2013 PLP (Trib (PTD)

These cross appeals have been filed by the Taxpayer and the Department against the order passed by the learned CIR(A) vide Order No.348 dated 14-12-2010. In its appeal the Tax payer has assailed the Order of the CIR(A) whereby he confirmed the treatment of the Deputy Commissioner Inland Revenue, Large Taxpayers Unit, Karachi for the Tax year 2007, which was passed under section 122(1)(5) through which the Deputy Commissioner has taxed the capital gain amounting to Rs.7,081,250 (M) by invoking the provisions of Rule 5(b) of the Fourth Schedule read with Section 109 of the Income Tax Ordinance, 2001 while the department in its appeal has assailed the deletion of the addition made on account of apportionment of expenses. These are disposed off through this combined order as under: Taxpayer's appeal

2. Following grounds have been raised by the appellant in his appeal before this Tribunal:-- "GROUNDS OF APPEAL GROUNDS OF APPEAL GAINST ORDER PASSED UNDER SECTION 122(1)/(5) DATED 14-12-2010 - TAX YEAR 2007 (1) That the order of learned Commissioner Inland Revenue (Appeals-I)/ learned Deputy Commissioner Inland Revenue-08, Audit Division-II, Large Taxpayer Unit, Karachi, is bad in law and on facts. (2) That the order of learned Commissioner Inland Revenue-08, Audit Division-II, Large Taxpayer Unit, Karachi, is illegal, ultra vires, void and without justification and without jurisdiction. (3) That the Order passed under section 122(1)(5) by the learned Deputy Commissioner Inland Revenue-8, Audit Division-II, Large Taxpayers Unit and confirmed by the learned Commissioner Inland Revenue (Appeals-I), Karachi, is without jurisdiction or in excess of jurisdiction. (4) That the Order passed by the Deputy Commissioner Inland Revenue under section 122(1) and (5) and the Order passed by Commissioner Inland Revenue under section 122(1) and (5) are void, without jurisdiction and illegal as the jurisdictional conditions and requirements of these provisions of law have not been fulfilled nor have they given any cogent reasons and legal justification. The Orders passed by Deputy Commissioner Inland Revenue and Commissioner Inland Revenue (Appeals) are, therefore, bad in law, illegal, erroneous, capricious, arbitrary and unsustainable. (5) That the Order passed by the Deputy Commissioner Inland Revenue and confirmed by the Commissioner Inland Revenue (Appeals) under subsection (5) of section 122 are illegal as the Deputy Commissioner Inland Revenue had no "definite information" within the meaning of that term in subsection (8) of section 122, and dicta laid down by the Superior Courts. (6) That the Deputy Commissioner Inland Revenue and Commissioner Inland Revenue (Appeals) have erred in law and on facts in misinterpreting the provisions of section 99 read with Rules 5(a) and 5(b) of Fourth Schedule to Income Tax Ordinance, 2001 further read with section 109. (7) That the Deputy Commissioner Inland Revenue and Commissioner Inland Revenue (Appeals) have seriously erred in law and on facts to hold that the appellant had indulged in "tax avoidance scheme" under subsection (2) of section 109. (8) That the Deputy Commissioner Inland Revenue and Commissioner Inland (Appeals) have seriously erred in re-characterizing realized and crystallized capital gain as mere appreciation of investment under Rule 5(b) of the Fourth Schedule to the Income Tax Ordinance, 2001 by doing violence to the text of Rule 5(b) and making addition in the income of the appellant. (9) That the Deputy Commissioner Inland Revenue and Commissioner Inland Revenue (Appeals) have seriously erred in holding; that the change in the Balance Sheet reflects "revaluation of same shares" due to the appreciation as per market price dressed up as capital gain ignoring the important fact that in law "appreciation" and "realization" and two separate and distinct concepts. (10) That the Deputy Commissioner Inland Revenue has no power nor function to deny and take back the exemption of capital gains under clause (6A) of the Fourth Schedule. Statutory exemption cannot be interfered with by any income tax authority on mere misinterpretation of statutory provision. (11) That the Deputy Commissioner has no power or authority to question transactions of buying and selling of shares of public companies quoted on the Stock Exchange whether quoted shares generally or of associated companies. The action of the Deputy Commissioner Inland Revenue duly confirmed by the learned Commissioner Inland Revenue (Appeals) is therefore, without jurisdiction or in excess of jurisdiction and therefore illegal. (12) The Deputy Commissioner Inland Revenue has erred in law and on facts in nullifying the concession/exemption granted by the statue under Rule 6A of the Fourth Schedule through the subterfuge of re-characterization under section

