1995 P T D 761
[Karachi High Court]
Before Mamoon Kazi and Mrs. Majida Razvi, JJ
Messrs ADAMJEE INSURANCE COMPANY LIMITED and others
Versus
INCOME TAX OFFICER and others
Constitutional Petitions Nos. D-1695, 1645--1649, 1686--16`0, 1696--1699, 1742--1750 of 1991, 37--44, 206, 653-656, 1203, 2055-2058 of 1992, 2, 1313- 1316,1698--1699, 2279 of 1993,1442 to 1444 of 1994, decided on 07/02/1995.
(a) Income Tax Ordinance (XXXI of 1979)--
----Ss.65(2) & 55---Expression "Definite information" occurring in S.65(2), Income Tax Ordinance, 1979---Connotation---Definite information includes actual information as well as information about the existence of a binding judgment of a competent Court of law but does not include any information based on a circular issued by Central Board of Revenue whereby an opinion earlier held was modified ---When the notices were served on the assessee which were based upon the interpretation of the relevant provisions of law given in a binding judgment of the High Court, notices so served were valid and did not suffer from any infirmity.
The expression "definite information" occurring in subsection (2) of section 65 could include actual information as well as information about the existence of a binding judgment of a competent Court of law but the same would not include any information based on a circular issued by the Central Board of Revenue whereby an opinion earlier held was modified.
In the present case, the notices were based upon the interpretation of the relevant provisions of law given by a binding judgment of High Court. There was no doubt that the notices respectively served upon the assessee under the said provision of law were valid and did not suffer from any infirmity.
Messrs Central Insurance Co. and others v. The Central Board of Revenue 1993 PTD 766 fol.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.26 & Fourth Sched., Rr.5 & 8---Insurance Company---Computation of profits and gains of insurance business---Dividend income---Entire income of the assessee included in the profit and loss account, including income from dividends, was liable to be assessed as a single unit and no concession could be claimed in respect of dividend income.
By use of the non obstante clause in section 26 of the Income Tax Ordinance, the Legislature manifested a clear intention to place the said section on a higher pedestal when compared to the other provisions of the Ordinance. Income from the profits and gains made from any business of an insurance company other than life insurance, falling under whatever head of income, is to be computed as a single unit of income. Although tax on such income is to be computed in accordance with the rates embodied in the First Schedule to the Ordinance, and according to clause (c) in the said Schedule, income consisting of any dividends is to be excluded by the I.T.O. while charging such income to tax, but such income can be treated as income within the provisions of the said clause. Such income by virtue of section 26(a) and Rule 5 in the Fourth Schedule only loses its character as a separate head of income as it is to be computed as a single unit of income. This has been further confirmed by use of a non obstante clause even in the Fourth Schedule, Rule 8, which further provides that, the provisions of the said Schedule would apply "notwithstanding anything contained in this Ordinance or any other law for the time being in force". Consequently, notwithstanding the fact that, as provided by clause (c) for the purpose of charging income to tax, such income is to be excluded but the said clause is clearly to be read subject to the provisions of section 26(a) and the said Rule 5 on account of the non obstante clause employed therein. Therefore, the entire income of the assessee included in the profit and loss account, including income from dividends was liable to be assessed as a single unit by virtue of the special provisions contained in section 26 of the Income Tax Ordinance and the Fourth Schedule thereto. Consequently, concession cannot be claimed in respect of income consisting of dividends in the present case.
Adamjee Insurance Co. Ltd. v. The Central Board of Revenue 1989 PTD 1090; Messrs Central Insurance Co. and others v. The Central Board of Revenue 1993 PTD 766 and Commissioner of Income-tax v. American Life Insurance Company 1967 PTD 427 ref.
American Life Insurance Company's case 1967 PTD 427 distinguished.
(c) Income Tax Ordinance (XXXI of 1979)---
----S.26---Income-tax Act (XI of 1922), S.10(7)---Section 26 of the Income Tax Ordinance, 1979, S.10(7) of the Income-tax Act, 1922 compared.
Section 26 is much larger in its operation as, unlike section 10(7) of the repealed Income Tax Act, which prevailed only over the provisions of sections 8, 9, 10, 12 and 18 of the said Act, section 26 of the Income Tax Ordinance overrides all other provisions of the said Ordinance in case of conflict. In the repealed Act, since no separate provision had been enacted by the Legislature for charging such income to tax at the same rate as other income of the assessee and the provisions of the Third Schedule to the Finance Ordinance,. 1960 by which different rates of tax were specified were to be given effect to, notwithstanding the provisions of section 10(7) of the repealed Act, the view that such income could not be subjected to the same rate of tax at thirty per cent. as the other income of the assessee, is not difficult to , understand.
