W.T.As. Nos. 371/KB to 374/KB of 2001, decided on 10th April, 2002. VS W.T.As. Nos. 371/KB to 374/KB of 2001, decided on 10th April, 2002., 2002 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2528 (2002)

(a) Wealth Tax Act (XV of 1963)‑‑‑‑

‑‑‑‑Ss.2(9) & (19)‑‑‑Company‑‑‑Trust‑‑‑Definition of "Company" as provided by S.2(9) & 2(19) of the Wealth Tax Act, 1963 did not include "Trust" and for Wealth Tax purposes a Trust could not be treated as a Company since the Wealth Tax Act, 1969 did not provide for the same.

(b) Wealth Tax Act (XV of 1963)‑‑‑‑

‑‑‑‑Ss.17‑B, 21, 16(3) & 2(9)(19)(5); Second Shed; Cl.(22)‑‑‑Power of Inspecting Assistant Commissioner to revise Wealth Tax Officer's order‑‑‑Company‑‑‑Trust‑‑‑Assessment made under S.16(3) of the Wealth Tax Act, 1963 on the basis of beneficial interest of each beneficiary as per the ratio noted in the Trust Deed was cancelled by the Inspecting Assistant Commissioner, under S.17‑B of the Wealth Tax Act, 1963 being erroneous and prejudicial to the interest of revenue on the ground that capitalization should have been made on the basis of gross rental value declared by the assessee in his Income Tax Return and exemption should have been allowed only to the extent of one million and not more than that because the assessee had been assigned the status of a company‑‑‑Validity‑‑‑Trust had not been brought into the ambit of wealth tax, neither impliedly by including the trust into the definition of Company nor expressly by taking the trust property as per the definition of assets owned by various entities‑‑‑Neither "Trust", whether public or private nor its property was chargeable to Wealth Tax‑‑‑Law specifically exempted the entire property of a public charitable trust vide Cl.(22) of the Second Sched. to the Wealth Tax Act, 1963‑‑‑Charge of Wealth Tax is created on the beneficiaries of the private trust to the extent of their beneficial interest in the trust property as per S.21 of the Wealth Tax Act, 1963‑‑‑"Trust" could .not be treated as a Company for Wealth Tax purposes, hence the action of the Additional Commissioner of Wealth Tax, in treating the Trust as a company was not correct, same being ultra vires of the provisions of the Wealth Tax Act, 1963‑‑‑Order passed under S. 17‑B of the Wealth Tax Act, 1963 was cancelled by the Tribunal being contrary to law and facts.

(1997) 36 Tax 150 (SC India); (1998) 78 Tax 50 (Trib) and (2000) 82 Tax 162 (SC) ref.

(1983) 142 ITR 149 (Cal.); (1982) 136 ITR 583 (MP) and 2000 PTD (Trib.) 376 distinguished.

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

‑‑‑‑Ss.2(16) & 2(31)‑‑‑Wealth Tax Act (XV of 1963), S.2(9)(19)‑‑ Company ‑‑‑Trust‑‑‑Determination of status‑‑‑Status of a trust for income tax purposes will be that of a company as provided by the definition of the Company in Ss.2(16) & 2(31) of the Income Tax Ordinance, 1979‑‑ To apply the definition of the Company as provided in the Income Tax Ordinance, 1979, to a matter of Wealth Tax, the Wealth Tax Act, 1963 was rather considered to be ill‑founded.

Wasi Haider Rizvi, ITP for Appellant.

Inayatullah Kashani, D.R. and Javed Iqbal Rana, IAC for Respondent.

Date of hearing: 17th November, 2001.

ORDER

ABDUL GHAFOOR JUNEJO (ACCOUNTANT MEMBER).‑‑‑These appeals have been directed against the order under section 17‑B of the Wealth Tax Act, 1963, passed by the Additional Commissioner Wealth Tax Range‑II, Companies‑II, Karachi for the assessment years 1995‑96, 1996‑97, 1997‑98 and 1998‑99, on the following common grounds:‑‑

"(1) That the learned I.A.C. Range‑II, Cos. II, Karachi has erred in making an assessment on the Trust Property instead of assessing to Wealth Tax the beneficial interest of the beneficiaries in the "Trust Property as per section 21 of the Wealth 'fax .Act, 1963.

