W.TAS. NOS.1302/KB TO 1304/KB OF 1986-87, DECIDED ON 26TH AUGUST, 1991. VS W.TAS. NOS.1302/KB TO 1304/KB OF 1986-87, DECIDED ON 26TH AUGUST, 1991., 1991 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1058 (1991)

(a) Wealth Tax Act (XV of 1963)---

----S. 2(e), Para. (ii), Explanation [as amended by Finance Act (XII of 1991)]-- Legislative history.

(b) Wealth Tax Act (XV of 1963)---

----S. 2(e), Para. (ii), Explanation [as amended by Finance Act (XII of 1991)]-- Assets---Any immovable property held for the purposes of letting out or business of letting out or for construction and letting out or for construction and sale by a firm, an association of persons or a body of individuals whether incorporated or not, and a company, falls within the definition of an `assets' and is thus exposed to wealth tax.

B.P. Biscuit Factory Ltd., Karachi v. The Wealth Tax Officer Civil Appeal No.K-140 of 1981 no more good law.

(c) Wealth Tax Act (XV of 1963)---

----S. 2(c), Para. (ii), Explanation [as amended by Finance Act (XII of 1991)]-- Words `shall be deemed always to have been so added' have made Explanation to S.2(e), para. (ii) retrospective in operation and Explanation is a clarificatory piece of legislation in nature---Association of persons would thus be assessable under Wealth Tax Act, 1963 if they held an immovable; property for the purposes of letting out only.

(d) Wealth Tax Act (XV of 1963) --- -

----S. 2(e), (i), (ii) & 2(m), Explanation (iii) & 3 [as amended by Wealth Tax (Amendment) Ordinance (II of 1980), Finance Ordinance (XXV of 1980) and Finance Ordinance (XII of 1991)]---Notional A.O.P. and real A.O.P.---Concept.

(e) Wealth Tax Act (XV of 1963)---

----Ss. 2(e)(i) & 2(m), Explanation (iii) & 3 [as amended by Wealth Tax (Amendment) Ordinance (II of 1980), Finance Ordinance (XXV of 1980) and Finance Ordinance (XI1 of 1991)].

If an individual has been enjoying any right, title or interest in any immovable property, he is liable to wealth tax irrespective of the assessment year and irrespective of the fact whether it is let out on rent or is self-occupied.

(f) Wealth Tax Act (XV of 1963)---

----Ss. 2(e)(ii) & 2(m), Explanation (iii) & 3 [as amended by Wealth Tax (Amendment) Ordinance (II of 1980), Finance Ordinance (XXV of 1980) and Finance Ordinance (XII of 1991)].

If more than one individual fall within the definition of A.O.P. they would be liable to be assessed as an A.O.P. in assessment year 1979-80 onwards only if any of the purposes for which the property was held by them was (a) letting out or business of letting out or (h) construction and letting out, or (c) construction and sale or letting out irrespective of the fact that they had tiled the returns individually or as an A.O.P.

(g) Wealth Tax Act (XV of 1963)---

----Ss. 2(e), (ii) & 2(m), Explanation (iii) & 3 [as amended by Wealth Tax (Amendment) Ordinance (1I of 1980), Finance Ordinance (XXV of 1980) and Finance Ordinance (XII of 1991)].

If more than one individual enjoy any right, title or interest in any immovable property they would be assessed as A.O.P. in assessment year 1980-81 onwards irrespective of the fact that they had either filed their returns individually, or that they did not hold the property for any of the purposes mentioned in Explanation added to para. (ii) of clause (e) of section 2 of the Wealth Tax Act by the Finance Act of 1991.

(h) Wealth Tax Act (XV of 1963)---

----Ss. 2(e), Para. (ii) & 2(m), Explanation (iii) & 3 [as amended by Wealth Tax (Amendment) Ordinance (II of 1980), Finance Ordinance (XXV of 1980) and Finance Ordinance (XII of 1991)].

