Income Tax Ordinance (XXXI of 1979)---

----Fourth Sched., R.5 & Ss.12(9-A), 136(2)---Reference to the High Court---Computation of income/profits and gains of an insurance company---Principles---Jurisdiction of the Assessing Officer ---Scope-- Profits and gains of business of insurance and tax payable thereon had to be computed in accordance with the rules contained in the Fourth Schedule of the Income Tax Ordinance, 1979---Provisions contained in S.12(9-A), Income Tax Ordinance, 1979 extending the jurisdiction of the Assessing. Officer having not been included in the Fourth Schedule of the Ordinance, Income Tax Appellate Tribunal had rightly deleted the addition to which no exception could be taken---Principles pertaining to the assessment of Insurance Company being established, Appellate Tribunal had rightly rejected the Reference application---Reference application under S.136(2), Income Tax Ordinance, 1979 stood dismissed in limine.

The principles pertaining to the computation of income/profits and gains of an Insurance Company are fully established to the effect that to the exclusion of any other provision contained in the Income Tax Ordinance, the profits and gains of business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Fourth Schedule. The jurisdiction of the Assessing Officer in the matter of computation of the profits and gains and the tax payable thereon are limited to the provisions contained in the Fourth Schedule and the Assessing Officer can make adjustments to the extent provided in Rule 5 of the Fourth Schedule in respect of profits and gains of any business of insurance other than life insurance and the jurisdiction of the Assessing Officer is not extended to any other provision contained in the Ordinance until and unless included in the Fourth Schedule itself.

Department in the present case, being unable to show that the provisions contained in section 12(9-A) had been included in the Fourth Schedule to the Income Tax' Ordinance, thereby extending the jurisdiction of the Assessing Officer the Tribunal had rightly deleted the addition to which no exception could be taken. Since the general principles- pertaining to the assessment of Insurance Company already stood established, therefore, the Tribunal rightly rejected the reference application to which no exception can be taken.

Commissioner of Income-tax v. Messrs Alpha Insurance Company PLD 1981 SC 293; Commissioner of Income Tax v. Messrs Mercantile Fire and General Insurance Co. Ltd. 1989 PTD 142; Commissioner of Income-tax v. International General Insurance Company 1991 PTD 401; 1998 PTD (Trib.) 1103; (1964) 51 ITR 773; Commissioner of Income Tax v. Premier Insurance Company Ltd. 1989 PTD 1022; Adamjee Insurance -Company v. Central Board of Revenue 1989 PTD 1090 and E.F.U. General Insurance Company Ltd. v. Federation of Pakistan PLD 1997 SC 700 ref.

Aqeel Ahmed Abbasi for Applicant.

Date of hearing: 19th November, 2002.

JUDGMENT

Through this reference application under section 136(2) of the Income Tax Ordinance, 1979, the Commissioner of Income Tax Companies III Karachi, has sought opinion of this Court on the following question of law:---

"Whether on the facts and circumstances of the case the learned Tribunal was justified to delete the addition made under section 12(9A) of Income Tax Ordinance, 1979."

According to the statement of facts appended with the reference application, the respondent/assessee is a public company engaged in the business of General Insurance. The profits and gains of the insurance business are assessed under section 26(a) of the Income Tax Ordinance, 1979, read with Rule 5 of the IVth Schedule. During the assessment year 1999-2000, the respondent distributed cash dividend at 20% of its after tax profit. Assessing Officer invoked the provisions contained in section 12(9-A) of the Income Tax Ordinance, 1979 and thereby worked out deemed income at Rs.275,522,680 and charged tax thereon at the rate of 10 %.

The respondent preferred first appeal before the learned CIT (Appeals), contending that the profits and gains of the insurance business is computed in accordance with the rules contained in the IVth Schedule as provided under section 26(a) of the Income Tax Ordinance. It was further urged that in various cases Assessing Officers, made addition to the total income derived from insurance business by recourse to the deeming provisions contained in section 10(2-A) of the repealed Income Tax Act, 1922, sections 25(c) and 12(9) of the Income. Tax Ordinance, 1979, but all such additions were deleted by the superior Courts. Reliance in this regard was placed on the judgments by the Supreme Court of Pakistan in the case of Commissioner of Income-tax v. Messrs. Alpha Insurance Company PLD 1981 SC 293, Commissioner of Income Tax v. Messrs Mercantile Fire and General Insurance Co. Ltd. 1989 PTD 142 and Commissioner of Income-tax v. International General Insurance Company 1991 PTD 401.

