1990 PLP (Trib (PTD)

FARHAT ALI KHAN CHAIRMAN.‑‑This appeal has been placed before us as a Full Bench to consider as to whether a decision of a Division Bench of this Tribunal recorded in ITA No. 1220/KB of 1983‑84 and ITA No. 1221/KB of 1983‑84 relating to assessment years 1979‑80 and 1980‑81 correctly interpreted the definition of the word `employee' as contained in clause (e) of subsection (2) of section 16 of the Income‑tax Ordinance with reference to clause (b) of sub‑rule (3) of Rule 39 of the Income‑tax Rules framed under repealed Income‑tax Act? The facts which have given rise to this reference are that the appellant claimed house rent and conveyance allowances from 2 companies of which he was a Director. The details are as under:‑ Salary H/Rent Con. Total M/s. Al-Ahram Builders 24,000 10,800 1,200 36,000 M/s. Amalgamated Construction Co. Pvt. Ltd. 48,000 21,600 2,400 36,000 The ITO, however, after coming to the conclusion that the definition of `employee' as given in clause (e) of subsection (2) of section 16 of the Income‑tax Ordinance was restricted for the purposes of section 16(1) only, made the following observation:‑‑ "For the purposes of determining the value of perquisites, allowance and benefits including the income chargeable under the head salary necessity was felt of re‑defining the term employee and the needful was done in Rule 3(2)(e) of the Income‑tax Rules of 1982. The scope of general definition of the term employee was left unrestricted; however, unlike section 16(2)(e) of the Income‑tax Ordinance only a Director of a company working whole‑time for one company was included. Structuring of the definition in that manner clearly implied that directors other than the whole‑timers were to be excluded for the purposes of Rule 3." Consequently, the house rent and conveyance allowances were rejected and on appeal his order has been confirmed by the learned A.A.C. though the reliance was placed on a departmental decision recorded in ITA Nos. 186, 187 and 188/CIT/A/2‑111 of May 31, 1987. Mr. Rehan Hasan Naqvi, the learned counsel for the appellant, supporting the appeal vehemently argued that Rule 3 of Income‑tax Rules of 1982 being in violation of the definition of the word `employee' as contained in clause (e) of subsection (2) of section 16 of the Income‑tax Ordinance was wrongly relied upon by both the officers below. According to learned counsel Rule 3 of the Income‑tax Rules of 1982 was ultra vires of clause (e) of subsection (2) of section 16 of the Income‑tax Ordinance. In this connection the learned counsel has cited at Bar the following decisions: (1) P L D 1968 Lahore 1012‑‑S. Mohammad Din & Sons v. Assistant Director, Labour Welfare. (2) (1937) 5 ITR 349 (Cal. HC) ‑ North British and Mercantile Insurance Co. In re. (3) (1971) 81 ITR 105 (Ind. SC) Bimal Chandra Banerjee v. State of Madhya Paradesh. (4) (1972) 86 ITR 282 (Mad. HC) M. CT. Muthiar Chettiar Family Trust v. 4th Income‑tax Officer. (5) (1980) 121 ITR 951 (Bom‑HC) ‑ Hindustan Lever Ltd. v. CIT, Bombay city. (6)(1982) 134 ITR 158 (A p. HC) ‑ Warner Hindustan Limited v. ITO and others. (7)(1982) SCMR 522 ‑ H.S.C. (Pak.) Limited v. Union Council and others. Moreover, the learned counsel has also placed his reliance on a Division Bench decision of this Tribunal mentioned above. The learned DR, Mr. Rahat Nasim Malik, however, has supported both the officers below. We have heard both the learned counsel for the appellant as well as learned DR. We think that it would be meaningfully advantageous to us if we start with the cases cited at Bar by the learned counsel for the appellant. Starting with the case of North British & Mercantile Ins. Co. (supra) it appears that in that case the Central Board of Revenue had framed Rules 25, 27, 30 and 35 in exercise of their powers conferred on them under section 59(2)(a) of the Income‑tax Act for IP‑ the purposes of determining the income, profits and gains of an Insurance Company. It further appears that the I.T.O. while classifying the average of the acturial surplus, although according to Rule 25, the average only net, profits disclosed by the acturial valuation were to be held as income, profits and gains of the Life Insurance business, adopted the average profits as the basis for determination of notional total income under Rule

