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

----S.39 & Second Sched., Part I, Cl.(72)---General insurance business-- Allowances and reliefs ---Exemption---Interest on Defence Saving Certificates, Zakat and Uslir---Bonus---Assessee, an insurance company, returned income and claimed exemption from tax on income from interest on Defence Saving Certificates---Held, assessee was not entitled for exemption on interest on Defence Saving Certificates under Cl.(72), Part I of Second Sched. of Income Tax Ordinance, 1979---Provision for bonus to be allowed as expenditure against business income ---Zakat deducted and paid into Zakat fund to be deducted from income of the assessee.

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

----S.39---Allowances and reliefs ---Expenditures---Add-backs---Assessee claimed certain expenses which were disallowed against the history of assessee---Held, since assessee enforced financial discipline and economy in expenditures and there was no deviation from past history, expenses in Profit and Loss Account were not to be disallowed.

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

----S.26---General Insurance Business---Charge of income-tax---Dividend-- Capital gain---Held, in case of insurance company entire income including income from dividend was liable to tax as a single unit by virtue of provisions contained in S.26 and Fourth Sched. of the Ordinance---Capital gain on sale of shares of listed public company was taxable.

(1992) 66 Tax 58; (1964) 53 ITR 186; 1989 PTD (Trib.) 39; 1991

PTD (Trib.) 643; 1991 PTD (Trib.) 817; 1995 PTD 761 and 1993 PTD 776 ref.

Mahmood A. Hashmi and Sh. Zulfiqar Ali, I.T.P. for Appellant.

Shahid Zaheer, D.R. for Appellant.

Shahid Zaheer, D.R. for Respondent.

Mahmood A. Hashmi and Sh. Zulfiqar Ali, I.T.P. for Respondent.

Date of hearing: 20th October, 1996.

ORDER

SIKANDAR KALIM FAZAL (ACCOUNTANT MEMBER).---The assessee, a Public Limited Company, deriving income from the business of general insurance has preferred these four appeals against the order of CIT (Appeals) Zone-III, Lahore dated 7-12-1991 relating to the assessment year 1990-91, order dated 29th August, 1992 and order dated 13 February, 1993 both relating to the assessment year 1991-92 and order of CIT (A) Zone-1, Lahore dated 5-6-1995 relating to the assessment year 1992-93. Depart mental cross appeals relating to assessment years 1991-92 and 1992-93 have been preferred against the aforesaid orders of CIT (Appeals) Zone-III and CIT (Appeals) Zone-1, Lahore. We will first take up the assessee's appeals.

2. Income from interest on DSC's at Rs.52,500 and Rs.31,775 for assessment year 1990-91 and 1991-92 was claimed exempt from tax under clause (72) Part-1 of the Second Schedule of the Income Tax Ordinance, 1979. However, the ITO turned down the claim on the plea that such exemption was not available to the Insurance Companies and learned CIT (A) agreed with this finding. Since the issue has finally been decided by the Supreme Court of Pakistan in the case of Central Insurance Co. v. CIT reported in 1993 PTD 766 in favour of the Department, therefore, assessee's appeals on this issue are hereby dismissed.

3. Provision for bonus to staff at Rs.8,00,000 and at Rs.1,102,151 relating to the Assessment Years 1990-91 and 1991-92 was disallowed by the Assessing Officer for the reason that these amounts admittedly were not paid during the period under consideration and were in the nature of provision only, hence they were added back to the taxable income. The learned CIT (Appeals) confirmed the add backs with the remarks that the add back being in line with the past, the disallowance is upheld. In support of the ground of appeal, the learned A.R. has submitted that this issue has been decided in favour of the assessee by an authoritative Judgment of Karachi High Court in CIT v. United Insurance Company of Pakistan Limited, reported in (1991) 63 Tax 141. He made a statement at the Bar that the Principle laid down by the Honourable High Court has neither been dissented upon by any other High Court, nor reversed by the Supreme Court of Pakistan. The learned DR could not controvert the arguments of the AR. In respectful agreement with the above judgments of the Karachi High Court, we hold that provision for bonus for both the years under appeal should be allowed as expenditure against the business income of the appellant.

