P L D 1967 Karachi 668 (PLP)

WAHIDUDDIN AHMED, J.-This is a reference under section 66(I) of the Income-tax Act in which the following question, of law has been referred for the decision of this Court :- "Whether on the facts and in the circumstances of the case the amount representing assessee's income from dividends was chargeable to super-tax under Para. 'B'(1) of Part I and Para. `A' (2) (a) of Part II of the Third. Schedule to the Finance Ordinance, 1960.'' In this reference the assessee respondents are engaged in the Life Insurance business. 1n the assessment year 1960-61 they declared a loss of Rs. 24,60,371 under rule 2 (a) of the 1st Schedule to the Income-tax Act, 1922 and disclosed a surplus of Rs. 5,47,270 under rule 2(b) of the said Schedule. The amount of surplus was inclusive of dividend income. The assessee contended before the Income-tax Officer that the amount re presenting income from dividends included in the above assess able surplus was chargeable to super-tax at the rate of 15 % in terms of Para. B(I) of Part I and Para. A (2)(a) of Part II of the Third Schedule to the Finance Ordinance, 1960. The learned officer rejected this plea on the ground that the profits and gains of Insurance business from all sources are to be computed artificially in accordance with, the rules contained in the Schedule to the Income-tax Act. Since the Insurance Company instead of submitting its return under the various heads as laid down in section 6 has to submit one unit of income as provided in the Schedule to the Act, it is to be charged as a whole and the income from dividends included in the total income cannot be separately charged as provided in the above said Finance Ordinance.

2. On a direct appeal the Income-tax Appellate Tribunal accepted the plea of the respondent-assessees on the following observations "We agree with the appellant's contention that although by artificial method the computation of the income in case of life insurance business is to be made in a particular manner yet for charging the tax we have to refer to the different provisions of the Schedule to section 10 of the Finance Ordinance, 1960 and since this Ordnance clearly demarcates different rates applicable to different kinds of incomes the rate applicable to the dividends as such has got to be adopted in conformity with these provisions." The Tribunal, therefore, found that though the computation of income in cases of life insurance business is to be made in a particular manner yet for charging the tax one has to refer to the different provisions of the Schedule to section 10 of the Finance Ordinance, 1960, and since it clearly demarcates different rates applicable to different kinds of income the rate applicable to the dividend as such has got to be adopted in conformity with the provisions. Accordingly the appeal was allowed. The Department being aggrieved by this order applied for referring the dispute between the parties in respect of the above questions of law to this Court. It is in these circumstances that the above question has come-up for consideration before us.

3. It is not disputed by Mr. Nusrat, the learned counsel for the Department, that an Insurance Company instead of making its return under the various heads as laid down in section 6 and has got to submit one unit of income, a sort of notional or artificial income as provided in the Schedule to the Income-tax Act. The learned counsel conceded that in the present case the total income of the assessee was computed on the basis of a surplus of Rs. 5,47,270 under rule 2(b) of the 1st Schedule to the aforesaid Act. He also conceded that the amount of surplus was inclusive of dividend income. Mr. Nusrat's contention is that since the method of computa tion of income of life insurance company is on the basis of "surplus according to actuarial valuation which comprises all the various sources of income, and the entire income has been offered for tax under section 10 of the Income-tax Act, it cannot be differentiated between the two heads of income, i.e. business and dividend and charged at different rates." The learned counsel referred us to section 10(7) of the Act which clearly provides in unequivocal terms that the provisions of sections 8, 9, 10 and 11 are inoperative to the extent to which the provisions of the said section are inconsistent with the rules of the 1st Schedule. We are in agreement with the contention of the learned counsel that the income of an Insurance Company has to be com puted under the 1st Schedule read with section 10(7). It cannot also be doubted that the income of an Insurance Company from any sources whatsoever is to be treated artificially to be one unit of income falling under one head of revenue.

