I.T.As. Nos. 3490/LB and 3491/LB of 2005, decided on 10th June, 2006. VS I.T.As. Nos. 3490/LB and 3491/LB of 2005, decided on 10th June, 2006., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2745 (2006)

(a) Income Tax Ordinance (XLIX of 2001)---

----S. 88---Income Tax Ordinance (XXXI of 1979), Second Sched., Part-I, Cl. (110)---Individual as a member of an association of persons---Shared income---Exemption---Assessee was a private limited company---Taxation of returns income filed declaring nil income while regarding share received from association of persons, the assessee claimed exemption under Cl.(110) of Part-I of Second Schedule to the Income Tax Ordinance, 1979---First Appellate. Authority cancelled such order on the ground that Assessing Officer was not justified in taxing the share received by the assessee-company as a member from association of persons---Validity---Section 88 of the Income Tax Ordinance, 2001 stipulates share of a company from income of association of persons, which was exempt from tax, but the share will only be included in the income of the company for tax rate purposes---Effect of S.88 of the Income Tax Ordinance, 2001 is to maintain position of cl. (110) of Part-I of Second Schedule to the Income Tax Ordinance, 1979 for tax of share of a 'company in the income of association of persons---First Appellate Authority had rightly cancelled the assessments---Order of First Appellate Authority was upheld by the Appellate Tribunal and the appeals filed by the Department were dismissed.

(b) Income Tax Ordinance (XLIX of 2001)---

----S. 88A---Income Tax Ordinance (XXXI of 1979), S.2(16)(e)---Share profits of company to be added to taxable income---Term "association of persons"---Definition---"Association of persons" was not defined in the Income Tax Ordinance, 1979, which means it has no technical meaning---Income Tax Ordinance, 2001 had defined the term "association of persons", which included a Firm and Hindu Undivided Family as association of persons---View of Taxation Officer that a Firm or Hindu Undivided Family could not be termed as "association of persons" was not correct---Definition in Income Tax Ordinance, 2001 excluded company just because S.88A of the Income Tax Ordinance, 2001 specifically dealt with taxation of the share of the company in the income of the association of persons, as its member---Definition of `company' given in Income Tax Ordinance, 1979 also included "foreign association" as defined in S. 2(16)(e) of the Income Tax Ordinance, 1979 and as such, `company' was basically an `association of persons'.

(c) Income-tax---

----Share of profit from association of persons---Taxation---If the income of association of persons was taxable, the share of profit received by a member whatsoever was their legal form, could not be taxed again, as it would amount to tax the same persons twice simultaneously for the same income---Central Board of Revenue in its Letter C. No.20(447)-IT-3/65, dated 20-4-1972 had also indicated that correct position was to tax the income of association of persons and not the member of association of persons.

Mrs. Sabiha Mujahid, D.R. for Appellant.

Imran Rasool and Khawar Rafique, Chief Accountant for Respondents.

ORDER

JAWAID MASOOD TAHIR BHATTI (JUDICIAL MEMBER).---Through these two appeals, the appellant-Department has objected to the consolidated impugned order of the learned CIT(A), dated 4-5-2005 for the assessment years 2001-2002 and 2002-2003 cancelling the assess ments for the years under review.

2. I have heard the learned representatives from both the sides and have also perused the consolidated impugned order of the learned CIT(A) and the assessment order.

I have found that the learned CIT(A) has cancelled the assessments for the two years under review with the observations that "the Assessing Officer while completing the assessments has ignored the relevant provisions of law and was not justified in taxing the share received by the appellant-company as a member from AOP, therefore the order passed for both the years by the Assessing Officer are not sustainable and merit to be cancelled and it is ordered so".

3. The assessee, in this case, is a (Pvt.) Ltd. Company and as per assessment order, is a member of Messrs En Em Enterprises (AOP). For the years under reference, returns of income were filed declaring nil income for both the years. While regarding share received from Messrs En Em Enterprises (AOP), the assessee claimed exemption under clause (110) of Part-1 of 2nd Schedule to the repealed Income Tax Ordinance, 1979. The Assessing Officer issued notice under section 61 of the repealed Income Tax Ordinance, 1979. In response to that, on behalf of the assessee, reply was submitted, relevant part of which has been reproduced in the assessment order in the following manner : --

(1) For ease of reference we are pleased to reproduce clause (110):--

Quote

"Any sum received by an assessee as a member of an Association of Persons (Other than Hindu Undivided Family, a Company or a Firm) on which tax has already been paid by the Association".