4. Zakat deducted under Zakat and Ushr Ordinance 1980 and paid into Zakat Fund at Rs.3,13,225, Rs.30,21,907 and Rs.3,79,686 for the assessment year 1990-91, 1991-92 and 1992-93 respectively was claimed as a deduction against income from insurance in the return of income. The Assessing Officer disallowed the deduction on the plea that since business of insurance is assessed under rule 8 of the Fourth Schedule of the Income Tax Ordinance, 1979, therefore provisions of Zakat and Ushr Ordinance, 1980 are excluded. The learned CIT (A) turned down assessee's appeal by stating that the add back is found proper and is confirmed. Only this issue has been raised in assessee's second appeal for 1991-92. The learned A.R. has strongly objected to the slipshod manner the appeal has been rejected. In support of the deduction of Zakat, the A.R. has placed reliance on 1; Full Bench judgment of the Tribunal reported in (1992) 66 Tax 58, wherein after detailed discussion of the relevant provisions of law, it has been held that Zakat deducted and paid into Zakat Fund is admissible as a deduction against income from business of insurance. The A.R. of the assessee made a statement at the bar that said judgment has neither been dissented, nor reversed by any other Court or Tribunal in the country. The learned D.R. could not controvert the arguments of the A.R. Therefore, in respectful agreement with the above judgment of the Tribunal, we hold that Zakat deducted and paid into the Zakat Fund should be deducted from the income of the appellant for all the three years under appeal.

5. Next issue in 1990-91 is the disallowance of Rs.1,00,000 on estimate out of profit and loss Account expenses. Only reason for this add back is as per part'. The learned CIT (A) confirmed the sanction of the I.T.O. by making a general remark that add back is proper and is confirmed.

6. Deviating from history of the case, in 1992-93 disallowances were made in profit and loss A/c expenses, individually under 9 heads either for non-business, personal or for unvouched, unverifiable nature. The learned CIT (A) observed that add backs under 5 heads are found excessive and these are reduced. He gave no reason for upholding add backs under remaining 4 heads. The position is summed up as follows: --

The learned A.R. of the assessee submitted before us a chart shows history of add backs as follows:------

With the help of above chart, the learned A. R. has demonstrated that main reason for add back i.e. history or past treatment is misconceived because there was no add back in 1985-86 and 1991-92. In 1986-87, 1987-88, 1988-89, 1989-90 and 1990-91 the add back was at 0.51 % , 0.47 % , 0.38 % , 0.37 % and 0.35 % of the claim. Hence add back confirmed by the learned CIT (A) at 2.78% of the claim is arbitrary, excessive and unprecedented.

7. The learned A.R. has vehemently argued that; (1) assessee is one of the concerns of well known 'Atlas Group of Companies' of Karachi; (2) It is run entirely and exclusively by professional managers and not by majority shareholder directors and. that even the Chief Executive Officer of the Company. Mr. S. C. Subjally, a man of high integrity, is a professional insurer; (3) Because of professional management (a) there is strict financial discipline and expenditure of not a single paisa is disbursed without support of a proper voucher sanctioned by a competent officer of the company; (b) the accounts of the Company are subjected to rigorous internal as well as external audit by a firm of auditors of repute; (5) none of the majority shareholder directors reside at Lahore and they live at Karachi. Consequently they do not use cars, hence there is, whatsoever, no non-business or personal element expenditure on car maintenance, petrol, conveyance, telephone or entertainment. All the expenses claimed in the accounts have been incurred wholly, exclusively and necessarily for the purposes of the business of the company. Since assessee kept full particulars of the expenses in the vouchers, and the ITO did not detect or pinpoint a single instance of personal non business or unvouched expenses, he was not justified to make any add back. In this behalf Mr.Hashmey has placed reliance on (1964) 53 ITR 186; 1989 PTD (Trib.) 39; 1991 PLD (Trib.) 643; 1991 PTD (Trib.) 817; (5) Because of factors set out above assessee company achieved very high return on equity, by declaring net accounting profit of Rs.7,21 1 ,228 on a paid up capital of Rs.15,870,000. Mr. Hashmey went on to argue further that in his capacity as the tax consultant of all the companies of the 'Atlas Group at Karachi, he can say that declared results are more or less being accepted by the Income Tax Department in the cases of all the Companies of the Group.

8. We have given active consideration to the above arguments of the A.R. and have also perused the record and vouchers. We directed the learned DR to examine the vouchers produced by the assessee at the time of hearing of this appeal. He could not identify any non-business on unvouched expenses. We find the declared income. to be fair and reasonable viz-a-viz the capital employed. Profit and loss A/c expenses have been claimed this year at Rs.26,908,104 as against claimed last year at Rs.28,407,973 when no add back was made. Insurance receipts have been declared this year at Rs.10,358,116 as against receipt declared last year at Rs.9,621,555. Thus assessee enforced financial discipline and economy in expenditure. In a nutshell there is not one good reason to deviate from the established history of the case since last many years.

9. Next issue in appeal is the disallowance out of management expenses. Particulars of expenses claimed, add back made and reduction allowed by the learned CIT (A) are reproduced as follows: --

The Assessing Officer made the add back on the plea that details and records of development officers and monthly production, business reports were not provided and social security, EOBI etc were not maintained and functions and duties performed were also not provided.

