(a) Interpretation of statutes--

---- Fiscal statutes are to be construed strictly and a cities is to be taxed within the letter arid spirit of a charging statute---Imposition of tax must be affected by plain words of Legislature.

Ormond Investment Co. v. Betts (1928) AC 143, 162; Revzan v. Nudelman (370) III.180 -18 N.E. (2) 219 and Bank of Commerce v. Tennessee 161 US 134, 145, 16 S. Ct. 456, 40 L. Ed. 645 rel.

(b) Interpretation of statutes--

---- Where the fiscal legislation embodies provisions for exemption/deduction the same are construed strictly and against assessee.

Iram Ghee Mills Ltd. v. Income-tax Appellate Tribunal 1998 PTD 3835 rel.

(c) Interpretation of statutes-

---- Provisions of exemption/deduction should be construed by liberal approach with an eye on the underlying purpose of the provisions---If the language of the provision is doubtful, same should be resolved in favour of assessee on the touchstone of the intention of Legislature.

P.A. Likunju, Cashew Industries v. Commissioner of Income-tax (1986) 166 ITR 804; Commissioner of Income-tax, Lucknow v. U.P. Cooperative Federation Ltd. (1989) 176 ITR 435; Collector of Central Excise, Bombay-I and another v. Parle Export (P.) Ltd. (1990) 183 ITR 624; Heartland v. Damon's Estate 103 V. 519, 156, At1.518 and Kimball v. Potter N.H. 196 Ad. 272 rel.

(d) Income Tax Rules, 1982---

----R.3(2)(c)---Employee---Expression "employ" in R.3(2)(c), Income Tax Rules, 1982, had been used as a fiction to cover a director of a company-- Rule 3(2)(c) did not provide that a person should not be director of more than one companies.

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

----Ss.16 & 136(1)---Income Tax Rules, 1982, Rr.3(2)(a)(b), (c) & 4-- Salary---Director of more than one companies---House rent/conveyance allowance ---Exemption---Assessee derived income from salary and allowances from only one company and served as director in other companies as honorary ---Assessee claimed exemption of house rent/conveyance allowances accordingly to Rules---Assessing Officer rejected the claim of assessee on the ground that director of more than one companies was not entitled to claim exemption as he was not working whole time for one company---Validity---Person who was director of more than one companies received rental allowance/perquisites from one company only and not from any other company, was entitled to claim deductions/exemptions/relief under Rr.3(2>(a0), (c) & 4 Income Tax Rules, 1982.

1998 PTD(Trib.) 3195 and 1990 PTD (Trib.) 321 rel.

Commissioner of Income-tax, Central Zone-A v. S. Mazhar Hussain 1988 PTD 563 ref.

Shafqat Mahmood Chohan for Appellant.

Syed Ibrar Hussain Naqvi for Respondent.

Date of hearing: 27th September, 1999.

JUDGMENT

MIANALLAH NAWAZ, J.---This judgment will govern two batches of thirty (30) Income-tax Appeals. Both of these pertain to Assessment Years 1991-92 to 1995-96. First batch comprises 16 appeals bearing Nos.557, 558, 559, 560, 561, 562, 563, 564, 565, 566, 567, 568, 569, 570, 571 and 572. This batch is by Revenue and is directed against four assessee namely Rana Arif Tauseef, Rana Asif Tauseef, Rana Atif Tauseef and Rana Zahid Tauseef. Second set consists of 14 appeals bearing Nos.l68 169, 170, 171, 172, 173, 174, 175, 176, 177, 178, 179, 180 and 181 of 1999. Appellant, in these appeals, is Revenue while respondents are assessee namely Saeed Akbar Khan, Iqbal Akbar Khan and Nasir Akbar Khan. All of these appeals have been filed under section136 of Income Tax Ordinance 1979 (shortly stated as "Ordinance").

