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Petitioner: COMMISSIONER (LEGAL DIVISION), KARACHI VS Respondent: ATLAS INVESTMENT BANK JUDGMENT
Court Name: Sindh High Court Judge(s): Muhammad Junaid Ghaffar, Muhammad Karim Khan Agha Title:COMMISSIONER (LEGAL DIVISION), KARACHI vs ATLAS INVESTMENT BANK
JUDGMENT
Reported As: 2016 PTD 2426 Result: Order accordingly Judgment JUDGMENT ' MUHAMMAD KARIM KHAN AGHA, J.---These three Income Tax Reference Applications (1TRA's) being ITRA 227/06 Commissioner of Income Tax v. Atlas Investment Bank Limited, ITRA 531/06, The Commissioner of Income Tax v. Faysal Investment Bank Limited and ITRA 564/09 Commissioner of Income Tax v. Atlas Investment Bank Limited were all filed against the respective orders of the Income Tax Appellate Tribunal (Pakistan) Karachi (ITAT) by the Commissioner of Income Tax under sections 133 and 136 of the Income Tax Ordinance, 1979 and 2001 (the 1979 or 2001 Ordinance as the case may be) and involve a common question of law arising out of the respective orders of the ITAT so will all be disposed of by this common Judgment. 2. As per the lead ITRA 227/06 the common question of law is, "Whether under the facts and in the circumstances of this case, the learned ITAT was justified to hold that investment banks are public limited companies and not the banking company within the purview of section 2(10) of the Income Tax Ordinance, 1979 read with section 5(b) and (c) Banking Companies Ordinance, 1962" which in effect is almost identical to the question raised in the other two ITRA's although worded slightly differently however significantly the definition of a banking company in the 1979 Ordinance at section 2(10) as discussed later is different from the definition of a banking company in the 2001 Ordinance at section 2(7). 3. Both the Assessee are investment banks (Atlas and Faysal). 4. The brief facts of the case as per ITRA 227/06 are that on 31-3-2000 the Deputy Commissioner of Income/Wealth Tax (DCIT) Circle 11 Companies Zone I, Lahore after hearing the respondent (the Assessee) passed an assessm ent order (Assessment Order) for the year 1999-2000 under section
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62 Income Tax Ordinance, 1979 on the basis that the respondent was a banking company as opposed to an investment finance company as contended by the respondent and that the respondents assessm ent to tax was on the basis of it being a banking company which was at a higher rate than that of an investment finance company. 5. The respondent appealed this particular finding in the Assessment Order to the Commissioner of Income Tax/Wealth Tax (Appeals) Zone I, Karachi who by Order dated 13-1-2003 reversed the finding in the Assessm ent Order regarding the applicant being a banking company and found it to be an investment finance company in the following terms of its Appellate Order (CIT(A)) at Para 3(1) which is set out as under for ease of reference: i) Regarding treatment of appellant as an investment finance company instead of a banking company, I find considerable force in the arguments of the AR of the appellant. The very fact that appellant has been granted licence under SRO 585(1)/86 dated 13 July 1987 by the Government of Pakistan and not a licence by State Bank of Pakistan under the Banking Companies Ordinance, 1962, makes the two institutions distinctly different. In case the plea of the revenue is accepted, then the above SRO becomes redundant and redundancy cannot be attributed to a taxing statute [(1998) PTD 1250]. Furthermore, appellant is specifically debarred from doing the business of banking and no violation has been found by SBP during regular periodical audit of the appellant company the explanation proposed by the revenue through Finance Bill, 1998, with a view to bring investment banks within the definition of banking companies, was also turned down by the legislature last year. Lastly, the full bench of the Income Tax Appellate Tribunal I.T.As. Nos. 3027 and 3028/LB of 1996 (assessm ent years 1991-92 and 1992-93) dated 19 April 1999 has finally clinched the issue in favour of the appellant. Respectfully following the said full bench judgment, which I am otherwise required to follow as held by Honourable Tribunal in 1996 PTD (Trib.) 388 I hold that the appellant being an investment finance company is therefore chargeable to tax at standard rate of listed public companies. "Regarding inter-corporate rate of tax on dividend income from listed companies, the learned DCIT misdirected himself in law by relying upon a judgment of the Honourable Tribunal reported in (1979) 48 Tax-57 (Trib.) because the said judgment relates to the assessment under the Repealed Income Tax Act of 1922. It is an admitted fact that the provisions of Income Tax Ordinance, 1979 are entirely directly different in so far as