COMMISSIONER OF INCOME TAX, COMPANIES-I, KARACHI VS STATE ENTERPRISES MUTUAL FUND, KARACHI, 2011 PTD-KARACHI-HIGH-COURT-SINDH 886 (2011)

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

----Ss. 2(29-A) & Second Sched., Cl. 105---Modaraba Companies and Modaraba (Flotation and Control) Ordinance (XXXI of 1980), Ss.2(i)(a) & 8---Exemption from income tax in status of Modaraba claimed by State Enterprises Mutual Funds---Plea of authority that assessee was not entitled to such exemption for not qualifying to be a Modaraba in terms of S.8 of Modaraba Companies and Modaraba (Flotation and Control) Ordinance, 1980---Validity---Words in a statute would be construed harmoniously to give meaning to all words included therein---Meaning assigned to word "modaraba" in S. 2(i)(a) of the Ordinance would be read for purposes of Income Tax Ordinance, 1979 by virtue of S. 2(29-A) thereof---Unit Trusts and Mutual Funds, by whatever name called, would be treated as Modarabas for purposes of applicability of all provisions of Income Tax Ordinance, 1979 including tax treatment---Adopted provisions would become a part of adopting statute---Once meaning of word "modaraba" given in the Ordinance had been adopted by reference in Income Tax Ordinance, 1979, then completion of formalities prescribed in Ordinance, 1980 by assessee for qualifying as modaraba would not be required for application of Income Tax Ordinance, 1979 including tax treatment---Mutual Funds falling under definition of "modaraba" would be entitled to same tax treatment as Modaraba---Assessee was assessed in status of modarabas in circumstances---Principles.

CIT v. Narsee Nagsee and Co. (1957) 31 ITR 164 Bom.; CIT v. V.R.M. Amin (1971) 82 ITR 94 (GUJ); Ramchandra Mardraj Deo v. Collector (1957) 31 ITR 651; CIT v. Alpha Insurance Co. Ltd. PLD 1981 SC 293; Beecham Pakistan v. CI 1995 PTD 577 and CIT v. Zafa Pharmaceuticals 2002 PTD 117 ref.

Crawford "The Constitution of Statutes" rel.

(b) Interpretation of statutes---

----Words in a statute would be construed harmoniously to give meaning to all words included therein---Principles.

(c) Interpretation of statutes---

----Adopted provisions become a part of adopting statute.

Crawford "the Constitution of Statutes" rel.

Jawaid Farooqui and Muhammad Farid for Applicant.

Sirajul Haque Memon and Arshad Siraj for Respondents.

ORDER

MUHAMMAD ATHAR SAEED, J.---All these Income Tax Appeals have been filed against the various orders of the Income Tax Appellate Tribunal, involving identical legal controversy in which the following common question was admitted by this Court:-

Whether the learned ITAT was justified in canceling the order by holding that the fund in question may be assessed as Mudaraba without its registration under the Modaraba Companies Ordinance 1980?

2. Brief facts of the case are that respondents are mutual funds owned by Investment Corporation of Pakistan. Upto the assessment year 1992-93, the income of the mutual funds was exempt under clause 105 of the Second Schedule of the Income Tax Ordinance, 1979. For the assessment year 1993-94 the respondents filed their returns of Income in the status of a Modaraba claiming the tax benefits, which were available to a Modaraba. This claim was not accepted by the Income Tax Officer who held that the respondents were not a Modaraba as they were neither registered as Modaraba under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 nor fulfilled the other formalities prescribed therein. He therefore assessed the respondents in the status of a Public Limited Company. Being aggrieved by the assessment orders, the present respondents filed appeals before for Commissioner Income Tax (Appeals), who vide his various orders after" finding the contention of the respondents regarding their claim of being assessed as a Modaraba prima facie correct set aside the assessments and remanded the cases back to the Income Tax Officer to examine the legal position in the light of his observations. Being aggrieved by the orders of the Commissioner Income Tax (Appeals) the respondents filed appeals before the Tribunal, who vide the impugned orders cancelled the assessments by holding that respondents should be assessed in the status of Modarabas. Hence these appeals.

3. We have heard Mr. Jawaid Farooqui and Mr. Muhammad Farid, Advocates, learned counsel for the Appellants/Applicants and Mr. Sirajul Hague Memon and Mr. Arshad Siraj, learned counsel for the respondents.

4. Mr. Jawaid Farooqui, the learned counsel for the appellant, argued that the Income Tax Officer had given cogent reasons for not assessing the respondents as Modarabas and the Tribunal had without rebutting these reasons cancelled the assessment orders. He further argued that the respondent Mutual Funds are managed by Investment Corporation of Pakistan, which is a Public Limited Company and not a Modaraba Management Company under the Modaraba and its purposes are not in accordance with the sections 5 and 6 of the above Ordinance. He submitted that the respondents Mutual Funds do not fulfill the provisions of sections 9, 10, 11 and 13 of the Ordinance and therefore do not qualify to be a Modaraba in terms of section 8 of the Modaraba Ordinance. The learned counsel went on to argue that the Modaraba Ordinance was promulgated in 1980 whereas Mutual Funds were in existence before the promulgation of said Ordinance and they were never brought within the ambit of the Ordinance at any stage and the exemption granted to these Mutual Funds was on different grounds from the exemption granted to Modarabas and therefore these Mutual Funds have no nexus with the Modarabas. He submitted that it is a settled law that the statute should be read and construed as a whole and not interpreted in isolation. In support of his contention he relied on the following judgments:

(i) CIT v. Narsee Nagsee and Co. (1957) 31 ITR 164 Bom.

