I. T. C. No. 228 of 2003
&
I. T. C. No. 229 of 2003
Present
Mr. Justice Aqeel Ahmed Abbasi
Mr. Justice Arshad Hussain Khan
Date of hearing : 23.11.2017
Date of order : 23.11.2017
Applicant : M/s. Habib Insurance
Company Limited
through
Mr. Ammar Athar Saeed,
Advocate.
Respondent : Commissioner of Income
Tax, Circle A-01 Companies III, Karachi & another
through
Dr. Shahnawaz Memon,
Advocate.
O R D E R
AQEEL AHMED ABBASI, J:- After hearing the learned counsel for the parties in detail, both the Reference Applications were allowed vide our short Order dated 23.11.2017 in the following terms:-
“The aforesaid reference applications have been filed by applicant against combined impugned order dated 13.11.2002, passed by the Income Tax Appellate Tribunal of Pakistan (Karachi) in ITA No.1073/KB/DB 2000-2001 (Assessment year 1999-2000) and ITA No.1375/KB 2002 (Assessment year 2000-2001), wherein following common Questions, which according to learned counsel for the applicant are Questions of Law arising from the order of the Appellate Tribunal:-
1) Whether on the facts and circumstances of the case, the Hon’ble Income Tax Appellate Tribunal was justified in rejecting the condonation order issued by controller of insurance under the proviso to section 40-C(1) of the Insurance Act, 1938 on the ground that the amount condoned was not specifically mentioned in the Condonation order?
2) Whether on the facts and circumstances of the case, the Hon’ble Income Tax Appellate Tribunal correctly interpreted the proviso to section 40-C(1) of the Insurance Act, 1938 and held that excess expenditure did not stand condoned in terms of the proviso of section 40-C(1) of the Insurance Act, 1938?
We have heard learned counsel for the parties, perused the impugned order passed by the learned Appellate Tribunal as well as two authorities below, gone through the record with their assistance, and have also examined relevant provisions of law as well as the case law, relied upon by both the learned counsel for the parties.
For the reasons, to be recorded later on, instant reference applications are allowed, and accordingly, the questions proposed hereinabove are answered in Negative, in favour of the applicant and against the respondents.”
2. Learned counsel for the applicant has vehemently contended that the Income Tax Appellate Tribunal of Pakistan (Karachi) has erred in law and fact, while dismissing the appeal filed by the applicant by rejecting the condonation order, issued by the Controller of Insurance under Section 40-C (1) of the Insurance Act, 1938, on the pretext that since the amount of excess management expenses was not specified, therefore, its condonation by the Controller of Insurance was not justified. It has been contended by the learned counsel for the applicant that the Appellate Tribunal has misconstrued the provision of Section 40-C(1) of the Insurance Act, 1938 as well as the provisions of sub-rule (c) of Rule 5 of the 4th Schedule to the Income Tax Ordinance, 1979, which provides that the Controller of Insurance has the authority to condone any contravention of sub-section (1) of Section 40-C by insurer, who has reasonable grounds to explain that such expenses an amount of excess management of such limits, whereas, the income tax authorities cannot dispute such condonation of excess amount of management expenses by Controller of Insurance. Learned counsel for the applicant further argued, while computing income in respect of the insurance business is separate mechanism has been provided in terms of Rule 5 of the 4th Schedule to the Income Tax Ordinance, 1979, whereas, the tax authorities are bound to accept the accounts approved by the Controller of Insurance. Per learned counsel, there is no limit of expenditure is provided under the income tax law. On the contrary, such limit in respect of management expenses has been provided under the Insurance Act, 1938 and in view of Section 40-C(1) of the Insurance Act, 1938, the Controller of Insurance has the authority to condone the amount of excess amount of management expenses, if the insurance company offer reasonable explanation in this regard. Per learned counsel, similar controversy came up for consideration before the Hon’ble Supreme Court in the case of Commissioner of Income Tax, Central, Karachi v. Messrs Alpha Insurance Co. Ltd and another [PLD 1981 SC 293], wherein, the Hon’ble Supreme Court has been pleased to decide the subject controversy in favour of the taxpayer against the revenue. Further reliance has been placed by the learned counsel for the applicant in the case of Commissioner (Legal), Inland Revenue v. Messrs EFU General Insurance Ltd. [2011 PTD 2042]. It has been further contended by the learned counsel for the applicant that in case of any ambiguity within the provisions of Statute, the same is to be resolved in favour of the subject i.e. taxpayer against the revenue. In support of his submissions, learned counsel for the applicant has placed reliance the case of Chairman, Federal Board of Revenue, Islamabad v. Messrs Al-Technique Corporation of Pakistan Ltd and others [PLD 2017 SC 99], Commissioner of Income Tax and another v. Balochistan Concrete and Block Works Ltd and others [2017 SCMR 1] and Messrs Multan Electric Power Co. Limited (MEPCO) v. Commissioner, Inland Revenue (WHT), RTO, Multan & another [2016 PTD 2567]. It has been prayed that the questions proposed hereinabove, may be answered in favour of the applicant and against the respondents and the impugned order passed by the Appellate Tribunal may be set-aside.
