2008 P T D (Trib.) 916
[Income-tax Appellate Tribunal Pakistan]
Before Jawaid Masood Tahir Bhatti, Judicial Member and Ch. Nazir Ahmad, Accountant Member
I.T.A. No.1386/LB of 2006, decided on 01/09/2007.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss.24(c) & 50(4A)---Deduction not admissible---Insurance-company--Addition was made by rejecting the pleas of the assessee that no element of payment was involved in commission transaction and it was a general practice of insurance companies that premium in respect of insurance business ceded by other insurance companies was distributed after charging their commission/service charges and no physical payments were involved in these transactions---Validity---Assessee had incurred the expenses through general entry and such expenses could not be disallowed---First Appellate Authority had rightly deleted the additions made under S.24(c) as well as charge of tax under S.50(4A) of the Income Tax Ordinance, 1979.
2003 PTD 589; 1999 PTD (Trib.) 2172 and 2002 PTD (Trib.) 1952 rel.
(b) Income Tax Ordinance (XXXI of 1979)---
----Ss. 24 & Fourth Sched., R. 5(c)---Insurance Act (IV of 1938), S.40C---Insurance Ordinance (XXXIX of 2000), Ss.167(h) & 56(s)---Insurance Rules, 1958, Preamble--Deduction not admissible---Insurance company---Management expenses. .-Curtailment of-Validity-Taxation Officer disallowed the claim of management expenses following R.5(c) of the Fourth Schedule of the Income Tax Ordinance, 1979 which had become redundant due to the repeal of Insurance Ordinance, 2000 and the subsequent rules made thereunder---First Appellate Authority rightly deleted the disallowance with the observation that "the fact cannot be denied that the provisions of law on which the Assessing Officer had relied for making the addition did not exist at the time of assessment"---No limitation as to the curtailment of management expenses had been laid down by the rules made by the Securities and Exchange Commission of Pakistan---Curtailment of expenses having been based on non-existent provisions were deleted and departmental appeal was dismissed by the Appellate Tribunal.
1991 SC 842 (sic); 2005 PTD (Trib.) 474 and Messrs Premier Insurance Company's case I.T.A. No.2171/KB of 2001 ref.
Mrs. Sabiha Mujahid, D.R. for Appellant.
Iqbal Hashmi for Respondent.
ORDER
Through this appeal, the appellant-Department has objected to the impugned order of the learned C.I.T. (A), dated 11-2-2006 for the assessment year 2002-03 deleting the addition of Rs.30,00,478 made under section 24(c) on the repealed Income Tax Ordinance, 1979 on account of commission paid on reinsurance and the addition of Rs.84,61,656 made under the head "Management Expenses".
We have heard the learned representatives from both the sides and have also perused the impugned order of the learned C.I.T. (A) and the assessment order.
The assessee, in this case, is a Public Limited Company deriving income from general insurance business. The Taxation Officer, while examining Form XL obtained from the Controller, Insurance Accounts observed that the assessee in the present case paid reinsurance premium and certain amounts withheld as commission and no evidence of tax deduction was produced by the assessee. The Assessing Officer asked the assessee-Company to provide evidences. In response, on behalf of the assessee company, it was contended that no element of payment is involved in such commission transaction and also explained that it is a general practice of insurance companies that premium in respect of insurance business ceded by other insurance companies is distributed after charging their commission/service charges and no physical payments are involved in these transactions.. It was also explained that there was no actual payment/receipts of commission, but the Taxation Officer rejected the plea of the assessee and made the additions under section 24(c) of the repealed Ordinance, 1979.
It has been contended by the learned counsel for the assessee that commission amount of Rs.30,00,478 was neither paid to others in cash nor any tax was deductible within the meaning of section 24(c) of the repealed Ordinance, 1979. He has argued that transacting business on accrual basis is a normal procedure between the insurance companies and no payment in respect of commission was paid either in cash or by cheques and the Taxation Officer has made the additions without any justification. It has further been contended that section 24 (c) requires that tax should be deducted from any sum paid to any person on account of commission, rent etc. but no payment was made in the present case and expense was charged on accrual basis and no tax deduction was possible, unless payment was physically made. The learned counsel, in this regard, has placed reliance on the decision of Honourable Karachi High Court reported as 2003 PTD 589 wherein, the order of this Tribunal has been upheld holding that the assessee was not liable to deduct tax at the time of accrual, but was required to deduct the tax at the time of making the payments. The learned counsel in this regard has also placed reliance on the decision of this Tribunal reported as 1999 PTD (Trib.) 2172 wherein it has been held that the assessee cannot be held to be in default, if the tax on any allowance or deduction has been paid by the recipient. It has been contended that the expense was incurred from book adjustment against premium paid for reinsurance and no commission was paid, but the Taxation Officer has made the addition with the observation that since no tax under section 50(4A) was deducted, the expense was inadmissible as per section 24(c). In this regard, the decision of this Tribunal reported as 2002 PTD (Trib.) 1952 has been referred wherein interpreting the word "sum" referred in section 24(c), it has been held that the word "sum" could not be interpreted as to include delivery of goods as the word "sum" represents payments made in cash and not in kind and did not represent anything other than cash. In this decision, it has further been upheld that "sum paid" means cash payment and not the payment in kind, distribution of ball point and pencils to its distributors on their good performance free of cost, which cannot be considered as "sum paid". We have also considered the provisions of section 24(c), which says:---
"Any sum paid to any person on account of salary, interest or profit, service rendered, brokerage or .commission or rent of house property on which tax is deductible under section 50 unless such tax has been paid or deducted and paid under section 50 as the case may be".
