Income Tax Ordinance (XXXI of 1979)---

---Ss. 156, 65, 59(1) & First Sched., Part IV, Para. B(2)---Economic Reforms Order (1 of 1972), Arts.7E(1), 7F & 7D--Companies Ordinance (XLVII of 1984), S. 156 & Part VIII), Form A, Para. 5---Rectification of mistake---Rebate---Status of company---Rebate yeas claimed being public company and the same was assessed by the Department-- Assessments were subsequently rectified under S.156 and re-opened under S.65 of the Income Tax Ordinance, 1979 keeping in view the period of limitation that assessee was not a public company as its majority of shares were not held by the Government but by the Corporation and .tax charged from it was too low as compared to the private limited companies---Validity---Majority shares of assessee first acquired by the Federal Government and then transferred to PAKO were deemed to be held by the Federals Government and fulfilling the condition of "public company" including a company in which not less than 50% of shares were held by the Government under definition as provided in Para. B(2) of Part IV of the First Schedule to Income Tax Ordinance, 1979---According to Arts. 7E & 7F of the Economic Reforms Order, 1972, Federal Government shall be deemed to have a majority portion of shares in a company carrying controlling voting rights, or the controlling proprietary interest in an establishment in case aggregate face value of the shares or proprietary interest in such establishment owned by the Federal Government and by an, institution owned or controlled by the Federal Government exceeds 50% of the total voting rights in the issued and paid-up share capital of the company of 50% of the proprietary interest of the establishment---Requirement of definition of Public Limited Company as per Para. B(2) of Part IV of the First Schedule to Income Tax Ordinance, 1979 having clearly been fulfilled by the assessee its status had to be taken as that of Public Limited Company for all the purposes of Income Tax Ordinance, 1979, including the application of tax rates---Order passed under Ss.65 & 156 of the Income Tax Ordinance, 1979 was disposed of and modified accordingly by the Appellate Tribunal.

I.T.As. Nos. 1872 to 1875/KB of 1987-88, I.T.A. No.3820, 52, 51, 1041, 3092 and 3093/KB all of 1987-88, dated 25-6-1988 rel.

1999 PTD 825 and 1993 PTD (Trib.) 1100 distinguished.

I.T.A. No. 1710/KB.of 1999-2000 ref.

Akbar G. Merchant, Yasmeen Ajani, (FCA), Sirajul Haq and Arshad Siraj for Appellant.

Javed Iqbal Rana, Akhtar Mehmood and Aftab H. Rizvi for Respondents.

Date of hearing: 27th April, 2002.

ORDER

The Hon'ble Supreme Court of Pakistan vide its order, dated 4th October, 2001, passed in Civil Appeals No.984 to 990 of 1999, arising from the judgment, dated 23-10-1998 passed by the High Court of Sindh at Karachi, I.T.Cs. Nos. 298 to 301, 325, 327 and 329 of 1999, has remanded seven appeals/references to the Income Tax Appellate Tribunal with directives recorded in the judgment reproduced hereunder: --

"We are inclined to remand the case to the, Income Tax Appellate Tribunal for deciding the question as to whether the respondent organization is a public company in terms of Para (1) Part-IV of the First Schedule to the Income Tax Ordinance, 1979."

2. The facts of the above captioned appeals, argued before the Full Bench; constituted for determination of the issues above, are that Messrs Sindh Engineering (Pvt.) Ltd., Karachi, a concern which was nationalized in pursuance of the Economic Reforms Order, 1972, duly furnished returns and claimed 5% rebate being a public company, vide Para. B(2) of Part-IV of the First Schedule to the Income Tax Ordinance, 1979. Initially for years together the department assessed the assessee as public company. Subsequently it transpired that assessee is not a public company, because its majority of shares are not held by the Government and the tax charged from it was too low as compared to Private Limited Companies. Separate notices under section 65 were issued for the assessment years 1977-78 to 1981-82 and for the assessment years 1982-83 to 1985-86, notices under section 156 were served whereby assessee was duly confronted on the point that tax rate as applicable to the public limited companies were applied, although the majority of shares were not held by the Government but were owned by Pakistan Automobile (Pvt.) Ltd., which is neither the Federal Government nor can be equated to Federal Government hence the mistake is apparent from the record, besides tax rate applied is also too low which is also required to be rectified under section 156 and liable to be reopened under section 65 keeping in view the limitation-period.

