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Petitioner: COMMISSIONER OF INCOME TAX, COMPANIES-II And Another VS Respondent: HAMDARD JUDGMENT
Court Name: Supreme Court of Pakistan Judge(s): Sajjad Ali Shah, Saleem Akhter, Ajmal Mian Title:COMMISSIONER OF INCOME TAX, COMPANIES-II And Another vs HAMDARD
JUDGMENT
Reported As: PLD 1992 Supreme Court 847 Result: Cases remanded Judgment JUDGMENT SALEEM AKHTAR, J.---We propose to dispose of these appeals by this judgment as the facts and questions of law involved and the parties are common. 2. These appeals, with the leave of the Court, challenge the judgment of the High Court of Sindh passed in Constitution petitions filed by the respondents which were allowed and the orders of assessment passed by the I.T.O. And the orders of the 1st Appellate Authority for the assessment years 1980-81 to 1988-89 holding that the respondents were not entitled to exemption under clause 93 of the Second Schedule to the Income Tax Ordinance on estimate of the income which is derived through the sale of Sharbat-e-Rooh Afza as without lawful authority and of no legal effect. 3.The brief facts are that Hakim Muhammad Saeed as sole proprietor, established the business in the name and style of `Hamdard Dawakhana' for manufacturing Tib medicines including `Sharbat' known as Sharbat-e-Rooh Afza. He created a trust on 26th September, 1953, known as Hamdard Dawakhana Trust and transferred to it his entire running business under the name of Hamdard Dawakhana with its assets and liabilities as shown in the balance-sheet as on 31st March, 1953, w.e.f. Ist April, 1953. Under the trust deed 3/4 of net profit received from the business was to be spent on development of arts and science pertaining to Tib and other charitable work while remaining 1/4 of the income was reserved by the donor himself during his lifetime and after his death to his legal heirs. For the assessment year 1954-55 Hakim Muhammad Saeed claimed exemption of 3/4 income of the trust from the charge of income tax under section 4(3)(i) of Income Tax Act, 1922. The Income Tax Officer rejected this claim. The respondent succeeded in obtaining relief from the Income Tax Appellate Tribunal and thus 3/4 income derived from
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commercial undertaking namely Hamdard Dawakhana Trust was exempted from charge of income tax. 4.For the subsequent assessm ent years 1955-56, 1956-57 and 1957-58 the I.T.O. Refused to grant exemption. However, the Tribunal allowed the appeal in respect of these assessment years partially and held:- that Sharbat-e-Rooh Afza was not manufactured in the course of carrying out of a religious or charitable purpose, as this product was not a medicine pure and simple. The income from the sale of Sharbat--e-Rooh Afza was, therefore, not entitled to any exemption. (ii)that the difference between the income returned by the assessee and the income determined by the ITO was not entitled to exemption as the same was not spent on charitable objects. On all other points the Tribunal agreed with its earlier findings in respect of assessment year 1954- 55 and held that 3/4 of the assessee's income other than derived from the two items mentioned above was exempt from tax under section 4(3)(i) of the Income Tax Act, 1922. At the instance of both the parties who applied separately, the following two questions were referred to the High Court:- (1) Whether in the facts and in the circumstances of the case the Tribunal was justified in holding that the income of the assessee is exempt from tax in view of the provisions as contained in section 4(3)(i) of the Income Tax Act? (Referred at the instance of the Department). (2) Whether under the facts and circumstances of the case the Tribunal was justified in holding that income arising from manufacture and sale of Sharbat-e-Rooh Afza is hit by the First Part of the First Proviso of section 4(3)(i) of the Income Tax Act, 1922, and is liable to tax? (Referred at the instance of the respondent). The High Court held that although the main object of Hamdard Dawakhana Trust was the promotion of Unani medicines which was undoubtedly an object of general public utility within the meaning of the explanation appended to subsection (3) of section 4 of the Act, and that the word `property' mentioned in clause (1) includes business, the proviso appended to the said clause applies in all cases where the exemption is claimed for income arising out of business. It was further held by the High Court that the exemption is available only if both the conditions laid down in the proviso are satisfied, namely, `that the business is carried on behalf of a religious or charitable institution and that the income