Per Farhat Ali Khan, Chairman; Abrar Hussain Naqvi, Judicial Member, Agreeing; A.A. Zuberi, Accountant Member, Contra---

(a) Income Tax Ordinance (XXXI of 1979)---

----Fourth Sched. Rr.5 & 8---Insurance Act (IV of 1938), S.15(1)---Zakat and Ushr Ordinance (XVIII of 1980), S.25---Assessee, a general insurance company---Deduction in respect of Zakat---Tax concession granted to Assessee by S.25, Zakat and Ushr Ordinance, 1980 would be available to the assessee in spite of the provisions contained in Rr.5 & 8 of the Fourth Schedule of the Income Tax Ordinance, 1979 and Insurance Act, 1938 would not stand in the way.

Per Abrar Hussain Naqvi Judicial Member, Agreeing.---

Per A.A. Zuberi, Accountant Member (Contra)---

In re: Mercantile Fire & General Insurance Company Limited 1989 PTD 142 and In re: International General Insurance Company 1991 PTD 401 fol.

Per A.A. Zuberi, Accountant Member, Farhat Ali Khan, Chairman, Agreeing---

(b) Income Tax Ordinance (XXXI of 1979)---

----Second Sched., C1.72 & Ss.30 & 31---Interest income---Exemption--- Exemption under the Ordinance such as those in the Second Schedule can be availed only where income chargeable under the heads specified in S.15 is being computed in accordance with provisions pertaining to those sections-- Where the interest income is to be computed in accordance with S.30, provisions of S.31 & C1.72 of the Second Schedule would come into play and exemption would be available when income was being computed under the relevant head but not where income was being computed on a notional (or artificial) basis such as from the `business of insurance'.

Exemption under the Ordinance such as those in the Second Schedule can be availed only where income chargeable under the heads specified in section 15 is being computed in accordance with the provisions pertaining to those sections. Consequently, where the interest income is to be computed m accordance with section 30, provisions of section 31 and clause 72 of Second Schedule would come into play, that is to say; the exemption would be available when income is being computed under the relevant head but not where income is being computed on a notional (or artificial) basis, such as from the `business of insurance'.

(1966) 60 I T R 496 and Habib Insurance Company Limited P L D

1990 SC 430 fol.

(c) Income Tax Ordinance (XXXI of 1979)---

----Fourth Sched., Rr.5, 7 & 8 and Ss.23 & 24---Assessee, a general insurance company---Claim of depreciation---In order to compute net amount representing income from business all claims preferred under S.23 are to be admitted subject to limits imposed by S.24 and, if the subject of assessment be the one from `any business of insurance' attracting rules contained in the Fourth Schedule, the `balance of profits' disclosed by the Annual Accounts required by the Insurance Act, 1938 are also to be modified so as to exclude such claims as violate section 23 read with S.24 of the Ordinance.

While computing `profits and 'gains of any business of general insurance', the computation is to be in adherence to Rules 5, 7 and 8 of the Fourth Schedule to the Ordinance XXXI of 1979. Rule 5 unequivocally authorises `adjustment' out of `any expenditure or allowance ... which is not deductible in computing the income chargeable under the head income from business or profession', which naturally envisages a scrutiny as to which deductions are permissible (and to what extent) under section 23 and which deductions are not admissible (and their extent) as per section 24 of the Ordinance for the purpose of working out income from Business or Profession. At the same time due regard is to be had of the Third Schedule to which reference is obtaining in clause (v) of subsection (1) of section 23.

Rule 8(8) of the Third Schedule places a definite bar as respects the actual costs of `road transport vehicles (not being passenger transport vehicles) not plying for hire' which is to be deemed not to exceed Rs.1,75,000. It is consequently beyond question that for purpose of computing profits or gains under the head `income from business or profession' allowance for depreciation prescribed in clause (v) of subsection (1) of section 23 read with sub-rule (8) of Rule 8 of the Third Schedule, can be allowed only to the extent of actual cost `deemed' at Rs.1,75,000 at the maximum. It cannot be denied that slightly varying expressions have been used in three different provisions of the Ordinance such as:

Section 23(1).... `allowance and deduction'

Section 24.... `allowance or deduction'

Rule 5(a) of Fourth Schedule `expenditure or allowance'.

The various provisions of an enactment should be interpreted so as to harmonise these with the other provisions of the same enactment. In order to compute net amount representing income from Business all claims preferred under section 23 are to be admitted subject to limits imposed by section 24 and, if the subject of assessment be the one from `any business of insurance' attracting rules contained in the Fourth Schedule; the `balance of profits' disclosed by the Annual Accounts required by the Insurance Act, are also to be modified so as to exclude such claims as violate section 23 read with section 24 of the Ordinance

PLD 1991 SC 787 and PLD 1982 Kar. 684 ref.

Per Farhat Ali Khan, Chairman not Agreeing with A.A. Zuberi, Accountant Member---

Adamjee Insurance Company Ltd., Karachi v. Central Board of Revenue, Islamabad 1'989 PTD 1090; Pandyan Insurance Co. v. Commissioner of Income-tax 1965 PTD 475;1988 PTD 140 (Trib.); Habib Insurance Co. Ltd. PLD 1985 SC 109 and 1989 PTD 192 (Trib.) ref.

