QAISER A. MANOO VS INCOME TAX APPELLATE TRIBUNAL, LAHORE

2005 P T D 2070

[Lahore High Court]

Before Muhammad Sair Ali and Sh. Azmat Saeed, JJ

QAISER A. MANOO

Versus

INCOME TAX APPELLATE TRIBUNAL, LAHORE and 2 others

Wealth Tax Appeal No.592 of 2000, decided on 08/06/2005.

(a) Wealth Tax Act (XV of 1963)---

-------S. 5(1)(xviii)---Zakat and Ushr Ordinance (XVIII of 1980), S.25(1)(a) & (ii)---Exemption from wealth tax--Object---Deduction of Zakat at source---Conditions to be fulfilled to avail concession of exemption---Provisions of S.25(1)(a)(ii) of the Zakat and Ushr Ordinance, 1980 as well as S.5(1)(xviii) of the Wealth Tax, 1963 allowed exemption from the wealth tax only to such assets which were subjected to the deduction of Zakat at source during the year relevant to the assessment year in question---Said provisions of the two enactments extended exemption to the Zakat paid assets only---Assets created out of encashment proceeds of Khas Deposit Certificates which suffered compulsory levy of Zakat under the Zakat and Ushr Ordinance, 1980 were not entitled to exemption under S.5(1)(xviii) of the Wealth Tax Act, 1963---Principles.

Section 25 of Zakat and Ushr Ordinance, 1980 excluded such assets from the taxable wealth of an assessee, in respect of which Zakat had been deducted at source during the year relevant to the assessment in question. This tax concession was thus, dependent upon fulfilment of the following two conditions:--

(i)deduction of Zakat at source; and

(ii)the deduction of Zakat to be made during the year relevant to the assessment year in question.

If the above two conditions co-existed, the asset in respect of which Zakat had been deducted at source enjoyed exemption from the levy of wealth tax.

The legislative intent in providing such tax concessions was obviously to avoid double taxation. Both Zakat and the wealth tax were the `taxes on the wealth' of an assessee. The assets which were liable to compulsory deduction of Zakat at source under the law, were exempted from the levy of `wealth tax' under the Wealth Tax Act, 1963. This exemption was allowed to protect the assessee from the imposition of the double levy.

The tax concession allowed by section 25(1)(a)(ii) of the Zakat and Ushr Ordinance, 1980 was given protection by the Wealth Tax Act, 1963 through insertion of clause (xviii) by the Finance Ordinance, 1979 in subsection (1) of section 5 of the Wealth Tax Act, 1963.

Section 25(1)(a)(ii) of the Zakat and Ushr Ordinance, 1980 as well as section 5(1)(xviii) of the Wealth Tax Act, 1963 allowed exemption from the wealth tax only to such assets which were subjected to the deduction of Zakat at source during the year relevant to the assessment year in question. These provisions of the two enactments extended exemption to the Zakat paid assets only. The exemption was not extendable to the assets created with the cash obtained on encashment of Zakat paid assets.

The assessee in the present case suffered compulsory deduction of Zakat at source on the face value of the K.D.Cs. (Khas Deposit Certificates), which throughout remained exempt from the wealth tax in view of the deductibility of Zakat at the time of their encashment. As long as they were held by the assessee as K.D:Cs. i.e. the assets liable to the deduction of Zakat at source, they enjoyed exemption from the wealth tax. In other words Zakat was the cost of exemption enjoyed by the K.D.Cs. under section 5(1)(xviii) of the Wealth tax Act, 1963. The provisions of the said section 5(1)(xviii) however, provide that the exemption from wealth tax was available only to those assets in respect of which Zakat was deducted at source. In the present case the assets liable to deduction of Zakat at source were the K.D.Cs., and not the cash obtained on their encashment. Such cash was wholly a new asset not liable to the deduction of Zakat at source, which was a sine qua non for availing exemption under section 5(1)(xviii) of the Wealth Tax Act, 1963. Extending the exemption to the encashment proceeds or any further assets created out of the said cash, would amount to stretching the exemption beyond the limits prescribed and permitted by the law.

(b) Interpretation of statutes---

---Exemption provision---Principles of construction.

Exemption provisions are to be given strict construction.