(2) That the learned I.A.C. Range‑II, Cos.II, Karachi has erred in treating the Trust as, a Company which is contrary to the provisions of sections 2(9) and 2(19) of the Wealth Tax Act, 1963, which does not include the Trust in the definition of a Company.

(3) That the order under section 17‑B passed by the I.A.C. Range‑II, Cos. II Karachi, is ultra vires of the provisions of Wealth Tax Act, 1963, void and hence of no legal consequence and pray should be declared as such."

As is apparent from the grounds noted above, the issues involved being identical and common, all the appeals are being disposed off by this single consolidated order. Facts of the case are as under:‑‑

The appellant in these appeals is a Trust and original assess ments of Wealth tax for the above years were made under section 16(3) of Wealth Tax Act, 1963 on the basis of beneficial interest of each beneficiary as per the ratio noted in the Trust Deed. However, the apportionment was made and assessment made on the basis of actual receipts by the beneficiaries, who happen to be the makers of the Trust and their five children (sons and daughters). Assessments were thus being made on the beneficiaries through one single order conveying the interest of each beneficiary in accordance with the provisions of section 21 of the Wealth Tax Act, 1963 right from the year when the trust was established during 1972. After examining the records of the appellant, the Additional. Commissioner of Income Tax, Range‑II, Cos.II, Karachi came to the conclusion that:‑‑

"(i) all the beneficiaries are the family members, therefore, the trust is a 'Waqf‑ul‑Aulad' basically aimed at distributing the benefit of the rental income/receipts among the family members. Hence neither it is a public charitable trust nor Waqf‑ul‑Allah. Hence it attracts the incidence of taxation under the Wealth Tax Act, 1963.

(ii) the 'management to avoid the proper incidence of taxation is capitalizing the rental receipts, which are not according to rental income declared in the income tax returns.'He, therefore proposed to modify the assessment by capitalizing the G.A.L.V declared by the appellant in its income tax returns.

(iii) to avoid proper tan, the appellant firstly allocated the shares to the beneficiaries and then deducting the basic Wealth Tax exemption of one million against each beneficiary and calculated the Wealth Tax. The Additional Commissioner of Income Tax further concluded that this was the appellant's self‑declared legislation and beyond the scope of Wealth Tax Act, 1963. He, therefore, intended to modify the assessment already completed by adopting the capitalized G.A.L V. of the rental receipts as per income tax returns and allowing exemption to the tune of Rs. one million only."

After confronting the appellant of the above observations, the Additional Commissioner of Wealth Tax modified the assessments for the years 1995‑96 to 1998‑99 under section 17‑B of the Wealth Tax Act. 1963 vide the impugned orders holding the original assessment orders passed under section 16(3) to be erroneous and. prejudicial to the interest of Revenue on the following scores:‑‑

"(a) That the capitalization should have been made on the basis of gross rental value declared by the assessee in his Income Tax Returns, and

(b) The exemption should have been allowed only to the extent of Rs. one million and not that Rs.7 millions (grant of exemption of Rs. one million to‑each beneficiary) because the assessee has been assigned the status of a Company by the Commissioner of Income Tax (Appeals) vide Appellate Order No.1152 of 1990 dated 18‑8-1991."

The Authorised Representative of the appellant, Mr. S. Wasi Haider Rizvi, I.T.P. and the D.R. Mr. Inayat Ullah Kashani assisted by Mr. Javaid Iqbal Rana, the author of the impugned orders presented their points of view on the issues contested by the appellant.

