I. T. A. NO. 150/KB OF 1996-97, DECIDED ON 13TH AUGUST, 1997. VS I. T. A. NO. 150/KB OF 1996-97, DECIDED ON 13TH AUGUST, 1997., 1998 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1103 (1997)

1998 P T D (Trib.) 1103

[Income-tax Appellate Tribunal Pakistan]

Before Muhammad Mujibullah Siddiqui,

Chairman and Nazeer Ahmad Saleemi, Accountant Member

I. T. A. No. 150/KB of 1996-97, decided on 13/08/1997.

(a) Income-tax---

----Unearned income---Concept---Insurance company---Concept of unearned income is not available in the insurance law or income-tax law as prevailing in Pakistan.

Property and Liability Insurance by John H. Magee and Oskar N. Serbein, 4th Edn., 1967, p.806; Advanced Accounts by N.C. Shukla and T.S. Grewal; Treatise of Advanced Accounting by J. R. Batliboi, 29th Edn., 1987, p.887 and Advanced Accounting by R.L. Gupta and M. Radhaswamy, 1988 Edn.

(b) Income-tax---

----Earned income---Net income---Insurance company---As soon as the premium is received the income is earned---Net income is earned on expiry of the insurance policy and after payment of claim on the risk covered, if any---Premium received though becomes income is the insurance company but before expiry of policy same is not converted in net income---Principles.

Under the laws prevailing in Pakistan as soon as the premium is received the income is earned. However, the net income is earned on expiry of the insurance policy and after payment of claim on the risk covered, if any. Thus, though the premium received becomes income of the insurance company but before expiry of policy it is not converted into net income. Since it is a continuous process, therefore, it is not possible to work out the exact net income on any particular date and, therefore, it is peculiarity of insurance business that the premium is received in advance but the risk can arise on any day during the year which is covered with the insurance policy and, therefore, a reserve for un expired risk is to be maintained.

Advanced Accounting by R.L. Gupta and M. Radhaswamy, 1988 Edn., p.560 ref.

(c) Income-tax---

----Insurance company---Reserve for un expired risk---Proportion to be allowed out of the net premium---Principles---Insurance Act (IV of 1938), S.27-A---C.B.R. Circular No.2 of 1981.

Reserve for un expired risk is to be treated as liability to the year the provision is made and it is shown on debit side of the revenue account and in the next year the balance in the provision is transferred to credit side of next year's revenue account. Thus, in the revenue account balance of the previous year appears or the credit side and the balance profit for the current year appears on the debit side. An amendment was introduced in the Insurance Act, 1938 by the Insurance (Amendment) Ordinance, 1960 and section 27-A was inserted in the Insurance Act, 1938.

A perusal of subsection (2) of section 27-A of the Insurance Act, shows that 40 % of the net premium in respect of fire, marine and miscellaneous insurance business within Pakistan and 100% of the net premium in respect of marine and aviation Hull Insurance business written in Pakistan has been treated as liability along with other liabilities specified in the said subsection (2). This provision has been made obviously for creating provision for un expired risk and, therefore, the Legislature has not left this issue either in discretion of C.B.R. to be dealt with by administrative instructions or in the hands of Income-tax Authorities to fix the ratio in their discretion. Likewise the insurance companies also have not been allowed free hand to set apart any amount of net premium deemed fit by them to reserve for un expired risk for meeting the contingent liability. The Legislature has itself fixed the proportion of liabilities vis-?-vis net premium.

Although the Income-tax Authorities have restricted the reserve for un expired risk to 40% of the net premium in pursuance of C.B.R. Circular which has no force of law, however, it derives its sanction from the provisions contained in section 27-A of Insurance Act, 1938.

Property and Liability Insurance by John H. Magee and Oskar N. Serbein, 4th Edn., 1967, p.806; Advanced Accounts by N.C. Shukla and T.S. Grewal; Treatise of Advanced Accounting by J. R. Batliboi, 29th Edn., 1987, p.887; Advanced Accounting by R.L. Gupta and M. Radhaswamy, 1988 Edn., p.560; Circular No.21 of 1941 by the C.B.R., p.254 of Income ?tax Manual, Part 11, 1958 Edn.; 1980 PTD 73; Treatise on the Law and Practice of Income-tax 4th, Edn. 1958, p.883 and PLD 1982 Kar. 684 ref.

(d) Income Tax Ordnance (XXXI of 1979)---

---Fourth Sched., R.5 [as added by Finance Ordinance (XXV of 1980)]--?Insurance Act (IV of 1938), S.27-A---General insurance---Computation of profits and gains of insurance business---Tax deducted at source was an expenditure and, therefore, could be excluded even before the amendment introduced in R.5 of the Fourth Sched. to the Income Tax Ordinance, 1979 by Finance Ordinance, 1980---Assessing Officer had no jurisdiction to exclude the provision for taxation up to the assessment year 1979-1980 and from the assessment year 1980-1981 the Assessing Officer was empowered to exclude the provision for taxation---Principles.

1980 PTD 73; 1992 PTD 1177; C.I.T. v. M/s. Phoenix Assurance Company Limited 1991 PTD 1028; C.I.T. v. Alpha Insurance Co. Ltd. PLD 1981 SC 293; I.T.C. No.326 of 1974; Dictionary of Accounting Terms by Derek French, 1985 Edn. and 1989 PTD (Trib.) 1263 ref.

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

---Fourth Sched., R.5---Insurance Act (IV of 1938), S.11---General insurance--- Computation of profits and gains of insurance business---Tax which had not been paid so far and for which the provision was made was to be shown in the profit and loss appropriation account in Form ' C' of the Schedule of Insurance Act, 1938---Tax already deducted at source shall not be applicable to any fund or account having already been paid was to be shown in Form ' B' of the said Schedule of Insurance Act, 1938 on expenditure side and was to be treated as expenditure---Principles.

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

----S.65---Re-opening of assessments---Change of opinion---Insurance company---Where entire facts were disclosed by the Insurance Company in the earlier proceedings the assessments could not be re-opened for that would amount to change of opinion.

1989 PTD (Trib.) 1263 ref.

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

----Fourth Sched., R.6-A---C.B.R. Circular No.2 of 1997 dated 22-1-1997--?Insurance Company---Capital gains on sale of shares---Exemption in the hands of insurance companies.

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

----S.10---Surcharge---Income-tax liability---Income-tax liability fell in the category of retained income for calculating the amount liable to the levy of surcharge.

1993 PTD 343 ref.

(i) Income-tax-

----Appreciation in value of assets---Addition---Insurance company---Market value of assets recorded in Form "AA" of Schedule to Insurance Act, 1938 cannot be made ground for appreciation of assets.

1989 PTD (Trib.) 1263 fol.

(j) Income-tax

---Provision of gratuity---Insurance company---Claim on account of provision for gratuity from the assessment year 1980-81 onward was rightly disallowed by the Department.

1994 SCMR 1040 and 1992 PTD 1177 fol.

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

----Ss.25, 26(a) & 12---Income-tax Act (XI of 1922), Ss. 10 (2-A) & 10(7)--?Addition---Application of provision of Ss.25 & 12 of the Income Tax Ordinance, 1979, and S.10(2-A) of the Income-tax Act, 1922 containing deeming provisions are ousted by virtue of the provisions contained in S.10(7) of the Act and S.26(a) of the Ordinance and thus, no addition could be made by recourse to the deeming provisions contained therein and additions made were liable to be deleted.

PLD 1981 SC 293; 1991 PTD 401 and 1989 PTD 14 ref.

(I) Income-tax---

----Bad debts---Insurance company---Such debts occurring on account of Bangladesh loan written off are allowable.

(m) Income-tax---

----Exemption---Insurance company---Exemption on the interest/profit earned on National Savings or Deposit Certificates including Defence Savings Certificates and Khas Deposits Certificates was not available to the Insurance companies.

1993 SCMR 1232 = 1993 PTD 766 and 'M/s. E.F.U. General Insurance Limited and others v. Federation of Pakistan PLD 1997 SC 700 = 1997 PTD 1693 fol.

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

----S.24(1)---Income-tax Act (XI of 1922), S.10(4)(a)---Perquisites--?Insurance company---Excess perquisites paid to employees being an expenditure, Assessing Officer is empowered to make disallowance--?Working out of excess perquisites---Principles.

As the excess perquisites paid to the employees is admittedly an expenditure, therefore, the Assessing Officer is empowered to make disallowance. However, in working out the excess perquisites the lease rentals paid to the leasing companies should be excluded from the perquisites to the employees for the reason that the cards/vehicles are owned by the companies and remain in the ownership of the company after the expiry of lease period. The ownership of the vehicles is not transferred to the employees. For working out the excess perquisites the salary should be taken as explained in the explanation to section 10(4)(a) of the repealed Income-tax Act, 1922 and explanation to section 24(1) of the Income Tax Ordinance, 1979. For making disallowance under the head excess perquisites the proper working should be made and the assessee should be duly confronted in the case of any difference of opinion on the said working.

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

----S.65---Re-opening of account---Definite information---C.B.R. Circular--?Impact--- Assessment cannot be re-opened on the basis of any C.B.R. Circular containing any interpretation on the point of law for such interpretation cannot be treated as information.

1993 SCMR 1232 = 1993 PTD 766 fol.

(p) Income-tax

----Dividend income---Insurance Company---Benefit of lower rate of tax--?Insurance companies are entitled to the benefit of lower rate of tax available to other assessees in relation to the dividend income under the First Schedule to the Income Tax Ordinance, 1979.

M/s. E.F.U. General Insurance Limited and others v. Federation of Pakistan and others Civil Appeals PLD 1997 SC 700 = 1997 PTD 1693 fol.

(q) Income-tax---

----Admissible deduction---Insurance company ---Zakat payment---Amount of Zakat paid by an insurance company is an admissible deduction.

1997 PTD (Trib.) 1294 fol.

( r) Income ?Tax-----

----Provision for bonus---Insurance company---Mercantile system of accounting--- Method of accounting of insurance company being mercantileunpaid quantified and ascertained liability disbursed subsequently was admissible.

