COMMISSIONER OF INCOME TAX VS ABDUL MATEEN

2008 P T D 182

[Karachi High Court]

Before Anwar Zaheer Jamali and Muhammad Athar Saeed, JJ

COMMISSIONER OF INCOME TAX (ZONE-D)

Versus

ABDUL MATEEN

I. T. R. As. Nos. 343 to 397 of 2006, decided on 19/10/2007.

(a) Interpretation of statutes---

----Interpretation leading to absurd consequences should be avoided as far as possible.

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

----Ss. 9, 10, 62, 66-A, First Sched.; Part-I para. A (f), Part-II para.C & Part-IV para. 2-B---Income tax rebate---Partners of registered firm---Super tax, levy of---Assessing Officer finalized assessments under S.62 of Income Tax Ordinance, 1979, and allowed rebate claimed by assessees---Additional Commissioner Income Tax initiated proceedings under S.66-A of Income Tax Ordinance, 1979 as in his opinion assessees were not entitled to rebate under proviso (f) to paragraph A of Part-I to First Schedule of Income Tax Ordinance, 1979---Plea raised by authorities was that para. A(f) of Part-I of First Schedule to Income Tax Ordinance, 1979, did not apply to assessees as the firm of which they were partners did not fall within the ambit of para. C of Part-II of First Schedule---Validity---Provisions of S.10 of Income Tax Ordinance, 1979, would apply to all persons who fell within the chargeability of super tax and it was not necessary for them to actually pay tax for failing within the ambit of charging section---Both Para, C of Part-II and para. 2B of Part-IV were part of First Schedule to Income Tax Ordinance, 1979, and therefore, in accordance with provisions of S.10 of the Ordinance, no super tax, though chargeable, was payable by them under First Schedule---Presence of non obstante clause in Part-IV had actually strengthened the case of assessee as it acknowledged the same---For non obstante clause assessee would have been liable to pay super tax under para C of Part-II of First Schedule to Income Tax Ordinance, 1979---Despite exemption provided to assessee under para. 2B of Part-IV of First Schedule, the firm in which assessees were partners fell within the ambit of para. C of Part-II of First Schedule and therefore, fell under the ambit of proviso (f), thus plea raised by authorities was rejected---Exemption had presupposed a liability and unless super tax was payable by the firm of which assessees were partners there was no need to exempt the firm from levy of super tax by insertion of para. 2B of Part-IV of First Schedule to Income Tax Ordinance, 1979---Judgment passed by Income Tax Appellate Tribunal was unexceptionable and no interference was called for from High Court---Reference was disposed of accordingly.

Messrs Alnoor Sugar Mills Ltd. v. Commissioner of Income Tax Central Zone Karachi, 2002 PTD 728; Irum Ghee Mills Ltd v. Income Tax Appellate Tribunal 1998 PTD 3835; Commissioner of Income Tax, Companies-1, Karachi v. Messrs National Investment Trust Ltd., Karachi 2003 PTD 589; A.V. Fernandez v. State of Kerala AIR 1957 SC 657; Ittefaq Foundry v. Federation of Pakistan PLD 1990 Lab. 121 and CIT v. Younus Brothers 1983 PTD 389 ref.

Al-Samrez v. Federation of Pakistan 1986 SCMR 1917 rel.

Aqeel Ahmed Abbasi for Applicant.

Dr. Farough Naseem along with Irfan Saadat for Respondent.

ORDER

MUHAMMAD ATHAR SAEED, J.---All these 55 reference applications have been filed by the Income Tax Department in cases of 29 individual assessees against the combined order of the Income Tax Appellate Tribunal, dated 28-2-2004 by which the reference applications filed by the applicant were dismissed and the Tribunal had refused to refer the proposed questions to this -Court for its opinion. The applicant-Department has sought the opinion of this Court on the following proposed questions:-

(1) Whether on the facts and in the circumstances of the case, the learned ITAT is justified to hold that even if no super tax is payable by a registered firm in respect of the income, profit and gains derived by it from the exercise of a profession under Para. (2B) of Part-IV of the First Schedule of the Income Tax Ordinance, 1979, still the partner of that firm would qualify to take the concession/rebate under proviso (f) to Part-A to the First Schedule?

