I.T.R.As No.158 to 160 Of 2010
Date of hearing : 15.04.2011.
Applicant through : Mr. Kafeel Ahmed Abbasi, Advocate.
IRFAN SAADAT KHAN, J: On 15.04.2011, vide our short order, we have dismissed the present Income Tax Reference Applications (ITRAs) by observing as under:-
These reference applications have been filed against the common order of the Tribunal dated 24.10.2009 in ITA No.643 to 645/KB/2008, whereby the following common questions said to have arisen from the order of the Tribunal have been proposed for the opinion of this Court.
i) Whether under the facts and circumstances of the case, the learned Tribunal was justified to uphold the order of the Commissioner (Appeals) annulling the order under Section 122(5A) without giving its own reasons, as required under Section 24A of the General Clauses Act, 1897?
ii) Whether under the facts and circumstances of the case, the learned Tribunal was justified in upholding the order of the Commissioner (Appeals) relying upon the concept of single basket income to annul the order, when insertion of Rule 5A in the fourth Schedule has itself done away with the concept of single basket income, by extending exemption to capital gains from sale of shares?
iii) Whether under the facts and circumstances of the case, the learned Tribunal was justified in upholding the order of the Commissioner (Appeals) which has relied upon the erroneous concept that fourth Schedule does not sanction application of Section 67 of the Income Tax Ordinance, 2001; whereas section 99 of the Ordinance is not a non-obstante clause?
iv) Whether under the facts and circumstances of the case, the learned Tribunal was justified to uphold the order of the Commissioner (Appeals) annulling the order under Section 122(5A), without considering the provisions of Section 67 read with Sections 7 and 8 of the Ordinance?
We have heard Mr. Kafeel Ahmad Abbasi, the learned Counsel for the Appellant and Mr. Arshad Siraj Memon, learned Counsel for the Respondent.
Mr. Kafeel Ahmad Abbasi has initially taken us to the provisions of Section 3 of the Income Tax Ordinance 2001 to point out that the provisions of this Ordinance override the other laws and shall apply notwithstanding anything contrary contained in any other law for the time being in force. He then took us to the provisions of Section 99 of the Ordinance 2001 and compared it with the provisions of Section 26-A of the Income Tax Ordinance 1979 and pointed out that whereas Section 26-A starts with a non-obstante clause, no such non-obstante clause has been provided under Section 99 and according to the learned Counsel this is a very significant exclusion and means that besides the provisions of fourth Schedule, which is provided by Section 99 for the computation of the profit and gains of the Insurance Company all other provisions including the provisions of Section 67 of the Ordinance shall apply for computation of the profit and gains of the business of Insurance Company. The learned counsel then compared the provisions of fourth Schedule of the 1979 Ordinance to the provisions of fourth Schedule of Ordinance 2001 and pointed out that there was Rule 8 in the 1979 Ordinance, which provided that the provisions of the Schedule shall apply notwithstanding anything contained in this Ordinance and provisions of any other law for the time being in force and this clause is also conspicuous by its absence in the fourth Schedule of the 2001 Ordinance and this exclusion leads to the conclusion that the fourth Schedule of 2001 Ordinance will not apply exclusively that the other provisions of the Ordinance can also apply. He further submitted that where there is a deviation from the earlier law it signifies that the legislature has a definite intention to deviate from the earlier law and according to the deviation pointed out above leads to the conclusion that the taxability of the profit and gains of the Insurance Company is not exclusively to be computed in accordance with the provisions of the fourth Schedule but the other provisions of the Ordinance can also be applied. He, therefore, prayed that his appeal may be allowed and the questions may be answered in his favour.