There are two basic principles of construing a provision of statute involving exemption from payment of tax, namely, the first rule is that the burden of proof is on the person who claims exemption. The second rule is that a provision relating to grant of tax exemption is to be construed strictly against the person asserting and in favour of taxing officer.

On the question of taxability of any income, doubt or ambiguity has to be resolved in favour of the assessee. In the case of exemptions however, the Courts have to be cautious. The exemption provisions of the taxing statutes have to be strictly interpreted and applied. If the conditions for availing of an exemption are not fulfilled in entirety, the claim for the exemption must be rejected.

Messrs Army Welfare Sugar Mills Ltd. and others v. Federation of Pakistan 1992 SCMR 1652 ref.

(c) Wealth Tax Act (XV of 1963)---

----Second Sched., Cl. 12(1)---Residential house---Exemption from wealth tax---Exemption clause applied to one residential house owned and occupied by the assessee for the purposes of his own residence---Conditions attracted to the exemption were that the claimed house must be residential and owned and occupied by the assessee and that such occupation by the assessee must be "for the purpose" of his own residence---principles.

The Assessing Officer and the Tribunal in the present case took the view that the house was not "maintained by the assessee for his own residence and that no evidence was produced by the assessee thereto". The exemption was, thus, denied by the Assessing Officer as well as by the Tribunal to the assessee. It was also held by them that "since the assessee was permanently residing in Lahore and had not shifted his residence to Karachi, the exemption claimed was, therefore, not allowed.

Normally, the question as to whether a residential house is occupied for the purposes of assessee's own residence or not is a question of fact which cannot be the subject-matter of further appeal before High Court. In the present case, however, the observations of the Assessing Officer and those of the Tribunal have changed the nature of the litigated question into a question of law. The Assessing Officer and the learned Tribunal denied exemption to the assessee for the reasons that the assessee permanently maintained his residence at Lahore and had not shifted his residence to Karachi and also that there was no evidence produced by him to prove that Karachi house was "maintained by him for his own residence".

The concise issue that legally arises for determination in the present case is as to whether the actual shifting into and maintenance of own residence, was mandatory for the assessee to earn the exemption. The view of the Tribunal is in the affirmative that the assessee must own, occupy and personally reside in the claimed house to avail of the exemption clause.

The Assessing Officer and the Tribunal misconstrued the exemption clause and restricted the scope thereof to a limit that the Legislature had not imposed. An additional condition was read into the exemption clause while no such condition had been so prescribed.

The powers to grant exemption from the wealth tax were provided for in section 5 of the Wealth tax Act, 1963. The exemptions were granted from time to time. The original clause (xvii) was substituted by the Finance Ordinance, 1984 and was later incorporated in clause 12(1) of the Second Schedule of the Act, providing for the exemption of "one residential house" to the assessee.

The exemption from the wealth tax was available to an assessee on:---

(i)One residential house;

(ii)owned by the assessee;

(iii)occupied by such assessee;

(iv)for the `purpose of assessee's own residence.

The exemption clause applied to "one residential house owned and occupied by the assessee for the purposes of his own residence..." the conditions attracted to the exemption were that the claimed house must be residential. It must be owned and occupied by the assessee. And that such occupation by the assessee must be "for the purposes" of his own residence.

Considered in the context of the meaning of the word "purpose", the exemption clause would read that the assessee should own and actually possess the house with an object or a goal or an end of having his own residence therein. Such a house should be in the occupation of the assessee who must hold and possess the same with the object of his own residence therein either at present or in future. The law does not impose upon the assessee the pre-condition of actual shifting into or/and maintaining self-residence in the house. Holding the house for such a purpose is adequate to avail of the exemption.

It appears that the Tribunal omitted to read the word "purpose" in the exemption clause. Instead it attached the exemption to the actual residence of the assessee while no such condition was prescribed by the law givers. In the present case, therefore, it was immaterial that the assessee was residing at Lahore (a property admittedly not owned by the assessee at the relevant time and had not shifted into the Karachi house). The assessee was entitled to the exemption from the wealth tax on one residential house owned and occupied by him anywhere in Pakistan provided the purpose of occupation of such house was his own residence. By claiming exemption of only the Karachi house as owned and occupied by him with the object of his own residence, the assessee had declared his intentic9(p, goal or the purpose. The onus shifted upon the Revenue to prove otherwise through strong evidence that the purpose of such occupation by the assessee was not his own residence. It was not the case of the Revenue that someone else was occupying and residing in the Karachi house though the same was owned by the assessee.