(2) Whether on the facts and in the circumstances of the case, the learned ITAT is justified to hold that C.B.R. Circular No.13 of 1982 in respect of working of export rebate is also applicable to cases covered under proviso (1) of para.A of Part-I of the First Schedule of the Income Tax Ordinance, 1979, and that circular has given rise to vested rights to the appellants as well?

(3) Whether on the facts and in the circumstances of the case, the learned ITAT is justified to frame the issue and adjudicate thereupon without confronting the same to the concerned parties?

2. Brief facts of the case are that all the respondents are partners of different registered firms comprising of professional Chartered Accountants and had filed returns of income for the assessment years 1999-2000, claiming the benefit of rebate prescribed in proviso (f) to Paragraph (A) of Part-I to the First Schedule of the Income Tax Ordinance, 1979. The Income Tax Officer finalized the assessments under section 62 of the Income Tax Ordinance, 1979 and allowed the rebate claimed by the respondents. However, on examination of the records of the case the Inspecting Additional Commissioner of Income Tax had arrived at the opinion that the respondents were not entitled to rebate under proviso (f) to paragraph (A) of Part-I to the First Schedule, which was in his opinion wrongly allowed by the Income Tax Officer. He, therefore, initiated the proceedings under section 66-A or-the Income Tax Ordinance, 1979 as according to him the assessment as framed by the Income Tax Officer was erroneous so far as it was prejudicial to the interest of the Revenue and modified the assessment under section 66-A of the Income Tax Ordinance, 1979 by disallowing the rebate claimed and allowed under proviso (t) to paragraph (A) of Part-II of the First Schedule.

3. Being aggrieved by the orders of the Inspecting Additional Commissioner the respondents preferred appeals before the Income Tax Appellate Tribunal who vide its common order, dated 30-8-2003,. annulled the orders passed under S.66-A of the Income Tax Ordinance, 1979, after concluding that the respondents were entitled to the rebate available under proviso (f) to paragraph (A) of Part-I of the First Schedule to the Income Tax Ordinance, 1979 and the Income Tax Officer had correctly allowed it and, therefore, the order was neither erroneous nor prejudicial to the interest of the Revenue and the action under section 66A of the Income Tax Ordinance, 1979 was taken without proper jurisdiction and authority and therefore they cancelled the orders under section 66-A of the Income Tax Ordinance, 1979 and restored the orders of the Income Tax Officer.

4. Being aggrieved by the order of the Income Tax Appellate Tribunal, the Department filed reference applications before the Tribunal, which as pointed out above, were rejected by the Tribunal vide the common impugned order. Hence these reference applications.

5. We have heard Mr. Aqeel Ahmed Abbasi learned counsel for the applicant and Dr. Farough Naseem Advocate and Irfan Saadat, learned counsel for the respondents. Since the learned counsel were fully prepared to argue the case we decided to admit these reference applications and finally dispose of the same.

6. Before we highlight the arguments of the learned counsel and examine the same, it will be relevant to reproduce Proviso (f) to Paragraph A of Part-I to the First Schedule of the Income Tax Ordinance, 1979, paragraph, C of Part-II to the First Schedule of the Income Tax Ordinance, 1979 and paragraph 2B of Part-IV to the First Schedule to the Income Tax Ordinance, 1979. These provisions are not only the subject-matter of the controversy in hand but the whole case revolves around them.

Proviso (f) of Paragraph (A) of Part-I of the First Schedule to the Ordinance:-

(f) where the total income includes any income from a share of the income, profits and gains of a firm to which paragraph C of Part-II applies, such portion of the super tax payable under the said paragraph as bears to the total amount of such super tax the same proportion as his share of income, profits and gains of the firm bears to the total income of the firm shall be added to the income tax payable by such partner under this paragraph, and, if the sum so arrived at exceeds 20% of the total income of such partner including his share of income, profits, and gains of firm before the deduction of super tax, the amount of income tax payable by him under this paragraph shall be reduced by the amount of such exceeds;

Paragraph C of Part-II of the First Schedule of the Income Tax Ordinance, 1979.

