Income Tax Ordinance (XXXI of 1979)---

----Ss. 18 & 136---Zakat and Ushr Ordinance (XVIII of 1980), S.25-- Reference to the High Court ---Asset---Khas Deposit Certificates are an asset ---Zakat is a charge on the assets and not an expenditure for earning interest---Payment of Zakat on Khas Deposit Certificates---Allowable deduction---Provision of S.25(1)(a), Zakat and Ushr Ordinance; 1980 allows special concession regarding deduction of Zakat from taxable income while determining the liability of an assessee--Income Tax Appellate Tribunal thus was justified in allowing deduction of Zakat attributable to the exempt, income towards the taxable income-Principles.

Arif Moton for Applicant.

Z.H. Jafri for Respondent.

Date of hearing: 13th November, 2002.

JUDGMENT

MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---The learned Income Tax Appellate Tribunal Karachi has referred following question of law for our opinion, at the instance of Commissioner of Income Tax Companies-III Karachi:---

"Whether on the facts and in the circumstances of the case, the learned Tribunal is justified in allowing deduction of Zakat attributable to the exempt income towards the taxable income?

The facts giving rise to the above question as stated by the learned Income Tax Appellate Tribunal (hereinafter referred to as the ITAT) are that, respondent/assessee is a Private Limited Company enjoying income from business of providing bulk storage facilities for industrial Alcohol and other products. During the assessment year 1988-89, the assessee earned income from K.D.C. amounting to Rs.10,31,500 out of which an amount of Rs.1,71,710 was deducted as Zakat. The amount of Zakat was claimed as deduction. The Income Tax Officer while framing the assessment on the principle that expenditure incurred for earning exempt income cannot be allowed as deduction, disallowed the whole amount of Zakat. The order was confirmed in appeal by the learned Commissioner of Income Tax (Appeals).

Respondent/assessee preferred second appeal before the ITAT, who vide-their order, dated 30-3-1991, reversed the (Wings and allowed the claim.

We have heard Mr. Arif Moton, learned counsel for the applicant/department and Mr. Z.H. Jafri, learned counsel for the respondent. We have gone through the order of learned ITAT with the assistance of learned Advocates for the parties. The learned counsel for the applicant is not able to point out any infirmity in the impugned order of the learned ITAT. Mr. Z. H. Jafri, learned counsel for the respondent has submitted that, the order passed by the learned ITAT is exhaustive, in which all aspects of the question referred for our opinion have been considered. We are, persuaded to agree with the contention of Mr. Z.H. Jafri. The learned ITAT, has elaborately discussed each and every aspect of the point under consideration and we can do no better than to reproduce the order of the learned ITAT, which reads as follows:--

"Mr. Z.H. Jafri, the learned counsel for the appellant, submitted that the first question which arises in these cross-appeals is as to whether both the officers below were justified in not allowance deduction of Rs.1,71,710 which was amount of Zakat deducted out of profits -earned from investment in Khas Deposit Certificates and FDR.?

The learned counsel has invited our attention to section 25 of the Zakat & Ushr Ordinance 1980, hereinafter referred to as the Zakat Ordinance and the prescribed pro forma for Return. According to him the Zakat was to be deducted from taxable income in order to determine the tax liability of an assessee under section 25 of the Zakat Ordinance as a special concession. According to him the Income Tax Officer and for that matter the learned CIT(A) fell in serious error in not allowing Rs.171,710 as deduction on account of payment of Zakat out of profit earned from investment in Khas Certificate for the reason that it was expenditure incurred for earning exempt income. The learned D.R., however; has supported both the officers below.

(2) We have heard both the learned counsel for the appellant as well as learned D.R. From perusal of the assessment order it appears that the Income Tax Officer disallowed deduction of Rs.171,710 with the following observation:--

Income from Khas Deposit Certificate is exempt from tax. Following the principle, that the expenditure incurred for earning exempt income, cannot be allowed as a deduction, against income, liable to tax the expenditure incurred on earning profit on Khas Deposit Certificates is disallowed.

From perusal of impugned order it appears that the learned CIT(A) has confirmed the finding of the income Tax Officer with the following observation:---

": ....As regards disallowance of claim of Rs.171,710 pertaining to Zakat the same is fully justified because-this amount was paid on profits of Khas Deposit Certificates which is exempt from tax and has not been considered while computing taxable income.