chargeability of income from dividend is concerned. The findings given by the honourable Tribunal in the case of Bank of Punjab are also of no help to the revenue, because it has already been held that, unlike Bank of Punjab, appellant is not doing the business of banking, in the case of EFU Insurance Company Ltd. And others v. Federation of Pakistan reported in PLD 1997 SC 700 = 1997 PTD 1693 it has been held that even the companies doing the business of general insurance, income from dividend is chargeable at the inter- corporate rate of tax at 5%. For all these reasons, I hold that income from dividend in the case of appellant is chargeable to inter-corporate rate of tax at 5%. I am guided, in this behalf, by a judgment of the Karachi High Court in the case of Nishat Talkies v. C.I.T. (A) reported in 1989 PTD 591 wherein it has been laid down that it is the duty of every Court and Tribunal in the country to follow the judgments of Supreme Court because under Article 189 of the Constitution any judgment of the Supreme Court which decides a question of law is binding on all courts in Pakistan." 6. The Income Tax Department being aggrieved by the CIT (A) Order filed an appeal before the ITAT against the same and in particular its finding that the applicant was to be treated as an investment finance company instead of a banking company for tax purposes and that the rate of tax applicable would be that applicable to public listed companies rather than a banking company. 7. The ITAT by Order dated 19-7-2005 (ITAT Order) dismissed the Income Tax Departments Appeal as being without merit after hearing the concerned parties and upheld the CIT(A) Order.
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8. The Income Tax Department since it did not agree with the ITAT Order filed Reference Application under section 133 of the 2001 Ordinance and raised the question of law as alluded to above i.e, "Whether under the facts and in the circumstances of this case, the learned ITAT was justified to hold that investment banks are public limited companies and not the banking company within the purview of section 2(10) of the Income Tax Ordinance, 1979 read with section 5(b) and (c) Banking Companies Ordinance, 1962" 9. Learned Counsel for the Income Tax Department drew the Court's attention to section 2(7) of the 2001 Ordinance which defined a banking company as under: "banking company" means a banking company as defined in the Banking Companies Ordinance 1962 (LVII 1962) and includes any body corporate which transacts the business of banking in Pakistan." 10. At this stage it is relevant to note that in the 1979 Ordinance (under which ITRA 227/06 which is the lead reference which is now under consideration) at section 2(10) a banking company was defined as having, "the same meaning as in the Banking Companies Ordinance, 1962 (LVII of 1962) and includes any body corporate formed by, or under, any law for the time being in force which transacts the business of banking in Pakistan" (Interestingly ITRA 531/06 does not mention the relevant section of any Income Tax Ordinance whilst ITRA 564/09 mentions section 2(7) of the 2001 Ordinance). 11. As can be seen in the 2001 Ordinance definition of a Banking Company at section 2(7) differed from the 1979 Ordinance definition at section 10(2) in so far as it omitted the words, "formed by, or under, any law for the time being in force" (bold added) 12. Perhaps this omission by Parliament was to add greater clarity to the section and make it absolutely clear that 2001 Ordinance was only to apply to companies carrying out the business of banking however so formed. 13. Learned Counsel for the Department then referred to section 5(b) and (c) of the Banking Companies Ordinance, 1962 (BCO) and submitted that when all 3 definitions were read together i.e, section 2(7) of the 2001 Ordinance and section 5(b) and (c) of the BCO it was evident that an investment bank was carrying out the business of banking especially as it was taking huge deposits from the public for investment purposes and later on returning the same and as such under section 2(7) of the Ordinance an investment bank was encompassed as a banking company and should be treated accordingly for taxation purposes as opposed to an investment finance company. 14. He also stressed that investment banks were licensed by the State Bank of Pakistan (SBP) which was the supervisory and regulatory body for banks in Pakistan and since investment banks were required to be licensed by the SBP it followed that they were banking companies. 15. He further placed reliance on 1999 PTD (Trib.) 2949 before the Income Tax Appellate Tribunal (Lahore Bench) Lahore to stress that the use of the word "otherwise" as used in section 5(b) of the BCO brought an Investment Bank on account of its functions within the ambit of conducting the business of banking and thus being a banking company for the purposes of section 2(7) of the Ordinance. 16. On the other hand learned Counsel for the investment banks argued that investment banks were not banks which fell within the definition of section 2(7) of the 2001 Ordinance and instead were to be regarded as Financial Institutions as per section 24 of the 2001 Ordinance where they had been separately defined. 17. Section 24 of the 2001 Ordinance reads as under: "Financial Institution means an Institution [as defined' by the Companies Ordinance [1984 XLVII of 1984]