35. The questions which were ultimately reached by the Calcutta High Court under section 66(2) of the Income tax Ordinance were as under:‑‑ "Question 1: Whether, When the income, profits and gains of a Life Assurance Company are arrived at for the purpose of charging income tax for any year, in the manner prescribed by Rule 35 read with Rule 25 of the Rules made by the Central Board of Revenue in exercise of the powers conferred by Section 59 of the Indian Income‑tax Act (Act XI of 1'922) it is open to the assessee to go behind this notional figure by referring to the actual sources of its receipts and claim exemption from taxation in respect of any portion of the income. Question 2: Whether, when the income, profits and gains of a Life Assurance Company are arrived at for the purpose and in the manner specified in question 1, and income‑tax is charged in respect of such amount, it is open to the assessee to go behind this notional figure and refer to the actual sources of its receipts in order to claim that a portion of the total income calculated represented income chargeable under the head interest on securities". Question 3: Whether, when income‑tax for any year is charged in respect of income, profits and gains of a Life Insurance Company computed in the manner prescribed by the rules referred to in question 1, the assessee can claim credit under section 18(5) of the Indian Income‑tax Act, for any deductions of tax made at the sources:' Their Lordships of Caluctta High Court answering the aforesaid questions have also laid down that where there is a conflict between the Rules framed under a Statute and the enactment of the Statute itself, the enactment must be treated as the governing consideration and the Rules as subordinate to it even though the Rules may have a statutory authority. In the case of S. Muhammad Din (supra) their Lordships of Lahore High Court were called upon to decide as to whether the word "or" appearing between the expressions "on receipts of information about an existing or apprehended dispute" and "where the dispute relevant to a Public Utility Services" signifies that the expression "Conciliation Officer shall forthwith arrange to interview both the employer and the workman concerned with the dispute" was used conjunctively. In this case the precise question, involved was whether the provisions of Rule 3 were ultra vires the provisions of subsection (1) of the Section 5 and their Lordships made the following observation:‑‑ "It is a cardinal principle of interpretation of statutes that the rules are subordinate to the section under which they are made. If reconciliation between the section and the rules is not possible, the rule must give way. And if they have meaning and effect which is not consistent with the‑Act under which they are made, they are ultra vires:" In Bimal Chandra's case (supra) a Notification was issued in exercise of powers conferred under sections 25, 26, 27; 62(l) and 62(d) and (h) of the Excise Duty Act whereby excise duty was levied on the quantity of liquor which a contractor had failed to take delivery of. Their Lordships of Indian Supreme Court held that since the Notification was ultra vires the power of the State Government hence such levy was illegal. In the case of Family Trust (supra) the Madras High Court was pleased to hold, under the facts and circumstances of the case, that where the purpose and intendment of the Act is to give a Statutory concession and tax relief to an assessee under certain stated circumstances, if those circumstances existed, the concession must be given. In Hindustan Lever's case (supra) the question before their Lordships of Bombay High Court was as to whether Rule 2(3) of the Incometax (Determination of Export Profits) Rules, 1962, was not applicable to the assessee's case merely because the assessee alleged that the profits and gains on exports effected by it could not be ascertained in spite of benefit given by Section 2(5)(i) of the Finance Act of 1962 and it was held by their Lordships that the Rules framed under a Statute could not be enlarged with a view to take away a benefit given to an assessee by certain Statutes. In the case of Warner Hindustan Limited (supra) the question before their Lordships of Andhra Paradesh High Court was as to whether Rule 19 A (2) (1) and (3) were beyond scope of section 80‑J of Income‑tax Act of 1961 and their Lordships were pleased to hold that aforesaid Rule was beyond the scope of Section 80‑J. It was further observed by their Lordships that provisions granting exemption should be liberally construed. In the case of H.S.C. (Pak) 'Limited (supra) the question before their Lordships of Supreme Court was as to whether the place of the appellant where it manufactured salt could be called "a market" so as to levy market fee under West Pakistan Union Council Dharat (Market Fees) Rules of 1961 and their Lordships were pleased to hold that Rules being merely subordinate legislation cannot override provisions of parent Statute. It was further held by their Lordships that in case of any conflict a provision of the Statute had to prevail upon the Rules if the inconsistency could not be otherwise reconciled. In view of the case‑law recapitulated above, we are very clear in our mind that the‑provisions of the Rules would be: (i) Ultra vires the provisions of a Statute if they travel beyond the scope as determined the statue. (ii) That if a Statute has given some benefit, it cannot be taken away by framing a rule to the contrary. (iii) That if there was a conflict between the provisions of a Statute and a rule framed there under, attempt should be made to remove such inconsistency by adopting cardinal principle of harmonious interpretation of Statutes and, if it was not possible the provisions of the Statute should be allowed to prevail upon. Now with this background let us turn to the provisions of the Income‑tax Ordinance and the Rules framed thereunder which are on anvil before us for resolving the controversy in dispute. Section 16 of the Income‑tax Ordinance is re‑produced herein below:‑‑ "16.Salary.‑‑(1)