The CIT (Appeals) did not decide the issue on merits and set aside the issue for the reason that no specific notice under section 62 was issued with the result that the points raised in appeal were not agitated. The Assessing Officer, was directed to re-consider the issue after giving opportunity of being heard to the assessee.

The respondent/assessee feeling dissatisfied preferred second appeal before the Income Tax Appellate Tribunal.

It was contended before the Tribunal that instead of setting aside the issue, the learned CIT (Appeals) ought to have deleted the addition, as the issue already stands decided in favour of the assessee. Reliance was placed in this behalf on a judgment of the I.T.A.T. reported as 1998 'PTD (Trib.) 1103. The relevant finding of the Tribunal reads as follows:--

"...Respectfully following the judgments of superior Court cited above it is held that the applicability of section 10(2-A) of the repealed Income Tax Act, 1922, section 25 and section 12 of the Income Tax Ordinance, 1979 maintaining deeming provisions are ousted by virtue of the provisions contained in section 10(7) of the repealed Income Tax Act, 1922 and section 26(a) of the Income Tax Ordinance, 1979 and thus, no addition can be made by recourse to the deeming provisions contained therein and additions are liable to be deleted."

The learned Tribunal accepted the contention and deleted addition made by the Assessing Officer.

Being dissatisfied with the deletion of addition, the Commissioner of Income Tax submitted reference application praying to refer the question reproduced in earlier part of this judgment, to the High Court for opinion. The reference application was dismissed for the reason that in the Tribunal's judgment reported as 1998. PTD (Trib.) 1103, the issue has already been considered with reference to the judgments of Hon'ble Supreme Court in the case of Alpha Insurance Company PLD 1981 SC 293 and the judgment of Sindh High Court in the case of Commissioner of Income Tax v. Messrs Mercantile Fire and General Insurance Co. Ltd. 1989 PTD 142.

Department still feeling aggrieved has preferred this reference application directly assailing the correctness of the decision of the Appellate Tribunal.

It is contended on behalf of department that subsection (9-A) of section 12 of the Income Tax Ordinance, 1979 was inserted by Finance Act, 1999 and therefore, it was not considered in the Tribunal's judgment reported as 1998 PTD (Trib.) 1103, on the basis whereof the learned Tribunal deleted the addition. It is further contended that Insurance Company is not included in para 59 of Part-IV of the Second Schedule which specifics the Companies to whom the provisions of section 12(9-A) is not applicable. The provisions contained in Clause 59 of Part-IV of Second Schedule read as follows:--

"(59) The provisions, of subsection (9A) of section 12 shall not apply to-

(i) a company listed on stock exchange which distributes profit equal to either forty per cent of its after tax profits or fifty percent. of its paid-up capital, whichever may be the less;

(ii) a public company not listed on the stock exchange;

(iii) a trust or a company in which not less than fifty per cent shares are held by the Government; or

(iv) a leasing company as defined in the Leasing Companies (Establishment and Regulation) Rules, 1996."

Mr. Aqeel Ahmed Abbasi, learned counsel for the applicant/department has contended that a substantial question of law is involved which requires consideration by this Court and therefore, the reference application-may be admitted to regular hearing.

After hearing Mr. Aqeel Ahmed Abbasi; learned counsel for the applicant and perusal of the Tribunal's order, rejecting the reference application under section 136(1) of the Income Tax Ordinance, 1979, we are persuaded to agree with the views held by the learned ITAT. The issue under consideration already stands decided by the Hon'ble Supreme Court and this Court repeatedly and therefore, no fresh consideration is required.

The general principles pertaining to the assessment of profits and gains of the insurance business stand decided by the Hon'ble Supreme Court in the case of Commissioner of Income Tax v. Alpha Insurance Company (Supra). In this case Hon'ble Supreme Court considered the provisions contained in section 10(7) of the repealed Income Tax Act, 1922 which reads as follows:---

"(7) Notwithstanding anything to the contrary contained in sections 8, 9, 10, 12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the First Schedule to this Act."

While considering the above' provisions the Hon'ble Supreme Court held that the expressed words of subsection (7) of section 10 of the Income Tax Act, have unmistakably the effect of applying by incorporation the rules contained in the First Schedule to the Income-tax Act. This has been done "notwithstanding anything to the contrary contained in sections 8, 9, 10, 12 or 18 of the Income Tax Act." The Hon'ble Supreme Court agreed with proposition that the result is that except for the provisions of the First Schedule no other provision of the Income Tax. Act is applicable. While agreeing with the proposition the Hon'ble Supreme Court of Pakistan referred with approval, the view held by Indian Supreme Court in the case of Life Insurance Corporation India v. Commissioner of Income Tax (1964) 51 ITR 773 as follows:--

"The assessment of the profits of an insurance business is completely governed by the rules in the Schedule and there is no power to do anything not contained in it.

