VS, 2009 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 405 (2008)

2009 P T D (Trib.) 405

[Income-tax Appellate Tribunal Pakistan]

Before Khalid Waheed Ahmad, Chairperson, Ehsan ur Rehman, Jawaid Masood Tahir Bhatti, Judicial Members, Naseer Ahmad and Mazhar Farooq Shirazi, Accountant Members

I.T.As. Nos.265/KB, 414/KB, 1070/KB and 1071 of 2005, decided on 24/05/2008.

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

----Second Sched., Part-1, Cl. 102E & S.23---Modaraba Companies and Modaraba (Floatation and Control) Ordinance (XXXI of 1980) Ss.14, 15 & 37---Modaraba Companies and Modaraba Rules, 1981, Rr.9 & 18---Banking Companies Ordinance (LVII of 1962) Ss. 91A & 35---State Bank of Pakistan Act (XXXIII of 1956), Ss. 46B & 54A---State Bank of Pakistan Circular No.13 of 1984---C.B.R. Circular Letter No. I.T.JI. 1(22)/81 dated 26-5-1988---C.B.R. Circular Letter C. No.4(78) TP-I/90 dated 11-7-1991---C.B.R. Circular No.24 of 1992 dated 30-7-1992---NBFI Circular No.1 dated 5-12-1991---Exemption---Modaraba---Claim of exemption was rejected on the grounds that assessee was earning interest by keeping the surplus funds as Bank deposits and charges the provisions of bad debts as expenditure which was not admissible---By making such add back, the distribution of profits fell short of distribution of 90% of the profits as profit in the books had incorrectly been worked out by charging the provisions for bad debts---Validity---Exemption under Cl.102E of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979 shall be granted on the basis of accounts as required under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980---Interest earning on keeping the surplus funds was the mark-up in the present banking system which was being acknowledged---Taking the mark-up earned as interest was not proper, even otherwise keeping the surplus funds in the Bank deposits was not in contravention with the Modaraba Ordinance and rules framed thereunder---When earning mark-up by depositing the surplus funds was in accordance with the Modaraba Rules and the Registrar of Modaraba Companies as well as the Religious Board functioning under the Modaraba Ordinance had not objected to it then the department was not competent to assume the role of Authority under the Modaraba Ordinance and Rules---Admissibility of provisions of bad debts as explained under S.23 of the Income Tax Ordinance, 1979 for framing the assessment could not be made as expenditure and also under the corresponding section of the Income Tax Ordinance, 2001 but it was allowable under the Modaraba Ordinance as well as the Rules framed thereunder and it could not be highlighted under S.23 of the Income Tax Ordinance, 1979 as a debatable issue---Net distribution of 90% profit shall be on the basis of accounts prepared as per Modaraba Ordinance and rules thereunder keeping in view the language of Preamble of Part-I of the Second Schedule to the Income Tax Ordinance, 1979 and upon fulfilment of preconditions as laid down in Cl.102E of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979, the exemption was to be allowed---When no violation in respect of presentation and preparation of accounts as per Modaraba Ordinance and Rules had been noticed or established by the Department, then the assessees were eligible for exemption under Cl.102E of Part-I of the Second Schedule to the Income Tax Ordinance, 1979.

Metal Box Company of India Ltd. v. Their Workmen 1969 ITR 53 SC; 2003 PTD 589; 1966 PTD 664; 43 Tax 18 = PLD 1981 SC 85; 2003 PTD 2023; 2002 PTD 2112; 2006 PTD 1709; 2006 PTD 3563; 2004 PTD 2577; Tax 1995 PTD 1128; PLD 2002 SC 800; PLD 2000 SC 225 and I.T.A. No.82 of 2004 ref.

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

----Second Sched., Part-1, Cl.102E---Exemption---Violation of objects of Modarabas---Jurisdiction---Registrar of Modaraba Companies was competent to grant registration as well as on noticing violation of objects thereof could proceed for cancellation of the same---Law pertaining to Modaraba Companies and Modarabas deals comprehensively with functions and day to day working and was vested with quite sufficient powers to deal with any contravention with law---Modaraba Companies and Modarabas after being allowed to function then after carrying on their business activities finally at the end of each income year were required to place the same in the form of the income tax return before Assessing Officer---Duties of Assessing Officer start from here if it was claimed for exemption then Cl.102E of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979 would come into play for granting of exemption---Assessing Officer could grant or refuse the claim of exemption by following what was given in Cl.102E of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979.

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

----Second Sched. Part-1, Cl. 102E---Exemption---Exclusive from exemption was only to the extent of income from trading activity in the hands of Modaraba.

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

----Second Sched., Part-1, Cl.102E, proviso---Exemption---First proviso to Cl.102E of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979 had laid down that 90% of the total profits for the year after deduction of transfer of the amount to mandatory reserves shall be distributed.

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

----Second Sched., Part-1, Cl.102E, proviso---Exemption---Word "said Ordinance" means the Modaraba Companies and Modarabas (Floatation and Control) Ordinance, 1980 as specified in Cl.102E of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979, for granting exemption to Modaraba Companies under Income Tax Ordinance, 1979.

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

----Second Sched., Part-I, Cl.102E, proviso---Exemption---Basis of working out profit for allowing exemption---For a claim of exemption under Cl.102E of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979, the pre-requirement was preparation, finalization and presentation of accounts of Modarabas should be as laid down in Modaraba Ordinance---Total profits were to be worked out as prescribed in Modaraba Ordinance and 90% of this total profit would be the basis of allowing exemption---No where, the question of total assessed profits as per Income Tax Ordinance, 1979 had arisen while determining the claim for exemption under Cl.102E of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979---90% of total profits should have been arrived at as per provisions of Modaraba Ordinance or the Rules made thereunder---When the presentation of the accounts was as per provisions of Modaraba Ordinance, there was hardly any justification of viewing this from the view point of the assessed/assessable income under Income Tax Ordinance, 1979 which had altogether a different domain and connotation---For seeking a claim for exemption under Cl.102E of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979, in respect of any income other than the income from trading activity, the first proviso had laid down that the reflection of figures should be as governed by the Modaraba Ordinance---In second proviso, the determinability of distribution of 90% profits, distribution of profits through bonus certificates or shares to the certificate-holders was not taken into account---Second proviso was in continuation of First proviso.

