1995 P T D 869
[Karachi High Court]
Before Mamoon Kazi and Mrs. Majida Razvi, JJ
The PREMIER INSURANCE COMPANY OF PAKISTAN LIMITED, KARACHI
Versus
The COMMISSIONER OF INCOME-TAX COS. III, KARACHI
Income Tax Cases Nos. 186 to 191, 222, 538, 539 and 540 of 1990, heard on 07/11/1994.
(a) Income Tax Ordinance (XXXI of 1979)---
----S. 26(a) & Fourth Sched., R.5(a) [as amended by Finance Ordinance (XXV of 1980)]---Scope of R.5(a), Fourth Sched., Income Tax Ordinance, 1979-- Insurance business---If any deduction is claimed on account of expected expenditure the same can also be adjusted by the Assessing Authority as provided by R.5(a), Fourth Sched., Income Tax Ordinance, 1979.
Commissioner of Income, Central, Karachi v. Alpha Insurance Co. Ltd., Karachi PLD 1981 SC 293 rel.
Allen (H.M. Inspector of Taxes) v. Farguharson Brothers & Company 17 Tax Cases 59; Commissioner of Income Tax, Central Zone `A', Karachi v. Phoenix Assurance Co., Ltd. 1991 PTD 1028; Commissioner of Income-tax Central, Karachi v. Alpha Insurance Co., Ltd., Karachi PLD 1981 SC 293 and Home Insurance Company Limited, Karachi v. Commissioner of Income Tax, Companies-III, Karachi 1992 PTD 1177 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 26(a) & Fourth Sched., R.5(a) [as amended by Finance Ordinance (XXV of 1980)]---Insurance business---Provision of tax---Expected expenditure---If deduction is claimed on account of any expected expenditure, be that a provision for tax, the Assessing Authority has been vested with sufficient power to subject such provision to adjustments as contemplated by R.5(a), Fourth Sched., Income Tax Ordinance, 1979---Provision made for the tax not being an expenditure could not be added back to the profits declared by the assessee.
Allen (H.M. Inspector of Taxes) v. Farguharson Brothers & Company 17 Tax Cases 59; Commissioner of Income Tax, Central Zone `A' Karachi v. Phoenix Assurance Co. Ltd. 1991 PTD 1028; Commissioner of Income-tax, Central, Karachi v. Alpha Insurance Co., Ltd., Karachi PLD 1981 SC 293 and Home Insurance Company Limited, Karachi v. Commissioner of Income Tax, Companies-III, Karachi 1992 PTD 1177 ref .
(c) Income Tax Ordinance (XXXI of 1979)------
----S. 26(a) & Fourth Sched., R.5(a) [as amended by Finance Ordinance (XXV of 1980)]---Insurance business---Amendment of Fourth Sched., R.5(a) introduced by Finance Act, 1980 which came into force on Ist July, 1980 was not applicable to the assessment years 1977-78, 1978-79 and 1979-80.
Muhammad Fareed and Makhdoom Ali Khan for Appellant.
Nasrullah Awan for Respondent.
Dates of hearing: 2nd, 3rd and 7th November, 1994.
JUDGMENT
MAMOON KAZI, J.---The applicant in these cases is an insurance company doing business of general insurance. The applicants submitted their respective returns to the Income Tax Officer under section 38 of the Insurance Act read with section 26(a) of the Income Tax Ordinance corresponding with section 10(7) of the repealed Income Tax Act of 1922 claiming taxation reserve as an item of expenditure. The same was, however. disallowed by the Income Tax Officer and the amount claimed by the applicants in each case was added back to the profits and gains made by the applicants. The applicants also failed to succeed in their appeals respectively filed by them before the Appellate Income Tax Commissioner and the Appellate Tribunal with the exception of the I.T.Cs. Nos. 538/90, 539/90 and 540/90 where although the applicants succeeded before the Income Tax Appellate Commissioner but on appeal such decisions were reversed by the learned Appellate Tribunal. Consequently, the following question arises for determination in the present case:---
"Whether on the facts and circumstances of the case the learned Appellate Tribunal was justified in law in not deleting the provision for taxation made by the applicants?"