C.I.T. v. Chemdyes Pakistan Limited 1990 PTD 248 fol.

(s) Income-tax---

----Management expenses in excess of 40% of an insurance company--?Disallowance not justified.

PLD 1981 SC 293 fol.

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

----Ss.111 & 65---Penalty---Levy of---Essentials---Penalty cannot be levied if there is honest difference of opinion between the assessee and the Revenue and no dishonest intention or motive for evasion of tax is established.

Muhammad Muslim v. C.I.T. 1980 PTD 227 and I.T.As. Nos.401 to 403/KB of 1988-89 fol.

(u) Income-tax---

----Computation---Insurance company---Compensation received by assessee being a capital gain is not liable to charge of income-tax.

1979 PTD (Trib.) 4 fol.

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

----S.80-D---Term "benefit"---Meaning---Insurance company---Gross receipts of an insurance company are included in the term "turnover" as defined in S.80-D(2), Income Tax Ordinance, 1979, for, the same is derived from rendering benefits to the insured persons---Application of S.80-D, Income Tax Ordinance, 1979 to the gross receipts of the insurance company was, thus, justified.

Chamber's Dictionary, 1993 Edn. ref.

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

S.49-7-Allowances ---Straight deduction cannot be allowed---Principles.

Section 49, Income Tax Ordinance, 1979 clearly indicates that no straight deduction is to be allowed, as in the case of allowances and deductions admissible under section 23, which provides that in computing the income, the allowances and deductions mentioned therein shall be made, on the other hand, it is provided under section 49 that the allowances shall be included in the total income but it may be deducted from such income for the purpose of computing the tax payable by an assessee. It is clearly indicative of the fact that straight deduction is not to be allowed and rebate shall be allowed while computing the tax.

I.T.As. Nos.6366/KB of 1979-80, 684/KB of 1992-93 and 618/KB of 1985-86 fol.

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

----Third Sched., R.8(8)(a)--Depreciation--Insurance company--Disallowance of depreciation on cars by recourse to the provision contained in R.8(8)(a), Third Sched., Income Tax Ordinance, 1979 is justified.

Sirajul Haq Memon. Iqbal Naeem Pasha, E.U. Khawaja, Muhammad Farid, Muhammad Jawaid Khurram, Shabbar Zaidi, F.C.A., arshad Siraj. Tai-yab G. Adeeb, F:C.A., Saqib Masood, C.A., Noor Muhammad. C.A., Muhammad Salecm, C.A., S.M. Sohail, A.C.A., Amin Malik, A.C.A., Tahir Muchalla, C.A., S.M. Tanauli, I.T.P., Muhammad Rafique, I.T.P. and Khaliqur Rehman for Appellants.

Ali Nasir Bukhari, D.R. for Respondent.

Dates of hearing: 29th July and 1st August, 1997.

ORDER

MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN).--In the above appeals common issues of law are involved and, therefore, all the appeals have been heard together and are disposed of by this single consolidated order.

2. We have heard learned representative for the department and all the learned representatives for the assessees on all the common issues of law involved in the appeals and, therefore, first we will decide the common issues of law generally. The contentions raised by the learned representatives for the parties shall be considered while deciding the common issues of law and in the light of our findings on the common issues of law the appeals filed by each insurance company shall be taken up separately and grounds of appeal agitated in each appeal shall be disposed of separately so that no confusion takes place to giving appeal effect to this consolidated order. We will take up the common issues of law one by one.

RESERVE FOR UNEXPIRED RISK

3.? This issue is common in respect of all general insurance companies. After hearing the learned representatives for the parties and perusal of record, it has transpired that there is no uniformity on this point with the general insurance companies as different companies have created reserve for un expired risk in different proportion of the premium received. The reserve of un expired risk created by each general insurance company varies from 40% to 50% in the category of fire insurance, motor insurance and miscellaneous insurance. The department has restricted the reserve to 40% of the net premium in pursuance of C.B.R. Circular No.2 of 1981 which reads as follows:

SUBJECT:INSURANCE BUSINESS-NON-LIFE-RESERVE

FOR UNEXPIRED RISK INCLUDING RISK OR EXCEPTIONAL

LOSSES---LIMIT TO

The undersigned is directed to say that it is .the practice of companies carrying on General Insurance business to set apart from their premium income of reserve usually equal to 40 % of the net premium income of the expiring year to meet un expired risk. Some companies set apart not only a reserve to this extent but also any additional reserve, with the result that the aggregate reserve thus, set apart is greatly in excess of 40 % and in some cases even more than the premium income of the expiring year.

2. The Board considers that normally a reserve equal to 40 % of the net premium of the expiring year in respect of Fire, Marine and Miscellaneous insurance business is sufficient provision against all un expired risk, but if, in any case, it is claimed that on account of the greater risks involved in a particular type of policies the normal allowance is not, sufficient, an aggregate allowance up to, but not, in any case, exceeding 50% of the net premium income may be allowed. The same principle should be followed in respect of those foreign companies which do not keep separate accounts for their business in Pakistan.

3. So far as Marine and Aviation Hull insurance business written in Pakistan is concerned, no objection should be taken to a reserve so long as it does not exceed 100% of the net premium of the expiring year.

3-A. ??? A perusal of the assessment orders, first appellate orders and the contentions raised by the learned representatives for the panies shows that all of them have dealt with the issue as if there is no law on the point in Pakistan. The first objection raised in this behalf by Mr. Sirajul Haq Memon, Advocate, Mr. Shabbar Zaidi, F.C.A. and other representatives for the assessees is that the reserve created for the un expired risk is an unearned income and in support of their contention they placed reliance on certain observations appearing on page 806 of the Book, "Property and Liability insurance", by John H. Magee and Oscar N. Serbein, 4th Edition, 1967, published in Homewood Illinois, U.S.A. The discussion in this books is under the head "unearned premium reserve requirement". It states as follows:

"It is the practice for the states to require insurers -to set up as a liability a reserve equivalent to the portion of the gross premium on the contract in force corresponding to the period the contract yet has to run to expiration. This is required because it is held that the full amount of the premium should not be allocated without restriction to the insurer until protection for the full contract period has been afforded. In addition, with respect of most contracts, the insured may elect to cancel his coverage at any time during the contract term and demand a return premium. Finally, because an insurer is obligated at any time during the contact term to proved protection for the balance of the term a fund must be available to re-insure all un expired risks in the event that for any reason this becomes necessary or desirable basically, the reserve requirement amounts to 'he establishment of an accounting practice that will make available funds from premium income for the proper settlement of claims or payment of losses only as the premiums are earned, at the same time, account for income received but not yet earned.

The reserve is carried on the books of the insurer as a liability and in computed on the gross premium. The reserve at all time must equal the unearned portions of gross premiums charged do all outstanding contracts. Reserve calculations are based on the assumptions that a premium is earned pro rata as the period covered by the contract runs out. Specifically, in the case of three years' contract, the day the contract goes into effect, the entire premium becomes a part of the reserve and is a liability on the books of the insurer. At the end of one month, 1 /36 of the premium is regarded as earned, and a like amount is earned each month thereafter as long as the contract remains in force. Thus, in the case of a three years' contract with a terms premium of $ 300 written to be effective on June 30 of a given year at the end of that year the insurer would be credited with an earned premium of $ 50 and would carry in the reserve an unearned premium of $ 250. During the next year, a full year's premium would be considered earned, that is $ 100, and $ 150 would remain as unearned premium in the reserve. This procedure is carried out through the entire contract term until the end of three years. The entire premium is earned and there is nothing left from the premium in the reserve While the state law required that hundred percent of the premiums received for new business shall be set up in the unearned premium reserve, the issuers are not obligated to compute reserves on the basis of every contract written as noted in the example just cited. Obviously this would be a tremendous task. In the interest of simplifying accounting it is assumed that during a given year there is a steady flow of business some contracts are written immediately after the beginning of the year and others are written just before the close of the year. Insurers in such circumstances are allowed to assume that all the business of a given year is written as of the mid period. This means that if $ one million in premiums is written during a given year for a term of one year the insurer will be allowed to take credit for 1 /2 of that amount at the end of the year as earned premium for the contracts written on January 1. For the contracts written on December 31, it will have earned none. Averaging all the contracts written for the year, fifty percent of the net premium is regarded as earned.?

4.? A perusal of the above citation shows that the entire discussion is with reference to the laws as prevailing in the States in U.S.A. On being confronted with this aspect of the matter Mr. Shabbar Zaidi conceded that the discussion is in the perspective of laws as in force in the States in U.S.A. We asked, if any such concept of earned premium and unearned premium is available in the law of insurance in Pakistan, but they could not furnish any reply. It would be appropriate to observe here that the objection was taken in the context of provisions contained in Rule 6 of the First Schedule to the repealed Income-tax Act, 1922 in pursuance of section 10(7) of the said Act and Rule 5 of the Fourth Schedule to the Income-tax Ordinance, 1979 in pursuance of section 26-A thereof which reads as follows:--

"Rule 6 of the First Schedule to Repealed Income-tax Act, 1992.--?(1) 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, copies of which are required under the Insurance Act, 1938, to be furnished to the Controller of Insurance after adjusting such balance so as to exclude from it any .expenditure, other than expenditure which any under the provision of section '10 of this Act be allowed for in computing the profits and gains of a business. Profits and losses on the realisation of investments, and depreciation and appreciation of the value of investments shall be dealt with as provided in rule 3 for the business of life insurance.

(2) Where a company sets aside a portion of its income, profits and gains to meet exceptional losses, so much of such portion as does not exceed ten per cent. of the premium income of the year in which it is set aside shall be deducted from the balance of the profits referred to in sub-rule (1).

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(3) The amount deducted under sub-rule (2) if any year, together with the amounts, if any, deducted or carried to a reserve in earlier years to meed exceptional losses (as reduced by the amounts, if any, paid out of such amounts or reserve to need exceptional losses) shall not exceed the premium income of that year or the average premium income of the three years immediately preceding that year. Which ever is the higher.

