Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss. 62‑C, 23(1)(x), 92 & Fourth Sched: R.5 Cl. (c)‑‑‑Income Tax Ordinance (XLIX of 2001), S. 124A & 221‑‑‑Insurance Act (IV of 1938), Ss. 3C(4), 11, 12, 15, 27A & 40‑C(1)‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑ Power of tax authorities to modify orders etc. ‑‑‑Management expenses‑‑ Premium written off‑‑‑Appellate Tribunal held that if excess management expenses had been condoned as per law within time, the same may be allowed keeping in view the relevant provisions of law and disallowance of claim on account of premium written off was deleted‑‑‑Rejection of application under S.62‑C of the Income Tax Ordinance, 1979 for compliance of Appellate Tribunal's instructions‑‑‑Validity‑‑‑Rejection of Complainant/assessee's application made under S.62‑C of the Income Tax Ordinance, 1979, requesting to follow the decision of Tribunal in assessment year 1999‑2000 and so far as it applies to the identical question arising in the assessment year 1998‑99 pending before him until the decision of the Tribunal is reversed or modified subsequently, was contrary to law‑‑‑Assessing Officer was bound to follow the decision of Appellate Tribunal in the appeal relating to assessment year 1999‑2000 as required under S.62‑C of the Income Tax Ordinance, 1979; notwithstanding pendency of any appeal under S.129 of the Income Tax Ordinance, 1979 or under S.221 of the Income Tax Ordinance, 2001 on the subject‑‑‑Decision of the Appellate Tribunal was not applicable to assessment year 2000‑2001 and the year subsequent thereto because the implication of clause (c) of R.5 of the 4th Schedule added by Finance Act, 1999 were yet to be adjudicated upon by the competent Court‑‑ Federal Tax Ombudsman recommended that Taxation Officer should proceed in accordance with the provisions of section 124A of the Income Tax Ordinance, 2001 corresponding to provision of section 62‑C of the Income Tax Ordinance, 1979 so far as the orders for assessment years 1998‑99 and 1999‑2000 were concerned.

PLD 1981 SC 293; I.T.A. No.1320/KB of 2000 and I.T.A. No.825/KB of 2000‑2001 ref.

Naeem Raza Hashmi for the Complainant.

S.A. Matee, DCIT for Respondent.

DECISION/FINDINGS

Maladministration is alleged in the instant complaint against the Taxation Officer (TO) Circle A‑1, and the CIT Companies Zone‑III, Karachi for wilful misreading, non‑reading of the judgments of the learned ITAT and a biased denial to the consequent relief that flowed out of them on two legal issues i.e. (1) Allowability of premium written off & (2) Allowability of management expenses. It is alleged that the rejection of complainant's application made under section 62C ibid to the DCIT, requesting him to follow the decision of the Tribunal so far as it applies to an identical question arising in the assessments of the years pending before him until the decision of the Tribunal is reversed or modified subsequently, is contrary to law. The DCIT is bound to follow the decision of ITAT in the appeal, relating to assessment year 1999‑2000, as required under section, 62C of the Income Tax Ordinance, 1979 (Repealed Ordinance).

2. It is stated in the complaint that the provisions of section 62C of the Repealed Ordinance are being pressed into (for all the assessment years from 1998‑1999 to 2002‑2003) because no appeal is pending under section 129 of the Repealed Ordinance or under section 221 of the Income Tax Ordinance, 2001 on this subject.

3. Briefly the facts are that Messrs United Insurance Co. of Pakistan is a Public Limited Company, listed on Stock and engaged in the business of general insurance. Their accounting year is the calendar year. The incomes for the calendar yeas 1997, 1998, 1999 and 2000 correspond to assessment years 1998‑99, 1999‑2000, 2000‑2001 and 2001‑2002.

4. The amounts claimed by the Company on account of management expenses were disallowed from year to year by the DCIT/TO for being in excess of limit laid down under Rule 40 of the Insurance Rules, 1958 read with section 40C of the Insurance Act, 1938. The amounts claimed on account of premium written off had been disallowed on the ground that the claims were in the nature of bad debts for which neither any details were furnished nor was there any justification for such write off. The DCIT had been invoking provisions of section 23(1)(x) of the Repealed Ordinance to disallow the claims.

5. It was contended before the Income Tax Appellate Tribunal (ITAT) that the excess management expenses were condoned by the Controller of Insurance in exercise of his powers vide "proviso" to section 40‑C of the Insurance Act. In this regard a copy of letter, dated 23‑8‑1999 sent by the appellant company to the Controller of Insurance was presented in which request was made for condonation of their excess management expenses. Copy of reply of Controller of Insurance, dated 30‑8‑1999 was also presented to indicate that the excess expenses were condoned by the said authority in accordance with the proviso to section 40C (1).