2. These appeals raise only one question of law for consideration which is as follows:--

"Whether on the facts and circumstances of the cases in hand, the learned Income Tax Appellate Tribunal erred in law in holding that under rule 3(2)(c) of Income Tax Rules, 1982, respondents, who weredirectors of more than one Company, were entitled to be treated as employees of one company end were/are so entitled to receive the benefit/advantage/exemption with regard to rental allowance and other perquisites under rule 3(2)(c) read with rule 4 of Income Tax Rules, 1982. "

3. The facts, briefly stated, giving rise to these appeals are not in dispute. These are as follows: Assessees/respondents namely Rana Arif Tauseef, Rana Asif Tauseef and Rana Zahid Tauseef derived/derive their income/salary and rental allowance as directors from only one company namely M/s. Rana Hosiery and Textile Mills (Pvt) Ltd. They were, further more directors of Rana Textile Mills (Pvt.) Ltd. Similarly, Saeed Akbar Khan, Iqbal Akbar Khan and Nasir Akbar Khan derived their income/salary and other allowances from M/s. Akbar Fabrics. (Pvt.) Ltd. Faisalabad. They filed their returns pertaining to years 1991-92, 1992-93, 1993-94, 1994-95 and 1995-96. In the aforesaid returns, they mentioned that they derived income in the form of salary and rental allowances from only one Company and served as directors in the other companies as honorary; that they were eligible to seek concession under rule 3(2)(c) read with rule 4 of Income Tax Rules, 1982 (shortly stated as "Rules 1982"). This plea, however, was not accepted and Assessing Officer found that they were the directors of more than one Companies and so they were not entitled to claim exemption. Resultantly, the amount, so received by them as rental allowances, was added in their salaries for computation of their tax-liability.

4. Feeling aggrieved, the aforesaid assessees filed appeals which were dismissed by the learned appellate authority in following terms:-

"In the written explanation dated 9-5-1997 the assessee himself had admitted that he is director of more than one companies i.e. Rana Hosiery and Textile Mills (Pvt.) Ltd. and Rana Textile Mills (Pvt) Ltd. However, for the year under consideration no salary was drawn from M/s. Rana Textile Mills Ltd. although, the assessee works as director in the Company. Thus income in this case is liable to be assessed under the head income from other sources and resultantly claim of exemption on account of house rent allowance and conveyance allowance etc- ate liable to be brought to the ambit of taxation. In addition to admissibility of tax allowance at lower rate in non-salary cases. It is quite clear that the assessee was not working whole time for one company irrespective of the receipt of any remuneration because of his appointment as directors for more than one Companies. Hence the assessee loses his eligibility for assessment under the head income from salary as contained under rule 3(2) (c) of the Income Tax Rules, 1982. "

5. Feeling dissatisfied, all of them preferred separate appeals pertaining to each assessment year. Their appeals were allowed by the learned Appellate Tribunal vide impugned order dated 28-9-1998 and 11-2-1999 in following terms:--

"Since the Assessing Officer did not succeed in establishing that the assessee in any way performed any duty or functions with respect to the other company in which he was a director, we will agree that treatment of claimed pre-requisite as income from other sources or otherwise liable to tax was unjustified. Therefore, for the various reasons expressed in the said reported judgment of this Tribunal namely (1998) 78 Tax 179, we will direct that the Assessing Officer shall treat the house rent, conveyance, utilities and other pre requisites including telephone in accordance with the Income Tax Rules considering the assessee as a whole time employee of M/s. Rana Hosiery and Textile Limited."

6. The learned counsel for revenue, in support of these appeals, inter alia urged as follows: that the learned Appellate Tribunal had erred in law in construing the rule 3(2)(c) of Income Tax Rules, 1982. According to him; a person who was/is a director only of one company, was/is fictitiously treated as employee of such company, was/is entitled to obtain advantage under rule 4 of the 1982 Rules. Stressing on expressions 'working whole time for the Company", he emphasised that whole time meant 'entirely' and that the condition for being as employee was that a director was to work for only one company and not to work in other Companies. Reliance was placed upon the Commissioner of Income-tax Central Zone-A v. S. Mazhar Hussain (1988 PTD 563); secondly, that rules 3 and 4 were to be read within the ambit of section 16 of Ordinance wherein it was postulated that allowances payable to an employee by the employer were to be treated as salary and so were chargeable to impost. On the strength of above lines of reasoning, it was urged that since the respondents were directors of more than one company and so were disentitled to claim exemption under rule 4 of Rules, 1982. Learned counsel for other side, however, relied upon decision of Full Bench of Tribunal (1998) 78 Tax 179 (Trib) where it was held that the question as to whether a person worked as whole time director of company was a question of fact and was to be decided in the context of facts of each case. It was further argued that the respondents/assessees derived allowances from one Company and participated in the meeting of Boards of Directors of other Companies without receiving any salary or any perquisites. It was suggested that the interpretation of rules 3 and 4 of Rules, 1982 by Appellate Tribunal was eminently correct and in consonance with underlying intention if rules.