It may be pointed out that rules for the computation of the profits and gains of insurance business are embodied in the Fourth Schedule to the Income Tax Ordinance. Rule 5(a) before its amendment by Finance Ordinance, 1980 provided as follows:---
"(a) Any expenditure or allowance which is not deductible in computing the income chargeable under the head `Income from business or profession' shall be excluded."
However, by the said amendment, which came into force on the first July, 1980, the words "or any reserve or provision for any expenditure, or the amount of any tax deducted at source from any dividends or interest received" were added to the said Rule.
2. The main contention raised by Mr. Muhammad Farid, learned counsel for the applicants in I.T.Rs. Nos. 186/90 to 191/90 and 222/90 has been that notwithstanding the said amendment, since deduction was claimed by the applicants in all the said cases on account of tax reserves, the same could not have been added back in view of any express provision made in Rule 5(a) to the said Schedule. In other words, the contention of the learned counsel was that the words "any reserve or provision for any expenditure added to the said rule after the said amendment" could not be construed so as to include any amount reserved on account of taxation by the assessee. Reliance has been placed by the learned counsel upon a King's Bench Division judgment reported as Allen (H.M. Inspector of Taxes) v. Farguharson Brothers & Company (17 Tax Cases 59, (63) where a distinction was drawn between income-tax and deduction, It was held that income-tax was part of profits and was not a deduction before you arrived at the profits. Reliance has also been placed by Mr. Muhammad Farid upon two earlier judgments of the Supreme Court in Commissioner of Income Tax, Central Zone `A', Karachi v. Phoenix Assurance Co. Ltd. 1991 PTD 1028 and Commissioner of Income, Central Karachi v. Alpha Insurance Co. Ltd., Karachi PLD 1981 SC 293. In the first case, the assessee, which was an insurance company had filed return alongwith a copy of annual accounts submitted to the Controller of Insurance. A provision was made for taxation which was charged to the profit and loss account on the expenditure side. The Appellate Tribunal deleted such provision for taxation from the income. When the matter went before the Supreme Court, it was held that the Tribunal was justified in deleting such provision for taxation from the income of the assessee. It was further held that in such a case, accounts were submitted by the insurance company under the Insurance Act to the Controller of Insurance and the limited jurisdiction vesting in the Income Tax Officer was not only to exclude expenditure from the balance of profits in such accounts which was not permissible under section 10 of the Act but the same required to be computed in accordance with the rules contained in the First Schedule to the repealed Income Tax Act. It was further held that section 10 of the said Act which applied by virtue of Rule 6 in the First Schedule to the said Act was applicable only for the limited purpose and adding back expenditure was not permissible under the said section. It was consequently held that the Income Tax Officer in the face of such statutory provisions was not competent to upset the integrity of the accounts submitted by the assessee under the Insurance. Act by applying ordinary rules for computation of profits and gains and for assessment of tax thereon. Reliance in this case was also placed upon the case of Alpha Insurance Company Limited PLD 1981 SC 293 which is the second case relied upon by Mr. Muhammad Farid on the point. In the said case it was held that the accounts submitted under the Insurance Act were binding on the Income Tax Officer as a fait accomplii and accordingly the limited power vesting in the Assessing Officer was to exclude only those items which were in the nature of "expenditure" which were not allowable under section 10(2) of the repealed Act. It was further held in this case that taxation reserve was not "expenditure" and, therefore, it was beyond the power of the Assessing Officer to invoke the provisions of section 10(2) and addback the reserve to the balance of profits for the purpose of putting it to tax.