3. On reply of the learned A.R. of the assessee, a notice under section 61 was also issued on 24-3-1987. In response thereof, Messrs Akbar G. Merchant & Co. Chartered Accountants, furnished cash book, ledger and filed a letter of explanation. However, learned Assessing Officer found the explanation devoid of any merit in view of the fact that the shares are not held by the Government but by a Corporation whereas the definition of public limited company, provided in Part IV, vide Para. B(2) of First Schedule, is clear that public limited company means a company in which not less than 50% shares are held by the Government.

4. The orders of the Assessing Officer were challenged before the learned CIT(A) through separate appeals for each assessment years, but appeals were dismissed, whereby orders separately passed under sections 65 and 156 of the Income Tax Ordinance, 1979 were maintained.

5. The assessee opted second round of appeal wherein the ITAT disposed of all the appeals holding the assessee to be a public limited company whereby action taken by the ITO under section 65/156 of the Income Tax Ordinance, 1979 and confirmed by the learned CIT(A); was annulled.

6. The department preferred reference applications under section 136(1) of the Income Tax Ordinance, 1979 with request to refer the following questions of law to the Hon'ble High Court:--

(1) Whether on the facts and in the circumstances of the case, the learned Income Tax Tribunal was justified in holding the company is a public company?

(2) Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal was justified in deleting the addition when assessment was finalized under section 59(1) of the Income Tax Ordinance, 1979?

7. On refusal to make reference, the assessee invoked the jurisdiction of the Hon'ble High Court under section 136(2) of the Income Tax Ordinance, 1979. The Hon'ble High Court also maintained the order of the Tribunal.

8. The department through learned Commissioner of Income Tax invoked the jurisdiction of Hon'ble Supreme Court of Pakistan of filing Petitions for Leave to Appeal against the judgment of the High Court which was granted inter alia to consider the question as to whether High Court was justified to decline the question referred to it. The Hon'ble Supreme Court of Pakistan, after detailed discussion set aside the order, dated 23-10-1998 and remanded back the cases/appeals to the ITAT for fresh decision keeping in view the observation reproduced above (Para. 1).

9. The Hon'ble Supreme Court while remanding the appeals, also observed that ITAT did not care to call for the record or get the same placed on record so as to determine "whether the assessee was a public company or a private company". And directed that the issue "whether the assessee is a public company because majority of the shares are held by the Government?" be ascertained by placing the authenticated documents or sending for the same from the concerned departments.

10. We have heard the learned representatives of the two parties at length and also perused the record called for under the directions of Hon'ble Supreme Court viz. Form-A required by Part-VIII of the Companies Ordinance, 1984, filed under section 156 containing details of annual return. Summary of shares, capital particulars of debentures, and indebtedness as well the particulars of holding companies/subsidiaries of the companies. We have also gone through the list of past and present members of debenture holders as well share holders/members, and details regarding particulars of Director, Chief Executive and Managing Agents. The entire record was called with the consent of the two parties through A.R. (Roster) under the instructions of this Tribunal and was duly submitted by the Security and Exchange Commission Company, Registration Office, having registered office at State Life Building No.2, Wallace Road. Karachi.