Per Abrar Hussain Naqvi, Judicial Member, Agreeing with A.A. Zuberi, Accountant Member--- '

Muhammad Sarfraz, CA. for Appellant.

S. Roomi Shah, D.R. for Respondent.

Date of hearing: 8th July, 1991.

ORDER

A. A. ZUBERI (ACCOUNTANT MEMBER).--- This appeal has been filed by a Company who is engaged in `general insurance business'. The appeal impugns order, dated 26-1-1991 passed by the learned Commissioner (Appeals Zone I), Lahore inter alia for the assessment year 1989-90. The following issues came up for adjudication.

ZAKAT

Zakat was said to have been deducted at source at Rs.112,673 out of Dividend and Interest on Securities received by the appellant. This was claimed exempt under the Zakat and Ushr Ordinance and, therefore, not included in the total income. The assessing officer, however, included the same holding the view that income of the appellant was to be computed under Rule 8 of the Fourth Schedule to the Income Tax Ordinance which specifically excluded the application of provisions of `any law for the time being in force'. On appeal the learned Commissioner concurred with the view that applicability of- every law stood ousted as respects `profits or gains of any business of insurance and the tax payable thereon' which were to be computed in accordance with the rules contained in the Fourth Schedule. The learned Commissioner thus maintained the denial of exemption with which the appellant is dissatisfied.

It was reiterated before us that Zakat deducted at source by the paying authority would not have figured in the accounts had the debit been adjusted against the credit to declare `not' receipts of Dividend and Interest on Securities but the appellant acted honestly to record the gross amount of receipts and then excluded Zakat (aggregating Rs.112,473) while computing the Income. The addition by the Assessing Officer was thus characterised by the learned counsel as clearly unwarranted because of the Zakat and Ushr Ordinance, section 25 whereof bestowed complete exemption of the amount of Zakat payments from inclusion for tax purposes. The D.R. on his turn supported the treatment meted out by the officers below contending that for computing the profits and gains of insurance business, rules have been framed as are contained in the Fourth Schedule to the Income Tax Ordinance where no scope is available for exclusion of Zakat deducted at source. Moreover, Rule 8 of the Fourth Schedule totally ousts the provisions of income Tax Ordinance especially, and those of `any law for the time being in force' generally; for the purposes of computing the profits and gains of the insurance business.

We have considered the rival arguments addressed to us by the two sides and we are of the view that it cannot -be disputed that section 26(a) of the Income Tax Ordinance makes `any business of insurance' liable to tax for its `profits and gains' in accordance with the rules contained in the Fourth Schedule. Of these Rules, Rule 5 deals with the General Insurance, as is carried on by the appellant. Now, the foundation on which the assessing officer is obliged to base the computation as per this rule is `the balance of the profits disclosed by the annual accounts required under the Insurance Act, 1938 to be furnished to the Controller of Insurance'. The conclusion is inescapable that if the Insurance Act has no provision authorising deduction in respect of Zakat from the balance of the profits a, disclosed to the Controller of Insurance, the assessing officer would have no authority in law to interfere with it because as per clause (a) of Rule 5 his authority to make adjustment is confined to 'any expenditure or allowance' but not to gross up the deductions made at source on account of tax, Zakat; or whatever. For. forming this view we have benefited by the decision of the Karachi High Court in re: Mercantile Fire and General Insurance Company Limited 1989 PTD 142 which has recently been reaffirmed in re: International General Insurance Company 1991 PTD 401, quoting the pronouncements by the Supreme Court of Pakistan in re: Alpha Insurance Company Limited PLD 1981 SC 291 which is as under:--

"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."

Moreover, the learned counsel was unable to demonstrate before us that balance as per annual accounts prepared under the Insurance Act was in any way illegally interfered by the assessing officer. He further failed to show that. the Insurance Act did .in any way authorise exclusion of Zakat deducted at source from the balance of the profits disclosed in the Annual Accounts. In this view of the matter we see no ERRONEOUSNESS in the treatment meted out by the officers below, hence MAINTAINING the same reject this ground.

Interest on Defence Saving Certificate. The assessing officer included m the computation of income a sum of Rs.30,585 on account of interest on Defence Saving Certificate. This the learned Commissioner confirmed. It was pleaded, as was the argument before the officers below, that clause 72 of the Second Schedule of the Income Tax Ordinance granted exemption in respect of yield of Defence Saving Certificate, therefore, the assessing officer should not have included income from this source. The two officers below overruled this argument for the reasons that assessment was framed under the Fourth Schedule to the Income Tax Ordinance particularly Rule 8 thereof, which proclaimed supremacy of the provisions of the schedule over all other provisions of the Income Tax Ordinance as also any law for the time being in force.