(4) Notwithstanding anything to the contrary contained in this Act, where any amount is paid, appropriated or diverted out of or from the amounts deducted under sub-rule (2) for purposes other than the meeting of an exceptional loss, such amount shall, together with the other premium income, if any, of the company for the year in which such payment, appropriation or diversion takes place, be deemed to be the premium income of the company for that year; and in the event of the liquidation of the company or the discontinuance of the business to which this rule applies, whichever is the earlier, the aggregate of the amounts deducted under sub-rule (2) as reduced by the payments made out of such amounts to meet exceptional losses) shall, together with the other income, if any, of the company for the year in which it goes into liquidation or in which such business is discontinued, be deemed to be the income of the company for that year.

(5) The term 'exceptional loss', as used in this rule, means the amount by which the aggregate loss in any year exceeds fifty percent. of the premium income of that year of fifty per cent. of the average premium income of the three years immediately preceding that year, whichever is the higher.

Rule 5 of the 4th Schedule to the Income Tax Ordinance, 1979 before amendment:

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 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 realization, 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."

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Rule 5 after amendment:

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"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 of interest received) which is not deductible in computing the income chargeable under the head "income from business or profession" shall be excluded;

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(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. "

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5. The contention that the reserve for un expired risk was unearned inckme was taken in context of the plea that the assessing officer could make adjustment in respect of any expenditure and pot income and more so in respect of an unearned income. However, in view of the fact that Mr. Shabbar Zaidi has conceded that the concept of unearned income is with reference to the law as prevailing in the States of U.S.A. and no such concept is available in the insurance law or income-tax law as prevailing in Pakistan we need not to dilate on the point any further. The next objection was taken that the reserve for un expired risk is the reserve in respect of income. We asked all the representatives for the assessees and a large number of Chartered Accountants present during the course of hearing to show from any standard book of accountancy that any reserve can be created in respect of income but none of them could show any such system from any accountancy book, during the course of arguments which continued for full four days.

6. The learned representative for the assessees and particularly M/s. Sirajul Haq, Advocate and Shabbar Zaidi, F.C.A., referred to a book "Advanced Accounts" by N.C. Shukla and T.S. Grewal who have observed that, "unlike life insurance the policies in general insurance are only for one year, hence no question of future liability arises in this case but one point is to be remembered. Policies are issued throughout the year and remain in force till after the close of financial year. The provision must be maintained to meet claims which may arise under such policies. The Executive Committee of the General Insurance Council (which has been set up under the Insurance Act to supervise General Insurance Companies) had laid down that in case of marine insurance the provision against un expired risk should be hundred per cent. of net premium and in the case of other businesses (fire, accident etc.) the provision should be 40% of the net premiums. The revenue account is credited with (1) provision against un expired risk in the beginning of the year, (2) premiums less insurance, (3) interest and dividends (less income-tax) applicable to the business concern, (4) other incomes pertaining to the business of which the revenue account is being prepared. On the debit side will be (1) claims (plus direct expenses) less covered by re-insurance, (2) commission paid to agents, (3) expenses of management, (4) other expenses and lossees pertaining to the business concern, and (5) provision against un expired risk required at the end of the year". The learned author has further observed that although 50% (or even 40% reserve of net premiums) is sufficient ordinarily to meet claims arising under policies on the date of the closing of the financial year, prudent companies tried to build up larger reserves.

7. The subject has been dealt with by J.R. Batliboi in his Treatise of Advanced Accounting, 29th Edition (1987) on page 887 as follows:--

"In fire, marine and other insurance business the policies issued are of a years duration, and consequently the profit or loss made each year can be easily determined after providing for the liability on such policies as have not expired and are in force at the end of the financial year. "

8. The annual profit of such companies is, thus, ascertained by setting against the annual premium and other income, the claims paid and all other losses and expenses incurred in earning such income. It is. however, the practice of first class companies to set aside usually from 30% to 40 % of the net premium as a provision for un expired risk on policies running at the time of balancing, before ascertaining the net profits. Similarly observations have been made in the Book "Advanced Accounting" by R.L. Gupta and M. Radhaswamy, 1988 Edition on page 560. "It is stated that the insurance business is peculiar in that the premium is received in advance but the risk can arise on any day. In general insurance the policy is issued for a year which means that the risk is covered for a year. Chances of risk covered occurred do not come down proportionately with the passage of time. Even on the last day of the policy company's risk is as high as it was on the day the policy was issued. Therefore, insurance companies must provide for the risk associated with all such policies for which the premium has been received and the policies are still in force".

9. A perusal of the citations above shows that there is no concept of unearned income under the Insurance Act, 1938 which is the law governing the insurance business in the sub-continent. Its act, under the laws prevailing in Pakistan and India as soon as the premium is received, the income is earned. However, the net income is earned on expiry of the insurance policy and after payment of claim on the risk covered, if any. Thus, though the premium received becomes income of the insurance company but before expiry of policy it is not converted in net income. Since it is a continuous process, therefore, it is not possible to work out the exact net income on any particular date and, therefore, as observed by R.L. Gupta it is peculiarity of insurance business that the premium is received in advance but the risk can arise on any day during the year which is covered with the insurance policy and, therefore, a reserve, for un expired risk is to be maintained. The department has also not disputed the system but the only dispute is on the proportion to which reserve for un expired risk is to be allowed out of the net premium. The controversy between the department and assessees is continuing on since very long and the issue has been taken several times to the superior Courts but it was surprising to us that the relevant statutory law has not been cited at any forum so far, by any Advocate either on behalf of department or any assessee. The department has throughout placed reliance for restricting the reserve for unexpired risk to case of general insurance relating to fire. motor and accident on the circulars issued by C.B.R. The first circular on which reliance was placed by the department is Circular No.21 of 1941 issued by the C.B.R. It is published on page 254 of Income?s. Manual. Part II, 1958 Edition which reads as follows:

"Normally the reserve equal to 40% of the premium income of the expiring year is sufficient provision against all unexpired risks. But? if, to any case, it is claimed that on account of the greater risks'' involved in a particular type of policies, the normal allowance is not, sufficient, an aggregate allowance up to but not in any case law exceeding 50% of the premium income may be allowed,"

?This circular was relied upon by the department in the case of Eastern Federal Union Insurance Company for the charge year 1962-63 and ultimately the following question was referred to the Hon?able Sindh High Court:

"Whether in the facts and circumstances of this case, the Tribunal was justified in holding that the reserve for un expired risk in fire marine and miscellaneous accounts could be reduced to 40% from 50% of the premium income as provided for in the accounts submitted to the Controller of Insurance."

10.The question was decided vide judgment reported as 1980 PTD 73.The Hon'ble High Court held that the Board of Revenue Circular although is binding on the I.T.O. but has no legal force. h1 the absence of statutory provision governing the allowance of an amount as a reserve for un expire disk, the amount claimed by the applicant and accepted by the Controller, of Insurance cannot be questioned by the I.T.O. The Hon'ble Judges of High Court in their judgment felt necessity of statutory provision referred to in the observation by Kanga and Palkhiwala in their Treatise on the Law and Practice of Income-tax, 4th Edition (1958),

' "It is imminently desirable that provision for allowance in respect of un expired risk should be made in the status itself rather than that the matter should be regulated merely by administrative practice and executive instructions."

11.? The Hon'ble Judges further observed that:

"It appears that the Indian Legislature has accepted this wholesome advice and has since made statutory provision in the new Rule 5(c) in the First Schedule of the Income Tax Act, 1961 to the effect that such amount carried over to reserve for un expired risk as may be prescribed in this behalf shall be allowed t as a deduction."

12. The department again invoked Circular No.21 of 1941 in the case of new Jubilee Insurance Company Ltd. in respect of assessment years 1963-64 and 1964-65 and the issue was again referred to the Hon'ble High Court. The judgment is reported as PLD 1982 Kai. 684 In this case also it was pleaded before the Hon'ble High Court that the directions issued by the C.B.R. have the force of law but the contention was again repelled with the observation that the instructions and directions of the C.B.R. cannot bind an assessee if the same are not based or do not rest for their validity on some provision of the Act or the rule framed there under. The learned Judges of the Hon'ble Sindh High Court again referred to the observation by Kanga and Palkhiwala and the amendment made by Indian Legislature referred to in the case of Easters: Federal Union Insurance (supra). It appears that C.B.R. did not take any guidance from the observations made by Hon'ble Judges of High Court that in order to have binding effect the validity of C.B.R. Circular should be supported with some statutory provision or rules framed there under, and again issued Circular No.2 of 1981 stating that it is the practice of companies carrying on general insurance company to set apart their premium income as reserve usually equal to 40% of the net premium income of the expiring year to meet un expired risk and further observed that some companies set apart not only a reserve to this extent but also an additional reserve. The C.B.R. then stated in the Circular that, "the Board considers that normally reserve equal to 40% of the net premium of the expiring year in respect of fire, marine and miscellaneous insurance business is sufficient provision against all un expired risks, but if, in any case, it is claimed that on account of greater risk involved in a particular type of policies the normal allowance is not sufficient an aggregate allowance up to, but not in any case, exceeding 50% of the net premium income may be allowed. This instruction gave rise to the exercise as to how much reserve of the net premium is sufficient to meet the requirement". As already observed an amendment has been introduced by Indian Legislature and the Executive Committee of the General Insurance Council set up under the Insurance Act to supervise general insurance companies has laid down that in case of marine insurance the provision for un expired risk should be 100% Of the net premium and in the case of other business like accident, fire etc. the provision should be 40% of the net premium. The law in this behalf has been referred to in the judgment in respect of un expired risk as well. During the course of arguments before us we asked time and again from all the learned representatives for the parties if there is any statutory law on the point in Pakistan as well and it was stated at Bar that there was none. However, to our utter surprise, on going through the Insurance Act, 1938 we found that statute law is available on this point. We have already seen while discussing the method of reserve for un expired risk that it is to be treated as liability in the year the provision is made and it is shown on debit side of the revenue account and in the next year the balance in the provision is transferred to credit side of next year's revenue account. Thus, in the revenue account balance of the previous year appears on the credit side and the balance profit for the current year appears on the debit side. An amendment was introduced in the Insurance Act, 1938 by the Insurance (Amendment) Ordinance, 1960. and section 27-A was inserted in the Insurance Act, 1938 Subsections (1) and (2) thereof are relevant which read as follows:

"27-A. Insurers of general insurance business to have assets invested in Pakistan.---(1) Every insurer transacting general insurance business in Pakistan shall have assets invested in Pakistan exceeding his liabilities by at least a sum of five lakhs of rupees or ten percent of the net premium income whichever is higher:

Provided that an insurer defined in subclause (a)(ii) or sub-clause (b) of clause (9) of section 2 who was no paid-up capital or has a paid?up capital of less than five lakhs of rupees shall be deemed to have complied with the requirements of this subsection of the assets invested by him in Pakistan, not being less than ten per cent. of the net premium income exceed his liability:---

(a) up to the 31st day of December, 1970 by a sum of not less than two lakh and fifty thousand rupees;

(b) up to the 31st day of December, 1971, by a sum of not less than three lakh seventy-five thousand rupees; and

(c) up to the 31st day of December, 1972, by five lakh rupees.