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18. He further contended that investment banks did not carry out the business of banking. Such submission was largely based on the doctrine of the interpretation of Statutes. According to him when interpretation of technical words was required in a Statute such as business of banking as used in the BCO the technical definition of business of banking was applicable as opposed to its ordinary dictionary meaning. In this connection he placed reliance on Noon Sugar Mills Ltd. v. CIT Rawalpindi PLD 1990 SC 1156 = 1990 PTD 768 = 1990 MLD 1977. Hirjana & Co. 'Pakistan) Limited v. Commissioner of Sales Tax 1971 SCMR 128, Abdul Hammeed v. Secretary Government of Balochistan PLD 1996 Quetta 21. 19. He also argued that when the language of a statute was clear and unambiguous there was no room for intendment and in this case the definition of Banking Company as per section 2(7) of the 2001 Ordinance the language was clear and unambiguous and did not require any discussion about what the legislature actually intended. 20. In his submission the definition clause of a banking company under section 2(10) of the 1979 Ordinance broke into two limbs both of which contained unambiguous language which provided that, a) Banking Company has the same meaning as defined in Banking Company Ordinance, 1962. b) Only those bodies corporate that are formed by or under any law and transact the business of banking in Pakistan. 21. At this point it would seem apparent that the learned counsel for the respondents through the use of the words, "are formed by or under any law and was basing his arguments on the definition of a Banking Company provided in section 2(10) of the 1979 Ordinance as opposed to the 2001 Ordinance especially as he had provided the Court with written submissions to this effect on which he based his arguments which were in respect of ITRA 227/06 which reference was currently under consideration. 22. He further emphasized that banking is a licensed business in Pakistan and without the permission of State Bank of Pakistan no person can indulge in this business. The investment banks were given license to carry out activities other then banking business as per Para 5(xx) of SRO No,585(I)/87 dated 13.7.1987. 23. He also submitted that the intention of the legislature was clear and unambiguous as was evident from the following provisions contained in the 1979 Ordinance and the later promulgated 2001 Ordinance, wherein the terms banking companies and financial institution have been used in contradistinction to show them as independent and separate entities: Income Tax Ordinance, 1979 1. Section 12(8) 2. Section 23(1)(via) 3. Section 50(2A) 4. Clause (79A) Part-I of the Second Schedule 5. Clause (3) of Part-IV of the Second Schedule 6. Rule (1) of the Third Schedule 7. Rule 5(1) of the Third Schedule 8. 2nd Proviso Rule 8(5) of the Third Schedule Income Tax Ordinance, 2001 1. Section 2(1A) 2. Section 28(1)(b) 3. Section 29 (1)(a)(ii) 4. Section 39(3) 5. Section 77(4) 6. Section 106(1) 7. Section 151 (1)(b)
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8. Section 151 (1)(b) 9. Section 153(5)(c) 10. Clause 81, Part-I of the Second Schedule 24. With regard to the words body corporate by and under any law, learned counsel argued that investment banks were not statutory bodies formed by or under any law. They are ordinary companies registered under the Companies Ordinance, 1984 and were given the status of Investment Finance Companies under SRO 585(1)/87 dated 13.7.1987 issued under subsections (4) and (4A) of section 3 of the Capital Issues (Continuance of Control) Act, 1947 (XXIX of 1947). 25. He placed reliance in this respect on CIT v. Lahore Cantt., Cooperative Housing Society, Lahore 2009 SCMR 715, CIT V. Engineering Corporative Housing Society, Lahore. 