COMMISSIONER OF INCOME TAX, COMPANIES-II, KARACHI VS TARIQ MOHSIN SIDDIQUI, 2007 PTD-KARACHI-HIGH-COURT-SINDH 290 (2006)

(a) Income Tax Ordinance (XXXI of 1979)---

----S.16 (2)---Income Tax Rules, 1982, R.3 (2)(c)---Term "employee"---Connotation---Definition of "employee" in Income Tax Ordinance, 1979, is much wider than the definition of "employee" in R.3 (2)(c) of Income Tax Rules, 1982, which contains a restrictive meaning.

(b) Interpretation of statutes---

----Framing of rules---Object---Inconsistency with main enactment---Effect---No rule can be regarded as valid if it is inconsistent with any provision of main enactment or tends to restrict meaning and scope of main enactment in absence of any restrictive meaning deduced from any provision of main enactment itself---Purpose of framing rules under any enactment is to give effect to the provisions of main enactment or to facilitate realization of objects and purposes of main enactment---Rules made to an enactment cannot narrow down application and scope of main enactment---Ii no circumstances, rules can be made or interpreted in a manner so as to restrict the meaning of main enactment when no such restrictive meaning can be gathered from the provisions of said enactment---Nothing inconsistent is to be read into the provisions of main enactment on the basis of some provision contained in rules.

(c) Income Tax Ordinance (XXXI of 1979)---

----Ss.16, 30 & 136 (2)---Income Tax, Rules, 1982, R. 3(2)(c)---Term "employee"---Scope---Director of more than one companies---Salaries from all companies---Assessee being director of two companies and treating remuneration received from both the companies as salary income, sought assessment under S.16 (1) of Income ' Tax Ordinance, 1979---Assessing Officer treated remuneration received from only one company as salary income, assessed the same under S.30 of Income Tax Ordinance, 1979---Income Tax Appellate Tribunal held remuneration from both the companies to be assessed under S.16 and not under S.30 of Income Tax Ordinance, 1979---Validity---Income Tax Appellate Tribunal rightly decided the question of law in favour of assessee by giving wider meaning to word "employee" and treating remuneration received by director from more than one company as salary income---No restricted meaning could be given to word "employee" for the purpose of head of income when it could not be spell out from the provision of S.16 (2)(c) of Income Tax Ordinance, 1979---Question of law was answered in affirmative in circumstances.

Commissioner of Income Tax v. S. Mazhar Hussain 1988, PTD 563 distinguished.

(d) Income Tax Ordinance (XXXI of 1979)---

----S.16 (2)(a)---Income Tax Rules, 1982, R.3 (2)(b)---Expression "salary" as used in Income Tax Ordinance, 1979 and Income Tax Rules, 1982---Comparison---Expression "salary" is defined in S.16 (2)(a) of Income Tax Ordinance, 1979, as well as in R.3 (2)(b) of Income Tax Rules, 1982---Both definitions are not same or similar but they differ from each other---No repugnancy being there, both definitions are for different purposes and operate in different fields.

(e) Income Tax Ordinance (XXXI of 1979)---

----S.16 (2)(e)---Income Tax Rules, 1982; R.3 (2)(c)--Term "employee" as used in Income Tax Ordinance, 1979 and Income Tax Rules, 1982---Comparison---Term "employee" defined in S.16 (2)(e) of Income Tax Ordinance, 1979, is for the purpose of determining head of income under which assessment is to be made and definition given in R.3 (2)(c) of Income Tax Rules, 1982, is for the purpose of determining value of perquisite, allowances and benefits to be included in salary income---No conflict exist in two definitions as purpose of both is different and they operate in different fields at the same time without being mutually exclusive of each other---No question of any repugnancy being there, definition of "employee" contained in rules is not violative of definition of terms "employee" given in the main enactment.

Nasrullah Awan for Applicant.

Sardar M. Ejaz Khan for Respondent.

Date of hearing: 20th September, 2006.

JUDGMENT

FAISAL ARAB, J.---The Commissioner of Income Tax Companies-II Karachi has proposed following question of law seeking opinion of this Court, which arises from Tribunal's decision, dated 14-10-1992 passed in I.T.A. No.279/KB of 1991-92.

Question of Law.

"Whether on facts and circumstances of the case the learned I.T.A.T. was justified in holding that salaries of a director are to be assessed under section 16 and not under section 30 of Income Tax Ordinance, 1979."

