insurance company (except those contained in the relevant schedule). For this he placed reliance on PLD 1981 SC 293 [Alpha Insurance case and further 1993 PTD 766 [Central Insurance Case and 1997 PTD 1693 EFU Case]. He also placed reliance on 2011 PTD 2042 [Sindh] [EFU Case], and finally 1989 PTD 1090 Sindh [Adam Jee Insurance case]. In the last mentioned case, it was held confirmation of income 1989 PTD 1090 that any income which was included in the balance of profit lost its character and became part and parcel of profit and gains of insurance business. He also referred the an old FBR Circular No. 4/1988 wherein it was held that all accounts Of insurance company would constitute insurance income regardless of their nature and character. 6. The learned CIR further observed that the aspect that dividend income was part and parcel of insurance business was not dilated upon in PLD 1997 SC 700 = 1997 PTD 1693 on which the reliance was placed by the appellant and hence was not applicable to the circumstances of the case in 2014 PTD 2043 [Lah.] [Insurance Investment Bank case] it was held that banking being a composite business the dividend earned was earning from its banking business and therefore should have been assessed as normal business and not as a separate block of income. He also compared Fourth Schedule with Seventh Schedule that deals with banking business and found that in Seventh Schedule specific treatment regarding chargeablity of dividend income was provided whereas the Fourth Schedule did not stipulate any separate treatment. He further went on to observe tdhat in 2011 PTD 2042 Sindh [EFU Case] , the Honourable Court did not approve reference to section 67 by the Department for the purposes of proration of expenses. Drawing analogy from this observation, the learned CIR held that section 5 dealing with chargeablity of dividend income was not applicable in the case. 7. On appeal the appellant before the learned Commissioner [appeals] placing reliance on PLD 1997 SC 700 = 1997 PTD 1693 argued in the Absence of tax rates for insurance companies, the reduced rate of tax on dividend income would apply. Further reliance was placed on 2011 PTD 2042 [Sindh] and 2002 PTD 577 [LHC], in the case of Muslim Insurance Company. The applicant further referred to the tax rates under Division III, Part I, First Schedule, applicable to dividend receipts by insurance company. 8. Conversely, the Department placed reliance on 2011 PTD 2042 and reference was made to omission of reduced rate of tax on dividend in case of insurance and public companies by Finance Act, 2007. In departments view after this omission the dividend was subject to normal rate applicable to the business income of a company. Besides, section 5 being a subordinate section was not applicable in case of insurance companies that were dealt with under a separate schedule i.e. Is Fourth Schedule.
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9. The learned CIR[A] observed after reading the provision contained in clause 5 that profit and gains before tax computed under the provisions of Insurance Ordinance, 2000 were the income in case of General Insurance Business for tax purposes. The learned CIR placed reliance on Note 2.1 to the Final accounts for the year ended December, 2011 to hold that the Profit and Loss accounts of the appellant depicted the profit and gains of the appellant in terms of Rule 5 of the Fourth Schedule for taxation purposes. He went further to place reliance on 2011 PTD 2042 (Sindh) and 2013 PTD (Trib.) 116. In the first case, it was held that all types of income of a general insurance companies were to be treated as One basket income and none of the items could be subjected to separate consideration/ taxation. In the second case, it was held by the tribunal that none of the general provisions of the Ordinance would be applied to an insurance company. Finally, the learned CIR[A], concluded that neither section 5 was applicable for taxation of general insurance business nor the case law PLD 1997 SC 700 = 1999 PTD 1693 mentioned supra. He finely held that under the repealed Ordinance, 1979, the dividend received by an insurance company was subject to normal rate upto 30.06.2001 reduced rate was specified under the present Ordinance upto 30.06.2007 and thereafter at the normal rate applicable to the business income of a company. Hence this appeal. 10. In response to call notice, Mr. Asim Zulfiqar, FCA appeared on behalf of the taxpayer while Mr. M. Asim Haleem, D.R (LTU) was present on behalf of the Department. Both of them were heard. 11. The learned AR starting his arguments submitted that the observation of the learned Commissioner in that the dividend income in case of general insurance company lost its character and became part and parcal of business income was incorrect. Under the law the dividend income always retains its original character and does not transform into any other category of income. The clear and unambiguous position emanating from express language of law is such that dividend income derived by any taxpayer, including those in whose case income is computed under Schedule regime (like insurance companies), always retains its original character. 