The following incomes shall be chargeable under the head salary namely:‑‑ (a) Any salary due to the assessee from an employer in the income year, whether paid or not; and (b) Any salary (including arrears or advances of salary) paid to the assessee in the income year by an employer: Provided that where any, share is included in the total income on the basis that it has become due to an assessee, it shall not be included again on the basis that it is paid. (2) For the purposes of subsection (1) (a) Salary includes‑ (i) Any wages. (ii) Any annuity, pension or gratuity (iii) Any fees, commissions, allowances, perquisites or profits in lieu of or in addition to salary or wages; (b) "Perquisite" includes‑ (i) The value of rent‑fee accommodation; (ii) The value of any concession in the matter of rent respecting any accommodation. (iii) Any sum payable by the employer, whether directly or indirectly, to reflect insurance on the life of, or to effect a contract for any annuity for the benefit of, the assessee, or his spouse or any dependent child. (iv) The value of any benefit provided free of cost or at a concessional rate. (v) Any sum paid by an employer in respect of any obligation of an employee; (c) "Profits in lieu of salary" includes‑ (i) The amount of any compensation due to or received by, an assessee from his employer at or in connection with, the termination of, or the modification of any terms or conditions relating to, his employment; (ii) Any payment due to, or received by, an assessee from a provident or other fund to the extent to which it does not consist of contributions by the assessee and the interest on such contributions; (d) "Employer" includes a former employer; and (e) `Employee in relation to a company includes a managing director or any other director or other individual, who, irrespective of his designation, performs any duties or functions in connection with the management of the affairs of the company." On the other hand, Rule 3 of the Income‑tax Rules reads as under:‑‑ "

3. Valuation of perquisites, allowances, benefits.

(1) For the purpose of computing the income chargeable under the head salary, the value of perquisites, allowances and benefits includible in the said income shall be determined in accordance with the provisions of rule 4 to rule 18,wherever is applicable. (2) For the purpose of detraining the value of perquisites, allowances and benefits under sub‑rule (1):‑ (a) Basic salary means the pay and allowances payable monthly or otherwise, but does not include. (i) Dearness allowances or dearness pay unless it enters into the computation of superannuation or retirement benefits of the employee concerned; (ii) Employer s contribution to a recognised provident fund or a fund to which the Provident Funds Act, 1925 (XIX of 1925) applies and the interest credited on the accumulated balance of an employee in such fund; (iii) Allowances which are exempt from the payment of tax; and (iv) Allowances, perquisites, annuities and benefits referred to in the said sub‑rule; (b) Salary means remuneration or compensation for services rendered, paid or to be paid at regular intervals and includes overseas, dearness or cost of living allowance, by whatever name it may be described, and bonus or commission which is payable to an employee in accordance with the terms of his employment as remuneration or compensation for services but does not include the employer's contribution to a recognised provident or superannuation fund or gratuity fund or any other sum which does not enter into the computation for pension or retirement benefits, and (c) Employee includes a director of a company working whole‑time for one company." From perusal of both clause (e) of subsection (2) of section 16 and clause (c) of sub‑rule (2) of Rule 3, it appears that both lay down the different definitions of expression employee. Thus, by throwing a cursory glance one may come to the conclusion that there was a conflict between the two. However, if one goes into the depth of both the provisions it appears that the purposes of both the definitions are altogether different. From opening part of subsection (2) of section 16 it appears that the definition of `employee' as contained in its clause (e) is restricted to the purpose of subsection (1) of section

16. In other words, if a question arises as to whether an income of a person falls within the definition of salary as contained in section 16(1) of the Income‑tax Ordinance, the definition of `employee' as contained in clause (e) of subsection (2) of section 16 shall he taken into consideration. Similarly if the opening part of sub‑rule (2) of Rule 3 of the Income‑tax Rules of 1982 is kept into consideration, it appears that the definition of `employee' as contained in its clause (c) is very much restricted to the purposes of determining the value of perquisites, allowances and benefits which are to be worked out under sub‑rule (1) of Rule