6. However, it was noted by the ITAT that the Assessing Officer as well as the CIT(A) have not mentioned the above correspondence, particularly the condonation letter of Controller of Insurance in the impugned orders. Thus it was not clear whether this evidence was made produced before the officer concerned during assessment/appeal proceedings. Further, the ITAT observed that accounts and balance‑sheet had to be drawn at the expiry of each calendar year under sections 11 and 12 of Insurance Act, 1938. The income year of the assessee/appellant Company ended on 31‑12‑1998 and the balance‑sheet, profit and account/Revenue account and profit and loss appropriation account of every insurance was to be audited by an Auditor.

7. The ITAT further observed that under section 15 a prescribed return had to be submitted by the Insurer to the Controller of Insurance within 6 months of the end of the accounting period, which date in this case expired on 30‑6‑1999. Thus in routing manner the return under section 15 would have been filed by 30‑6‑1999 with the Controller of Insurance whereas the correspondence for condonation of excess management expenses took place in August 1999, which would be out of relevance once the amounts were closed and return under section 15 was submitted. When the learned counsel was required to show evidence regarding letter of condonation submitted before the DCIT, he presented a copy of a letter of explanation, dated 29‑5‑2000 sent by the appellant in response to notice under section 62. In this letter the appellant had stated that they had incurred these expenses (management expenses) within the rules and regulation of Insurance Act and the Controller of Insurance had not objected. The learned counsel also submitted annual report of 1998 wherein the claim of Management expenses for the year under consideration was mentioned at Rs.8.645 millions. But neither in the letter of the insurer company, dated 23‑8‑1999 nor the Controller of Insurance in his letter, dated 30‑8‑1999 had mentioned the amount or the ratio of excess management expenses against gross premium receipts. Mr. Umer Farooq, the D.R. too could not present the record before the Tribunal. Since it was not possible to verify whether the assessee had presented the condonation letter of the Controller of Insurance before the DCIT during the assessment proceedings the Tribunal remanded the case with the direction to the DCIT to examine the record and verify if the excess management expenses had been condoned as per law within time. The ITAT in their decision given on complainant's I.T.A. No. 1190/KB of 2000‑2001 on 5th September, 2001, relating to assessment year 1999‑2000 held that if the excess management expenses had been condoned as per law within time, same may be allowed keeping in view the relevant provision of law.

8. Regarding the disallowance of the claim on account of premium written off, the, Tribunal observed that by invoking section 23(1)(x) of Repealed Ordinance the Assessing Officer relied on the wrong section and did not consider the provisions of section 3C (4), section 15 and section 27A of the Insurance Act, 1938; rule 44 prescribed thereunder was also overlooked. It was, therefore, held that the disallowance of the claim on account of premium written off was unwarranted; hence deleted.

9. The decision was followed by the Tribunal in ITA No. 572/KB of 2002 for assessment year 1998‑99 decided on 3rd April, 2003. Reference Application (RA) No. 25/KB of 2002 (A. Y. 1999‑2002) on the forgoing question has been disallowed by the Tribunal on 21‑2‑2002. A (Miscellaneous Application) M.A. No. 113/KB of 2003 had also been moved by the Department alleging that by remanding the issue of admissibility of‑ excess management expenses with the direction supra. The Tribunal had inadvertently committed a mistake of omission in so far as they ignored the principle set by the Honourable Supreme Court of Pakistan in its decision reported in PLD 1981 SC 293 in the case of CIT v. Alpha Insurance Co. Ltd. It was stated in the application that although the said judgment was not in effect after insertion of new clause (c) in Rule 5 of the Fourth Schedule of Income Tax Ordinance, 1979, by Finance Act, 1999, the principle set by the Supreme Court that the Rules contained in First Schedule of (Repealed Act of 1922) completely and exhaustively acts to the ‑exclusion of every other provision and not expressly incorporated, govern the computation of profits and gains of insurance business.

10. The department further pleaded that clause (c) of Rule 5 of 4th Schedule will, therefore, govern the computation of profits and gains of insurance business irrespective of condonation of excess management expenses by the Controller of Insurance. The two decisions of the Tribunal in ITA No. 1320/KB of 2000, dated 29‑11‑2001 and I.T.A. No. 825/KB of 2000‑2001 had also been cited in support of the contention by the applicant/Department.

11. The D.R. submitted before the Tribunal that since the order of Tribunal, dated 5‑9‑2001 was in conflict with the other decisions of the Tribunal referred by the Department in its miscellaneous application and that the department was empowered to restrict any expenses not exclusively incurred for the business, as provided under section 23 as well as Rule 5(c) of 4th Schedule, the Tribunal may either recall the order or rectify the same accordingly.

12. The counsel for the applicant argued before the Tribunal that under Rule 5(c) the restriction of any expenditure is subject to the limits laid down in the Insurance Act, 1938 and that the Controller of Insurance has the authority under the same Act to condone any management expenses in excess of limits prescribed under Rule 40 of Insurance Rules, 1958 read with section 40(c) of Insurance Act, 1938. Hence, if the Controller of Insurance condones ay excess management expenses the Department has no authority to disallow the same.