7. Before proceeding further, we feel necessary to reiterate three well knows rules of construction of fiscal statute. Firstly, that fiscal statutes are to construed strictly and a citizen is to be taxed within the letter and spirit of a charging statute. Briefly, the imposition of tax must be affected by plain words of Legislature. Lord Atkinson stated this principle in case of Ormond Investment Co. v. Betts, (1928) A.C. 143, 162) in the following words:---

"It is well-established that one is bound, in construing Revenue Acts, to give a fair and reasonable construction to their language without leaning to one side or the other, that no tax can be imposed on a subject by an Act of Parliament without words in it clearly showing an intention to lay the burden upon him, that the words of the statute must be adhered to, and that so-called equitable constructions of them are not permissible. "

The same rule was reiterated in recent case Revzan v. Nudelman (370) III 180 - 18 N.E. (2) 219). This case involved a sales tax law, and was decided in favour of the taxpayer by subjecting the words "use" and "consumption" to their restrictive meaning of "use up: or "exhaust". It was held:

"In the first place it must be remembered that the Act imposes a tax only upon persons engaged in the business of selling at retail. No other class is included in its provisions, either expressly or by necessary implication. Defendants insist that the sole leather and rubber heels sold by plaintiffs to repairmen are retail sales, on the theory that such materials are used or consumed by the repairman. This brings us to a consideration of the meaning of the terms 'for use or consumption'. In construing a statute it is fundamental that taxing laws must be strictly construed. They are not to be extended by implication beyond the clear import of the language used. In case of doubt, they are construed most strongly against the Government and in favour of taxpayer, Strict construction does not require that the words be given that narrowest meaning of which they are susceptible, and words of the Act are to be given their full meaning."

On this rule it will be highly useful to reproduce whatever was said in Bank of Commerce v. Tennessee (161 US 134, 145, 16 S.Ct. 456, 40 L. Ed. 645).

"Taxes being the sole means by which sovereignties can maintain their existence, any claim on the part of any one to be exempt from the full payment of his share of taxes on any portion of his property must on the account, be clearly defined and founded on plain language. There must be no doubt or ambiguity used upon which the claim to the exemption is found. It has been said that a well founded doubt is fatal to the claim; no implications will be indulged in for the purpose of construing the language used as giving the claim for exemption, where such claim is not founded upon the plain and clearly expressed intention of the taxing power:"

Secondly; where the fiscal legislation embodies exemption/deduction provisions, the same are construed strictly and against assessee. See Iram Ghee Mills Ltd. v. Income-tax Appellate Tribunal; (1998 PTD 3835); Thirdly; an exemption/deduction provision should be construed by liberal approach with an eye on the underlying purpose of said provisions. If the language of that provision is doubtful, the same should be resolved in favour of assessee on the touch-stone of the intention of legislature. See P.A. Likunju, Cashew Industries v. Commissioner of Income Tax (V. 166 (19861 ITR 804), Commissioner of Income-tax, Lucknow v. U.P. Cooperative Federation Ltd. (V. 176 (1989) ITR 435 and Collector of Central Excise, Bombay-I, and another v: Parle Export (P) Ltd. (V. 183 (1990 ITR 624). Reference be made also to Heartland v. Damon's Estate (103 V. 519, 156, Atl.518) and Kimball v. Potter (N.H. 196 Ad. 272). Observation of learned Judge, in first case, in following terms:--

"A law for the assessment and collection of taxes is to be construed with the utmost liberality. But in order to be subjected to a tax, the property must be such as is ordinarily included in the description given in the statute, and not such as can be brought within it by a process of reasoning only or by a strained construction because the legislature must be presumed to be fairly able to describe such property as it desires to tax without resorting to a strained construction or a course of fine reasoning "

In latter case statute provided that property passing by will. inheritance, "or by deed, grant, bargain, sale of gift, made in contemplation of death, or made or intended to take effect in possession or enjoyment at or after death of the grantor or donor, to any person, absolutely or in trust," should be taxable, with certain enumerated exception. The defendant argued that the transfer involved took effect in possession and enjoyment when the trust property was delivered to the trustees pursuant to the instrument of trust; that such delivery took place in the intestate's lifetime, so that the gift was not taxable. The trust instrument provided that the defendant was to have the income and also the principal so far as was needed to take care of him, and at his death was to end, and the trust estate go to two nephews. The Court, however, indicating a leaning toward a liberal construction, said.

