COMMISSIONER OF INCOME TAX, COMPANIES-II, KARACHI VS FAZAL-UR-REHMAN, 2009 PTD-KARACHI-HIGH-COURT-SINDH 862 (2009)

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

----Ss.2(43), 9, 10 & 69(4)(a)---Computation of allowable income to be distributed amongst partners of registered firm---Scope---Both super tax and penalty would be deducted from total income to arrive at such allowable income---Principles.

The words used in section 69(4) with which the proportionate share has to be reduced is "tax" only, whereas the words used in section 9 is "income tax" and in section 10, which directly applies to the registered partnership firm, is "super tax" and "surcharge". If the legislature wanted to restrict the reduction from the allowable income to the extent of tax payable on the income of registered partnership firm then there was no difficulty in using the word "super tax" and "surcharge" in place of the word "tax" used in this section and once the legislature has used the word "tax" without restricting it to any item which is included in the definition of "tax" given in section 2(43) of the Income Tax Ordinance, then to restrict such reduction only to super tax is a violation of the intention of the legislature and is not permitted by the principles of interpretation.

(b) Interpretation of statutes---

----Fiscal statute---More than one interpretation possible---Effect---Interpretation more beneficial to and in favour of taxpayer would be adopted.

Nasrullah Awan for Applicant. None present for Respondent.

Date of hearing: 24th February, 2009.

JUDGMENT

MUHAMMAD ATHAR SAEED, J.---By this Income Tax Reference Application the Income Tax Appellate Tribunal has referred the following question said to be arising out of the order of the Tribunal, dated 19-8-1989 passed in ITA No.1013/KB of 1986-87, for the opinion of this Court:--

"Whether the Income Tax Appellate Tribunal was justified in holding that the word `tax' used in section 69(4)(a) of the Income Tax Ordinance, 1979 has been used in the same sense as defined in section 2(43) of the Income Tax Ordinance, 1979 and has not been used in restrictive sense referring to the charges created under sections 9 and 10 of the Income Tax Ordinance only."

Briefly, the controversy involved in this reference application is the basis of arriving at the income to be allocated between the partners of registered partnership firm under section 69(4) of the Income Tax Ordinance, 1979. Initially the case was heard by a Division Bench comprising of Accountant Member and a Judicial Member and the order was written by the learned Accountant Member who held that for the purpose of allocation of distributable income only super tax will be deducted from the income of the firm and the penalty which has been levied on the firm shall not be deducted from the Income of the firm to arrive at the allocable income. This conclusion was reached by the learned Accountant Member on the basis of an elaborate order. However, the learned Judicial Member through another elaborate order dissented with the decision of the Accountant Member and held that for the purpose of reaching the allocable income to be distributed amongst the partners both super tax and penalty levied under section 111 of the Income Tax Ordinance, 1979 will have to be deducted from the total income of the firm and the following question was placed before the learned Chairman of the Tribunal for referring the same to third member:--

"Whether the word "tax" used in section 69(4)(a) of the Income Tax Ordinance, 1979 has been used in the same sense as defined in section 2(43) of the Income Tax Ordinance, 1979 or has been used in restrictive sense referring to the charges created under sections 9 and 10 of the Income Tax Ordinance only."

The appeal was then heard by the learned Chairman himself and through another elaborate order he concurred with the decision of the learned Judicial Member and, therefore, by majority it was held that for the purpose of arriving at the allocable income to be distributed amongst the partners of the firm in accordance with the provisions of section 69(4) of the Income Tax Ordinance, 1979 both the super tax and the penalty shall be deducted from the total income to arrive at the allocable income to be distributed amongst the partners.

Notice was issued to the respondent through the department and an inspector's report was presented by the learned counsel which is placed on record. No one attended on behalf of the department and by holding the notice good we decided to dispose of this Income Tax Reference Application with the assistance of the learned counsel for the applicant.

We have heard Mr. Nasrullah Awan the learned counsel for the' applicant.

Mr. Nasrullah Awan has supported the majority order of the learned Accountant Member and has based his arguments on the discussions made in the order of the learned Accountant Member.