We have further noted that in this case, the assessee-Company has incurred the expenses through general entry and expenses cannot be disallowed in view of the decision of this Tribunal reported as 2002 PTD (Trib.) 1952.
After considering all this legal position and the facts of the case, we are of the view that the learned C.I.T. (A) has rightly deleted the additions made under section 24(c) as well as charge of tax under section 50(4A) of the repealed Ordinance, 1979.
Regarding the disallowance of "Management Expenses", we have found that Taxation Officer has disallowed "Management Expenses" for the reason that the same was in excess of limit laid down under the Insurance Act, 1938.
It has been contended on behalf of the assessee that special procedure for computation of profits and gains of insurance business has been prescribed in the repealed Ordinance, 1979 through 4th Schedule of the Ordinance in Rule- 5, which deals with the computation of profits and gains of insurance business. Sub-Rule (c) of Rule 5 was inserted in 4th Schedule through Finance Act, 1999, which deals with admissibility of management expenses incurred by general insurer for the purposes of computation of profits and gains of such insurer. Sub Rule (c) of Rule 5 of the 4th Schedule of the repealed Ordinance, 1979 is reproduced hereunder:---
"(c) Nothing contained in this rule shall be construed to authorize the deduction of any expenditure or allowance or reserve or provision in excess of the limits and laid down in the Insurance Act, 1938".
On behalf of the assessee, various decisions of this Tribunal have been placed before the Bench, wherein management expenses were not approved to be disallowed.
(1) 1991 SC 842 (sic); (2) 2005 PTD (Trib.) 474 and (3) Order of this Tribunal, dated 24-6-2003 in I.T.A. No.2172/KB/2001 in the case of Messrs Premier Insurance Company.
We have noted that Insurance Act, 1938 was repealed on 19th August, 2000 through promulgation of Insurance Ordinance, 2000. Insurance Rules, 1958 framed under Insurance Act, 1938 were also repealed in terms of section 167(2) of the Insurance Ordinance, 2000 and rules of the same were to be made by Securities and Exchange Commission of Pakistan, which has been published in the gazette on 23-12-2002. Under section 66(s) of the Insurance Ordinance, 2000, Securities and Exchange Commission of Pakistan have been given power for prescribing maximum limit of management expenses of an insurer incurred in a year, but no limitation of expenses was fixed by the Securities and Exchange Commission of Pakistan. We are, therefore, of the view that with the repeal of Insurance Act, 1938 and the rules made thereunder, the provisions of Rules 5(c) of 4th Schedule has become redundant in respect of assessments to be made subsequent to the promulgation of the new Ordinance and the new Insurance Ordinance and the new Insurance Act and the rules do not place any limit on the management expenses as against the treatment of these expenses under Rule 80 of the repealed rules read with section 40C of the repealed Insurance Act, 1938. We have noted that Taxation Officer has disallowed the claim of management expenses following Rule 5(c) of 4th Schedule, which has become redundant due to the repealed Insurance Ordinance, 2000 and the subsequent rules made thereunder. We are, therefore, of the view that the learned C.I.T. (A) has rightly deleted the disallowance with the observation that "the fact can not be denied that the provisions of law on which the assessing officer has relief for making the impugned addition did not exist at the time of assessment, therefore, on non-existent provisions, how can the assessee be penalized?. In view of the facts, history of the case and by following the case law quoted above no limitation as to the curtailment of management expenses has been laid down by the rules made by the Securities and Exchange Commission of Pakistan, therefore, the curtailment of the expenses having been based on non-existent provisions are deleted".
Considering all these legal as well as factual position, the appeal filed by the Department on this issue is, therefore, also dismissed.
The appeal filed by the Department is dismissed on both the issues.
C.M.A./20/Tax(Trib.)Appeal dismissed.