is applied solely for a charitable purpose. The assessee in this case did not qualify for exemption as 1/4th of the income of the business was reserved for the author of the trust.' The respondent was granted leave to appeal and the appeal was allowed. Hamdard Dawakhana v. Commissioner of Income Tax PLD 1980 SC 84, in the following manner:-- . "The position emerging from the foregoing discussion may be summed up by saying that the term `property' as used in clause (i) of subsection (3) of section 4 of the Income Tax Act includes business; that this clause deals with property including business held wholly or partly under trust for religious or charitable purposes, and that income derived from such property or business is exempt from taxation to the extent of its dedication and application; that there is a clear distinction between' business held under trust and business carried on behalf of a religious or charitable institution, as where business itself is held under trust, it is the business of the trust, as the trustees represent and act for the trust and it is not a business carried on behalf of a religious or charitable institution, that notwithstanding the generality of its opening words, the proviso, on its true construction, applies on to income derived from business which is not itself held under trust, but is carried on behalf of a religious or charitable institution, and that it would not be correct to apply the proviso to income squarely falling under clause (i), simply because of a presumption that the proviso was enacted for this specific purpose on the recommendation of the Lahore High Court, as the proviso does not embrace the subject-matter of the clause; that even otherwise. The requirements spelt out in the proviso for income derived from business to qualify for exemption
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from taxation are neither relevant nor necessary in the case of business which is itself held under trust, for to the extent of dedication income derived from such business must, as of legal necessity. He applied wholly (or partly) for the purposes of the trust. On this view of the matter, it appears that the proviso must be construed as being in the nature of a substantive clause applying to a category of business distinct from the one mentioned in clause (i) and it is only in this manner that an invidious distinction between income derived. From business held under trust, and from property other than business similarly held, can be avoided. Finally, the maintenance of the Waqif and his family or descendants being a charitable or religious purpose under the Hanafi Law, the explanation to subsection (3) of section 4 of the Income-tax Act, illustrating the meaning of the expression `charitable purpose' cannot negative or destroy the accepted nature of this particular purposeof a Muslim Wakf. For these reasons, I am of the view that the case of the Hamdard Dawakhana Trust falls squarely within the ambit of clause (i) of subsection (3) of section 4 of the Act, as the business constituting the trust is property held in part for religious or charitable purposes, and, therefore, the income applied or finally set apart for application to such purposes, namely 75% of the total income would be exempt from taxation under the second part of the said clause. This income being from business held under trust, the first proviso to clause (i) has no application to this case. I would, accordingly, accept this appeal and answer in the affirmative the question referred to the High Court at the instance of the Income-tax Department under section 66(i) of the Act. In view of the legal questions involved, I would leave the parties to bear their own costs. I may observe that in view of the construction that I have placed on the relevant provisions of law, the question referred to the High Curt at the instance of the assessee, namely whether on the facts and circumstances of the case the Tribunal was justified in holding that income arising from manufacture and sale of Sharbat-e-Rooh Afza is hit by the first part of the first proviso to section 4(3)(i) of the Income-tax Act, 1922, and is liable to tax, will need to be answered by the High Court, and the case will, accordingly, go back to it for this purpose." It may be mentioned that although Muhammad Afzal Zullah, J. (as he then was) agreed with the conclusion, by a separate judgment, expressed his inability to concur with the reasoning and his Lordship was not in favour of changing the law laid down by this Court in Muhammad Abdur Rauf Khan PLD 1963 SC 209. The High Court reconsidered the matter and answered the question in the negative as follows: "Since the manufacture and sale of Sharbat-e-Rooh