Brief facts of the case are that the Respondent as director of Pakland Cement Limited and Pakland Housing (Pvt.) limited received director's remuneration from both the companies. In his return for the assessment year 1989-90, the. Respondent treated remuneration received from both the companies as salary income and sought assessment under section 16(1) read with section 16(2)(e) of the Income Tax Ordinance, 1979. The Income Tax Officer however, treated director's remuneration received from only one company as salary income. The remuneration received from the second company was treated as income from other sources and assessed it under section 30 of the Income Tax Ordinance, 1979.

The Respondent preferred appeal before the Commissioner of Income Tax (Appeals) who affirmed the order passed by the income tax officer and dismissed Respondent's appeal. The Respondent then preferred appeal before the Tribunal, which vide its decision, dated 14-10-1992 held that directors remuneration received from both the companies are to be treated as salary income and is to be assessed under section 16 of the Income Tax Ordinance, 1979.

Mr. Nasrullah Awan, learned counsel for the applicant argued that the controversy involved in this case already stands settled by a judgment of this Court delivered in the case of the Commissioner of Income Tax v. S. Mazhar Hussain, 1988 PTD 563. He submitted that in the said judgment this Court relying upon Rule 39 (3)(b) of Income Tax Rule, 1982 held that a director receiving remuneration from more than one company is not an employee within the contemplation of term defined in Rule 39(3)(b) and such income is not salary income assessable under section 7 of the 1922, Act was income from other sources assessable under section 12 of the Act.

The assessment year in the case reported in 1988 PTD 563 pertained to a period when the repealed Income Tax Act, 1922 was in force, whereas the assessment year in the present ease pertains to the assessment year 1989-90, when Income Tax Ordinance, 1979 was in force. Prior to the promulgation of Income Tax Ordinance, 1979, the word `employee' was not defined in Income Tax Act, 1922 but it was defined in Rule, 39(3)(b) of Income Tax Rules, 1982 which read as follows:--

"39(3)(b) `employee' includes a director of company working whole-time for one company"

In the Income Tax Ordinance, 1979, however the word `employee' was defined under section 16(2)(e) which is reproduced as follows:

(e) "employee" in relation to a company, includes a managing director or any other director or other individual, who, irrespec?tive of his designation, performs any duties or functions in connection with the management of the affairs of the company.

The word `employee' was defined for the first time in the main enactment in section 16 of the Income Tax Ordinance, 1979. However, the C.B.R. while framing Income Tax Rules, 1982 under the Income Tax Ordinance, 1979 adopted the definition of term employee contained in Rule 39 of Income Tax Rules, 1982, in new Rule 3(2)(c). Thus there were two definitions of the word `employee'. One in the Rules and the other in the main enactment. Reading the definition of `employee' in both the provisions it clearly appears that the definition of `employee's in the Income Tax Ordinance, 1979 is much wider than the definition of `employee' in Rule 3(2)(c) of the Income Tax Rules, 1982, which is restrictive meaning. It is settled principle of law that no rule can be regarded as valid if it is inconsistent with any provision of the main enactment or tend to restrict the meaning and scope of the main enactment in absence of any restrictive meaning deducted from any provision of the main enactment itself.

If after the promulgation of the 1979 Ordinance the definition of `employee' in Rule 3(2)(c) is applied to the case in hand then it would mean that term `employee' is to be given restrictive meaning and director's remuneration received from more than one company is not to be treated income from salary assessable under section 16 of the Income Tax Ordinance, 1979, but income from other sources assessable under section 30 of the Ordinance. However, from a bare reading of section 16 of Income Tax Ordinance, 1979 no such intendment could be gathered so as to give restricted meaning to the word `employee'.

The purpose of framing Rules under any enactment is to give effect to the provisions of the main enactment or to facilitate realization of the objects and purposes of the main enactment. Rules made to an enactment cannot narrow down the application and scope of the main enactment. Therefore, in no circumstances Rules could be made or interpreted in a manner so as to restrict the meaning of the main enactment when no such restrictive meaning could be gathered from the provisions of the main enactment. Nothing inconsistent is to he read into the provisions of main enactment on the basis of some provision contained in the Rules. Therefore, no reliance could be placed on Rule 3(2)(c) of the Income Tax Ordinance, 1982 for the purpose of giving restricted meaning to the word `employee', as such interpretation would be inconsistent with the provisions of the main enactment.