3. It is pertinent to point out that the case of Phoenix Assurance Co. Ltd. 1991 PTD 1028 decided by the Supreme Court came up for discussion before a Division Bench of this Court in Home Insurance Company Limited, Karachi v. Commissioner of Income Tax, Companies-III, Karachi 1992 PTD 1177. In this case, the alteration of law brought about by the said amendment by Finance Act, 1980 was noticed by the Division Bench and it was held that the addition of the words "any reserve or provision for any expenditure" had materially altered the legal position because originally before the amendment introduced in Rule 5(a) the position was similar to that as embodied in Rule 6(1) of the First Schedule to the repealed Income Tax Act. However, the amendment had enlarged the scope of the said Rule by including provisions for expenditure etc. which did not earlier exist in the said Rule before the said amendment. In the case before the Division Bench, the Assessing Officer had computed total income of the assessee while disallowing the provision for taxation, gratuity and civil commotion. The question was agitated first before the learned Tribunal and subsequently the matter came before this Court. Reference in this case was also made to the case of Phoenix Assurance Co. Ltd. 1991 PTD 1028 but the said case was found to be distinguishable on account of the addition of words in Rule 5(a), as pointed out earlier. Although the Division Bench was of the view that finality still attached to the accounts submitted by the assessee insurance company under the Insurance Act but jurisdiction also vested in the Income-tax Assessing Authorities to exclude expenditure, reserve or provision for expenditure which was not permissible under section 26 of the Income Tax Ordinance in view of the amended Rule 5(a) in the Fourth Schedule to the said -Ordinance.
4. We would like to point out that before the amendment of Rule 5(a) although the profits and gains of any business of such insurance companies was to be taken to be the balance of profits disclosed by the annual accounts required under the Insurance Act, 1938 to be furnished to the Controller of Insurance but the same was only subject to adjustment 'in respect of any expenditure or any allowance which was not deductible in computing the income chargeable under the head "income from business or profession" as only such deductions were to be excluded by the Assessing Authority. However, by addition of the words "any reserve or provision for any expenditure, or the amount of any tax deducted at source from any dividends or interest received" an intention was manifested by the Legislature to further enlarge the scope of Rule 5(a). Consequently, under the said Rule, adjustment can be made by the Assessing Authority not only in respect of the expenditure actually incurred but even in respect of contingent or expected expenditure which though not actually incurred but has been claimed as expenditure by such insurance company. No doubt, observations were made by the Supreme Court in the case of Alpha Insurance Company to the effect that taxation reserve not being expenditure could not be added back to the balance of profits for the purpose of putting it to tax but as has been pointed out earlier, the scope of Rule 5(a) has been materially enlarged on account of the said amendment introduced by Finance Act, 1980. Therefore, in our opinion, if any deduction is claimed on account of an expected expenditure, the same can also, be adjusted by the Assessing Authority as provided by the said Rule. As was pointed out earlier, Mr. Muhammad Farid has very strongly contended that "expenditure" and provision for taxation are the expressions which cannot be held to be synonymous because income tax is to be paid out of the profits earned by the assessee. In our view, it is not necessary for us to go into this question because as is indicated by the circumstances of each case, the provision for tax was claimed by the applicants as an item of expected expenditure. If deduction is claimed on account of any expected expenditure, be that a provision for tax, in our opinion, the Taxing Authority has been vested with sufficient power to subject such provision to adjustments as contemplated by Rule 5. We, therefore, find ourselves in respectful agreement with the view earlier taken by the Division Bench in the case of Home Insurance Company 1992 PTD 1177. Consequently, so far as I.T.Cs. Nos. 186/90 to 191/90 and 222/90 are concerned, in our opinion, the Income Tax Officer was justified in adding back the amount claimed as provision for tax.
5. So far as I.T.Cs. Nos. 538/90, 539/90 and 540/90 are concerned, the cases pertained to assessment years 1977-78, 1978-79 and 1979-80. Therefore, the amendment introduced by Finance Act, 1980 which came into force on 1st July, 1980 was not applicable to such cases. In fact, no controversy exists in this regard. Consequently, as was held by the Supreme Court in the case of Phoenix Assurance Co. Ltd. 1991 PTD 1028 the provision made for tax not being an expenditure, could not be added back to the profits declared by the applicants. Therefore, in the case of the said three References, the question is answered accordingly. The parties are left to bear their own costs in view of the questions raised.
M.B.A./P.311/KReference answered.