Income Tax Ordinance (XXXI of 1979)--

----S.66-A---Income Tax Rules, 1982, R.3(2)(c)---Director of a Company-- Perquisites---Working whole-time for one company ---Assessee was a Director of a company and was also running his private business ---Assessee declared his salary income as well as income from other private businesses and claimed exemption on perquisites under R.3(2)(c) of the Income Tax Rules, 1982 which was allowed by the Assessing Officer---Inspecting Additional Commissioner cancelled the assessment on the ground that assessee could not be termed as whole-time employee of a company as he was engaged in other businesses apart from drawing salary as a "Director" of a company and, therefore, was not entitled to exemption ---Assessee contended that if a person was working whole-time for one company, his engagement in private businesses after working hours would not exclude him from the purview of R.3(2)(c) of the Income tax Rules, 1982 because by running his own private business he could not be considered to be working for any other company---Validity---No restriction upon a person to engage himself in a private business was imposed while working for a company-- Rule 3(2)(c), Income Tax Rules, 1982 also refers to a person who is working whole-time for one company---Working whole-time for one company gains importance only when person is working for more than one company because R.3(2)(c) was enacted only to discourage misuse of" provisions of law pertaining to claiming of exemption on perquisites---Assessee was only working for one company and his engagement in private business did not give any benefit with regard to claiming of exemption on account of his perquisites ---Assessee was declared as a whole-time director/employee in one company and, therefore,, was entitled to exemption to allowances under R.3(2)(c) of the Income Tax Rules, 1982 in circumstances---Order under S.66-A of the Income Tax Ordinance, 1979 was vacated and that of the Assessing Officer restored by the Appellate Tribunal.

Commissioner of Income-tax v. S. Mazhar Hussain 1988 PTD 563 PLD 1988 Kar. 438 and 1998 PTD (Trib.) 3195 distinguished.

Ch. Manzoor Ahmad for Appellant.

Khalid Aziz Banth, D.R. for Respondent.

ORDER

SYED NADEEM SAQLAIN (JUDICIAL MEMBER).---The present appeals for the assessment years 1993-94 to 1996-97 have been preferred by the assessee against the combined impugned order, dated 13-5-1999 passed under section 66-A of the Income Tax Ordinance, 1979 (hereinafter called the Ordinance) by the, learned IAC, Range-II, Companies, Zone-1, Lahore. Assessee's main contention is with regard to cancellation of the assessment orders under section 66-A of the Ordinance and holding that the assessee is not working whole-time for one company.

2. Briefly stated the facts of the case are that the assessee, who is earning salary income being a director of M/s. Modern Pipe Mills (Pvt) Ltd., Lahore filed return for above assessment years declaring income as under:---

3. The assessee claimed exemption on perquisites at Rs.48,600, Rs.48,600, Rs.59,400 and Rs.70,200 for all the assessment years under appeal under Rule 3(2)(c) of the Income Tax Rules, 1982 being whole-time director of above named company. Exemption was allowed by the Assessing Officer as claimed. Examination of record revealed to the IAC that the assessee was also earning income from running a show-room, a hotel and an z the name of M/s. Bilal Traders. The learned IAC considering the assessment orders passed by the Assessing Officer to be prejudicial as well as erroneous in the eye of law for the reason that exemption to allowances and perquisites is available under rule 3(2)(c) of the Income Tax Rules, 1982 (hereinafter called the rules) only to such employee/director who is a whole time Director/employee in one company only. According to the learned IAC since the assessee was engaged in other business apart from drawing salary as a 'director' of the company, the assessee cannot be termed as whole-time employee of one company. He was, therefore, not considered to be entitled to exemption for the perquisites. Considering the assessment orders as erroneous as well as prejudicial to the interest of revenue, a show-cause notice bearing No. 1390/R-11, dated 2-2-1999 was issued. Reply was received through the A.R. vide dated 12-2-1999. The reply of the A.R. is being reproduced in the order as under:---

"Please refer your `Letter No. 1390/R-II, dated 2-2-1999 for Rule 3(2)(c) of the Income Tax Rules, 1982, it is respectfully submitted that the assessee is a whole-time director of the company in accordance with rule 3(2)(c) of Income Tax Rules, 1982, which is being reproduced below:--- ,

'(C) 'employee' includes a director of a company working whole-time for one company'.