All the firms or body of individuals whether incorporated or not and a company shall be liable to wealth tax regarding that immovable property only which is held by them for any of the purposes mentioned in Explanation (iii) added to para. (ii) of clause (e) of section 2 of the Wealth Tax Act, 1963 by the Finance Act of 1991.

(i) Wealth Tax Act (XV of 1963)--

----S. 2(e), Para. (ii), Explanation [as amended by Finance Act (XII of 1991)]-- Association of persons could be taxed to wealth tax only for those immovable properties which were held by an A.O.P. for any of the purposes mentioned in S 2(e)(ii), Explanation of the Act---Self-occupied property by an A.O.P. would not fall within any of such purposes.

Ashrafuddin Bhatti, D.R. for Appellant.

Nemo for Respondent (absent).

Date of hearing: 25th August, 1991.

ORDER

These Departmental appeals are directed against consolidated order of learned C.W.T.(A) recorded by him on 9th December, 1986 relating to assessment years 1979-80, 1980-81 and 1981-82.

2. The brief facts giving rise to these appeals are that the respondent, an association of persons, hereinafter referred to as "A.O.P." declared their net wealth at Rs.1,80,850 in each assessment year on the basis of their co-ownership of three properties bearing No.S.R-9/1, pacer Bhai Karimji Building, Serai Quarters, Karachi, No.S.R-7, Serai Quarters. Karachi and No.72/E-G/2 A.K-13 B-6-3-31, Haji Camp, Siddiq Wahab Road, Karachi. The first property has covered area of 8,000 sq. ft. on each of the ground and two floors. The rent of ground floor was declared at Rs.2,110 as it was allegedly let out to Muslim Commercial Bank. It was further alleged that two flats on first floor were let out on monthly rent of Rs.70 whereas two flats on second floor were self-occupied by members of Association of Persons. On the other hand, the respondent declared Gross Annual Letting value of 1/4th of second property at Rs.6,000 whereas 3/4th of the building was declared to be self-occupied. The W.T.O., however, rejected the declared version for the reason that tenancy agreements were not produced before him. He, therefore, determined G.A.R.V. of first property at Rs.1,05,000 on the basis of monthly rent of the ground floor at Rs.8,000, first floor at Rs.6,000 and second floor at Rs.2,400. The second property was valued at Rs.24,000.

3. Having been aggrieved and dissatisfied the respondent went up in appeal in all the three assessment years and it was contended before the learned C.W.T.(A) that the W.T.O. was not justified in treating self-occupied portions of the property as taxable assets of A.O.P. under section 2(e)(ii) for the reason that it covered only those properties which were held for the purposes of business of letting out, construction and sale. It was further contended that the W.T.O. adopted G.A.R.V. without evolving any basis thereforelearned C.W.T.(A) accepted both the findings and disposed of the appeals by the impugned order making following observations:--

"I find lot of force in his contention because self-occupied property of A.O.P. does not fall under the ambit of section 2(e)(ii) and GA.R.V. has been determined without any verification from M.C.B. or other sources in the vicinity. The impugned orders are, accordingly, set aside to be passed de novo in accordance with law after proper appreciation of facts."

4. This time the Department feels aggrieved and has come up in second appeal. Mr. Ashrafuddin Bhatti, the learned D.R. supporting departmental appeals submits that the learned C.W.T.(A) was not justified in setting aside the assessment orders on the ground that the self-occupied property of A.O.P. did not fall under the ambit of section 2(e)(ii) and that the GA.R.V determined without verification from M.C.B. or other sources in the vicinity was not correct. The learned D.R. submits that the property let out to Muslim Commercial Bank was let out even on higher rent. None for the respondent has turned up in spite of satisfactory service of hearing notice. We have, however, to dispose of these appeals on merits.