3. Thus, both the definitions as given in, the Income‑tax Ordinance and the Rules framed thereunder are neither conflict with each' other nor the definition of clause (e) of sub‑rule (2) of Rule 3 is ultra vires they section 16 or any other section of the Income‑tax Ordinance. Moreover, the definition of employee has contained in clause(e) of sub‑rule (2) of Rule 3 of the Income‑tax Rules of 1982 does not take away any rights or benefits given by any provision of the Income‑tax Ordinance. Let us also mention here that Rule 3 has been framed in exercise of the power conferred on the Central Board of Revenue by section 165 of the Income tax Ordinance, and clause (b) of its subsection (2) empowers the CBR to frame rules for determination of the value of any allowances, benefits or perquisites. Since Rule 3 deals with valuation of perquisites, allowances and benefits of an employee, therefore, the definition of this word was necessary for its restricted purpose, Similarly, since section 16 deals with the income of an employee as a source of income, the definition of employee was also necessary to determine as, to whether the income of a particular person was or was not falling within the head `salary'. It is important to note that section 16 has dealt with the definition of employer also which is conspicuous by its absence in rule

3. In other words, the definition of employer was necessary in order to determine the nature of income in section 16 but for the purposes of determining the value of perquisites allowance and benefits it was not necessary although the word `employer' has been used in paragraph (ii) of clause (a) of sub‑rule 2 of Rule 3 of the Income‑tax Rules. We are, therefore, of the considered view that neither there was any conflict between two definitions nor the definition of Rule 3 has taken away or purports to take away any benefit given by any provision of the Income‑tax Ordinance. However, before parting with this appeal let us briefly deal with a Division Bench decision of this Tribunal recorded in I.T.A. Nos. 1220 and 1221/KB of 1983‑84 relating to assessment years 1979‑80 and 1980‑81 dated 16‑8‑1988. From its perusal it appears that in that case also the respondent was deriving his income as a Director of 2 companies and claimed house allowances from each company. The I.T.O., however, disallowed it for the reason that he was not whole‑time employee of each of the company as required by Rule 39(3)(d) of the Income‑tax Rules framed under repealed Income‑tax Act. On appeal, however, the learned C.I.T.(A) ordered its deletion. In the departmental appeal the learned DR. contended that the order of learned CIT(A) was not sustainable in law and he put his reliance on a decision of Sindh High Court reported as 1988 P F D 563, C.I.T. v. S. Mazhar Hussain. However, the learned counsel for the respondent accepted the contention of the learned DR and, thus, the following observation was made by the Division Bench of this Tribunal:‑‑ "Mr. A.G. Channa, the learned DR, relying upon a recent decision of the Sindh High Court at Karachi reported as (1988) PTD 563, C.I.T. v. S. Mazhar Hussain, argued that the order of learned C I T (A) was not sustainable in law for the simple reason that the respondent was not whole‑time employee of either of the companies. Mr. Javed Khurram, the learned counsel for the respondent, has agreed with his contention." However, the departmental appeal was rejected for the reason that the definition of employee as contained in Section 16(2)(e) of the Income‑tax Ordinance, applied in the ease of the respondent and the case of Mazhar Hussain (supra) was distinguishable for the reason that it dealt with assessment year 1972. In this eonnecti0n the following observations of the Division Bench of this Tribunal is quite pertinent:‑‑ "We have perused the decision relied upon by Mr. Channa and with due respect to him we do not think that it applies in the case of the respondent at all. In the decision relied upon by Mr. Channa, the assessment year involved was 1972‑73 whereas we are concerned with assessment years 1979‑80 and 1980‑