The certificate from the Chief Executive of the company regarding working whole-time is attached herewith.

It is admitted that the assessee was doing the business as an individual through the manager and the business was being supervised after the working hours of the company. The restriction imposed vide rule mentioned above is that the Director should not work in more than one company as an employee and restriction is not imposed for doing the business after the company s working hours, the condition was fulfilled that Director being an employee of the company was working whole-time for one company.

The entitlement of house rent is fully justified being an employee for whole-time, so the order passed for the years mentioned above is not erroneous in the eye of law as well as prejudicial to the interest of revenue, so show-cause Notice under section 66-A of the Income Tax Ordinance, 1979. is not justified and also against the facts of case".

In the last it is requested that the proceedings tray be dropped". After receipt of reply from the assessee, the learned IAC while placing reliance on the judgment of the Honourable Sindh High Court re: Commissioner of Income Tax v. S. Mazhar Hussain 1988 PTD 563 = PLD 1988 Kar. 438, proceeded to cancel the assessment framed by the Assessing Officer.

4. Feeling aggrieved by the said order passed by the learned IAC under section 66-A of the Ordinance, the assessee has approached the Tribunal through the present appeals. ,

5. Both the parties have been heard and the relevant records perused. The learned AR for the assessee has vehemently argued the case and contended that rule 3(2)(c) of the Income Tax Rules, 1982 is attracted in the assessee's case because the assessee is a whole-time director in M/s. Modern Pipe Mills (Pvt) Ltd. and he is not an employee of any other company. In this regard he referred to rule 3(2)(c) of the Income Tax Rules, 1982 which defines the word "employee" including a director of a company working whole-time for one company. His contention was that if the person is working whole-time for one company his engagement in private business after the working hours would not exclude him from the purview of rule 3(2)(c), because by running his own private business he cannot be considered to be working for any other company. In this regard he produced a certificate from the firm for which the assessee is working, the subject matter of which is as follows:

"This is to certify that our Director Mr. Muhammad Saleem, with our Directors, has been working full-time from 8.00 a.m. to 17-00 p.m. since the incorporation of the firm i.e. 5-8-1991 uptil dated. He, Mr. Muhammad Saleem, is not involved in any other company."

6. By referring to that certificate' he emphasised that the assessee was working for the company from 8-00 a.m. to 17-00 p.m. which means that he. was working for the said company for the full working hours which are usually practised in the commercial world. The certificate of the company also stated that the assessee was not involved in any other company.

7. The assessee also placed reliance on two judgments reported as 1988 PTD 563 = PLD 1988 Kar. 438 and 1998 PTD (Trib.) 3195.

He tried to seek strength from these two judgments in support of his contention. The facts in the first case referred to by the learned A.R. were that the assessee in the said case was Managing Director of M/s. Atlas Rubber & Plastic Industries Ltd., Karachi. He was also a Director of Atlas Trading Agencies and of Simplex Rubber Manufacturing Company Ltd. During the assessment year 1972-73 he received a salary of Rs.2,000 per month from Atlas Rubber & Plastic Industries Ltd., Karachi. He also received remuneration of Rs.6,000 during this year from Atlas Trading Agencies. No remuneration was received by him from Simplex Rubber Manufacturing Company Ltd. Besides, he was paid conveyance and entertainment allowances by the three companies mentioned above. The assessee claimed exemption under Rule 39 of the defunct Income Tax Rules only in respect of payment of entertainment allowance made to him by Atlas Rubber & Plastic Industries Ltd., Karachi. The. Assessing Officer was of the view that since the assessee was working for two companies he was, therefore, not working on whole-time basis for either of these companies and as such he was not an employee within the meaning of sub-rule (3)(b) of rule 39 of the Rules. The remuneration received by him, therefore, was taxed under section 12 of the Income-tax Act, 1922. Before the Tribunal the assessee's stand was that he was working for one company i.e. M/s. Atlas Rubber & Plastic Industries Ltd., Karachi by virtue of a resolution adopted at the General Meeting of the said company. The Tribunal held that the assessee was actually an employee of the said company under section 7 of the Act, and as such, was liable to be taxed in respect of the salary received by him from the said company. The department approached the Honourable High Court, Karachi through a reference couched in following words:

"Whether in the facts and circumstances of the case, the Tribunal was justified in holding that notwithstanding his being a director in three companies, the assessee was a whole-time employee of one of them within the meaning and for the purpose of clause 3(b) of the rule 39 of the Income Tax Rules?"