5. As the learned D.R. wants us to explain in detail the legal position after decision of the Supreme Court recorded in Civil Appeal No.K-140 of 1981 on 9th January, 1989 in the case of B.P. Biscuit Factory Ltd., Karachi v. The Wealth Tax Officer, we have heard the learned D.R. From perusal of the impugned order it appears that the learned C.W.T.(A) has upheld the contention of the respondent that self-occupied immovable property belonging to A.O.P. did not fall within the ambit of section 2(e)(ii) of the Wealth Tax Act. As such, the prayer of Mr. Ashrafuddin Bhatti for guidance in the light of decision of the Supreme Court of Pakistan appears to be quite reasonable. We have, therefore, decided to dwell upon the issue involved in some details.

6. We have been called upon to record our finding on the issue as to whether an immovable property held by an A.O.P. either let out, or self-occupied, falls within the ambit of section 2(e)(ii) of the Wealth Tax Act? However, before answering this question, we would like firstly to recapitulate the history of section 2(e)(ii) of the Wealth Tax Act, which reads as under:--

"2. Definitions.--In this Act, unless the context otherwise requires,--

(e) "assets" includes--

(ii) in the case of a firm, an association of persons or a body of individuals, whether incorporated or not, and a company, immovable property held for the purpose of the business of construction and sale, or letting out, of property;"

7. Now turning to the historical background let us point out that prior to promulgation of Wealth Tax (Amendment) Ordinance, 1980, hereinafter referred to as the Ordinance II of 1980, the wealth-tax was chargeable on the assets of an individual and Hindu Undivided Family. But the Ordinance II of 1980 extended operation of wealth tax to those immovable properties also which were held by individuals, group of individuals whether incorporated or not, registered firm or company, for the purposes of business of construction and sale or letting out. For this purpose the amendment was made not only in section 3, which is charging section, but also clause (e) of section 2 of the Wealth Tax Act was substituted so as to introduce paragraph (ii) thereof which has already been reproduced above. The Ordinance II of 1980 was made applicable retrospectively from 28th June, 1979 by its subsection (1) of section 3, but in the official Gazette the year was mentioned as 1980 instead of 1979. Consequently, the Sindh High Court at Karachi rectified the mistake after going through Statute Book and finally their Lordships of Supreme Court have put their seal of approval on aforesaid decision. Thus, the legal position is that Ordinance II of 1980 became effective from 28th June, 1979.

8. Presumably some difficulties were still felt and the Legislature by the Finance Ordinance of 1980, which became effective from 1st July, 1980, inserted Explanation (iii) to clause (m) of section 2 of the Wealth Tax Act, and thus since assessment year 1980-81 the immovable properties held by individuals as co -owners also stood exposed to the wealth tax liability as properties belonging to an AOP.

9. However, in the case of B.P. Biscuit Factory Ltd. and Ebrahim Brothers Ltd., the true import and meaning of paragraph (ii) of clause (e) of section 2 came up for consideration of their Lordships of Sindh Hi Court at Karachi.

Both in cases of B.P. Biscuit Factory Ltd. and Ebrahim Brothers Ltd., the assessees in their capacity of a company had constructed certain buildings on the plots of land obtained by them. Both the companies finding some parts of the buildings not necessary for their respective businesses, let them out on rent. The WTO thought that part of the property which they had given on rent wag falling within the definition of paragraph (ii) of clause (e) of section 2 of the Wealth Tax Act and, consequently, he communicated his intention of charging wealth tax to B.P. Biscuit Factory and did charge wealth tax on Ebrahim Brothers Limited after considering their respective objections. Having been aggrieved and dissatisfied both the assessees invoked the extraordinary jurisdiction of the High Court. But, their Lordships repelling their arguments observed that they were liable to wealth tax as the immovable property was held by them for the purposes of business of letting out of property. Both of them, however, still remained unsatisfied and went up in appeal and finally their arguments had found favour with their Lordships of the Supreme Court of Pakistan. In short, the finding of the High Court has been that any immovable property held by a firm of AOP or a body of individuals, whether incorporated or not, and a company; for the purposes of--

(i) the business of consturction and sale, or

(ii) the business of letting out,

falls within the definition of assets as laid down in paragraph (ii) of clause (e) of section 2 of the Wealth Tax Act (Please see B.P. Biscuits Factory Ltd. v. Wealth Tax Officer, II Circle Karachi 1981 PTD 217).