3. Conversely, learned counsel for the respondent supported the order passed by the Appellate Tribunal in the instant case, submitted that in the absence of any amount specified towards excess management expenses, the same cannot be allowed by the tax authorities in view of sub-rule (c) to Rule 5 of the 4th Schedule of the Income Tax Ordinance, 1979. It has been contended by the learned counsel for the respondent that in view of insertion of sub-rule (c) of Rule 5 to Finance Act, 1999, Income Tax Officer was not authorized to allow such expenditure in excess of the prescribed limit in terms of Section 40-C(1) of the Insurance Act, 1938, therefore, Income Tax Appellate Tribunal was justified, while dismissing the appeal of the applicant. It has been prayed that the questions proposed may be answered in “Affirmative” against the applicant and in favour of the respondent and both the reference applications may be dismissed.
4. I have heard the learned counsel for the parties, perused the record and relevant provisions of law with their assistance and also examined the case law relied upon by the learned counsel in support of their contention. It is an admitted fact that the applicant’s claim of management expenses was in excess of the prescribed limit under the Insurance Act, 1938 for the relevant tax year. However, the applicant has sought condonation of entire expenses in excess of the prescribed limit in terms of proviso to Section 40-C(1) of the Insurance Act, 1938, in writing, whereas, such request of the applicant was duly considered by the Controller of Insurance, who after examining the reasons given by the applicant for seeking such condonation, was pleased to condone the entire expenses in excess of prescribed limit, in writing in the following terms:-
“The General Manager,
Habib Insurance Company Limited,
Habib Square,
Ist Floor, State Life Building No.6,
M.A. Jinnah Road,
Karachi.
Sub: CONDONATION OF MANAGEMENT EXPENSES IN EXCESS OF THE PRESCRIBED LIMIT FOR THE YEAR 1998:
Dear Sir,
Reference M/s. Habib Insurance Company Limited’s letter dated 24th August, 2002, on the subject.
2. It is to inform you that the then Controller of Insurance, in exercise of the powers conferred under the provision to Section 40-C(1) of the Insurance Act, 1938 had condoned the entire management expense exceeding the prescribed limit of the Company for the year 1998, as reflected by the audited accounts for the said year.
Yours truly,
(Muhammad Reyazuddin)
Assistant Director.”
5. It may be noted that the Controller of Insurance, while condoning the management expenses in excess of the prescribed limit has made reference to the amount as reflected in the audited accounts of the applicant insurance company, which shows that the excess amount was specified in the audited account submitted by the insurance company to the Controller of Insurance, therefore, the arguments made by the learned counsel for the respondent to the effect that since the amount was not specified, hence, the same could not be condoned, is misconceived in fact and law.
6. From perusal of the provisions of Section 40-C(1) of the Insurance Act, 1938, it is clear that the authority to condone the excess amount of management expenses vests in the Controller of Insurance, whereas, the income tax authorities have no authority to dispute such legal position. Similarly, from perusal of provisions of sub-rule (c) of Rule 5 of the 4th Schedule to the Income Tax Ordinance, 1979, it is clear that the tax authorities cannot allow deduction of any expenditure, allowance, reserves or provision in excess of limits as prescribed in the Insurance Act, 1938. This restriction reflects upon the clear intention of the legislature that once the accounts submitted by a General Insurance Company, if approved by the Controller of Insurance, including the condonation of excess management expenses in terms of Section 40-C (1) of the Insurance Act, 1938, cannot be interfered with by the tax authorities in view of provisions of Rule 5 of the 4th Schedule to the Income Tax Ordinance, 1979, which provides for its own mechanism to compute the profits and gains as per accounts approved by Controller of Insurance, in the case of a General Insurance Company. In the case of Commissioner of Income Tax, Central, Karachi v. Messrs Alpha Insurance Co. Ltd and another [PLD 1981 SC 293], the Hon’ble Supreme Court has dealt with similar situation in the following terms:-
9. What clearly emerges from section 40-C is that there is a prohibition against exceeding the management expenses. The prohibition is not, however, absolute, irremediable, or punitive in all cases. On the contrary, it appears from the language of the proviso itself that it is a regulatory supervisory and corrective power exercisable by the Controller of Insurance. The other feature of this provision of law is that it is a mandatory requirement that “all expenses of management wherever incurred, whether directly or indirectly” must be “fully debited in the revenue account as expenses”. Thus the annual statement of account, the balance-sheet and the profit and loss account must reflect fully and correctly, uncontrolled by any limitations prescribed under the Insurance Act all the expenses of management including there exceeding the ceiling. They have to be treated as a part of the account and the balance-sheet for all purposes and in fact form the jurisdictional basis for the Controller of Insurance for either condoning it or penalizing it. The certificate of the Chairman two directors and the principal officer of the insurer and an auditor’s certificate “certifying that all expenses of management wherever incurred, whether directly or indirectly” in respect of general insurance “ have been fully debited in the revenue account as expenses” is to be incorporated in the revenue account.