11. The learned counsel for the Department namely Mr. Akhtar Mehmood, in view of the record furnished by the Security and Exchange Commission Company, Registration Office, argued that the assessee-company is a nationalized taken over industry under the provisions of Economic Reform Order, 1972, and for the purpose of assessment the company was initially assigned a status of public limited company, and tax rate applicable to the pubic limited company was applied, contrary to the First Schedule to Part-IV under paragraph B(2) which defines "Public Limited Company" as a company in which not less than 50% shares are held by the Government and since in the present case, the condition of share of the Government to the extent of 50% or above is not fulfilled, hence the public company status assigned to the assessee, is not in accordance with law. The learned counsel further stressed that the assessment originally assigning a status of public limited company have been rightly reopened and rectified by invoking sections 65 and 156 of the Ordinance.

12. While taking into consideration the arguments and record furnished before us, it would not be unaccustomed to refer following Para B(2) of Part-IV of the First Schedule to the Income Tax Ordinance, 1979 and documents on record:

"B(2) "Public company" means-

(a) a company in which not less than fifty per cent of the shares are held by the Government."

13. The record has been duly verified in view of the above definition, Messrs Sindh Engineering (Pvt.) Ltd. has furnished Form-A under section 156 as required by Part-VIII of .the Companies Ordinance, 1984 before Security and Exchange Commission Company Registration Officer, which reveals that out of 2000000 ordinary shares, 100% shares, are owned by Messrs Pakistan Automobile (Pvt.) Ltd., as per particulars of holding companies vide Para 5 of Form-A, whereas list of past and present members and debenture holders is hereunder:---

14. Admittedly Messrs Pakistan Automobile Corporation Ltd. (PAKO) has all the 2shares except one share owned by Chief Executive, Namely Mr. Azhar I, Jaffery, as on 31st December, 2001, hence the learned counsel for the Department urged that it is not the Federal Government but a Federal Corporation, Messrs Pakistan Automobile Corporation owning majority of shares and Federal Government cannot be equated with Corporation, hence shares held by the assessee Company cannot be taken to be held by the Government of Pakistan as contemplated in the definition of a public company. The learned counsel further stressed that in the circumstances, assessee -Company cannot be accorded the status of a public limited company but could only be accorded the status of a private limited company being not a department of the Government.

15. In view of the arguments above, it is necessary to look into the entire situation keeping in view the Economic Reforms Order, 1972, which is reproduced hereunder:--

"(3) Order to override other laws.

(1) This order shall have effect notwithstanding contained in the Provisional Constitution Order or any law for the time being in force or in any agreement, contract, memorandum or articles.

(2) It is hereby declared that development under Federal control of the industries pertaining to any of the categories set out in the First Schedule is expedient in the public interest.

(4) Power to appoint Managing Director.

(1) The Federal Government may, if it consider necessary in the public interest so to do, by order appoint a Managing Director in respect of an establishment.

(2) On the appointment of a Managing Director in respect of an establishment, the administration of the affairs of that establishment shall vest in him and any person or authority exercising or having the right to exercise immediately before such appointment any power or function in relation to the establishment shall cease to exercise or to have the right to exercise such power or function and, on and from such date as the Federal Government may, by notification in the Official Gazette, specify, the establishment shall be known by such name as may be so specified.

(3) The Managing Director shall hold office during the pleasure of the Central Government, and shall, in the discharge of his functions, be subject to such orders and directions as the Federal Government may from time to time give in writing.

7B. Power to acquire shares or business of an establishment

(1) The Federal Government may, if it considers necessary in the public interest so to do, by an order-

(a) in the case of an establishment which is a company or an establishment owned by a company-

(i) acquire the entire share held in the company by the sponsors, and directors, of the previous management thereof, the family members of such sponsors and directors and the associated undertakings and managing agents which were the associated undertaking and managing agent of the company at the time at which a Managing Director was appointed in respect thereof and the whole or a portion of the shares from all or any of the shareholders of such company and, as from the date of such order, the shares so acquired shall vest in the Federal Government: or

(ii) acquire the whole or a portion of the proprietary interests of such company in such establishment and, from the date of such order, the interests so acquired shall vest in the Federal Government, or

(b) in the case of an establishment owned by person, acquire the whole or a portion of the proprietary interests of such person and, as from the date of such order, the interest so acquired shall vest in the Federal Government.