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

----Second Sched., Part-1, Cl.102E---Exemption---For scrutinizing the claim of exemption under Cl.102E of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979, the Assessing Officer was bound to proceed on the basis of accounts prepared under the provisions of Modaraba Ordinance which was to be followed to determining the 90% of the profits---Profits and loss account which had been drawn in compliance to Rules and Procedure given in Modaraba Ordinance were unquestionable by the Assessing Officer to the extent of grant of exemption---When was the 90% of the profit, it should not be gathered by applying the sections relevant for working out the taxable/assessable income under the Income Tax Ordinance, 1979---Provisions of admissibility or inadmissibility of expenditure of arriving at the profit for the purpose of exemption by the Assessing Officer would not come into play as per Cl.102E of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979---Assessing Officer totally failed to point out that the accounts and determining of profits were not in conformity with the provisions of Modaraba Ordinance and Rules---Assessing Officer could not stretch the provisions of Cl.102E of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979 in a manner that income which, as had been arrived at by applying the provisions of Income Tax Ordinance, 1979 would be governing the claim of exemption---Total profits determined as per prescribed provisions of Modaraba Ordinance and the rules made thereunder was the only yardstick for allowing the exemption---Only on deviation from the provisions of Modaraba Ordinance and Rules made thereunder that claim for exemption could be refused by properly confronting same to the assessee.

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

----Second Sched., Part-1, Cl.102E-Exemption-Bad debts---Provisions for bad debts were a prescribed deduction as specified in Modaraba Ordinance in determining the 90% of the profit of distribution.

Messrs Grindlays Bank PLC, Karachi v. ACIT bearing I.T.A. No.565 of 2002 rel.

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

----Second Sched., Part-1, Cl.102E---Exemption---Jurisdiction---Contention that any activity was not in accordance with the conditions as laid down in the Modaraba Ordinance, it was the duty of the Registrar of Modaraba Companies and none else to see.

(j) Income Tax Ordinance (XXX of 1979)---

----Second Sched. Part-1, Cl.102E---Exemption---Earning of interest as un-Islamic---Jurisdiction---Exercising of authority on the question of earning of interest as un-Islamic was not within the competency of the Taxation Officer/Assessing Officer---Such act of the Assessing Officer was ultra vires of its power which were of no legal consequence.

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

----Second Sched., Part-1, Cl.102E---Exemption---Trading activity---Income from trading activity could be charged to tax under normal taxation system but refusing to grant the exemption for any income which fell under the Modaraba Ordinance, no exception could be drawn where nothing contrary to the provisions of Cl.102E of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979 could be found by the Assessing Officer.

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

----Second Sched., Part-1, Cl.102E---Exemption---Add backs---Determining 90% profit by taking into consideration the add backs under the Income Tax Ordinance, 1979 was an unending phenomena---Passing on 90% profit on this way was practically not possible that was why in Cl.102E of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979, the entire yardstick was the provisions and rules of Modaraba Ordinance.

Jawaid Farooqi and Shahid Jamil Khan, L.As. and Farrukh Ansari, D.R. for Appellant.

Irfan Saadat and Hassan Naeem, Muhammad Arshad and Saleem Siddique, A.C.As./A.Rs. for Respondent.

ORDER

EHSAN UR REHMAN (JUDICIAL MEMBER).---Through this consolidated order, we intend to dispose of all the title four appeals which have been remitted to this Tribunal by the Honourable Sindh High Court in the case of Messrs First UDL Modaraba, Karachi for decision by a Larger Bench. In the case of Messrs First Professionals Modaraba, Karachi since the issues are identical with Messrs First UDL Modaraba, Karachi, so on application from the appellant that this may also be taken up by this Larger Bench, so by acceding to the request made earlier to the Honourable Chairperson,' ITAT, the title appeals in the case of Messrs First Professionals Modaraba on specific request of the appellant assessee, have also been placed before this Larger Bench. The issues now we are required to dilate upon are as follows:--

(i) Not allowing the claim of exemption under Clause 102-E for earning interest on keeping the surplus funds as Bank deposits;

(ii) Charging of provisions for bad debts as expenditure; and

(iii) Not distributing the 90% of profits.

2. Firstly, the Legal Advisor, Mr. Jawaid Farooqi, L.A: (RTO, Karachi) read out before us earlier orders passed by this Tribunal and text from the impugned order in the case of Messrs First UDL Modarba.

3. Mr. Farrukh Ansari, D.R. (L.T.U. Karachi) read out the assessment order supporting the stance of the department and for maintaining the assessment so framed by rejecting the claim of exemption under Clause 102E of the Second Schedule to the repealed Income Tax Ordinance, 1979 for earning interest by keeping the surplus funds as Bank deposits. Secondly, charging the provisions of bad debts as expenditure which is not admissible and by adding it back resultantly, the distribution of profits falls short of distribution of 90%of the profits as profit in the book has incorrectly been worked out by charging the provisions for bad debts. Mr. Farrukh Ansari, the learned D.R. has tried to distinguish between the provision and reserve.

4. Citing various excerpts from the case law, Mr. Farrukh Ansari, D.R. (L.T.U. Karachi) has attempted to elaborate his viewpoint in the following manner:--

(i) 1969 ITR 53 (SC)-Judgment of the Supreme Court of India in the case titled "Metal Box Company of India Ltd. v. Their Workmen"

"The distinction between a provision and a reserve is in commercial accountancy fairly well known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the P & L account and the balance sheet. On the other hand reserves are appropriations of profits, the assets by which they are represented being retained to form part of capital employed in the business. Provisions are usually shown in the balance-sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest."

(ii) 2003 PTD 589

"While interpreting a fiscal statute, there is no room for any intendment, inference or presumption. Plain words used by Legislature are to be looked only for application of a particular Provision."

(iii) I1996 PTD 664

"Provisions granting exemptions of privileges have to be construed strictly against the person claiming such exemption or the privilege. It is for him to show that he is entitled to the exemption."

(iv) 43 Tax 18 = PLD 1981 SC 85

"Onus of proof that income qualified for exemption under section 4(3)(vii) of the Act---Whether on the assessee---Held yes"

(v) 2003 PTD 2023

"It may also be noted that section 29 of the repealed Wealth Tax Act, further provided an appeal to the Honourable Supreme Court of Pakistan against the orders recorded by this Court under section 27 of the Act. The, exclusion of these provisions in section 12, subsections (a) and (10) of the Finance Act, 1991 appear complete and absolute. The provisions accordingly cannot either be read into or be made applicable on the proceedings for levy or collection of corporate assets tax."

"Just a the appeal provisions of the Wealth Tax Act cannot be read into section 12 of the said Finance Act, the provisions of sections 17 and 17-A of Wealth Tax Act prescribed various limitations for service notice or framing of assessments also cannot be read into the revisions of section 12."

(vi) 2002 PTD 2112

"Fiscal statute---Literal approach, unless it leads to a manifest absurdity, has to be followed"---"Interpretation of statutes---Deficiency in the language of law-Court cannot supply such deficiency"

(viii) 2006 PTD 1709

"Interpretation of statutes---Tax law---While interpreting any provision of law and more particularly a tax law the plain language of the law is to be looked into---Words used by the Legislature are to be interpreted and they are not to be substituted or changed, as there is no room for any intendment if the language used by the Legislature is clear and unambiguous"

5. Mr. Shahid Jamil Khan, the learned L.A. from L.T.U., Lahore has challenged 90% workability of profit by deducting the provisions for bed debts which is not an allowable expenditure. It was further explained that by adding this amount, the distribution of profit would not be 90% but would be short of the required amount. The thrust of the entire arguments was on formulation of accounts and presentation as per Income Tax Ordinance.