109. Such action is entirely void without jurisdiction and illegal ab initio. (13) That the Deputy Commissioner Inland Revenue and Commissioner Inland Revenue (Appeals) have erred in law in not following the judgments of the Superior Courts which are para-materia with the issues dealt with by them. (14) The Deputy Commissioner and Commissioner Inland Revenue (Appeals) have erred in law and on facts in denying exemption of capital gains amounting to Rs. 7,081,205 (M) and charging the same to tax. (15) The learned Commissioner Inland Revenue (Appeals) has erred in law and on facts in invoking the powers under section 129(1)(b) of the Income Tax Ordinance, 2001 in setting aside the additions in respect of following items, instead of deleting the same which action is without jurisdiction. (1) Regarding addition under section 34(5) on account of provision for outstanding claims including IBNR amounting Rs.11.624 Million. (2) Regarding claim of authorization of good will amounting to Rs.51.321 Million. (3) Regarding provision against diminution in the value of investment amounting to Rs.14.958 Million. (4) Regarding loss on sale on trading of share amounting to Rs.4.955 Million. (16) Without prejudice to above, the action of making addition of items mentioned in above ground was an exercise based on misinterpretation of Statue and without considering the material on record and without having fulfilled the parameters of section 122(1)(5) of the Income Tax Ordinance, 2001. (17) That the appellant, therefore prays that relief claimed above be allowed, additions be deleted and assessment modified accordingly. (18) That the appellant further prays that he may be allowed to vary, amend or add to the above grounds before or at the time of hearing of the appeal."

3. Brief facts of the case relevant for disposal of the case are that the taxpayer is a Public Limited Company and is engaged in the business of providing general insurance services in the spheres of fire, marine, motor and miscellaneous. The audit of this case was done under section 177 rejecting the taxpayer's alleged claim of exemption of capital gain of Rs.7,081.205(M) under Rule 6A of the Fourth Schedule to the Ordinance, 2001 by holding that this is not a capital gain and is in fact "appreciation of investment" which is taxable under Rule 5(b) being actually an appreciation in value of shares. The DCIR further observed that the taxpayer sold and simultaneously re-purchased the same shares of blue chips Companies within 72 hours in a highly controlled manner with the help of associate through a series of same day twin and simultaneous transaction. The DCIR hence inferred that this was a case of tax avoidance under section 109 it is not a capital gain rather it is more sum taken credit for in the accounts for "appreciation of investments" and is liable to be re-characterized under section 109(1)(a) read with Rule 5(a) and Rule 5(b) of the 4th Schedule. The DCIR further made the addition under section 67 of the Income Tax Ordinance, 2001 being apportionment of expenses between PTR and NTR. The Taxpayer vehemently opposed the treatment meted out by the DCIR by stating that the DCIR has travelled beyond his jurisdiction by invoking section 109 of the Income Tax Ordinance, 2001 which is nothing but a deeming provision of the law as Fourth Schedule being special law will prevail. Being aggrieved and dissatisfied with the order of DCIR the taxpayer filed appeal before the CIR (A) who vide order mentioned supra, confirmed the action of the DCIR in respect of capital gain re-characterized under section 109 as revaluation gain and added the same under Rule 5(b) of the Fourth Schedule to the Income Tax Ordinance, 2001. However, the learned CIR(A) deleted the addition made under section 67 of the Income Tax Ordinance, 2001. Being aggrieved the instant appeals have been filed by the taxpayer and the department. First we would take up the appeal of the taxpayer.