Afw was part of the business donated to and held under the Trust, the same considerations which apply to income from business held under the Trust are applicable. The question is, therefore, replied in the negative and it is held that the income arising from the manufacture and sale of Sharbat-e-Rooh Afza is not hit by the first part of first proviso to section 4(3)(i) of the Income Tax Act, 1922, and the liability to tax is only after allowing exemption under the second part of clause (i) of subsection (3) of section 4 of the Act." 5.Again for the assessm ent years 1976-77 to 1979-80 the Income Tax Officer assessed the respondents without granting them exemption under section 4(3)(i) of the Act. In 1979 the Income Tax Ordinance was promulgated and all the returns submitted for the years 1980-81 to 1988-89 were dealt with under this Ordinance. Originally clause 61 of the Second Schedule to the Ordinance was applied for exemption. However, by Finance Ordinance of 1981 instead of clause 61 clause 93 provided for exemption applicable to the respondents. The department claimed that in view of the change in the language of clause 93 of the Second Schedule to the Ordinance the respondents were not entitled to any exemption. The Income Tax Officer upheld this plea. For the assessment years 1981-82 to 1988-89 assessm ent orders were passed on different dates and although the matters were proceeding before the Income Tax Appellate Authorities and/or the Tribunal, the respondents filed Constitution petitions against the assessments and the orders passed by such
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authorities. The particulars of such petitions and the orders passed by the Income Tax Officer and the Appellate Assistant Commissioner have been summarised by the High Court in the impugned judgment in the following manner:- Petition No,Date of filing the petition in High CourtAsstt. YearDate of order of ITODate of order of Assistant Appellate Commissioner.Proceedings pending in the Department. 02/87 1-4-1987 1980-81Nil 27-7-86 Appeal before I.T Appellate Tribunal 69/85 31-12-1984 1981-82Nil 27-7-86 -do- 301/87 1-4-1987 1982- 8315-6-85 27-7-86 -do- 303/87 1-4-1987 1983- 8416-9-85 27-7-86 -do- 328/87 8-4-1987 1984- 8524-3-87 8-12-87 -do- 327/87 8-4-1987 1985- 8624-3-87 8-12-87 -do- 497/87 17-5-1987 1986- 87Nil 8-12-87 -do- 406/87 27-4-1988 1987- 8831-3-88 29-5-88 Nil 1361/88 28-12-88 1988- 8930-11-88 Appeal pending Nil By the impugned judgment the High Court observed as follows: It is quite clear from the judgment in Civil Reference No.5/1966 that the manufacture and sale of Sharbat-e-Rooh Afza was considered as part of the business donated to and held under the Trust. It was also found in the said judgment that same considerations were applicable to the income arising from the business held under the Trust as to the income arising from the sale of Sharbat-e- Rooh Afza. There being a categorical finding of this Court that the manufacture and sale of Sharbat-e-Rooh Afza was part of the business donated to and held under the Trust, it was not open to the department to have treated that income differently." While dealing with the contention that the language of clause 93 of the Second Schedule is differently worded from section 4(3)(i) of the Act it was observed as follows: On comparison of the 1st Proviso of clause 93 of the Second Schedule of the Ordinance with the 1st Proviso of section 4(3)(i) of the Act, it is quite clear that except for the addition of words `itself is the subject or and which were added between the words `business' and `is' in the proviso, the rest of the 1st Proviso to clause 93 of the Second Schedule to the Ordinance is identical to the 1st Proviso of section 4(3)(i) of the Act. The addition of words `itself is the subject of in the 1st Proviso to Clause 93 of the Second Schedule to the Ordinance, in our view, has not in any manner, affected the availability of the exemption to the petitioner, under the decision of Supreme Court and of this Court in Civil Reference No.5 of 1966 in the case of petitioner wherein it was ,categorically held that manufacture and sale of `Rooh Afza' Sharbat waspart of the business donated to and held under the Trust. It is nobody's case that the income arising to the petitioner from the sale of `Sharbat-e- Rooh Afza' was not applied for or finally set apart for advancing the object of the petitioner's Trust. In these circumstances we are clearly of the view that the income arising to the petitioner from the sale of `Sharbat Rooh Afza' was also entitled to exemption under clause 93 of the Second Schedule to the Ordinance as an income arising from the business carried on behalf of the petitioner's Trust.