81. Let us mention here that in these assessment years the Income‑tax Ordinance, 1979, became applicable and the definition of `employee' as contained in Section 16(2)(e) thereof stood as under:‑‑ (e) Employer in relation to a company includes a managing director, or any other director or other individual, who, irrepective of his designation, performs any duties or functions in connection with the management of the affairs of the company. Thus, the definition of the employee as laid down in clause (d) of sub -rule (3) of Rule 39 of the Income‑tax Rules framed under repealed Income‑tax Act was no more applicable for the relevent assessment years. It is, therefore, clear that during the relevant assessment years the employee should not have been a whole‑time employee in order to make him entitled to house allowance. If a Director has to perform any duty or function in connection with the management of the affairs of the company he becomes entitled to be designated as an employee of a company. An assessee, therefore, can be an employee of more than one company." Now, if we peruse the above‑quoted passage it would appear that the Division Bench applied the definition of `employee' as contained in clause (e) of subsection (2) of section 16 of the Income‑tax Ordinance instead of the definition of the word `employee' as given in clause (d) of sub‑rule (3) of Rule 39 of the Income‑tax Rules framed under repealed Income‑tax Act with the observation that the latter was not applicable during assessment years 1979‑80 and 1980‑81 which were involved in that case. We feel that elaborate order was not written to fully explain the above‑quoted view of the Division Bench because' the point involved in the departmental appeal was conceded by the learned counsel for the respondent. We, therefore, take this opportunity to dilate on the subject in some details. If we peruse clause (p) of subsection (2) of section 166 of the Income‑tax Ordinance it would appear that all the notifications, directions and instructions etc. etc. issued under repealed Income‑tax Act remained applicable provided they were not inconsistent with the corresponding provision of the Income‑tax Ordinance or any direction, instruction or notification issued thereunder. Similarly, if we peruse Rule 217 of the Income‑tax Rules of 1982 it appears that the Notification No. 355(K)/62, dated March 27, 1962, whereby the Income‑tax Rules were notified by C.B.R. in exercise of their power under section 59 of the repealed Income‑tax Act stood repealed. Before proceeding further let us also mention here that Rule 39 which was referred to by the Division Bench was contained in Income‑tax Rules which were notified by C.B.R. vide the Notification No. 355(K)/62, dated March 27, 1962. Thus, it is clear that Rule 391 remained applicable in spite of the promulgation of the Income‑tax Ordinance till it was repealed in 1982 by Rule 217 of the Income‑tax Rules of 1982. It would therefore be advantagous to reproduce sub‑rules (1), (3) and (4) of Rule 39 framed under the repealed Income‑tax Act and it reads:‑‑ "39 (1) For the purpose of assessment under Section 7 of the Act, the allowances, annuities, benefits and perquisites specified in column 2 of the Schedule annexed hereto shall, to the extent indicated in column 3 hereof be deemed to be the Income of an assessee and shall be included in his total income:‑‑ (3) For the purposes of this rule (a) Basic salary means the pay and allowances payable monthly or otherwise, but does not include‑‑ (i) Dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the company of the employee concerned; (ii) Employer s contribution to a recognised fund or a fund to which the Provident Funds Act, 1925 (XIX of 1925) applies and the interest credited on the accumulated balance of an employee in such fund; (iii) Allowances which are exempt from the payment of tax; and (iv) Allowances perquisites, annuities and benefits referred to in sub‑rule (1); and (d) Employee includes a director of a company working whole‑time for one company. (4) This Rule shall apply to the allowances, annuities, benefits and perquisites which become due to an assessee on or after the first day of July, 1961." Since we shall be referring to Section 59 of the repealed Income‑tax Act also, it would be in the fitness of things if its relevant Clause were also reproduced as it stood on the date of repeal of the aforesaid repealed Income‑tax Act. It reads:‑‑ Section59 (dd) provide for the ascertainment, and the determination of the value, of the allowances, benefits, perquisites, income, profits or gains for the purposes of clause (vi) of subsection (3) of section 4, subsection (1) of section 7 and subsection (1) of Section 12." Before proceeding further let us mention here that clause (dd) as reproduced above was inserted originally by the Finance Ordinance 15 of 1959 w.e.f. Ist July, 1979, and it was as under: "Provide for the ascertainment of the allowances, benefits, perquisites, income, profits and gains for the purposes of clause (4) of subsection (3) of Section 4, subsection (1) of Section 7 and subsection (1) of Section 12." However, the Finance Ordinance 25 of 1960, which became effective from Ist July, 1960, introduced the concept of the determination of the value of the allowances etc., and it got the text as reproduced above. It is, thus, clear that when Income‑tax Rules were being framed under section 59 of the repealed Income‑tax Act on March 29, 1962, vide a Notification No. 355(K)/62, the legislature had already given the power to the C.B.R. to frame rules regarding determination of the value of the allowances, benefits, perquisites etc. in addition to ascertainment thereof. But from perusal of either sub‑rule (1) or (3) or (4) of Rule 39 framed under repealed Income‑tax Act, the concept of determination of value of the allowances or perquisites etc. is conspicuous by its absence. On the contrary sub‑rule (2) of Rule 3 of the Income tax Rules of 1982 specifically deals with this issue. Thus, from the discussion made above it is clear that the repealed Income‑tax Act neither explained various types of allowances and perquisites etc in so many words nor defined the word `employee'. The CBR, therefore, in exercise of their powers under section 59 of the repealed Income‑tax Act framed and notified the Income‑tax Rules of 1962 whereby sub‑rule (1) of Rule 39 laid down various types of allowances, annuities, benefits and perquisites in the Schedule attached thereto. Moreover, by notifying sub‑rule (3) the concepts of `basic salary' and `employee' were also defined. Thus, till 30th June, 1979, this legal position continued, But with promulgation of Income‑tax Ordinance of 1979 from Ist July, 1979 it underwent' considerable change. Subsection (1) of Section 16 of the Income‑tax Ordinance of 1979 has dealt with the issue of chargeability of income under the head `salary'. By subsection (2) of Section 16 of the Income‑tax Ordinance the legislature also explained not only the ambit 'of expressions `salary', `perquisites', "profits in lieu of salary", but also defined the expressions, "employer" and `employee'. It is, therefore, clear that since Ist July, 1979, sub- rules of Rule 39 of the Income‑tax Rules framed under repealed Income‑tax Act were to be read with subsections (1) and (2) of section 16 of the Income‑tax Ordinance and in case of any inconsistency the provisions of the Income‑tax Ordinance had to prevail in view of clause (p) of subsection (2) of Section 166 of the Income‑tax Ordinance. Thus, it was for these reasons that the Division Bench of this Tribunal has held that the definition of `employee' as contained in clause (d) of sub‑rule (3) of Rule 39 was inapplicable in assessment years 1979‑80 and' 1980‑