12. Further explaining this point he submitted that dividend income in the case of an insurance company had always been intended by legislature to be taxed at rate prescribed under/ Division III of Part I of First Schedule vis-a-vis section 5 of the Ordinance. The fact that there had been no- change, whatsoever, since promulgation of 2001 Ordinance in the operative part of section 5 and section 99 of the Ordinance, that is to say, section 5 throughout had been using the expression "subject to the Ordinance......, when one refers to following contents of Division III of Part I of First Schedule, as had remained applicable during the period July 1, 2002 to June 30, 2007, it becomes abundantly clear that, in case of insurance companies, legislature never intended to transform the character of dividend income into any other category of income and hence always intended to charge the same at tax rate generally applicable on dividend income and not at corporate tax rate prescribed under Division II of Part I of First Schedule: DIVISION III RATE OF DIVIDEND TAX The rate of tax imposed under section 5 on dividend received from a company shall be-- (a) in the case of dividend received by a public company or an insurance company or any other resident company, 5% of the gross amount of the dividend; or (b) in any other case, 10% of the gross amount of dividend. 13. From the above express position, in particular a categorical inclusion of insurance companies in the Division, there was no doubt that 'one basket' form of income of an insurance company does not change the character of dividend income for the purposes of application of tax rate. The stance taken by Revenue, it follows, glaringly contradicts the unambiguous statutory position and remains unsustainable when one takes into account the fact that aforesaid position was adopted by legislature in the presence of language of section 5 and section 99 of the Ordinance as is
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currently prevailing. That is to say, dividend income of an insurance company was categorically prescribed by the legislature to be taxed under section 5 read with Division III of Part I of First Schedule to the Ordinance in the presence of expression "subject to this Ordinance" 14. Vide Finance-Act-, 2007 certain amendments were introduced in the aforesaid Division 111 of Part I of First Schedule in consequense to which following position emerged effective July 1, 2007 which principally remained unaltered until June 30, 2015 i.e. Covering all years in appeal: DIVISION III RATE OF DIVIDEND TAX The rate of tax imposed under section 5 on dividend received from a company shall be 10%. 15. The effect of aforesaid amendment is simply that the tax rate in all cases, including those for which- tax rate of 5% (like for public companies and insurance companies etc.) was previously prescribed, became 10%. Only effect of the amendment was to prescribe a uniform tax rate for all taxpayers, in respect of whom section 5 read with Division III of Part I was previously setting out different rates, and under no circumstances the same be interpreted to have an effect of excluding insurance companies from the scope of section 5 of the Ordinance. This position is evidently clear from following excerpts of Circular No. 1 of 2007 dated July 2, 2007, wherein Federal Board of Revenue clarified the purpose of amendment: 16. He further submitted that in the case before Sindh High Court. 2011 PTD 2012 on which the Revenue has placed reliance, applicability or otherwise of section 67 of the Ordinance, dealing with apportionment of common expenses, to an insurance company covered by section 99 of the Ordinance read with Fourth Schedule to the Ordinance. It is in this background that Sindh High Court observed that by use of expression "subject to this Ordinance,..." in section 67 of the Ordinance the legislature has made the same subservient to section 99 of the Ordinance, a special provision. This conclusion emerged because both section 67 of the Ordinance and section 99 of the Ordinance deal with computation of income. Under no circumstances the principles settled in this judgment support or permit juxtaposing two independent provisions, one dealing with computation of income and the other relating to computation of tax under section 5 with each other. The special provisions of section 99 read with Fourth Schedule to the Ordinance, setting out exclusively the principles for computation of income, would only prevail over general provisions of the Ordinance dealing with this issue. The reliance of Revenue is, thus, misconceived. 17. The controversy that whether the dividend income of an insurance company would attract concessional tax rate or, alternatively, would remain chargeable to tax at corporate rate of tax is not new. The dispute arose in the context of repealed 1979 Ordinance and was finally settled by Supreme Court of Pakistan PLD 1997 SC 700 = 1997 PTD 1693 in the case of EFU General Insurance Company Limited. The controversy was settled in the favour of taxpayers by the Honourable Supreme Court of Pakistan after carrying out a thorough and an in-depth analysis of the then prevailing relevant statutory provisions. The operative part of judgment is reproduced hereunder for the ease of quick reference: "19........... ....Section 26(a) of the Ordinance, inter alia provides 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 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 provisions contained in the First Schedule for business income of companies will apply. The