[C. In the case of every registered firm,---

(1) Where the total income does not exceed Rs.30,000

Nil

(2) Where the total income exceeds Rs.30,000 but does not exceed Rs.80,000

Five per cent of the amount exceeding Rs.30,000.

(3) Where the total income exceeds Rs.80,000 but does not exceed Rs.80,000

Rs.2,500 plus 10 per cent of the Rs.130,000 amount exceeding

(4) ------------

-----------------

(5)------------

-----------------

Paragraph 2B of Part-IV to the First Schedule of the Income Tax Ordinance, 1979.

[(2B) No super tax shall be payable by a registered firm in respect of the income, profits and gains derived by it from the exercise. of a profession of such income, profits and gains depend wholly or mainly on the professional qualifications of its partners who are prevented by any law for the time being in force or by convention or rules or regulations of the professional association, society or similar body of which they are members to constitute themselves into a corporate body with a limited liability which can be registered as a company under the Companies Act, 1913 (VII of 1913) unless such profession consists wholly or mainly in the making of contracts on behalf of other persons or the giving to other persons of advice of a commercial nature in connecting with the making of contracts].

7. Mr. Aqeel Ahmed Abbasi learned counsel for the applicant, referred to sections 9 and 10 of the Income Tax Ordinance, 1979 to point out that section 9 is the charging section by which income taxis charged and section 10 is the charging section for the charge of super tax and surcharge and specifically referred to section 10 of the Income Tax Ordinance to highlight that the word "paid" and "not payable" has been used in section 10 and, therefore, according to him, only those cases will fall under section 10 in which tax has actually been paid and this charging section will not be applicable to those cases in which tax has not been paid.

8. During his arguments Mr. Aqeel Ahmed Abbasi learned counsel for the applicant referred the provisions of proviso (f) of Para. A of Part-I of the First Schedule of the Income Tax Ordinance, 1979. According to the learned counsel the application of the provisions of proviso is conditional and is only restricted to the share of income, profits' and gains of firms to which paragraph-C of Part-II apply, The learned counsel submitted that the provision of paragraph C of Part-II, which specifies a rate of tax on incomes of every registered firm, do not apply to the respondents because under para. (2B) of Part-IV to the First Schedule of Income Tax Ordinance, 1979 the registered firm comprising of partners who are prevented by any law has been exempted from the leviability of super tax under paragraph C of Part-II and therefore, since the basic condition for application of proviso (f) is not present and they do not fall within the ambit of proviso (0 and therefore they are not entitled to the rebate specified under this proviso.

9. The learned counsel then took us through the provision of section 69 of the Income Tax Ordinance, 1979 which deals with the assessment of the firms and partners and specifically referred to subsection 4 of this section, which reads as under:-

(4) For the purposes of this section, the share of a partner in the income of any firm means the aggregate of---

(a) the proportionate share in the total income of the firms as reduced by the tax, if any, payable by the firm and any sum referred to in clauses (b); and

(b) any salary, brokerage, interest or commission receivable by the partners from the firm.

10. According to the learned counsel once the firm is not liable to the levy of super tax then the provisions of section 69 shall not apply to this firm and its partners specially subsection (4) as no super tax is to be deducted from the total income of the firm to arrive at the allocable/distributable income, which has to be distributed between the partners. The next ground taken by the learned counsel is that the exemption clauses have to be strictly interpreted and not liberally in favour of the taxpayer. The onus is on the taxpayer to prove that his case falls within the four corners of the exemption clause and if he is unable to discharge this onus the exemption will not be allowed to him. He stated that the applicants have miserably failed to bring their case within the four corners of the exemption clause and therefore they are not entitled to such exemption.

11. The learned counsel also referred to the non obstante clause in Part-IV of First Schedule and argued that provisions of para. (2B) of Part-IV shall override provisions of para. C of Part-Il and proviso (f) of para. A of First Schedule.