4. Mr Arshad Siraj, Advocate, and Syed Muhammad Shabbar Zaidi, FCA, represented the appellant. The learned counsel for the appellant at the outset, have not pressed the Ground No. 15, relating to the action of the Commissioner (Appeals) setting aside certain additions made by the tax officer for fresh adjudication. Therefore, the order of the learned CIR(A) is hereby maintained and the appeal on this ground stands dismissed.

5. Reverting back to the other grounds of appeal, it was argued by the learned counsel that since the appellant company is engaged in the business of General Insurance, section 99 read with Rule 5 of the Fourth Schedule is applicable being special law. Similarly, Capital Gain from sale of shares is also exempt under Rule 6A of the Fourth Schedule to the Income Tax Ordinance, 2001. The provision of law is reproduced below:

"THE FOURTH SCHEDULE (see section 99) RULES FOR THE COMPUTATION OF THE PROFITS AND GAINS OF INSURANCE BUSINESS RULES General Insurance (5) The profits and gains of any business of insurance (other than life insurance) shall be taken to be the balance of the profits disclosed by the annual accounts required under the Insurance Ordinance, 2000 (XXXIX of 2000), to be furnished to the Securities and Exchange Commission of Pakistan subject to the following adjustments:-- (a) any expenditure or allowance, or any reserve or provision for any expenditure, or the amount of any tax deducted at source from dividends or profit on debt received which is not deductible in computing the income chargeable under the head "Income from Business" shall be excluded; (b) any amount either written off or taken to reserve to meet depreciation or loss on the realisation of investments shall be allowed as a deduction, and any sums taken credit for in the accounts on account of appreciation, or gains on the realisation of investments shall be treated as part of the profits and gains, provided the Commissioner considers the amount to be reasonable; and (c) no deduction shall be allowed for any expenditure, allowance, reserve, or provision in excess of the limits laid down in the Insurance Ordinance, 2000 (XXXIX of 2000), unless the excess is allowed by the Securities and Exchange Commission and is incurred in deriving income chargeable to tax. 6A. Exemption of capital gains from sale of shares.

In computing income under this Schedule, there shall not be included "capital gains", being income from the sale of modaraba certificates or any instrument of redeemable capital as defined in the Companies Ordinance, 1984 (XLVII of 1984), listed on any stock exchange in Pakistan or shares of a public company (as defined in subsection (47) of section 2) and the Pakistan Telecommunications Corporation vouchers issued by the Government of Pakistan, derived up to tax year ending on the thirtieth day of June, 2010."

7. The learned counsel for the appellant submitted that the appellant during the year under consideration, the appellant declared capital gain on sale of shares of Public Limited Companies being exempt under Rule 6A of the Fourth Schedule to the Income Tax Ordinance, 2001. Such capital gain has been taxed by invoking section 109 by treating the actual realized gain as sum taken credit for in the account on account of appreciation read with Rule 5(a) and Rule 5(b) of the Income Tax Ordinance, 2001. Such action has been taken for the reason that the appellant after selling shares and earning capital gain re-purchased the same shares from the market. The main thrust of their arguments are as under:-- (i) Whether the Income Tax Department/Deputy Commissioner Inland Revenue can invoke the other Sections/provisions of Income Tax Ordinance, 2001 while making assessment of an Insurance Company under the Fourth Schedule? (This issue has been raised by the Officer in the assessment that he can invoke other provisions of the Ordinance while making assessment of an Insurance Company. The view has been not approved very recently by the Hon'ble High Court in the case reported in 2011 PTD 2042) (ii) Whether Section 109 read with Rule 5(1)(b) is attracted in the present case ? (iii) Whether in the present case Rule 5(b) is applicable when actual realized capital gain on sale of shares is exempt under Rule 6A of the Fourth Schedule.