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intention of the legislature is clear and that is that income from general insurance shall be subject 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 no 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 the First Schedule of the Ordinance can only be denied to the general insurance companies by suitably amending the law. 20. In the circumstances, we are of the view that assessments of the appellants which has already been made inter alia extending benefit of extending benefit of lower tax on dividends on the basis of the rule laid down in the American Life Insurance Company case could not be re-opened under section 65(1) of the Income Tax Ordinance, 1979 ...." 18. The aforesaid authoritative judgment, unequivocally settling the controversy, squarely applies to the case under consideration. The provisions of Fourth Schedule of the repealed Ordinance are pari materia to provisions of Fourth Schedule to 2001 Ordinance and thus, the principles settled by the Honourable Apex Court, in the context of repealed Ordinance, fully apply to cases covered by the new Ordinance. In the aforesaid excerpts, the honourable Apex Court had inter alia decided following two fundamental points: (i) Firstly, it has been settled that since Fourth Schedule deals only with "computation of income", and did not in itself contain any taxation provisions, therefore, for the purposes of determining the incidence of tax on dividend income of an insurance company one would have to refer to general rates for tax on dividend income. The position is absolutely the same in 2001 Ordinance, therefore, the ratio would constitute a relevant and a binding precedent for the purposes of dividend income derived by an insurance company post year 2002; and ii) Secondly, the court has also settled that if an insurance company is to be deprived of the benefit of reduced rate specific provisions have to be incorporated in the statute, in the absence of which the general concessional rate would remain applicable. This finding also favours the case of the appellant. In this respect, it is pointed out that after the aforesaid judgment, the legislature, vide Finance Act, 1999, had introduced specific provisions in Para D of Part V of First Schedule to repealed Ordinance prescribing full corporate tax rate for dividend income of insurance companies. In the absence of any such insertions in 2001 Ordinance, it follows that general rate of tax for dividend income remains applicable to such income derived by an insurance company. 19. Elaborating further on the aforesaid judgment of the apex court, it would not be out of context if the fundamental issue, as was being examined by court, is also referred to. In the case before the Honourable apex court the primary contention of the Revenue was as under: "...To put in the nutshell, the stand of the Department is that the judgment in the case of Adamjee Insurance Company, where it was, inter alia, observed that in case of a company engaged in general insurance business, income which is included in the balance of profits declared by it in its annual account submitted to the Controller of Insurance loses its original character and becomes part of the profits and gains of such insurance business and the whole of it is to by taxed accordingly and, therefore, the entire balance of profits declared by a general insurance
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company could not be bifurcated under different heads for charging different rates of income lax and entire balance of profits was chargeable to tax as a single unit..." 20. The apex court while settling the controversy principally upheld an earlier decision of Sindh High Court delivered in the case of American Life Insurance Company reported as (1967) 15 TAX 268 by observing that "view taken in the case of American Life Insurance Company is correct and it equally applies to Income from General Insurance Business....... In the said judgment, it was, for the first time and that too in the context of repealed Income Tax Act, 1922, held that dividend income of an insurance company attracts general concessional/reduced rate of tax. 21. The Appellate Tribunal Inland Revenue, in a decision reported as 1987 PTD 613 [later on upheld by the Lahore High Court in 1996 PTD 276], while referring to the aforesaid decision in American Life Insurance Company