12. The learned counsel then submitted that since on combined reading of the three statutes, which are subject-matter of this controversy, it emerges that super tax is neither chargeable nor payable by a professional firm in view of the provision of para. (2B) of Part-IV of the First Schedule, therefore, the case of the partners of this firm does not fall within the ambit of proviso (f) and they are not entitled to the rebate provided in this proviso. Replying to the initial objections raised by the learned counsel for the respondent that since the Tribunal had quashed the order under section 66-A of the Income Tax Ordinance, 1979 and no question has been proposed challenging such quashment, the learned counsel submitted that he has proposed the questions on the merits of the case and if the same are answered in his favour and the copy of the judgment is sent to the Appellate Tribunal to pass an order in consonance with the judgment of this Court then Tribunal will have no option but to hold that the order of the Income Tax Officer allowing the exemption was erroneous in so far as it was prejudicial to the interest of the revenue and therefore, the action of Income Tax Officer initiating proceedings under section 66-A and cancelling the order of the Income Tax Officer was justified. He therefore, argued that by not challenging the action under section 66-A of the Income Tax Ordinance., 1979, his reference application had not become infructuous. He also argued that there is no room for any intendment inference and presumption in interpretation of tax laws and only the plain words used by legislature are to be looked into. He also argued that the fiction of law is restricted to the extent specified in the statutes. In support of his contentions he relied on the following case laws:--

1. Messrs Alnoor Sugar Mills Ltd. v. Commissioner of Income Tax Central ZoneKarachi, (2002 PTD 728).

(2) Irum Ghee Mills Ltd v. Income Tax Appellate Tribunal (1998 PTD 3835).

(3) Commissioner of Income Tax, Companies-I, Karachi v. Messrs National Investment Trust Ltd., Karachi (2003 PTD 589).

13. Dr. Farough Naseem the learned counsel for the respondents while replying to the arguments of the learned counsel for the applicant requested that the arguments he made before the Income Tax Appellate Tribunal, which are reproduced in para. 8 on pages 28 and 29 of the impugned order, may be considered to be his initial arguments before this Court. While replying to the arguments of the learned counsel for the applicants, he submitted that proviso (1) had remained in operation in form of proviso c and proviso of para. A of Part-I of the First Schedule for a long time but pars (2B) of Part-IV of first Schedule was inserted in the Act vide Finance Ordinance, 1980. He further submitted that before 1980 the firms of professionals was not exempt from payment of super tax was. therefore, entitled to benefit of proviso (f) and therefore, the insertion of para. (2B) will not take the partner's of a professional firm out of the ambit of clause C of Part-II of the First Schedule and they will still fail within the ambit of this clause but tax will not be payable by them due to the exemption provided in para. (2B) of Part-IV of the First Schedule of the Income Tax Ordinance, 1979. The learned counsel further argued that there is a difference between exemption and non-liability and both are different concepts. According to the learned counsel para (2B) of Part-IV of the First Schedule of the Income Tax Ordinance, 1979, provides exemption from levy of super tax but it does not mean that these firms are not liable to the super tax under para. C of Part-II and therefore, do not fall within the ambit of clause C of Part-II. 'He further argued that exemption presupposes a liability and if the applicants were not liable to pay super tax under para. C of Part-II then there was no need to incorporate para. (2B) of Part-IV of the First Schedule of the Income Tax Ordinance, 1979. He further rebutted the arguments of the learned counsel for the applicants that non obstante clause in Part-IV of the First Schedule will have the effect of the non-application of Para-C of Part-II of the First Schedule and proviso (f) of para. A of Part-I of the First Schedule. The learned counsel submitted that both proviso (f) of para A of Part-1 and para (2B) of Part-IV of the First Schedule are beneficial sections and if due to the availability of provisions of para (2B), the provisions of proviso (f) are not applicable to him and the firm and the partners have jointly to pay more tax than the other firms to whom para (2B) does not apply then the benefit provided to him under para. 2B will not be of any actual benefit to him but will result in paying more tax than the other firms. The learned counsel, therefore, submitted that the Tribunal has taken a correct view and rightly quashed the orders under section 66-A and prayed that the Income Tax reference applications may be dismissed. In support of his contention the learned counsel relied on following case-laws:--

(1)Al-Samrez v. Federation of Pakistan reported as 1986 SCMR 1917.

(2) A.V. Fernandez v. State of Kerala reported as AIR 1957 SC 657.

(3) Ittefaq Foundry v. Federation of Pakistan reported as PLD 1990 Lah. 121.