Iqbal Naeem Pasha, M.G. Ha san, Sirajul Haque, Muhammad Farid, Sultan Muhammad Tanauli and Muhammad Ather Saeed, Advocates for Petitioners.
Shaik Haider, Advocate, Ikram Ahmed Ansari, Deputy Attorney General and Nasrullah Awan, Advocate for Respondents.
Dates of hearing: 16th, 17th,18th,19th, 23rd and 24th January, 1995.
JUDGMENT
MANOON KAZI, J. --We propose to dispose of these petitions together as common questions of law have arisen in these petitions. Briefly stated, the facts of the case are that that petitioners are engaged in the business of general insurance. After the petitioners had filed their respective returns of income under section 55 of the Income Tax Ordinance, 1979 for the relevant income tax years and the income-tax was assessed in accordance with the relevant provisions of the said Ordinance and in some cases even appeals were pending before the learned Income Tax Appellate Tribunal, the petitioners respectively received notices under section 65 of the Income Tax Ordinance indicating that the dividend income declared by them was not capable of being bifurcated under a different head for the purpose of charging of income-tax and the same was chargeable to tax as a single unit and was thus melded in the balance of profits respectively declared by the petitioners and submitted to the Controller of Insurance under the Insurance Act, 1938. Therefore, such income had been assessed at too low a rate, which called for such notice under section 65 of the said Ordinance. In some cases, notice was issued under section 66-A of the said Ordinance. It may be pointed out that such notices were issued by -the respondent Income, Tax Officers after judgment was delivered by a Division Bench of this Court in the case of Adamjee Insurance Co. Ltd. v. The Central Board of Revenue (1989 PTD 1090) wherein it was held that in case of a company engaged in general insurance business income which had been included in the balance of profits declared by it in its annual account submitted to the Controller of Insurance had lost its original character and had become part of profits and gains of such insurance business and thus the whole of it was to be taxed accordingly. It was under such circumstances that the present petitions have been filed in this Court.
2. Before adverting to the merits of the, case, it may be pointed out that a preliminary objection has been raised on behalf of the petitioners, notice by whom has been received under section 65 that one of the conditions imposed by subsection (2) of section 65 of the Ordinance is that no proceedings under the said section are to be initiated unless definite information has come into the possession of the Income Tax Officer. In this regard, the contention raised on behalf of the petitioners is that the words `definite information' have been misconstrued by the said respondents since a different interpretation of law given by this Court on the subject could not constitute such information resulting in issuing of such notices to the petitioners. Consequently, the entire proceedings based upon such notice are vitiated for want of jurisdiction. Section 65 of the Income Tax Ordinance provides as follows:---
"65. Additional assessment.--- (1)If, in any year; for any reason,---
(a) Any income chargeable to tax under this Ordinance-has escaped assessment, or
(b) The total income of an assessee has been under-assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund under this Ordinance; or
(c) The total income of an assessee or the tax payable by him has been assessed or determined under subsection (1) of section 59 or section 59-A or deemed to have been so assessed or determined in under subsection (1) of section 59 or section 59-A; the Income Tax Officer may at any time, subject to the provisions of subsections (2), (3) and (4), issue a notice to the assessee containing all or any of the requirements of a notice under section 56 and may proceed to assess or determine, by an order in writing, the total income of the assessee or the tax payable by him, as the case may be, and all the provisions of this Ordinance shall, so far as may be, apply accordingly:
Provided that the tax shall be charged at the rate or rates applicable to the assessment year for which the assessment is made.
(2) No proceedings under subsection (1) shall be initiated unless definite information has come into the possession of the Income Tax Officer and he has obtained the previous approval of the Inspecting Assistant Commissioner of Income tax in writing to do so.
Explanation: --As used in this subsection, `definite information' includes information in respect of sales and purchases, made by the assessee, of any goods, and any information regarding acquisition, possession or transfer, by the assessee, of any money, asset or valuable article, or any investment made or expenditure incurred by him.
(3) ................................................................
(3-A) ............................................................
(4) .