6. In order to substantiate the instant case, the following excerpts from a judgment of this Tribunal reported as 91 Tax 484(sic): 2006 PTD 3563 (sic) have also been quoted by the learned D.Rs. for our consideration:--

"Income and profit---Special Law---Income Tax Law in itself is a special law and had its own provisions to regulate the charge of income tax with reference to its calculation etc.---No other law could be invoked to define the term "income" and "profit" for the purpose of charging income tax---Income tax law had its own history and development of various provisions had progressed with the changing circumstances---Income tax is charged on the incomes, profits and gains and the same could only be defined and brought under tax under the provisions thereof"

"The assessee claim is that these provisions were made as per Prudential Regulations of State Bank of Pakistan which override Income Tax Law vide section 91A read with section 35 of Banking Companies Ordinance, 1962 and sections 46B and 54A of State Bank of Pakistan Act, 1956."

"We have held in a number of cases that while making assessment of income tax, one is guided by law, rules and precedents under the said Ordinance. The non obstante provision in terms of section 54-A is applicable on similar instructions by authorities that deal with administrative working of the banks. These are not in respect of charge of income tax or calculation of the income under the Income Tax Ordinance or any tax like sales tax, customs, excise duty etc. It is to regulate the financial institution and it deals with the policies, that regulations and directives for the purpose of financial control and protection of the rights of account holder."

"No other law can be invoked to define the term "income" and "profit" for the purpose of charging income tax. The law in hand has its own history and development of various provisions has progressed with the changing circumstances. Income Tax is charged on the incomes, profits and gains and the same can only be defined and brought under tax under the provisions thereof."

7. On behalf of the assesses, Mr. Irfan Saadat Khan, the learned A.R. stated that the assessee is a Modaraba and is being managed by UDL Modaraba Management (Pvt.) Limited (the management company), the principal activities of the assessee are to provide finance on Modaraba and Musharika arrangements, leasing, commodity, trading and trading in listed and non-listed and non-interest bearing securities. The learned A.R. submitted that the assessee was duly entitled for exemption provided under Clause (102E) of Part-1 of the Second. Schedule to the repealed Ordinance in the years under consideration. Mr. Irfan Khan invited our attention to Clause (102E) which is reproduced below to facilitate reference.

Clause (102E) of Part-1 of the Second Schedule

"Any income, not being income from trading activity, of a Modaraba registered under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980) for any assessment year commencing on or after the first day of July, 1999:

Provided that not less than ninety per cent of its total profits in the year as reduced by the amount transferred to a mandatory reserve, as required under the provisions of the said Ordinance or the rules made thereunder:

Provided further that with effect from the first day of July, 1999 for the purpose of determining the distribution of ninety per cent profits, the profits distributed through bonus certificates or shares to the certificate holders shall not be taken into account."

8. In response to the initial observation regarding disallowance of exemption in the previous years, Mr. Irfan invited our attention to the fact and stated that the exemption was refused by the T.O. in the assessment years 1999-2000 and 2000-2001 which was challenged before the ITAT and ITAT vide its decision reported as 2004 PTD 2577 in respect of the assessment year 1999-2000 and in I.T.A. No.178/KB of 2003 in respect of assessment year 2000-01 allowed the exemption to the assessee. As far as assessment year 1999-2000 is concerned, a belated time barred Reference Application was filed by the department which was dismissed in limine by the ITAT. For the assessment year 2000-2001 also a reference was filed by the department which was also dismissed by the ITAT. Mr. Irfan provided the copies of above orders of this Tribunal which are placed on record.

9. Mr. Irfan Khan regarding the observation of the learned assessing officers that the assessee had itself termed the profit earned on investment to be interest, vehemently argued that the Assessing Officers were not justified in observing that the assessee had itself termed the profit earned on investment to be interest. He drew our attention towards Circular No.13 of 1984 issued by the State Bank of Pakistan (S.B.P.) wherein it has been mentioned that no banking company shall be allowed to accept any interest bearing deposit after 1st July, 1985. He continued to argue and submitted that whatever amount was earned is profit and not interest since after 1st July, 1985 banking companies were accepting deposits on profit and loss sharing basis. The said fact was also brought to the knowledge of the Assessing Officer during the assessment proceedings. Mr. Irfan further added that the reliance of the Assessing Officer on a circular letter of 11th July, 1991 issued by the Central Board of Revenue (C.B.R.) was also misplaced as the Circular letter only explained the concepts of Modrabaha and Musharika and nothing else.

10. Mr. Irfan further submitted that the Assessing Officer has no authority under the law to declare the assessee to be not functioning as per the injunctions of Islam. The Assessing Officer exercises his jurisdiction under the provisions of the Ordinance, accordingly, his authority is limited and he is only authorized to proceed in accordance with that law and not otherwise. He further argued that the determination whether the transaction is according to the Injunctions of Islam or not is not the domain of the Assessing Officer, it is the Registrar of Modaraba who is empowered under the previsions of Modaraba Ordinance to check whether the transactions undertaken by a management company and a Modaraba would conform with the Sharia or not. Apart from above submissions, Mr. Irfan referred in this regard to the decisions reported as 4 Tax 1 and 1995 PTD 1128 wherein the Honourable Courts have held that the Assessing Officer has jurisdiction to examine whether an assessee's tax affairs are in accordance with the provisions of the repealed Ordinance or not while he has no authority to examine whether the assessee has contravened any other law for the time being in force since jurisdiction in this regard lies on the concerned/relevant department/authority. Moreover, he further added that no such criterion is prescribed under clause 102E for claiming exemption by a Modaraba.

11. Mr. Irfan Saadat Khan after placing before us copies of Modaraba Authorization Certificate awarded by the Registrar of the Modaraba and Prospecuts of Modaraba referred various sections of the Modaraba Ordinance which for the sake of reference are reproduced hereunder: --

"10. Business of Modaraba.---No Modaraba shall form a business which is opposed to the Injunctions of Islam and the Registrar shall not permit the floatation of a Modaraba unless the Religious Board has certified in writing that the Moderaba is not a business opposed to the Injunction of Islam."

