RECKIT BENCKISER PLC UK VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2008 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 1646 (2005)

Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)---

----Ss. 9 & 2(3)---Income Tax Ordinance (XXXI of 1979), Ss.27, 28, 29 & 62---Companies Ordinance (XLVII of 1984), Ss.284, 287(1)(a)(d), 288---Jurisdiction, functions and powers of the Federal Tax Ombudsman---Capital gain---Amalgamation of companies-Assessment of capital gain---Assessee contended that in case of amalgamation of one company with `another with all its assets and adjustment or allotment of shares of the company with which it was amalgamated did not legally amount to transfer of capital assets as amalgamated with entire assets and stood dissolved without winding up---Department contended that Federal Tax Ombudsman had no jurisdiction to make any recommendation as regards decision or judgment of judicial Tribunal set up under the Income Tax Ordinance, 1979 which was not part of the Revenue Division and judgment passed in the case by the Income Tax Appellate Tribunal dismissing appeal filed by the complainant/assessee was immune from challenge before Federal Tax Ombudsman---Validity--Complainant/assessee availed statutory remedies by filing appeal before First Appellate Authority against the order of Assessing Officer and before the Income Tax Appellate Tribunal, which were dismissed---Jurisdiction of Federal Tax Ombudsman extended to proceedings within Revenue Division. and its officers and not the Income Tax Appellate Tribunal, which was a judicial Tribunal and not part of revenue division---Appellate Tribunal was an independent body and Federal Tax Ombudsman had no power to make any recommendation or pass any direction in respect of judgment passed by the Appellate Tribunal---Complaint was disposed of being not maintainable and the case was closed.

Barrister Ibrahim Shahid for the Complainant.

Basharat A. Qureshi Additional Commissioner of Income Tax for Respondents.

DECISION/FINDINGS

JUSTICE (RETD.) MUNIR A. SHEIKH, (FEDERAL TAX OMBUDSMAN).----The facts of the case are that the complainant, a non-resident company incorporated in the United Kingdom was a shareholder, in accompany know as Reckitt & Colman (Pvt.) Limited hereinafter called as "RCPPL" and held 5,562,959 ordinary shares of Rs.10 each. RCPPL was merged with Reckitt & Colman of Pakistan' Limited (RCPL) under a Scheme of arrangement for amalgamation under sections 284 to 288 of the Companies Ordinance, 1984 approved through judgment, dated 27-11-1996 of the High Court of Sindh Karachi passed in J. Miscellaneous Application No.204 of 1996. According to this Scheme, the whole undertaking of RCPPL together with all its properties, assets, rights and liabilities as described in paragraph 2 thereof stood transferred and vested in RCPL under section 287(1)(a) of the Companies Ordinance, 1984. The RCPL was required to allot 1.5 ordinary shares of the nominal value of Rs.10 each credited as fully paid up qua the shares of the nominal value of Rs.10 each to the registered holders of those shares in RCPPL and RCPPL stood dissolved upon the allotment of shares without winding up under section 287(1)(d) of the Companies Ordinance, 1984. As a consequence thereof, the complainant company was allotted 8,344,438 ordinary shares of RCPL and RCPPL stood dissolved automatically without winding up.

2. In the Income Tax Return for the assessment year 1997-98 filed by the complainant company, merger was duly disclosed. The Deputy Commissioner Income Tax (DCIT), in the assessment framed for the said assessment year under section 62 of the Income Tax Ordinance, 1979 on 10-6-2000 treated the allotment of above mentioned shares as capital gain under section 27 of the said Income Tax Ordinance, 1979 and assessed a sum of Rs.536,825,508 thereof, raising tax demand at the rate of Rs.25%. It appears that while assessing the said amount, it was assumed that value of allotted shares was far in excess of par value which was cost of shares of RCPPL held previously from which it appears that difference of the alleged value of the shares already held by the complainant company before the merger in RCPPL and those allotted under the scheme of arrangement considering its market value was taken to be the capital gain/income on transfer of capital assets as contemplated by section 27 of the TIO, 1979. The appeal filed by the complainant company was dismissed by the Commissioner Income Tax Appeal (CIT)(A) Zone-1, Karachi through order, dated 14-5-2001. Further appeal filed by the complainant before the Income Tax Appellate Tribunal was also rejected through order dated 20-6-2005. This complaint has been filed alleging that firstly the complainant had been discriminated inasmuch as the allotment of shares to the shareholders other than the complainant were not subjected to assessment of capital gain as was done in the case of the complainant, therefore, it constituted maladministration as envisaged by section 2(3)(i)(b) and a clear departure from the established law, practice and procedure as provided in section 2(3)(i)(a)(b) of the Establishment of Office of FTO, 2000. On merits it was argued by the learned counsel for the complainant that in the case of amalgamation of one company with another with all its assets and adjustment or allotment of shares of the company with which it was amalgamated did not legally amount to transfer of capital assets as provided by section 27 ibid, therefore, the provisions thereof were not attracted. According to him, with the amalgamation of RCPPL with entire assets, etc., with RCPL, the former stood dissolved without winding up, which was permissible under the Companies Ordinance, 1984.

