1989 PLP 652 (PTD)

FARHAT ALI KHAN (CHAIRMAN).-- A quite interesting point has arisen in this departmental appeal. It appears that the respondent, a private Ltd. Co., during asstt. year 1983-84 declared its income from business at Rs.90.737 and from property at Rs.6,13,

458. The respondent, however, claimed deduction of wealth-tax of Rs.2,71,370 but the I.T.O. computed the tax at Rs.2,38,054 by adopting the following method:- "Business income property income Rs.90,737 Rs.6,13,458 Total income Rs.7,04,198 Less Wealth-tax liability Rs.2,71,370 Taxable income Rs.4,32,825 Income-tax @ 30% Rs.1,29,848 Super-tax @ 25% Rs.1,08,206 Total Tax Rs.2,38,054 On appeal, however, the respondent worked out the amount of total tax at Rs.1,61,454 in the following way: "Income-tax payable at 30% Rs.1, 29,848 on total income of Rs.4,32,825 Wealth-tax paid Rs.2,71,370 Less 75% of total income of 4,32, 825 quantum by which income-tax payable is to be reduced Rs.4,01,218 Rs.3, 24,618 Rs.76,600 Income tax payable as reduced by Rs.76,000 works out at Rs.1,29,8.18 less Rs.76,600 Rs.53, 248 Add super-tax payable Rs.1,08,206 Total Income-tax & Super-tax Payable. Rs.1,61,454 The learned C I T (A) has accepted this method of determining tax payable by the respondent and allowed the appeal on this point with the following observation: "After perusing the observation of the I.T.O. in his assessment order and also giving serious consideration to the written arguments filed by the appellant representative, the contention of the appellant is accepted to so far as that the total income for the purposes of provision of Second Schedule; of I.T. Ordinance, 1979, of Part III (1) is Rs.4,32,825 and not Rs.7,04,195 as taken by the I T O. I fully agree with the interpretation as given by the appellant." This time the department feels aggrieved and has come up in second appeal against the order of learned C.I.T. (A) recorded on 21st January, 1985. 2 Thus it is clear that the controversy has arisen out of the interpretation of Part-III of Second Schedule of the Ordinance in so far it deals with the limit on the income-tax payable and the relevant paragraph reads as under:- "Incomes, or classes of income, or persons or classes of persons, enumerated below, shall be allowed reduction in tax liability to the extent and subject to such conditions as are specified hereunder:- Limit on the income-tax pay able (1) Where any person for any year (a) is liable to income tax and also to the wealth tax payable under the Wealth-Tax Act, 1963 (XV of 1963) and (b) his, taxable income under this Ordinance exceeds one hundred thousand rupees; and (c) the aggregate amount of income-tax and wealth tax payable by him exceeds seventy five per cent of his total income. The income tax payable by him shall be reduced by the amount by which the said aggregate amount exceeds seventy-five percent of his total income." From perusal of the assessment order it appears that the first reason which the I.T.O. advanced for rejecting the method adopted by the respondent for reducing its tax liability is to the effect that since the respondent is a company, Part-III of the Second Schedule does not apply in its case simply for the reason that it is a Private Limited Company. Mr. Ather Saeed, the learned DR, has also attacked the impugned order on this ground. Mr. Mehtab Khan, the learned counsel for the respondent, on the other hand, inviting our attention to definition of word 'person' as contained in subsection (32) of Section 2 of the Income Tax Ordinance, hereinafter referred to as 'the Ordinance', strongly contended that since the definition of word 'person' included within its fold a company also, the benefit of tax reduction under Part III of Second Schedule was very much available to the respondent as well. The contention of Mr. Mehtab Khan appears to be well-founded. Surely Part III is an integral part of the second Schedule, the benefits whereof have been ensured by Section. 14 of the Ordinance to persons or classes of persons who are specified in the Second Schedule. It is true that the definition given in subsection (32) of Section 2 of the Ordinance may not apply if the context required a different meaning. However, in the case under discussion, there is nothing to evince that the context of Part III of Second Schedule required some different meaning than that of subsection (32) of Section

2. It is pertinent to note that during the relevant assessment year the Wealth-tax Act became applicable to all the assets held by a company for the purposes of the business of construction or sale or letting out of the property by virtue of the Wealth-tax (Amendment) Ordinance of 1980, dated 17th January, 1980. Thus, the first) contention of Mr. Ather Saeed, the learned DR. is, rejected