11. Authorization.---The Registrar may, after obtaining from the Religious Board a certificate to the effect mentioned in section 10 and on being satisfied that it is in the public interest so to do, grant a certificate in the prescribed form authorizing the floatation of Modaraba on such conditions as he may deem fit, including conditions as to the business to be undertaken expenses- relating to the management of the Modaraba Fund, preservation of assets and the other matters relating to the mode of management and distribution of the profits:

Provided that, before issuing the certificate of authorization, the Registrar may require the Modaraba company to make such modifications, additions or omissions in the prospectus as the Religious Board may have indicated or as he may deem fit."

PROSPECTUS OF THE MODARABA

"8.3 The Modaraba's Business objectives.---The management of UDL Modaraba Management (Private) Limited and the First UDL, Modaraba will ensure that all the business transactions and dealings undertaken by the Modaraba, including investments, resource mobilization, financial advisory services and underwriting shall conform with the Sharia. In order to ensure compliance with this vital policy all the produces and business arrangements will be in accordance with those approved by the Religious Board.

The scope of Modaraba's business activities are described in the following sections. All the following operations shall be carried out strictly in accordance with Sharia and the agreements, instruments and arrangement approved by the Religious Board from time to time. The Modarbaa shall not transact any business itself which involves the element of "Riba" directly or indirectly nor shall participate in 'a business project violative of the Injunctions of Sharia."

12. It was submitted that whenever a Modaraba Management Company wants to float a Modarba it is incumbent upon the Management Company to get the Modaraba registered with the Registrar of Modaraba by filing an application under section 6 of the Modaraba Ordinance with the Registrar of Modaraba. The Registrar in turn after inquiry and obtaining further information and after satisfying himself and on receiving the requisite certificate from the Religious Board (Federal Government constituted the Religious Board) grants permission to the Management Company to float a Modaraba. It follows, Mr. Irfan further submitted, that the Registrar only allowed the Management Company to float a Modaraba when he is satisfied that the business to be carried out by the Modaraba is not opposed to the Injunctions of Islam. Further, if at any stage, the Registrar of Modaraba comes to the conclusion that the Modaraba is not working as per the Injunctions of Islam he may cancel the registration and take various other actions as stipulated under section 19 of the Modaraba Ordinance. Mr. Irfan Khan further argued that once a Modaraba is formed, all the legal requirements are monitored by the Registrar and all the necessary information and the periodical submission of accounts/documents etc, as envisaged in the Modaraba Ordinance, are to be filed with the Registrar who alone has the authority to monitor the same as per the provisions of the Modaraba Ordinance. It has, therefore, argued that the assessee being a Modaraba was under constant vigilance of the Registrar of Modaraba and no adverse inference has ever been drawn by the Registrar that the assessee was not functioning as per the Injunctions of Islam. Mr. Irfan invited out attention to the decision of the Honourable Supreme Court of Pakistan reported as PLD 2002 SC 800 wherein the Court has suspended the operation of PLD 2000 SC 225, hence, the T.O.'s allegation that in view of the decision given by the Honourable Supreme Court assessee has earned interest which is Riba and which is against the Injunctions of Islam, is totally misplaced. Copies of above orders were provided by A.R. which are placed on record.

13. Mr. Irfan Khan also referred to some parallel cases wherein income earned on Bank deposits by other Modarabas have been accepted to be a profit and no adverse inference on this issue has been drawn by the department. Copies of the assessment orders are also placed on record.

14. As far as the other basis of rejection of exemption is concerned, the assessing officer observed that assessee did not distribute 90% of its total profits among its certificate holders during the years under consideration. While determining the amount of profit which was to be distributed among the certificate holders in the opinion of the learned Assessing Officer, he added back the provision for diminution in value of investments and provision for doubtful debts being inadmissible and held that 90% of this profit was not distributed.

15. Mr. Muhammad Arshad, in this regard submitted that the assessee being a Modaraba is required to prepare its financial statements i.e. balance sheet and profit and loss account in such form and manner as have been prescribed under the Modaraba Ordinance. The assessee has to follow the procedure otherwise it will be exposed to cancellation of its registration. Mr. Muhammad Arshad referred to section 14 of the Modaraba Ordinance and Rule 9 of the Modaraba Companies and Modaraba Rules, 1981 (the Modaraba Rules) wherein it is incumbent on a Modaraba that the balance sheet and the profit and loss account shall comply with the requirements of the Third Schedule of the Modaraba Rules. The above referred section and rule are reproduced below for the sake of reference:---

"14. Preparation and circulation of annual accounts, reports etc.---(1) The Modaraba company shall, within six months from the close of accounting year of the Modaraba, prepare and circulate to the holders of Modaraba Certificates.

(i) annual balance-sheet, and profit and loss account in such form and manner as may be prescribed;

(ii) a report of the auditor on the balance sheet and profit and loss account;

(iii) a report by the Modaraba company on the state of affairs; activities and business prospectus of the Modaraba and the amount of profits to be distributed to the certificate holders."

15. Audit of accounts.

(1) ----------------

(2) In addition to other matters, the auditor shall also state in his report whether in his opinion the business conducted, investments made and expenditures incurred by the Modaraba are in accordance with the objects, terms and conditions of Modaraba."

The Modaraba Companies and Modaraba Rules, 1981

"9. Submission of annual report by Modaraba company.---(1) The annual report required by section 14 to be furnished by the Modarbaa company shall include a balance sheet and profit and loss account and a statement of changes in financial position in respect of each Modaraba and fullest information and explanations in regard to any reservation, observation qualification or adverse remarks contained in the auditor's report.

(2) The balance sheet and profit and loss account included in annual report prepared by the Modaraba company shall comply with the requirements of the Third Schedule as nearly as possible.

(3) .."

The Third Schedule of the Modaraba Rules "General provisions as to balance sheet and profit and loss account."

(i)

(ii) Requirement as to profit and loss account.

1. The profit and loss account shall be so made out as to disclose clearly the result of the working of the Modaraba during he period covered by the account and shall show, arranged under the most convenient heads, the gross income and the gross expenditure of the Modaraba during the period, disclosing every material feature and in particular the following:

(G) (v) Provision of doubtful or bad debts,

(vi) Provision for diminution in value of investments;"

16. Mr. Muhammad Arshad drew our attention to sub-clause G(v) and (vi) of clause 1 of Part-II of the Third Schedule of the Modaraba Rules wherein it has been required to make a provision for doubtful debts and diminution in value of investments respectively. Mr. Arshad continued to argue and submitted that the said provisions, were made following the prescribed Rules for preparing financial statements.

17. Mr. Muhammad Arshad further submitted that in the matter of distribution of profits/earnings of a Modaraba through dividend, the interpretation of the expression "profits" has to be viewed and understood from what the corporate laws, practices and related accounting conventions mean and determine as "profits" which are legally held to be divisible to the certificate holders. He invites our attention to Rule 18 of the Modaraba Rules which is reproduced below to facilitate reference:--

"(18). Distribution to profit and reserves.---(1) The distribution of profit shall include distribution in cash or issue of bonus certificate out of the capitalized profit of any other security.