(4) CIT v. Younus Brothers reported as 1983 PTD 389.

14. Mr. Irfan Saadat Khan adopted the arguments of Dr. Farough Naseem and also filed a statement showing the comparative tax payable by the respondents and the partners of the other non-professional firms to prove his contention that if the benefit of proviso (f) is not provided to ahem they will be required to pay more tax.

15. We have examined the case in the light of the arguments of the learned counsel and perused the records of the case and the judgments relied on by the learned counsel.

16. We would first like to examine the contention of the learned counsel for the applicants that proviso (f) does not apply to the respondents because the main condition for the applicability of this proviso is that they should be partners of a firm to which para. C of Part-II applies and since they have not paid any tax under para. C of Part-II because of the exemption available to them under para. 2B of Part-IV of the First Schedule, therefore, they do not fall within the ambit of para C of Part-II and consequently within the ambit of sub para. (f) of Para A of Part-I of First Schedule. At the same time we have also examined the contention of the learned counsel for applicant that since in section 10 the word "Paid" has been used therefore, the charging section i.e. section 10 will only be applicable if super tax levied under clause C of Part-II of First Schedule is actually paid and since in the case of the firm of which the respondents are partners super tax has not been paid therefore, section 10 and consequently para. C of Part-II of First Schedule will not be applicable to the firm and therefore, the partners of such firms will not fall within the ambit of proviso (f) of para A of Part-I of First Schedule.

17. From a reading of para C of Part-II of the First Schedule of the Income Tax Ordinance, 1979 it is seen that this para prescribes rate of super tax in case of very Registered firm. Firm has been defined in other subsection 22 of section 2 and partnership firm has been defined in subsection 38 of section 2 of the Income Tax Ordinance, 1979 since both these definition are relevant to the controversy in issue, they are reproduced for the sake of convenience.

Sections 2(22)

"firm", partner and "partnership" have the meaning respectively assigned to them in the Partnership Act, 1932 (IX of 1932); and the expression "partner" includes any person, who being a minor, has been admitted to the benefits of partnership;

Section 2(38)

"registered firm" means a firm which has been, and continues to be registered under section 68;

18. We have seen that in proviso (f) of para. A of part-I firm has been mentioned, whereas in clause C of Part-II registered firm has been mentioned and since registered firm has been defined as the firm which has been registered under the Income Tax Ordinance., 1979, therefore, the only interpretation which can be drawn is that the firm to whom the rebate has been allowed under the provisions of proviso (f) is a registered firm, which is liable to tax under para. C of Part-II of the First Schedule. We have also seen the heading of paragraph C of Part-II, which specifies that the schedule of super tax shall apply in case of every registered firm and no exception has been made. It is an admitted fact that all the applicants are partners of registered firm and therefore, in our opinion they are liable to super tax under para. C of Part-II of the First Schedule and would have been liable to pay such tax, if they were not provided exemption under para (2B) of the Part-IV of the First Schedule.

19. We have also carefully perused the provisions of section 10 of the Income Tax Ordinance, 1979. This section provides that there shall be charged levied and paid an additional amount of duty known as super tax at the rates specified in the First Schedule.

20. The learned counsel has laid stress on the fact that since no super tax has been paid by the firms therefore, they do not fall under the provisions of para. C of Part-II of the First Schedule. If the contention of the learned counsel is accepted then it will lead to the conclusion that this para will also not apply to those cases where the income of the Registered firm is below Rs.30,000 and therefore, no tax has been paid by them as their income is below the minimum liable to tax. We had asked the learned counsel during the course of arguments whether in such cases the rebate under proviso (f) is being allowed however he has reframed from replying to this query. We are of the opinion that the interpretation of section 10 proposed by the learned counsel will lead to absurd results which cannot be the intention of legislature. It is a settled law that interpretation leading to absurd consequences should be avoided as much as possible, therefore it our considered opinion that the provisions of section 10 shall apply to all persons who fall within the chargeability of super tax and it is not necessary for them to actually pay the tax for falling within the ambit of the charging section. Even otherwise both para. C of Part-II and para (2B) of Part-IV are part of the First Schedule and therefore, in accordance with the provisions of section 10 no super tax, though chargeable under this section, are payable by them under the First Schedule. The presence of non obstante clause in Part-IV actually strengthens the case of the respondents as it acknowledges that but for this non-obstante clause they would have been liable to pay super tax under para. C of Part-II.