-------------------------------------------

(7D) Re-organization of establishment.

(1) Where, in respect of any managed establishment which is a company or an establishment owned by a company, the Federal Government holds or has acquired the whole or a majority portion of the shares in the company carrying the controlling voting rights, or where the Federal Government has acquired the whole or controlling portion of the proprietary interests it may at any time re-organize such establishment with a view to increasing its efficiency and rationalizing its operation.

(2) The re-organization may include provision for amalgamation of a managed establishment with other such establishments or with undertaking owned or managed by the Federal Government or be a corporation set up under the authority of the Government and, in the case of establishments which are companies or establishments owned by companies may provide for the reconstruction of any such company or companies, or more companies amalgamation of any such two or more companies for all or any of the matters contained in section 153 or section 153B of the Companies Act 1913 (VII of 1913) or for alteration of share capital or loan structure and alteration of existing, or adoption of fresh, articles of association of such companies.

(3) The re-organization shall, be implemented and take effect in such manner and at such time as the Federal Government may, by notification in the official Gazette, specify.

Explanation. -For the purposes of this Article, Article 7E and Article 7F, the Federal Government shall be deemed to have a majority portion of share in a company carrying controlling: voting rights or the controlling -proprietary interests in a establishment if the aggregate face value of the shares or proprietary interests in such establishment owned by the Federal Government and by an institution owned or controlled by the Federal Government exceeds 50% of the total voting rights in the issued and paid-up-share capital of the company or 50% of the proprietary interest of that establishment."

16. Under the abovesaid provisions the Federal Government acquired entire shares .of the Sindh Engineering Limited w.e.f. 29-11-1973 and decision was communicated to the Managing Director of Messrs Sindh Engineering Ltd. and other Government concerns vide letter, dated 29th November, 1973. Later on vide order, dated 12-7-1974 the management and the shares acquired by the Federal Government were transferred to Pakistan Automobile Corporation Ltd. (PAKO) in exercise of the powers conferred by clause (1) of Article, 7E of the Economic Reforms Order, 1972. However the explanation specifically provided in, respect of Articles 7D, 7E & 7F of the Economic Reforms Order, 1972, has made it clear that the Federal Government shall be deemed to have a majority portion of shares in a company even in case of transfer of the management and such majority shares, by the Federal Government to any Corporation wholly owned or controlled by the Federal Government or a Corporation to be set up for the purpose.

17. In the circumstances supra, we find that the majority shares of the assessee-Company first acquired by the Federal Government and then transferred to PAKO are deemed to be held by the Federal Government and also fulfilling the condition of "public company" including a company in which not less 50% of the shares are held by the Government under the definition as provided in Para B(2) of Part-IV o the First Schedule to the Income Tax Ordinance, 1979. The argument or the learned counsel would lost its effect in view of the explanation attached to Articles 7E and 7F of the Economic Reforms Order, 1972, as Federal Government shall be deemed to have a majority portion of shares in a company carrying, controlling, voting rights, or the controlling proprietary interest in an establishment in case aggregate face value of the shares or proprietary interest in such establishment owned by the Federal Government and by an institution owned or controlled by the Federal Government exceeds 50% of the total voting rights in the issued and paid-up share capital of the company of 50% of the proprietary interest of that establishment.