(2)

(3) No distribution shall be made otherwise than out of profits of the year or any other undistributed profits or realized capital gains ."

18. It has been submitted by Mr. Muhammad Arshad that as a statutory imperative only such dividend is allowed to be distributed in terms of Rule 18 ibid, arise out of "profits" of a Modaraba and any other distribution as does not emanate out of such profits of a Modaraba are by established principles of law and upheld by numerous judicial precedents deemed to be out of capital, which is not only illegal but also exposes the management company to penalties. He goes on to argue that, therefore, only such profits are distributable as dividend as are based by and determined on the basis of the statutory annual accounts prepared and presented in accordance with the provision of sections 14 and 15 of the Modaraba Ordinance and Rule 9 of the Modaraba Rules, regardless, of the fact whether a particular provision or an expense is not admissible to be deducted for determining "income" under the repealed Ordinance. In the matter of evaluating the prescribed quantum of dividend in relation to "profits" there cannot be any escape from the fact that the term "profits" has to be understood and determined in accordance with the statutory annual accounts which alone is the governing document on the basis of which distributable profits are to be determined under the provisions of the Modaraba Ordinance. What is therefore required to be determined as "income" liable to tax under the repealed Ordinance to be determined as distinguished from "profits" given the facts that the former is determined through a process of assessment of "income" and tax thereon while the latter needs to be determined under the Modaraba Ordinance as per statutory annual accounts.

19. Mr. Muhammad Arshad also submitted that the C.B.R. on a query, vide its Circular letter No. I. T. JI. 1(22)/81 dated 26th May, 1988 confirmed that "profits" for the purpose of section 37 of the Modaraba Ordinance [earlier the exemption was provided to the Modaraba under section 37 on the same basis as now provided under Clause (102E)] would be as determined and arrived at as per the Third Schedule of the Modaraba Rules. The contents of the query from the firm of Chartered Accountants (vide letter dated 18th February, 1988) and the reply of the C.B.R. are reproduced below:--

We are writing to you to seek clarification on taxability of a Modaraba.

We would inform you that a company formed and registered under the Companies Ordinance, 1984 is required to be registered with the Registrar of Modarabas before it can float a Modaraba. Such a company is a taxable entity and is liable to pay taxes on its income just like any other company.

The Modaraba Company can float one or more Modarabas as authorized by the Registrar of Modarabas. Under section 12 of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980, each Modaraba is a legal person and is treated as a separate entity. Under section 37 of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance 1980 (photocopy enclosed), the income of a Modaraba shall be exempt from tax under the Income Tax Ordinance, if not less than 90% of the profits in a year are distributed to the holders of the Modaraba Certificates.

The word `profits' has not been defined in the said Ordinance and, therefore, it is not clear whether this means accounting profits or the profits computed in accordance with the Income Tax Ordinance, 1979. You would appreciate that the accounting profits and the taxable profits may vary depending on the method of accounting employed by the Modaraba and also due to other factors e.g. the depreciation policy (Companies Ordinance, 1984 does not require charging of initial depreciation in the accounts). As practical measure, we are of the opinion that the Modaraba should distribute 90% of the accounting profit in order to be exempt from tax in accordance with section 37 of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980. If this is not so, then you may have a situation where the taxable profit/total income is more than the accounting profit and the Modaraba may not be able to distribute 90% of the taxable profit as an entity cannot distribute more than the accounting profit.

We would request you to kindly let us have the clarification regarding the above at your earliest convenience."

Reply of the C.B.R. dated 26th May, 1988.

"The undersigned is directed to refer, to your letter No. 0704/X-6, dated 18 February, 1988 and to say that "profits" for the purpose of section 37 of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 would be as determined and arrived at as per Third Schedule of the Modaraba Rules."

20. Mr. Muhammad Arshad also referred to some parallel cases wherein 90% distribution of "profit" as per statutory accounts has been accepted and accordingly, exemption under Clause (102E) was granted. Copies of the assessment order also placed on record.

21. Mr. Hassan Naeem started his arguments by giving the analysis vis-a-vis the history of exemption from tax available to a Modaraba. He stated that initially the exemption was available under section 37 of the Modaraba Ordinance in the following manner:-

"37 Exemption from tax.---The income of a Modaraba shall be exempt from tax under the Income Tax Ordinance, 1979 (XXXI of 1979), if not less man ninety per cent of its profits in a year is distributed to the holders of the Modaraba Certificates."

However, in the year 1992 amendments were made in charging section 9 of the repealed Ordinance wherein vide the Finance Act, 1992, subsection (1A) in section 9 of the repealed Ordinance was added which is reproduced as under:--

"(1A) Notwithstanding anything contained in section 37 of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980) or any other law for the time being in force, there shall be charged, levied and paid for each assessment year commencing on or after the first day of July, 1993, income tax in respect of the total income of a Modaraba at the rate specified in the First Schedule:

Provided that the total income of a Modaraba shall not be chargeable to tax for the first there assessment years after commencement of its business if not less than ninety per cent of its profits in year is distributed to the Modaraba certificate holders."

Subsequently, through the Finance Act, 1999, Clause (102E) was inserted in Part-I of the Second Schedule to the repealed Ordinance as under (Again reproduced below for better understanding the history of exemption):

"102(E) Any income not being income from trading activity, of a Modaraba registered under a Modaraba Companies and Modaraba (Floatation and Control) Ordinance. 1980 (XXXI of 1980), for any assessment year commencing on or after the first of July, 1999:

Provided that not less than ninety per cent of its total profits in the year as reduced by the amount transferred to a mandatory reserve, as required under the said provisions of the said Ordinance or the rules made thereunder:

Provided further that with effect from the first of July, 1999 for the purpose of determining the distribution of ninety per cent profits, the profits distributed through bonus certificates or shares to the certificate holders shall not be taken into account."