3. On the other hand, D.R. submitted that jurisdiction of the FTO is barred in the matter under section 9 of the FTO Ordinance in that firstly the FTO has no jurisdiction to make any recommendation as regards decision or judgment of a judicial tribunal set up under the Income Tax Ordinance which is not part of the Revenue Division, therefore, the judgment passed in this case by the Income Tax Appellate Tribunal through which the appeal filed by the complainant has been dismissed, is immune from challenge before the FTO. He further argued that under section 9(2) of the FTO Ordinance, the question of assessment and quantum of income is also out of the purview of jurisdiction of the FTO, therefore, the complainant is liable to be dismissed.

4. I have heard the learned counsel for the complainant and D.R. is supported of their above mentioned contentions.

5. In order to appreciate properly the contentions raised by the learned counsel for the complainant, it would be useful to keep in view the relevant provisions of sections 27, 28 and 29 of the ITO of 1979 which are reproduced below in extenso:-

"27. Capital gains.---(1) Any profits or gains arising from the transfer of a capital asset shall be chargeable under the head "Capital gains" and shall be deemed to be income of the income year in which the transfer took place.

(2) For the purpose of subsection (1) and sections 28 and 29

(a) "capital asset" does not include-

(i) any assets or class of assets in respect of which the assessee is entitled to an allowance for depreciation under the Third Schedule; and

(ii) any immovable property; and

(b) "transfer" includes the sale, disposition, exchange or relinquishment of the asset, or the extinguishments of any right therein, but does not include--

(i) any transfer by reason of the compulsory acquisition of any capital assets under any law for the time being in force;

(ii) any transfer of a capital asset under a gift, bequest or will or an irrevocable trust;

(iii) any distribution of the assets of a company to its shareholders on its liquidation; and

(iv) any distribution of capital assets on the dissolution of a firm or other association of persons or the partition of a Hindu undivided family.

28. Computation of capital gains.---(1) Computing the income under the head "Capital gains", the cost of acquisition of the capital assets and any expenditure incurred wholly and exclusively in connection with the transfer thereof shall be deducted.

(2) The provisions of section 24 shall, so far as may be, apply to the allowances and deductions under this section as they apply to the allowances and deductions in respect of income chargeable under the head "income from business or profession".

29. Cost of acquisition, and consideration for transfer how determined.----(1) Where the capital asset became the property of the assessee

(a) under a gift, bequest or will; or

(b) by succession, inheritance or devolution; or

(c) on any distribution of assets on the dissolution of a firm or other association of persons or the partition of a Hindu undivided family; or

(d) on any distribution of assets on the liquidation of a company; or

(e) under a transfer of a revocable or an irrevocable trust, the fair market value of the asset, as on the date on which it became the property of the assessee, shall, for the purpose of subsection (1) of section 28, be deemed to be the cost of acquisition".

