(a) Interpretation of statutes---

---- Legislature cannot be imputed with the ignorance of law of the land and no superfluity can be assigned to it vis-a-vis the laws it enacts.

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

----Second Sched., Cl. 99, Ss.151, 14(1) & 2(6)(32)---Constitution of Pakistan (1973), Fourth Sched., Federal Legislative List ---Assessee deriving income from business of fish catching which he carried on in partnership with his wife under the name and style of a firm and the partnership was not registered either with the Registrar of Firms or with the Income-tax Department---Clair of exemption of income from said business by assessee---Validity.

In the present case the exemption was claimed regarding income frorm fish catching. It does not fall within the ambit of any of the entries of Federal Legislative List of Fourth Schedule of the Constitution of Islamic Republic of Pakistan. Any income from any source including income from fish catching is chargeable to tax unless the Legislature has been made incompetent to make it chargeable or unless it falls under any of the clauses of the Second Schedule c the Income Tax Ordinance which is enacted pursuant to the provision c section 14(1) of the Income Tax Ordinance. Clause (99) of the Second Schedule of the Income Tax Ordinance says that any income derived by an assessee after 30-6-1975 and before 1-7-1988 from fish catching was exempt from tax. It is important to note that the expression "an assessee" has been used in this clause. Since a firm whether registered or unregistered falls within the definition of an "assessee" and "person" as contained in clauses (6) and (32) of section 2 of the Income Tax Ordinance and since its partners also are included within the folds of both the definitions, it is, therefore, obvious that the first recipient of the fish catching income would be the firm and the second recipient would be its partners. Section 151 applies in the case of the assessee.

M/s. Julian Hoshing Dinshaw Trust v. ITO 1992 PTD 1; 1985 PTD (Trib.) 869 and (1985) 52 Tax (Trib.) 59 ref.

D.D. Sethna for Appellant.

Noor Muhammad, D.R. for Respondent.

Date of hearing: 3rd August, 1992.

ORDER

The assessee derived his income in the assessment years 1983-84, 1984-85, 1985-86, 1986-87 and 1987-88 from business of fish catching which he carried on in partnership with his wife under the name and style of M/s. Pak Fishing Corporation. It is not disputed that the partnership was not registered either with the Registrar of Firms or with the Income-tax Department. In his returns filed in the relevant assessment years the assessee declared his income- inter alia, received from aforesaid partnership business but claimed exemption under clause 99 of the Second Schedule to the Income Tax Ordinance. The ITO, however, declined to grant exemption and taxed it in each assessment year involved for the reason that it was not exempt in the hands of the assessee under section 151 of the Income Tax Ordinance, 1979. Obviously the assessee felt aggrieved and went up in appeal in all the assessment years involved. In the assessment years 1983-84 and 1984-85 the learned CIT(A) by his impugned order, dated 15-1-1987 allowed the appeals with the following observation:

" ....The appellant challenges this view of the assessing officer and I find force in it because a firm and its partners in law are not two distinct persons. The mode of taxing a firm and its partners under the Income Tax Ordinance cannot change this legal position as a firm in the eye of law is not anything except a combination of a number of individuals and by itself is a fictional person and not even a legal person. In this view of the matter, the provisions of section 151 cannot be invoked as partner of a firm cannot receive anything from the firm as whatever belongs to the firm belongs to him and him alone..."

But in his another order recorded on 6-6-1987 relating to assessment years 1985-86 and 1986-87 the same learned CIT(A), however, appears to have lost his confidence as he recorded the following order:

" ..I have examined the contentions of the counsel and the findings of the ITO. In my opinion the provisions of section 151 cannot be invoked as a partner of a firm cannot receive anything from the firm as whatever belongs to the firm belongs to him and him alone. However, having regard to the sphere of controversy between the ITO and the appellant, 1 would remit the case back to the ITO to examine the provisions of section 151 of the Ordinance and clause 99 of the Second Schedule to the Ordinance and thereafter adjudicate in the matter after giving a reasonable opportunity to the appellant of being heard..."