81. Let us also mention here that sub‑rule (4) of Rule 39 of the Income‑tax Rules framed under repealed Income‑tax Act was also rendered meaningless as it applied to the allowances, annuities, benefits and perquisites which became due to an assessee on or after Ist day of July, 1961. To be precise, let us observe that it did not lay down that it was to be used for the purposes of determining the value of the perquisites, allowances and benefits etc. We therefore, think that the decision of the Division Bench relied upon by Mr. Rehan Hassan Naqvi does not come to his rescue in assessment year 1986‑87 which is involved in the appeal under discussion for the simple reason that the legal position further underwent a. change after notification of Income‑tax Rules of 1982 which include Rule 3 with its sub‑rules as reproduced above and which we have already discussed in details while comparing the definitions of `employee' as contained in clause (e) of subsection (2) of Section 16 and clause (c) of sub‑rule (2) of Rule 3 of the Income‑tax Rules of 1982. In view of discussion made above we find no force. in this appeal and it stands rejected accordingly. As Per Alvi Abdul Rahim (Accountant Member).‑ I have gone through the order proposed by the learned Chairman. In his well‑researched order he has examined the issue in respect of following assessment years: (i) Assessment years up to 1978‑79 when the Income‑tax Act, 1922 and Income‑tax Rules, 1962 framed thereunder were in force, (ii) Assessment years 1979‑80, 1980‑81 and 1981‑82 when the Income‑tax Ordinance, 1979 and the Income‑tax Rules, 1962 were in force, and (iii) Assessment year 1.982‑83 and onwards which are governed by the Income‑tax Ordinance, 1979 and Income‑tax Rules, 1982, A non‑whole‑time director working for more thane one company during assessment years up to 1978‑79 is not entitled to any benefit in respect of conveyance allowance as provided by the Income‑tax Rules, 1962. This is a led position because of the Sindh High Court decision reported as 1988 PTD 563 (C.I.T. v. S. Mazhar Hussain). As far as assessment year 1982‑83 and, onwards are concerned the proposed order authored by the learned Chairman clearly says that a non‑whole‑time director working for more than one company is not entitled to any benefit in respect of conveyance allowance available in the Income‑tax Rules, 1982. I fully, agree with this view. As far as the three years viz. J 1979‑80, 1980‑81 and 1981‑82 are concerned, I hold the same view as in respect of other years. A non‑whole‑time director is liable to tax‑because he is earning income which attracts income liability. This is apparent from section 9 which is reproduced below. "

9. Charge of income‑tax.‑‑(1)

Subject to the provisions of this Ordinance, there shall be charged, levied and paid for each assessment year commencing on or 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. (2) Where, by virtue of any provision of this Ordinance, income‑tax is to be deducted at source or collected or paid in advance, it shall be so deducted, collected or paid, as the case may be, accordingly." As far as computation of his remuneration from the companies is concerned, as per the Income‑tax Ordinance the same has to be computed under section