10. But, their Lordships of Supreme Court have held that--

......only such immovable properties as are held for the purposes of business of construction and sale or letting them out fall within the definition-----"

11.Thus, the controversy was finally set at rest by their Lordships of Supreme Court and the legal position till 30th June, 1991 was that only that immovable property which was held by a company for the purposes of business of construction and sale or letting out falls within the definition of an asset and, consequently, stood exposed to wealth tax. In other words, a property held by a company was not liable to wealth tax if it did not hold it for the purposes of business of construction and sale or letting out. However, at this juncture the legislature intervened and in deference to the observations of their Lordships of the Supreme Court that para. (ii) of clause (e) of section 2 was not happily worded added an explanation to aforesaid para. by Finance Act of 1992, which is as under.--

"Explanation.---For removal of doubt, it is hereby declared that immovable property and the purpose, referred to in this sub-clause, includes--

(i) immovable property held for the purpose of letting out, or business of letting out, of property;

(ii) immovable property held for the purpose of construction and letting out of property; and

(iii) immovable property held for the purpose of construction and sale of property."

12. Thus, it is now clear that aforesaid Supreme Court decision is no more good law and now any immovable property held for the purposes of letting out or business of letting out or for construction and letting out or for construction and sale by a firm, an Association of Persons or a body of individuals whether incorporated or not, and a company, falls within the definition of an asset and is thus exposed to wealth tax Nevertheless in the appeals before us the point requiring our decision is regarding that immovable property which is either self- occupied or let out by an AOP. We have, therefore, to proceed further.

13. As pointed out earlier, before promulgation of Ordinance II of 1980 an immovable property held by an individual and Hindu Undivided Family fell within the definition of "asset" as it did after its promulgation. Thus, if an individual owned an immovable property and it did not enjoy any of the exemptions laid down in the Wealth Tax Act, it was exposed to wealth tax being an asset of an individual. However, before promulgation of the Ordinance II of 1980, the taxing of co-owners as AOP was not permissible though under the Income-Tax Ordinance such authority was embedded in section 21 thereof. The legislature, therefore, introduced not only para. (ii) of clause (e) of section 2 but as included the expression "AOP or body of individuals" in section 3, which is the charging section. It is, therefore, clear that even after decision of the Supreme Court in the case of B.P. Biscuit Factory Limited (supra) an AOP or body of individuals remained liable to wealth tax although the Supreme Court restricted such an immovable property which was held by them for the purposes of business of construction and sale or letting out. Although their Lordships were deciding the cases of companies yet their Lordships made no comments on the wealth tax liability of an AOP for the simple reason that they were not called upon to do so. However, the question which is squarely before us is as to whether an AOP would be assessable under the Wealth Tax Act, if they held an immovable property for the purposes of letting out only or if it is self-occupied by them. The learned CWT (A) has answered the second part of the question in the negative but the first part of the question has not been specifically and directly answered though by implication it appears to be in the affirmative for the reason that the assessment orders had been set aside to be passed de novo alter ascertaining the C GARY according to law. But, in view of the Explanation added to para. (ii) of clause (e) of section 2 of the Wealth Tax Act the answer to the first part of the question should now be in the affirmative for the simple reason that the legislature has made aforesaid explanation retrospective in operation by using the words "shall be deemed always to have been so added:" Since it is clarificatory piece of legislation in nature, therefore, there should not be two opinions about its retrospectivity. As such, this issue should not detain us any more. Nevertheless IC we do not appear to have reached the end of the road, firstly because, we have still to examine the implication of Explanations (iii) added to clause (m) of section 2 of Wealth Tax Act by the Finance Ordinance of 1980 and, secondly, we have still to answer the second part of the aforesaid question, viz., whether an immovable property self-occupied by an AOP is liable to wealth tax? We, therefore, now turn to examine both these issues.