2000 PTD 3388, CIT v. Spring Field Secondary School, Kyc 2003 PTD 1264 (Karachi High Court), Padamprashad Ratan Chand v. CIT (1954) 25 ITR-335, Queen v. Registrar of Joint Stock Companies (1891) 2QB 594, Elve v. Baylan (1891) 1 CH 501, Smith Davidson v. Mayrtle (1896 CH 590),United Dairies Lond Ltd. v. Beekemham Corporation (1963 1 QB 434) and the learned Income Tax Appellate Tribunal in its judgment reported as 1998 PTD (Trib.) 2017 26. Finally he drew the Court's attention to a letter dated 8-12-2005 from the CBR through its Commissioner Legal Division, Large Tax Payers Unit Lahore to its counsel requesting him to withdraw the Appeals before the Hon'ble Lahore High Court whereby the CBR had raised the same question of law as in these ITRA's. His contention was that the CBR had already conceded through its withdrawal of the Appeals in Lahore that investment finance companies were not banking companies. 27. We have heard this case at length and carefully considered the documents on file (including written submissions), the relevant law and oral submissions by learned counsel and the case law cited by them at the bar. 28. As the ITRA being considered was subject to the 1979 Ordinance and the proceedings thereunder were saved by section 239 of the 2001 Ordinance we shall initially proceed by considering section 2(10) of the 1979 Ordinance which seems to have defined a banking company in wider terms than section 2(7) of the 2001 Ordinance and thereafter consider section 2(7) if still considered necessary. 29. The hub of the issue seems to us whether an investment bank comes within the meaning of a banking company which carries on the business of banking so as to be treated as a banking company as defined in the 1979 Ordinance so as to bring it within the ambit of that Ordinance and be taxed as a banking company as opposed to a financial investment company. 30. The starting point therefore is section 2(10) of the 1979 Ordinance which reads as under: "10. "Banking company" has the same meaning as in the Banking Companies Ordinance, 1962 (LVII of 1962) and includes any body corporate formed by, or under, any law for the time being in force which transacts the business of banking in Pakistan." (as mentioned earlier these bolded words have since been omitted from the 2001 Ordinance) 31. A banking company under the BCO is defined under section 5(c) as under: (c) "banking company" means any company which transacts the business of banking in Pakistan; [and includes their branches and subsidiaries functioning outside Pakistan of banking companies incorporated in Pakistan]." (bold added) 32. This leads to the crucial question of what is the business of banking. In this regard section 5(b) gives us a strong indication by providing that: ' Section 5(b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and with drawable by cheque, draft, order or otherwise;(bold added)
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33. In terms of statutory interpretation plain words are to be given there ordinary meaning and if they are clear and unambiguous are to be applied as such. In such cases there is no need to interpret the same in order to discover the intent of the legislature. 34. In this respect reliance is placed on the case of Justice Khurshid Anwar Bhinder v. Federation of Pakistan (PLD 2010 SC 483) which a larger Bench of the Hon'ble Supreme Court found as under at P.531 in respect of the interpretation of statutes. "A fundamental principle of constitutional construction has always been to give effect to the intent of the framers of the organic law and of the people adopting it. As has been aptly observed The pole star in the construction of a Constitution is the intention of its makers and adopters, When the language of the statute is not only plain but admits of but one meaning, the task of interpretation can hardly be said to arise. It is not allowable to interpret what has no need of interpretation. Such language best declares, without more, the intention of the lawgivers, and is decisive of it. The rule of construction is "to intend the Legislature to have meant .What they have actually expressed". It matters not, in such a case, what the consequences may be. Therefore, if the meaning of the language used in' the statute is unambiguous and is in accord with justice and convenience, the courts cannot busy themselves with supposed intentions, however admirable the same may be, because, in that event they would be traveling beyond their province and legislating for themselves. But if the context of the provision itself shows that the meaning intended was somewhat less than the words plainly seem to mean then the court must interpret that language in accordance with the indication of the intention of the Legislature so plainly given. The first and primary rule of construction is that the intention of the Legislature must be found in the words used by the Legislature itself. If the words used are capable of one construction only then it would not be open to the courts to adopt any other hypothetical construction on the ground that such hypothetical construction is more consistent with the alleged object and policy of the Act. The judicial consensus seems to be that the essence of law lies in its spirit, not in its