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We accordingly allow the above petitions and declare the orders passed by the I.T.O. And the 1st Appellate Authority holding that the petitioner was not entitled to exemption under clause 93 of the Second Schedule to the Income Tax Ordinance, 1979, on so much of the income which it derived through the sale of `Sharbat-e-Rooh Afza' for the assessment years 1980-81 to 1988-89 as without lawful authority and of no legal effect." The same contention has been raised by the learned counsel for the appellant that clause 93 has been differently worded and, therefore, the judgment m PLD 1980 SC 84 is not applicable. It would be. Proper to reproduce both the provisions which read as follows:- "Section 4(31.---Subject to the provisions of this Act, any income, profits or gains falling .Within the following classes shall not. To such extent as may be specified in this subsection or prescribed in this behalf, be included in the total income of the person receiving them: (i) any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, and in the case of property so held in part only for such purposes, the income applied, or finally set apart for application, thereto: Provided that in the case of income derived from business this clause shall not apply unless the business is carried on behalf of a religious or charitable institution and the income is applied solely for a religious or charitable purposes of the institution, and either- (i) the business is carried on in the course of the carrying out of a religious or charitable purpose of the institution; or (ii) the work in connection with the business is mainly carried on by the beneficiaries of the institution: Provided further that nothing in this clause shall apply to so much of the income, profits and gains as is not expended during the previous year or set apart for being expended within Pakistan; Provided further that if any sum out of the amount so set apart is expended outside Pakistan, it shall be included in the total income of the previous year in which it was set apart, whichever is the greater, and the provisions of subsection (2) of section 34 shall not apply to any assessment or reassessm ent, as the case may be, made or to be made in pursuance of this proviso. (ii) Any income of a religious or charitable institution derived from voluntary contributions and applicable solely to religious or charitable purposes: Provided that nothing contained in clause (i) or clause (ii) shall operate to exempt from the provisions of this Act that part of the total income of a private religious trust which does not enure for the benefit of the public. Explanation---The expression 'charitable purpose' as used in clauses (i) and (ii) includes relief of the poor, education, medical relief and the advancement of any other object of general public utility." Clause 93 of the Second Schedule to the Income Tax Ordinance reads as follows:- "93.Income of religious or charitable trusts etc. Any income which is derived from property or business held under trust or other legal obligations wholly, or in part only, for religious and charitable purposes and is actually applied or finally set apart for application thereto: Provided that in the case of business this clause shall not apply unless the business itself is the subject of and is carried on behalf of such trust or a religious or charitable institution and the income derived from such business is applied solely for religious or charitable purposes of the trust or institution and either:-- (i) the business is carried on in the course of carrying out of the religious or charitable purposes of the trust or the institution; or (ii) the work in connection with the business is mainly carried on by the beneficiary of the trust or the institution"
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Explanation:---Notwithstanding any provision contained in the instrument or relating to the trust or the institution, if any amount is set apart, expended or disbursed for the maintenance and support wholly or partially of the family, children or descendants of the author of the trust or the donor or the maker of the institution or for his own maintenance and support during his lifetime or payment to himself or his family, children, relations .Or descendants or for the payment of his or their debts out of the income, profits and gains of the property decided, or if any expenditure is made other than for charitable purposes, in each case such expenditure, provision, setting apart, payment or disbursement shall not be deemed, for the purposes of this clause, to be for religious or charitable purposes." 6.According to Mr. Sheikh Haider, the learned counsel for the appellant, the Supreme Court had not considered the question whether the income arising from manufacture and sale of Sharbat-e- Rooh Afza was exempted under section 4(3)(i) of the Income Tax Act, 1922 and was not liable to tax. This question was considered by the High Court in Civil Reference No.5 of 1966, Hamdard Dawakhana v. Commissioner of Income Tax, and it was answered in the negative with the observation reproduced earlier. 