8. In reply to the said reference, his Lordship held that "A person may be a director of several companies. He may also work whole-time in one company or part-time in several companies of which he is a director. If a person does work part-time in several companies then he cannot be said that he works whole-time for one company which is prima facie the requirement of rule-39". And it was concluded as under:---

"In our opinion the benefit of the rules has to be given to a person who works whole-time for one company and not part time. If a person works as a director for one hour only and does not work for another company he can still be considered to be working whole time for that company and if a person works whole day for one company and whole night for another company or for some days in a month for one company, and for some other days in a month for other he cannot be said to be working for one company only, for, the word' 'whole-time' used is rule 39(3)(b) in our opinion means entire time as the word 'whole' has been used in the sense of entire. "

9. The other judgment of the Tribunal relied upon by the learned A.R. for the assessee reported as 1998 PTD (Trib.) 3195 whereitl the facts of the case were that the assessee was a director in three Private Limited Companies. As against the declared loss, the assessment was framed at as taxable income for the reason that the assessee was not a whole-time director for one company and, therefore, was not entitled to the benefits allowable under Rule 4 to rule 18 of the Income Tax Rules, 1982. The Provisions of Rule 3(2)(c) of the Ordinance were also reproduced to support the conclusion drawn. The learned first appellate authority maintained the treatment meted out to the assessee. The appeal was preferred before the Tribunal which was allowed and the assessee was held to be whole-time director for one company. It was held that he was not performing any duties for other company nor received any salary or benefit from that company.

10. The learned DR has on the contrary supported the impugned order and submitted that since the assessee is engaged in conducting many other business so he cannot be considered to be working as whole-time director for one company.

11. We have heard the arguments advanced at the bar by both the representatives of the parties and have gone through the relevant orders as well as perused the judgments placed on record. Before we embark upon to discuss the arguments submitted by both the parties, we would like to distinguish the case law cited at the bar. Facts of the two cases (supra) are slightly different from the subject-matter in appeal before us. In those two (supra) cases, the assessees were directors in more than one company, but in the instant case the assessee is working for one company though he is doing his private business apart from holding directorship of the company. In this view of the matter we would like to observe, that the ratio settled in the two supra cases cited above is not attracted in the present case.

12. The learned A.R. has contended that Income Tax Ordinance has, not placed embargo on a person who is working for a company to do his own private business. His further contention was that rule 3(2)(c) of the Income Tax Ordinance, 1979 envisages that this rule is applicable in case of person working whole-time for one company. We are also of the view that law does not impose restriction upon a person to engage in a private business while working for a company. Secondly the rule 3(2)(c) also refers to a person who is working whole-time for one company (under lining is -our). This mentioning of working whole-time for one company gains importance only when a person is working for more than one company because we understand that this provision was enacted only to discourage misuse, of provisions of law pertaining to claiming of exemption on perquisites. Eyen the case law cited at the bar also supports this view for the reason that no person should be allowed to claim exemption on perquisites if he is working for more than one company. This question of claiming exemption does not arise at all in the instant case because the assessee is only working for one company while his engagement in private business does not give any benefit with regard to claiming of exemption on account of his perquisites. Since the company has certified that the assessee is a whole-time director/employee and it is stated that he is conducting his own businesses outside the working hours of the company, in our view he fulfils the conditions laid down in rule 3(2)(c) of the Income Tax Rules, 1982.

13. After hearing the arguments of both the parties, we are in full agreement with the arguments advanced by the learned A.R. of the assessee at the bar and have no hesitation in holding that the assessee in the present case was a whole-time director/employee in one company, and therefore, was entitled to exemption to allowances under rule 3(2)(c) of the Income Tax Rules, 1982. The impugned orders passed under section 66-A of the Income Tax Ordinance, 1979 cancelling the assessments for the assessment years 1993-94 to 1996-97 is hereby vacated and orders that of the Assessing Officer are restored.

14 In the light of above discussion appeals of the assessee succeed as above,

C. M. A. /M. A. K./6/Tax(Trib.) Order accordingly