2. Another CIT(A) however upheld the finding of the ITO in assessment year 1987-88 vide his order recorded on 30-10-1988 with the following remarks:

" ....There is no dispute regarding the exemption available in the hands of the partners of a R.F. This is also clarified by CBR Circular under reference. The learned counsel however was asked to submit any authority in support of his contention that the income in the hands of partners .of a URF is also exempt. Any case-law or any circular in support is not filed. In the circumstances there is no reason to extend the extension of exemption in the hands of partners of a URF.. "

Thus, in first two appeals the department has come up in appeal whereas in the remaining three it is the assessee who assails the orders against him. I shall be referring to the assessee and the department as the appellant and the respondent hereinafter.

3. From the facts recapitulated above it is clear that applicability of section 151 to the income received by a partner from fish catching business carried on by a URF is on the anvil before me. Mr. D.D. Sethna, Advocate has argued the case of the appellant whereas Mr. Noor Muhammad, the learned D.R. has projected the views of the respondent. Mr. Sethna argues that section 151 cannot be applied in case of R.F. much less in case of URF for the simple reason that a firm and its partners are not distinct and separate from each other in law. Therefore, there cannot be an original and subsequent recipient as envisaged by section 151 of the Income Tax Ordinance. The learned counsel has also fortified his submission by putting reliance on a recent decision reported as 1992 PTD 1 M/s. Julian Hoshing Dinshaw Trust v. ITO coming from no less an authority than Supreme Court of Pakistan. Mr. Noor Muhammad the learned D.R., however, has relied upon two decisions of this Tribunal reported as 1985 PTD (Trib.) 869 and (1985) 52 Tax (Trib.) 59 as anchor sheet of his arguments.

4. Now turning to the merits of first submission of Mr. Sethna, the learned counsel for the appellant, I see no substance in it. In the decision relied upon by Mr. Noor Muhammad, the learned D.R. the issue before a Division Bench of this Tribunal was as to whether export rebate could be granted to both a partnership firm as well as its partners. In spite of vehement opposition of the department this Tribunal held on true and correct interpretation of clause (a) of subsection (4) of section 3 of the Finance Ordinance, 1978 that since the word assessee included both, a partner as well as a registered firm, both were entitled to export rebate. The D.B. of this Tribunal could arrive at this conclusion because they were of the view that a partnership firm was different from its partners. In para. 5 at page 872 of the reported decision the learned D.B. made the exposition of law in the following words:

" ....To start with let us be very clear about the nature and a relationship of the partnership firm and its partners. Unlike a company incorporated under Companies Act a partnership firm carries no juristic personality. However, for the purpose of income-tax a registered firm has been given a special legal status of a legal entity and has been included within the definition of `person' and "assessee". Let us also mention at this juncture that there are three distinct stages in assessment proceedings namely, computation of taxable income, determination of tax payable, and demand for the tax so far due. As far as the registration of firm is concerned, it makes no difference for the purpose of computation of taxable income. But it is very material as far the determination of tax payable and demand for the tax found due are concerned. It is also very pertinent that under the relevant income-tax law the partnership firm was liable to pay super tax only whereas income tax was payable by its partner..."

Thus, a firth and its partners could enjoy benefit of export rebate simply because of their separate existence for the purpose of income-tax till the Finance Ordinance, 1992 withdraw the rebate on exports. It is unfortunate that the attention of the learned CIT (A) was not drawn to aforesaid decision of this Tribunal and consequently he reached wrong conclusion. I therefore for the reasons given above find no merit in the first submission of Mr. Sethna. It is rejected accordingly.

5. Now before turning to his other leg of argument it would be in the fitness of things that section 151 of the Income Tax Ordinance is reproduced at this juncture. It reads:

"151. Limitation of exemption.--Where any income is exempt from tax, the exemption shall, in the absence of a specific provision to the contrary contained in this Ordinance, be limited to the original recipient of that income and shall not extend to any person receiving any payment wholly or in part out of that income..."

6. It appears from perusal of the decision of this Tribunal relied upon by the learned D.R. that a Full Bench dealt elaborately with this section particularly with reference to the case of Supreme Court of Pakistan recorded in the case of CIT v. E.V. Miller which is reported as PLD 1959 SC 219. Dealing with the purpose and intent of enactment of this section it was noticed by the Full Bench that no provision like this was available in the repealed Income Tax Act. Adverting to legislative intent with special reference to the Miller's case (supra) the Full Bench observed as under:

" ....We are of the considered view that the purpose of enacting section 151 is to neutralise the effect of Miller's case. The legislature, no doubt, is competent to do it and, we think, that in its wisdom it has done so..."