The Hon'ble Supreme Court ultimately concluded as follows:--

"The rules contained in the First Schedule of the Income Tax Act, completely, exhaustively, and to the exclusion of every other provision not expressly incorporated, govern computation of profits and gains of insurance business."

The issue pertaining to the applicability of section 10(2-A) of the repealed Act, 1922 again came for consideration before this Court in the case of Commissioner of Income Tax v. Messrs Mercantile Fire and General Insurance Co. Ltd. His Lordship Mr. Justice Saleem Akhtar (as his lordship then was) while placing reliance on the ratio, in the case of Commissioner of Income Tax v. Alpha Insurance Co. (Supra) held that section 10 of the repealed Income Tax Act, has been applied for limited purposes only and the entire section 10 cannot be applied under the garb of limited application and consequently, section 10(2-A) of the repealed Income Tax Act, 1922 was held inapplicable.

The question pertaining to jurisdiction of Assessing Officer, in respect of insurance company again came for consideration before this Court in the case of Commissioner of Income Tax v. Premier Insurance Company Ltd. 1989 PTD 1022, arid it was reiterated by following the dictum laid down by the Hon'ble Supreme Court in the case of Alpha Insurance Company (Supra) that," It is well-settled that the Income Tax Officer has no authority to make any addition to the annual accounts submitted to the Controller of Insurance."

It was further held that, "it is thus; clear that the Income Tax Officer has to refer the rules in Schedule for assessing the profits of an Insurance company and in that regard he cannot exercise any power not contained in it."

The general principles pertaining to the computation of profits and gains of an insurance company came for consideration before a Division Bench of this Court in the case of Adamjee Insurance Company v. Central Board of Revenue 1989 PTD 1090, with reference to the provisions contained in section 26(a) of the Income Tax Ordinance, 1979, which reads as follows:--

"(26) Notwithstanding anything contained in this Ordinance:--

(a) the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Fourth Schedule;"

The respondent in this case is engaged in general insurance business and the assessee in the cited case was also engaged in general insurance business. In the said case, Insurance Company had claimed exemption from payment of Income-tax on the income arising from Khas Deposit Certificates by virtue of the exemption available in Second Schedule to the Income Tax Ordinance. Speaking for the Division Bench, his lordship Mr. Justice Saeeduzaman Siddiqui (as his lordship then was), observed that, "a careful analysis of section 26(a) of the Income Tax Ordinance, 1979 showed that the profits and gains of any business of insurance and the tax payable thereon is to lie computed in accordance with the rules contained in the Fourth Schedule to the Ordinance". After referring rule 5 of the Fourth schedule, dealing with the computation of profits and gains from the general insurance, it was held that,' "the profits and gains of any business of insurance (other than life insurance) shall be taken to be the balance of the profits disclosed by the assessee in the annual accounts submitted by it before the Controller of Insurance under the provisions of Insurance Act of 1938, which means that no further enquiry or probe with regard to the above declared profits and gains of the assessee is permitted by the Income Tax Officer, except to the extent as provided in sub-rules (a) and (b) of Rule." A contention was raised that notwithstanding the provisions contained in section 26(a) of the Income Tax Ordinance, 1979 and Rule 5 contained in the Fourth Schedule, the scope of total income as defined in section 11 of the Income Ordinance and the provisions contained in section 9 of the Ordinance pertaining to the levy/charge on the total income of an assessee were applicable and consequently, income derived by the Insurance Company from Khas Deposit Certificates which enjoyed exemption under second Schedule could not be subjected to the charge of income tax. The contention was not accepted and it was held as follows:--

"It is not disputed before us that for assessment' of profits and gains and tax payable thereon in respect of insurance Companies, special provisions have been made in the Ordinance and same is given overriding effect over other provisions of the Ordinance."

Ultimately it was held that the provisions contained in Second Schedule allowing exemption were not applicable to the computation of profits and gains of an Insurance Company.