The learned A.R. of the appellant, at the very outset of his arguments has conceded that the appellant is a private trust, which, besides providing maintenance to the makers and their children, contributes to charities also. It has also been pointed out that since beneficial interest of each beneficiary has been determined in the Trust Deed, Wealth Tax assessments were made on the basis of beneficial interest of each beneficiary. He has thus stressed that making an assessment on the Trust itself treating it is as a company and taxing the Trust Property as per the impugned orders is uncalled for and has no sanction in law. The learned A.R. has also invited our attention to the definition of "Company" as provided by the Wealth Tax Act, 1963, so also, he refers to the definition of the "asset" as it appears in the said Act.

The learned A.R. vehemently stresses that in view of the above position and in the face of the rulings in cases cited as:‑‑

(1) (1997) 36 Tax 150 (SC India) and

(2) 1998 PTD 2054.

the Additional Commissioner of Income Tax had no call for invoking the provision of section 17‑B of the Wealth Tax Act, in the appellant's case.

Defending the action/orders under section 17‑B, the D.Rs. have asserted that reliance placed by the‑assessee on charging of the assets under section 21 of the Wealth Tax Act, 1963, is devoid of any merit since section 21 deals with assessments when assets are held by Courts of wards, administrator general etc. It is also argued that the appellant's status has been determined by the Income‑tax Appellate Tribunal as a Company and that the appellant's case may fall within the purview of subsection (4) of the section 21 of the Wealth Tax Act, 1963 because the shares of the persons on whose behalf the assets are held are indeterminate. To substantiate Department's view that the shares of the beneficiaries are not determinate, the learned D.Rs. have taken the plea that all the rent agreements have been executed by the trust; all rents, rates and taxes are paid by the Trust, all the donations have made by the Trust and in all these activities, individual beneficiaries do not figure. They have also referred to the following cited cases, which as claimed support the Department's case. The cited cases are:‑‑

(i)(1983) 142 ITR 149 (Cal.), (ii) (1982) 136 ITR 583 (MP) and (iii) (2000) PTD (Trib.) 376.

It has also been argued that appellant's application under section 35 of the Wealth Tax Act, 1963 was rejected by the Department against which no appeal has been filed, hence it is argued that it amounts to acceptance on the part of the appellant that the Trust is a fictional individual for the Wealth Tax purposes and that its assets should be taxed in one hand and not in the hands of individual beneficiaries.

The above arguments indicate that the D.Rs. stand was not convincing. The D.Rs., it appears, do not appreciate the fact that trust is a legal person and that a trust can own properties, it can sign agreements, and make donations its any individual can do. If every thing as regards Trust properties was to be done by the individual beneficiaries, then why established a Trust and bequeath the properties to it. The arguments do not seem to carry any force. As to the case‑law noted above we may state here that the first two relate to cases where shares of beneficiaries are not determinate and the third case, cited by the D.Rs. deals with the property owned by the Company incorporated under the repealed Companies Act, 1913. It is quite clear that none of these cases support the stand taken by the Department. Regarding non-filing of appeal against rejection of rectification applications, again is no good for the action taken. What we are dealing with presently are the appeals against the orders containing the findings sought to get revised under section 35 of the Wealth Tax Act, 1963. There is no substance at all in the above arguments hence they are rejected.

From the facts as have been brought about in the foregoing and after hearing the arguments of the learned A.R of the appellant and the departmental representatives, we have come to the conclusion that the whole issue revolves around the matter presented for appraisal of the following two factors viz:‑‑

"(1) Whether for Wealth Tax purposes, a Trust can be treated as a 'company' and its assets taxed as the assess of the Company are ordinarily assessed to Wealth Tax, and

(2) Whether the asset/property of the Trust should be capitalized on the basis of the gross annual letting value or on the basis of receipt of income by the individual beneficiaries?

For determining the first issue as .to whether or not a Trust can be treated as a Company for Wealth Tax purposes, it is imperative that the definitions provided by the Wealth Tax Act, 1963 to Company are examined.