(ii) CIT v. V.R.M. Amin (1971) 82 ITR 94 (GUJ).

(iii) Ramchandra Mardraj Deo v. Collector 1957 31 ITR 651.

5. Mr. Muhammad Farid adopted the arguments of the learned counsel Mr. Jawaid Farooqui.

6. Mr. Sirajul Haq Memon and Mr. Arshad Siraj, learned counsel for the respondents strongly opposed the arguments of the learned counsel for the appellants and supported the orders of the Tribunal. The learned counsel after narrating the history of the taxability of Mutual Funds drew our attention to subsection 29-A of section 2 of the Income Tax Ordinance, 1979, which defines Modaraba, Modaraba Company and Modaraba Certificate as having the same meaning as assigned to them under Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980. They then read out section 2(1)(a) of the above Ordinance, which defines a 'Modaraba' as a business in which a person participates with money and another one with skill or both, and Unit Funds and Mutual Funds by whatever name called have also been included in this definition of 'Modaraba'. The learned counsel submitted that once this definition of Modaraba is carried over to the Income Tax Ordinance it becomes clear that for the purposes of application of the provisions of Income Tax Ordinance Modaraba includes Unit Trusts and Mutual Funds and these entities will be subjected to same tax treatment to which a Modaraba is subjected to. Rebutting the arguments of the learned counsel for applicant, they submitted that they have no cavil to the legal proposal advanced by the learned counsel for the appellant that the statutes have to read as a whole and not in isolation but according to them the Income Tax law alone should be read as a whole and no extraneous statues should be read with the Income Tax Law for the purposes of interpretation. They submitted that it is a settled law that restrictions imposed in other laws cannot be applied for the purposes of Income Tax Computation and application of the provisions of Income Tax Ordinance. They submitted that in case of Insurance Law and Drug Law the Courts have held that restriction on incurring management expenses under the Insurance Act and the publicity expenses under the Drugs Act are not applicable for the allowability of these expenses under the Income Tax Ordinance as long as they have been incurred wholly and solely for the purposes of business. In this connection, they retied on the following judgments:--

(i) CIT v. Alpha Insurance Co. Ltd. PLD 1981 SC 293

(ii) Beecham Pakistan v. CIT 1995 PTD 577.

(iii) CIT v. Zafa Pharmaceuticals 2002 PTD 117.

7. The learned counsel further submitted that where a statute for any purpose refers to the meaning given in another statute, such legislation is known as 'adopted statute'. They then took us through the meaning of Adopted Statute by Crawford given in his book 'Constructions of Statutes'.

8. They then submitted that as far as the tax treatment of a Modaraba is concerned it has the dual status of a Modaraba and as a Company. On this point they read out and placed reliance on C.B.R. Circular No.14 of 1992 dated 1-7-1992, which highlighted the obligation and responsibilities that has fallen on a Modaraba by its inclusion in the definition of a Company.

9. On the basis of the above arguments the learned counsel prayed that the proposed question may be answered in affirmative and the Appeals may be dismissed.

10. We have examined the appeals in the light of the submissions of the learned counsel and have carefully perused the records of the case including the relevant provisions of the Income Tax Ordinance, 1979 and the Judgments relied on by the learned Court.

11. Before we proceed further it will be relevant to reproduce section 2(29)(a) of the Income Tax Ordinance and section 2(i) of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance 1980, as both of the Sections seek to define 'Modaraba" as applicable to these Ordinances:-

"2(29-A) "modaraba" "modaraba company" and "modaraba certificate" have the meaning respectively assigned to them in the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980)"

"2(i)(a) "modaraba" means a business in which a person participates with his money and another with his efforts or skill or both his efforts and skill and shall include Unit trusts and Mutual Funds by whatever name called."

12. From a perusal of these two sections it is seen that the Income Tax Ordinance has specified that for the purposes of Income Tax Ordinance the definition of Modaraba will have the meaning assigned to it under the Modaraba Ordinance, which means that the definition of Modaraba in the Income Tax Ordinance, 1979, will also read as under:--

"2(i)(a) "modaraba" means a business in which a person participates with his money and another with his efforts or skill or both his efforts and skill and, shall include Unit trusts and Mutual Funds by whatever name called."