13. The Tribunal held on the forgoing facts and circumstances that:

"Clause (c) of Rule 5 was inserted by Finance Act, 1999 and would be applicable for. the assessment year 2000‑2001 onwards, whereas this appeal pertains to the assessment year 1999‑2000 and thus the said clause would not be applicable to this case.

Even if it is construed that certain limits have been laid down in the Insurance Act, 1938, the Controller of Insurance has the power to condone the same under the same Act and thus any violation of any Rule, if condoned by the competent authority, would be in existence.

For the computation of Income on profits of any business of general insurance, the. Legislature has provided rules as per 4th Schedule read with section 26(a) of the Income Tax Ordinance, 1979. Under Rule 5 of 4th Schedule such profits and gains shall be taken as per annual accounts as required to be furnished to the Controller of Insurance under the Insurance Act, 1938, subject to some adjustments enumerated in sub‑rules (a) (b) and (c) of Rule 5.

The case law referred by the department in I.T.A. No. 1320/KB of 2000‑2001, dated 29‑11‑2001 is not relevant as in the said judgment it was held that the Supreme Court's judgment was not applicable to that case after insertion of rule 5(c) of 4th Schedule by [of] Finance Act, 1999.

The other decision cited as I.T.A. No. 825/KB of 2000‑2001 is also not relevant as in the said order the Tribunal has rejected the assessee's appeal with the finding that the Controller had not condoned the contravention of section 40 (c) and that no such orders were presented before the Bench, whereas, in the present case, the assessee has claimed that the Insurance Company had applied vide letter, dated 23‑8‑1999 to Controller of Insurance for condonation of excess management expenses and that the Controller of Insurance vide letter, dated 30‑8‑1999 condoned the same, but since there was no mention of the actual amount of excess management expenses nor its ratio against gross premium receipts, nor any record was made available before the Bench, the case was set aside with certain directions.

Finally, the reference application filed by the Department that the question framed on the similar issue vide R.A. No. 25/KB of 2002 on 15‑2‑2002 has been rejected by the Tribunal vide, its order, dated 21‑2‑2002.

In view of the above observations, we do not find any substance in the department appeal [application of the Department] to recall our order which would tantamount to review for which this forum has no jurisdiction.

The application is disposed of in the manner indicated above."

14. The respondent submitted in response to the notice under section 10(4) of the Ordinance XXXV of 2000, that appeals/reference under the Income Tax Ordinance are pending in the complainant's case therefore, no complaint lies before this forum as envisaged under section 9(2) of the Establishment of the Office of the Federal Tax Ombudsman Ordinance, 2000. Notice of demand, dated 25‑4‑2003 for the assessment year 2000‑2001 was served in the complainant's case on 5‑5‑2003. The complainant's application for rectification vide letter, dated 20‑5‑2003 was disposed of by the Taxation Officer vide his letter No. TO/Cir A‑1/Cos‑III/2002‑2003/545, dated 4‑6‑2003. The complainant was requested to pay the tax by 15‑5‑2003 as per demand notice already served. Since reasonable time from 5‑5‑2003 to 4‑6‑2003 had already been availed by the complainant, the taxation Officer resorted to proceed under section 92 of the Income Tax Ordinance, 1979 on 16‑6‑2003.

15. The department in order to facilitate the taxpayer had already allowed payment of arrear demand of assessment years 1994‑95 to 1999‑2000 in installments of Rs.150,000 per month. However, in the month of June department had to achieve given targets. Hence; action for recovery under the law had to be taken against the defaulting tax payers. Still complainant's request, dated 19‑6‑2003 for installments to pay the demand for 2000‑2001 had been granted by the Additional Commissioner. Notices under section 92 had been withdrawn by the Taxation Officer on the same day.

16. It is found that the rejection by the DCIT of complainant's application made under section 62C ibid, requesting to follow the decision of the Tribunal in assessment year 1999‑2000 and so far as it applies to the identical question arising in the assessment year 1998‑99 pending before him until the decision of the Tribunal is reversed or modified subsequently, is contrary to law.

17. The DCIT is bound to follow the decision of ITAT in the appeal relating to assessment year 1999‑2000 as required under section 62C of the Income Tax Ordinance, 1979 (Repealed Ordinance); notwithstanding pendency of any appeal under section 129 of the Repealed Ordinance or under section 221 of the Income Tax Ordinance, 2001 on the subject.

18. However, the decision of the Tribunal ibid is not applicable to assessment year 2000‑2001 and the years subsequent thereto because the implications of clause (c) of Rule 5 of the 4th Schedule added by Finance Act 1999 are yet to be adjudicated upon by a competent Court.

19. It is now recommended that:‑‑

(a) the Taxation Officer proceeds in accordance with the provisions of section 124A of the Income Tax Ordinance, 2001 corresponding to provisions of section 62C of the repealed Ordinance so far as the orders for assessment years 1998‑99 and 1999‑2000 are concerned.

(b) Compliance is reported within 30 days.

C.M A /1001/FTOOrder accordingly.