(2)??????? For the purpose of subsection (1) the following shall be deemed to

??????????? be the liability of the insurer named:---

(a)??????? the net claims outstanding in respect of General Insurance Business??????? in Pakistan;

(b)??????? forty per cent. of the net premium in respect of Fire, Marine and??????????? Miscellaneous insurance business within Pakistan;

(c)??????? one hundred per cent. of the net premium in respect of Marine and??????? Aviation Hull insurance business written in Pakistan;

(d)amount of provision for dividends and unpaid dividends;

(e)??????? amount due to Insurance Companies carrying on insurance business;

(f)???????? amount provided for taxation:

(g)??????? amount due to other creditors but excluding share capital general reserves, investment reserve, reserve for bad and doubtful debts, depreciation funds except on such items as are taken credits- for an asset.

Explanation. ---Marine and Aviation Hull insurance business shall include any policies issued to an owner of a vessel or aircraft relating to any interest of such an owner in respect of a vessel or aircraft."

13. ????? A perusal of said subsection (2) above shows that 40 %a of the net premium in respect of fire, marine and miscellaneous insurance business within Pakistan and 100 % of the net premium in respect of marine and aviation Hull insurance business written in Pakistan has been treated as liability along with other liabilities specified in the said subsection (2). This provision has been made obviously for creating provision for un expired risk and, therefore, we are of the considered opinion that the Legislature has not left this issue either in discretion of C.B.R. to be dealt with by administrative instructions or in the hands of Income-tax Authorities to fix the ratio in their discretion. Likewise the insurance companies also have not been allowed free hand to set apart any amount of net premium deemed fit by them to reserve for un expired risk for meeting the contingent liability. The Legislature has itself fixed the proportion of liabilities vis-?-vis net premium and, therefore, the controversy should come to rest with this statutory provision. We are of the opinion that if the C.B.R. while issuing Circular No.2 of 1981 had referred to section 27-A of the Insurance Act, 1938, inserted as long back as 1960 and had drawn attention of the Controller of Insurance in this behalf this long drawn controversy would not have arisen after the year 1960. After laying hand on section 27-A of the Insurance Act, 1938 we called Mr. Shabbar Zaidi, F.C.A., the senior most Chartered Accountant (to the best of our knowledge) who appeared before us during the course of arguments in these appeals and apprised him of the statutory provision. We asked him, if the provisions contained in section 27-A of the Insurance Act, 1938 provides complete answer to all the objections raised by them? Mr. Shabbar Zaidi candidly conceded. He stated that the will discuss the legal position with Mr. Sirajul Haq, Advocate and other advocates who appeared before us and let us know if he has to say anything in this behalf. However, Mr. Shabbar Zaidi has not turned up till 13th of August, 1997 and, therefore, we presume that he has nothing to say in this behalf. We are of the considered opinion that if this statutory provision had been brought to the notice of superior Courts, the Hon'ble High Court in the case of Eastern Federal Union Insurance Company 1980 PTD 73 would not have observed that, "in the absence of statutory provision governing the allowance of an amount as a reserve for un expired risk, the amount claimed by the applicant and accepted by the Controller of Insurance cannot be questioned by the I.T.O." The Hon'ble Court would not have expressed desirability of statutory provision in this behalf if section 27-A of the Insurance Act, 1938 would have been brought to the notice of their lordships. Be that as it may, we are of considered opinion that although the Income-tax the reserve for un expired risk to 'is ill pursuance of C.B.R. Circular which has no force of law as held by the Hon'ble High Court however, it derives its sanction from the provisions contained in section 27-A of Insurance Act, 1938 and consequently, the treatment given by the Department in this behalf is hereby maintained.

PROVISION FOR TAXATION:

14. It is conceded by all the learned representatives for the assessee that after the amendment introduced in Rule 5 of the Fourth Schedule to the Income Tax Ordinance, 1979 Lay Finance Ordinance, 1980 the provision for taxation can be disallowed by the Assessing Officer and that the issue is covered with the judgment of Hon'ble High Court in the case of Home Insurance Company reported as 1992 PTD 1177. It is not contended on behalf of the department that the amendment has retrospective effect and, thus, the controversy remains to the issue in respect of the assessment years prior to 1980-81 and that too, to the extent of tax deducted at source only. With the judgment of Hon'ble Supreme Court of Pakistan in the case of C.I.T. v. M/s. Phoenix Assurance Company Limited reported as 1991 PTD 1028, the issue that no disallowance can be made in respect of provision for taxation up to the assessment year 1979-80 stands settled. The contention of the department is that under the un amended Rule 5 of the Fourth Schedule to the Income-tax Ordinance, 1979 and Rule 6 of the First Schedule to the repealed Income-tax Act, 1922 the restriction on the authority of Income-tax Officer is in respect of a provision for taxation and not the tax already deducted at source which is admittedly an expenditure and the assessing officer had the authority given before the amendment in 1980 to exclude from the balance of profits disclosed by the annual accounts any expenditure by way of adjustment which was not admissible under section 10 of the repealed Income-tax Act, 1922 and under section 23/24 of the Income Tax Ordinance, 1979. It is contended on behalf of assessees that provision for t taxation is inclusive of the tax deducted at source in accordance with the format prescribed under the Insurance Act and, therefore, whatever amount is included in the provision for taxation although it may be in reality an expenditure could not be disallowed by the assessing officer up to the assessment year 1979-80. Reliance is placed, in this behalf, on the judgment of Hon'ble Supreme Court of Pakistan in the case of Phoenix Assurance Company Ltd. 1991 PTD 1028. While, on the other hand, it is contended on behalf of Department, that, the judgment of Hon'ble Supreme Court of Pakistan in the case of Phoenix Assurance Company Ltd. is restricted to the provision for taxation only. It has been submitted that the following question was referred to the Hon'ble High Court which was ultimately taken to the Hon'ble Supreme Court in appeal:

"Whether on the facts and circumstances of the case the Tribunal was justified in deleting the provision for taxation from the income of the assessee."

15.? In the judgment of Hon'ble Supreme Court of Pakistan the reasons prevailing with the Income-tax Appellate Tribunal for deleting the provision for taxation have been reproduced the relevant part whereof is as follows:

"Inasmuch as rule 6 of the 1st Schedule only authorises deduction of expenses which are not allowable under section 10(2) and in view of the fact that the provision for taxation or taxation reserve is not expenditure the I. T. O. was not entitled to disallow the same."

16.? The Hon'ble Supreme Court has further referred to the plea taken on behalf of the department before the Hon'ble High Court which was to the effect that, "as the reserve for taxation is not an expenditure item, the same should not have been mentioned on the expenditure side in preparing profit and loss account. Therefore, it was liable to be excluded from the expenditure side under the aforesaid rule 6, looking to its real character as an amount still in the hands of the assessee and not having become a part to the expenditure".

17. The contention was repelled by Hon'ble High Court for the following reasons:

"From Regulation No. l it seems that profit and loss appropriation account in part and parcel of the profit and loss account and both have to be read together. The profit and loss appropriation account on the expenditure side contained the item, transfer to any particular funds or accounts' (details to be given). This indicates that transfer made to any fund or account has to be shown on the expenditure side. Therefore, it does not mean that all entries on the expenditure side have necessarily to be expenditure only. Mr. Athar has stated that provision for taxes or reserves funds for taxes and if any balance is left it is shown as income in the next year."

18.? Leave to appeal was granted by the Hon'ble Supreme Court of Pakistan, "to consider the question inter alia, whether on the facts and circumstances of the case, the High Court was justified in holding that the reserve for taxation was not expenditure, and, therefore, rule 6 of the First Schedule of the Income-tax Act, 1922. was not applicable to the case". In the narrative part of the judgment of the Hon'ble Supreme Court of Pakistan it is stated as follows:

"The point in controversy in this case is the allow ability or otherwise of the provision for taxes charged to the profit and loss account prepared in Form B, Part II of Second Schedule prescribed under section 11 of the Insurance Act, 1938 read with the regulations contained in Part I of the Second Schedule of Insurance Act, 1938. The liability to tax under the Income-tax Act, 1922 is to be worked out in accordance with the provisions contained in Rule 6 of the First Schedule reads with section 10 of the Income-tax Act, 1922. "

19.? A perusal of the judgment of Hon'ble Supreme Court of Pakistan further shows that plea was taken before the Hon'ble High Court that provision for taxation reserve in the accounts submitted by the assessee to the Controller of Insurance having been shown on the expenditure side it has to be treated as expenditure, therefore, under Rule 6 of the First Schedule to the Income-tax Act, 1922, the I.T.O. was entitled to examine it for the purpose of adjustment of the balance of profits and gains. This contention was repelled by placing reliance on the judgment of Hon'ble Supreme Court of Pakistan in the case of C.I.T. v. Alpha Insurance Co. Ltd. (PLD 1981 SC 293), wherein it was held that the I.T.O. had limited power to exclude only items which are in the nature of expenditure but since taxation reserve was not expenditure the conclusion was drawn that it was beyond the power of assessing officer. Reference was made to two earlier judgments on Hon'ble Sindh High Court wherein it was held that the provision was not expenditure for the reason that the expenditure connotes "paying out or away" of money which is the primary meaning of the term. It was held by the Hon'ble Sindh High Court that the expenditure means paid out or away and is something which has gone irretrievably. Conclusion drawn by the Hon'ble Sindh High Court in I.T.C. No.326 of 1974 was as follows:

"In our view provision for taxation or taxation reserve cannot be equated with expenditure which is something which has already been incurred or something which has already been paid out and which has gone irretrievably. In essence provision for taxation or taxation reserve remains reserve and is not an expenditure. In the case of Phoenix Assurance Company the Hon'ble Supreme Court of Pakistan extensively referred to the findings of Hon'ble Supreme Court of Pakistan in the case of Alpha Insurance Company (PLD 1981 SC 293) and specifically referred to the finding that the assessing officer could exclude by way of readjustment the expense which could not qualify as legitimate deduction under section 10. The Hon'ble Supreme Court of Pakistan in the case of Phoenix Assurance Company Ltd. further referred to the law laid down by the Hon'ble Supreme Court of Pakistan in the case of Habib Insurance Company Ltd. v. CIT (PLD 1985 SC 109) which shows that the contention raised on behalf of the department that the assessing officer was empowered to look at the substance of the things and not at the manner in which the account was stated was repelled. "

20.? The Hon'ble Supreme Court of Pakistan further held that "the jurisdiction of the I.T.O. is extended to the expenditure, whereas in the present case admittedly two items in question was amounts appropriated to taxation reserve and, therefore, by the test adopted by the learned counsel with reference to case of Indian Molasses Co. Ltd. they were not amounts to expenditure in so far as they were not sums already paid so that it can be said that they were irretrievably paid out or away." In the concluding part of the judgment Hon'ble Mr. Justice Zafar Hussain Mirza held as follows:

"In any case, since the revenue itself concedes that the disputed items in these appeals did not constitute expenditure, it follows that it was not permissible for the I.T.O. to disallow these items and add back the same to balance of the profits. He did not also have the power to hold that the taxation reserves were not liable to be mentioned on the debit side of the accounts submitted under the Insurance Act, for the reason that, as already discussed, he could not travel beyond the provisions of the Income Tax Act and modify the accounts with reference to the provisions of the Insurance Act. "

21.?? While agreeing with the conclusions arrived at by Hon'ble Mr. Justice Zafar Hussain Mirza it was added in a brief note by Hon'ble Mr. Justice Naimuddin as follows:

"The taxation reserve is not expenditure, therefore, Income-tax Officer has no jurisdiction under the law to examine or exclude from the profit and loss account and the profit and loss appropriation account, approved by the Controller of Insurance under the Insurance Act, 1938."

22. ????? The above discussion shows that in the case of Phoenix Assurance Company Ltd the contention raised on behalf of the department before the Income-tax Appellate Tribunal, Hon'ble High Court and Hon'ble Supreme Court was that reserve/provision for taxation was not expenditure and, therefore, it should not appear on the debit side of the Balance Sheet and that the assessing officer was empowered to examine the real substance and had further authority to disallow the claim which was not admissible. One of the contentions raised on behalf of the revenue was that even if the taxes are paid they are not admissible deduction and, therefore, the provision for income? tax is not to be allowed. The contention was repelled at all the forums for the reason that since the provision/reserve for taxation was not expenditure, therefore, by virtue of the provisions contained to rule 6 of the First Schedule to the Income-tax Act, 1922 the assessing officer had no jurisdiction to make re--adjustment. As already stated the Hon'ble Supreme Court considered the controversy on the point relating to allowability or otherwise of the provision for taxes which was created in respect of liability to tax under the Income-tax Act, 1922.

23.? The above discussion is directed on the point arising out if contention raised by Mr. Pasha that the issue relating to tax deducted at source also stands decided by the Hon'ble Supreme Court of Pakistan in the case of Phoenix Assurance Co. Ltd. The entire discussion shows that neither the question in respect of taxes deducted at source was referred to the Hon'ble High Court nor it was considered by the Hon'ble Supreme Court of Pakistan. The entire discussion to the judgment of Hon'ble Supreme Court of Pakistan is confined to the provision for taxation which is in respect of liability for taxes. At this juncture we would like to observe that our view is that the provision for taxation is an issue different from the taxes deducted at source, because the provision for taxes is in the nature of liability to be discharged in future, while taxes deducted at source is not in the nature of a liability to be discharged' in future, but is an expenditure simplicitor as it is an amount which goes away irretrievably, as we will discuss presently. We are fortified in our views, with the provisions contained in subsection (2) of section 27-A of the Insurance Act, 1938 which states that certain items shall be deemed to be liability of the insurer and it includes various items such as amount of provision for dividends and unpaid dividends, amount due to insurance companies carrying on insurance business, amount provided for taxation and amount due to other creditors. Its shows that all these amounts are in the nature of liabilities which are to be discharged in future. It does not include any item relating to the amount which already stands paid or given away irretrievably as in the case of tax deducted at source. It would be appropriate to see as to that is the connotation of the term liability. The terms itself is not defined in the Income-tax Act, 1922, Income-tax Ordinance, 1979 and the Insurance Act, 1938. It is defined in Dictionary of Accounting Terms by Derek French, 1985 Edition as follows:

"Liability. ---A claim against an accounting entity which, it is expected, will be settled by the entity parting with assets or in some other way losing an economic benefit.

Traditionally, the claims of the owner of an accounting entity to be repaid contributed capital and to have reserves distributed to them on the winding up of the entity were regarded as liabilities of the entity at all times and were so described in balance-sheets. Nowadays, however they would not be regarded as liabilities until the claims became enforceable, which would happen, for example, when a limited company resolved to pay shareholders a dividend out of profits or went through the correct procedure for authorising a repayment of capital.

Liability and the plural form 'liabilities' are also used for the value of a claim, or an aggregate of the values of claims, against an accounting entity. The estimated value of a liability which is likely to be incurred, or certain to be incurred although of an uncertain amount or at an uncertain time, is usually called a 'provision' and is included in liabilities.

FASB Statements of Financial Accounting concepts No.3 states: 'Liabilities are probable (footnote omitted) future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events'. It goes on to identify three essential characteristics of a liability---

(a) it embodies a present duty or responsibility to one or more other entities that entails settlement by probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand, (b) the duty or responsibility obligates a particular enterprise, leaving it little or no discretion to avoid the future sacrifice, and (c) the transaction or other event obligating the enterprise has already happened."

24. We have dealt with this issue in the judgment reported as 1989 PTD (Trib.) 1263 (in which one of us Muhammad Mujibullah Siddiqi is signatory). It has been held that till the assessment year 1979-80 provision for taxation cannot be disallowed by the assessing officer though the amount of tax deducted at source can be disallowed because it is not a provision for taxation but actual payment of tax. After detailed discussion we have held that the tax deducted at source are in the nature of expenditure because there is no time lag between the creation of liability and the payment. However, up to the assessment year 1979-80 the Assessing Officer had no authority to disallow provision for taxation. As already discussed the Hon'ble Supreme Court of Pakistan has held in the case of Phoenix Assurance Company Limited that provision for taxes relates to the liability to tax under the Income-tax Act, 1922 (now under Income Tax Ordinance, 1979) and the term "liability" embodies present duty or responsibility to discharge the claim in future and is in respect of claims which are likely to be incurred or are certain to be incurred although of an uncertain amount or at an uncertain time and a provision can be made for the inclusion of such liabilities. Thus, if no responsibility or duty is to be settled or discharged in future and the obligation is not subsisting to be discharged in future it shall not be a liability. It means a responsibility, claim or duty already discharged cannot be treated as a liability and, therefore, cannot form part of a provision and, therefore, a distinction has been made by the Hon'ble High Court in the cases discussed above and has been approved by the Hon'ble Supreme Court of Pakistan that an expenditure is what is paid out or away or disposed and is something which is gone irretrievably and a provision/reserve is an amount which has been set apart to meet the future claims and liabilities. On facts also this difference is demonstrated in the case of Phoenix Assurance Company (1991 PTD 1028) in which plea was taken on behalf of insurance company by Mr. Ali Athar, Advocate that provisions for taxes are reserve funds for taxes and if any balance is left, it is shown as income in the next year. No such statement can be given in respect of taxes deducted at source. The provision of law contained in the repealed Income-tax Act, 1922 and the Income Tax Ordinance, 1979 in this behalf are very clear. It is contained in section 18(5) of the repealed Act that any deduction made and paid to the account of Central Government in accordance with the provision of this section shall be treated as a payment of income-tax or super-tax on behalf of the person from whose income the deduction was made and credit shall be given to him, therefore, on the production of certificate furnished under subsection (9). Subsection (9) of section 18 of the repealed Act provides that every person deducting income-tax or super-tax shall at the time of payment of the sum from which tax has been deducted, furnished to the person to whom such payment is made a certificate to the effect that income-tax or super tax has been deducted and specifying the amount so deducted, the rate on which the tax has been deducted, and such other particulars as may be prescribed. It is provided in subsection (6) of section 18 of the repealed Act that all sums deducted in accordance with the provisions of this section shall be paid within the prescribed time by the person making the deduction to the credit of the Central Government or as the C.B.R. directs. Likewise, it is provided in section 50(8), paras. (b) and (c) of the Income Tax Ordinance, 1979 that any sum deducted or collected or purported to be deducted or collected under section 50 shall be treated as payment of tax on behalf of the assessee and paid within the prescribed time and in the prescribed manner by the person making the deduction or collection as the case may be to the credit of the Federal Government. It is provided in section 51 of the Income Tax Ordinance, 1979 that every person deducting or collecting tax under section 50 shall at the time of making payment of the same from which tax has been deducted, or at the time of collection of the tax, as the case may be furnish to the person to or from whom such payment or collection has been made, a certificate to the effect that the tax has been so deducted or collected and such other particulars as may be prescribed. It is also pertinent to note that once a tax has been deducted or collected then the liability of an assessee to that extent stands discharged and if the tax deducted or collected is not paid the person deducting or collecting a tax is held to be assessee in default. It is indicative of the fact that the tax deducted at source is an expenditure which is paid irretrievably and, therefore, falls within the purview of expenditure as defined by the Hon'ble Sindh High Court and Hon'ble Supreme Court of Pakistan as discussed above.