"The argument commands little respect. The view that the statutes imposing taxes are, as a matter of course, to be strictly construed, does not usual test of statutory construction, to declare what the legislature has meant by the language it has used, will-be found to have been employed, it is believed, in all cases where statutes providing for taxation have been interpreted and was expressly accepted in (a) recent case. The policy of the State requires the taxation of property, as a general rule. If the literal meaning of particular words is inconsistent with the general purpose, where is grave reason to doubt whether the literal sense is the sense intended by the legislature."

The question as to what expenses/allowances are to be allowed as deduction/exemption has always been a troublesome exercise. It is to be remembered that the purpose of allowing deduction on these items is to allow the investors/businessmen to pay tax on their net income, gains, profits. This is in line with the spirit of mercantile activity. This being the underlying intention of the legislature it is necessary that such provisions have to be construed with a liberal approach. Guided by the above said rules we proceed to examine crucial rule i.e. rule 3(2)(c) and rule 4 of Income Tax Rules, 1982. These are as follows:--

"3(2)(c) 'employee' includes a director of a company working whole-time for one company.

4. Where the house rent allowance is receivable by the employee in cash, the amount, if any, by which the house rent allowance so receivable the time scale of the basic salary shall be included in his income.

Provided that where there is no time scale the basic salary of a particular employee against a particular post of office shall be construed to be the minimum of time scale of basic salary."

From the plain reading of rule 3(2) (c), it is quite clear that the expression "employee" has been used as a fiction to cover a director of a company. It says that director of Company shall be employee who shall work whole time for one company. This is the only restriction contained in this rule. This rule does not say that a person should not be director of more than one Company. Rule 4 is consequential. It exempts the house rent allowance from being included in salary for the computation of tax liability; it says that where rent allowance is received by employee in cash, the amount, if any, shall not be subject to incident of tax, if it does not exceeds 45 % of minimum of time scale of basic salary. The ceiling has been provided to prevent the commission of frauds and inflated claims of rental allowances. It further states that where there is no time scale, the basic salary shall be considered. No doubt, when rule 3(2)(c) and rule 4 are read conjunctively, prima facie, impression appears that a person who becomes director of more than one Companies, is disentitled to relief under rule 4. However, when the intention of legislature and the concepts of deduction are thoroughly studied this impression fades away for so many reasons. Firstly, the rule 2, as already stated, is fictional in nature. It makes the directors of a company as the employee of Company. Furthermore, it states that such person shall be employee of company who works whole time as a director for one Company. It does not forfeit his right to become honorary director of more than one Companies. Rule 4 is an exempting provision. Exemption is with regard to allowances given by company and are given to employee as his basic necessities. The employee does not seek any benefit/Advantage so far as his salary is concerned. Ceiling has been specifically provided. This being the position, a conjunctive reading of both the rules shows that underlying object of these two rules was/is to prevent/minimize frauds and fictitiousness of the claims. This rule, according to our opinion. is facilitative in nature. It is also true that total income has been made chargeable to tax under section 9 of the Ordinance, Nevertheless Income Tax Ordinance is a self-contained Ordinance. It takes into consideration the realistic norms of business activities and expenses incurred on business are excluded from income liable to be taxed.

Applying these principles to the facts and circumstances of the cases in hand, we have no difficulty to reaching the conclusion that the provisions pertaining to this exemption namely rule 3(2) (c) and rule 4 of Rules, 1982 are to be liberally construed. We, thus, find that the rule enunciated by the Tribunal in 1998 PTD (Trib.) 3195 and 1990 PTD (Trib.) 321 is eminently correct, just and in consonance with the principle of construction of fiscal legislation noted above.

For the aforesaid reasons, we have no difficulty in holding that a person who is director of more than one Company, if he receives rental allowance/perquisites from one company only and not from any other company is entitled to claim deductions/exemptions/relief under rule 3(2)(a)(b) and (c) and rule 4 of Rules, 1982. As a result of the above, we find no merit in these appeals which are accordingly dismissed in limine. The Registrar Lahore High Court, Lahore shall send the copy of this order/answer to Regional Commissioner Income Tax.

C.M.A./M.A.K./C-33/L Appeals dismissed.