It may be pointed out that after the decision of the Division Bench in the case of Adamjee Insurance Company, reference to which has earlier been made by us, such a question arose before the Supreme Court in Messrs Central Insurance Co. and others v. The Central Board of Revenue (1993 PTD 766? which by a common judgment disposed of a number of appeals filed by various insurance companies. The Supreme Court after quoting extensively from the Indian Jurisdiction and reviewing the law earlier laid down by the Courts in Pakistan, came to a conclusion that the expression "definite information" occurring in subsection (2) of section 65 could include actual information as well as information about the existence of a binding judgment of a competent Court of law but the same would not include any information based on a circular issued by the Central Board of Revenue whereby an opinion earlier held was modified. The conclusion arrived at by the Supreme Court in this regard was as under:---
"26. The views found favour in the above cases seem to be in consonance with law, particularly the view taken in the two judgments of the Sindh High Court relied upon by Mr. Nasim A. Farooqui, Advocate. We are inclined to hold that the expression `definite information' will include factual information as well as information about the existence of a binding judgment of a competent Court of law/forum for the purposes of section 65 of the Ordinance, but any interpretation of a provision of law by a functionary which has not been entrusted with the functions to interpret such provision judicially, cannot be treated as a `definite information. We have already pointed out hereinabove that the Central Board of Revenue does not figure in the hierarchy of the judicial forums provided for under the Ordinance and, therefore, the interpretation placed by it on the relevant provisions of the Ordinance in the Circular, at the most, can be treated as an administrative interpretation and not a judicial decision to qualify for treatment as a definite information. It is, being an administrative opinion, liable to be varied, modified and, therefore, from its very nature, cannot be treated as definite information. If we were to treat an administrative interpretation of a provision of law as definite information, it will lead to uncertainty and will cause harassment to the assessees. The Central Board of Revenue may, at any time, place construction on a particular provision of the Ordinance, which may not be legally sustainable, but it will be treated by the Income Tax Officers as a definite information for the purposes of reopening of the assessments which were competently framed long time back. We may observe that in the present case the construction placed by the Central Board of Revenue on the relevant provisions of the Ordinance seems to be correct, but that fact alone, will not change its character as to qualify it as a definite information to justify re opening of assessments."
In view of the above observations of the Supreme Court, we hardly find it necessary to dwell further on this issue. Since in the present case, the notices were based upon the interpretation of the relevant provisions of law given by a binding judgment of this Court, we have no doubt that the notices respectively served upon the petitioners under the said provision of law were valid and did not suffer from any infirmity.
3. Turning to the merits of the case, the main controversy which requires to be determined in this case relates to section 26(a) of the Income Tax Ordinance which provides that:
"26. Special provisions regarding business of insurance and production of oil and natural gas and exploration and extraction of other mineral deposits.---Notwithstanding anything contained in this Ordinance,---
(a) the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Fourth Schedule.
(b) .."
The Fourth Schedule to the said Ordinance refers to the rules for the computation of profits and gains of insurance business. Rule 5 which relates to the business of general insurance provides 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."
The main contention of the learned counsel for the petitioners is that although section 26(a) read with Rule 5 in the Fourth Schedule provides that the profits and gains of any business of general insurance and the tax payable thereon shall be computed as balance of the profits disclosed by the annual accounts required under the Insurance Act, but no provision is embodied in the Fourth Schedule for computation of any tax payable on such income. Consequently, as is indicated by section 9 of the Income Tax Ordinance, income is to be assessed in accordance with the rate or rates specified in the First Schedule. Clause (c) in the First Schedule indicates that in case of every company referred to therein total income thereof is to be assessed at the rate of thirty per cent. of such income excluding income consisting of any dividends. Consequently, no tax was payable on income from dividends. Reliance has been placed upon a Division Bench judgment of this Court in the case of Commissioner of Income tax v. American Life Insurance Company 1967 PTD 427. In this case, the main question to be determined by the Division Bench was whether the amount representing the assessee's income from dividends was chargeable to super-tax under the Finance Ordinance, 1960. In this case, although the assessee was engaged in life insurance business but the contention raised on behalf of the Commissioner of Income Tax was that in view of the provisions of section 10(7) of the repealed Income-tax Act, 1922, the income of the assessee from whatever source was to be artificially treated to be one unit of income and taxed accordingly. It is pertinent to point out that the said provisions of the repealed Act in this regard were not materially different from those of the Income Tax Ordinance, 1979 reference to which has already been made in this judgment. It may be pointed out that super-tax from dividend income in this case was to be separately charged at the rate of fifteen per cent. of such dividend income. The contention was, however, repelled by the learned Judges by the following observations:
"5. It is quite correct that the word `assessment' enjoys a very wide meaning and it includes not only the computation of income, the determination of the amount of tax payable and lays down the procedure for imposing liability. But all these are to be done under the Income-tax Act, 1922. If there is no other provision in the said enactment to charge income-tax and super-tax on the total income of an Insurance Company it is difficult for us to accept the contention of the department that the tax at 30% should be charged on the total income on the same basis as the income is computed under section 10(7)."
The counsel have stated at the bar that this view was followed by the Department in cases of insurance companies without any distinction made between the business of life insurance or general insurance till judgment was delivered by this Court in the case of Adamjee Insurance Co. Ltd. (1989 PTD 1090).
