INCOME TAX OFFICER VS AKBAR GUL, 2018 PTD-SUPREME-COURT 1664 (2018)

(Against judgment dated 08.08.2008 of High Court of Sindh at Karachi, passed in Income Tax Reference No. 154 of 1993)

Income Tax Ordinance (XXXI of 1979) [since repealed]---

----S. 151 & Second Sched., Part-I, Cl. 99---Exemptions from total income---Partnership engaged in poultry business---Income of partnership exempted from tax---Prohibition on extending benefit of such exemption to partners (second recipients) when receiving their share of profits from the partnership---Respondent/assessee was carrying on business of poultry in partnership with another person through an unregistered partnership firm---Total income of the firm was entitled to certain exemptions under Cl. 99 of Part-I of Second Sched. to the Income Tax Ordinance, 1979, which exemption was duly availed---Respondent, however, also claimed the same exemption for his share of the profit received from the business of the firm, which was declined by the income tax officer in view of the provisions of S. 151 of the Income Tax Ordinance, 1979---Legality---Perusal of S. 151 of the Income Tax Ordinance, 1979 showed that the exemption available under Cl. 99 of Part-I of Second Sched. to the said Ordinance was limited to the original recipient of that income and did not extend to any person receiving any payment wholly or in part out of that income---Partnership firm whether registered or unregistered was an independent assessee and was treated as a legal entity; it was distinct from its partners for the purposes of filing returns, payment and calculation of taxes---In the present case, the income was admittedly received by the unregistered partnership firm which (as a legal entity) enjoyed exemption from payment of income tax, however, any part of its income which was received by the respondent (partner) was taxable in view of the provisions of S. 151 of the Income Tax Ordinance, 1979 which provided that exemption shall not extend to any person receiving payment from the original recipient---Second recipient, such as the respondent-partner, was not entitled to claim any exemption from tax---Appeal was allowed accordingly.

Julian Housing Dinshaw Trust v. Income Tax Officer 1992 PTD 1 = 1992 SCMR 250 and Commissioner of Income Tax, Karachi (West), Karachi v. Muhammad Yousuf & Co. Karachi 1984 PTD 74 distinguished.

M. Habib Qureshi, Advocate Supreme Court for Appellant.

Ex parte for Respondent.

Habib Ullah Khan, Member IR, FBR on Court's Call.

Date of hearing: 19th March, 2018.

JUDGMENT

IJAZ UL AHSAN, J.---This Civil Appeal with leave of the Court is directed against judgment dated 08.08.2008 passed by a learned Division Bench of the High Court of Sindh at Karachi. Through the impugned judgment, an Income Tax Reference bearing No.154 of 1993, preferred by the Income Tax Appellate Tribunal was allowed.

2.Briefly stated the facts necessary for decision of this lis are that the Respondent/Assessee was carrying on business in partnership with another person under the name of Messrs Diamond Poultry Farm which was an unregistered partnership Firm. The total income of the Firm was entitled to certain exemptions under Part-I of Second Schedule of the Income Tax Ordinance, 1979 (the Ordinance, 1979). This exemption was duly availed. The Respondent, however, also claimed the same exemption for his share of the profit received from the business of the Firm. This was declined by the Income Tax Officer in his order, in view of the provisions of section 151 of the Ordinance, 1979.

3.The appeals filed by the Respondent/Taxpayer before the Commissioner Income Tax and Income Tax Appellate Tribunal were also dismissed. However, not finding any precedent from the superior Courts directly dealing with the issue, the Income Tax Appellate Tribunal referred the following questions for consideration of the learned High Court under section 136(1) of the Ordinance, 1979:-

"1.Whether the mere fact, that income from poultry farming was credited in the accounts of two partners in the books of Messrs Diamond Poultry Farms, warranted an inference that the said "Firm Name" was the first recipient and the partners were the second recipients of the said income;

2.Whether the Appellate Tribunal was legally right in holding that income from Poultry Farming received by the applicant through the firm name of Messrs Diamond Poultry Farm was taxable in his hands; and

3.Whether in view of the factual as well as the legal aspects of the case provisions of section 151 could be invoked in the case of the applicant?"

The learned High Court, vide its impugned judgment held that the exemption granted to the income of Messrs Diamond Poultry Farm under Clause-99 of Part-I of the Second Schedule of the Ordinance, 1979 could be availed by the partner/shareholder of the Firm and proceeded to allow the Reference.

4.The Department was aggrieved of the impugned judgment of the learned High Court and approached this Court through a Civil Petition for Leave to Appeal bearing No.410-K of 2008. Leave to appeal was granted to consider the following questions:-

"(i)Whether the learned High Court was justified in extending the benefit of exemption to the partners of the firm and overlooking the fact that the firm was an independent assessee and section 151 of the Ordinance prohibited the benefit of exemption to a second recipient of the income exempted from tax; and

(ii)Whether section 151 only contemplated that the benefit of a particular exemption could only be claimed once and had no application when the income derived from a particular source was totally exempt from tax."

5.Despite repeated notices for service of the Respondent, no one entered appearance on his behalf. He was therefore proceeded against ex parte vide our order dated 01.11.2016.

