IQBAL HAJI ALI MUHAMMAD VS INSPECTING ADDITIONAL COMMISSIONER OF INCOME/WEALTH TAX, KARACHI, 2006 PTD-KARACHI-HIGH-COURT-SINDH 1000 (2005)

Wealth Tax Act (XV of 1963)---

----Clause 7 (ii), Second Sched.---Exemption on asset made from foreign exchange---First conversion---Principles---Assessee purchased shares after exchanging his Foreign Exchange Bearer Certificates into Pakistani Rupees---Income Tax authorities refused to give exemption under clause 7(ii) of Second Schedule to Wealth Tax Act, 1963, on the ground that the purchase was not from first conversion of foreign exchange---Validity---Exemption was granted under clause 7 (ii) of Second Schedule to Wealth Tax Act, 1963, to the first conversion of asset only---Pakistani currency was not foreign exchange and foreign exchange was not Pakistani currency---Both were two different and distinct properties and consequently distinct assets---If foreign exchange belonged to an assessee, it was an asset and when the foreign exchange was encashed in Pakistani Rupees or any other property was acquired with foreign exchange, in either case as new asset other than foreign exchange was acquired, first conversion had taken place---If thereafter any other property was acquired either from Pak currency or out of any other asset created out of foreign exchange then the second conversion took place and the second conversion did not enjoy exemption from payment of wealth tax---Income Tax Appellate Tribunal had rightly held that the shares purchased by the assessee through Pak currency, which was created out of the Certificates was a second conversion and therefore, an asset created on second conversion was not entitled to exemption under clause 7 (ii) of Second Schedule to Wealth Tax Act, 1963---Answers to the questions were in affirmative.

(1999) 79 Tax 153 (Trib.) and 1997 76 Tax 76 (Trib.) ref.

Rehan Hassan Naqvi and Lubna Pervez for Appellants.

Nasrullah Awan for Respondents.

Date of hearing: 29th September, 2005.

JUDGMENT

MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---In Wealth Tax Appeals Nos.18 and 21 of 2000, the following common questions of law have been proposed for our consideration:--

(1) Whether the learned Income Tax Appellate Tribunal has rightly interpreted the provisions of Clause 7(ii) of the Second Schedule to the Wealth Tax Act, 1963, holding that the shares purchased on encashment of F.E.B.Cs. into Pakistani currency is not exempt from Wealth Tax when the creation of an asset was possible only after encashment of F.E.B.Cs.?

(2) Whether the learned Income Tax Appellate Tribunal was justified to hold that the shares of Messrs Gul Ahmed Energy Ltd. of the value of Rs.2,30,03,307 purchased on encashment of F.E.B.Cs. into Pakistani rupees was not the assets created out of Foreign Exchange, meaning thereby denial of exemption admissible under Clause 7(ii) of the Second Schedule to the Wealth Tax Act, 1963?

(3) Whether the learned Income Tax Appellate Tribunal was justified to hold that its own decision reported as (1999) 79 Tax 153 (Trib.) is not relevant according to which Foreign Exchange Bearer Certificate (F.E.B.Cs.) have been held to be as Foreign Exchange although in the case of the appellant shares of Messrs Gul Ahmed Energy Ltd. of Rs.2,30,03,790 were purchased from cash obtained on encashment of F.E.B.Cs.?

(4) Whether on the facts and in the circumstances of the case the learned Income Tax Appellate Tribunal was right to hold that the learned Inspecting Additional Commissioner of Income Tax/Wealth Tax had jurisdiction to invoke section 17-B of the Wealth Tax Act, 1963 and cancel the order passed under section 16(3) of the Wealth Tax Act, 1963?

In Wealth Tax Appeals Nos.19 and 20 of 2000, one additional question has been proposed as follows:--

"Whether on the facts and in the circumstances of the case the learned Income Tax Appellate Tribunal was justified in confirming the orders passed under section 16(3) of the Wealth Tax Act, 1963 in pursuance of the orders under section 17-B of the Wealth Tax Act, 1963 passed by Respondent No.2?"

The remaining four questions in W.T.As. Nos. 19 and 20 of 2000 are the same as proposed in W.T.As. Nos. 18 and 21 of 2000.

We have heard Messrs Rehan Hassan Naqvi and Lubna Pervez, Advocates for the appellants and Mr. Nasrullah Awan, learned counsel for the respondents.

At the time of arguments the learned counsel for the appellants have not pressed the question No.4, in Appeals Nos. 18 and 21 of 2000 and Questions Nos. 1 and 5 in Appeals Nos. 19 and 20 of 2000.

The facts giving rise to three common questions which have been pressed in all the four appeals are that the appellant a Director of Messrs Gul Ahmed Textile Mills Ltd., while filing return of Wealth Tax for the Assessment years 1996-97 and 1997-98 claimed exemption in respect of 23,00,370 shares of Rs.10 each of Messrs Gul Ahmed Energy Limited, under Clause 7(i)(ii) of the Second Schedule to the Wealth Tax Act, 1963, for the reason that the shares were purchased on encashment of Foreign Exchange Bearer Certificate into Pakistan currency.

Exemption was allowed by the Deputy Commissioner of Wealth Tax. However, the Respondent No.1, IAC, Wealth Tax, modified the assessment under section 17-B of the Wealth Tax Act, 1963, holding that the exemption was wrongly allowed and the order passed by the wealth tax officer was erroneous and prejudicial to the interest of revenue. It was held by the IAC that the exemption was available to the F.E.B.Cs. under Clause 9(iii) of the Second Schedule to the Wealth Tax Act, 1963 and not to the amount received on encashment thereof.