4. In the case of Adamjee Insurance Company which, as pointed out earlier, was a company engaged in the business of general insurance, the question before the Division Bench was whether income from interest received on investments made by the said Company on Khas Deposit Certificates which was included in the annual accounts submitted by, the Company to the Controller of Insurance under the Insurance Act and shown in the balance of profits, was exempt from tax under the provisions of the Income Tax Ordinance. Although the judgment of the Division Bench in the case of American Life Insurance Company, just referred to by us in this judgment, was not considered by the Division Bench but it was held that in view of section 26 and Rule 5 incorporated in the Fourth Schedule, profits and gains of business of an insurance company which was doing the business of insurance other than life insurance was to be treated as a single unit of income and, therefore, income on interest derived from Khas Deposit Certificates was not entitled to exemption from tax under the provisions of the Income Tax Ordinance. In this case, the jurisdiction exercised by the Income Tax Officer to issue notice under section 65 on the basis of the circular issued by the Central Board of Revenue was also challenged but the objection was turned down by the learned Judges. When these issues were considered by the Supreme Court in the case of Messrs Central Insurance Company v. The Central Board of Revenue (1993 PTD 766) although, the appeals were allowed on the ground that the circumstances of the case did not warrant, issuing of notice under section 65 of the said Ordinance but the judgment was not reversed on the other grounds.
5. Reference to the said provisions of law clearly indicates that by use of the non obstante clause in section 26 of the Income Tax Ordinance, the Legislature manifested a clear intention to place the said section on a higher pedestal when compared to the other provisions of the Ordinance. It is a common ground between the parties that income from the profits and gains made from any business of an insurance company other than life insurance, falling under whatever head of income, is to be computed as a single unit of income. Although tax on such income is to be computed in accordance with the rates embodied in the First Schedule to the said Ordinance, and according to clause `C' in the said Schedule, income consisting of any dividends is to be excluded by the I.T.O. while charging such income to tax, but it is nobody's case that such income cannot be treated as income within the provisions of the said clause. As has been pointed out earlier, such income by virtue of section 26(a) and Rule 5 in the Fourth Schedule only loses its character as a separate head of income as it is to be computed as a single unit of income. This has been further confirmed by use of a non obstante clause even in the Fourth Schedule, Rule 88, which further provides that, the provisions of the said Schedule would apply "notwithstanding anything contained in this Ordinance or any other law for the time being in force". Consequently, notwithstanding the fact that, as provided by clause `C' for the purpose of charging income to tax, such income is to be excluded but the said clause is clearly to be read subject to the provisions of section 26(a) and the said Rule 5 on account of the non obstante clause employed therein. Therefore, the entire income of the petitioners included in the profit and loss account, including income from dividends was liable to be assessed as a single unit by virtue of the special provisions contained in section 26 of the Income Tax Ordinance and the Fourth Schedule thereto. Consequently, concession cannot be claimed in respect of income consisting of dividends in the present case. So far as the case of American Life Insurance Company 1967 PTD 427 is concerned, in the said case, income from dividends was chargeable to super-tax but at a lesser rate. But the Division Bench was dealing with the provisions of section 10(7) of the repealed Income-tax Act. Although such provisions are comparable to those of section 26 of the said Ordinance, as the two provisions are similar in all material respects but they are not identical. Section 26 is much larger in its operation as, unlike section 10(7) of the repealed Income Tax Act, which prevailed only over the provisions of sections.8, 9, 10, 12 and 18 of the said Act, section 26 of the Income Tax Ordinance overrides all other provisions of the said Ordinance in case of conflict. In the repealed Act, since no separate provision had been enacted by the Legislature for charging such income to tax at the same rate as other income of the assessee and the provisions of the Third Schedule to the Finance Ordinance, 1960 by which different rates of tax were specified were to be given effect to, notwithstanding the provisions of section 10(7) of the repealed Act, the conclusion arrived at by the Division Bench that such income could not be subjected to the same rate of tax at thirty percent as the other income of the assessee, is not difficult to understand. In the present case, the other provisions of the Ordinance including those of the First Schedule, being subservient to section 26 of the Ordinance and the Fourth Schedule thereto, cannot prevail over the latter. The circumstances of the present case are, therefore, different. Therefore, in our opinion, the observations made in the case of American Life Insurance Company are not attracted to the facts of the present case.
6. For the aforesaid reasons, we are inclined to hold that the notices respectively issued by the respondent Income Tax Officers either under section 65 or 66-A of the Income Tax Ordinance are valid and they do not contravene any of the provisions of the Income Tax Ordinance. In the result, the petitions are dismissed. The parties are left to bear their own costs in view of the questions raised.
M.B.A/A.-1528/KPetitions dismissed.