COMMISSIONER INLAND REVENUE, ZONE-I, REGIONAL TAX OFFICES, KARACHI VS RELIANCE SECURITIES LTD., 2017 PTD-KARACHI-HIGH-COURT-SINDH 876 (2017)

Income Tax Ordinance (XLIX of 2001)---

----Cl.110, Part 1, Second Sched., Ss.53 & 133---Companies Ordinance (XLVII of 1984), S.2(30A)---Exemption from tax---Income chargeable under head of "capital gains"---Sale of redeemable capital---Term "Finance Certificate"---Question before the High Court was whether return obtained on Term Finance Certificates (TFCs) was exempt from tax under Cl.110 of the Second Schedule to the Income Tax Ordinance, 2001---Held, under provisions of Cl.110, Part I of the Second Schedule to the Income Tax Ordinance, 2001; any income chargeable under head of "capital gains" being income from the sale of, inter alia, instruments of redeemable capital as defined in the Companies Ordinance, 1984 were exempt from levy of tax---Redeemable capital had been defined under S.2(30A) of the Companies Ordinance, 1984 which included finance obtained on the basis of "Participation Term Certificate (PTC)", "Musharika Certificates" as well as "Term Finance Certificate" (TFCs)---Contention that exemption for TFCs had not been specifically mentioned in the Second Schedule to the Income Tax Ordinance, 2001 was misconceived as intention of the Legislature had been expressed therein, where exemption to any income chargeable under the head of capital gains from sale of redeemable capital had been included and such legislative intent was clear and unambiguous---Reference was answered, accordingly.

Amjad Jawaid Hashmi for Applicant.

Abdul Raheem Lakhani for Respondent.

ORDER

AQEEL AHMED ABBASI, J.---Through instant reference application the following two questions have been proposed by the applicant, which according to learned counsel for the applicant, are questions of law, arising from the impugned order dated 15.11.2012 passed by the Appellate Tribunal Inland Revenue (Pakistan) in I.T.A. No.70/KB/2012 (Tax year - 2010 under section 122(5A):--

1.Whether on the facts and in the circumstances of the case, the learned Appellant Tribunal Inland Revenue, Karachi was justified in holding that the Return of TFCs are exempt from tax under the provisions of clause 110 of Part 1 of 2nd Schedule to the Income Tax Ordinance?

2.Whether on the facts and in the circumstances of the case, the learned Appellate Tribunal Inland Revenue, Karachi was justified in holding that the Additional Commissioner Inland Revenue is not legally authorized to levy WWF on the income of the taxpayer in view of the Workers Welfare Fund Ordinance, 1971?

2.Learned counsel for the applicant at the very outset submits that the Question No.2 relating to the levy of WWF can be disposed in terms of a recent Judgment of the Honourable Supreme Court passed in Civil Appeals Nos.1049 to 1055 of 2011 and the order passed by this Court in C.P. No.D-1250 of 2013 (Messrs A.F.Ferguson and others Vs. Province of Sindh and others) by answering the proposed Question No.2 against the applicant department, and in favour of respondent, as according to learned counsel, in the aforesaid decisions, it has been held that amendments introduced through Finance Act, 2006 and Finance Act, 2008, are ultra-vires to the Constitution of Islamic Republic of Pakistan, 1973, therefore, WWF cannot be levied. Learned counsel for respondent does not dispute such factual and legal position and submits that the Question No.2 proposed herein above may be answered in affirmative against the applicant and in favour of the respondent. Accordingly, Question No.2 as proposed herein above, is answered in affirmative against the applicant by respectfully following the afore-cited decision of this Court as well as the Judgment of the Honourable Supreme Court in respect of levy of Workers Welfare Funds.

3.As regards Question No.1 learned counsel for the applicant submits that both the Appellate Forums were not justified to hold that Return of Terms Finance Certificates (TFCs) are exempted from tax under the provisions of clause 110 of Part 1 of 2nd Schedule to the Income Tax Ordinance, 2001, as according to learned counsel, the Term Finance Certificates have not been expressly included in the exemption clause i.e. Clause 110 of Part 1 of 2nd Schedule to the Income Tax Ordinance, 2001. Per learned counsel, the exemption, if any, has to be expressly defined in 2nd Schedule, therefore, impugned order is liable to set aside.