Mr. Arshad Siraj Memon, learned Counsel for the Respondents strongly opposed the arguments of the learned Counsel for the Appellant and supported the order of the Tribunal. He submitted that there is no material and significant difference between the provisions of the 2001 Ordinance and the provisions of Ordinance 1979 as regards the taxability of profits and gains of an Insurance Company and submitted that the word ‘notwithstanding’ may not have been included in Section 99 because of the earlier judgment of the Honourable Supreme Court of Pakistan holding that for the purposes of computing the tax on the profit and gains of an Insurance Company First Schedule has to be applied. As far as the provisions of Rule 8 of Schedule fourth of the Ordinance 1979 are concerned he submitted that the question of application of the provisions of the other laws is para materia with Section 3 of the Ordinance 2001 and Section 3 has now been incorporated in the Ordinance to extend the non-applicability of the other laws in respect of the entire Ordinance and not in respect of fourth Schedule only. He submits that Rule 5 of the fourth Schedule, which is the provisions which provides for the computation of the profit and gains of the Insurance Company is the same in both the Ordinances except that it has been modified to include certain other disallowances, which were not provided under Section 24 of the 1979 Ordinance, which provided for various disallowances while computing the business income. He conceded that all the allowances, which are not allowable under section 21 of the Ordinance, will not be allowed for computation of the profit and loss of Insurance Company as it has been specifically provided in Rule 5. He then referred to Rule 9 of seventh Schedule, which has been incorporated in accordance with Section 100-A of the 2001 Ordinance for providing specific procedure for computation of profit and gains of the Banking Company. He pointed out that this Schedule provides for the computation of profit and gains of the Banking Company and Rule 9 has been specifically incorporated to provide for the applicability of the provisions of the Ordinance, which have not specifically been dealt in the rules and applied them mutatis mutandis to the Banking Company. The learned Counsel then referred to Rule 6-A of the fourth Schedule of Income Tax Ordinance 2001 to point out that although capital gains are exempted from the levy of tax under the second Schedule of the Ordinance also but it has specifically been provided in the Schedule as according to the earlier judgments of the Honourable Supreme Court the provisions of second Schedule does not apply to the Insurance Company. He filed a comparison statement of Rule 6-A with the clauses under second Schedule to the Income Tax Ordinance 2001 under which capital gains on sale of shares are exempt and pointed out that under Clause 6-A the exemption has been granted to capital gains being income on sale of shares while computing income under this Schedule whereas income exempted under clause 110 is under the head ‘capital gains’. The learned Counsel submitted that the computation of income under profit and gains of Insurance Company under fourth Schedule is a special law and it is a trite law that Special law prevails over the general law. On this point, he relied on following judgments:-
1. 2004 SCMR 130 – FEDERAL BANK FOR COOPERATIVES, ISLAMABAD versus AHSAN MUHAMMAD (Relevant Page 134[D])
2. 1993 SCMR 1635 – GODELN ORPHIES (Pvt.) LTD versus DIRECTOR OF VIGILANCE, CENTRAL EXCISE, CUSTOMS AND SWALES TAX
3. A.P. MOLLER versus TAXATION OFFICER OF INCOME TAX, AUDIT V (ITRA NO.2050/2007 & Others)
The learned counsel then read out Section 67 of the Income Tax Ordinance 2001 and pointed out that by its very wordings Section 67 does not apply to the fourth Schedule because it provides initially that it is subject to this Ordinance and since fourth Schedule, which provides for computation of profits and gains and Section 99 are part of the Ordinance and Section 99 provides that the profit and gains of an insurance company will be taxed in accordance with the provisions of fourth schedule in which no mention is made of applicability of Section 67, therefore, Section 67 will not apply. In this connection he once again relied on the unreported judgment of this Court in A.P. Moller’s case quoted supra.
The final ground argued by the learned Counsel was that no material change has been made in the scheme for the computation of the profit and gains of the Insurance Company under the 1979 Ordinance by the 2001 Ordinance and there is no deviation and, therefore, the old judgments will continue to apply. In this connection he relied on the following judgments, which have been passed by the Honourable Supreme Court on the basis of fourth Schedule of the repealed Ordinance.
1. 1991 SCMR 2485 - COMMISSIONER OF INCOME-TAX, CENTRAL ZONE, ‘A’ KARACHI versus Messrs PHOENIX ASSURANCE CO. LTD.
2. 1997 PTD 1693 – Messrs E.F.U. GENERAL INSURANCE CO. LIMITED versus THE FEDERATION OF PAKISTAN and others
3. [(1993) 68 TAX 86 S.C. Pak)] – CENTRAL INSURANCE CO. AND OTHERS versus CENTRAL BOARD OF REVENUE, ISLAMABAD, ETC.
The learned Counsel, therefore, prayed that the appeals may be dismissed and the questions answered in his favour.
We have examined the case in the light of the arguments and for the reasons to follow we answer the questions referred above to us in the following manner:-
(i) We have already decided the question No.1 in a Judgment in I.T.R.A. No.116 of 2010 dated 26.08.2010, whereby we have held that whenever the Tribunal uphold the order of the C.I.T. Appeals by endorsing the reasons given by the C.I.T. (Appeals) for passing such order the case does not fall under Section 24-A. Following the above judgment we answer the Question No.1 in affirmative.
(ii) As far as Questions No.2, 3 and 4 are concerned, as stated above, for the reasons to follow we answer the questions in affirmative in favour of the Respondent and against the Appellant and, therefore, these Reference Applications are dismissed in limine.
2. Briefly stated the facts of the case are that the respondent is a Public Limited Company engaged in the business of General Insurance. The returns of total income for the Tax Years 2005, 2006 and 2007 were filed by declaring income of Rs.425,411,502/-, Rs.332,160,644/- and Rs.240,147,792/-, respectively. The respondent derives income from the following sources:
a) Net premium revenue
b) Investment income
c) Rental income
d) Profit on sale of assets
e) Exchange rate difference
3. The returns filed by the respondent were considered deemed assessments under the provisions of section 120 of the Income Tax Ordinance, 2001, (the Ordinance). Thereafter record of the cases were examined and the department came to the conclusion that the assessments so framed were erroneous insofar prejudicial to the interest of revenue, hence, the respondent was intimated under the provisions of section 122(9) of the Ordinance as to why the assessments may not be amended under the provisions of section 122(5A) of the Ordinance. Detailed reasons were thereafter communicated to the respondent for reopening the cases vide letter dated 18.12.2007 which were duly complied with by the counsel of the respondent vide his letters dated 12.01.2008 and 28.01.2008 by explaining that the issues on the basis of which the department proposes to reopen the cases were not in accordance with law and submitted that income of the assessee/respondent may be accepted as declared in their returns of total income. The Taxation Officer (T.O.) thereafter rejected the contentions raised by the respondent and finalized the assessments of all the three years under consideration on 31.01.2008, at the incomes of Rs.433,974,937/-, Rs.367,052,561/- and Rs.303,354,658/-, respectively.