25.? As a result of foregoing discussion the contention of Mr. I.N. Pasha that the Hon'ble Supreme court of Pakistan has held in the case of Phoenix Assurance Company Limited that the tax deducted at source is not an expenditure and, therefore, up to the assessment year 1979-80 the assessing officer cold not exclude the same by way of re-adjustment in pursuance of the jurisdiction vested in him under Rule 6 of the First Schedule to the Income-tax Act, 1922 and Rule 5 of the 4th Schedule to the Income Tax Ordinance, 1979 is not correct. The contention is repelled. It is held that the tax deducted at source is an expenditure and, therefore, it could be excluded even before the amendment introduced in Rule 5 of the 4th Schedule to the Income Tax Ordinance, 1979 by Finance Ordinance, 1980.

26.? The upshot of the above discussion and finding is that the Assessing Officer had no jurisdiction to exclude the prevision for taxation up to the assessment year 1979-80 and from the assessment year 1980-81 the Assessing Officer is empowered to exclude the provision for taxation. However, the Assessing Officer had the jurisdiction to exclude the tax deducted at source even before the amendment introduced by Finance Ordinance, 1980 for the reason that tax deducted at source is an expenditure.

27. Before parting with this issue we would further like to deal with the provisions contained in section 11 of the Insurance Act, 1938 which had been a point for consideration in the earlier proceedings also and Mr. Shabbar Zaidi, F.C.A. has referred to the said section and the regulations in pursuance thereof, contained in Part I of the Second Schedule and Part II of the Second Schedule to the Insurance Act, 1938. Mr. Shabbar Zaidi has submitted that the insurance companies are required to prepare their accounts and balance sheet under section 11 of the Insurance Act, 1938 in accordance with the regulations contained in Part I and Part 11 of the Second Schedule. We have examined the regulations contained in Part I and the Forms prescribed in Part II of the Second Schedule to the Insurance Act, 1938. Regulation No.1 in Part I contained that, "deductions from interest, dividends, and rents to be shown in respect of income-tax must include all amounts in respect of federal income-tax whether or not it has been or is to be deducted at source or paid direct. Regulation No.3 status that, "the interest dividend and rents less income-tax thereon shown in the revenue accounts for any classes of business other than life insurance business, including annual business may, if the insurer so desires, be included in the corresponding items in the profit and loss account.

28. In Form B prescribed in Part II of the Second Schedule to the Insurance Act, 1938 which is in respect of profit and loss account it is provided that on expenditure side, federal taxes on the instance profits (not applicable to any particular fund or account) is to be shown less income-tax thereon. In Form ' C' which is for profit and loss appropriation account it is prescribed that on expenditure side any item transferred to any particular funds or accounts details whereof are to be given is to be shown. It was argued by Mr. Ali Ather, Advocate before the Hon'ble High Court in the case of Phoenix Assurance Company Limited that both the forms are to be read together. The contention was accepted by-the Hon'ble High Court and has been approved by the Hon'ble Supreme Court of Pakistan. We respectfully follow the dictum and on reading both the forms together we find that the provision of taxation is dealt with in the Form ' C' which relates to the profit and loss appropriation account and the provision for taxation is included in the transfer on any particular fund or account which was held by the Hon'ble High Court and Hon'ble Supreme Court of Pakistan not to be in the nature of expenditure although shown on the expenditure side. However, the federal taxes on the insurer's profit not applicable to any particular fund or account which appears on the expenditure side in Form? which relates to the profit and loss account shall be inclusive of the tax deducted at source. When it is read with Regulation No.2 which provides that the deduction from interest, dividends and rents is to be shown in respect of income-tax and must include all amounts in respect of federal income-tax whether or not it has been or it is to be deducted at source or paid direct. Thus, the tax which has not been paid so far and for which the provision is made is to be shown in the profit and loss appropriation account in Form ' C' while the tax already deducted at source which naturally shall not be applicable to any fund or account having already been paid is to be shown in Form ' B' on expenditure side and is to be treated as expenditure. This can be the only conclusion which can be drawn on examination of the entire Second Schedule to the Insurance Act, 1938 and which is in consonance with the entries on the income side in profit and loss account which specifically provides that the income from interest, dividend and rents not applicable to any particular fund or account is to be shown less income-tax thereon. When these provisions are read along with the provisions contained in the Income-tax Act, 1922 and Income Tax Ordinance, 1979 we find that the provisions relating to tax deducted at source are applicable to the interest, dividend and rent income while it is not applicable to the income relating to the premium received by insurance company and as such different treatment has been given by the Legislature to the taxes paid on these two different items of income. When confronted with the situation that deductions from interest, dividends and rents were to be shown as well as income-tax which is to be paid directly and, therefore, in respect of insurance companies the tax already deducted at source is to be given different treatment as against the tax liability which is to be crystallized in future and for which provision is to be made, Mr. Shabbar Zaidi was not able to advance any arguments to the contrary. This concludes our finding on the issue relating to the provision for taxes and taxes deducted at source before amendment in 1980 and thereafter.

REOPENING OF ASSESSMENT UNDER SECTION 65 FOR THE YEARS UP TO 1979-80:

29.? The department has reopened assessments for various years up to the assessment year 1979-80, to wit, prior to the amendment in Rule 5 of the 4th Schedule to the Income Tax Ordinance, 1979 for various reasons such as claim for payment of tax or claim of excess perquisites so on and so forth. The point in issue has already been decided by a Division Bench of this Tribunal in the judgment reported as 1989 PTD (Trib.) 1263 wherein it has been held that when entire facts were disclosed by the insurance company in the earlier proceedings the assessments could not be reopened because it would amount to change of opinion. In the cited judgment the assessment order passed under section 65 in respect of assessment years 1973-74 to 1979-80 were annulled. Respectfully following the above judgment it is held that in all those cases where full facts were already disclosed in the original proceedings the reopening of assessments was not justified.

CAPITAL GAIN ON SALE OF SHARES:

30.? All the learned representatives for the parties have placed reliance in this behalf on Rule 6-A inserted in 4th Schedule to the Income Tax Ordinance, 1979 which reads as follows:

"6-A Exemption of capital gains from sale of shares.---In computing income under this Schedule, there shall not be included ' capital gains' being income from the sale of any instrument of redeemable capital as defined in clause (30-A) of subsection (1) of section 2 of the Companies Ordinance, 1984 (XLVII of 1984), listed on stock exchange in Pakistan or shares of a public company, as defined in sub-paragraph (2) of Part IV of the First Schedule to this Ordinance, derived in respect of any assessment year ending on or before the thirtieth day of June, 1998. "

31.? The Central Board of Revenue has also issued Circular No.2 of 1997 explaining that a new Rule 6-A has been inserted in the 4th Schedule consequently capital gains from sale of shares have been exempted in the hands of insurance companies. The issue is decided accordingly.

SURCHARGE ON INCOME-TAX LIABILITY:

32.? The following question on the point of surcharge was referred to the Hon'ble High Court:

"Whether on the facts and circumstances of the case, the Tribunal was justified in holding that income-tax liability payable for the relevant assessment year can be included for purposes of working out retained income for levy of surcharge. "

33.? The Hon'ble High Court confirmed the view and held that the income-tax liability fell in the category of retained income for calculating the amount liable to the levy of surcharge. The Department took appeal to the Hon'ble Supreme Court which was dismissed vide judgment reported as 1993 PTD 343. The issue thus stands conclusively decided against the department.

ADDITION ON ACCOUNT OF APPRECIATION IN VALUE OF ASSETS:

34. The Department has made additions on account of appreciation in values of assets. The point already stands decided by this Tribunal vide judgment reported as 1989 PTD (Trib.) 1263 against the department. All the additions in this behalf shall, therefore, be deleted.

PROVISION FOR GRATUITY:

35.? In view of the law as laid down by the Hon'ble Sindh High Court in the case of Home Insurance Company Limited v. C.I.T. 1992 PTD 1177, the provision for gratuity is to be disallowed from the assessment year 1980-81 onwards. Mr. I.N. Pasha submitted that although from the assessment year 1980-81 onward the Assessing Officer has the authority to disallow the claim on account of provision for gratuity but in cases where the liability is ascertained no disallowance should be made. In support of his contention he has placed reliance on some judgments of the Hon'ble Supreme Court of Pakistan and Sindh High Court. It was pointed out to Mr. Pasha that the Hon'ble Supreme Court of Pakistan and the Sindh High Court have considered the law as contained in the Income-tax Act, 1922 while the law on the point is not same under the Income Tax Ordinance, 1979 in which it is specifically provided that the claim on account of gratuity fund in not to be allowed if it is not approved. The point in issue has already been considered by a Division Bench of this Tribunal in the judgment reported as 1994 SCMR 1040. Respectfully following the judgment of Hon'ble High Court in the case of Home Insurance Company 1992 PTD 1177 and the Division Bench judgment of this Tribunal cited above it is held that the department has rightly disallowed the claim on account of provision for gratuity from the assessment year 1980-81 onward. However, no disallowance is to be made under this head up to the assessment year 1979-80.