We have examined the question referred for our opinion in the light of the arguments of the learned counsel and have carefully perused all the three orders of the three learned Members of the Tribunal. Before we go any further it will be relevant to reproduce the provisions of the Income Tax Ordinance which are subject matter of this controversy and on the interpretation of which sections the learned Members of the Tribunals have based their decisions:--

Section 69

69. Assessment of firms and partners.---(1) Notwithstanding anything contained in this Ordinance, where the assessee is a firm and the total income of the firms has been determined or assessed under sections 59, 59A, 60, 62, 63 and 65, as the case may be,--

(a) in the case of a registered firm,--

(i) the tax payable by the firm itself shall be determined;

(ii) the total income of each partner of the firm, including therein his share of its income, profits and gains of the income year shall be assessed and the sum payable by him on the basis of such assessment shall be determined;

(iii) if such share of any partner is a loss, it shall be set off against his other income or carried forward and set off in accordance with the provisions of sections 34, 35, 36, 37 and 38;

(iv) where any of such partners is a non-resident, his share of the income, profits and gains of the firm shall be assessed on the firm at the rates which would be applicable if it were assessed on his personally, and the sum so determined as payable shall be paid by the firm; and

(b) in the case of an unregistered firm, the Deputy Commissioner:---

(i) may determine the tax payable by the firm on the basis of the total income of the firm; or

(ii) may proceed in the manner laid down in clause (a) as applicable to a registered firm, if, in his opinion, the aggregate amount of tax (including the tax payable under sub-clause (i) of that clause) would be greater than the aggregate amount which would be payable by the firm and the partners individually of the firm were assessed as an registered firm:

Provided that this sub-clause shall not apply in respect of any assessment year commencing on or after the first day of July, 1986.

(2) Whenever the Deputy Commissioner makes a determination in accordance with the provisions of subsection (1), he shall notify to the firm, by an order in writing, the amount of tax payable by it, if any, and the amount of the total income on which the determination has been based and the apportionment thereof between the several partners.

(3) Notwithstanding anything contained in subsection (1) of this section or subsection (4) of section 83, there shall be included in the total income of an assessee, being a partner in a firm,--

(a) share income of the spouse or a minor child of the assessee from the firm in which the assessee is a partner; and

(b) share income of the spouse of the assessee from a firm in which the assessee is not a partners unless the capital contribution, in any form, of the spouse in such firm is not provided, directly or indirectly, by the assessee; and

(c) share income of a minor child of the assessee from a firm in which the assessee is not a partner unless the capital contribution, in any form, of the minor child in such firm is derived from inheritance passed on to him:

Provided that nothing in this subsection shall apply unless the assessee, in the cases referred to in clauses (b) and (c), and the spouse in the case referred to in clause (b), has been given a reasonable opportunity of being heard.

(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 firm as reduced by the tax, if any, payable by the firm and any sum referred to in clause (b); and

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

Section 2 (43) of the Income Tax Ordinance, 1979

(2) Definitions.--In this Ordinance, unless the context otherwise requires,--

(43). "tax" means income tax, super tax, surcharge and additional tax chargeable or payable under this Ordinance, and includes any penalty, fee or other charge or any sum or amount levaible or payable or payable under this Ordinance;

Section 9

Section 9. Charge of income tax.---(1) Subject the provisions of this Ordinance, there shall be charged, levied and paid for each assessment year commencing on order after the first day of July, 1979, income tax in respect of the total income of the income year or years, as the case may be, of every person at the rate or rates specified in the First Schedule:

Provided that where, by virtue of an amendment in the First Schedule, the rate of income tax, for the purposes of assessment in respect of any assessment year, is altered, the rate of income tax existing prior to the said alteration shall continue to appeal in respect of any assessment year to which the said existing rate is applicable.