case, summed up the ratio in the said decision as follows:- It may be noted here that section 10(7) of the repealed Act provided that business of Insurance companies was to be computed under First Schedule of the Repealed Income Tax Act which, inter alia, provided that such an income was chargeable under the head Income from business or profession irrespective of the source from which the same was derived. In the present case, dividend income, rightly or wrongly, has been assessed by the assessing officer as 'business income' while in the cited case, the insurance company's income under law was assessed as an income from business from whatever source derived. It is in these circumstances that the High Court held that rate of tax applicable on dividend income would be as provided in the Schedule and the dividend income continued to carry the label of dividend income. Consequently, in the concluding paragraph of the judgment, the High Court observed.... " 22. The observations of Appellate Tribunal are unambiguous and reaffirm the position that in the case of insurance companies no matter the aggregate income is classifiable as 'business income', the component constituting 'dividend income' retains its original character/label and hence could not be subjected to tax at corporate rate of tax on the grounds of its classification as one basket/unit. 23. The fact that the position is un-changed under the new Ordinance is further fortified from observations recorded in EFU General Insurance Company case, reported as 2011 PTD 2042, relied upon by the Revenue, wherein the Court has categorically confirmed continuity of taxation scheme from 1979 Ordinance to 2001 Ordinance for insurance companies. In order to support this, reference may be made to paragraph 12 of the judgment, also reproduced by learned first appellate authority in the impugned orders, stating as follows: 12. We also would like to observe that the concept of one basket income so far as the case of Insurance Company is concerned is still in vogue. The capital gains/dividends income like other profits of the Insurance business are its one unit. It is the Controller of the Insurance under the insurance Ordinance, 2000, who has the authority wider the law to report the income of insurance Company. The principle of one unit/single basket income is not a new concept in the case or Insurance business, this principle has been upheld by the superior Courts in a number of Judgments, already in field in this regard." 24. The aspect of retention of original character for 'dividend income' is further strengthened from provisions contained in Seventh Schedule to the Ordinance which is again a special provision but contrary to Fourth Schedule, simultaneously deals with both 'computation of 'income' and 'computation of tax liability'. In this Schedule, though again one basket income concept is adopted. However 'dividend income' has always been and still described as dividend income, for which a reduced had been applicable upto June 30, 2015. In other words, the scheme canvassed in this Ordinance ensures that original character of income is retained in all cases. 25. Case law 2014 PTD 2043 in Crescent Investment Bank Limited, relied upon by the Revenue is distinguishable because.
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(a) The case pertains to a banking company with regard to assessments governed by repealed 1979 Ordinance whereunder both the computation of income and computation of tax liability was required to be carried out under the general law as against insurance companies for which computation of income was governed by a special law. The two cases being not absolutely comparable, the decisions delivered in relation to insurance companies, would take precedence over any decision rendered in the case of a banking company. This is without prejudice to the fact that the decision, referred to above [PLD 1997 SC 700 = 1997 PTD 1693], expressly deals with the matter involved in these appeals and has been rendered by Supreme Court, which, in any case, would have an overriding effect over the above referred decision. (a) In the case of banking companies, the position under the 2001 Ordinance, effective tax year 2009, is different as since then both 'computation of income and 'computation of tax liability' are governed by Seventh Schedule to the Ordinance. In the present case, since issue in appeals pertains to tax year 2009 and onwards, therefore, any decision of a Court delivered in the case of a banking company, would be relevant if the same deals with comparable provisions in two schedules and, of course, comparable period; (b) The dispute before Lahore High Court pertained to interpretation of Part V of First Schedule to the repealed Ordinance, whereunder for the purposes of applicability of rate of tax, three distinct categories of companies were prescribed viz. 'banking company', 'public company' and any other company'. The issue before the High Court was whether 'investment bank was classifiable as…
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