The action of the Assessing Authority in this respect is, therefore, upheld.

3. Thus, it is clear that both the officers below have treated Zakat as an expenditure incurred for earning exempt income. However with due respect to them the Zakat is one of the five pillars of Islamic Faith. If we peruse the Zakat Ordinance it appears from its preamble that the Legislature has acknowledged it as one of the fundamental pillars of Islam. It also becomes obvious that the Zakat Ordinance has been promulgated so that Zakat could be recovered from all Sahib-e-nisab Muslims through the Agency of State of Islamic Republic of Pakistan and then disburse it according to Injunctions of Islam. For easy reference the Preamble of Zakat Ordinance is reproduced herein-below:---

"'Whereas it is necessary to make provisions relating to the assessment, collection and disbursement of Zakat and Ushr and matters connected therewith or incidental thereto;

And whereas Pakistan being an. Islamic State, must provide for the implementation of Islamic precepts;

And whereas the Constitution of the Islamic Republic of Pakistan lays down that the Muslims of Pakistan shall be enabled to order their lives, in the individual and collective spheres, in accordance with the tenets of Islam;

And whereas Zakat including Ushr, is one of the fundamental pillars (Arkan) of Islam.

And whereas the prime objective of the collection of Zakat and Ushr, and disbursements therefrom, is to assist the needy; the indigent and the poor;

And whereas the ratesof Zakat and Ushr, as also the purposes for the utilization of Zakat and Ushr, are specified in Shariah:

And whereas Shariah enjoins all Muslims who are Sahib-e-nisab to pay and the State to arrange for the proper collection, disbursement and utilization of, Zakat and Ushr, and also allows such Muslims to disburse for the purposes authorised by Shariah the part thereof not collected by the State;--

And whereas the Constitution also provides, in Article 31, that the State shall endeavour as respects the Muslims of Pakistan, to secure inter alia, the proper organisation of Zakat;

And whereas the President is satisfied that circumstances exist which render it necessary to take immediate action;

Now therefore, in pursuance of the Proclamation of the fifth day of July, 1977, read with the Laws (Continuance in Force) Order, 1979 (C.M.L.A. Order No.1 of 1979) and in exercise of all powers enabling him in that behalf, the President is pleased to make and promulgate the following Ordinance."

4. From perusal of the Zakat Ordinance it further appears that, inter alia, the clauses (iii), (xiii), (xxx), (xxxi), and (xxxii) of its section, 2 have laid down the definition of asset, Sahib-e-nishab, valuation date, Zakat fund and Zakat year. However, the provision for charging and collection of Zakat read as under:--

"(3) Charge and collection of Zakat.---(1) Subject to the other provisions of this Ordinance, Zakat in respect of assets mentioned in the First Schedule shall be charged anti collected, on compulsory basis, for each Zakat year, at the rates and in the matter specified therein, and as may be prescribed, from every person (other than a person excluded from the definition of Sahib-e-nisab) who owns or possesses such assets on the valuation Date:

(1) Provided that where an asset mentioned in first Schedule has been assigned by the person owning or possession it, in favour of another person, Zakat in respect of 'the asset shall be charged and collected on compulsory basis as if the asset has not been assigned.

(2) In determining the amount to be collected as Zakat on compulsory basis, the value of an asset on which Zakat is deductible at source may be reduced, to the extent and in the manner prescribed; only on account of debts which have been:

(a) Primarily secured by that asset;

(b) Used for the creation of an asset on which Zakat is deductible at source; and

(c) Obtained from the Deducting Agency having custody of the asset securing the debt in clause (a) and of the asset created under clause (b).

(3) Where a person from whom Zakat has been deducted at source proves that;

(i) (a) He is not a Muslim, or

(b) He is not a citizen of Pakistan, or:

(c) The amount deducted from him is more than what is due under this Ordinance, either,

(i) On account of error apparent from the record, or,

(ii) On account of reduction provided for in subsection;

(2) not having been duly allowed to him, the amount so deducted or, as the case may be, the amount so deducted in excess, shall be refunded to him in the prescribed manner.

(4) Where the recovery of Zakat deductible at source, in respect of any of the assets mentioned in the first Schedule falls into areas, the Administrator-General may forward to the Collector of the District concerned a duly signed certificate specifying the amount of arrears due and the particulars of the person from whom due, and the Collector shall, on receipt of such certificate, proceed to recover the amount so specified, as if it were an arrear of land Revenue.