4. Being aggrieved with the above orders appeals thereafter were filed before the Commissioner of Income Tax [CIT(A)] who vide his order dated 28.06.2008 allowed the appeals by observing as under:
I have carefully considered the rival arguments, the case record and the case law and provisions of the Income Tax Ordinance 2001. I agree with the arguments of the learned AR of the3 appellant that ratios of decision of Hon’ble Superior Courts in case of Insurance companies still hold the field on issue of income being treated s one unit/one basket. The Hon’ble High Court at Karachi in case recent reported as (2003) 88 TAX 235 has discussed various case decision cited above has held that in case of insurance companies, the assessing officer has to compute profit and gain and tax payable under the Fourth Schedule of the Income Tax Ordinance 1979(R) and the jurisdiction of the assessing officer is not extended to any other provision contained in the ordinance until and unless included in the Fourth Schedule itself. The said decision of Hon’ble High Court is binding on me. I note that the Clause 6A of Fourth Schedule of IT Ord. 2001 starts with the words “ In computing income under the schedule, …..”, hence even after introduction of clause 6A in Fourth Schedule the ratio of the decision still holds the field as the said clause 6A mandates that income be computed under the said Fourth Schedule.
As per Clause 6A in Fourth Schedule to IT Ord 2001 has done is to extend the exemption that was available to other tax payer under clause 110 of Part 1 of Second Schedule to I.T. Ord., 2001 to insurance companies. This was also clarified by CBR vide Circular No. 1 of 2005 . What the clause 6A effective is directing is that while computing income under Fourth Schedule, capital gain on sale of modaraba certificate or any instrument of redeemable capital as defined in the Companies Ordinance 1984 which is listed on stock exchange shall not be included in income under the said Fourth Schedule. It would not be out of place to mention that similar provision i.e. Clause 6A was also introduce vide Finance Suppl (Amendment) Act 1997 in Fourth Schedule to IT Ord 1979 (R) Section 99 of IT Ord 2001 which reads; “Special provision relating to insurance business:-
The profit and gains of any business shall be computed in accordance with rules in the Fourth Schedule” , (underlining provided to emphasis). As is clear form section 99 of IT Ord 2001 the law mandates that profit and gains from insurance business shall be computed as per Fourth Schedule to I.T.Ord 2001 which is self contained. The Fourth Schedule does not sanction application of Section 67 of the Income Tax Ordinance 2001 and Rule 13 to I.T.Rules 2002 relating to prorating expenses allegedly attributable to capital gain and dividend income to profit and gains of Insurance business. The learned AR has also relied on number of decisions of superior Court of Pakistan on interpretation and on Insurance business, the said decisions are binding on me and I respectfully agree with them. Based on the above, I agree with the arguments of the learned AR for the appellant and I hold that income in case insurance companies is to be computed as per Fourth Schedule to I.T.Ord, 2001 and all incomes treated as one basket and specific exemption granted in Fourth Schedule is to be allowed to insurance Companies while computing their profit and gains from Insurance business. As such I hold that on facts and circumstances of the case and Fourth Schedule being self-contained, the Addl. Commissioner was not justified of facts and circumstances of the case and in law to hold that the order passed under section 120 of the Income Tax Ordinance 2001 was erroneous and prejudicial to interest of the revenue. As such the Additional Commissioner was not justified in invoking provision of Sec 122(5A) of the Income Tax Ordinance 2001 and the same being illegal are annulled. Having held that Fourth Schedule in self contained law for computing profit and gains of Insurance business and that all incomes treated as one basket / one unit and specific exemption granted in Fourth Schedule is to be allowed to Insurance Companies while computing their profit and gains from Insurance business and that the Fourth Schedule does not sanction application of Section 67 of the Income Tax Ordinance 2001 and Rule 13 to IT Rules 2002 relating to prorating expenses allegedly attributable to capital gain and dividend income to profit and gains of Insurance business, the alternate argument also stand decided in favor of the appellant.
5. Being aggrieved with the consolidated order passed by the CIT(A), appeals thereafter were filed by the department before the Income Tax Appellate Tribunal (ITAT) which were allotted I.T.A Nos.643 to 645/KB/2008 pertaining to the Tax Years 2005, 2006 and 2007, respectively. The said appeals were heard by the learned ITAT on 17.10.2009 and vide its consolidated order dated 24.10.2009, after reproducing the above order of the CIT(A), dismissed the appeals filed by the department after noting that no infirmity, irregularity, impropriety or illegality in the orders passed by the CIT(A) was found. It is against the said consolidated order passed by the ITAT that the present ITRAs have been filed by raising the questions of law, which have already been reproduced supra.