In our view there should be no quarrel with the now well-settled proposition that exemption under the Ordinance such as those in the Second Schedule can be availed only where income chargeable under the' heads specified in section 15 is being computed in accordance with the provisions pertaining to those sections. Consequently, where the interest income is to be computed in accordance with section 30, provisions of section 31 and clause 72 of Second Schedule would come into play, that is to say; the exemption would be available when income is being computed under the relevant head but not where income is being computed on a notional (or artificial) basis, such as from the `business of insurance'. This view was expressed by a Court of Indian jurisdiction reported as (1960) 60 ITR 496 and has been approved by the Supreme Court of Pakistan in re: Habib Insurance Company Limited PLD 1990 SC 430. On the strength of this pronouncement by the highest judicial forum of the realm no elaborate reason or discussion seems warranted to REJECT this ground of appeal.

Out of a claim of Rs. 286,400 the assessing officer disallowed a sum of Rs.111,400 which emerged because the value of various vehicles was restricted to Rs.175,000 for purposes of calculation of depreciation, or for working out the WDV. The learned Commissioner confirmed the treatment expressing the view that clause `a' of Rule 5 to the Fourth Schedule lays down that `any expenditure or allowance' which is not deductible in computing the income, chargeable under the head Income from Business or Profession shall be excluded from the `balance of profits disclosed by the annual accounts' required to be furnished to the Controller of Insurance under the Insurance Act, 1938. The learned counsel insisted that clause `a' of Rule 5 permitted exclusion of only such Expenditure or Allowance which is `not deductable in determining income chargeable under the head Income from Business or Profession, thus demanding scrutiny as to which deductions are not so admissible. For this purpose, the learned A.R. pleaded, the attention is to be kept focussed on section 24 of the Income Tax Ordinance which lists out Deductions not Admissible but places no bar as respects claim (and its admission) for Depreciation which consequently becomes admissible allowance as per clause (v) of subsection (1) of section 23 of the Ordinance. According to the learned counsel, there was no justifcation for the curtailment of the claim by the assessing officer and its confirmation by the learned Commissioner.

We do not feel persuaded by the arguments of the learned counsel because we are clear in our mind that while computing `profits and gains of any business of general insurance', the computation is to be in adherence to Rules 5, 7 and 8 of the Fourth Schedule to the Ordinance. Rule 5 unequivocably authorises `adjustment' out of `any expenditure or allowance ... which is not deductible in computing the income chargeable under the head income from business or profession', which naturally envisages a scrutiny as to which deductions are permissible (and to what extent) under section 23 and which deductions are not admissible (and their extent) as per section 24 of the Ordinance for the purpose of working out income from Business or Profession. At the same time due regard is to be had of the Third Schedule to which reference is obtaining in clause (v) of subsection (1) of section 23 which reads as under.

(v) In respect of depreciation of any such buildings, machinery, plant, furniture or fittings, being the property of the assessee, the allowance admissible under the Third Schedule; (here underlined, for emphasis)

Now, Rule 8(8) of the Third Schedule places a definite bar as respects I D the actual costs of `road transport vehicles (not being passenger transport vehicles) not plying for hire' which is to be deemed not to exceed Rs.1,75,000. It is consequently beyond question that for purpose of computing profits or gains under the head `income from business or profession' allowance for depreciation prescribed in clause (v) of subsection (1) of section 23 read with sub-rule (8) of Rule R of the Third Schedule, can be allowed only to the extent of actual cost `deemed' at Rs.1,75,000 at the maximum. It cannot be denied that slightly varying expressions have been used in three different provisions of the Ordinance such as:

Section 23(1).... `allowance and deduction'

Section 24.... `allowance or deduction'

Rule 5(1) of Fourth Schedule `expenditure or allowance'.

In a recent decision reported as PLD 1991 SC 787 in re: Mst. Ameer Khatoon, the learned Judges of the Supreme Court have ruled that the various provisions of an enactment should be interpreted so as to harmonise these with the other provisions of the same enactment. Keeping this enunciation in mind, we feel no hesitation to clarify that in order to compute net amount representing income from Business all claims preferred under section 23 are to be admitted subject to limits imposed by section 24 and, if the subject of assessment be the one from `any business of insurance' attracting rules contained in the Fourth Schedule; the `balance of profits' disclosed by the Annual Accounts required by the Insurance Act, are also to be modified so as to exclude such claims as violate section 23 read with section 24 of the Ordinance. For this conclusion we draw strength from pronouncements by the superior Courts such as PLD 1982 Kar. 684 in re: New Jubilee Insurance Company Ltd. where the learned Judges ruled as under:--

"The I.T.O. is bound to accept the balance of profit as disclosed by the accounts submitted by an assessee to the Controller of Insurance under section 15(1) of the Insurance Act, and accepted by him, except that the I.T.O. is entitled to exclude expenditure not permissible under the provision of section 12 of the Act."

(here underlined for emphasis)

Since treatment meted out by the officers below is in consonance with the above interpretation, we MAINTAIN the same, thus REJECTING this ground of appeal.

CONCLUSION

For the reasons recorded hereinabove, the appeal FAILS and is hereby DISMISSED.

FARHAT ALI KHAN (CHAIRMAN).---I have carefully gone through the order proposed by my learned brother -- Mr. A.A. Zuberi, the Accountant Member, but, I am afraid, I could not persuade myself to agree with his proposed orders regarding deduction of Zakat and depreciation. However, I concur with his finding regarding interest on Defence Saving Certificates.