10. The jurisdiction of the Income-tax Officer under rule 6 of the First Schedule to the Income-tax Act is confined to the taking of the profits and gains of any business of insurance other than life insurance” to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938 to be furnished to the Controller of Insurance”. This presents the Assessing Authority with a fait accompli, over which he exercises no control. If the law requires such excess to be excluded from the balance-sheet the Assessing Authority cannot reintroduce it. If the law, as in these cases requires such expenses to be included in the balance-sheet, the Assessing Authority cannot exclude it on any principle not made a part of the First Schedule to the Income-tax Act. This brings us back to the starting point, namely, that the Income-tax Officer has “no power to do anything not contained in the First Schedule to the Income-tax Act.
14. Our conclusions therefore are that:
(i) the rules contained in the First Schedule to the Income-tax Act completely, exhaustively and to the exclusion of every other provision not expressly incorporated, govern the computation of the Profits and Gains of insurance business,
(ii) the power of the Assessing Authority under rule 6 of the First Schedule to the Income-tax Act does not, like rule 2 of the same Schedule, or on the strength of section 40-C of the Insurance Act or rule 40 of the Insurance Rules, extend to disallowance of the excess management expense,
(iii) the power of the Assessing Authority under first part of rule 6 (ibid) to readjust the balance of the profits disclosed by the annual accounts required to be furnished under the Insurance Act, 1938 is restricted to “exclude from it any expenditure, other than expenditure” which may under the provisions of section 10 of the Income-tax Act be allowed for in computing the profits and gains of a business. The Assessing Authority has to apply an independent mind uncontrolled by Insurance Act to arrive at such a re-adjustment,
(iv) the expense of management incurred in excess of the limit prescribed under section 40-C of the Insurance Act and rule 40 of the Insurance rules are not in the nature of penalty, fine or forfeiture for the purposes of their admissibility for deduction as business expenses under section 10 of the Income-tax Act.
7. It is pertinent to note that by insertion of sub-rule (c) of Rule 5 of the 4th Schedule to the Income Tax Ordinance, 1979, the legal position with regard to authority of taxation officer in respect of audited account duly approved by the Controller of Insurance, in respect of insurance company, does not change, therefore, the taxation officer is not authorized to interfere with the audited accounts duly approved by the Controller of Insurance in the case of General Insurance Company. It further emerges that the expenditure in excess of limits prescribed under Insurance Act, in respect of management expenses in the case of General insurance company, as referred to sub-rule (c) of Rule 5 of the 4th Schedule to the Income Tax Ordinance, 1979, includes the excess amount, which has been duly considered and condoned by the Controller of Insurance. We are of the opinion that any other interpretation of the provisions of Section 40-C(1) of the Insurance Act, 1938 and sub-rule (c) of Rule 5 of 4th Schedule to the Income Tax Ordinance, 1979 would frustrate the intention of legislation, which provides for specialized mechanism for the purposes of determining the profit and gains as well as the tax liability in the case of insurance business in terms of Rule 5 of the 4th Schedule to the Income Tax Ordinance, 1979.
8. In view of hereinabove facts and circumstances of the case, and by respectfully following the judgment of the Hon’ble Supreme Court as referred to hereinabove, we are of the opinion that the Income Tax Appellate Tribunal of Pakistan, Karachi was not justified to dismiss the appeal of the applicant by holding that since the excess management expenses were not specified, therefore, the same could not be allowed as deduction in terms of sub-rule (c) of Rule 5 of the 4th Schedule to the Income Tax Ordinance, 1979. Accordingly, impugned order passed by the Appellate Tribunal of Pakistan, Karachi in the instant case was set-aside and the reference filed by the applicant was allowed in terms of short order dated 23.11.2017, while answering the proposed questions in “Negative” in favour of the applicant and against the respondent, and these are the reasons for such short order.
J U D G E
J U D G E
A.S.