No doubt in the decision given by this Court in the case of the Commissioner of Income Tax v. S. Mazhar Hussain reported in 1988 PTD 563 reliance was placed on Rule, 39(3)(b) of the Income Tax Rules, 1982 but such reliance was placed only for the reason that none of the provisions of the then applicable main enactment i.e. Income Tax Act, 1922 had defined the word `employee' and therefore this Court while deciding the said case relied on the definition of `employee' provided in Rule 39(3)(b) of the Income Tax Rules. In the present case the situation is different as the word `employee's is defined in the main enactment under section 16(2)(e) of the 1979, Ordinance and therefore the word `employee' is to be interpreted on the basis of provisions contained in section 16(2)(e) of 1979, Ordinance without taking aid of the definition of `employee' provided in the Rules. On account of above discussed change in law and the principle that Rules cannot override the provisions of main enactment, the case reported in 1988 PTD 563 has no application to the facts of the present case.

We are therefore of the opinion that the Tribunal has rightly decided the question of' law in favour of the Respondent by giving wider meaning to the word `employee' and treating remuneration received by a director from more than one company as salary income. No restricted meaning can be given to the word `employee' for the purpose of head of income when it cannot be spelt out from the provisions of 16(2)(e) of Income Tax Ordinance, 1979. The question of law is answered in affirmative.

While answering the question of law in affirmative, we apprehended that our judgment may not be misinterpreted to the effect that we have held the definition of employee contained in Rule 3(2)(c) as contrary and repugnant to the definition of employee contained in section 16(2)(e) of the Income Tax Ordinance, 1979 and consequently, the definition contained in the rule being violative of the definition in the main enactment 'is invalid. We would therefore, like to clarify that in fact, we have merely held that the definition of employee contained in Rule 3(2)(c) 'is not to be employed for the purpose of determining the head of income for assessing the salary of a director received from more than one company. A perusal of the definitions of the term employee contained in section 16(2)(e) of the Income Tax Ordinance, 1979 and Rule 3(2)(c) of the Income Tax Rules, 1982, shows that they are for two different purposes and their area of operation is not the same and therefore, the definition of the term employee contained in section 16 is not exclusive of the definition of the term employee contained in Rule 3(2)(c) of the Income Rules, 1982.

It is provided in section 15 of the Ordinance that all income shall, for the purposes of the charge of tax and the computing of total income be classified tinder the heads specified therein. First head is salary and the expression `salary' is defined in section 16(2)(a). The perquisite, allowances and benefits are also included in the definition of salary. The expression `perquisite' is defined in section 16(2)(b) of the Ordinance. Thus, for the purpose of determining the head of income, the definition of employee contained in section 16(2)(e) is to be employed.

On the other hand, in Rule 3 of the Income Tax Rules, 1982, it is provided that for the purpose of computing income chargeable under the head `salary' the value of perquisites, allowances and benefits to be included in the said income shall be determined in accordance with the provisions of Rule 4 to Rule 8. It is further provided in Rule 3(2) that for the purpose of determining the value of perquisites, allowances and benefits under sub-rule (1) the definition of basic salary and salary as given therein shall be considered. Likewise the definition of term `employee' is also given for restricted purpose of determining the value of perquisites, allowances and benefits under sub-rule(1) of Rule 3 for including the same in the income under the head salary. It is imperative to note that the expression "salary" is also defined both in section 16(2)(e) as well as rule 3(2)(b). The definitions are not same or similar, but they differ. Again there is no repugnancy and the two definitions are for different purpose and operate in different fields. Thus, the term employee defined in section 16(2)(e) is for the purpose of determining the head of income under which the assessment is to be made and the definition given in Rule 3(2)(c) is for the purpose of determining the value of perquisite, allowances and benefits to be included in the salary income. The result is that there is no conflict in the two definitions as the purpose of both is different and they operate in different fields at the same time without being mutually exclusive of each other. There is no question of any repugnancy to the definition of employee contained in the rules or being violative of the definition of the term employee given in the main enactment.

Vide short order, dated 20-9-2006 we answered the question of law in the affirmative. The above are the reasons for the same.

M.H./C-30/K?????????????????????????????????????????????????????????????????????????? Answered in affirmative.