8. It was submitted that the appellant sold its holding investment to number of companies to earn capital gain and as the market was conducive, it re-purchased the shares of such companies from the market on the prevailing rates. All the transactions were done through banking channel, CDC account and according to market rates. As stated above, since the capital gain on sale of shares is exempted under Rule 6A, the exemption was rightly claimed, which has wrongly been re-characterized as appreciation by invoking section 109 read with Rule 5b of the Fourth Schedule. Since the assessment was made through audit, the Deputy Commissioner Inland Revenue has not placed any definite information that it was a sham transaction, nor he has brought anything on record that the sale transaction was not done through proper banking channel or by violating any law enforceable and there was any legal prohibition or bar. He has attributed that motive of the sale was that since it was apprehended that capital gain on sale of shares would be taxed through Finance Act, 2008, the appellant sold its shares. The assumption of the Deputy Commissioner Inland Revenue is completely incorrect as the Finance Act, 2008 came into force on 26-6-2008, whereas the appellant had filed its return of income much before that, time i.e. 20-10-2007 so that at that relevant time, there was no such legal stipulation that the capital gain would be taxed for Tax Year 2007 and for that matter 2008. In fact the exemption of capital gain on shares has been extended up till Tax Year 2010.

9. The learned counsel for the appellant argued that the issue raised by the Deputy Commissioner Inland Revenue as to whether the department can invoke the other general Sections of the Ordinance while making assessment of an Insurance Company was a decided issue up to the Hon'ble Supreme Court of Pakistan. It was held by the Hon'ble Supreme Court that other provisions would not be applicable and only such provisions of law will be applicable which are contained in the relevant Schedule, which provides Rules for computation of profit and gains of an Insurance business. In support of his argument the learned counsel placed reliance on judgment of Messrs Alpha Insurance PLD 1981 SC 293 where the Hon'ble Supreme Court of Pakistan held that that Rules contained in the First Schedule (which is identical to the fourth Schedule of Income Tax Ordinance, 2001) to the Income Tax Act, 1922 completely, exhaustively and to the exclusion of every other provisions, not expressly incorporated governs the computation of profit and gains of the Insurance business. The view of Messrs Alpha Insurance case was reaffirmed by the Hon'ble Supreme Court of Pakistan in subsequent judgments of Central Insurance Company case reported in 1993 SCMR 1232 = 1993 PTD 766 and Messrs EFU General Insurance reported in 1997 PTD 1693 SC. Despite these judgments, the department took the view that under the Income Tax Ordinance, 2001, because there is no non-ostensive clause, as it was present in the Income Tax Ordinance, 1979, in section 26(a), the department can invoke other provisions. Such proposition was not accepted by the Commissioner Inland Revenue (Appeals) as well as by this Hon'ble Tribunal in the cases of various Insurance Companies in I.T.As. Nos. 256 to 258/KB of 2009 dated 17-10-2009. Very recently, through judgment in the case of the Commissioner (Legal) v. Messrs EFU General Ins. and others Insurance Companies reported in 2011 PTD 2042, the Hon'ble High Court has rejected the interpretation of the department and has categorically held that no other provisions of the Ordinance are applicable and only the provisions mentioned in the Fourth Schedule would only apply. The learned counsel pointed out that when the present case was pending before the DCIR and learned Commissioner of Inland Revenue(Appeals) the judgment of High referred above 2011 PTD 2042 was not decided. Relevant portion of 2011 PTD 2042 is reproduced below:-- "(8) After perusal of the above law and the decisions relied upon by the learned counsel representing the respondent we are of the considered view that the taxability of the insurance business has been separated from the taxability of other business concerns that is why in the repealed Ordinance by virtue of section 26 of the Ordinance and in new Ordinance by virtue of section 99 of the Ordinance it has specifically been mentioned that taxability of the insurance business is to be dealt with by special provisions. Under section 26 of the repealed Ordinance it has specifically been mentioned that "Notwithstanding anything contained in this Ordinance (which was a non-obstante clause) the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the Fourth Schedule", meaning thereby that lawmakers were of the opinion that the tax of an insurance business has to be separated from the taxability of the other business which were dealt with under the provisions of section 22 of the repealed Ordinance. Had the intention of the legislature was to treat these two businesses i.e. normal business and an insurance business to be of the like nature, section 26 would not have been part of the law depicting the intention of the legislature to give it a separate treatment. (9) In the repealed Ordinance also there was a specific Schedule, the Fourth Schedule, which deals with the manner and mode as to how the profits of an insurance business were to be computed, what adjustments were to be allowed, what were the exemptions in this regard and how far the said Schedule would apply to the Ordinance. In the newly introduced Ordinance also it is seen that section 99 specifically provides that a special mechanism has been prescribed with regard to determination of profits and gains of an insurance business which shall be computed in accordance with the rules as given in the new Fourth Schedule. This Fourth Schedule also, just like the previous Schedule of the repealed Ordinance, talks about how profits of an insurance business are to be computed, what adjustments are to be allowed and what are the exemptions in this regard. It is observed that not only in the repealed Ordinance special provisions existed with regard to the taxability of insurance business but in the Income Tax Act, 1922, also. As per the provisions of section 10(7) of the Act, which was para meteria to section 26 of the repealed Ordinance and section 99 of the new Ordinance, it was specifically mentioned that the profits and gains of the insurance business will be computed as per the First Schedule of the Act which Schedule deals with the computation of profits and gains in the case of an insurance company, therefore, it appears to be an admitted position that since quite some time the lawmakers have treated the insurance business to be something different from normal business income and had treated its taxability to be different also, hence, it is established beyond doubt that ordinary rules for computation of profits and gains assessment cannot be applied in the case of an insurance business as the profits and gains of an insurance business has to be computed in accordance with the procedure laid down in the Fourth Schedule of the Ordinance. (11) In our considered view this method of assessment, though no doubt, could be valid had there been a normal business income but the T.O. simply ignored the fact that he is making the assessment of an Insurance Company. Reading of the Clause 6A of the Fourth Schedule clearly reveals that it starts with the word "In computing income under this Schedule" meaning thereby that this Clause clearly speaks that the computation has to be made in accordance with this Schedule only. It is a settled proposition of law that if something is stated to be done in a particular manner it has to be done in that manner only otherwise any deviation in this regard would vitiate the whole proceedings. It is also a well settled proposition of law that when special statue provides something to be done in a particular manner the general provisions are ousted. There are plethora of judgments in this regard and reference may be made to the decision in the case of Federal Bank for Cooperatives, Islamabad v. Ehsan Muhammad reported in 2004 SCMR