7.The contention of the learned counsel for the appellant is that considering the proviso to clause 93 for claiming exemption, besides the conditions that income is derived from property or business held under the trust and is subject of such trust which is carried on, on behalf of such trust and the income derived from such business is solely applied for religious or charitable purposes of the trust, one of the following conditions should also be satisfied: (1) The business is carried on in the course of carrying out the religious or charitable purposes of the trust or institution, or (2) the work in connection with the business is carried on by the beneficiaries. ---The learned counsel vehemently argued that the first additional condition is lacking in the present case as the manufacture of Sharbat-e-Rooh Afza is not carried on for the religious or charitable purposes of the trust. From this argument what the learned counsel intends to impress is that the business carried on should be of a nature which may be in consonance with the charitable and religious purposes of the trust. 8.A comparison of the provisions of-the Act and the Ordinance brings out change in the language. In clause 93 after the word "property" words "or business" have been added. The other change has been made in the first proviso by adding "itself is the subject of after the words "unless the business". The addition of the words in clause 93 and the first proviso has been made in view of the judgment in Hamdard Dawakhana v. CIT PLD 1980 SC 84 where controversy raged whether the word "property" as used in clause (i) of subsection (3)(a) of section 4 included business as well. In this judgment, after a review of the historical background and judgments of various Courts it was observed (page 96) as follows: "There is consensus of judicial opinion that the term `property' as used in clause (i), is a term of the widest import and subject to any limitation or qualification which the context might require, it signifies every possible interest, which a person can acquire, hold and enjoy. It is comprehensive enough so as to cover even business, cash deposits, securities and other such things- There is nothing in the language of the clause in question to restrict in any manner the normal and accepted meaning of the word `property' so as to exclude business, from its connotation ............. The same view was taken in the case of Muhammad Abdur Rauf Khan on which reliance has been placed by the High Court in the judgment under appeal, and it was reiterated that the term property as used in clause (i) included business ........................ It follows, therefore, that clause (i) exempts from taxation any income derived from business held, as property under trust or other legal obligation wholly for religious or charitable purposes and if the business is so held in part only for such purposes, the exemption would apply only to the income applied or finally set apart for
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application to such purposes. In other words, the clause deals with income accruing from property, including business, dedicated or donated to the trust either wholly or partly. It is clear that to the extent of dedication the income must be devoted to the purposes of the trust and any diversion to other purposes would be in breach of the trust. It is for this reason that the legislature allows complete exemption without stipulating any further condition, to the income of such property which is permanently tied up for application to the religious or charitable purposes. The clause, as it stands, does not contain any reference to business or property which is not itself the subject- matter, of dedications..."........................... In view of the preponderance of judicial opinion as to there being a real distinction between business as property held under trust wholly or partly for religious or charitable purposes and business carried on behalf of a religious or charitable institution, it does not appear to be necessary to pursue the matter any further. However, it must be stated that if. Indeed, the intention of the legislature was to include business held under trust in the phraseology used in the proviso, then it would have been redundant to provide that its income should he applied soley for religious or charitable purposes, as in the case of business held under trust it is a requirement of law that income derived therefrom must be applied to the purposes of the trust. Similarly, it appears that in the case of business which itself is the subject-matter of dedication, and whose income is permanently tied to the purposes of the trust, it would hardly be necessary to prescribe that the business should be one carried on in the course of the carrying out of the religious or claritable purposes of the institution or that the work in connection with the business is mainly carried on by beneficiaries of the institution. These conditions clearly have reference to a business which is not itself the subject-matter of the trust, as in such a case it would be necessary to provide safeguards before exemption from tax could be granted ......................................................... I am, therefore, of the view that the proviso does not apply to a business which is itself held under trust or other legal obligation for a religious or charitable purposes. As the proviso stands, it has clearly failed to bring within its ambit income derived from business which is itself held under trust .......................... I have already commented upon the fact that even though the opening words of the proviso appear to deal generally with income derived from all kinds of business, yet these words stand qualified by the phrase `carried on behalf of a religious or charitable…
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