Section 2(9) of the Wealth Tax Act, 1963 defines the Company as under:‑‑

"(9) `Company' means a Company as defined in the Companies Ordinance, 1984 (XLVIII of 1984), but does not include a Company:

(i) in which not less than 50% of the shares are held by the Government; or

(ii) the shares of which were the subject of dealing in a registered Stock Exchange in Pakistan at any time during the income year and remained listed on the Stock Exchange till the close of that year. "

Whereas Section 2(19) provides the following definition to a Company:

"(19) 'Public Company' means a Company;‑

(1) in which not less than 50% of the shares are held by the Government, or

(2) the shares of which were listed on a registered Stock Exchange in Pakistan at any time during the previous year and remained so listed till the close of that year."

Both the above definitions of the Company as provided by the Wealth Tax Act, 1963, do not include Trust, hence it is obvious that for Wealth Tax purposes a Trust cannot be treated as a Company, since the Wealth Tax Act does not provide for it. While at it, it appears to be opportune to examine as to which assets are liable to Wealth Tax. Here we would thus like to examine the definition of "assets" as provided by the Wealth Tax Act, 1963. Section 2(5) of the said Wealth Tax Act, defines the word "asset" as under;‑‑

(5) 'Asset' includes

(i) in the case of an individual and 'a Hindu Undivided Family, property of every description movable or immovable , except,

(a) growing crops, grass or standing trees on agricultural land, and

(b) any building owned or occupied by the cultivator or receiver of rent or revenue out of agricultural land:

Provided that the building is on or in the immediate vicinity of the land and is a building which the cultivator or the receiver of rent or revenue by reason of his connection with the land requires as a store house or an out house, and

(ii) in the case of a firm, an association of persons or a body of individuals, whether incorporated or not, and a Company, immovable property held for the purpose of the business of construction and sale, or letting out, of property."

An examination of the above definition points to an unassailable conclusion that every asset owned by an individual, a Hindu Undivided Family, a firm, an association of persons, a body of individuals, whether incorporated or not and a Company is liable to tax unless of course specifically exempted by the law. Here it is very pertinent to note that "Trust" has not been brought into the ambit of Wealth Tax, neither impliedly by including the trust into the definition of a Company nor expressly by taking the trust property as per the definition of assets owned by various entities. It is thus quite obvious that neither "trust", whether public or private nor its property is chargeable to Wealth Tax. It may, however, be pointed out here that whereas the law specifically exempts the entire property of a public Charitable Trust vide clause (22) of the Second Schedule to the Wealth Tax Act, 1963, it creates a charge of Wealth Tax on the beneficiaries of the Private Trust to the extent of their beneficial interest in the property of the Trust as per the provision of section 21 of the Wealth Tax Act, 1963, which we would like to discuss at a later stage.

From the above analysis we do not find any doubt in our minds in coming to the conclusion that a "Trust" cannot be treated as a Company for Wealth Tax Purposes, hence the action of the Additional Commissioner of Wealth Tax, in treating the appellant Trust as a Company is not correct, since it does not enjoy the sanction of the Wealth Tax Act, 1963, and so it is ultra vires of the provisions of the said Wealth Tax Act. As to the reference of a decision by the CIT (Appeals) vide order dated 18-8‑1991 in this very case whereby the appellant has been assigned the status of a Company, we may point out here that the said order relates to an income tax appeal and surely for income tax purposes the status of a trust will be that of a Company as provided by the definition of the Company in sections 2(16) and 2(31) of the Income Tax Ordinance, 1979. To apply the definition of the Company as provided in the Income Tax Ordinance, 1979, to a matter of Wealth Tax, the Wealth Tax Act, 1963, is rather considered to be ill founded.

Now coming to the taxation of the trust property, we find that by enacting section 21 of the Wealth Tax Act, 1963, the Legislature provides a special treatment for the purpose and the apparently is the reason that the provisions of the sections 2(9) and 2(19) of the Wealth Tax Act, 1963, do not include the "Trust" within the definition of the Company. Before proceedings any further in the matter, we would like to reproduce the provisions of section 21(1) of the Wealth Tax Act, 1963. Subsection (1) of section 21 reads as under:‑‑

"21. Assessment when assets held by Courts of ward Administrator‑General etc.‑‑‑(1) in the case of assets chargeable to tax under this Act which. are held by a Court of wards or an Administrator‑General or an official trustee of any receiver or manager or any other person, by whatever name called, appointed under any order of Court to manage property on behalf of another, or any trustee appointed under a trust declared by a duly executed instrument in writing, whether testamentary or otherwise include a trustee under a valid deed of waqf, the Wealth Tax shall be levied upon and recoverable from the Court of Wards, Administrator‑General official trustee, receiver, managers or trustee, as the case may be in the like manner and to the same extent as it would be leviable upon and recoverable from the person on whose behalf the assets are held, and the provisions of this Act shall apply accordingly."