21. We are therefore, of the considered opinion that despite the-exemption provided to them under-para. (2B) of Part-IV of the First Schedule; the firm in which the applicants are partners still fall within the ambit of para C of Part-II of the First Schedule and therefore, fall under the ambit of proviso (f) and therefore, the arguments of the applicants' counsel that sub para (f) of para. A of Part-1 of the First Schedule does not apply to the applicants as the firm of which they are partners does not fall within the ambit of para. C of Part-II of the First Schedule does not carry any weight and is hereby rejected.

22. It is settled law that exemption presupposes a liability and unless super tax was payable by the firm of which the applicants are partners there was no need to exempt these firms from levy of super tax by insertion of para. (2B) of Part-IV of the First Schedule of the Income Tax Ordinance, 1979. On this point reliance can be placed on the following extract from the judgment of the Hon'ble Supreme Court in the case of Al Sumrez Enterprises v. The Federation of Pakistan (1986 SCMR 1917):--

The exemption from customs duties on the goods of the type with which we are concerned in this case was first granted to the extent mentioned therein by notification, dated 8th June, 1972, in exercise of this power. It is in assertion of the same power by virtue of section 21 of the General Clauses Act, that the Government partly withdrew the exemption and modified the earlier notification on 11th June, 1977. The effect of exemption from the payment of a tax or duty levied by a fiscal statute in exercise of statutory power must be understood for a proper appreciation of the controversy in this case. In this connection it will be instructive to refer to a passage defining the nature and purpose of exemption in the Corpus Juris Secundum, 1954 Edition, Volume 84, para. 215, page 411;

"Exemption, as applied to taxation, presupposes a liability, and is property applied only to a grant of immunity to persons or properly which otherwise would have been liable to assessment, and exists only by virtue of constitutional or statutory provisions.

Exemption, as applied to taxation, is freedom from the burden of enforced contribution .to the expenses and maintenance of Government, and may include freedom from the burden of taxes accrued and unpaid as well as from the burden of future levies. The terms, as here used, presupposes a liability, and is properly applied only to a grant of immunity to persons or property which otherwise would have been liable to assessment, and, thus, is distinguishable from immunity from taxation which exists apart from any exempting statute or constitutional provision, or from abatement whereby the property is relieved of its share of the burden of taxation after the assessment has been made and the tax levied, or from a deduction which is merely a subtraction.

Exemption from taxation are regarded on only as in derogation of sovereign authority, but of common right as well, and the tax exist only by virtue of constitutional or statutory provisions. Thus, the right to immunity is not inherent in the persons or property exempted, is a matter of grace and not of right, and exists only by grant. An exemption may arise from a contract which has received legislative sanction, and such an exemption will be governed by the terms of the contract, and be subject to the rules of law applicable to contracts. Where an exemption is granted by statute, whether or not particular person or particular property is entitled to the immunity depends on the facts and circumstances of the case.

23. We have also gone through the statement filed by the learned counsel for the respondent from which it is clear that the total tax payable by the applicants if the exemption under proviso (f) of part A is not available to them is much more than the other firm to whom the exemption under para (2B) is not available and therefore, it cannot be intention of the legislature to deprive them of their benefit by providing the other benefit.

24. We have also perused the reasons highlighted by the Tribunal in support of its order, allowing the appeals and we find our self in agreement with these reasons except for its observation that the departmental practice, whether right or wrong, has given rise to vested rights to the applicants, which cannot be taken away, which in our opinion is not good law.

25. The upshot of the above discussion is that the judgment of the Tribunal is unexceptionable and no interference is called from this Court. We will therefore, answer question No.1 in affirmative. Since our opinion on this question has resolved the controversy in issue and since the learned counsel has not argued on questions Nos. 2 and 3, therefore, it is not necessary for us to express our opinion on these questions. All these ITRs are disposed off in the above manner.

M.H./C-17/KOrder accordingly.