6. We have heard both the learned counsel at some length and have perused the record and decisions relied upon by them. The contentions of both the learned counsel have quite elaborately been discussed in our short order, which are not repeated here for the sake of brevity.
7. It would be in the fitness of things if the law relied upon by both the learned counsel is first discussed:
SECTION 24 OF THE ORDINANCE, 1979.
24. Deductions not admissible.- Nothing contained in section 23 shall be so construed as to authorize the allowance or deduction of-
(a) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed as a percentage, or otherwise on the basis, of any such profits or gains;
(b) any sum paid to a non-resident on account of interest, fees for technical services, brokerage or commission or any other sum chargeable under the provisions of this Ordinance, unless tax thereon has been paid or deducted and paid under section 50, as the case may be;
(c) any sum paid to any person on account of salary, interest or profit, services rendered, brokerage or commission or rent of house property on which tax is deductible under section 50, unless such tax has been paid or deducted and paid under section 50, as the case may be;
(cc) any expenditure or allowance which results directly or indirectly in the provision of salaries of directors of a domestic company, not being a public company as defined in the First Schedule, which exceeds forty per cent of total income of the company before the charge of such expenditure or allowance:
Provided that the deduction in respect of the aggregate of such expenditure or allowance in respect of any director shall not exceed,-
(i) where such expenditure or allowance relates to a period exceeding eleven months comprised in an income year, the amount three hundred and sixty thousand rupees; and
(ii) where such expenditure or allowance relates to a period not exceeding eleven months comprised in an income year, an amount calculated at the rate of thirty thousand rupees for each month or part thereof comprised in that period:
Provided further that nothing contained in this clause shall apply in respect of any assessment year commencing on or after the first day of July, 1991.
(d) any sum paid, on account of interest, brokerage, commission, salary or other remuneration, by a firm or an association of persons to any partner of the firm or any member of the association of persons, as the case may be;
(e) any expenditure in the nature of head office expenditure, in the case of an assessee, being a nonresident, in excess of such limits as may be prescribed.
Explanation. -As used in this clause, "head office expenditure" means executive and general administration expenditure incurred by the assessee outside Pakistan for the purposes of the business or profession, including expenditure incurred in respect of-
(a) any rent, local rates and taxes(excluding any, foreign tax corresponding to any tax leviable under this Ordinance), current repairs or insurance against risks of damage or destruction of any premises outside Pakistan used for the purposes of the business or profession;
(b) any salary paid to an employee employed by the head office outside Pakistan for the purposes of the business or profession;
(c) any traveling by such employee for the purposes of business or profession; and
(d) such other matters connected with executive and general administration as may be prescribed;
(f) any allowance in respect of expenditure on entertainment in excess of such limits and in contravention of such conditions as may be prescribed;
(ff) any payments, made on or after the first day of July, 1998, on account of expenditure under a single account head which, in aggregate, exceed fifty thousand rupees made otherwise than through a crossed bank cheque or by a crossed bank draft except transactions not exceeding five hundred rupees or payments on account of postage or utility bills.
(fff) Notwithstanding anything contained in clause (ff), any payment made on or after the first day of July, 1998, on account of salary if–
(i) it exceeds five thousand rupees, through a crossed cheque or transfer to the employee's bank account, or
(ii) it does not exceed five thousand rupees, made through a bearer cheque.
(g) any sum paid to any provident fund, superannuation fund or gratuity fund, not being a recognised provident fund, an approved superannuation fund or an approved gratuity fund;
(h) any sum paid to any provident fund or other fund established for the benefit of employees of the assessee, unless the assessee has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are chargeable to tax under the head "Salary";
(i) any expenditure incurred by an assessee on the provision of perquisites, allowances or other benefits to any employee, in excess of fifty percent of his salary excluding perquisites, allowances or other benefits:
Explanation.-As used in this clause-
(i) "salary" means remuneration or compensation for services rendered paid, or to be paid, at regular intervals, and includes dearness or cost of living allowance and bonus or commission payable to an employee in accordance with the terms of his employment as remuneration or compensation for services but does not include the employer's contribution to a recognised provident fund or an approved superannuation or gratuity fund or any other sum which does not enter into the computation for pensionary or retirement benefits;
(ii) "perquisite", "employee", and "employer" have the same meaning as in sub-section (2) of section 16; and
(iii) "other benefits" does not include employer's contribution to a recognised provident fund or an approved superannuation or gratuity fund; or
(j) any expenditure incurred on account of payment of a fine or penalty for the violation of any law or rule or regulation for the time being in force.
SECTION 26 OF THE ORDINANCE, 1979.