22. According to Mr. Naeem, it is apparent from the provisions of section 37 of thee Modaraba Ordinance, proviso to section 9 of the repealed Ordinance and clause (102E), Part-I of the Second Schedule of the repealed Ordinance that they are similar in character and the gist thereof is the same. He stated that the provisions of all the above referred statutes provide exemption to "income" of a Modaraba provided the Modaraba distributes 90% of its total profits to its certificate holders. He emphasized that while the exemption is given to income of a Modaraba, the condition of distribution is with reference to the total profits. Since section 37 of the Modaraba Ordinance talks of distribution of profits, such profits would only mean the profits as worked out under the provisions of the Modaraba Ordinance and not otherwise. According to him, the terms "income" and "profits" used by the legislature are two separate and distinct terms. Under the repealed Ordinance, income is arrived at after 'deducting expenses and admissible allowances from profits. However, under the provisions of the Companies Ordinances, 1984, profits are worked out in accordance with the guidelines and instructions and general accounting principles, and while working out the profits for the year such provisions may have been adjusted which are inadmissible/not allowable under the repealed Ordinance. He referred to the computations of income filed for the years under appeals by the Modaraba and submitted that while computing "income" for the year for the purposes of the repealed Ordinance, inadmissible provisions have been added back to arrive at "income" for the year and since the Modaraba distributed 90% of the profits (as per profit and loss account for the year) among its certificate holders, the income as worked out in the above manner has been claimed as exempt under clause (102E) ibid. He then reiterated to a query addressed to the then Member Tax, C.B.R. and the reply of C.B.R. as reproduced above and argued that it is apparent that the C.B.R. gave its view that the, term "profits" as used in section 37 of the Modaraba Ordinance means profits as computed under the provisions of the Modaraba Ordinance, and general accounting principles and guidelines. He then contended that accordingly the term "profits" as used in the proviso to section 9 and Clause (102E) of the Part-I of the Second Schedule would have the same meaning as it carries in section 37 of the Modaraba Ordinance and, therefore, distribution of profits would be only from accounting profits of the year.

23. He further argued that the respondent Modaraba being an NBFI is required to follow Rules of Business issued by the S.B.P. It is submitted that under the Banking Companies Ordinance, 1962, section 3A authorizes S.B.P. to determine activities for the monetary of credit policies of S.B.P. which are applicable to financial institutions both DFI's and NBFI's. The provisions of section 3(A) referred to above read as under:--

"3A. The provisions of sections 25 and 41 of this Ordinance shall, with such notifications as the State Bank may determine from time to time in relation to activities which have implications for the monetary or credit policies of the State Bank, apply to the Investment Corporation of Pakistan, the National Investment Unit Trust, the Pakistan Industrial Credit and Investment Corporation, the House Building Finance Corporation, and such other companies, corporations or institutions, or class of companies corporations or institutions as the Federal Government may from time to time, by notification in the official gazette, specify in this behalf."

He then referred to NBFI Circular No. 1 dated December 5, 1991 issued by the NBFI's Regulation and Supervision Department of S.B.P. Through this Circular the S.B.P. introduced the Rules of Business for NBFI's while stating as under:--

"Chief Executives of DFI's,

Investment Banks, Leasing Companies,

Modarabas and Housing Finance Companies.

Dear Sir,

As you are aware, the Government has, through an amendment in the Banking Companies Ordinance, 1962 assigned the responsibility of supervising the business of NBFI's to the State Bank of Pakistan. The State Bank has, accordingly, framed Rules of Business for NBFI's. These appear in Paragraph II below. These rules will come into force with effect from 1st January, 1992. The Rules will govern the business of NBFI's which they are permitted to undertake under the relevant laws, S.R.O's, Notifications, Government consent, Charters etc. the rules should not be construed as permission to undertake business which you are not authorized to do. All transactions taking place on or after 1st January, 1992 shall be in conformity with these rules. It should be ensure that undertaking of business on or after 1st January, 1992 does not result in violation of these rules."

As per the "Rules of Business for NBFI's", clause (h) of Part-A includes a Modaraba in the definition of NBFI's and it reads as under:---

"(h) "NBFI" means a Non-Bank Financial Institution and include a Development Finance Institution (DFI). Modaraba, leasing company, Housing Finance Company, Investment Bank, Discount House and Venture Capital Company."

24. In the light of the above, it is evident that the S.B.P. had full regulatory authority over the Modarabas and the Modaraba Companies. In this connection Mr. Hassan Naeem relied on C.B.R. Circular No. 24 of 1992 which clarified certain issues with reference to the identical exemption in the proviso to subsection (IA) to section 9 of the repealed Ordinance. The C.B.R., inter alia, stated as under:--

"2. The issues arising out of the implementation of the provisions relating to the Modarabas have been examined in consultation with the Corporate Law Authority and the State Bank of Pakistan. Clarifications are accordingly issued as under:

(i) According to State Bank Regulations, 20% of the profits of a modaraba are required to be transferred to reserves. Out of the remaining 80% profits, ninety percent are to be distributed to the modaraba certificate holders under the Modaraba Companies and Modaraba) (Floatation and Control) Ordinance, 1980. Therefore, for purposes of exemption from income tax, distribution of 72% of the total profits (including reserves) amongst the modaraba certificate holders will entitle the modarabas to avail the tax concession under the proviso to subsection (IA) of section 9 of the Income Tax Ordinance, 1979.

He then submitted that vide the above quoted Circular, the C.B.R. itself has recognized that under the S.B.P's regulations (i.e. Rules of Business for NBFI's) Modarabas are required to transfer a certain percentage of their profits to reserves required to be created and maintained as per the above referred regulations.

25. According to Mr. Hassan Naeem, the above Circular implies that the C.B.R. does not on its own clarified the issue unless consultation with the then CLA (now SECP) and the S.B.P. were taken place. This according to Mr. Hassan Naeem shows that the averments of the tax authorities that by distributing 90% profits as per accounts including the effect of inadmissible deductions, the appellants have violated the provisions of Clause (102E), is of no effect and the disallowance of exemption was incorrect, unjustified and against the very provisions of the repealed Ordinance as well as the Modaraba Ordinance and the Modaraba Rules.

26. He finally placed reliance on a decision given by the Honourable Sindh High Court in I.T.A. No.82 of 2004 in the case of First Habib Modaraba vide order dated 13th September, 2005 wherein the following questions of law were formulated by the C.I.T, Companies-I, Karachi for consideration by their Lordships of the Sindh High Court.

"(1) Whether on the facts and the circumstances of the case, the learned Income Tax Appellate Tribunal was justified in interpreting the word "Profit" as that profit which is derived by relevant accounting principles and standards and ignoring the fact that the profit is to be determined in accordance with the 1st proviso to clause 102-E of Part-I, of the Second Schedule of the Income Tax Ordinance, 1979, for the purpose of exemption, wherein only deduction of mandatory reserve is allowed and that "provisions" do not fall in the definition of "reserves"?

(2) Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal was justified in holding that any provision which is permissible under the accounting standards and principles, should be allowed as such, without looking into the fact that whether there was any justification of provision for taxation, being retained income, to be allowed under 1st Proviso to Clause 102-E of Part-I of Second Schedule to the Income Tax Ordinance, 1979 under which specific exemption is being claimed?

(3) Whether on the facts and in the circumstances of the case the learned Income Tax Appellate Tribunal was justified to hold that principles of accounting should override or prevail over the provisions of Income Tax Ordinance, 1979, in determining the profits for the purpose of exemption under Clause 102-E of Part-I of Second Schedule to the Income Tax Ordinance, 1979?"