APPLICABILITY OF DEEMING PROVISIONS TO THE INSURANCE COMPANIES:

36. In various cases the assessing officers have made addition by recourse to the deeming provisions contained in section 10(2-A) of the repealed Income-tax Act, 1922, sections 25(c) and 12(9) of the Income Tax Ordinance, 1979. The learned representatives for the parties have submitted that the point in issue already stands decided by Hon'ble Supreme Court of Pakistan in the case of Alpha Insurance Co. (PLD 1981 SC 293) and Hon'ble Sindh High Court in the judgment reported as 1989 PTD 14 and 1991 PTD 401. In the case of Alpha Insurance Company the Hon'ble Supreme Court of Pakistan held that the First Schedule of the Income-tax Act, 1922, governs the computation of profits and gains of insurance business and is exhaustive of the subject and that 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, governs the computation of the profits and gains of insurance business. Section 10(2-A) of the repealed Income-tax Act, 1922 a corresponds to section 25 of the Income Tax Ordinance, 1979. This specific provision came for consideration before Hon'ble Sindh High Court in the case of C.I.T. v. Mercantile Fire and Insurance Company and it was held by Hon'ble High Court that by virtue of the provisions contained in Rule 6 of the First Schedule to the Income-tax Act, 1922, section 10 was applicable for limited purpose of excluding expenditure other than which may under section thus be allowed for computing the profits and gains of the business and the provisions of section 10(2-A) cannot be applied under this garb. In coming to this conclusion reliance was placed on the judgment of Hon'ble Supreme Court of Pakistan in the case of Alpha Insurance Company Ltd. (supra). The point again came for consideration before Hon'ble Sindh High Court in the case of C.I.T. v. International General Insurance Company 1991 PTD 401. The assessing officer made additions in the assessment years 1972-73 and 1973-74 under section 10(2-A) of the Income-tax Act, 1922 for outstanding trading liability. The Tribunal directed for deletion of these additions mainly on the ground that applicability of section 10 of the Income Tax Act has been ousted in case of insurance business. The finding was maintained.

37. Respectfully following the judgments of superior Court cited above it is held that the applicability of section 10(2-A) of the repealed Income-tax Act, 1922, section 25 and section 12 of the Income Tax Ordinance, 1975 containing deeming provisions are ousted by virtue of the provision contained in section 10(7) of the repealed Income-tax Act, 1922 and section 26(a) of the Income Tax Ordinance, 1979 and thus, no addition could be made by recourse to the deeming provisions contained therein and such additions are liable to be deleted.

BAD DEBTS ON ACCOUNT OF BANGLADESH LOAN WRITTEN OFF.

38. The point in issue already stands decided in favour of assessee by a Division Bench of this Tribunal in the judgment reported as 1989 PTD 532. It is, therefore, held that the claim is to be allowed.

TAXABILITY OF INTEREST/PROFIT ON KDC/DSC:

39. The point in issue already stands decided against assessees and in favour of department by the Hon'ble Supreme Court of Pakistan in the case of Central Insurance Company and others v. C.B.R. 1993 SCMR 1232 = 1993 PTD 766. The said finding has been confirmed by the Hon'ble Supreme Court of Pakistan in a recent judgment in the case of M/s. E.F.U. General Insurance Limited and others, in Civil Appeals Nos.933 to 940 of 1995 vide judgment dated 3-6-1997. It is, therefore, held that the exemption on interest profit earned on National Savings or Deposit Certificates including Defence Saving Certificates and Khas Deposit Certificates arc not available to the insurance companies.

DISALLOWANCE ON ACCOUNT OF EXCESS PERQUISITES.

40. It is conceded by. Mr. Sirajul Haq Memon, Advocate that from assessment year 1980-81 assessing officer has the authority to disallow the excess perquisites. His only contention is that the lease rentals may be directed to be excluded for the purpose of working the excess perquisites as according to him the cars belong to the company and not to the employees. He has likewise submitted that the issue relating to excess perquisites may be decided on merits in each case and no blanket disallowance be made without proper working of the same. He has further submitted that further direction may be given to treat these allowances as part of salary which are provided in explanation to section 10(4)(d) of the repealed Income-tax Act, 1922 which reads as follows:

"Explanation 1.---The expression 'salary', as used in this clause, means remuneration or compensation for services rendered paid or to be paid at regular interval and includes dearness, grain compensation or cost of living allowance and bonus and commission, which are payable to an employee in accordance with the terms of his employment as remuneration or compensation for services but does not include the employer's contribution to a recognised provident or superannuation fund or any other sum which does not enter into the computations for pensionary or retirement benefits."

He has made similar submission for working out excess perquisites under the Income Tax Ordinance, 1979 and has drawn our attention to the explanation to section 24(i) of the Income Tax Ordinance, 1979 which is in similar terms as in the repealed Act and reads as follows:

"Explanation. ---As used in this clause---

(i) ' salary' means remuneration or compensation for services rendered paid, or to be paid, at regular inervals, and includes dearness or cost of living allowance and bonus or commission payable to an employee in accordance with the terms of his employment as remuneration of compensation for services but does not include the employer's contribution to a recognised provident fund or an approved superannuation or gratuity fund or any other sum which does not enter into the computation for pensionary or retirement benefits".

41.? Some other learned representatives for the assessees have, however, submitted that the Assessing Officer is not empowered to make disallowance out of the excess perquisites. As the excess perquisites paid to the employees is admittedly an expenditure, therefore, we are of the considered opinion that the Assessing Officer is empowered to make disallowance. However, we find force in the contention of Mr. Sirajul Haq that in working out the excess perquisites the lease rentals paid to the leasing companies should be excluded from the perquisites to the employees for the reason that the cars/vehicles are owned by the companies and remain in the ownership of the company after the expiry of lease period. The ownership of the vehicles is not transferred to the employees. We are further persuaded to agree with the contention of Mr. Sirajul Haq that for working out the excess perquisites the salary should be taken as emplained in the explanation to section 10(4)(a) of the repealed Income-tax Act, 1922 and explanation to section 24(i) of the Income Tax Ordinance, 1979. We are further persuaded to agree with the submission that for making disallowance under the head excess perquisites the proper working should be made and the assessee should be duly confronted in the case of any difference of opinion on the said working.

REOPENING OF ASSESSMENTS ON CBR CIRCULARS:

42.? The point in issue already stands decided against the Department by the Hon'ble Supreme Court of Pakistan in the case of Central Insurance Co. 1993 SCMR 1232 = 1993 PTD 766. Respectfully following the dictum laid clown by the hon'ble Supreme Court of Pakistan it is held that no assessment can be reopened on the basis of any C.B.R. Circular containing any inerpretation on the point of law as it is not to be treated as information.

RATE OF TAX ON DIVIDED INCOME:

43.? The department has applied rate of tax on the dividend income in the normal course as applied to the income derived from general insurance business. The assessees are aggrieved with this treatment. The point in issue stands decided in favour of assessee in the recent judgment dated 3-6-1997 in the case of M/s. E.F.U. General Insurance Limited and others v. Federation of Pakistan and others in PLD 1997 SC 700 = 1997 PTD 1693 and others. The Hon'ble Supreme Court of Pakistan has held that the insurance companies are entitled to the benefit of lower rate of tax available to other assessees in relation to the dividend income under the First Schedule to the Income Tax Ordinance The issue is decided accordingly in favour of the assesses.

ADMISSIBILITY OF PAYMENT OF ZAKAT:

44.? The Department has disputed the admissibility of the payment of Zakat but the point in issue already stands decided in favour of assessee by Tribunal vide judgment reported as 1992 PTD (Trib.) 1294 wherein it has been held that the amount of Zakat paid by an insurance company is an admissible deduction. We respectfully follow the above decision and direct accordingly.

ADMISSIBILITY OF PROVISION FOR BONUS:

45. The provision for bonus claim by some of the assessee insurance companies have been disallowed by the Department. The A.Rs. for the assessees and particularly Mr. E.U. Khawaja has submitted that the method of accounting employed by the assessees' company is mercantile and hence the unpaid; quantified and ascertained the liability disbursed subsequently, is provided for in the accounts and is a legitimate deduction which does not warrant any disallowance as inadmissible expense. He has submitted that the point in issue already stands settled in favour of assessee by the Hon'ble Sindh High Court vide judgment reported as 1990 PTD 248 C.I.T. v. Chemdyes Pakistan Limited. There is force in the contention. It is, therefore, held that the claim was admissible and the disallowance is not justified.

MANAGEMENT EXPENSES IN EXCESS OF 40%:

46. The point in issue already stands decided in favour of assessees by the Hon'ble Supreme Court of Pakistan in the case of Alpha Insurance Co. vide judgment reported as PLD 1981 SC 293. It is, therefore, held that the disallowance is not justified which shall stand deleted.

PENALTY LEVIED UNDER SECTION 111 ON ACCOUNT OF CLAIMING PROVISION FOR TAXES:

47. The penalties levied under section III, in pursuance of reassessment orders under section 65 in respect of the assessment years up to 1979-80 are liable to be deleted, firstly, for the reason that the re-assessment orders have not been maintained. Secondly, the point in issue stands resolved in favour of assessees by the Hon'ble Sindh High Court in the case of Muhammad Muslim v. C.I.T. 1980 PTD 227 wherein it has been held that no penalty can be levied until and unless dishonest motive of assessee in filing untrue estimate of tax is established by the revenue. The issue further stands resolved in favour of assessees by a Division Bench of this Tribunal in I.T.A. No.401 to 403/KB of 1988-89 relating to the assessment years 1976-77 to 1979-80 vide order dated 8-8-1996. By now it is established proposition of law that no penalty can be levied by the Revenue if there is honest difference of opinion between the assessee and the Revenue and no dishonest intention or motive for evasion of tax is established. Thus, the penalties levied for claiming provision for taxes shall stand deleted.