Undoubtedly the profits and gains of any general insurance business and the tax payable thereon is to be calculated under Rule 5 of the Fourth Schedule attached to the Income Tax Ordinance, 1979. It is also true that Rule 8 of aforesaid Schedule has laid down a non-obstante provision and both the officers below together with the learned D.R. have invoked it while disallowing deduction of Zakat from the total income of the appellant. It would, therefore, be advantageous if both of them are reproduced at this juncture. Rule 5 of the Fourth Schedule reads as under:--

"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 Income Tax Officer 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."

Similarly, Rule 8 of the aforesaid Schedule is as under:--

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."

Now from perusal of Rule 5 it appears that it applies in the case of profits and gains of any business of general insurance. It is also obvious from its perusal that the balance of the profits disclosed by the annual accounts required under the Insurance Act of 1938 as furnished to the Controller of Insurance are to be accepted by the assessing officer. However, he has been given powers of making adjustments regarding any expenditure or allowance or any reserve or provision for any expenditure or the amount of any tax deducted at source from any dividend or interest received which is not deductible in computing the income chargeable under the head Income from business or profession. Thus, there cannot be two opinions on the point' that Rule 5 lays down specific provision regarding computation of the income of business of general insurance. It also appears to be fully established by pronouncements from an authority not less than Supreme Court of Pakistan that this schedule excludes not only other provisions of this Ordinance but also any other law for the time being in force. My learned brother has mentioned several cases in his order and I respectfully follow them. Nevertheless, the issue pertaining to deduction of Zakat is not such an easy issue, which could be disposed of under guidance either from superior Courts or under provisions of Rules 5 and 8 of the Fourth Schedule or provisions of the Insurance Act of 1938.

As far as judicial pronouncements are concerned in spite of my research I could not lay my hand on any case in which the provisions of Zakat and Ushr Ordinance of 1980 and the provisions of Fourth Schedule and Insurance Act of 1938 might have been interpreted. The issue of deduction of Zakat from the total income of an insurance company carrying on business either of life insurance or business of general insurance is, therefore, still an open issue. I would, therefore, like to examine it in some details.

From perusal of Zakat and Ushr Ordinance of 1980, hereinafter referred to as `Zakat Ordinance', it appears that Zakat is payable by a person who is `Sahib-e-Nasab' or, in other words, who owns or possesses the assets on the valuation date. It further appears that Zakat is charged once in a Zakat year and it is subsequently credited to Zakat Fund wherefrom it is disbursed according to the tenets and injunctions of Islam. However, for our purposes its section 25 is very important and it is reproduced hereinbelow:--

"25. Certain tax concessions.---(1)

Notwithstanding anything contained in any other law for the time being in force,--

(a) in determining the tax liability of an assessee for an assessment year,--

(i) under the Income Tax Ordinance, 1979 (XXXI of 1979), his taxable income shall be reduced by the amount paid by him to a Zakat Fund, during the previous year relevant to that assessment year; and

(ii) under the Wealth Tax Act, 1963 (XV of 1963), his assets in respect of which Zakat or contribution in lieu thereof, has been deducted at source during the year relevant to that assessment year shall be excluded from his taxable wealth; and

(b) land revenue and development cess shall not be levied on land on the produce of which Ushr or contribution in lieu thereof, has been charged on compulsory basis.

(2) Nothing in the preceding subsection shall be deemed to affect the liability to pay income tax, wealth tax, land revenue or development cess in respect of any period preceding the enforcement of the relevant provisions of this Ordinance."

From its perusal it appears that it also starts with non-obstante clause "Notwithstanding anything contained in any other law for the time being in force" as does Rule 8 of the Fourth Schedule of the Income-tax Ordinance. However, in my humble opinion, the provisions of section 25 of the Zakat, Ordinance will prevail upon the provisions of Rule 8 of Fourth Schedule of the Income Tax Ordinance, firstly for the reason that when the Income Tax Ordinance was promulgated in 1979, the Zakat and Ushr Ordinance was not in force. Hence it is to be presumed that the legislature has not in its contemplation the provisions of Zakat Ordinance. On the other hand, from perusal of Zakat Ordinance, it appears that it has specifically made reference to the determination of the tax liability of an assessee under the Income Tax Ordinance. Thus, under section 25 of the Zakat Ordinance the intention of legislature has been manifested in very clear and unambiguous terms. It, therefore, appears very obvious that for purposes of determination of the tax Zakat Ordinance will prevail upon the liability of an assessee the provisions of Income Tax Ordinance and since para. (i) of clause (a) of subseciton (1) of section 25 of the Zakat Ordinance lays down that under the Income tax Ordinance, the taxable income of an assessee shall be reduced by the amount paid by him to a Zakat Fund during the previous year relevant to that assessment year, the deduction, therefore, would be admissible. Let me specifically mention here that the Zakat Ordinance has not excluded a company deriving its income from general insurance business from the I definition of Sahib-e-Nasab as contained in clause (xiii) of section 2,of the Zakat Ordinance. It may also be noted that the appellant does not fall within the definition of insurer also which is contained in clause (xii) of section 2 of the Zakat Ordinance. I am, therefore, of the considered view that the tax concession granted to an assessee by section 25 would be available to the appellant in spite of the provisions contained in Rules 5 and 8 of the Fourth Schedule of the Income tax Ordinance.