letter, for the letter is significant only as being the external manifestation of the intention that underlies it, Nevertheless in all ordinary cases the courts must be content to accept the litera legis as the exclusive and conclusive evidence of the sententia legis. They must, in general, take it absolutely, for granted that the Legislature has said what it meant, and meant what it has said. Its scriptures is the first principle of / interpretation. Judges are not a liberty to add to or take from or modify the letter of the law simply because they have reason to believe that the true sententia legis is not completely or correctly expressed by it. That is to say, in all ordinary cases grammatical interpretation is the sole form allowable." (bold added) 35. Apart from the word "otherwise" it would appear that the rest of the language in section 5(b) is clear and unambiguous and does not require interpretation. 36. If the word or "otherwise" had not been used it would appear prima facie that if we were to take section 5(b) BCO as the business of banking this would be relatively clear and unambiguous. However the word "otherwise" tends to create a degree of uncertainty as "otherwise" could potentially mean anything connected with the words that followed and as such some interpretation of the word "otherwise" is required especially as learned Counsel for the Department stressed that it was this word that brought an investment bank within the purview of a banking company for the purposes of the 2001 Ordinance. 37. Further clarification on what actually is the business of banking through use of the word "otherwise" could be sought from section 7 BCO which sets out the forms of business which a bank may engage in. It may therefore follow that if a company carries out forms of business which are not covered by section 7 it may not be conducting the business of banking and would not fall within the definition of a banking company or if considered to be a banking company was acting in violation of section 7.
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38. Section 7 reads as under: BUSINESS OF BANKING COMPANIES 7. Forms of business in which banking companies may engage. (1) In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely:--(bold added) (a) the borrowing, raising or taking up of money; the lending or advancing of money either upon or without security; the drawing making accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundis, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips [participation term certificate, term finance certificates, musharika certificates, modaraba certificates and such other instruments as may be approved by the State Bank] and other instruments. And securities whether transferable negotiable or not; the granting and issuing of letters of credit, traveler's cheques and circular notes; the buying, selling and dealing in bullion and species; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities, [participation term certificates, term finance certificates, musharika certificates, modaraba certificates and such other instruments as may be approved by the State Bank] and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities [participation term certificates, term finance certificates, musharika certificates, modaraba certificates and such other instruments as may be approved by the State Bank] on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities; (aa) the providing of finance as defined in the Banking Tribunals Ordinance, 1984;] (b) acting as agents for any Government or local authority or any other person or persons; the carrying on of agency, business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a managing agent or treasurer of a company; (bb) acting as "modaraba company" under the provisions of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980);] (c) contracting for public and private loans and negotiating and issuing the same; (d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public, Government, municipal or other loans or of shares, stock, debentures, [debenture stock or other securities] or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue; (f) carrying on and transacting every kind of guarantee and indemnity business; (ee) purchase or acquisition in the normal course of its banking business of any property, including commodities, patents, designs, trade marks and copyrights, with or without buyback arrangements by the sellers or for sale in the form of hire-purchase or on deferred payment basis with mark-up or for leasing or licensing or for re-sharing or for any other mode of financing]; (f) managing, selling and realizing any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims; (g) acquiring and holding and generally dealing with any property or any…
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