(d) Words and phrases----

---"Purpose"---Definition.

Muhammad Iqbal Khawaja for Appellant.

Muhammad Ilyas Khan for Respondent.

Date of hearing: 3rd May, 2005.

JUDGMENT

MUHAMMAD SAIR ALI, J.---For the relevant assessment years, the assessee Mr. Qaiser A. Manoo claimed exemption of Rs.35,80,312 from the Wealth Tax for being the Zakat paid amount. The appellant assessee also claimed exemption from the incidence of wealth tax of the house at Karachi being owned and occupied by him for self-residence. The Assessing Officer rejected the appellant assessee's claimed to the exemptions.

2. The appellant filed an appeal before the Commissioner of Income Tax/Wealth Tax, Lahore. This appeal was accepted through order, dated 30-3-1993. The Revenue filed an appeal there against before the learned Income Tax Appellate Tribunal, Lahore. Accepting the appeal of the Revenue, the learned Tribunal restored the order of the Assessing Officer holding as under:--

" .the exemption in respect of Khas Deposit Certificates have already been discussed and decided in the case of Shazada A. Manoo, Lahore against whom the Departmental appeals have already been decided by us vide an order, dated 5-4-2000 ... Since the facts and circumstances are admittedly the same, following that order the order of the Assessing Officer on the issue of allowance of exemption of the KDCs is restored in the assessment year 1990-1991.

(2) The remaining common issue is in respect of assessee's claim of exemption of a residential house at Karachi with the declared value of Rs.4,24,000. The Assessing Officer noted that the assessee was residing permanently at Lahore and had not shifted his residence to Karachi ... ... The learned CIT (Appeals), however, allowed the exemption... .. ... The onus of proving that the house was "maintained" by the assessee for his own residence lies on the claimant of the exemption. Merely because premises described as 70-Main Boulevard Gulberg, Lahore were property of Ravi Constructions (Pvt.) Ltd., Lahore did not mean that the same were not used by this assessee for residential purpose. In any case, we do not find any mention of such reason being given in the assessment order. Hence we find that there was no sufficient evidence or clause to allow the exemption of this property to the assessee by the learned CIT(A). Hence, we restore the orders of the Assessing Officer in all the three years on this issue. All the three appeals of the Revenue succeed to the extent indicated above."

Hence the present further appeal.

3. In para. 6 thereof, the assessee prays for an opinion of this

Court on the following questions:--

"(i) Whether on the facts and in the circumstances of the case, respondent No.1 was justified to accept the appeal of the Department where exemption to the extent of Zakat Paid Assets was not allowed?

(ii) Whether on the facts and in the circumstances of the case, respondent No.1 was justified to hold that exemption was claimed in respect of KDCs which did not exist on the valuation date?

(iii) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in holding that the payment of Zakat after the encashment of KDCs is not adjustable against the demand of Wealth Tax after conversion of KDCs. into cash?

(iv) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in accepting the appeal and confirming the disallowance of exemption of residential house although their was no allegation that house was occupied for any other purpose than residential purpose?"

4. The first three questions read together raise one principal question that as to whether the assets created out of encashment proceeds of KDCs which suffered compulsory levy of Zakat under the Zakat and Ushr Ordinance, 1980 were entitled to exemption under clause (xviii) of section 5(1) of the Wealth Tax Act, 1963.

5. The Zakat and Ushr Ordinance, 1980 (XVIII of 1980) on its promulgation extended `certain tax concessions' in section 25' to the income tax as well as wealth tax assessees. The tax concession relating to the assets chargeable to wealth tax, prescribed as under:--

"(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) ..

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

6. Section 25 ibid excluded such assets from the taxable wealth of an assessee, in respect of which Zakat had been deducted at source during the year relevant to the assessment in question. This tax concession was thus, dependent upon fulfilment of the following two conditions:

(i)deduction of Zakat at sources; and

(ii)the deduction of Zakat to be made during the year relevant to the assessment year in question.

If the above two conditions co-existed, the asset in respect of which Zakat had been deducted at source enjoyed exemption from the levy of wealth tax.