The Honourable Sindh High Court considered Question No.1 only for their decision and held as under:-

"Mr. Aqueel Ahmed Abbasi has pressed question No.1 only. We asked him to show as to how the finding of the Tribunal is violative of the provisions contained in proviso of Clause 102-E of Part-I of the Second Schedule to the Income Tax Ordinance, 1979. The learned counsel is not able to point out any illegality in the order passed by the Tribunal or any deviation from the provisions of law.

We are, therefore, of the view that no substantial question of law arises out of the order of the Tribunal requiring our opinion and consequently the Reference Application stands dismissed in limine along with the listed application."

Mr. Hassan Naeem contended that since the Honourable Sindh High Court has also held the. order of the learned ITAT to be in accordance with the provisions of Clause (102E) allowing exemption to the appellant-Modaraba, the issue has attained finality whereby the contention that distribution of profits by a Modaraba would be of accounting profits and not of the income as computed as a resulted to assessment by the tax authorities.

27. We are indebted to the learned representatives of both the parties for their able and exhaustive arguments and also appreciate their manner in presenting their case in a clear and lucid form.

28. We have given anxious thought to the arguments placed at bar before us. Various citations as well as the C.B.R.'s Circulars as referred before us have also been gone through by us. The Modaraba Companies and Modarabas (Floatation and Control) Ordinance, 1980 and the Modaraba Companies and Modarabas Rules, 1981 with Prudential Regulations for Modarabas (hereinafter collectively referred to as "Modaraba Ordinance" have also been perused.

29. Modarabas are registered by the Registrar of Modaraba Companies appointed by. the Federal Government. In this context, the requisite certificate from the Religious Board is obtained. It is this Religious Board which has to specify itself as to whether the activities of Modaraba Companies or Modarabas are as per the Islamic mode of financing or not. The Federal Government through the Registrar of Modaraba Companies keeps a constant control and check over running of Modaraba Companies and Modarabas. The Registrar of Modaraba Companies is competent to grant registration as well as on noticing violation of objects thereof could proceed for cancellation of the same. The law pertaining to the Modaraba Companies and Modarabas deals comprehensively with the functions and day-to-day working and is vested with quite sufficient powers to deal with any contravention with the law. The Modaraba Companies and Modarabas after being allowed to function them after carrying on their business activities finally at the end of each income year are required to place the same in the form of income tax return before the Assessing Officer. The duties of the Assessing Officer start from here if it is claimed for the exemption then clause 102E of Part-I of the Second Schedule to the repealed Income Tax Ordinance, 1979 would come into play for granting of exemption. The Assessing Officer can grant or refuse the claim of exemption by following what is given in clause 102E ibid. For convenience, clause 102E of Part-I of the Second Schedule to the repealed Income Tax Ordinance, 1979 is being reproduced as under:---

"[(102E) Any income, not being' income from trading activity, of a modaraba registered under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1989 (XXXI of 1980), for any assessment year commencing on or after the first day of July, 1999:

Provided that not less than ninety per cent of its total profits in the year as reduced by the amount transferred to a mandatory reserve, as required under the provisions of the said Ordinance or the rules made thereunder:

Provided further that with effect from the first day of July, 1999 for the purpose of determining the distribution of ninety per cent profits, the profits distributed through bonus certificates or shares to the certificate holders shall not be taken into account.]"

30. A bare reading of this clause makes it very clear that exclusion from exemption is only to the extent of income from trading activity in the hands of Modaraba Ordinance. It has further been specified in the two provisos that distribution of profit shall be not less than 90% of its total profit in the year as reduced by the amount transferred to a mandatory reserve as required under the provisions of the Modaraba Ordinance or the rules made thereunder. As far as this first proviso to clause (102E) is concerned, it has laid down that 90% of the total profits for the year after deduction of transfer of the amount to mandatory reserves shall be distributed. As per these provisos ibid, the ninety per cent of the total profits and transfer to mandatory reserve shall be as required under the provisions of the said Ordinance or the rules made thereunder. The words said Ordinance means the Modaraba Companies and Modarabas (Floatation and Control) Ordinance, 1980 (XXXI of 1980) as specified in the main clause (102E), for granting the exemption to the Modaraba companies under Income Tax Ordinance, 1979, it is the over-riding provisions of clause (102E) which would be regulating the Revenue/Department for processing the claim till its final stage. Since clause 102E has specifically mentioned the compliance to Modaraba Ordinance for the preparation/presentation of accounts, accordingly for a claim of exemption under clause (102E), the pre-requirement is preparation, finalization and presentation of accounts of Modarabas should be as laid down in Modaraba Ordinance. So as specified in the said Ordinance, the total profits are to be worked out as prescribed therein, further in compliance to it the presentation of accounts shall be made, and 90% of this total profit (worked out as per said Ordinance) would be the basis for allowing exemption. Thus, nowhere, the question of total assessed profits as per Income Tax Ordinance has arisen while determining the claim for exemption under clause (102E) ibid. So, 90% of the total profits should have been arrived at as per the provisions of the Modaraba Ordinance or the Rules made thereunder. With this expression as given in clause (102E) ibid, it is abundantly made clear that when the presentation of the accounts is as per the provisions of the Modaraba Ordinance, there is hardly any justification of viewing this from the viewpoint of the assessed/assessable income under Income Tax Ordinance, 1979 which has altogether a different domain and connotation. Accordingly for seeking a claim for exemption under clause (102E) ibid, in respect of any income other than the income from trading activity, the first proviso has laid down that the reflection of figures should be as governed by the Modaraba Ordinance. In the second proviso of this clause (102E) ibid which has become effective from July, 1999, the determinability of distribution of 90% profits, distribution of profits through bonus certificates or shares to the certificate-holders is not taken into account. This second proviso is again in continuation of the 1st Proviso.

31. So, to proceed further from here, it will be of utmost importance to specify that for grant of exemption conditions have been specifically laid down in clause (102E) ibid, and on compliance to it, the entitlement to exemption becomes clear. The preamble of the Part-I of the 2nd Schedule to the Income Tax Ordinance, 1979 has made it crystal clear that exemption from tax would be subject to the conditions and to the extent as specified in it. For ready reference and sake of convenience, it is reproduced below:--

"THE SECOND SCHEDULE

(See Section 14(1))

PART-I

(EXEMPTIONS) FROM TOTAL INCOME

Incomes or classes of income or persons or, classes or persons, enumerated below, shall be exempt from tax, subject to the conditions and to the extent specified hereunder."

Even at the cost of repetition, it is to be clarified that for viewing the functioning as to whether these are as per the objects of Modarba Companies and Modarabas, it is within the exclusive purview of the Registrar of Modaraba Companies which is the competent authority i.e.' Registrar of Modaraba Companies under the Modaraba Ordinance who could register or de-register on judging the merit of each situation. The Assessing Officer has no competency to interfere and take the role of Registrar of Modaraba Companies. So also the Registrar of Modaraba Companies cannot become Assessing Officer under the Income Tax Ordinance, 1979. The Assessing Officer can grant exemption for any income and with the only exception that it should not be from the trading activity by the Modaraba Companies and Modarabas.