Being aggrieved with the order of IAC under section 17-B of the Wealth Tax Act, 1963, the appellant preferred appeal before the ITAT, challenging the validity of the order passed under section 16(3) 17-B of the Wealth Tax Act, 1963 by the Deputy Commissioner Wealth Tax. The learned ITAT, confirmed the order of IAC with the result that the shares of, Messrs Gul Ahmed Energy Limited, purchased by the appellant valuing Rs.2,30,03,790 purchased out of cash obtained from the encashment of F.E.B.Cs. were subjected to tax. It was held by the learned ITAT that the learned IAC was justified in concluding that the shares purchased by using Pak rupees, acquired out of encashment of F.E.B.Cs. were not the asset created out of foreign exchange but were the asset created out of Pak rupees which were acquired on encashment of F.E.B.Cs. The ITAT, further held that on conversion of F.E.B.Cs. into Pak rupees an asset was created in the form of Pakistan currency and from the said currency shares are purchased. Thus, the purchase of shares was not the first conversion of asset from foreign exchange (F.E.B.Cs.) but was the second version. Reliance in this behalf was placed on the earlier decision of the Tribunal reported as (1997) 76 Tax 76 (Trib.).

We have heard learned Advocates for the parties. It has been contended by the learned Advocates for the appellant that under clause 7(ii) of the Second Schedule to the Wealth Tax Act, 1963, if any asset is created by an assessee out of remittance received in or brought into Pakistan, through normal banking channels during the period referred to in sub-clause (i) such asset also enjoys exemption. It is conceded that such exemption is available to the assets created, as result of first conversion only and any subsequent conversion is not entitled for exemption. It is contended by the learned advocates for the appellant that although the appellants encashed the F.E.B.Cs. in Pak rupees and thereafter purchased the shares in Pakistani currency but still the purchase of shares remains an asset created out of F.E.B.Cs. or in other words the purchase of shares is first conversion and therefore, exemption is available. They have submitted that the Tribunal has erred in holding that the shares purchased by using Pak rupees acquired by encashment of F.E.B.Cs. were not the asset created out of foreign exchange but is an asset created out of cash in Pak currency which in itself is an asset created out of foreign exchange.

On the other hand Mr. Nasrullah Awan, learned counsel for the department has submitted that the Tribunal was fully justified in holding that as soon as the foreign exchange is converted into any other asset whether in cash or kind or any asset is acquired out of the said foreign exchange brought through normal banking channels in the form of any movable or immovable property it would amount to creation of asset which is a new class of asset. This brings into existence a newly created asset in the hands of assessee. This newly created asset shall enjoy exemption under Para. (ii) of clause (7) of the Second Schedule to the Wealth Tax Act, 1963. Thereafter if any new asset is acquired by the assessee it shall not be entitled for exemption as it would not be created out of the foreign remittances but it would amount to creation of asset out of an asset which was a already created out of foreign remittances and thus such newly created asset will not fall within the purview of clause (7) (ii) of the Second Schedule to the Wealth Tax Act, 1963.

We have carefully considered the contentions raised by the learned Advocates for the parties and the impugned judgment passed by the learned Tribunal. It is admitted that under Clause 7(ii) of the Second Schedule to the Wealth Tax Act, 1963, the exemption is granted to the first conversion of asset only. The point for consideration is whether in the facts and circumstances of the present case, the purchase of shares by the appellant is first conversion of the asset or second conversion of the asset. In other words whether the shares were purchased out of the foreign exchange or out of the asset created out of the foreign exchange. The definition of asset shall clinch the issue. According to provisions contained in section 2(5) of the Wealth Tax Act, 1963, an asset includes in case of an individual, the property of every description movable or immovable, except certain properties enumerated in the section. Thus, there can be no cavil to the proposition that the foreign exchange as well as Pak currency are asset within the definition of the term contained in section 2(5) of the Wealth Tax Act, 1963. No lengthy discussion is required for holding that the foreign exchange in its any form is different from Pakistani currency. Pakistani currency is not foreign exchange and the foreign exchange is not the Pakistani currency. Thus, these two are different and distinct properties and consequently distinct assets. The result is that if foreign exchange belongs to an assessee it is an asset and when the foreign exchange is encashed in Pakistan rupees or with the foreign exchange any other property is acquired, in either case a new asset other than foreign exchange is acquired, and thus, first conversion takes place. If thereafter any other property is acquired either from the Pak currency or out of any other asset created out of foreign exchange then the second conversion takes place and the second conversion does not enjoy exemption from payment of Wealth Tax.

As a result of above discussion we are of the opinion that the Tribunal has rightly held that the shares purchased by the appellant through Pak currency, which was created out of F.E.B.Cs. is a second conversion and therefore, an asset created on second conversion is not entitled to exemption under clause 7(ii) of the Second Schedule to the Wealth Tax Act, 1963.

Consequent to the above findings, the three questions proposed for our opinion are answered in affirmative.

After hearing the learned Advocates for the parties on 29-9-2005 the reference was answered by a short order. These are the detailed reasons in support thereof.

M.H./I-5/K????????????????????????????????????????????????????????????????????????????????????????? Reference affirmed.