The question pertaining to the jurisdiction of the Income Tax Officer in respect of the computation of profits and gains derived by an Insurance Company, came for. consideration before the Hon'ble Supreme Court in the case of E.F.U. General Insurance Company Ltd. v. Federation of Pakistan PI:D 1997 SC . 700. A larger Bench of Hon'ble Supreme Court held as follows:---

"(9) From section 26(a) of the Income Tax Ordinance, section 10(7) of the Act read with rule 5 of the Fourth Schedule, First Schedule of the Act and the relevant provisions of the Insurance Act, 1938, it would follow that the Income Tax Officers have very limited jurisdiction to challenge the accounts submitted by a company dealing in insurance business. The jurisdiction of the Income Tax Officer is limited to the clauses (a) and (b) of rule-5 of the Fourth Schedule to the Ordinance (and provided in rule 6 of the First Schedule to the Act). Subject to the above, the Income Tax Officer is not competent to challenge the accounts submitted by the assessee under the Insurance Act, 1938. The Income Tax, Officer cannot go behind such accounts. This question has been considered in sufficient detail by this Court in an earlier judgment in the case of Commissioner of Income Tax v. Phoenix Assurance Company Limited 1991 SCMR 2485. It was inter alia noted in the said judgment as follows:--

(I) Under section 11 of the Insurance Act, 1938, every Insurance Company has to prepare, at the expiration of each calendar year, as balance-sheet, a profit and loss account and a revenue account in the prescribed form to be authenticated:

(II) Under section 15, such audited accounts and statements have to be furnished to the Controller of Insurance as return;

(III) Section 18 of the Insurance Act requires every insurance company to furnish to the Controller of Insurance a certified copy of every report on the affairs of the concern which is submitted to the members or policy holders of the insurance;

(IV) Section 21 enables the Controller of Insurance to call for such further information from the insurer in respect of the return furnished by it if he feels that the same is inaccurate or defective in any manner;

(V) He can examine the books of accounts, registers and documents as well as any officer of the insurer;

(VI) He is empowered 'to decline to accept any return unless the inaccuracy has been corrected or the deficiency has been supplied and in case the Controller of Insurance declined to accept any return, the insurer shall be deemed to have failed to comply with the provisions of section 15 of the Insurance Act relating to, the furnishing of return.

After referring to these provisions of the Insurance Act, it was then observed by this Court that it was in this context that finality has been given to the accounts for purposes of rule 6 of the First Schedule to the Act (rule 5 of the Fourth Schedule to the Ordinance). It was held that the Income Tax Officer was not competent to upset the integrity of the accounts submitted by the assessee under the Insurance Act, 1938 by applying the ordinary rules for computation of profits and accounts and for assessment of tax in the light of the provisions of Income Tax law in respect of the income in regard to the head "business". It was also held that there was no substance in the contention that the combined effect of section 10(7) read with rule 6 of the First Schedule to the Act (section 26(a) read with rule 5 of the Fourth Schedule to the Ordinance) was that the Income Tax Officer was vested with the power to probe into the accounts submitted by the insurance company with a view to determining the real nature of any item of such accounts for purpose of excluding it in order to adjust the balance of profits."

Dilating on the effect of non obstante clause contained in section 26(a) of the Income Tax Ordinance, 1979 the Hon'ble Supreme Court held as follows;

"A non obstante clause is usually used in a provision to indicate that the provision should prevail despite anything to the contrary in the provision mentioned in such non obstante clause. In case there is any inconsistency between the non obstante clause and another provision, one of the objects of such a clause is to indicate that it is the non obstante clause which would prevail over the other clause (Bindra on Interpretation of Statutes, 7th Edition)."

A perusal of the above judgments clearly shows that the principles pertaining to the computation of income/profits and gains of an Insurance Company are fully established to the effect that to the exclusion of any other provision contained in the Income Tax Ordinance, the profits and gains-of business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Fourth Schedule. The jurisdiction of the Assessing Officer in the matter of computation of the profits and gains and the tax payable thereon are limited to the provisions contained in the Fourth Schedule and the Assessing Officer can make adjustments to the extent provided in Rule 5 of the Fourth Schedule in respect of profits and gains of any business of insurance other than life insurance and the jurisdiction of the Assessing Officer is not extended to any other provision contained in the Ordinance until and unless included in the Fourth Schedule itself.

Mr. Aqeel Ahmed, learned counsel for the department is not able to show that the provisions contained in section 12(9-A) have been included in the Fourth Schedule to the Income Tax Ordinance, thereby extending the jurisdiction of the Assessing Officer and thus, we are of the considered opinion that the learned ITAT has rightly deleted the addition to which no exception can be taken. Since the general principles pertaining to the assessment of Insurance Company already stand established, therefore, the learned Tribunal rightly rejected the reference application to which no exception can be taken. The Reference application submitted under section 136(2) of the Income Tax Ordinance, 1979, stands dismissed in limine.

M.B.A./C-69/K Application dismissed.