COMMISSIONER OF INCOME-TAX, CENTRAL ZONE "B", KARACHI VS MESSRS PFIZER LABORATORIES LTD., WEST WHARF ROAD, KARACHI
1991 P T D 39
[Karachi High Court]
Before Saleem Akhtar and Imam Ali Kazi, JJ
COMMISSIONER OF INCOME-TAX, CENTRAL ZONE "B", KARACHI
versus
Messrs PFIZER LABORATORIES LTD., WEST WHARF ROAD, KARACHI
I.T.C. No.34 of 1981, decided on 24/01/1990.
Income Tax Ordinance (XXXI of 1979)---
----S. 136(2)---Income-tax Act (XI of 1922), S.10(4)(d), Explanation 3 [added by Finance Act (L of 1975)]---Reference---Question raised for opinion of the High Court was whether Explanation 3 to S.10(4)(d) of the Income-tax Act, 1922 added by Finance Act, 1975 could be deemed to have retrospective effect-- Where relevant provision of law was obvious and the answer to the question sought to be raised was patently clear, application for Reference was rejected by the High Court.
Nasrullah Awan for Applicant.
Iqbal Naeem Pasha for Respondent.
Date of hearing: 24th January, 1990.
JUDGMENT
SALEEM AKHTAR, J.---In respect of assessment year 1974-75 the respondent filed statement of excess perquisite amounting to Rs.1,19,449 which did not include employer's contribution to provident fund amounting to Rs.69,674. The Income Tax Officer considered this amount as perquisite and added it back to the income. The respondent filed an appeal before the Appellate Assistant Commissioner which was allowed relying on the decision of the Tribunal which was based on the amendment made by Finance Ordinance 1975 whereby explanation 3 was added to section 10(4)(d) of the Income Tax Act. It was held that although the amendment was made by Finance Act 1975 it was retrospective in operation and was applicable to assessment year 1974-75. It was further held that employer's contribution does not give any immediate benefit to employee and hence it could not form part of the salary consequently the addition made by the Income Tax Officer was deleted. The department filed an appeal before the Appellate Tribunal which was dismissed in view of Explanation No." added to section 10(4)(d) of the Income Tax Act. The department then filed an application to refer the following question but it was refused:
"Whether, on facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was justified in holding that explanation 3 to section 10(4)(d) of the Income Tax Act, added vide Finance Act, 1975, can be deemed to have retrospective effect:"
The Department has filed application under section 136(2) of the Income Tax Ordinance, for reference of the above question for our opinion.
The relevant parts of section 10(2)' are reproduced as follows:-
"S.10(2). Subject to the provisions of this Act such profits or gains shall be computed after making the following allowance, namely--
(xvi) any expenditure not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.
3.......................................
4. Nothing in clause (ix) or clause (xvi) of subsection (2) shall be deemed to authorise the allowance of any sum paid on account of any cess, rate of tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on any such profits or gains; and nothing in clause (xvi) of subsection (2) shall be deemed to authorise.
(a). ...................................
(b). ...................................
(bb). ..................................
(c) any allowance in respect of payment to a provident or other fund established for the benefit of employees, unless the employer has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are taxable under the head `Salaries; or
(d) any allowance in respect of so much of the expenditure incurred by an assessee on the provision of perquisites or other benefits to any employee as exceeds thirty per cent of the salary of such employee: Provided that in the case of an employee whose contract service has been approved under clause (xiii) of subsection (3) of section 4, this clause shall not apply for a period of five years commencing next after the expiry of three years since the date of his arrival in Pakistan.
Explanation 1. The expression `salary' as used in this clause, means remuneration or compensation for services rendered, paid or to be paid at regular intervals and includes dearness, grain compensation or cost of living allowance and bonus and commission which are 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 any other sum which does not enter into the computations for pensionary or retirement benefits.
Explanation 2. The expression `employee' where the assessee is a company, includes a director thereof."
By Finance Act, 1975 the following explanation was added as Explanation 3.
Explanation 3. The expression `perquisites or other benefits', as used in this clause, does not include employer's contribution to a recognized provident fund or to an approved superannuation fund.
Mr. Nasrullah Awan, the learned counsel has contended that Explanation 3 was added in the year 1975, therefore, the benefit conferred by it will not apply to the respondent for the assessment year 1974-75. On the other hand Mr. Iqbal Naim Pasha has contended that Explanation 3 does not create any right or liability, it merely clarifies the existing position. From a bare reading of the aforesaid provision, without taking into consideration Explanation 3, it is clear that subsection 4(c) and (d) of section 10 permits grant of any allowance in respect of payment of provident fund established for the benefit of employees provided it is effectively secured by the employer that tax shall be deducted at source from any payments made from the fund which are taxable under the head `Salaries'. Further that no allowance will be granted on any perquisite or benefit to an employee which exceeds 30% of the salary of such employee. The question arises whether employer's contribution to the provident fund is perquisite or not? Explanation 1 clarifies that the salary does not include employer's contribution to the recognized provident fund. Therefore, for the purpose of granting allowance the employer's contribution to the provident fund has not been treated as salary. However, the only question remains whether contribution made to the provident fund can be treated as perquisite and falls within the ambit of section 10(4)(d). The treatment given to such contribution in section 10(4)(c) will be completely negatived if it is treated as perquisite and section 10(4)(d) is applied to it. The grant of allowance in respect of such contribution is conditional. Where condition laid down by section 10(4)(c) is satisfied, the assessee in terms thereof becomes entitled to the allowance in respect of contribution made to the provident fund. Therefore, the legal position which emerged before addition of Explanation 3 was that allowance on payment of contribution to the provident fund established for the benefit of the employee was permissible on terms as provided by section 10(4)(c). Such contribution cannot therefore, be treated as perquisite for the purposes of granting allowance under section 10(4) (d). This legal position has been reiterated and explained, by Explanation 3 added in 1975, It has reaffirmed the existing position and clarified the ambiguity due to which tax authorities were treating such contribution as perquisite or other benefit for the purposes of taxation. It is a well-recognized principle of interpretation that an explanation added to any statute does not extend or restrict the scope of an enactment. The main object is to clarify and explain the existing state. The purpose and object of the explanation can be ascertained and gathered with reference and context in which it has been added and the manner in which it has been provided. The scheme of the Act, the preceding and subsequent provisions, if relevant, have to be taken into consideration to find out the purpose and object which such explanation seeks to achieve. Explanation 3 hardly changed the existing state of law and therefore, the contribution made to the provident fund by the employer stands at the same footing and requires the same treatment as existed before the amendment.
Mr. Iqbal Naim Pasha, the learned counsel for the respondent referred to Commissioner of Income Tax v. Pakistan Beverage Company Karachi 1967 P T D 265 in which dealing with section 17(2) of the Sales Tax Act which is equivalent to section 136 of the Income Tax Ordinance it was observed as follows:--
"When a plain reading of he provisions of the Act, to which we have referred, shows that such a question of law, as has been urged, does not properly arise we are not obliged to require the Tribunal to refer such a question for our opinion. If the answer to the question is patently clear and free from any doubt the High Court is not bound to require the Tribunal to state the case and refer it to this Court. In this view we are supported by the observations in two cases of the Indian jurisdiction namely (Mangaldas v. Commissioner of Income Tax 25 I.T.R. (195) 175 at 191 and Mathura Pershad v. Commissioner of Income Tax 30 I.T.R. (1959) 695 at 700."
The application for reference was rejected. We respectfully follow this judgment and in view of the fact that the provision of law quoted above is obvious and the answer to the question sought to be raised is patently clear, we reject the application.
M.B.A./C-169/K Application rejected.