I.T.A. NO.5383/LB OF 1999 VS I.T.A. NO.5383/LB OF 1999
2001 P T D (Trib.) 876
[Income-tax Appellate Tribunal Pakistan]
Before Khawaja Farooq Saeed, Judicial Member and M. Munir Qureshi,
Accountant Member
I.T.A. No. 5383/LB of 1999, decided on 18/10/2000.
(a)Words and Phrases---
------ Securities Meanings---Term "securities" means and includes such document which company issued in recognition of one's share in business company which entitled the securities holders to share the profits to the grant of holding and included such documents which were issued in acknowledgment of a debt owned by a company.
(b) Words and phrases---
---- Term "Finance Certificate"---Explanation---Term "Finance Certificate" issued by a Finance Company with the guarantee to give a fixed expected profit did not vest in any right to share the business or right to participate in earning other than the expected guaranteed profit---Certificate was an acknowledgment of deposit of an amount, a redeemable capital but the holder in no way obtained right to participate in the earning and/or distribution of the profits of a Leasing Finance Company.
(c) Income Tax Ordinance (XXXI of 1979)---
----Ss.50(2) & 50(7-D)---Deduction of tax at source---Interest---Section 50(2) was applicable on "interest" on securities while S.50(7-D) created a charge on "profit or interest" from bonds, certificates and securities.
(d) Interpretation of statutes---
---- Fiscal statute---Purposive approach---While interpreting a fiscal statute the intendments are not to be ignored---When a statute is enacted with some background the principle of interpretation is that the Courts should suppress the mischief and advance the remedy---Courts are required to adopt a purposive approach to interpret the statute and statute as a whole has to be considered to ascertain the true purpose of law.
(e) Words and phrases---
----Securities---Term "Finance Certificate"---Generally, bonds, shares, convertible debentures, stocks, warrants are considered as securities but the certificates issued in recognition and acknowledgement of some deposit which do not give the right to tire bearer to act as a shareholder are not considered as securities.
(f) Income Tax Ordinance (XXXI of 1979)---
----Ss.52, 50(7-D) & 50(2)---S.R.O. No.703(I)/97, dated 13-9-1997-- S.R.O. No.171(1)/98, dated 17-3-1998---Assessee in default---Term "Finance Certificate"---Profit---Deduction of tax at source---Rate of tax-- Assessee deducted tax on profit of term "Finance Certificate" @10% under S.50(7-D) of the Income Tax Ordinance, 1979---Department treated term "Finance Certificate" as securities covered under S.50(2) of the Income Tax Ordinance, 1979 and taxed @30 % for the purpose of S.52 of the Income Tax Ordinance, 1979 while holding the assessee as "assessee in default"-- Validity---Term "Finance Certificates" were not securities in terms of S.50(2) of the Income Tax Ordinance, 1979, even if it was covered within the definition of securities it was a fixed income security rated by credit rating company registered under Credit Rating Companies Rules, 1995, under the Securities and Exchange Ordinance, 1979---Such securities have been exempted by cl. (10-B) of the Second Sched.---Term "Finance Certificate" was subject to withholding tax under S.50(7-D) and not under S.50(2) of the Income Tax Ordinance, 1979---Order under S.52 declaring the assessee as assessee in default was declared to be unjustified and cancelled by the Appellate Tribunal.
Messrs State Cement Corporation of Pakistan v. Collector of Customs, Karachi 1998 PTD 2999; State v. Allen 216 NC 621, 5 S.E. 2nd 844, 845, 487 and Oklahma - Texas Trust v. Securities and Exchange Commissioner, C.C.A. 10,000 P.2d 888, 890 ref.
Iqbal Khawaja for Appellant.
Mian Manawar Ghafoor, D.R. for Respondent.
Date of hearing: 25th March, 2000.
ORDER
KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).---The petitioner assails holding him as an assessee in default under section 52.