26. Special provisions regarding business of insurance and production of oil and natural gas and exploration and extraction of other mineral deposits, etc.-
Notwithstanding anything contained in this Ordinance,-
(a) the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Fourth Schedule;
(b) the profits and gains from the exploration and production of petroleum (including natural gas) and from refineries to be set up at Dhodak and Bobi fields; income of exploration and production companies from pipeline operations, and manufacture and sale of liquefied petroleum gas or compressed natural gas and the tax payable thereon shall be computed in accordance with the rules contained in Part I of the Fifth Schedule:
Provided that nothing in this clause shall apply to the profits and gains attributable to the production of petroleum (including natural gas) which was discovered before the twenty-fourth day of September, 1954; and
(c) the profits and gains of any business which consists of, or includes, the exploration and extraction of such mineral deposits of a wasting nature (not being petroleum and natural gas) as may be specified in this behalf by the Federal Government carried on by an assessee in Pakistan shall be computed in accordance with the rules contained in Part 11 of the Fifth Schedule:
Provided that nothing contained in this clause shall apply in the case of an assessee whose income has at any time been exempt from tax under clause (123A) of Part I of the Second Schedule.
RULE 5 OF FOURTH SCHEDULE OF THE ORDINANCE 1979
5. General Insurance.-
The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts required under the Insurance Act, 1938 (IV of 1938) to be furnished to the Controller of Insurance, subject to the following adjustments, namely:-
(a) any expenditure or allowance, or any reserve or provision for any expenditure, or the amount of any tax deducted at source from any dividends or interest received which is not deductible in computing the income chargeable under the head "Income from business or profession" shall be excluded;
(b) any amount either written off or taken to reserve to meet depreciation or loss on the realisation, of investments shall be allowed as a deduction, and any sums taken credit for in the accounts on account of appreciation, or gains on the realisation, of investments shall be treated as part of the profits and gains:
Provided that the Deputy Commissioner is satisfied about the reasonableness of the amount written off or taken to reserve in the accounts to meet depreciation, or loss on the realisation, of investments, as the case may be.
(c) Nothing contained in this rule shall be construed to authorise deduction of any expenditure or allowance or reserve or provision in excess of the limits laid down in the Insurance Act, 1938 (IV of 1938).
RULE 8 OF FOURTH SCHEDULE OF THE ORDINANCE 1979
8. Application of this Schedule.-
The provisions of this Schedule shall apply notwithstanding anything contained in this Ordinance or any law for the time being in force.
SECTION 3 OF THE ORDINANCE 2001
3. Ordinance to override other laws.- The provisions of this Ordinance shall apply notwithstanding anything to the contrary contained in any other law for the time being in force.
SECTION 67 OF THE ORDINANCE 2001
67. Apportionment of deductions.- (1) Subject to this Ordinance, where an expenditure relates to –
(a) the derivation of more than one head of income; or
1[(ab) derivation of income comprising of taxable income and any class of income to which sub-sections (4) and (5) of section 4 apply, or;]
(b) the derivation of income chargeable to tax under a head of income and to some other purpose, the expenditure shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates.
(2) The 2[Board] may make rules under section 3 for the purposes of apportioning deductions.
SECTION 99 OF THE ORDINANCE 2001
99. Special provisions relating to insurance business.- The profits and gains of any insurance business shall be computed in accordance with the rules in the Fourth Schedule.
SECTION 100A OF THE ORDINANCE 2001
1[(100A) Special provisions relating to banking business.—(1) Subject to sub-section (2), the income, profits and gains of any banking company as defined in clause (7) of section 2 and tax payable thereon shall be computed in accordance with the rules in the Seventh Schedule.
(2) Sub-section (1) shall apply to the profits and gains of the banking companies relevant to tax year 2009 and onwards.]
RULE 5 OF FOURTH SCHEDULE OF THE ORDINANCE-2001
5. 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 Ordinance, 2000 (XXXIX of 2000), to be furnished to the Securities and Exchange 1[Commission] of Pakistan subject to the following adjustments –
(a) any expenditure or allowance, or any reserve or provision for any expenditure, or the amount of any tax deducted at source from dividends or profit on debt received which is not deductible in computing the income chargeable under the head “Income from Business” shall be excluded;
(b) any amount either written off or taken to reserve to meet depreciation or loss on the realization of investments shall be allowed as a deduction, and any sums taken credit for in the accounts on account of appreciation, or gains on the realization of 2[investments] shall be treated as part of the profits and gains, provided the Commissioner considers the amount to be reasonable; and
(c) no deduction shall be allowed for any expenditure, allowance, reserve, or provision in excess of the limits laid down in the Insurance Ordinance, 2000 (XXXIX of 2000), unless the excess is allowed by the 3[Securities] and Exchange Commission and is incurred in deriving income chargeable to tax.
RULE 6A OF FOURTH SCHEDULE OF THE ORDINANCE, 2001.
4[(6A) Exemption of Capital Gains from the sale of shares.- In computing income under this Schedule, there shall not be included “capital gains”, being income from the sale of modaraba certificates or any instrument of redeemable capital as defined in the Companies Ordinance, 1984 (XLVII of 1984), listed on any stock exchange in Pakistan or shares of a public company (as defined in sub-section (47) of section 2) and the Pakistan Telecommunications Corporation vouchers issued by the Government of Pakistan, derived up to tax year ending on the thirtieth day of June, 1.]
RULE 9 OF SEVENTH SCHEDULE OF THE ORDINANCE, 2001.
9. Provision of Ordinance to apply— The provisions of the Ordinance not specifically dealt with in the aforesaid rules shall apply, mutatis mutandis, to the banking company.