4.Conversely, learned counsel for the respondent vehemently opposes the contention of the learned counsel for the applicant and submits that no question of law arises from the order of Appellate Tribunal in the instant reference application, whereas, the impugned order passed by the Appellate Tribunal as well as the concurrent finding as recorded in the order of Commissioner (Appeals) does not suffer from any error or illegality. Per learned counsel, both the appellate forums have, after examining the material facts and by making correct interpretation of the law relating to exemption of Return of Terms Finance Certificates in terms of Clause 110 of Part 1 of 2nd Schedule to the Income Tax Ordinance, 2001 have been pleased to declare that any income chargeable under the head "capital gains" being income from the sale of "modaraba certificates or any instruments of redeemable capital as defined in the Companies Ordinance, 1984, if derived by a taxpayer upto tax year ending on the thirtieth day of June-2010 is exempt from levy of tax. Per learned counsel, the term redeemable capital has been defined in section 2(30-A) of the Companies Ordinance, 1984, which includes "Terms Finance Certificates" as well, therefore, there is no ambiguity or error which may require any other interpretation Clause 110 Part-1 of the 2nd Schedule, which clearly provides exemption to the capital gains earned on the sale of Terms Finance Certificates during the relevant financial year. Learned counsel for the respondent submits that Question referred to herein above may be answered in affirmative against the applicant and in favour of respondent.

5.We have heard the learned counsel for the parties, perused the record and the impugned order passed by the Appellate Tribunal Inland Revenue, as well as the orders of two authorities below with their assistance. It will be advantageous to examine the scope of the provision of Clause 110 of Part-1 of 2nd Schedule to the Income Tax Ordinance, 2001, and provision of section 2(30A) of the Companies Ordinance, 1984, which are reproduced hereunder for the sake of convenience:--

(a) "110. Any income chargeable under the head "capital gains" being income from the sale of "modarba certificates or any instruments of redeemable capital as defined in the Companies Ordinance, 1984 (XLVII of 1984), listed on any stock exchange in Pakistan or shares of a public company (as defined in sub-section (47) or section 2) and the Pakistan Telecommunications Corporation vouchers issued by the Government of Pakistan, derived by a taxpayer upto tax year ending on the thirtieth day of June - 2010. "

(b). Sec.2 (30-A) "redeemable capital" includes finance obtained on the basis of Participation Term Certificate (PTC), Musharika Certificate, Term Finance Certificate (TFC), or any other security or obligation not based on interest, other than an ordinary share of a company, representing an instrument or a certificate of specified denomination, called the face value or nominal value, evidencing investment of the holder in the capital of the company on terms and conditions of the agreement for the issue of such instrument or certificate or such other certificate or instrument as the Federal Government may, by notification in the official Gazette, specify for the purpose;

6.From perusal of the provisions of Clause 110 Part 1 of 2nd Schedule to the Income Tax Ordinance, 2001, it is clear that any income chargeable under the head of capital gains, being income from the sale of Modaraba Certificates, or any instruments of redeemable capital as defined in the Companies Ordinance, 1984 listed on Stock Exchange in Pakistan or shares of a public company and PTCL vouchers issued by the Government of Pakistan, derived by a taxpayer upto tax year ending on the 30th day of June, 2010, is exempted from the levy of tax, whereas, redeemable capital has been defined under the terms of section 2(30A) of the Companies Ordinance, 1984, which includes, finance obtained on the basis of Participation Term Certification (PTC), Musharika Certificate as well as Terms Finance Certificate (TFC).

7.It appears that there is no dispute between the applicant and the respondents with regard to the capital gains earned by the respondent on the sale of Terms Finance Certificate (TFC) during the relevant financial year. However, only dispute which has been raised by the learned counsel for applicant is that since Terms Finance Certificate has not been specifically mentioned in the aforesaid exemption clause, therefore, such exemption cannot be extended to Terms Finance Certificate. However, such, contention of learned counsel for the applicant is misconceived and contrary to the facts and the intention of the legislature as expressed in terms of Clause 110 of Part 1 of 2nd Schedule to the Income Tax Ordinance, 2001, wherein the exemption to any income chargeable under the head, capital gains from the sale of redeemable capital which includes Terms Finance Certificates (TFC) as well, has been extended. Legislative intent is manifests from the very language of Clause 110 of Part I of 2nd Schedule to the Income Tax Ordinance, 2001 and section 2(30A) of the Companies Ordinance, 1984 which is clear and unambiguites in nature. Accordingly, we do not find any error in the impugned order passed by the Appellate Tribunal in this regard, which depicts correct legal and factual position and does not require any interference by this Court under its reference jurisdiction.

Accordingly, the Question No.1 as proposed herein above is answered in affirmative against the applicant and in favour of respondent.

Instant Reference Application is disposed of in the above terms.

KMZ/C-3/Sindh Reference answered in affirmative.