7. From perusal of the aforesaid decision it further appears that it was argued that the legislature was not competent to legislate regarding taxes on capital gain obtained from sale of immovable properties hence there arose no question of its exemption. In order to meet this argument the Full Bench analysed in some details, various expressions used in section 151. Starting with the expression "where any income is exempt from tax" it was observed that the word "where" `did not necessarily refer to the Ordinance. Explaining the expression "any income" the Full Bench remarked as under:

"...Thus, it is to be ascribed wider meaning. On top of it the addition of word "any" to word "income" in section 151 has widened the scope of its definition further so as to include capital gains also within its folds "

Discussing the correct and true import of the expression "is exempt from tax" the Full Bench expressed the view that aforesaid expression meant and implied that income which was exempt under any provision of law which exempts any income from tax chargeable under Income Tax Ordinance. This finding was fortified by reproducing section 49 of the State Bank of Pakistan Act, 1950, which exempted the income of the Bank from income-tax and super-tax. Repelling, argument advanced with reference to Entry No.50 of Fourth Schedule of the Constitution of Islamic Republic of Pakistan the Full Bench observed as under:

"...Moreover if the legislature is not competent to impose a tax on any income as is contended by learned counsel, it is necessarily exempt. Similarly, this expression does not mean that the income should. be chargeable before it is exempted..:"

Elaborating the genesis of Entry No.50 the Full Bench has dealt with it together with Entry No.47 in the following words:

"...From its perusal it appears that the legislature has been given the power to impose taxes on income excluding agricultural income. Let us mention here that this entry has come down to us passing through various Constitutions. In the Government of India Act., 1935, Entry 54, List I of Schedule VII was exactly same. Then, in late Constitution of 1956 it was contained in Entry 26 of Scheduel V. In the late Constitution of 1962 it was laid down in clause (e) of Entry 43 of Third Schedule. We may usefully mention here that word `income' as used in Entry 54 of the Government of India Act was given wider meaning than assigned to it by the Income Tax Act in Navinchandra Mafat Lai v. CIT (1954) 26 ITR 758 by Indian Supreme Court. This case has been followed subsequently in numerous decisions. However if we read clause (I) of the Second Schedule of the Ordinance, we find that the agricultural income has been exempted from charge of income-tax surely under the provision of the Ordinance. If the argument of Mr. N...is accepted then the legislature would not be competent to exempt agricultural income because it is not chargeable to income tax. But we have to keep into consideration the fact that it has been exempt under the Act despite the entries of the Government of India Act, 1935 and late Constitutions of 1956 and 1962. We may also mention here that in Indian Constitution Entry 82 of List I of Seventh Schedule is exactly same yet agricultural income has also been exempt under the Indian Income Tax Acts of 1922 and 1961.

20. It is true that entry 47 has used the words "other than" whereas entry S0 has used the words "not including". But in our view, the words "other than" mean "excluding" or, negatively speaking, "not including". Let us point out here that in the Government of India Act, 1935 there was no such entry like Entry 50. But Indian Supreme Court in Mafat Lai's case (supra) held that capital gains were included within the folds of `income' as used in Entry 54 of Government of India Act, 1935. However, when late Constitution of 1956 was framed by its Entry 26 of Schedule the Legislature was permitted to impose, "taxes on capital value of assets exclusive of agricultural land". But in clause (c) of Entry 43 of the late Constitution of 1962 a change was introduced. Now it read:

"Taxes on capital value bf assets not including, taxes on capital gains on immovable property.--In view of this discussion we do not think that for our purposes the use of word "other than" in Entry 47 and "not including;" in entry 50 has any significance They mean and imply same thing, namely, the legislature was not permitted to impose tax either on agricultural income or capital gains on immovable property ......