13. Once we substitute this definition of Modaraba in the Income Tax Ordinance then without making any further reference to the Modaraba Ordinance, we can decipher the meaning of 'Modaraba' as applicable for Income Tax purposes. The meaning which emerges is that Modaraba includes unit trust and mutual funds by whatever name called. The obvious interpretation which can be arrived at is that for the purposes of applicability of all the provisions of Income Tax Ordinance unit trust and mutual funds will be treated as Modarabas. We have also noted that unit trust and mutual funds have not been defined individually in the Income Tax Ordinance, 1979 and have been included in the definition of Company when Modaraba was included in the definition of Company by Finance Act, 1992 by virtue of their inclusion in the definition of Modaraba. It is a cardinal principal of interpretation that legislature does not use words in vain and a statute has to be harmoniously construed to give meaning to all the words included in it. The only obvious meaning which can be given to the inclusion of 'unit trusts' and 'mutual funds' in the definition of Modaraba is that the, legislature intends that for all purposes of the Income Tax Ordinance including tax treatment, units trusts and mutual funds have to be treated in the same manner as a Modaraba.

14. We now take up the arguments of the learned Counsel for the appellant that unless all the formalities prescribed for the registration of Modaraba under the Modaraba Ordinance including its registration and its management by a Modaraba Management Company are met, it does not qualify to be a Modaraba under the Modaraba Ordinance and since these formalities have not been fulfilled by a Mutual Fund and therefore it does not qualify to be a Modaraba and cannot be afforded the same tax treatment.

15. We regret that we cannot concur with this argument because as already pointed out by us once the meaning of Modaraba as defined in Modaraba Ordinance is incorporated in the Income Tax Ordinance, 1979, then for purposes of its applicability to the Income Tax Ordinance the completion of above formalities in its registration is not required as this definition does not prescribe that for a mutual fund to be included in its definition of Modaraba it has to complete the formalities prescribed in the Modaraba Ordinance for registration or be managed by a Modaraba Management Company.

16. Our above view is substantiated by the concept of 'Adopted Statute' as highlighted by Crawford in his "The Construction of Statutes" which reads as under:--

"S. 234. Adopted Statutes.---A statute may adopt all or only a part of another statute by express reference, or by reenactment of the former in verbatim or in substantially the same language. Where this is true, the adopted provisions become a part of the adopting statute by what is known as descriptive reference. In this case, the adopted provisions become a part of the adopting statute but only those provisions which relates to the new statute's subject."

17. A perusal of the above extract makes it clear that the adopted provisions become a part of the adopting statute i.e. in this case Income Tax Ordinance only to the extent of these provisions which relate to adopting statute's subject, which in this will obviously be the tax treatment of these entities.

18. Our view is further strengthened by the judgment of the Honourable Supreme Court in the case of Alpha Insurance quoted supra and judgment of this Court in the cases of Beecham and Zafa quoted supra. Relevant extracts from these judgments are reproduced below:--

"CIT v. Alpha Insurance Co., Ltd. PLD 1981 SC 293:--

(i) the rules contained in the First Schedule to the Income Tax Act completely, exhaustively and to the exclusion of every other provision not expressly incorporated, govern the computation of the Profits and Gains of insurance business;

(ii) the power of the Assessing Authority under Rule 6 of the First Schedule to the Income Tax Act does not, like Rule 2 of the same Schedule, or on the strength of section 40C of the Insurance Act or Rule 40 of the Insurance Rules, extend to disallowance of excess management expense;

(iii) the power of Assessing Authority under first part of Rule 6 (ibid) to read/just the balance of the profits disclosed by the annual accounts required to be furnished under the Insurance Act, 1938 is restricted to "exclude from it any expenditure, other then expenditure" which may under the provisions of Section 10 of the Income Tax Act be allowed for computing the profits, and gains of a business. The assessing Authority has to apply an independent mind uncontrolled by Insurance Act to arrive at such a re-adjustment."

"Beecham Pak. v. Commissioner of Income Tax 1995 PTD 577:

No doubt, Rule 33 of the Drugs (Licensing, Registration and Advertising) Rules, 1976 indicates that no person shall spend more than five percent of his turn over on advertising, sampling and other promotional activities in respect of drugs and Rule 12 provides for cancellation or suspension of a license by the Central Licensing Board in case any provision of the Drugs Ordinance or the Rules framed thereunder is violated by a licensee. But, the penalty provided by the said Rule cannot be extended to the provisions of Income Tax Ordinance as no such penalty has been provided by the provisions of the said Ordinance."

"CIT v. Zafa Pharmaceutical Laboratories (Pvt.) Ltd. 2002 PTD 117:--

"After a clear finding that Rule 33 of the Drugs Rules, cannot be extended to disallow the expenses claimed under the head advertising and sales promotion, otherwise spent in connection with the business, it is obvious that any disallowance made with reference to Rule 33 of the Drugs Rules, 1976, is not sustainable in law."

19. We are therefore of the considered opinion that mutual funds fall under the definition of Modaraba and are entitled to same tax treatment as a Modaraba and therefore no exception can be taken to the decision of the Tribunal on this point which is upheld. As a consequence thereof we answer the question admitted by this Court in affirmative in favour of the respondents and against the applicant. Hence all these appeals are dismissed.

S.A.K./C-14/KAppeals dismissed.