14.From perusal of Explanation (iii) added to clause (m) of section 2 of Wealth Tax Act by the Finance Ordinance of 1980 it appears that the concept of D notional -AOP was introduced for the first time by the legislature. Before proceeding further let us reproduce Explanation (iii) added to clause (m) of section 2 of the Wealth Tax Act, which is as under:--

"Explanation.- For the purposes of this clause,---

(iii) Where the right, title or interest to or in any immovable property other than agricultural land vests in more than one person, such persons shall, in respect of such property, be assessed as an association of persons, and the value of such right, title or interest shall not be included in the net wealth of an individual provided wealth tax is charged on such right, title or interest."

15. However, before proceeding further, let us divert our discussion to the concepts of a real AOP and notional AOP.

16. A Full Bench of this Tribunal in a decision, reported as 1988 PTD 1027, has defined an AOP as under:

"The AOP is a combination of two or more persons, formed on their own volition, actuated by a common design and associated in common adventure of income producing activity."

In another decision reported as 1989 PTD 20, a Division Bench of this Tribunal has dealt with the concept of AOP as well as process of its creation in the following words:--

" It further appears to us from perusal of the relevant law that in order to create an AOP there should not only be a volition on the part of the individuals but it should also be for the purposes of some common adventure with the intention of earning profit. If certain number of persons are going on a street they are nothing but a crowd. Now suppose they stop at a place where immovable property is being put on auction.

They still remain a crowd. If they individually start offering bids they would still be treated as part of the crowd but if more than one of them come together and decide to purchase the property in specified shares so that they can share the rent yielded by it in specified shares and indeed they succeed in purchasing it they will constitute what we call in the Tax Law as an AOP. For an Assessing Officer if above-noted facts are established then he would tax them as AOP irrespective of the fact that they are related to each other and inherited the money from their ancestors as these facts shall be wholly irrelevant for tax purposes...."

This type of AOP has been called real AOP in both the cases, mentioned above, as against a notional or fictional AOP. The Full Bench of this Tribunal in aforesaid case has dealt with concept of notional or fictional AOP in the following words:-

" Thereafter Explanation (iii) to section 2(m) reproduced above, was added by Finance Ordinance, 1980, whereby a new category of notional or fictional AOP was created and in all cases where property unit stood registered in the name of more than one individual, the unit was treated as property owned by an AOP and was made liable to be, assessed in the hands of AOP .."

17. The Division Bench of this Tribunal in the other case mentioned above, has dealt with both the concepts as under:--

..if we go through Wealth Tax Act, it appears that it deals with two types of AOP, which we would like to call real AOP and notional AOP. The real AOP which is created by exercise of volition of the persons concerned and notional AOP is that which is to be presumed by virtue of operation of law. The concept of real AOP existed in section 3 of the Wealth Tax Act which created wealth tax charge on net wealth of an AOP. However, the immovable property held by an AOP was not made chargeable to tax till Wealth Tax (Amendment) Ordinance of 1980 substituted the definition of assets as given in clause (e) of subsection (1) of section 2. Thus, from 28th June, 1979 wherefrom the said Ordinance became effective, the immovable property held by an AOP for the purposes of business of construction and sale or business of letting out was brought to the charge of wealth tax. However, the Finance Ordinance, 1980, also introduced Explanation (iii) in clause (m) of aforesaid subsection (1) of section 2 of the Wealth Tax Act, wherein is contained concept of Notional AOP .

18. Now with this background let us revert to the wealth tax liability of both real and notional AOP particularly with reference to Explanation added to paragraph (ii) of clause (e) of section 2 and Explanation (iii) added to clause (m) of section 2, if both are read with section 3 of the Wealth Tax Act, which is the charging section.