3. The next argument of learned DR is that since the assessee is a limited company and liable to income tax and super-tax both, the benefit of clause (a) of Para 1 of Part III of Second Schedule of the Ordinance was not available to the respondent. The I T O has also raised the same points in his assessment order after reproducing Para 1 of Part III of the Second Schedule. He has observed at page 2 of his assessment order that:- , "From the above it is evident that any person who is liable to income-tax only is entitled to reduction in tax liability. The assessee is a limited company and liable to income-tax and super-tax both and I am of the view that Clause (1) of Part III of the Second Schedule of the Income-tax Ordinance, 1979, is not applicable in his case." The learned C I T (A), however, has not himself dealt with this issue but has rather adopted the reasoning advanced before him, in the written arguments by the respondent which is as under "The expression used in clause (I) is PERSON which within the meaning of section 2 (32) includes 'a company'. Thus the fact that Clause (1) of Part III of the Second Schedule is applicable to the case of a company as well is beyond any shadow of doubt." Be it as it may, the reasoning of the I T O, however, has not impressed us at all. From the passage reproduced above it appears that he has read the word `only' in Clause (a) of Para I of Part III of Second Schedule, which is not permissible under any of the Rules of Interpretation of Statutes. This clause actually deals with al person who is liable to income-tax and also the super-tax. It does not deal with the case of any person who is liable to pay income tax only or wealth-tax only. Similarly this clause does not excluded a person who pays some other type of tax in addition to income-tax and wealth-tax. It is true that a company pays super-tax under Part II of First Schedule. However, it also, pays income-tax according to paragraph C of Part I of the First Schedule. Since a company is a person and it pays income-tar and also wealth-tax, it is entitled, in our humble opinion, to the benefit provided by Part III of Second Schedule of the Ordinance. It is pertinent to keep in mind that a company has not only to pay income-tax and super-tax under the Ordinance but additional tax and surcharge are also payable under it. It, therefore, cannot be said that since a person is liable to surcharge and additional tax also therefore, paragraph I of Part III of Second Schedule would not be available to it. Moreover a person has to pay so many other taxes like excise duty, custom, property taxes, octroi duty etc. etc. Thus, if the argument of learned DR is accepted then the benefits of Part III would not be available to any, person as everyone has to pay some sort of tax other than income-tax which of course, does not appear to be the intention of the Legislature for enacting Part III of Second Schedule, This submission of learned DR is also rejected.

4. Mr. Ather Saeed, the learned DR, then argued that since the aggregate amount of income-tax and super-tax payable by the respondent did not exceed 75 % of his total income, the benefit of paragraph 1 of Part III of Second Schedule of the Ordinance was, therefore, not available to it. Mr. Mehtab Khan, the learned AR, however, contended that if the formula adopted by the respondent is accepted and according to him it must be accepted, the aggregate amount of income-tax and wealth-tax payable by the respondent would exceed 75% of its total income. Referring to the word 'taxable income' as used under Clause (b) of Para 1 of Part III of Second Schedule the learned AR invited my attention to the definition of 'taxable income' which is contained in Clause (4) of Paragraph of Part IV of the Second Schedule and it reads as under: "(4) 'taxable income' means `the total income of the assessee as diminished by an allowance of Rs.24,000'." Elaborating his arguments further the learned counsel argued that even in the prescribed return the taxable income is shown to be that which is obtained after deduction of Zakat and wealth-tax. Thus, according to him, the total income of the respondent stood at Rs.4,32,825 which he arrived at after deducting wealth-tax of Rs.2,71.370 from Rs.7,04,195. 5 We have heard both the learned DR as well as the learned counsel for the respondent and have also given our serious consideration to this issue. Now as far as the first submission of Mr. Mehtab Khan is concerned. We think, with due respect to him, that the definition of 'taxable income' as contained in Clause (4) of Para B of First Schedule does not come to his rescue at all as it is confined to the provisions of First Schedule only whereas we are concerned with Second C Schedule. This conclusion we have arrived at because the definition in paragraph B of Part IV of First Schedule begins with the words 'As used in this Schedule'. This submission therefore; also stands rejected.