16. Income‑tax is to be levied on salary received in cash as well as in kind. sub‑clauses (a) and (b) of section 16(2) are reproduced below: "

16. Salary.‑‑ (2) For the purposes of subsection (1);-- (a) Salary includes‑‑ (i) Any wages; (ii) Any annuity, pension or gratuity; (iii) Any fees, commissions, allowances perquisites or profits in lieu of, or in addition to, salary or wages: (b) Perquisite includes‑‑ (i) The value of rent-free accommodation. (ii) The value of any concession in the matter of rent respecting an accommodation; (iii) Any sum payable by the employer, whether directly or indirectly to effect an‑insurance on the life of, or to affect a contract for any annuity for the benefit of the assessee, or his spouse or any dependent child; (iv) The value of any benefit provided free of cost or at a concessional rate; (v) Any sum paid by an employer in respect of any obligation of an employee;" Section 16(2)(e) says that directors of a company are to be treated as employees for the purpose of computing their income from this source. However, the position was different under the Income‑tax Act, 1922. Section 7 dealing with computation of salary income, did not say that remuneration of a director is to be calculated as salary income falling in that section. A director is not an ordinary employee of a company. He is an employee in the sense that he works for the company and is paid remuneration for his personal services. But at the same time the master‑servant relationship does not exist in the strict sense of the word because a director is also a shareholder of the company. He, therefore, owns the company to the context of his shareholdings. In view of this there was some controversy as to whether remuneration of a director should be computed under section 7 or under section 12 of the Income‑tax Act, 1922. Under the Income‑tax Ordinance, 1979 there can be no such controversy. Thus, a director of a company has to pay tax in respect of salary in cash as well as in kind and the amount of his salary has to be computed in accordance with provisions of section 16 of the Income‑tax Ordinance. If he wants any exemption for a part of his remuneration in cash or kind he has to rely on some provision of law. Item 4 of the Schedule to Rule 39 of the Income‑tax Rules, 1962 says that a part of conveyance allowance shall not be deemed to be income of an employee. But this provision is not applicable in the case of a part‑time director as only a whole‑time director working for one company is covered by these rules. This is mentioned in Rule 39(3)(d). It provides that Rule 39 is applicable to a director of a company who works whole‑time for one company. I may add here that though Rule 39 of Income‑tax Rules, 1962 and Rules 3 to 18 of the Income‑tax Rules, 1962 have been framed for the purposes of determining value of perquisites, allowances and benefits enjoyed by an employee they, in fact, contain exemption facilities for the tax‑payers. It is mentioned in these rules that benefits and allowances up to limits, mentioned therein, are not to be included in taxable income. This exemption has been extended to a non‑whole‑time director. The same cannot be given until and unless the Rules are amended. Rule 39(1) of the Income‑tax Rules, 1963 gives an impression as if the subordinate legislature is giving taxation rights over various types of allowances listed therein. The relevant portion is reproduced below: "39(1). For the purpose of assessment under section 7 of the Act, the allowances, annuities, benefits and perquisites specified in column 2 of the Schedule annexed hereto shall to the extent indicated in column 3 hereof be deemed to be the income of an assessee and shall be included in his total income. In fact it is not so. The taxation rights are given by a statute framed by the legislature. The role of a subordinate legislature is limited to implempnting of provisions of the statute. Moreover, as section 14 empowers the Government to grant exemption from levy of tax, the same can be given. But the executive has no power to levy tax on something, which does not fall in the scope of a fiscal statute. What in fact has been done by Rule 39 is that a part of income in the form of cash allowances or facilities in kind, which otherwise falls in the category of taxable income has been excluded from the ambit. It will be appropriate to say that Rule 39 provides that a part of such allowances and benefits will not be deemed to be income. As a matter of fact the provisions of section 16 do not need support of any Income‑tax Rule to compute value of cash conveyance allowance received by an assessee who is a director in two or more companies. Therefore, it cannot be said that conveyance allowance received by a non‑whole‑time director couldn t be subjected to tax because Rule 39 does not contain any provision on the subject. Similarly, it cannot be said that Rule 39 should be made applicable to a non, whole‑time director because definition of the term `employee' contained in Rule 39 is too narrow as compared to the definition contained in section