Brief facts giving rise to this appeal are as follows:---
The company in order to raise funds from the public, floated Term Finance Certificate, hereinafter called T.F.C. through Karachi Stock Exchange on 15-/16-1-1996. Before, floatation of T.F.C., statutory approvals were obtained from Corporate Law Authority vide their Letter No. Co. 120/2/95, dated 31-7-1995 and also from credit rating agency i.e., M/s. Pacra. The factum of these approvals were published alongwith prospectus in the Daily Dawn on January 4, 1996. The T. F. C. bears profit @18% payable after every six months which was subject to withholding tax @10%: These facts were duly published for public in general in the prospectus of the company. In the prospectus the reference to section 50(7D) was also made as T.F.C. being one of Islamic Mode of financing was statedly covered under the said provision:
The Deputy Commissioner of Income-tax/Wealth Tax, however, treated T.F.Cs. as securities covered by the provisions of section 50(2) and taxed @30% for the purposes of section 52. While holding petitioner an assessee in default the observations of the Assessing Officer were as follow:---
Your explanation as furnished vide above cued letter was considered in the light of provision of section 50(2) of the Income Tax Ordinance, 1979. It is noticed that you have issued securities under the head 'Term Finance Certificate' and interest on these securities were paid amounting to Rs.366,29,797 and tax was deducted at source @10% of Rs.3,662,980. It is found that tax has been deducted at a lessor rate, which is against the provisions of law. The word 'securities' is not notified under the Income Tax Ordinance. One has, therefore, to depend upon its natural meanings and meaning ascribed to it under various judicial pronouncements. The Oxford English Dictionary defines the word 'Security' as
'a document held by a creditor as guaranteed, of his right to payment.
In other words, unless the payment of debt is secured in some way a mere debit is not a security. In your case the 'Term-Finance Certificates' are secured by 'First International Bank Limited'. Therefore, the securities issued by you are covered only under the provision of section 50(2) of the Income Tax Ordinance, 1979. Hence your reference that it falls under the purview of section 50(7D) of the Ordinance is irrelevant. 'It is, therefore, established that you have to deduct tax @30% on the amount of payment of interest. Which you have failed to do."
In appeal before the C.I.T.(A), the assessee's arguments could not; find favour and the appeal was dismissed.
Before us the learned A.R. has submitted that the First International Investment Bank Limited is not a guarantor as wrongly assumed. The bank is a trustee as confirmed by bank itself by their certificate, dated 27-7-1998, thus, the very basis of the assessment stands vacated. It was said that during the assessment proceeding, S.R.O. No.703(I)/97, dated 13-9-1997 was issued by C.B.R. and a new provision was inserted in Part IV of the Second Schedule to say:---
"(10B) The provision of subsection (7D) of section 50 shall not apply to any payments made by way of profit or interest on fixed income securities rated by a credit rating company registered under the Credit Rating Companies Rules, 1995, made under the Securities and Exchange Ordinance, 1979 (XVII of 1969)."
A further clarification vide S.R.O. No.171(I)/98 dated 17-3-1998 was issued. The clarified S.R.O. is reproduced as under:
Clause (10B).
"The provisions of the subsection (7D) of section 50 shall not apply to any payments made by way of profit of interest to an individual, unregistered firm, association of persons, Hindu undivided family or an artificial juridical person, other than a company on rated and listed Term Finance Certificate being the instruments of redeemable capital under the Companies Ordinance, 1984, issued on or after the 14th day of September, 1997. "
It was argued that from the examination of above vital provision of law one can easily ascertain the intention of the legislature which is very clear. According to this provision of law the T.F.Cs. are covered under section 50(7D) only and where rate of tax deduction is 10% as per clause (J) of the First Schedule.
The intention of legislature being clear and unambiguous he said, the direction should have been followed without hesitation. In his opinion where the language of law is clear in its application, further interpretation may lead to deviation from intention which is not permissible. The judgment referred by him in support of his argument is as follows:---
1998 PTD page 2999 Messrs State Cement Corporation of Pakistan v. Collector of Customs, Karachi.
"(c) Interpretation of statutes---
--- Interpretation of a statute is to adhere to the ordinary meaning of the words used unless that is at variance with the intention of Legislature which intention is to be collected from the statute itself---If the language of the statutory provision is unambiguous and the statute's meaning is clear the statute must be accorded the express meaning without deviation."
In addition to above submissions the A.R. informed that in other cases where T.F.Cs. are issued deduction rate is 10%. This he said is evident from the printed copies of their prospectuses. The provision of law as mentioned in all these prospectuses is 50(7D) read with Part IV of the Second Schedule as quoted above. The names of said cases are:---
(a) M/s. Packages Ltd.
(b) M/s. Sui Northern Gas Pipelines Limited.
(c) M/s. NDLC Limited.
(d) M/s. ICI (Pakistan) Limited.