10. The learned CIT (A) upheld the rejection accounts but reduced the add backs from Rs.4,174,813 to Rs.1,674,813 because he found the add back excessive.

11. The learned A.R. has submitted before us a chart showing history of the declared receipts, management expenses claimed and allowed as follows:-

Over and above the arguments recorded by us in Para 6 above, the additional arguments of the A.R. are (1) no add back has ever been made either in the past or in future years under this head; (2) claim of expenses is reduced as compared to last year despite increase in insurance receipts, therefore even if there was a minor technical fault, the claim ought to have been accepted; (3) there is no change in facts or law justifying departure from past.

12. We have carefully considered in the above arguments of the A.R. and we find considerable merit and force in them. The Assessing Officer has not brought any material on record to justify departure from past. It is also true that there is increase in the receipts and decrease in expenses. Disallowance has been made on conjectures, surmises, suspicion and other extraneous remarks. Remunerations of Field Development Staff is an integral part of the business of insurance which is highly competitive. Permanent and regular executives at head office and at branches of a company run by professional management cannot be rejected on flimsy grounds. Especially when the audited accounts of the company have been accepted by the Controller of Insurances. In a nutshell we find no justification or merit in the order of learned CIT (A) wherein he confirmed the add back of Rs.1,674,813.

13. After taking into consideration all the facts and circumstances of the case, add back in profit and loss A/c at Rs.100,000 in 1990-91, calls for no interference because it is in line with addition made for assessment years 1986-87, 1987-88, 1988-89 and 1989-90. Addition totalling at Rs. 7,47,00. in 1992-93 being excessive viz-a-viz history of the case is likewise reduced to Rs.100,000. Addition at Rs.1,674,813 in 1992-93 in the management expenses being uncalled for is hereby deleted in toto.

14. Next ground of appeal is the rate of tax charged at 44 % on income from dividend. In the return of income, assessee paid fax at the rate of 5 % as laid down under Para A(2)(a) of Part-II of the First Schedule on income from dividend of listed public companies at Rs.3,476,369. The Assessing Officer, however, charged tax at the standard rate of 44 % and the learned CIT (A) upheld the order of assessment. Karachi High Court in the case of Adamiee Insurance Company Limited v. ITO., reported in 1995 PTD 761 has already held that in the case of an insurance company entire income including income from dividend is liable to be assessed as a single unit by virtue of provisions contained in section 26 and Fourth Schedule of the Income Tax Ordinance, 1979. In respectful agreement with the judgment of the Honourable High Court, we uphold the order of authorities below and dismiss assessee's appeal on this issue.

15. Last ground of appeal pertains to the assessment of capital gain on sale of shares of listed public companies at Rs.3,052,762 which was claimed exempt under clause (116) part-I of the Second Schedule but was assessed on normal rate of tax as a part of the income from business of insurance. The learned CIT (A) confirmed the order of assessment. Since this issue has already been decided by the Supreme Court of Pakistan in the case of Central Insurance Company v. CIT reported in 1993 PTD 776 in favour of the revenue, therefore, assessee's appeal on this ground is hereby dismissed.

16. Now we take up the Departmental cross appeals for assessment years 1991-92 and 1992-93.

17. In 1991-92, Zakat deducted and paid into a Zakat Fund at Rs.301,907 was clime dash reduction against income from insurance. The Assessing Officer disallowed the claim on the plea that since assessment is made under Rule 8 of the Fourth' Schedule, therefore assessee is not entitled to the reduction. On assessee's appeal, the learned CIT (A) vide his first order for 1991-92 dated 29-8-1992, set aside the assessment with the remarks that this expense should be allowed after verifying the amount of the claim The Department has come in appeal against the said order. For reasons recorded in para. 4 above, Departmental appeal is hereby dismissed.

18. In 1992-93, the Assessing Officer curtailed a sum of Rs.4,000,000 out claim of salaries of field development, head office and branch office staff out of total claim of Rs.11,371,419. The learned CIT (A) reduced the add back to Rs.1,500,000. Likewise in the profit and loss account the Assessing Officer made disallowances under 9 heads totalling to Rs.1,457,000. The learned CIT (A) reduced the add backs under 5 heads by Rs.710,000. Department has come in appeals against this reduction in add back. For reasons recorded in aforegoing paragraphs where we have already deleted even the balance disallowance addition of Rs.1,500,000 in salaries and Rs.610,000 in profit and loss account expenses, consequently Departmental appeal is hereby dismissed on both the grounds.

19. As a result, the assessee's appeals for the four years succeed to the extent as indicated in above paragraphs and Departmental appeals are dismissed for both the years.

C.M.S,/383/Trib. Order accordingly.