1988 PLP (Trib (PTD)

These three appeals have been filed at the instance of a private limited company who runs general insurance business. The appeal for the assessment year 1982-83 is directed against order, dated 20-12-1985 passed by the learned C .I. T. (A), ' Zone 1, Lahore. The impugned order for the assessment years 1983-84 and 1984-85 was passed on 12-2-1986 by the same Commissioner. All the appeals contain common points which are discussed and adjudicated hereunder:-

2. Capital Gains. In the assessment year 1982-83 a sum of Rs.954,563 was treated as part of the taxable profits from insurance business, rejecting the assessee's claim for its exemption under clause 116 of the Second Schedule to the Income Tax Ordinance, Under the same treatment sums at Rs.147,475 and Rs.1,100,673 were included in the income in 1983-84 and 1984-85. On appeal the learned C. I. T. (A) confirmed the assessment for the reason that under the provisions of Rule 5(b) of the Fourth Schedule, read with section 26 of the Ordinance, there was no scope for controversy that the gain on the realisation of investment formed part of the insurance profit. With this the appellant feels aggrieved

3. The learned counsel argued that the assessing officer invoked clause 5(b) of the Fourth Schedule completely over-looking that income was covered by exemption in clause 116 of the Second Schedule and the profit had arisen from the sale of N .I. T. units and shares of company as defined in para. B(2) of Part IV of the First Schedule. The learned counsel admitted that the Appellant was running general insurance business and assessment was to be made under the Fourth Schedule of which Rule 5W was applicable which is at par with Rule 6(1) of the First Schedule of the repealed Act. It -was vociferously pleaded that the exemptions enlisted in the Second Schedule were granted under section 14 of the Ordinance and, therefore, they did not attract the provisions of section 9 of the Ordinance. It was insisted with vehemance that section 26(a), under which the profits and gains of any business of insurance were to be computed was not a charging section and, therefore, it could not oust the exemption granted under section

14. For this assertion reliance was placed on a case of Indian jurisdiction reported as (1949) 17 I T R

180. The learned counsel drew our attention to the wording employed in the charging section 9 and submitted that the charge of tax was 'subject to the provisions of this Ordinance' hence the two officers below clearly erred in ignoring the exemption granted under section 14 read with clause 116 of the Second Schedule to the Ordinance. A case was made out to argue that tax was to be charged under section 9 in respect of income from business and profession which is to be computed under section 22 read with sections 26(a) and the Fourth Schedule but the reliefs and allowances admissible generally could not be refused. For this argument reliance was placed on a case of Indian jurisdiction reported as (1979) 119 I T R

660. It was, however, admitted by the learned counsel that no appeal against the order by the learned C. I. T. (A) was filed in the assessment year 1980-81 where capital gain was taxed in similar circumstances.

4. The learned Legal Advisor for the Department on his turn submitted that section 10(7) of the repealed Act is at pari passu with section 26(a) of the Ordinance. Similarly Rule 6(a) of the First Schedule of the repealed Act is parallel to Rules 5 and 8 of the Fourth Schedule. Referring to section 26 it was submitted that a special provision was made in the Ordinance as against the repealed Act where only a subsection dealt with the computation of income of insurance companies. It was asserted that a combined reading of section 26(a) and section 22(a) leaves no manner of doubt that these charging sections also deal with the computation of income. Arguments were advanced to submit that in the eye of law there was no difference between the main provisions of an enactment and schedules attached to it with the result that the Fourth Schedule had the same force of law for the 'computation of the profits and gains of Insurance Business' as other provisions have for computation of income in respect of other sources. The learned Legal Adviser made particular mention of Rule 8 of the Fourth Schedule, which lays down: "notwithstanding anything contained in the Ordinance or any law for the time being in force' the provisions of the Schedules shall apply. The learned Legal Adviser expressed the opinion that the Schedule was as much a charging enactment as any other provision of the Income-tax Ordinance. For this view the learned Legal Adviser took support from a High Court decision reported as P L D 1983 Kar.