The learned A.R of the appellant has provided photostat of the Trust Deed dated 1‑6‑1972 named as "Muhammad Usman Hajrabi Trust "Waqf‑al‑Alaud" on page 4 whereof, beneficial interest of the beneficiaries in the income of the trust properties have been determined which stand modified by the second supplementary trust deed (Waqfnama) dated 9‑4‑1981. Both the documents containing the beneficial interest of each beneficiaries in the income of the trust properties are duly registered instruments by the Sub‑Registrar T Division, Karachi and are valid documents which have all along been acted upon by the persons concerned at various levels. While dewelling on the issue the learned A.R. of appellant has invited our attention to the findings of the Supreme Court of India in the case cited as "(2000) 82 Tax 162 (SC India)" forming part of the explanations submitted to the learned Additional Commissioner of Wealth Tax in response to the show- cause notice dated 8‑4‑2001. Extract from the finding of the Supreme Court is reproduced hereunder for facility as easy reference. The ruling says that:

"Under the scheme of section 21, the Revenue has two modes of assessment available for assessing the interest of a beneficiary in the trust properties, it may either assess such interest in the hands of the trustee in the representative capacity under subsection (1) or assess it directly in the hand of the beneficiary by including it in the net Wealth of the beneficiary. What is important to note that is that in either case what is taxed is the interest of the beneficiary in the trust properties and not the corpus of the trust properties. So also where beneficiaries are more than one and their shares are indeterminate or unknown, the trustee would be assessable in respect of their total beneficial interest in the trust properties.

Commenting on the above defense, the learned Assessing Officer on page 8 of the Impugned Order .admits that `the case‑law produced by the assessee cited as (2000) 82 Tax 162 (SC) India is only related to the trusts which are created for the benefit of the trustees or the beneficiaries and their shares, are ascertainable separately. It has no bearing on the trusts, which are charitable trusts. In fact, it is the admittance by the assessee, that the trust named as M/s Muhammad Usman Hajrabi Trust is not a charitable trust but a "Wafq‑ul‑Aulad.

Now here a very peculiar situation has developed. The appellant, has made out in the preceding para. is a private trust, "Waqf ul‑Aulal" and assessment of Wealth tax were made on the beneficiaries to the extent of their beneficial interest in the income of the trust properties year after year under section 21 of the Wealth Tax Act, the Additional Commissioner of Wealth tax himself admits that the case‑law, cited by the appellant is related to the trusts which are Waqf‑ul‑aulad and shares of trustees or beneficiaries are ascertainable, yet he has rejected the appellant s defence and proceeded to tax the property of the trust, treating it as a company the basis of the definition of the company as provided by the Income Tax Ordinance, 1979. It appears that the learned Additional Commissioner of Income‑tax, got carried away in his efforts to establish that the appellant is not a public charitable trust and hence its property is not exempt under clause (22) of part 1 of the second schedule to the Wealth Tax Act, 1963. It mar be pointed out there that only a reference to the trust deed dated 1‑6‑1972 would have proved this fact. However, from the foregoing it is proved that the Department had no case for invoking the provisions of section 17B of the Wealth Tax Act, 1963 in the appellants case, hence the impugned orders under section 17B for all the years viz. 1995‑96, 1996‑97, 1997‑98, and 1998‑99 passed on 18‑5‑2000 are hereby cancelled being contrary to lawn and facts.

The appeals succeed as above.

C.M.A./M.A.K./385/Tax(Trib.)

Appeals accepted.