19. From perusal of paragraph (i) of clause (e) of section 2 of the Wealth Tax Act, it appears that in case of an individual property of any description, movable or immovable falls within the definition of "asset" and thus if an individual has any right, title or interest in any movable or immovable property, he has to declare it as an asset. However, from perusal of Explanation (iii) added to clause (m) of section 2 of the Wealth Tax Act, it appears that if more than one person have any right, title or interest in any immovable property, they would be assessed as an AOP and the value of such right, title or interest would not be included in the net wealth of an individual. Since section 3, which is the charging section, lays down that the wealth tax could be charged on AOP also, Explanation (iii) of clause (m) of section 2 is to be acted upon by giving effect to the intent and purpose of introduction of aforesaid Explanation. Thus, it is clear that all those individual assessees who have any right, title or interest in any immovable property are compulsorily to be assessed as AOP from assessment year 1980-81 onward, if they are not otherwise exempted under any provision of Wealth Tax Act notwithstanding the fact that the immovable property is not held for any of the purposes mentioned in Explanation added by the Finance Act of 1991 to para. (ii) of clause (e) of section 2 of the Wealth Tax Act.

20. It is important to note that individuals having common right, title or interest in any property, movable or immovable, are compulsorily to be assessed as AOP in view of provision of paragraph (i) of clause (e) of section 2 and Explanation (iii) of clause (m) of section 2 read with section 3 of the Wealth Tax Act. This legal position will prevail even if individuals having any right, title or interest in any immovable property file their returns in their individual capacity for the simple reason that we have to give effect to the intent and purpose of introduction of Explanation (iii) to clause (m) of section 2 of the Wealth Tax Act. On the other hand, if an AOP files a return, it would be assessable as such if it holds immovable property for any of the purposes mentioned in Explanation added by the Finance Act of 1991 to para. (ii) of clause (e) of section 2 of the Wealth Tax Act. Thus, in view of discussion made above, the legal position can be summarised as under:--

(i,) If an individual has been enjoying any right, title or interest in any immovable property, he is liable to wealth tax irrespective of the assessment year and irrespective of the fact whether it is let out on rent or is self-occupied.

(ii) If more than one individual fall within the definition of AOP, as discussed above, they would be liable to be assessed as an AOP in assessment year 1979-80 onwards only if any of the purposes for which the property is held by them are--

(a) letting out or business of letting out, or

(b) construction and letting out, or

(c) construction and sale or letting out irrespective of the fact that they had filed the returns individually or as an AOP.

(iii) If more than one individual enjoy any right, title or interest in any immovable property, they would he assessed as AOP in assessment year 1980-81 onwards irrespective of the fact that they have either filed their returns individually, or that they did not hold the property for any of the purposes mentioned in Explanation added to para. (ii) of clause (e) of section 2 of the Wealth Tax Act by the Finance Act of 1991.

(iv) All the firms or body of individuals whether incorporated or not and a company shall be liable to wealth tax regarding that immovable property only which is held by them for any of the purposes mentioned in Explanation (iii) added to para. (ii) of clause (e) of section 2 of the Wealth Tax Act by the Finance Act of 1991.

21. Now reverting to the merits of these appeals it appears from the discussion made above, that the respondents shall be liable to wealth tax as an AOP for those properties which have been let out by them. The direction of learned CWT (A) that the WTO should determine the GARV of such properties after proper verification from the Muslim Commercial Bank or other sources, therefore, appears to be correct and is hereby confirmed. The departmental appeals, therefore, on this issues fail and stand rejected accordingly. Similarly, the finding of learned CWT (A) that the self-occupied property of AOP does not fall under the ambit of section 2 (e) (ii) also seems to be correct in view of Explanation added to paragraph (ii) of clause (e) of section 2 of the Wealth Tax Act, for the simple reason that wealth tax on an AOP could be imposed only for those immovable properties which are held by an AOP for any of the purposes mentioned in aforesaid Explanation added by Finance Act of 1991 and self occupied property does not fall within any of such purposes. The departmental appeal, therefore, fails on this point also.

22. In view of discussion made above, all the, three departmental appeals are found to be devoid of any merit and stand rejected accordingly.

M.B.A./1203/TAppeals dismissed.