Let me also mention here that as far as the provisions of the Insurance Act of 1938 are concerned I have no doubt that the provisions of Zakat Ordinance would prevail upon them for the simple reason that Zakat is charged under section 3 of the Zakat Ordinance on compulsory basis from every person who is Sahib-e-Nasab. Since admittedly it has been collected from the appellant, it cannot be deprived of the benefit of section 25 of the Zakat Ordinance, as reproduced above, because its opening clause is excluding all types of provisions for the time being in force and thus I can see no reason to think that the Insurance Act of 1938 would stand excluded. Since it is a special concession given to an assessee who pays Zakat, he, therefore, is entitled to get his taxable income reduced by the amount paid by him to a Zakat Fund.

Thus, in view of discussion made above, I am of the humble opinion that under the facts and circumstances of this appeal the appellant is entitled to claim deduction of the amount of Zakat and both the officers below fell in error in not allowing it to the appellant. I, therefore, allow the appeal on thispoint.

Now turning to the issue pertaining to disallowance of depreciation allowance I once again beg to differ with my learned brother, the Accountant Member. However, before dealing with the merits of this issue let me point out that under the Insurance Act an insurer has to prepare at the expiration of the calendar year a balance sheet, a profit and loss account and a revenue account in accordance with its Schedules and Regulations. Let me also mention here that an insurer is required under various provisions of the Insurance Act, its Schedules and Regulations to prepare its profit and loss account keeping into consideration the depreciation of investments (not charged to reserve or any particular Fund or Account) and appreciation of investments (not credited to reserve or any particular fund or account). Such accounts are thereafter required to be presented to the Controller of Insurance and they are binding on the I.T.O. under Rule 5 of the Fourth Schedule of the Income-tax Ordinance subject to certain permissible adjustments. Since the profits and gains of the appellant have been arrived at after considering the depreciation and appreciation of assets, they are binding on the I.T.O. In a case reported as 1989 PTD 1090, Adamjee Insurance Company Ltd., Karachi v. Central Board of Revenue, Islamabad, the issue before Their Lordships was as to whether the income from Khas Deposit Certificates of the insurer was exempt, but Their Lordships held that once an insurer includes its interest income derived from Khas Deposit Certificates in its profits and gains of business of insurance that income loses its character of interest income on securities and thus such profits and gains of insurance business are binding on an I.T.O. Before Their Lordships a decision from Madras High Court reported as 1965 PTD 475, Pandyan Insurance Co. v. Commissioner of Income Tax was cited and in this case the issue involved was the same which is before us. The Insurance Company had claimed depreciation which was disallowed by the I.T.O. but it was held that Rule 3(b) of the First Schedule of the Indian Income-tax Act did not empower the ITO to adjust the account on the basis of revaluation made by him. My learned brother, the Accountant Member, has also, speaking for the Division Bench, held in a case reported as 1988 PTD 140 (Trib.) that an income of. Insurance Company from whatever source derived has to be taxed as one unit under the head profits and gain of any business of insurance. However, he has also held that Assessing Officer could still bring to charge to tax the notional or artificial income if the same was `taken credit for in the accounts on account of appreciation of investments'. It appears that my learned brother has put reliance for his conclusion on a judgment of our own Supreme Court reported as PLD 1985 SC 109 in the case of Habib Insurance Co. Ltd. However, with due respect to my learned brother, their Lordships have not held that the ITO has the power of either going beyond the accounts of insurance business submitted to the Controller of Insurance nor to make adjustment regarding any expenditure or allowance allowed by clauses (a) and (b) of Rule 5 of the Fourth Schedule of Income Tax Ordinance. In that case the share capital of the investments made out of such capital were specifically appropriated to non-life insurance business and they were treated as such in the balance sheet also. The observation of my learned brother, therefore, is to be restricted to the facts and circumstances of the case of Habib Insurance Company Ltd. as discussed above. On the other hand, another Division Bench of this Tribunal in a case reported as 1989 PTD 192 (Trib.), to which I am signatory, has held that depreciation is an allowable expenditure under Rule 3(b) of the Fourth Schedule of the Income Tax Ordinance. Although the observation has been made in the case of life insurance business income yet I think that it states the correct principle of law.

Moreover, it is important to keep in mind that the ITO has made disallowance out of claim of depreciation by putting reliance on the provisions of Third Schedule of the Income Tax Ordinance. Now if Rule 8 of the Fourth Schedule of Income Tax Ordinance excludes other provisions of the Income Tax Ordinance, I am unable to understand as to how the provisions of Third Schedule' would be made applicable. However, from perusal of the impugned order it appears that the learned CIT(A) has allowed it. It was argued before learned CIT(A) that the restriction of the depreciation allowance on vehicles in accordance with the Third Schedule to the Income Tax Ordinance was not justified in view of the provisions of Rule 5 of the Fourth Schedule. The learned CIT(A) however, repelled this argument with the following observation:-- .