7. The legislative intent in providing such tax concessions was obviously to avoid double taxation. Both Zakat and the wealth tax were the `taxes on the wealth' of an assessee. The assets which were liable to compulsory deduction of Zakat at source under the law, were exempted from the levy of `wealth tax' under the Wealth Tax Act, 1963. This exemption was allowed to protect the assessee from the imposition of the double levy.

8. The tax concession allowed. by section 25(1)(a)(ii) of the Zakat and Ushr Ordinance, 1980 was given protection by the Wealth Tax Act, 1963 through insertion of clause (xviii) by the Finance Ordinance, 1979 in subsection (1) of section 5 of the Wealth Tax Act, 1963 in the following words:---

"(5) Exemption in respect of certain assets:

(1) Wealth tax shall not be payable by an assessee in respect of following assets, and such assets shall not be included in the net wealth of the assessee:---

(xviii) assets in respect of which Zakat or contribution in lieu thereof has been deducted at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980), in the year or during the Zakat year commencing immediately before the valuation date.

Explanation.---"Zakat year" means year according to the Hijra Calendar for which Zakat is chargeable, commencing on the first day of Ramadhan-ul-Mubarak and ending with the last day of the following Sha'ban-ul-Moazzam."

9. Section 25(1)(a)(ii) of the Zakat and Ushr Ordinance, 1980 as well as section 5(1)(xviii) of the Wealth Tax Act, 1963 allowed exemption from the wealth tax only to such assets which were subjected to the deduction of Zakat at source during the year relevant to the assessment year in. question. These provisions of the two enactments extended exemption to the Zakat paid assets only. The exemption was not extendable to the assets created with the cash obtained on encashment of Zakat paid assets.

10. The law is well-settled that the exemption provisions are to be given strict construction. In the case titled "Messrs Army Welfare Sugar Mils Ltd., and others v. Federation of Pakistan" (1992 SCMR 1652), the Hon'ble. Supreme Court Pakistan pronounced the principles on the interpretation of the exemption in the fiscal statutes as under:

"There are two basic principles of construing a provision of statute involving exemption from payment of tax, namely, the first rule is that the burden of proof is on the person who claims c exemption. The second rule is that a provision relating to grant of tax exemption is to be construed strictly against the person asserting and in favour of taxing officer."

11. There is no doubt in our minds that on the question of taxability of any income, doubt or ambiguity has to be resolved in favour of the assessee. In the case of exemptions however, the Courts have to be cautious. The exemption provisions of the taxing statutes have to be strictly interpreted and applied. If the conditions for availing of an exemption are not fulfilled in entirety, the claim for the exemption must be rejected.

12. The appellant-assessee in the present case suffered compulsory deduction of Zakat at source on the face value of the KDCs (Khas Deposit Certificates), which throughout remained exempt from the wealth tax in view of the deductibility of Zakat at the time of their encashment. As long as they were held by the appellant-assessee as KDCs i.e. the assets liable to the deduction of Zakat at source, they enjoyed exemption from the wealth tax. In other words Zakat was the cost of exemption enjoyed by the KDCs under section 5(1)(xviii) of the Wealth Tax Act, 1963. The provisions of the said section 5(l)(xviii) ibid however, provide that the exemption from wealth tax was available only to those assets in respect of which Zakat was deducted at source. In the instant case the assets liable to deduction of Zakat at source were the KDCs, and not the cash obtained on their encashment. Such cash was wholly a new asset not liable to the deduction of Zakat at source, which was a sine qua non for availing exemption under section 5(1)(xviii) of the Wealth Tax Act, 1963. Extending the exemption to the encashment proceeds or any further assets created out of the said cash, would amount to stretching the exemption beyond the limits prescribed and permitted by the law.

13. The questions raised by the appellant regarding exemption in respect of KDCs are thus answered in the affirmative. The findings of the learned Income Tax Appellate Tribunal on the issue of chargeability of the assets created out of the encashment proceeds of the KDCs are upheld. The assessee's appeal to the extent of these questions is dismissed.

14. The fourth question is regarding the exemption of the residential house from the wealth tax. In the present case, the parties are not at dispute that the house at Karachi for which the exemption was claimed by the assessee was not a residential house owned and occupied by the assessee. The Assessing Officer and the learned Tribunal took the view that the said house was not "maintained by the assessee for his own residence and that no evidence was produced by the assessee thereto". The exemption was, thus, denied by the Assessing Officer as well as by the learned Tribunal to the assessee. It was also held by them that "since the assessee is permanently residing at 70-Main Boulevard Gulberg, Lahore and had not shifted his residence to Karachi, the exemption claimed is, therefore, not allowed".