Provided that ----------"Unquote

The plain reading of the clause without insertion of brackets clearly indicates income of a member of association is exempt from tax, but the members of an AOP being, Hindu Undivided Family, a Company or a Firm are not exempt as their shares from HUF, dividend from a company and share of profit for a firm are taxable in hands of various members of such AOPs being members shareholders and partners etc. Kindly appreciate that company, Hindu Undivided Family, a Firm all are Association of Persons in the first instance and then after registration under the respective laws or otherwise are named as Companies or Firms as the may be.

Your; attention is drawn to the corresponding old Section 86 of Indian Income Tax Law, which is reproduced as under:--

"86. Income Tax shall not be payable by an assessee in respect of the following:

(i) ------

(ii) ------

(iii) if the assessee is a partner of an unregistered firm (not being an unregistered firm assessed as a registered firm under clause (b) of section 183), any portion of the assessee's share in the profits and gains of the firm computed in the manner laid down in section 67 on which income tax is payable by the firm.

(iv)----------

(v) If the assessee is a member of an Association of Persons, or a body of individuals other than a Hindu Undivided Family, a Company or a Firm, any portion of the amount which he is entitled to receive from the association or body on which income tax has already been paid by the association or body".

After careful examination of respective provisions it would be quite clear that the word and phrase "other than" qualifies the AOP not the member. A member of an Association is not liable to pay tax again in respect of his share in the profits of association on which tax has already been paid by the association unless the association is in the nature of HUF, a Company or Firm.

Prior to 1939 the phrase used in the 1922, Act was "Association of Individuals", but it was changed to "Associations of Persons" by amending Act of 1939. The word persons has wider connotation than individuals and amendment was made to remove any doubt as to the assessability "as a unit" of an association of which the members might not, strictly speaking be called "Individuals". The phrase association of persons is of the most comprehensive importance under section 3 (39) of General Clauses Act. Persons includes any Company or Association or Body of Individuals whether incorporated or not. Therefore, an Association of Persons may have its members companies, firms, joint families and associations.

Let there be no doubt that a company cannot be member of an association.

The Company being a member of AOP is exempt from taxation, but a member of the company when receives is share from company being an AOP is not exempt".

The Assessing Officer after reproducing the above-referred contentions of the assessee in the assessment order has observed that the assessee has no business activity other than receiving share income from Messrs En Em Enterprises and as the assessee is a (Pvt.) Ltd. Company, therefore, the claim of exemption from taxation under Clause (110) of Part-1 of 2nd Schedule to the repealed Income Tax Ordinance, 1979 was not found in accordance with the said provisions and he has, therefore, rejected the' above said reply of the assessee with the following observations:--

"Through the above reply, the A.R. of the assessee-company has relied on the corresponding old section 86 of Indian Income Tax Law, 1922 Act, amending Act of 1939 and General Clauses Act and has contended that The words "firm, Hindu Undivided Family, Company" appearing in the parenthesis represent AOP i.e. according to A.R. AOP includes firm, Hindu Undivided Family and a Company and exemption is available to the AOPs other than those AOPs which represent a company, Hindu Undivided Family and Firm. The arguments/contention of the A.R. have been considered but were found to be without any merit/force for the following reasons. As per Income Tax Ordinance, 1979, an AOP and a Company are tax different and distinct legal entities. One can say that both are persons, but one cannot, by any stretch of imagination say that AOP includes a Company. As per section 2 (32) of the Income Tax Ordinance, 1979 persons is defined as under:--

"2(32) "persons" includes an individual, a firm, an association of persons, a Hindu Undivided Family, a company, a local authority and every other artificial juridical person".