214. The learned Legal Adviser pleaded that Capital Gain having once been made chargeable under Rule 5(b) there was no occasion to refer to section 14 or to the Second Schedule. For this assertion reliance was placed on a case reported as 1986 P T D (Trib)

433. It was clarified by the learned Legal Adviser that a charging provision could be placed in any part of the legislation as was done in the present case by enacting the Fourth Schedule. The learned Legal Adviser referred to decisions reported as P L D 1986 Kar. 393 and (1986) P T D (Trib.) 408 to develop the argument that if any inconsistency appeared between section 14 and the Fourth Schedule, then the later provision was to prevail. It also was canvassed that the whole Ordinance is to be read together to give meaning to Rule 5 of the Fourth Schedule and it was not correct to place the different provisions under water-tight compartments nor an isolated reference to section 2(44) or section 1'1 of the Ordinance was necessary.

5. We have given our earnest consideration to the arguments advanced by both sides and also scanned through the case-law as pronounced by the superior Courts of Pakistan which lends enough guidance as may not necessitate reference to the Indian decisions to which the learned counsel for the Appellant so freely referred. On the basis of the Pakistan decisions we infer that although the method of computation of income, under different heads set out in section 15, is embodied in sections 16, 17, 13. 22 and 30 of the Income-tax Ordinance, to view of section 26(a) these methods have no application in the case of an insurance company. The computation of 'profits and gains' of any business of insurance' is to be carried out in accordance with the mode prescribed in the Fourth Schedule to the Ordinance. It also is settled that the income of an insurance company, from any source whatsoever, is to be treated artificially as one unit of income. It is for this reason that insurance companies are not to submit their returns under different heads but as one unit of income reflecting 'the balance of profits disclosed by the annual accounts required under the Insurance Act, 1938 (IV of 1938), to be furnished to the Controller of Insurance'. For these conclusions we rely on Karachi High Court decision in re: American Life Insurance Company P L D 1967 Kar. 668 and in re: Habib Insurance Company Ltd. P L D 1975 Kar.

848. In the latter case, besides other controversies, exemption was claimed under section 4(3) of the repealed Act in respect of income from a newly constructed property. The learned Judge held that the insurance company was not entitled to this exemption as its income was to be computed under the special provisions contained in the Schedule. It was further held that if the legislature intended to grant exemption to the insurance companies also in respect of newly constructed properties, the same could be done by incorporating suitable provisions in the Schedule. The obvious conclusion is that even if the various sources of total income of an insurance company are ascertainable (some of which may be exempt under other provisions of law) still the total income is to be treated as a single unit to which the charging provision of section 9 become applicable. Moreover, in the face of section 26(a) of the Fourth Schedule, the other provisions of the Ordinance (including those granting exemptions) have no application to the case of an insurance company. For this decision, besides the judgments discussed hereinabove, we draw support from the provisions of Rule 8 of the Fourth Schedule which demands enforcement of 'the provisions of this schedule . . . . . notwithstanding anything contained in this Ordinance or any law for the time being enforced."

6. It also is to be borne in mind that in the present case what was charged to tax, as per provisions of Rule 5(b) of the Fourth Schedule, was

sum taken credit for in the accounts, on account of

gains on the realization of investment

If it is presumed, for the sake of argument that there was no transaction of sale of shares etc even then, we entertain no doubt, the assessing officer could still bring to charge to tax the notional or artificial income if the same was 'taken credit for in the accounts on account of appreciation

of investments'. A judgment to this effect was delivered by the highest legal forum of the realm in PLD 1985 SC 109 in yet, another case of Habib Insurance Company limited where their lordships went on to hold that appreciation in the value of assets/investments are a component of business of insurance which the assessing officer is not competent to exclude or to ignore. In the case before us the factum of sale of shares etc. the realization of gain thereon and its credit in the accounts as submitted to the Controller of Insurance; is not in dispute and, therefore, we need not take long to hold that the same was correctly brought to tax, though a correct nomenclature may not have been assigned. In our judgment, therefore, the Appellant was not entitled to exemption available in clause 116 of the Second Schedule as its total income comprised of business of insurance of which the computation of profits and gains was made under the Fourth Schedule of the Ordinance read with section 26 thereof.