6.The learned counsel for the Appellant submits that the learned High Court erred in law in failing to appreciate that an unregistered Firm, irrespective of its status under the normal law, is an independent assessee for the purposes of the Ordinance, 1979. As such, a partner of the Firm receiving his share of profits was clearly a second recipient in terms of section 151 of the Ordinance, 1979. He maintains that the lower fora were correct in holding that income from poultry farming received by the Respondent through the Firm was taxable in his hands. He further submits that the language of section 151 of the Ordinance, 1979 is clear and unambiguous and does not admit of any interpretation other than what has been adopted by all the fora in the tax hierarchy. He points out that it is clear from a plain reading of the Section that the exemption is limited to the original recipient of the income and does not extend to any person receiving any payment wholly or in part out of that income.

7.We have heard the learned counsel for the Appellant, considered his contentions and examined the record. It is evident from the record that the Respondent is an individual who is a partner of an unregistered Firm. He declared his share of profit from an unregistered Firm namely Messrs Diamond Poultry Farm. He claimed exemption in respect of his share which was denied by the Income Tax Officer for the reason that the Firm was the first recipient of the income and hence could claim exemption. However, having received his share from the Firm which had already claimed exemption, the Assessee was a second recipient, therefore, the claim of exemption under Clause-99 ibid was not available to the Respondent. The same line of reasoning was followed by the Commissioner, Income Tax as well as the Appellate Tribunal.

8.Our answers to the questions for consideration of which leave to appeal was granted by this Court lies in interpreting the provisions of Clause 99 of Part-I of the Second Schedule of the Ordinance, 1979 under which the exemption claimed by the Respondent was granted. For ease of reference, said Clause-99 is reproduced below:-

"Incomes, or classes of income, or persons or classes of persons, enumerated below shall be exempt from tax, subject to the conditions and to the, extent specified hereunder. Income from Poultry Farming, fish catching, cattle or sheep breeding."

The language of Clause-99 ibid to the extent that it applies to income derived from poultry farming being exempt is clear. However, it is equally clear that such income was derived by Messrs Diamond Poultry Farm which is an entity in its own right in terms of section 2(6) and (32) of the Ordinance, 1979. As such, it is an independent assessee for the purposes of the Ordinance, 1979.

9.There is no denial of the fact that the amount received by the Respondent in his capacity as a partner of the Firm constituted his share of profit of the Firm which had already claimed exemption on it. Therefore, being a second recipient, exemption was not available to him because of the provisions of section 151 of the Ordinance, 1979. For ease of reference, the said Section is reproduced below:-

"Limitation of exemption.---Where any income is exempt from tax, the exemption shall, in the absence of a specific provision to the contrary contained in this Ordinance, be limited to the original recipient of that income and shall not extend to any person receiving any payment wholly or in part out of that income."

A perusal of section 151 of the Ordinance, 1979 leaves us in no manner of doubt that the exemption available under Clause-99 thereof is limited to the original recipient of that income and does not extend to any person receiving any payment wholly or in part out of that income. The income was admittedly received by Messrs Diamond Poultry Farm which enjoyed exemption from payment of income tax. However, any part of its income which was received by the Respondent was taxable in view of the provisions of section 151 of the Ordinance, 1979 which provides that exemption shall not extend to any person receiving payment from the original recipient. In other words, a second recipient was not entitled to claim any exemption from tax. This is in view of the fact that in terms of the provisions of the Ordinance, 1979 a partnership Firm whether registered or unregistered is an independent assessee and is treated as a legal entity. It is distinct from its partners for the purposes of filing returns, payment and calculation of taxes.

10.That being so, the lower fora were right in denying exemption to the Respondent. The learned High Court erred in law in coming to the conclusion that since the income of the Firm was exempt, any subsequent recipients of the said income were also exempt in view of the fact that they would be treated as first recipients considering that the Firm was unregistered. Such interpretation may have been correct under ordinary civil law. However, in view of the special treatment of partnership Firms under the Ordinance, 1979 as discussed above, the benefit of exemption was unavailable and could not have been extended to the Respondent by including him in the definition of a first recipient. The said aspect of the matter appears to have escaped the notice of the learned High Court and its reliance on Julian Housing Dinshaw Trust v. Income Tax Officer (1992 PTD 1 = 1992 SCMR 250) and Commissioner of Income Tax, Karachi (West), Karachi v. Muhammad Yousuf & Co. Karachi (1984 PTD 74) appears to be misplaced.

11.We have carefully gone through the judgments relied upon by the learned High Court and find that the ratio of the said judgments was not attracted to the facts and circumstances of the instant case. We, thus find that the learned High Court was not justified in extending the benefit of exemption to the partners of the Firm by overlooking the fact that the Firm was an independent assessee and section 151 of the Ordinance, 1979 prohibited the benefit of exemption to a second recipient of the income exempt from tax.

12.Section 151 of the Ordinance, 1979 contemplates that the benefit of a particular exemption could only be claimed once. Any recipient of such exempt income would be receiving income out of the exempt income could therefore not claim the benefit of Clause-99 of Part-I of the Second Schedule of the Ordinance, 1979 for second time. We, therefore, find that the impugned judgment of the High Court is not sustainable.

13.For reasons recorded above, this appeal is allowed. The impugned judgment of the learned High Court is set aside and the orders passed by the lower fora are affirmed and upheld.

MWA/I-6/SC Appeal allowed.