18. The similar finding was accorded by the Tribunal in ITA Nos.1872 to 1875/KB of 1987-88, ITA No.3820, 52, 1321, 51, .1041, 3092 and 3093/KB all of 1987-88, dated 25-6-1988 in case of Awami Autos Limited, on the basis of which, the Tribunal has decided the present appeals holding that the appellant is a public limited company. The relevant para. 11 in this context is reproduced hereunder: --

11. We, are therefore, of the opinion that the arguments the veil of the corporation is to be lifted for revealing Government ownership and control was totally irrelevant and the learned CIT(A), fell in error by entering into the discussion if a corporation was separate entity distinct from the Government or not?. The learned CIT(A) did not advert to the relevant provisions of Economic Reforms Order, 1972 cited above, and, therefore, wrongly concluded that fiction of law cannot be assumed. There is no question of assuring any fiction of law as explanation to Article 7D of Economic Reforms Order, 1972 (supra) clearly provides that for the purpose of Articles 7D, 7E and 7B of the Economic Reforms Order, 1972 the Federal Government shall be deemed to have majority portion of shares in a company, if the said shares are owned by an institution owned or controlled by the Federal Government: For the aforesaid reasons and on the facts and in the circumstances shown above, the majority of shares of the appellant shall be deemed to have acquired by the Government and, therefore, qualifying condition of the definition of public limited company' as defined in Para B(2) of Part IV of the First Schedule of Income Tax Ordinance, 1979 is fulfilled. The appellant is, therefore, held to be a public limited company' the learned two officers below have erred in holding otherwise. Mr. Muhammad Farid, learned D.R. referred to Articles 165-A of the Constitution of Pakistan for making a distinction between `corporation' and `Government' but we are of the opinion that in view of fiction of law referred to above the general provision of law relating to the status of corporation is to be left out of consideration and becomes irrelevant, and therefore, we need not to dilate on the contention raised by Mr. Muhammad Farid, in this behalf.

19. The learned counsel for the department has, however, relied upon case-law reported as 1999 PTD 825, but we find that the case of Messrs Indus Steel Pipes Limited reported as 1999 PTD 825 is also not relevant in the present case as shares of Messrs Indus Steel Pipes Limited incorporated under the Companies Ordinance, 1984, were taken over by PIDC (the then WPIDC) which was originally established under the Pakistan Industrial Development Corporation Act, 1950 and nothing to do with the provisions of law under Economic Reforms Order, 1972 and deeming provisions provided therein. The ITAT vide its judgment, dated 24-5-2001 recorded in ITA No. 1710/KB of 1999-2000 (Assessment year 1998-99) has passed detailed judgment in case of Messrs Republic Motors, keeping in view the case of Indus Pipe Steels and has drawn distinction between companies whose shares are acquired by Corporation and taken over industries which are as a whole acquired by the Government, for the purpose of determining the status of a company. Because of same circumstances, we also find support in deciding the present case, and holding that reliance cannot be placed on case-law reported as 1993 PTD (Trib) P. 1100.

20. Moreover a reference to the Economic Reforms Order, 1972 shows that as per Para. 7(1)(i) of the Order as reproduced at para 15 above, all the shares of Messrs Sindh Engineering after its take-over by the Government had come to vest with the Federal Government. In our view, this declaration in the said Economic Reforms Order, 1972 puts an end to all the disputes regarding ownership of the shares which were acquired by the Government and held by it so that there is not event the question of their being deemed or resumed to have been owned as these were outrightly taken into possession by the Government in pursuance of the above referred order. This being the factual position, the requirements of definition of Public Limited Company as per para. B(2), Part IV of the First Schedule to the Income Tax Ordinance, 1979 is clearly fulfilled by the said company and its status has to be taken as that of a Public Limited Company, for all the purposes of Income Tax Ordinance, including the application of tax rates.

21. In view of above discussion we are of the considered opinion and find that Messrs Sindh Engineering (Pvt.) Ltd. is a public limited company as provided in Para B(2) of Part-IV to the First Schedule to the Income Tax Ordinance, 1979.

22. In consequence thereof, all the above appeals arising from the orders under sections 65 and 156 of the Income Tax Ordinance, 1979 are disposed of to the extent and in the manner indicated above.

C.M.A./767/Tax(Trib.) Order accordingly.