16. The purposes of the definitions given in section 16 and in the Income‑tax Rules are different as has been explained lucidly by the learned Chairman. In view of the foregoing I am of the view that a non‑whole‑time director will have to pay tax on conveyance facility of allowance received by him without any exemption for a part or whole of the allowance or of value of the facility. As Per Saiyid Saeed Ashhad (Judicial Member).‑‑‑ I have gone through the orders proposed to be delivered by the learned Chairman and Mr. Alvi Abdul Rahim, the learned Accountant Member. From a minute and detailed examination and consideration of clause (e) of subsection (2) of section 16 and clause (c) of sub‑rule (2) of Rule 3 it is absolutely beyond any dispute that the definitions of the word `employee' appearing in the aforesaid two provisions of the Income‑tax Ordinance and the Income‑tax Rules are in the context of two different situations and for two different purposes. The definition of the word `employee' in clause (A) of section 16 of the Income‑tax Ordinance is for the purpose of determining or specifying the persons in employment or in service of a company, for the purposes of subsection (1) of section 16 of the Income‑tax Ordinance. In other words, it can be said that the purpose of the above definition is to define or specify those persons in the employment or 'service of a company whose remuneration falls within the definition of the expression `salary' as defined in section 16(1) of the Income‑tax Ordinance. Thus, the object of section 16 in defining the expression `employee' is to specify and define employed persons for the purpose of charging to tax the remuneration payable to them under the head `salary'. The definition of the expression `employee' as provided in clause (c) of sub‑rule (2) of Rule 3 of the Income‑tax Rules is for the purpose of defining or specifying a person who is to be treated as an employee for the purpose of determination and computation of the value of perquisites, allowances and benefits included in the income chargeable under the head salary. Thus, from the above examination and consideration of the two definitions of the expression `employee', it is to be observed that section 16 deals with a different situation while Rule 3 of the Income‑tax Rules deals with ‑altogether a different situation and object. The object or the purpose of the above two provisions of the Income‑tax Ordinance and the Income‑tax Rules are absolutely different and the two provisions cater for absolutely two different purposes or situations which are not in conflict with each other. As such, the definition of the expression `employee' in one of the above provisions cannot be said to be contradictory to the definition of the expression `employee' in another provision or to be in derogation of one another. It may also be pointed out that Rule 3 of the Income‑tax Rules was framed by the Central Board of Revenue in exercise of the powers conferred on it by section 165 of the Income‑tax. Ordinance. It will be appropriate to reproduce clause (b) of section 165(2) of the Income‑tax Ordinance, which is as under:‑‑ "

165. Power to make rules.‑‑(1)...................................... (2) ........ ........ (a) ........... ........ (b) Provide for the determination of the value of any allowances, benefits or perquisites." From persual of the above provisions of the Income‑tax Ordinance, the contention that Rule 3 of the Income‑tax Rules was ultra vires of section 16 of the Income‑tax Ordinance is without any substance. The Central Board of Revenue had been empowered by above clause (b) of section 165 of the Income‑tax Ordinance to make rules for determining the value of any allowances, benefits or perquisites and in consequence thereof the CBR framed Rule 3 of the Income‑tax Rules and for that purpose it defined the expressions basic salary, salary and employee. The definitions of the above expressions in Rule 3 are in agreement context while the definitions of the above expressions in section 36 of the Income‑tax Ordinance are with regard to some other context and situation different, from the one provided in the Rules. In view of the above, I am entirely in agreement with the conclusion arrived at by the learned Chairman that there was neither any conflict between the two definitions of the expression `employee' as provide in section 16(2)(b) of the Income‑tax Ordinance and Rule 3(2)(c) of the Income‑tax Rules, nor the definition provided in Rule 3 is either ultra vires of section 16 of the Income‑tax Ordinance, or had taken away any benefit given by any provision of the Income‑tax Ordinance. The reasons as to why the finding of a Division Bench of this Tribunal recorded in I.T.A. Nos. 1220 and 1221/KB of 1983‑84 dated 16‑8‑1988 was not followed in this appeal, have been elaborated in great detail by the learned Chairman in his discussion beginning from para. 3 on page 12 till the end of para. 1 on page 19, and I find myself entirely in agreement with the reasons advanced by him for not applying the finding arrived at by this Tribunal vide its order dated 16‑8‑1988 in I.T.As. No. 1220 and 1221 /KB of 1983‑

84. In view of the above discussion, I find that the above appeal is without any force and it accordingly, stands rejected. M.B.A./853/T Appeal dismissed.