7. Management Expenses. Addition was made at Rs.62,000 in the year 1982-83 Rs.63,000 in 1983-84 and Rs.50,000 in 1984-85. The reason for add-back in each assessment year was: 'inadmissible'. This inadmissibility was discussed in the main body of each order which shows that the disallowance was made out of the expenses claimed under the heads: entertainment, motor vehicles, repairs, travelling and telephone. It was mentioned by the assessing officer that similar disallowances were made in the earlier years, which were upheld in appeals. The assessing officer discarded the arguments that the disallowance in the past were unjustified and the expenses in the past (as now) were supported by voucher and were fully admissible under law. According to assessing officer the disallowance of motor vehicles and telephones were made for non-business use and the argument of the A.R. was not acceptable that such non-business use may be possible in the Head Office where Chairman/ Directors worked but not in the branches which are wholly controlled by managers. The learned C.T.I. (A) did not feel persuaded by the arguments that there was no justification for the add-backs as the assessing officer had not pointed out any specific instance of unverifiable and inadmissible expenses; in the face of admission that the add-backs were in line with the treatment in past years. Before us the learned counsel for the Appellant repeated the same arguments as were taken up before the two officers below. It was further argued that Rule 5 of the Fourth Schedule (read with section 26 of the Ordinance) did not empower the assessing officer to make any disallowance though add-backs were possible by resort to section 13 of the repealed Act, as was done in the past, but now the power to make disallowance was restricted only to such expenses as were not deductable. In the case of insurance company 'the balance of profit disclosed by the annual accounts' submitted to the Controller of Insurance were 'to be accepted, hence the assessing officer could not interfere with these. The learned D.R. on his turn referred to the decisions in re: Habib Insurance Company Ltd. P L D 1985 SC 109 and 1978 P T D 97 in re: New India Assurance Co. Kar. where it was held that so much of the management expenses could be added back as exceeded the prescribed limit remained unproved.

8. We discover that the treatment meted by tie assessing officer in the past and the confirmation by the first appellate authority clearly establishes that the accounts contain such expenses as are either not proved or do not relate to business hence not deductable in computing the income chargeable under the head 'Income from business or profession'. The add-backs in the years-under -consideration are of the same nature moreso when the method and manner of maintaining accounts has admittedly not undergone any change We, therefore, need not take long to UPHOLD these when it has been authoritatively held in P L D 1982 Kar. 684 in re: New Jubilee Insurance Company Ltd. "The I.T.O. is bound to accept the balance of profit as disclosed by the accounts submitted by an Assessee to the Controller of Insurance under section 15(1) of the Insurance Act, and accepted by him, except that the I.T.O. is entitled to exclude expenditure not permissible under the provision o section 12 o the Act."

9. We are of the view that the power to disallow unproved or unsubstantiated expenditure still vests with the assessing officer as per subsection (3) of section 32 which is available to him as much while computing income under Rule 5(a) as while proceeding under section 22 of the Ordinance.

10. Provisions for Taxation. The assessing officer made the following add-backs in the years-under-appeal out of the expenses debited to the Profit and Loss Account:- 1982-83 Rs.2,400,000 1983-84 Rs.314,000 1984-85 Rs.2,300,000 The assessing officer made the adjustment by adding back the above amounts to the balance of profit disclosed by the annual accounts, by resort to Rule 5(a) of the Fourth Schedule. We recall that add-backs on account of 'Provisions for Taxation' were ordered to be deleted by this Tribunal in innumerable decisions, which the learned Judges of the Karachi High Court confirmed in P L D 1982 Kar. 684 - New Jubilee Insurance Co. Ltd, after an elaborate and authoritative discussion of the distinction between the words 'Expenditure' and 'Reserve'. However, under the Income-tax Ordinance, 1979 the legislature inserted the words 'or/the amount of any tax deducted at source from any dividends or interest received' vide Finance Ordinance, 1980 to enable the assessing officers to make additions for provisions and reserves in addition to expenditure or allowance. Therefore, the position in law now appears to be different in Rule 5(a) of the Fourth Schedule compared to Rule 6 of the First Schedule to the repealed Act where adjustment was restricted 'so as to exclude from it any expenditure, other than expenditure which may under the provisions of 10 of this Act be allowed for computing the profits and gains of business." In the appeal before the learned C.I.T.(A) this issue was not taken up (or was not pressed) hence it was not adjudicated in the impugned orders. .

11. In the three appeals filed before this Tribunal on 19-4-1986 once again the grounds did not include this issue. However, this has been taken as an additional ground through applications moved on 16-8-1987. We do not think that this is a purely legal ground as may go to the root of the case and, therefore, refuse to entertain the same at this belated stage.

12. For the reasons recorded hereinabove all the three appeals Fail and are hereby dismissed. M.B.A./457/T Appeals dismissed.