"After hearing the learned A.R. I, do not find any merit in his contention. Clause (a) of the Rule 5 to the Fourth Schedule clearly lays down that any expenditure or allowance which is not deductible in computing the income under the head `income from business or profession' shall be excluded. Since the depreciation allowance is admissible under section 23(1)(v) read with the Third Schedule to the Income Tax Ordinance, the restriction by the departmental authority was more than justified."

Similarly, from perusal of the order proposed by my learned brother it appears that he has confirmed the order of the learned CIT(A) with the following observation:--

"Rule 5 unequivocably authorises `adjustment' out of `any expenditure or allowance 'which is not deductible in computing the income: chargeable under the head `income from business or profession', which naturally envisages a scrutiny as to which deductions are permissible (and to what extent) under section 23 and which deductions are not admissible (and their extent) as per section 24 of the Ordinance for the purpose of working out income from business or profession. At the same time due regard is to be had of the Third Schedule to which reference is obtaining in clause (v) of subsection (1) of section 23, which reads as under:--

(v) in respect of depreciation of any such buildings, machinery, plant, furniture or fittings, being the property of the assessee, the allowance admissible under the Third Schedule."

However, with due respect to my learned brother I think that the provisions of clause (a) of Rule 5 have not been correctly appreciated. As I have pointed out earlier the provisions of Insurance Act, its Schedules and Regulations, lay' down for an insurance company as to how its accounts should be prepared which include valuation of its assets giving due margin to depreciation and appreciation and if the interpretation given by my learned brother is accepted, then the ITO would be given the powers of re-evaluating the assets of an insurer which on the authority of Pandyan Insurance Company's case (supra) the ITO does not enjoy. 1, therefore, allow the appeal on this point also.

Now as far as the finding of my learned brother on disallowance of interest on Defence Saving Certificates is concerned, I respectfully agree with him.

(Sd.)

FARHAT ALI KHAN, CHAIRMAN

Since we have not agreed on two issues, the case is, therefore, to be referred to third Member with the following two questions to be answered by him:--

(1) Whether under the facts and circumstances of this appeal the appellant is entitled to deduction of Zakat from his total income for the purposes-of payment of Income-tax?

(2) Whether under the facts and circumstances of this case the ITO is legally justified in making disallowance of depreciation allowance under Third Schedule of the Income Tax Ordinance?

(Sd.)

FARHAR ALI KHAN,

CHAIRMAN

(Sd.)

A.A. ZUBERI,

(ACCOUNTANT MEMBER)

ABRAR HUSSAIN NAQVI (JUDICIAL MEMBER).---This appeal was originally heard by a Division Bench of this Tribunal consisting of Mr. A.A. Zuberi, the Accountant Member and Mr. Farhat Ali Khan, the Chairman. A differance of opinion has arisen between the two learned members on two issues enumerated above. In order to resolve this difference of opinion the case has been referred to me as a third member. I have again heard the learned counsel for the assessee as well as the learned D.R. on both these questions and my findings on the two issues are as under:--

Admissibility of Zakat: Both the learned members have discussed this question at quite a length supported by the case-law. The relevant provisions contained in the 4th Schedule i.e. Rule 5(a) as well as section 25 of the Zakat and Ushr Ordinance, 1980 have also been reproduced above and I need not reproduce these provisions again. The precise point on which the two learned members have differed is as to whether Rule 8 of the 4th Schedule overrides section 25 of the Zakat and Ushr Ordinance in the case of an Insurance Company or section 25 of the Zakat and Ushr Ordinance overrides the rule 8 of the 4th Schedule of the Income Tax Ordinance. Rule 8 of the 4th schedule may here be reproduced for reference:

"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."

According to the learned Accountant Member this being. a case of an Insurance Company the above rule 8 has an overriding, effect even on the Zakat and Ushr Ordinance inasmuch as this is a special law in regard to the determination of tax of an Insurance Company. According to the learned Chairman, section 25 of the Zakat and Ushr Ordinance has the overriding effect as the tax concession has been specifically allowed under that provision and also for the reason that it is the law later in time. According to him at the time of the promulgation of the Income Tax Ordinance, 1979 the Zakat and Ushr Ordinance was not and could not be in the mind of the Legislature while at the time of allowing the tax concession in the Zakat and Ushr Ordinance, the Income Tax Ordinance was in the mind of the Legislature and therefore, it has to be presumed that the Legislature, in. its wisdom, has excluded all other laws including the one contained in Rule 8 of the 4th Schedule so as to make the overriding application of the Zakat and Ushr Ordinance.

The learned Accountant Member has not dealt with this issue in this context and he has not said a word as to why the Zakat and Ushr Ordinance will not have an overriding effect being the later law.