(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 of specified in the First Schedule:

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

Section 10

(10) Charge of super tax and surcharge.--(1) In addition to the income tax charged for any year, there shall be charged, levied and paid for that year in respect of the total income, or any part thereof, of the income year or years, as the case may be, of every person, an additional duty of income tax (in this Ordinance referred to as `super tax') and surcharge at the rate of rates specified in the First Schedule:

Provided that where, by virtue of an amendment in the First Schedule, the rate of super tax and surcharge, for the purpose of assessment in respect of any assessment year, is altered, the rate of super tax and surcharge existing prior to the said alteration shall continue to apply in respect of any assessment year to which the said existing rate is applicable.

(2) Subject to the provisions of this Ordinance, the total income of any person shall, for the purposes of super tax and surcharge, be the total income as assessed for the purposes of income tax, and where an assessment has become final and conclusive for the purpose of income tax for any year, the assessment shall also be final and conclusive for the purposes of super tax or surcharge, as the case may be, for the same year.

(3) All the provisions of this Ordinance, relating to the charge, assessment, deduction at source, collection, or payment in advance, recovery and refund of income tax shall apply, so far as may be, to the charge, assessment, deduction at source, collection, payment in advance, recovery and refund of super tax and surcharge, as the case may be.

From a perusal of the order of the learned Accountant Member w. e have seen that the learned Accountant Member on the basis of two Judgments one of Dhaka High Court and one of Lahore High Court held that the word `tax' used in section 69(4)(a) refers to tax levied vide sections 9 and 10 of the Income Tax Ordinance and it does not cover penalty levied under section 111. We have carefully perused both the above judgments and after such perusal we are of the view that both the above judgments have dealt with a completely different aspect of the definition of tax and have no nexus with the facts of the present case. He has also held by tracing the history of amendments and law that the legislature had no intention of treating charges other than those levied under sections 9 and 10 as tax simpliciter. A perusal of order passed by the learned Judicial Member reveals that he has held that word `tax' used in section 69(4)(a) has been used in the same sense as defined in section 2(43) of the Ordinance. The learned Judicial Member reached this conclusion after elaborately discussing the principles of interpretation including the cardinal rule that in the construction of Acts of Parliament they should be construed according to the intention expressed by Act itself which principle reads as under:--

"Where the language of an Act is clear and explicit we must give effect to it, whatever may be the consequences, for in that case the words of the statute speak the intention of the legislature"

On a perusal of section 69(4) which deals with the computation of the income allocable to be distributed amongst partners of registered firm, it is seen that the words used in subsection (4) with which the proportionate share has to be reduced is `tax' only whereas the words used in section 9 is `income tax' and in case of section 10 which directly applies to the registered partnership firm `super tax' and `surcharge'. We are of the view that if the legislature wanted to restrict the reduction from the allowable income to the extent of the tax payable on the income of the registered partnership firm then there was no difficulty in using the word `super tax' and `surcharge' in place of the word `tax' used in this section and once the legislature has used the word `tax' without restricting it to any item which is included in the definition of tax given in section 2(43) of the Income Tax Ordinance then to restrict such reduction only to super tax is a violation of the intention of the legislature and is not permitted by the principles of interpretation. Another principle of interpretation which will be applicable to the controversy in issue is that any fiscal law where there are more than one interpretations possible the Courts will adopt the interpretation which is more beneficial to and in favour of the taxpayer. The fact that three learned Members of the Income Tax Appellate Tribunal have given two different interpretations of section 69(4) and have given elaborate arguments to substantiate their interpretation leads to the conclusion that there are two interpretations possible and the one that is beneficial to the taxpayer in this case has been given by the learned Judicial Member and the learned Chairman of the Tribunal, who agreed with the decision of the learned Judicial Member and therefore this interpretation will have to be given effect to in accordance with the above principle. We are, therefore, of the considered opinion that the interpretation arrived at by the learned Judicial Member seconded by the learned Chairman of the Tribunal is the correct interpretation of section 69(4) of the Income Tax Ordinance, 1969.

In view of our above opinion we answer the question referred for our opinion, in affirmative in favour of the respondent and against the applicant.

This Income Tax Reference Application is, therefore, dismissed.

S.A.K./C-6/KReference dismissed.