8. After perusal of the above law and the decisions relied upon by the learned counsel representing the respondent we are of the considered view that the taxability of the insurance business has been separated from the taxability of other business concerns that is why in the repealed Ordinance by virtue of Section 26 of the Ordinance and in new Ordinance by virtue of Section 99 of the Ordinance it has specifically been mentioned that taxability of the insurance business is to be dealt with by special provisions. Under Section 26 of the repealed Ordinance it has specifically been mentioned that “Notwithstanding anything contained in this Ordinance (which was a non-obstante clause) the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the Fourth Schedule”, meaning thereby that lawmakers were of the opinion that the tax of an insurance business has to be separated from the taxability of the other business which were dealt with under the provisions of Section 22 of the repealed Ordinance. Had the intention of the legislature was to treat these two businesses i.e. normal business and an insurance business to be of the like nature, Section 26 would not have been part of the law depicting the intention of the legislature to give it a separate treatment.
9. In the repealed Ordinance also there was a specific Schedule, the Fourth Schedule, which deals with the manner and mode as to how the profits of an insurance business were to be computed, what adjustments were to be allowed, what were the exemptions in this regard and how far the said Schedule would apply to the Ordinance. In the newly introduced Ordinance also it is seen that Section 99 specifically provides that a special mechanism has been prescribed with regard to determination of profits and gains of an insurance business which shall be computed in accordance with the rules as given in the new Fourth Schedule. This Fourth Schedule also, just like the previous Schedule of the repealed Ordinance, talks about how profits of an insurance business are to be computed, what adjustments are to be allowed and what are the exemptions in this regard. It is observed that not only in the repealed Ordinance special provisions existed with regard to the taxability of insurance business but in the Income Tax Act, 1922, also. As per the provisions of section 10(7) of the Act, which was parameteria to section 26 of the repealed Ordinance and section 99 of the new Ordinance, it was specifically mentioned that the profits and gains of the insurance business will be computed as per the First Schedule of the Act which Schedule deals with the computation of profits and gains in the case of an insurance company, therefore, it appears to be an admitted position that since quite some time the lawmakers have treated the insurance business to be something different from normal business income and had treated its taxability to be different also, hence, it is established beyond doubt that ordinary rules for computation of profits and gains assessment cannot be applied in the case of an insurance business as the profits and gains of an insurance business has to be computed in accordance with the procedure laid down in the Fourth Schedule of the Ordinance.
10. In the present cases it is seen that T.O. was of the view that after the promulgation of the new Ordinance, since special provisions of Rule 6A has been inserted in the Fourth Schedule, the position has changed. As per the T.O. after the insertion of Rule 6A in the Fourth Schedule exemption given to capital gain in the case of General Insurance Companies has been bifurcated into two classes of income i.e. capital gain and business income and according to him capital gain remained exempt whereas the business income has become taxable. He was, therefore, of the opinion that now the entire expenses claimed have to be bifurcated and to be prorated or apportioned according to their nature of identifiable expenses and unidentifiable expenses has to be prorated to both the above classes of income. The T.O. was of the opinion that the mechanism provided in this regard under Section 67 read with Rule 13 of the Income Tax Rules the expenses incurred by the Insurance Companies, which are identifiable, will be apportioned and deducted against the classes of income to which it belongs and so far as the unidentifiable expenses are concerned the same are to be prorated against the exempt income and the normal business income. Keeping this theory in his mind the T.O. then prorated the unidentifiable expenses, in his view, not only against the business income but against the exempt income also.
11. In our considered view this method of assessment, though no doubt, could be valid had there been a normal business income but the T.O. simply ignored the fact that he is making the assessment of an Insurance Company. Reading of the Clause 6A of the Fourth Schedule clearly reveals that it starts with the word “In computing income under this Schedule” meaning thereby that this Clause clearly speaks that the computation has to be made in accordance with this Schedule only. It is a settled proposition of law that if something is stated to be done in a particular manner it has to be done in that manner only otherwise any deviation in this regard would vitiate the whole proceedings. It is also a well settled proposition of law that when special statue provides something to be done in a particular manner the general provisions are ousted. There are plethora of judgments in this regard and reference may be made to the decision in the case of Federal Bank for Cooperatives, Islamabad Vs. Ehsan Muhammad reported in 2004 SCMR 130. In the present case the Fourth Schedule is the relevant law under which profits and gains of Insurance Company are to be dealt with and computed. We are guided in this regard by the decision given by the Hon’ble Supreme Court of Pakistan in the case of E.F.U. General Insurance Co. Ltd. Vs. Federation of Pakistan reported in 1997 PTD 1693 wherein the Hon’ble Apex Court observed as under:
9. From section 26(a) of the Ordinance, section 10(7) of the Act read with rule 5 of the Fourth Schedule (First Schedule of -the Act) and the relevant provisions of the Insurance Act, 1938, it would follow that the Income Tax Officers have very limited jurisdiction to challenge the accounts submitted by a company dealing in Insurance business. The jurisdiction of the Income Tax Officer is limited to the clauses (a) and (b) of rule 5 of the Fourth Schedule to the Ordinance (and provided in rule 6 of the First Schedule to the Act). Subject to the above, the Income Tax Officer is not competent to challenge the accounts submitted by the assessee under the Insurance Act, 1938. The Income Tax Officer cannot go behind such accounts. This question has been considered in sufficient detail by this Court in an earlier judgment in the case of Commissioner of Income Tax v. Phoenix Assurance Company Limited 1991 SCMR 2485. It was inter alia noted in the said judgment as follows:---
(i) Under section 11 of the Insurance Act, 1938, every Insurance Company has to prepare, at the expiration of each calendar year, a balance-sheet, a profit and loss account and a revenue account in the prescribed form to be authenticated;
(ii) Under section 15, such audited accounts and statements have to be furnished to the Controller of Insurance as returns;
(iii) Section 18 of the Insurance Act requires every insurance company to furnish to the Controller of Insurance a certified copy of every report on the affairs of the concern which is submitted to the members or policy holders of the insurance;
(iv) Section 21 enables the Controller of Insurance to call for such further information from the insurer in respect of the return furnished by it if he feels that the same is inaccurate or defective in any manner; .