It may here be noted that the 4th Schedule has the sanction of section 26(a) of the Income Tax Ordinance which reads as under:--

26(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;'

In clause (a) of section 26 of the Income Tax Ordinance three things are conspicuous. First: it also starts with the words 'notwithstanding anything contained in this Ordinance'. Secondly: it is the Profits and gains of any business of insurance which has to be computed in accordance with the 4th Schedule and not the income or the total income of an insurance company. Thirdly: not only the profits and gains of any business of insurance has to be determined but the tax thereon has also to be computed in accordance with Rules contained in the 4th Schedule. Strangely while the manner of computing the profits and gains of an insurance business has been given but the manner of computation of tax has not been provided to the 4th Schedule though clause (a) of section 26 enjoins that such a computation has to be made under the 4th Schedule. To my mind there seems to be some flaw and something is missing in the 4th Schedule which had to be provided as required by clause (a) of section 26 of the Income Tax Ordinance: As stated above the profits and gains is not synonymous term with either income or the total income. In order to calculate the tax, first the total income has to be determined which necessarily is not the same as the profits and gains. It therefore, follows that Rule 5 of the 4th Schedule of the Ordinance is to the complete code for the purpose of determining the total income of an Insurance Company and therefore, the tax can also not be computed merely by applying the methodology contained in Rule 5 of the Fourth Schedule and thus, of necessity, the assessing officer had to be empowered to do something more than merely accepting the balance of the profits disclosed in the annual accounts required under the Insurance Act, 1938 to be furnished to the Controller of Insurance. Clause (a) of aforesaid Rule 5 empowers the ITO to make certain adjustments. This power of adjustment however, is restricted to exclude any expenditure or allowance etc. which is not deductible in computing the income chargeable under the head income from business or profession. Therefore, the power of the ITO to make adjustment under Rule 5(a) of the 4^th Schedule is restricted only to exclude that expenditure or allowance etc. which is not deductible i.e. which is prohibited under section 24 of the Income Tax Ordinance. The plea of the department that since Rule 5(a) of the 4th Schedule does not specifically permit the Zakat deducted at source as allowable deduction and therefore cannot be said to be admissible to the assessee completely falls to the ground. The power of the ITO is negative i.e. he has the power to exclude the expenditure or allowance which is not deductible i.e. which is not allowable under section 24 of the Income Tax Ordinance or under any other provision of the Ordinance. It therefore, follows that it is not the assessee who had to show as to under what provision of law this allowance was admissible as section 25 of the Zakat and Ushr is already in favour of the assessee. It is for the assessing officer to show that such allowance was not admissible or allowable under section 24 of the Income Tax Ordinance. There being no such restriction under section 24 of the Ordinance, the allowance of Zakat could not be held to be not deductible.

I am also in full agreement with the reasoning and conclusion of the learned Chairman that Zakat and Ushr Ordinance being later in time, therefore, notwithstanding the overriding provision contained in Rule 8 of the 4th Schedule; the provisions contained in section 25 of the Zakat and Ushr Ordinance will have precedence over the Income Tax Ordinance. There is still another argument, which supports this view Rule 8 of the 4^th Schedule provides that it is to be applied notwithstanding the provisions contained in the Income Tax Ordinance or in any other law for the time being in force. As stated above the 4th Schedule only contains the provisions in which the profits and gains of any business of insurance company can be computed and the ITO has been given certain powers of adjustment so as to exclude an expenditure or allowance, which was not deductible. On the contrary section 25 of the Zakat and Ushr Ordinance talks about the lax liability of an assessee. The relevant part of section 25 of the Zakat and Ushr, Ordinance may here be reproduced for reference:--

"Certain tax concessions.----(1) Notwithstanding anything contained in any other law for the time being in force,--

(a) In determining the tax liability of an assessee for an assessment year,---

(i) Under the Income Tax Ordinance, 1979 (XXXI of 1979), his taxable income shall be reduced by the amount paid by him to a Zakat Fund, during the previous year relevant to, that assessment year and."

It would be seen that even if the 4th Schedule is applied with full force, even then there is no conflict between the two provisions. Rule 5 only talks about the determination of the profits and gains of an Insurance Company. Even after making an adjustment under clause (a) of Rule 5 of the 4th Schedule, at best the assessing officer works out the total income. Even if the total income as laid down in the 4th Schedule is determined still under the Zakat and Ushr Ordinance, 1980 it is the taxable income from which the Zakat has to be deducted. Thus, there will be no illegality at all if the assessing officer determines the total income of an insurance Company under the 4th Schedule and works out a certain figure and then he determines the taxable income of the insurance company and from that figure he has to deduct the Zakat. Therefore, to my mind, there is no conflict between Rule 5(a) of the Income Tax Ordinance and section 25(1)(i) of the Zakat and Ushr Ordinance, 1980.

For the foregoing reasons I am in respectful agreement with the view of the learned Chairman and may answer to question No.l is in the affirmative and the conclusion would be that the assessee is entitled to the deduction of Zakat from his taxable income.

Allowance of depreciation. Before dealing with this issue I would like to state few facts which have not been narrated in the order of my two learned brothers. The assessee had claimed depreciation at the normal rate of 20% of the value which may here be reproduced:--

The ITO restricted the depreciation to Rs.175,000 and out of the claim of Rs.2,86,400 he made a disallowance of Rs.111,400 and allowed the claim at Rs.1,75,000. From the above figures it is obvious that this is not the moot point as to whether the depreciation is allowable to the assessee under the Third Schedule of the Income Tax Ordinance or not. The real question is as to whether the ITO was right in restricting the claim to Rs.1,75,000. The fact that the assessing officer had himself allowed the allowance to the tune of Rs.1,75,000 makes the issue undisputed that the assessee is entitled to the depreciation under the Third Schedule of the Ordinance. Therefore, the real issue would be as to under what provision of law the assessing officer had restricted the allowance to Rs.1,75,000. From the perusal of the Third Schedule. of the Income Tax Ordinance (the applicability of which is not in dispute) an assessee is entitled to depreciation on motor vehicles at the normal rate of 20% of the written down value as has been mentioned in Rule 2 of the Third Schedule Item No.8. Rule 6 of the Third Schedule defines various terms for the s purposes of this Schedule. Sub-rule (7) of the Rule 8 defines the written down value. Rule 8(8) of the Third Schedule reads as under:--

For the poses of clause(7) .