(5) A. Sahib-e-nisab may pay either to a Zakat Fund or directly to those eligible under Shariah to receive Zakat so much of the Zakat due under Shariah as is not deductible at source under this Ordinance, for example, that due in respect of assets mentioned in the Second Schedule.

(6) Any amount -deducted at source as Zakat by the Deducting Agency from any person shall be treated as payment of Zakat on behalf of such persons."

Thus, it is clear that the Zakat is payable by a person who is Sahib-e-nisab or in other words who owns or possess the assets on the valuation date. It further appears that Zakat, is charged once in a Zakat year and it is subsequently credited to Zakat fund wherefrom it is disbursed according to tenets and Injunctions of Islam. Mr. Jafri however, .has relied upon section 25 of tote Zakat Ordinance and it reads:---

"(25) Certain tax concession.---(1) Notwithstanding anything contained in any other law for the time being in force.

(a) in determining the tax liability of an assessee for an assessment year.

(i) under the Income Tax Ordinance, 1979 (XXXI of 1979), his taxable income shall be reduced by the amount paid by him to a Zakat Fund, during the previous year relevant to that assessment year; and

(ii) under the Wealth Tax Act, 1963 (XV of 1963), his wealth in respect of which Zakat or contribution in lieu thereof, has been deducted at source during the year relevant to that assessment year stall be excluded from his taxable wealth; and

(b) land revenue and development cess shall not be levied or land on the produce of which Ushr or contribution in lieu thereof, has been charged on compulsory basis.

(2) Nothing in the preceding subsection shall be deemed to effect the liability to pay income tax, wealth tax, land revenue or development cost in respect of any period preceding the enforcement of the relevant provisions of this Ordinance."

From perusal of clause (a) of subsection (1) of this section it appears, that the Legislature .has allowed special concession regarding deduction of Zakat from taxable income while determining the liability of an assessee. The expression "Notwithstanding anything contained in any other law for the time being in force" clearly indicates that this is a special tax concession. With this background let us now revert to the merits of this appeal on the issue.

5. As discussed above it appears that both the officers below have disallowed Zakat on the principle that an expenditure incurred for earning exempt Income cannot be allowed as a deduction. However, with due respect to them we are not inclined to accept their conclusion. Khas Deposit Certificates are an "asset" which is subjected to Zakat under various provisions of Zakat Ordinance. Thus the Zakat is a charge on the "asset" and not an expenditure for earning interest.

In other words an assessee pays Zakat because he is under religious as well as legal obligation to pay it simply because he is in possession thereof on the valuation date. It is not an expenditure for earning the `asset' namely the Khas Deposit Certificates. It is -important to note that the Income Tax Ordinance has not exempted the Khas Deposit Certificates but the income earned therefrom. On the other hand the Zakat Ordinance has charged Zakat on the Khas Deposit Certificates themselves whereas it may be deducted from its usufruct which is under the provision of Income Tax Ordinance exempt from income tax. Moreover, as is clear from perusal of section 25 that the Zakat Ordinance has laid down special provisions and they have to prevail upon all the provisions of the Income Tax Ordinance and the principles of Tax i.aws including the alleged principle relied upon by both the officers below.

5. The reliance of Mr. Z. H. Jafri on the prescribed form of Return of total income to be determined under Income Tax Ordinance also appears to be very much well placed. It is clear from its perusal that all sorts of income are first to be grouped together and then from the total income earned from all sources the; amount of Zakat and wealth tax paid is to be deducted. It is important to note that its Part-II provides column for exempt Income which is not included in total income. But there is nothing to show that Zakat deducted from exempt income shall not be deductible from total income worked out in Part-I. Thus, we find force in submission of Mr. Z.H. Jafri and allowing the appeal on this point direct the Assessing Officer to allow deduction of Rs.171,710.

We fully subscribe to the reasoning and the conclusion contained in the order of the learned ITAT, reproduced above. The order of the learned ITAT is so well-reasoned and exhaustive that no addition is required by us. The impugned order of the Tribunal is upheld in entirety and the question referred to us by the ITAT, is answered in affirmative.

M.B.A./C-70/K Reference answered in the affirmative.