6. It is argued that a bare perusal of section 27 ibid shows that it is profit or gain arising from the transfer of a capital asset which has been treated as capital gain or income of the assessee which is to be assessed, therefore, primarily the transfer of capital assets as provided in this section should be by the assessee in favour of another person. In the present case, there is no transfer as such of capital assets or the shares held by the complainant assessee in the dissolved company with reference to which the capital gain could be said to have arisen. It is a case of amalgamation of the company in which the complainant company held specified number of shares of nominal value of Rs.10 each and under the judgment of the High Court of Sindh Karachi, the same stood dissolved. In the company with which the same was amalgamated, the question of allotment of shares to the complainant-company arose. The High Court in its judgment, dated 27-11-1996 while approving the scheme of amalgamation laid down a criterion that the share-holders amalgamated/dissolved company should be allotted fully paid-up shares of specified number. The allotment was not in consequence of transfer of capital assets of any valuable consideration in order to treat the same as capital gain or income. In the judgment of the Sindh High Court, the reference to the shares held by the complainant company in the dissolved company was made only to provide a criterion for allotment of number of shares in the company with which the same was amalgamated and nothing else, therefore, comparison of the value of both sets of shares in order to hold that it was a gain as envisaged by section 27 was not in accordance with the said provisions of law, for as submitted, there was no transfer or disposition from complainant of any capital assets from which any income could be said to have arisen. This is apart from the fact the nominal value of the shares allotted was merely paper transaction, therefore, the pars value of the same could not have been taken as far excess of the share value in order to make comparison of the difference of the value of the two sets of shares.

7. Learned counsel for the complainant further maintained that the complainant has been discriminated in this case in that those share-holders of the dissolved company who were also allotted 33% shares in the company after amalgamation were not proceeded against under section 27 of the ITO, 1979. According to him, this conduct of the department is clear indication of the stand of the department that it was not a capital gain/income, which could be assessed and income tax charged. As regards objection to the jurisdiction of the FTO with reference to section 9(2) on the ground that it was a mere question of assessment of quantum of income and the determination of the quantum of income tax recoverable under the law, he submitted that the complaint is against misadministration inasmuch the Income Tax Officer erroneously treated the allotment of shares in the amalgamated company as income or capital gain based on transfer of capital asset. It was a case of objection to the proceedings under section 27 of the ITO, 1979 and not in the proceedings on merits relating to quantum of income tax assessed.

8. D.R. on the other hand, submitted that apart from section 9(2), the FTO has no power in matter as the Income Tax Appellate Tribunal being not part of the Revenue Division, as such, no direction or recommendation could be made or given with regard thereto. He submitted that there was no discrimination inasmuch as if no proceedings were initiated against those to whom 33% shares were allotted, the same may be an act against law but could not in any manner benefit the complainant as an illegal act could not be a ground to commit another illegality. He further submitted that a letter was written to the complainant to provide particulars of those shareholders by the department but no reply was given.

9. To the last contention raised by the D.R., learned counsel for the complainant replied that the complainant is not objecting to the department of not taking 'action against the other shareholders under section 27 but inaction on its part against them was being put up as evidence in favour of the contention raised above that it was not treated as capital gain correctly by the Department qua those shareholders and the complainant was demanding equal treatment in the matter that the complainant should also not be charged any income tax and treated alike.

10. Learned counsel for the complainant submitted that the particular of the said shareholders could easily be obtained from the Registrar of the Companies, therefore, it was a lame excuse that the complainant did not provide particulars for the complainant was not required to know the particulars of those shareholders.

11. After considering the above-contentions raised by the parties, I was inclined to agree with those raised by the learned counsel for the complainant and would have proceeded further but for lack of the power to make any recommendation or direction, the case could not be processed further qua judgment of the Income Tax Appellate Tribunal and objection raised by D.R. in this regard is hereby sustained. However, I am not disposed to agree with him that it was a case of bar of jurisdiction under section 9(2) of the FTO Ordinance, being merely a case of assessment of income.

12. The complainant availed statutory remedies by filing appeal before the Commissioner Appeal against the order of the DCIT and before the Income Tax Appellate Tribunal, which were dismissed. The jurisdiction of the FTO extends to proceedings within Revenue Division and its officers and not to the Income Tax Appellate Tribunal, which is a judicial Tribunal and not part of Revenue Division. The Tribunal is an independent body and FTO has no power to make any recommendation or pass any direction in respect of judgment passed by the said Tribunal. The complainant law in the circumstances of the case.

13. For the foregoing reasons, this complaint is hereby disposed being not maintainable and the case is closed.

C.M.A./574/FTOOrder accordingly.