The A.R., therefore, argued that the treatment accorded to his client by the Assessing Officer and confirmed by the C.I.T.(A) may be declared as illegal and necessary relief may be granted.
The learned D.R. supporting the order of the I.T.O. argued that the word "Term Finance Certificates" is fully covered under the definition of 'securities' and the interest paid thereon is chargeable under the provisions of section 50(2) on which the deduction of tax is not 10% but 30%. The assessee having deducted only 10% had defaulted, hence was assessable under section 52 to the extent of deficiency. He said that the assessee was issued a show-cause notice under section 62 prior to this addition wherein he was asked to explain as to how the T.F.C. is not a security, which he could not satisfactorily explain. He repeated that the word 'security' is not defined under the Income Tax Ordinance and as per its natural meaning it is a document held by a creditor as guarantee of his investment. This way he opined that unless the payment of debt is secured in some way it remains a debt and when it is supported by a surety it becomes a security. In this way he said that T.F.Cs. are secured by 1st International Investment Bank Ltd. therefore the 'securities' issued by the assessee were covered under the provisions of section 50(2) of the Income Tax Ordinance, 1979.
In his opinion the provisions of law and Circular quoted by the assessee were quite irrelevant. He further added that the provisions of clause (1013) of Part IV of the Second Schedule and C.B.R. C.No.171(1)/98, dated 17-3-1998 were applicable to those bonds, certificates, debentures etc. which fall under the provisions of section 50(7D). Further, the provisions of clause (1013) of aforesaid Schedule exempted only those parts of the payments which were made by way of profit or interest to individuals, U. R. F., A. O. P.; H. U. F. or artificial juridical person and not a company. He said that the assessee client to whom such certificates have been are limited companies and the provision has exempted the classes of person other than a limited company. The same, therefore, was not applicable on T.F.C. issued by this company, in any case.
Before we give our finding we would like to dilate upon and determine as to whether the 'Term-Finance. Certificates' are covered within the definition of Securities or not. The term 'Securities' has neither been defined by the Income Tax Ordinance nor by Company Law. However, its definition is available in the cases decided by superior Courts of U.K. In the case of State v. Allen 216 N.C. 621, 5 S.E. 2nd 844, 845, 487, the term 'Securities' has been defined as: "Evidences of obligations to pal money or of rights to participate in earning and distribution of corporate, trust, and other property".
This can further be understood from the definition given in the case of Oklahma - Texas Trust v. Securities and Exchange Commissioner, C.C.A. 10,000 P.2d 888, 890, it. says,
"Stocks, Bonds, Notes, Convertible debentures, Warrants, or other documents that represent a share in a company or a debit owned by a company."
The term 'Securities', therefore, means and includes such document which a company issued in recognition of ones share in business and asset; of the company. II also entitles the securities holders to share the profits to the grant of holding. It also includes such documents which are issued acknowledgment of a debt owned by a company.
The Term 'Finance Certificate' is a certificate issued by a Finance Company with the guarantee to give a fixed expected profit. This document does not vest in any right to share the business or right to participate in earning other than the expected guaranteed profit. It is an acknowledgment of deposit of an amount, a redeemable capital but the holder in no way obtains right to participate in the earning and or distribution of the profits of a Leasing Finance Company.
From the above definitions it apparently is obvious that the Securities besides other things include a right in the ownership of the company but in the case of T.F.Cs. it is only an acknowledgement of the deposit and security of income in the shape of a fixed expected profit. The holder does not have any right to participate in profit of the Finance Company. In its present shape it is taking to the certificate issued by the Banks for fixed deposits and other such certificates issued by the Government of Pakistan through National Saving Centers, etc.
Now we shall discuss the provisions of the Income Tax Ordinance that deal with the deductions. Section 50(7D) which A.R. says is applicable speaks as follows:---
"(7D) Any person responsible for making any payment by way of profit or interest on bonds, certificates, debentures, securities or instruments of any kind issued by any banking company, or any company referred to in sub-clause (a) or sub-clause (b) or clause (16) or section 2, or any local authority, or a finance society, not being a payment to which subsection (2) of section 50 applies, shall deduct advance tax, at the time of making such payment at the rate specified in the First Schedule. "
Above provision of law speaks of deduction of tax on profit or interest on various bonds and certificates, which are not covered by section 50(2), hence for ready reference reproduce section 50(2) as well:---
"(2) Any person responsible for paying any income chargeable under the head "Interest on securities" shall, except in cases to which clause (a) of subsection (2) of section 17 applies, deduct, at the time of payment, tax at rates specified in the First Schedule."