32. As far as 90% of the total profit of the year is concerned, here presentation of the account as prescribed in the Modaraba Ordinance is the deciding factor as has specifically been given in the clause (102E) ibid. For scrutinizing the claim of exemption under clause (102E), the Assessing Officer is bound to proceed on the basis of accounts prepared under the provisions of the Modaraba Ordinance which is to be followed for determining the 90% of the profits. The profit and loss account which has been drawn in compliance to the Rules and Procedure given in the Modaraba Ordinance are unquestionable by the Assessing Officer to the extent of grant of exemption. So to see what is the 90% of the profit, it should not be by applying the sections relevant for working out the taxable/assessable income under the Income Tax Ordinance so to say the provisions of admissibility or inadmissibility of expenditure for arriving at the profit for the purpose of exemption by the Assessing Officer would not come into play as per clause (102E) ibid. In the instant case before us, we have found that what is strictly prescribed in clause 102E to grant exemption has not been properly understood where the Assessing Officer has totally failed to point out that the accounts and determining of profits are not in conformity with the provisions of the Modaraba Ordinance and. also as per the specific rules laid thereunder. Had the purpose of the law-makers was to see the determining of the taxable profit from the Income Tax Ordinance's point of view, then the enactment would have been made accordingly by making it part of the clause (102E) which has not been done. The Assessing Officer in the circumstances cannot stretch the provisions of clause (102E) in a manner that income which as has been arrived at by applying the provisions of the Income Tax Ordinance would be governing the claim of exemption. So we have no reservation in holding that the total profits determined as per prescribed provisions of Modaraba Ordinance and the rules made thereunder is the only yardstick for allowing the exemption. It is only on deviation from the provisions of the Modaraba Ordinance and Rules made thereunder that claim for exemption could be refused by properly confronting to the appellant assessee.

33. After making a minute study of the provisions and rules of the Modaraba Ordinance, we have come to an inescapable conclusion that provisions for bad debts are a prescribed deduction as specified in Modaraba Ordinance in determining the 90% of the profit of distribution. By recording such findings, we do not intend to interfere in the authority of the Assessing Officer for proceeding under the Income 'Tax Ordinance for determining the income which could be made chargeable to tax. The provisions of bad debts as expenditure is not finding any place as has been held by the Honourable Sindh High Court in the judgment dated 1-3-2006 delivered in the case of Messrs Grindlays Bank PLC, Karachi v. ACIT bearing I.T.A. No.565 of 2000 which we are bound to respectively follow for the proceedings under the Income Tax Ordinance to assess the income where the case is not falling under clause (102E) for exemption as pre-conditions specified therein. So far framing the assessment by disallowing such provisions, there is nothing to help the appellant-assessee under the Income Tax Ordinance when income would be assessed in normal course of process. The entire controversy arose when the Assessing Officer attempted to assume the role under the Modaraba Ordinance as well as under the Income Tax Ordinance for assessing the income which could be made chargeable to tax. As far as the contention that any activity is not in accordance with the conditions as laid down in the Modaraba Ordinance, it is the duty of the Registrar of Modaraba Companies and of none else. The Registrar has not taken any activity as contravention of the Modaraba Ordinance on keeping the surplus funds with the scheduled banks then the Assessing Officer is not seized with powers to comment on it. The exercising of the authority, as such, on the question of earning of interest as un-Islamic is not within the competency 'of the Taxation Officer/Assessing Officer. Such act of the Assessing Officer is ultra vires of its powers which are of no legal consequence to be dilated upon by us. The Assessing Officer failed to appreciate that it is not the interest but mark-up which is prevalent in the banking system. The Assessing Officer has firstly failed to see any violation under Modaraba Ordinance in drawing the profit and loss account, reflection of profits or accounting record being is not as per prescribed provisions and rules of the Modaraba Ordinance. As far as income from trading activity is concerned that too can be charged to tax under the normal taxation system but refusing to grant the exemption for any income which falls under the Modaraba Ordinance, no exception can be drawn where nothing contrary to the provisions of clause (102E) ibid, could be found by the Assessing Officer. Here we would like to express ourselves that determining 90% profit by taking into consideration the add backs under the Income Tax Ordinance is an unending phenomena, so passing on the 90% profit on L this way is practically not possible that is why in Clause (102E), the entire yardstick is the provisions and rules of the Modaraba Ordinance.

34. The nutshell of the discussion supra would be that exemption under clause 102E of Part-I of the Second Schedule to the repealed Income Tax Ordinance, 1979 shall be granted on the basis of the accounts as required under the Modaraba Ordinance. As far as earning of interest on keeping the surplus funds, we have no hesitation in holding that in the present banking system, it is the mark-up which is being acknowledged. So taking the mark-up earned as interest is not proper, even otherwise keeping the surplus funds in the Bank deposits is not in contravention with the Modaraba Ordinance and rules framed thereunder. We therefore, accordingly hold that when such way of earning mark-up by deposing the surplus funds is in accordance with the Modaraba Rules and the Registrar of Modaraba Companies as well as the Religious Board functioning under the Modaraba Ordinance have not objected to it then the department is not competent to assume the role of Authority under the Modaraba Ordinance and Rules. The admissibility of provisions of bad debts as explained under section 23 of the repealed Income Tax Ordinance for framing the assessment cannot be made as expenditure and also under the corresponding section of the present Income Tax Ordinance, 2001 but as far as it allows ability under the Modaraba Ordinance, it is allowable as per the said Ordinance as well as the Rules framed thereunder and further clarified that it could not be highlighted under section 23 of the repealed Income Tax Ordinance, 1979 as a debatable issue. Accordingly, we hold that net distribution of the 90% profit shall be on the basis of the accounts prepared as per Modaraba Ordinance and rules thereunder keeping in view the language of the Preamble of Part-I of the Second Schedule to the Income Tax Ordinance, 1979 and upon fulfilment of preconditions as laid down in Clause (102E) of it, the exemption is to be allowed. Further, we are persuaded to hold that when no violation in respect of presentation and preparation of accounts as per Modaraba Ordinance and Rules has been noticed or established by the Revenue/Department, then the assessees are eligible for exemption under clause (102E) of Part-I of the Second Schedule to the repealed Income Tax Ordinance, 1979.

35. In view of the foregoing discussion, the departmental appeals in respect of First UDL Modaraba fail whereas the appeals of appellant assessee in the case of First Professionals Modaraba succeed.

C.M.A./1/Tax(Trib.)Appeals of assessee succeeded.