4. The contention of the learned counsel for the Depart ment that the above treatment given to the income of an Insurance Company statutorily cannot be snatched away by the provisions of the Finance Ordinance has received our anxious consideration. The learned counsel, however, had to concede that section 10(7) only deals with the computation of the income of an Insurance Company and is not a charging section. Therefore, in order to charge an Insurance Company to income tax it would be necessary, as in the case of other persons, to rely on the other provisions in the income-tax Act which are called charging sections. In section 3 of the Income-tax Act it is provided that income-tax shall be charged at any rate or rates fixed for the year by the annual Finance Act in respect of the total income of the previous year of every person which includes the Company. Section 4 defines the gamut of total income, the ambit of taxation varies with the factor of residence in the previous year, etc. Under section 6 of the Income-tax Act there are six heads of income, profits and gains chargeable to income-tax, but in view of section 10(7) these have no application to the case of Insurance Companies. In such cases the Insurance Company instead of submitting its returns under different heads has to submit it as one unit of income on the basis of notional or artificial income as provided in the Schedule to the Act. In order, however, to charge the Insurance Companies to income tax, as in other cases, resort has to be made to the Finance Act applicable to the relevant assessment year. In the present case, Finance Ordinance, 1960 is applicable. Now under section 10 of the said Ordinance income-tax was to be charged at the rates specified in Para. 1 of the Third Schedule. There is no other method of charging the income-tax. So far as the super-tax for purposes of section 55 of the Income-tax Act, 1922 is concerned, it was to be charged at the rate specified in Part II of the said Schedule. Thus it was necessary - for the assessing authorities in terms of Part I and Part II of the Third Schedule to find out the rates at which the income-tax and super-tax was to be charged on the assessee's income. Admittedly, the income-tax could be charged in the present case only under Para. B, Part I and super-tax under Para. A, Part It of the said Schedule. It will, therefore, be necessary to refer to the provisions of Para. B, Part I and Para. A(1) of Part II which are as under :- "Para. B, Part I. In the case of every company and local authority and in every case in which under the provisions of the Income-tax Act, 1922 (XI of 1922). Income-tax is to be charged at the maximum rate- (1) On the part of the total income ,consisting of the amount, if any, to which sub-paragraphs (2) and (3) of Para. A of Part II apply . . . . . Nil. (2) On the balance of the total income . . . . 30% of such income." "Para. A, Part II. Rates of Super-tax. In the case of a company- (1) on the whole of the total income excluding income to which sub-paragraphs (2) and (3) apply ..30 per cent. of such total income." It will be noticed that under Para. B, Part I no income-tax is chargeable on the part of total income consisting of the amount, if any, to which sub-paras. (2) and (3) of Part II apply. It is only on the balance of the total income that income tax is to be charged at 30 %. of such income. Similarly under Para. A of Part II super-tax is chargeable only at the rate of 30 % on the whole of the total income excluding income which sub-pares. (2) and (3) apply. In this respect no exception has been made in the case of Insurance Companies. It is not mentioned in these paragraphs that so far as the Insurance Companies are concerned their total income is to be charged for purposes of income-tax and super-tax. The learned counsel for the Department, however, contended that in order to charge income-tax and super-tax this Court should adopt the same method as is to be adopted for purposes of computing the income of an Insurance Company. In support of his conten tion Mr. Nusrat was unable to refer to any provision in the Finance Ordinance of 1960 to this effect. Had that been the intention of the Legislature it could easily have provided for this purpose. In the absence of any such provision the only method of charging the tax will be one provided in the above paragraphs. If these paragraphs are not taken into consideration then it would have been impossible for the Department to charge any tax on the assessees under section 3 of the Income-tax Act.

5. It is quite correct that the word "assessment" enjoys a very wide meaning and it includes not only the computation of income, the determination of the amount of tax payable and lays down the procedure for imposing liability. but all these are to be done, under the Income-tax Act, 1922. If there is no other provision in the said enactment to charge income-tax and super-tax on the total income of an Insurance Company it is difficult for us to accept the contention of the Department that the tax at 30 % should be charged on the total income on the same basis as the income is computed under section 10(7).

6. The Finance Ordinance, 1960 in Para. A(2) of Part II of the Third Schedule separately provides for the amount repre senting the income from dividends from a company having its registered office in Pakistan. According to it under sub-clause (a) 15 % is to be charged in respect of such dividends declared and paid by the Company formed and registered in Pakistan under the Companies Act, 1913. It is on this basis that the learned Income-tax Appellate Tribunal has accepted the plea of the assessees that in respect of dividend income they could be charged only at 15 %. The learned counsel for the Depart ment was unable to satisfy us that the view of the Income-tax Tribunal on this aspect of the case is in any way erroneous and not in accordance with the provision of the Finance Ordinance, 1960. In these circumstances, we fully agree with the observa tions of the learned Tribunal that although by artificial method the computation of the income in cases of life Insurance business is to be made in a particular manner yet for charging the tax one should refer to the different provisions of the Schedule to section 10 of the Finance Ordinance, 1960; and since this Ordinance clearly demarcates different rates applicable to different kinds of income, the rates applicable to the dividend as such has got to be adopted in conformity with these provisions. We would, therefore, answer the question in the affirmative. The Department will bear the costs of this reference. S. Q. Reference answered in the affirmative.