(v) He can examine the books of accounts, registers and documents as well as any officer of the insurer;
(vi) He is empowered to decline to accept any return unless the inaccuracy has been corrected or the deficiency has been supplied and in case the Controller of Insurance declined to accept any return, the insurer shall be deemed to have failed to comply with the provisions of section 15 of the Insurance Act relating to the furnishing of return.
After referring to these provisions of the Insurance Act, it was then observed by this Court that it was in this context that finality has been given to the accounts for purposes of rule 6 of the First Schedule to the Act (rule 5 of the Fourth Schedule to the Ordinance). It was held that the Income Tax Officer was not competent to upset the integrity of the accounts submitted by the assessee under the Insurance Act, 1938 by applying the ordinary rules for computation of profits and accounts and for assessment of tax in the light of the provisions of Income Tax law in respect of the income in regard to the head "business". It was also held that there was no substance in the contention that the combined effect of section 10(7) read with rule 6 of the First Schedule to the Act section 26(a) read with rule 5 of the Fourth Schedule to the Ordinance was that the Income Tax Officer was vested with the power to probe into the accounts submitted by the insurance company with a view to determining the real nature of any item of such accounts for purpose of excluding it in order to adjust the balance of profits.
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 incomes 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 under 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 of insurance business this principle has been upheld by the Superior Courts in a number of judgments, already in field in this regard. Reliance in this regard may also be made to the decision given by the Hon’ble Supreme Court in the case of Central Insurance Company reported in 68 TAX 86 which was followed with approval in the case of E.F.U., cited above, therefore, the manner and mechanism of computing the income so far as Insurance Company are concerned could not now be changed.
13. Our attention was also invited to the decision given by a Division Bench of this Court in the case of Commissioner of Income Tax, Companies-III, Karachi Vs. Central Insurance Co. Ltd., Karachi reported in [(2003) 88 TAX 235 H.C. Kar.)] wherein it was observed as under:
“A perusal of the above judgments clearly shows that the principles pertaining to the computation of income/profits and gains of an insurance company are fully established to the effect that to the exclusion of any other provision contained in the Income Tax Ordinance, the profits and gains of business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Fourth Schedule. The jurisdiction of the Assessing Officer in the matter of computation of the profits and gains and the tax payable thereon are limited to the provisions contained in the Fourth Schedule and the Assessing Officer can make adjustments to the extent provided in Rule 5 of the Fourth Schedule in respect of profits and gains of any business of insurance other than life insurance and the jurisdiction of the Assessing Officer is not extended to any other provision contained in the Ordinance until and unless included in the Fourth Schedule itself.
Mr. Aqeel Ahmed, learned counsel for the department is not able to show that the provisions contained in section 12(9-A) have been included in the Fourth Schedule to the Income Tax Ordinance, thereby extending the jurisdiction of the Assessing Officer and thus, we are of the considered opinion that the learned ITAT has rightly deleted the addition to which no exception can be take. Since the general principles pertaining to the assessment of Insurance Company already stand established, therefore, the learned Tribunal rightly rejected the reference application to which no exception can be taken. The Reference application submitted under section 136(2) of the Income Tax Ordinance, 1979, stands dismissed in limine.”
14. We have also examined all the above provisions of law and hardly find any material difference in the repealed Ordinance and the new Ordinance. The jist of section 26 remained same as that of section 99, whereas Fourth Schedule also had almost remained the same both in the old Ordinance and the new Ordinance. We, therefore, do not agree with the contention raised by Mr. Abbasi that there is a material difference in the provisions of law of the repealed Ordinance and the new Ordinance. So far as the provisions of section 67 of the new Ordinance are concerned we would like to observe that this section starts with the words “Subject to this Ordinance” meaning thereby that this section appears to be a subservient section as it possess the words “subject to this Ordinance” meaning thereby that if something contrary is provided under the Ordinance the same would prevail over this section 67.