The above provision under section 50(2) speaks of deduction from interest on securities. This provision also exempts certain securities which are of Federal Government or Provincial Government. However, this being not relevant for the proceedings before us is ignored. From the comparative study of the two provisions above, it is obvious that section 50(2) is applicable on .'interest' on securities while section 50(7D) creates a charge or 'profit or interest' from bonds, certificates and securities. The usage of wore: 'profit' here is not to be ignored. It is with the back ground of the instruction: of Islamic Fiscal System. Further, existence of two separate provisions in the income Tax Ordinance are also not without purpose. The law of interpretation in this regard now is almost settled. The golden principle is; that while interpreting a fiscal statute the intendments are not to be ignored.' When a statute is enacted with some background the principle of interpretation is that the Courts should suppress the mischief and advance the remedy. The Courts are required to adopt a purposive approach to interpret the statute and statute as a whole has to be considered to ascertain the true purpose of law. In keeping view above principles the purpose of introducing two separate provisions one in term of section 50(2) and the other as section 50(7D) would become unnecessary, if the departmental position is considered as correct. It is also not to be ignored that the legislature never introduces a superfluous or redundant provision. Generally, bonds, shares, convertable debentures, stocks, warrants are considered as securities but the certificates issued in recognition of an acknowledgment of some deposit which does not give the right to the bearer to act as a shareholder is note considered as securities. The introduction of two separate provisions, therefore, is obvious. Moreover, the provision of section 50(7D) has been inserted by the Finance Act, 1991 much after the introduction of the concept of Modraba Companies and Leasing Finance Companies in the country in pursuance of the urge to reduce the involvement of interest in Fiscal System. On the other hand, section 50(2) is on the statute since 1979, i.e. from the date when the Ordinance itself came into force. The insertion, therefore, was with the obvious purpose. It created another provision for withholding tax from the certificates and other bonds and securities which 'Ire not to be charged under section 50(2). A separate deduction for the same, therefore, was with the obvious purpose. This intention of the legislature is further supported by- the amendments and Notifications referred by A.R. of the assessee.
The argument of the learned D. R. that the provisions of clause (10B) of the Second Schedule exempted only the profits and interest on individual, U.R.Fs., A.O.P., H.U.Fs. and juridical persons and not companies is also not relevant. The issue is not exemption from deduction but rate of deduction and application of the actual provisions. By introducing this provision in the Second Schedule the intention of legislature becomes more obvious. Nothing can be exempted unless it is earlier chargeable under the Income Tax Ordinance. Clause (10B) undoubtedly has exempted person other than limited companies from deduction under section 50(7D). This would mean that a limited company is still chargeable under section 50(7D), This obviously concludes that the legislature in unequivocal terms considered the Term Finance Certificates to be chargeable for the purposes of deduction under section 50(7D) as before considering it chargeable under a provision the question of exemption from said provisions does not arise.
Regarding discrimination we do not have before us the orders of the cases referred. However, it will not have any adverse bearing as we have found that Term Finance Certificates firstly are not securities in terms of section 50(2); secondly even if it is covered within the definition of 'Securities', it is a "Fixed Income Security" rated by credit rating company registered under Credit Rating Companies Rules, 1995, under the Securities and Exchange Ordinance, 1969 (XVII of 1969). Such securities have been exempted by clause (10B) of the Second Schedule and through S.R.O. "Fixed Income Security' has been explained to be "rated and listed Term Finance Certificate". The legislature in its wisdom has exempted from deduction the holders of T.F.Cs. other than limited companies: This exemption to A.O.Ps. Individuals; U.R.Fs., Firms, H.U.F. and Artificial Juridical persons is available to the holders of T.F.Cs. from the provisions of 50(7D). This on one hands concludes that section 50(7D) was applicable on them prior to introduction of clause (10B) and on the other hand leaves the provisions of section 50(7D), still applicable on the holders of Term-Finance Certificates if they are limited companies.
The upshot of above discussion is that profit on the Term-Finance Certificates is subject to withholding tax under section 50(7D) and not under section 50(2). The holding of this assessee as an assess-in-default is therefore, unjustified. The order of the I.T.O. under section 62 and its confirmation by the C.I.T.(A) is hereby cancelled.
C.M.A./M.A.K./54/Tax(Trib.) Order accordingly.