(a) In the case of road transport vehicles being passenger transport . vehicles, not plying for hire, the actual cost to the assessee shall be deemed not to exceed (one hundred and seventy-five thousand rupees)."

From the reading of sub-rule (8) of Rule 8 reproduced above it is evident that this is for the purposes of claue (7)..Clause (7) gives the definition of written down value. Clause (a) of sub-rule (7) deals with the ship or any asset to which sub-rule (3) applies (which deals with the furniture). Clause (b) applies in the case of other assets or class of assets. In this sub-clause (b) there are two categories of cases:--

(1) where the asset or class of assets was acquired its the income year and in that case the written down value would be actual cost to the assessee;

(2) where the asset or class of assets was acquired before the income year in that case the written down value would be the actual cost to the assessee as reduced by the aggregate of the allowance or depreciation allowed to him in the earlier years;

From the perusal of the assessment order it is not mentioned as to whether the assets were purchased in the income year or in the earlier year. Assuming that the assets were acquired in the income year and the value shown by the assessee is the actual cost., then the restriction placed by sub-rule (8) of Rule 8 has to be applied with full force. There is no dispute that the asset or class of assets of the assessee are of the category which fall under sub-clause (a) of sub- rule (8) of Rule 8 reproduced above. Therefore, there is hardly any reason to say that such a restriction was wrongly applied by the assessing officer as that is the law contained in the Third Schedule. I may reiterate here that the disallowance has not been made by the ITO on the ground that the assessee is an Insurance Company. The disallowance has been made as this restriction is applicable in all cases where the class of assets is the road transport vehicles being passenger transport vehicles not plying for hire. Thus, the moot point is not as to whether the assessee is entitled to the depreciation or not. The moot point is whether the restriction imposed by the assessing officer was justified or not. It is therefore, evident from the above discussion that the restriction was applicable on this class of assets on which the assessee had claimed depreciation and which applies to all the assessees including the Insurance Companies An Insurance company is not on higher footing than any other assessee.

The learned Chairman has placed reliance on the Supreme Court of India's case Pandyan Insurance Company v. CIT reported as (1965) P T D 475. With utmost respect, in. my humble view that case has absolutely no relevancy and is not applicable on the facts of the present case. That was a case under the repealed Income Tax Act and First Schedule of that Act made the depreciation specifically allowable. Rule 6 of the First Schedule of the Repealed Income Tax Act (which corresponds to Rule 5(a) of the Fourth Schedule of the Income Tax Ordinance) provided that the profits and gains of any business of insurance other than life insurance would be taken to be the balance of the profits disclosed by the annual accounts furnished to the Controller of Insurance after adjustment of such balance so as to exclude from it any expenditure. It was specifically provided in that rule "depreciation and appreciation of the value of investment shall be dealt with as provided in rule 3 for the business of life insurance". Rule 3(b) provided that any amount written off or reserved in the accounts or through the actuarial valuation balance sheet to meet depreciation of or loss on the realisation of the securities or other assets shall be allowed as a deduction. It would be seen that it is in this context that the Supreme Court of India had allowed the depreciation, which had been written off by the assessee in that case. In the Income Tax Ordinance, 19'79 the only provision under which the depreciation is allowable is under the authority of section 23(v) of the Ordinance. Obviously the assessee is claiming the depreciation under this clause which lays down that the depreciation shall be admissible as provided in the Third Schedule. It, therefore, naturally follows that the Third Schedule, under which the claim of depreciation has been made, shall be applicable as a whole. It cannot be said that the part of the Schedule is applicable and part of it is not applicable. Once we have come to this conclusion that the allowance had been claimed under the Third Schedule and is admissible under the Third Schedule then it will be applicable with all its limitations. It has also been demonstrated above that under the Third Schedule the depreciation is allowable on the written down value and the written down value has been defined and in the case of road transport vehicles of the nature on which the depreciation has been claimed by the assessee, the Third Schedule puts a limitation that such an allowance shall not exceed an amount of Rs.1,75,000 in case of road transport vehicle being passenger transport vehicles not plying for hire. Admittedly, the assessee's class of assets falls under this category and therefore, the restriction is fully applicable on the assessee.

For the foregoing reasons my fording on the question No.2 is in the affirmative and while agreeing with the learned Accountant Member on this issue (though for different reasons), I would

dismiss the assessee's appeal on this point.

ORDER OF THE BENCH

For the reasons given above the amount of Zakat paid by the assessee is directed to be deducted from the taxable income of the assessee. However on other points the assessee fails and the appeal is only accepted to the extent indicated above.

M.BA./1620/TOrder accordingly.