15. Now if a closer look is taken to the Fourth Schedule of the Ordinance it will be seen that it states that the same deals with the rules for the computation of the profits and gains of the insurance business meaning thereby that it is a special provision of law which would prevail over the general provisions of the same Ordinance. There is nothing under the Fourth Schedule of the Ordinance which speaks of proration of any expense, hence, enlarging said provisions of the law and applying the same to the profits and gains computable for the Insurance Company is beyond the spirit of law. The business income of the insurance and computation of its income is governed by the special provisions of section 99 of the Ordinance read with rules contained in Fourth Schedule and cannot be given a meaning to consider it at par with the computation and taxability of the normal business as an Insurance Company is required to maintain its accounts as per the Insurance Ordinance, 2000, which are to be furnished to the Securities and Exchange Commission of Pakistan who is their monitoring head to examine whether the accounts kept by an Insurance Company are in accordance with the Insurance Ordinance, 2000, or not and as per that Ordinance profits of insurance business are to be computed as one basket income which concept is not a new concept and has been recognized in a number of judgments, mentioned above.
16. It is seen that in the late eighties also the department tried to disturb the concept of one unit when incomes from Khas Deposit Certificate/Defence Saving Certificate were charged to tax by treating the same to be an insurance income ignoring the fact that specific exemption was available in the then Second Schedule to the repealed Ordinance by reopening the matter. The matter was challenged before this Court who upheld the reopening of the matter by the department. Thereafter the matter went to the Hon’ble Supreme Court in the case of Central Insurance, cited supra, and the Hon’ble Court after examining the same held the notices issued under section 65 to be of no legal effect, however, held that the profit earned on Khas Deposit Certificate/Defence Saving Certificate to be income of the Insurance Company and liable for tax as when the Insurance Companies are to be governed by Fourth Schedule, the exemption provided under that Schedule only would be available to the Insurance Companies and as the income of Khas Deposit Certificate/Defence Saving Certificate was given exemption provided under Second Schedule only, hence, the same would not be available to an Insurance Company because of the reason that section 26 being a special provision of law has to be given a separate treatment.
17. Applying the above principle of law, laid down by the Hon’ble Supreme Court of Pakistan, to the present case it is established beyond doubt that the provisions concerning the computation of profits and gains of the insurance business are special in nature and could not be considered to be the same as that of a normal business. We, therefore, are of the considered view that applying section 67 of the Ordinance to Insurance Companies is a defiance of the law and totally against the concept of working out the profits and gains of an Insurance Company.
18. Reading of section 67 of the Ordinance also reveals that the same relates to proration in the case of Companies earning income under more than one heads and in such cases the lawmakers have provided a mechanism that unidentifiable expenses have to be prorated among the businesses of different heads, whereas in the case of an Insurance Company this concept is totally lacking. The Insurance Companies are taxed as one unit hence the very concept of allocation of unidentifiable expenses is absent. The proration of expense could be valid so far as the business of Companies deriving income from various heads are concerned but in our considered view so far as the Insurance Companies are concerned this is not the case. This appears to be a misconception of law on the part of the T.O. which was rightly disapproved by the CIT(A) and the ITAT.
19. We have also come across a Circular issued by the Federal Board of Revenue (FBR) way back in 1988 wherein the concept of one unit has been recognized by the FBR itself. Needless to state that all the instructions of the FBR are binding on the Tax Authorities as per section 214 of the Ordinance. We are, therefore, of the considered view that the application of section 67 on the Insurance Company is unlawful. Section 26A and Fourth Schedule of the repealed Ordinance are in parameteria to section 99 and Fourth Schedule to the new Ordinance and profits and gains of an Insurance Company are to be computed as per the Fourth Schedule only and we find no deviation in the new Ordinance from that of the repealed Ordinance and only the expenses which have expressly been held to be not allowable, as per the Fourth Schedule are to be excluded while computing the income of an Insurance Company.
20. We also observe that in the Seventh Schedule of the new Ordinance, which deals with the computation of income of Banking Companies only, there is a specific Rule 9 which states that the provisions of the Ordinance would apply to the Seventh Schedule whereas no such rule is available in the Fourth Schedule meaning thereby that the taxability of an Insurance Company has to be dealt with in accordance with the rules prescribed there under only. The Rule 6A of the Fourth Schedule specifically deals with the capital gain earned by an Insurance Company which exempts the same from the levy of the tax as though the same are exempt from tax under the Second Schedule but after the announcement of the decision by the Hon’ble Supreme Court of Pakistan, mentioned above, specific exemption under Fourth Schedule is also necessary for exempting income under the head capital gain also. The Fourth Schedule being special provision overrides the other provision and the profits and gains of Insurance Company are to be made in accordance with the Fourth Schedule only and as there is no mention of section 67 of the Ordinance in the Fourth Schedule the provision of section 67 could not be applied so far as working out the profits and gains of an Insurance Company under the Fourth Schedule.
21. In view of the observations made above we are of the considered view that the department has miserably failed to justify the application of section 67 of the Ordinance so far as the cases of Insurance Company are concerned. We, therefore, answer both the questions raised in these ITRAs in negative i.e. against the department and in favour of the assessee.
22. Above are the reasons of our short order dated 15.04.2011 by which we have dismissed the present ITRAs.