DEDUCTION ON DONATIONS:

48.? The assessees have further objected to the maintaining of action by the I.T.O. in not allowing straight deduction of donation. In support of his contention Mr. Sirajul Haq has placed reliance on provisions contained in section 47 and section 49 of the Income Tax Ordinance 1979. He has submitted that according to the provisions contained in section 47 of the Income Tax Ordinance, 1979, an assessee shall be entitled to an allowance in respect of any sum paid by him in any 'income year as donation to any approved institution and the institutions specified therein, subject to the restrictions contained in the section itself and according to section 49 any allowance admissible or any sum exempt from tax under any provision contained in the Ordinance shall be included in the total income but may be deducted from such income for the purpose of computing the tax payable by assessee. He has submitted that the assessing officer has merely allowed rebate instead of allowing straight deduction which is not justified. The separable from the other business of an assessee, the compensation received would be a capital gain and not revenue income. The point has been considered by a Division Bench of this Tribunal also in the judgment reported as 1979 PTD (Trib.) 4, wherein Mr. M.T. Siddiqui, the then President of the Tribunal held that when compensation is received for assets lost, it is a capital gain and is not liable to charge of income-tax. We are, therefore, of the considered opinion that the learned two officers below were not justified in holding that the compensation received by the assessee was chargeable to tax, and, therefore, the findings of the learned two officers, below in this behest are hereby vacated and it is held that the compensation received by the assessee at Rs.50,00,000 is not liable to the charge of income-tax.' "`

49.? Another objection is to the charging of tax under section 80-D of the Income Tax Ordinance, 1979. The contention of Mr Sirajul Haq Memon is that under section 80-D the aggregate of the declared turnover shall be deemed to be the income of a company or registered firm and tax thereon shall be charged in the manner specified in subsection (2) thereof. He has further submitted that in explanation to section 80-D(2) the expression "turnover" is defined as follows:

"Explanation.--For the removal of doubt, it is declared that turnover' means the gross receipts, exclusive of trade discount shown on invoices or bills, derived from sale of goods or from rendering, giving or supplying services or benefits or from execution of contracts."

50. According to Mr. Sirajul Haq in order to constitute turnover for the purpose of section 80-D there should be gross receipts derived from sale of goods or from rendering, giving or supplying services or benefits or from execution of contracts. He has submitted that the appellant being an insurance company engaged in the business of life insurance is neither selling any goods nor is rendering, giving or supplying services and no receipts are derived from execution of contracts, therefore, the receipts of appellant do not fall within the purview of turnover as defined in section 80-D of the Income Tax Ordinance, 1979. The attention of Mr. Sirajul Haq Memon was drawn to the expression "benefit" used in the explanation defining the term "turnover". Mr. Sirajul Haq Memon submitted that the business of assessee ?company is to over the risk of life of a person which cannot be termed as benefit. He has submitted that benefit is always without quid pro quo and it is always without payment and without consideration. Mr. Sirajul Haq has further submitted that the risk is covered for consideration, which is the premium and, therefore, the premium received for covering the risk being for consideration does not amount to benefit. The attention of Mr. Sirajul Haq Memon was further drawn to the definition of perquisites as contained in para. B of section 16(2) of the Income Tax Ordinance, 1979 which includes the value of any benefit provided free of cost or on concessional rate. It further includes any sum' payable by the employer whether directly or indirectly to effect an insurance on the life of, or to affect a contract for any annuity for the benefit of the assessee, or his suppose or any dependent child. Thus, the Legislature has not used the expression benefit in the sense Mr. Sirajul Haq wants us to interpret. The expression benefit as used in section 16(2)(b) does not support the interpretation placed by Mr. Sirajul Haq that the benefit is always without quid pro quo and always without payment or consideration. In short if we accept the interpretation as placed by Mr. Sirajul Haq the expression "benefit" becomes synonymous with charity which is not acceptable. Mr. Sirajul Haq has not denied the fact that benefit provided to an employee is always for consideration of the services rendered and it is not without consideration. As the term "benefit" has not been defined specifically in the Income Tax Ordinance, therefore, in addition to taking guidance 'from the other provisions in the Ordinance such as section 16(2)(b) we will refer to dictionary meaning also. In the Chamber's Dictionary, 1993 Edition the word "benefit" has been defined to mean any advantage, natural or other; a performance, match etc. whose proceeds go to one of the company, a player or other particular person or cause; a right in the form of money or services enjoyed under social security or insurance claims; a kindness; favour. A right in the form of money or services under insurance scheme are specifically included in the meanings assigned to the word "benefit". Thus, it is held that the gross receipts of an insurance company are included in the term "turnover" as defined in the explanation to section 80-D(2) because it is derived from rendering benefits to the insured persons. The objection raised in this behalf by Mr. Sirajul Haq is, therefore, without substance and is hereby repelled. It is held that the Assessing Officer has rightly applied section 80-D to the gross receipts of the insurance company. The treatment is hereby maintained.

51. One of the objections raised is to the disallowance out of salary paid to development staff. A perusal of the assessment order shows that the assessing officer has observed that increase in claim in respect of salary paid to development staff does not commensurate with the increase in earning of premium. He has further observed that increase in premium offered over last year is about 5 % while the increase in salary is about 10% . He has further observed that the assessee has filed statement showing name and amount (sic) point in issue already stands decided against the assessee by the Tribunal at least in three cases being I.T.A. No.6366/KB of 1979-80 dated 1-2-1986, I.T.A. No.684/KB of 1992-93 dated 25-11-1987 and I.T.A. No.618/KB of 1985-86 dated 1-3-1988. In the above cases, after detailed discussion the claim for straight deduction was turned down. A perusal of section 49 clearly indicates that no straight deduction is to be allowed, as in the case of allowances and deductions admissible under section 23, which provides that in computing the income, the allowances and deductions mentioned therein shall be made, on the other hand it is provided under section 49 that the allowances shall be included in the total income but it may be deducted from such income for the purpose of computing the tax payable by an assessee. It is clearly indicative of the fact that straight deduction is not to be allowed and rebate shall be allowed while computing the tax.

52. In addition to the above reasons we are further persuaded to agree with the view of C.I.T. (A) expressed in some of the cases that so far as the income-tax is concerned, the rate is given in Part I of the 1st Schedule. However, the rate of super-tax was given in the relevant year (now the provision has been omitted) in Part II of the First Schedule which clearly stated that the super-tax shall be levied in the case of a company on the total income, excluding such part of the total income as consist of dividend or bonus or bonus share to which sub-para. (2) or sub-para. (3) apply. This provision contained specific exclusion from the total income for the purpose of levy of super-tax. On the other hand, Part I of the First Schedule prescribed rate of income-tax in the case of a company, specifically containing that such part of the total income excluding any dividend or bonus or bonus share to which sub-para. (2) or sub-para. (3) of Para. A of Part II applies to the income to which Chapter V applies. Thus, for the purpose of rate of income-tax the exclusion is extended to the income-tax, to which Chapter V applies, which includes sections 47 and 49 while Part II of the First Schedule which gives rate of super-tax does not contain exclusion of super-tax to which Chapter V applies. This omission in Part II of the First Schedule is very conspicuous and the only inference is that reflects legislative intent to the effect that rebate shall be allowed in respect of donation while computing income-tax only and not super-tax. We, therefore, respectfully following earlier decisions of the Tribunal and the reasons stated above repel the contention of the learned counsel for assessee for allowing straight deduction of donation and confirmed the treatment given by the learned two officers below whereby rebate has been allowed.

53. The appellants have further objected to the maintaining of disallowance of depreciation on cars by recourse to the provisions contained in Rule 8(8)(a) of the Third Schedule to the Income Tax Ordinance, 1979. Mr. Sirajul Haq Memon has submitted that the restriction of disallowance is not justified though he has contended that Third Schedule to the Income Tax Ordinance, 1979 is applicable to the insurance companies but rule 8(8)(a) restricting the value of vehicles is not applicable. We do not find any substance in the contention because nothing has been shown to us in support of the contention that only beneficiary provisions of the Third Schedule are applicable to the insurance companies while any provision adversely affecting or restricting any benefit or allowance in case of insurance companies is not applicable. The finding of the learned two officers below on this point is, therefore, maintained.

54. An objection has been raised on behalf of Eastern Federal Union Insurance Company to the charging of tax at Rs.50,00,000 being compensation received from State Life Insurance Company for taking over the entire business of life insurance. It is contended that the compensation is capital receipt and not chargeable to tax, as held by the superior Courts. The contention of the assessee before the assessing officer was that the receipt was capital in nature and reliance in this behalf was placed on various judgments from Indian jurisdiction particularly in the case of Lakshmi Insurance (Pvt.) Limited v. C.I.T. (1980) ITR-575, which was specifically a case of compensation for taking over life insurance business. The assessing officer did not accept that the case of Lakshmi Insurance Company was applicable to the assessee for the reason that the Lakshmi Insurance Company was engaged in life insurance business only, while the assessee was engaged in general insurance business also which still continues even after taking over life insurance business by the State Life Insurance: Corporation. Certain other reasons were also assigned for distinguishing the ratio of judgment in Lakshmi Insurance Company but they did not appear to be very material. Same contention was raised before the learned CIT(A) who agreed with the view taken by Assessing Officer and held that the action taken by the I.T.O. was justified. We have gone through the case from Indian jurisdiction, in the case of Lakshmi Insurance Company and we are of the opinion that it is an all fours to the present case and the distinction made by the learned two officers below is of no significance. It does not make any difference if the Lakshmi Insurance Company was engaged in the life insurance business only and the Estern Federal Union was engaged in life insurance as well as general insurance business. The principle is that when asset itself is lost and the entire source of business is taken away which is (sic) of salary paid to Field Staff but did not offer total, which was very much required to co-relate with the quantum of salary paid and premium earned. He has further given the quantum of disallowance in the earlier years. The assessing officer ultimately observed that the claim of salary allowed in the preceding year was 3.5% of net premium. On this basis he allowed claim at Rs.23,66,750 out of total claim of Rs.32,52,978 and then rounded of the amount disallowed at Rs.9,00,000. We are of, the considered opinion that no disallowance is to be made under the head salary paid to development staff on the basis of any formula as it has no sanction in law. The disallowance under the head salary can be made if the payment is not verifiable or in the case of payment of salary above taxable limit if no deductions have been made and the employees have also failed to offer the same to income-tax. All other reasons assigned by the assessing officer are not warranted in law and, therefore, no addition can be sustained on such ground. When no limit has been prescribed in law the departmental officers have no authority to fix any such limit. The departmental officers are not supposed to fix the parameter in which an assessee should conduct his business and business affairs. As the assessing officer has not observed that the salary paid to staff is not verifiable, therefore, the presumption would be that details of the payments furnished were found to be verifiable. The addition is, therefore, deleted.

55.? In the light of our findings above all the appeals preferred by the insurance companies and the department stand disposed of separately as follows:

(Details omitted from the copy supplied for reporting)

M.B.A. /429/Trib.?????????????????????????????????????????????????????????????????????????????? Appeal disposed of.