The Full Bench then turning down the argument advanced before it recorded its conclusion as under:

"...Thus our conclusion would be that Entries 47 and 50 have laid down restriction on imposition of tax on agricultural income and capital gains on immovable property but they have not, it is important to note, prohibited the legislature from exempting them from chargeability of tax itself. It is our view that by exempting them formally from chargeability of the tax under the provision of the Ordinance the legislature has complied with Entries No.47 and 50 instead of violating them..."

From perusal of the aforesaid decision it also appears that Full Bench after considering the effect of sections 14 and 26 of the Income Tax Ordinance with reference to Entries No.47 and 50 summed up its view in the following words:

" .In this way the legislature has avoided the possibility of imposition of tax on agricultural income and capital gains on immovable property without reference to the relevant entries. The Income Tax Ordinance is now self-contained in this respect for general public as well as for aft those who are concerned with the administration of tax law. No body needs to find out exemptions from study of the Constitution...

This conclusion appears to have been based on two cardinal principles of interpretation of statutes namely; that the legislature cannot be imputed with the ignorance of law of the and that no superfluity can be assigned to it vis-a-vis the laws it enacts...

8. Before proceeding further let me mention that explaining the true and correct interpretation of Miller's case (supra) the Full Bench made the following pertinent remarks:

..However, at this juncture we would like to add that, as we understand it, the ratio of Miller's case (supra) is that Raison D'etre of a company being earning of profits for its shareholders, the income of a company is indeed income of its shareholders. Thus, the reasoning of their Lordships is that if it is agricultural income and exempted from tax in the hands of the company, it must also be exempt in the hands of its shareholders notwithstanding the fact that it is called dividend. Nevertheless it is pertinent to note that their Lordships had accepted existence of two separate entries namely, a company having juridic personality and a shareholder made of bone, blood and flesh. At the same time it is also noteworthy that their Lordships have called the income in the hands of a company as its notional income which becomes "actual income" according to their Lordships, in the hands of shareholders. But, with due respect to their Lordship, it appears that in any case, the original recipient of the income is a company which on subsequent distribution, is received by the shareholders..."

It is apparent from perusal of the aforesaid decision that the Full Bench also took pains in explaining the extent of the application of the ratio decidendi of Miller's case with special reference to Entry No.50 and section 151, the following remark of the Full Bench is also very significant. In paragraph 21 at page 68 of the reported decision the Full Bench observed as under:

" ....The Constitution has put embargo on the legislature regarding capital gains obtained from immovable property, but this embargo does not lay down the principle that once capital gains always capital gains. Apparently it means embargo on the capital gains in the hands of first recipient. The reason is obvious, when the amount which is capital gain in the hands of first recipient is further disbursed, it adopts different nomenclature and is for various considerations. This principle has been followed by the legislature in enacting section 49 of the State Bank of Pakistan Act, 1956 (please see proviso to section 49(2) which has been reproduced above). Now turning to the facts of the present case it is true that the money received by M/s. M....E...L... is capital gains in its hands obtained from immovable property. But when it came in the hands of the appellant it was given the name of dividend and the consideration was shareholdings of the appellants. Again, when appellants pay it say to their Manager or domestic servant it is called salary or wages respectively and the consideration is services rendered by the Manager or domestic servant. Now, Manager may spend it on buying commodities and making payments to the school of his children. In the first case it would be called price and consideration would be the supply of commodities. Similarly, in the second case, it would be called tuition fees and consideration would be education imparted to his children. The examples can be multiplied. Now, can it be said that the dividend, salary or wages, price of tuition fees are capital gains obtained from immovable property? Can it be said that Entry 50 has barred legislature from taxing such dividend, salary, wages, price of tuition fees etc? The answer to the above question now in view of section 151 of the Ordinance is an emphatic "no". It is true that in view of Miller's case (supra), the position would have been somewhat different as far as dividend was concerned, but in any case, it did not provide cover to other cases cited by us. In other words it shielded only the dividend income in the hands of shareholders. However, when legislature in its wisdom has enacted law to neutralise Miller's case (supra), we have no other alternative but to apply it as it stands. Mr. N....the learned counsel for the appellants was very much anxious to see that section 151 when interpreted to neutralise Miller's case (supra) should not become ultra vires Entry 50."