Now if Association of Persons includes a Company, firm or Hindu Undivided Family, then the words a firm, a Hindu Undivided Family and company becomes redundant in the above definition as the same will then be included in the definition of Association of Persons and the words Firm, a Hindu Individual Family and Company become redundant which is against the cardinal principle of interpretation of statutes which states that the redundancy cannot be readily attributed to legislature. Lastly, the interpretation of the

assessee-company on the basis of General Clauses Act is also not relevant since it does not relate to the provisions of income Tax Ordinance, 1979. Moreover, General Clauses Act is a general law, whereas, Income Tax Ordinance is a specific one. It has already been held by Superior Courts that, specific law prevails over general law.

Keeping in view the above stated facts and discussion, the plea of the assessee-company that company being an AOP is exempt from tax under said clause 110 of Part-1 of Second Schedule cannot be accepted and is rejected."

4. Against the above treatment of the Taxation Officer, the assessee filed first appeal before learned CIT(A), who has cancelled the assessments for both the years with the following observations:

"The arguments of the learned AR have been considered and the order passed by the Assessing Officer has been gone through. All the contentions raised by the appellant are proved from record. The AR of the appellant during appeal proceedings also filed a copy of appellate order passed by my predecessor for the assessments year 2000-2001 wherein the same issue was involved and which assessment has been cancelled at first appellate forum. The perusal of assessment/ appellate orders and after considering, the arguments of the appellant's A.R. it transpires that the Assessing Officer while completing the assessments has ignored the relevant provisions of law and was not justified in taxing the share received by the appellant company as a member from AOP, therefore, the order passed for both the years by the Assessing Officer are not sustainable and merit to be cancelled and it is ordered so".

5. After considering the rival arguments from both the sides and perusal of the impugned order of the learned CIT(A) and the assessment order, I am of the view that the Taxation Officer has erred in interpreting Clause (110) of Part-1 of 2nd Schedule to the repealed Income Tax Ordinance, 1979 particularly the word in parenthesis appearing after the word "Association of Persons". I find force in the contentions 'made by the learned counsel for the assessee that a Company, Firm and Hindu Undivided Family, all are association of persons, but these are given separate names, by different laws:---

(a) A firm by partnership Act

(b) A company by Companies Ordinance, 1984

(c) Hindu Undivided Family by Hindu personal law

The Taxation Officer is not correct in holding that a company is not an association of persons. In this respect, section 15 of the Companies Ordinance, 1984 dealing with memorandum of association may be referred which clearly stipulates that a company is basically an association of one or more persons. In the repealed Income Tax Ordinance, 1979, term "Association of Persons" was not defined, which means it had no tactical meaning. However, Income Tax Ordinance, 2001 has defined the term "association of persons", which includes a Firm and Hindu Undivided Family as Association of Persons, so the view of Taxation Officer that a Firm or Hindu Undivided Family cannot be termed as "Association of Persons", is not correct. This definition in Income Tax Ordinance, 2001 excludes Company just because section 88A of the Income Tax Ordinance, 2001 specifically deals with taxation of the share of the company in the income of the Association of Persons, as its member. Further, the definition of company given in repealed Income Tax Ordinance, 1979 also includes "foreign association" as defined in clause (E) of subsection (16) of section 2 of the repealed Income Tax Ordinance, 1979 and as such, company is basically an Association of Persons. I am further of the view that if the income of Association of Persons is taxable, the share of profit received by a member whatsoever is their legal form, cannot be taxed again, as it would amount to tax same persons twice simultaneously for the same income. In this respect, C.B.R.'s Circular, dated 20-4-1972 has been referred, which forbids the taxation of Association of Persons as well as its member. This Circular also indicates that correct position is to tax the income of association of persons and not the member of Association of Persons. I have further noted that section 88 of the Income Tax Ordinance, 2001 stipulates share of a company from income of Association of persons, which is exempt from tax, but the share will only be included in the income of the company for tax rate purposes. The effect of this section is to maintain position of clause (110) of Part-1 of 2nd Schedule to the repealed Income Tax Ordinance, 1979 for tax of share of a company in the income of Association of Persons.

6. In view of this legal position, I am of the view that the learned CIT(A) has rightly cancelled both the assessments. The impugned order of the learned CIT(A) is, therefore, upheld and the appeals filed by the Department for both the years under review i.e. 2001-2002 and 2002-2003 are dismissed.

C.M.A./152/Tax (Trib.)Appeals dismissed.