6. It appears from perusal of Clauses (b) and (c) of para 1 of Part III of Second Schedule that the Legislature has used the words 'taxable income' and 'total income' in both the clauses. Surely the legislature must be having different v and distinct concepts of taxable and total income. If we turn to subsection (44) of Section 2 of the Ordinance it appears that the word 'total income' has been defined as under:- "(44) Total income' means 'the total amount of income referred to under section 11 computed in the manner laid down in this Ordinance; and includes any income which under any provision of this Ordinance is to be included in the total income of an assessee." Thus, the total income means and includes all income which is received or is deemed to have been received in Pakistan or which accrues or arises or is deemed to accrue or arise in Pakistan to a resident and which is received or deemed to be received in Pakistan or accrues or arises or is deemed to accrue or arise to a non-resident in Pakistan. Thus, the concept of total income does not mean and imply an income, which is arrived at after deduction of Zakat or wealth- tax. It is true that the expression 'taxable income' has not been defined by the Ordinance, however, as this expression has been used as against the expression 'total income' in the same paragraph of Part III of Second Schedule, it must carry some different connotation and in my humble opinion it does so. Thus, the taxable income means that income which is arrived at after allowing all permissible exemptions or deductions and on which the amount of tax is to be worked out.

7. Now turning to the other leg of the argument of Mr. Mehtab regarding the proforma of return let me concede that does show that amount as total income, which is arrived at after deduction of Zakat and wealth tax. But in my humble opinion that is not the end of the matter. It we read Section 49 of the Ordinance it appears that it makes it obligatory on an I T O to exclude any exempt income or permissible deduction from the total income before computing the tax payable by an assessee. Before proceeding further let me reproduce Section 49 and it reads as under:- "49:-Allowance to be treated as deductions from income.-- Save as otherwise provided in this Ordinance, any allowance admissible or any sum exempt from tax under any provision contained in this Ordinance shall be included in the total income, but may be deducted from such income for the purposes of computing the tax payable by an assessee. Thus, from its perusal it is clear that any admissible allowance or any sum, which is exempt from tax is in any case to be included in the total income but may be deducted, if the circumstances so required, from such income for the purposes of computing the tax. Let me mention here that the provision of this Section have been elaborately considered in two decisions of the Tribunal reported as 1988 PTD 345 and 1988 PTD 350

8. The Zakat and Wealth tax both have been laid down as exemptions in Part I of Second Schedule and this Part-I begins with the heading EXCLUSION FROM TOTAL INCOME. Moreover the Second Schedule has been enacted pursuant to the provisions of Section 14 of the Ordinance and let me reproduce its Subsection (1) which is as follows:-- "14 (1) Exemptions.--Notwithstanding anything contained in this. Ordinance, the incomes or classes of income or persons or classes of persons specified in the Second Schedule shall be (a) exempt from tax under this Ordinance subject to the conditions and to the extent specified therein; or (b) liable to tax at such rates which are less than the rates specified in the First Schedule as are specified therein; or (c) allowed a reduction in tax liability, subject to the conditions and to the extent specified therein; or (d) exempt from the operation of any provision of this Ordinance, subject to the conditions and to the extent specified therein " Thus, it is clear from perusal of subsection (1) of Section 14 as reproduced above that it deals with 4 special cases, which have been laid down in its Clause (a) to Clause (d). We have called them special cases because these clauses deal with exemptions from tax, reduction in tax rates reduction in tax liability and exemptions from the operation of any provisions of the Ordinance particularly in view of the provisions of First Schedule. Thus, if the provision of Part I of Second Schedule is read with reference to and in context of Sections 14 and 49 of the Ordinance it becomes quite clear that those exemptions which are enumerated therein are to be excluded from total income before the taxable income is arrived at but otherwise they arc to be included within the fold of expression 'total income' as defined by subsection (44) of Section 2 of the Ordinance

9. From all this discussion it is, therefore, clear that since the return is prescribed for the purposes of working out taxable income, therefore, the deduction of Zakat or wealth-tax has rightly been mentioned therein but both the amounts for our purposes would stand included within the fold of total income. Let us mention here that in column 9 of the return the income which is arrived at after deduction of Zakat and wealth-tax has wrongly been described as 'total income. Be it as it may, the prescribed return cannot overrule the provisions off Sections 14 and 49 of the Ordinance.

10. Thus, in view of discussion made above, the method of computing the tax by the I.T.O. appears to be in accordance with the provisions of law-as discussed above. The departmental appeal is, therefore, allowed and the assessment order of the I.T.O. regarding the points in dispute is hereby restored. M.BA/599/T Appeal allowed.