15. Normally, the question as to whether a residential house is occupied for the purposes of assessee's own residence or not is a question of fact which cannot be the subject-matter of further appeal before this Court. In the present case, however, the observations of the Assessing Officer and those of the learned Tribunal as referred to above have changed the nature of the litigated question into a question of law. The Assessing Officer and the learned Tribunal denied exemption to the assessee for the reasons that the assessee permanently maintained his residence at 70-Main Boulevard Gulberg, Lahore and had not shifted his residence to Karachi and also that there was no evidence produced by him to prove that Karachi house was "maintained by him for his own residence".

16. The concise issue that legally arises for determination in the present case is as to whether the actual shifting into and maintenance of own residence, was mandatory for the assessee to earn the exemption. The view of the learned Tribunal is in the affirmative that the assessee must own, occupy and personally reside in the claimed house to avail of the exemption clause.

17. Our considered view is that the Assessing Officer and the learned Tribunal misconstrued the exemption clause and restricted the scope thereof to a limit that the Legislature had not imposed. An additional condition was read into the exemption clause while no such condition had been so prescribed.

18. The powers to grant exemption from the wealth tax were provided for in section 5 of the Wealth Tax tact, 1963. The exemptions were granted from time to time. The original clause (xvii) was substituted by the Finance Ordinance, 1984 and was later incorporated in clause 12(1) of the Second schedule of the Act, providing for the exemption of "one residential house" to the assessee. It reads as under:--

"Wealth tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee:-

(1) .

(2) .

(3) .

(4) .

(5) .

(6) .

(7) .

(8) .

(9) .

(10) .

(11) .

(12)(1) One residential house, owned and occupied by the assessee for purpose of his own residence, where the assessee opts to exclude such house from his assets:

Provided that such option may be exercised by either of the spouse:

.."

19. Bare reading of the above reproduced clause shows that the exemption from the wealth tax was available to an assessee on:

(i)One residential house;

(ii)owned by the assessee;

(iii)occupied by such assessee;

(iv)for the `purpose' of assessee's own residence.

20 The exemption clause applied to "one residential house owned and occupied by the assessee for the purposes of his own residence..." the conditions attracted to the exemption were that the claimed house must be residential. It must be owned and occupied by the assessee. Andl that such occupation by the assessee must be "for the purposes" of his own residence.

The word "purpose" has been defined by the Blacks Law Dictionary, 7th Edition as under:--

"Purpose: An objective, goal, or end:..."

Considered in the context of the meaning of the word "purpose", the exemption clause would read that the assessee should own and actually possess the house with an object or a goal or an end of having his own residence therein. Such a house should be in the occupation of the assessee who must hold and possess the same with the object of his own residence therein either at present or in future. The law does not impose upon the assessee the 'pre-condition of actual shifting into or/and maintaining self-residence in the house. Holding the house for such a purpose is adequate to avail of the exemption.

21. It appears that the learned Tribunal omitted to read the word "purpose" in the above referred exemption clause. Instead it attached the exemption to the actual residence of the assessee while no such condition was prescribed by the law givers. In the present case, therefore, it was immaterial that the assessee was residing at 70-Main Gulberg, Lahore (a property admittedly not owned by the assessee at the relevant time and had not shifted into the Karachi house). The assessee was entitled to the I exemption from the wealth tax on one resential house owned and occupied by him anywhere in Pakistan provided the purpose of occupation of such house was his own residence. By claiming exemption of only the Karachi house as owned and occupied by him with the object of his own residence, the assessee had declared his intention, goal or the purpose. The onus shifted upon the Revenue to prove otherwise through strong evidence that the purpose of such occupation by the assessee was not his own residence. It was not the case of the Revenue that someone else was occupying and residing in the Karachi house though the same was owned by the assessee.

22. We are, therefore, of the opinion that the learned Tribunal misinterpreted the above exemption provision. It was not justified in accepting the departmental appeal to disallow the exemption of the Karachi house to the assessee. The fourth question as raised in this appeal is answered in the negative. Consequently, this appeal to the extent of this question is accepted.

M.B.A./K-108/LOrder accordingly.