9. With this discussion let me now turn to the case of Dinshaw Hoshing Trust (supra). From perusal of aforesaid decision it appears that M/s. Julian Hoshing Dinshaw Trust was created under a Trust Deed dated 17-3-1966. It is referred to hereinafter as Trust. This Trust alongwith a private limited company known as M/s. Nali Dinshaw Ltd. hereinafter referred to as Company, owned shares of another private limited company known as M/s. Eduljee Dinshaw Ltd. hereinafter referred to EDL which owned some agricultural land and other immovable property. As luck could have it, the land belonging to EDL was acquired under the provision of Land Acquisition Act and a sum of Rs.3939 was paid to it as compensation which it passed on to the Trust and the Company. The Trust and the Company claimed it exempt from income-tax for the reason that it was compensation for acquisition of their capital asset. The ITO, however, invoking section 151 of the Income Tax Ordinance repelled the claim of the Trust and the Company and thus Constitution Petitions were tiled before the High Court which were dismissed, without decision on merits, on the ground, that ordinary remedy was available to the Trust and the Company under Income Tax Ordinance. However, the Special Leave was sought which was granted. Dealing with aforesaid Entry 50 their Lordships of Supreme Court of Pakistan came to the conclusion that the imposition of tax on the capital gain arising from the Transfer of Immovable Property is beyond the taxing power of the Federal Government. The question whether the receipt which is not at all income and completely outside the purview of Income Tax Act, changes its character in the hands of the shareholders, was answered by their Lordships in the negative. Their Lordships were pleased to observe that ratio of Miller's case (supra), was squarely applicable to the facts and circumstances of the Trust and the Company. Dealing with section 151 their Lordships were pleased to observe as under:

" ....But, this section has absolutely no applicability to cases before us. The reason being that the concept of exemption postulates chargeability under the charging provisions of the statute. Here the receipt is basically outside the purview of taxing statute and rather there is a Constitutional bar on its taxability. According to the definition of the term income, as given in the Income Tax Act/Ordinance, the receipt cannot in any manner be categorised as income of the Company .... "

Thus, aforesaid Full Bench decision of this Tribunal stands overruled in so far as it lays down that Miller's case applied even after promulgation of section 151 and I respectfully bow my head to their Lordships' view as it is in any case, binding on me. However, if the Department feels aggrieved it should seek its remedy elsewhere.

10. Nevertheless, I feel that Dinshaw's case (supra) does not come to the. rescue of Mr. Sethna. According to my humble understanding this case is to be restricted to the cases which fall within the ambit of those entries of exemption which are contained in the Federal Legislative List of the Fourth Schedule of the Constitution of Islamic Republic of Pakistan and which prohibit the Legislature from taxing the receipts falling under them. In the case of Mr. Sethna, on the other hand, the exemption is claimed regarding income from fish catching. I am afraid, it does not fall within the ambit of any of the entries of Federal Legislative List of Fourth Schedule of the Constitution of Islamic Republic of Pakistan. Any income from any source including income from fish catching is chargeable to tax unless as pointed out by their Lordships of Supreme Court the legislature has been made incompetent to make it chargeable or unless it falls under any of the clauses of the Second Schedule of the Income Tax Ordinance which is enacted pursuant to the provision of section 14(1) of the Income Tax Ordinance. If we peruse clause (99) of the Second Schedule of the Income Tax Ordinance it appears that any income derived by an assessee after 30-6-1975 and before 1-7-1988 from fish catching was exempt from tax. It is important to note that the expression "an assessee" has been used in this clause. Since a firm whether registered or unregistered falls within the definition of an "assessee" and "person" as contained in clauses (6) and (32) of section 2 of the Income Tax Ordinance and since its partners also are included within the folds of both the definitions, it is, therefore, obvious that the first recipient of the fish catching income would be the firm and the second recipient would be its partners. Thus in my humble opinion, section 151 applies in the case of the appellant. I, therefore, reject the appeal filed by the appellant and allow the appeals filed by the department.

11. Before parting with those appeals let me mention that the appellant had applied for stay of recovery of tax also but in order to avoid duplicity of orders I decided to dispose of the Stay Application together with the appeals on merits. It, therefore, also stands rejected.

12. All the appeals and the Miscellaneous Application stand disposed of accordingly.

M.BA./1715/TOrder accordingly.