130. In the present case the Fourth Schedule is the relevant law under which profits and gains of Insurance Company are to be dealt with and computed. We are guided in this regard by the decision given by the Hon'ble Supreme Court of Pakistan in the case of E. F.U. General Insurance Co. Ltd. v. Federation of Pakistan reported in 1997 PTD 1693 wherein the Hon'ble Apex court observed as under: (9) From section 26(a) of the Ordinance, section 10(7) of the Act read with Rule 5 of the Fourth Schedule (First Schedule of the Act) and the relevant provisions of the Insurance Act, 1938, it would follow that the Income Tax Officers have very limited jurisdiction to challenge the accounts submitted by a company dealing in Insurance business. The jurisdiction of the Income Tax Officer is limited to the clauses (a) and (b) of rule 5 of the Fourth Schedule to the Ordinance (and provided in rule 6 of the First Schedule to the Act). Subject to the above, the Income Tax Officer is not competent to challenge the accounts submitted by the assessee under the Insurance Act, 1938. The Income Tax Officer cannot go behind such accounts. This question has been considered in sufficient detail by this Court in an earlier judgment in the case of Commissioner of Income Tax v. Phoenix Assurance Company Limited 1991 SCMR 2485. It was inter alia noted in the said judgment as follows:

(i) Under section 11 of the Insurance Act, 1938, every Insurance Company has to prepare, at the expiration of each calendar year, a balance-sheet, a profit and loss account and a revenue account in the prescribed form to be authenticated; (ii) Under section 15, such audited accounts and statements have to be furnished to the Controller of Insurance as returns; (iii) Section 18 of the Insurance Act requires every insurance company to furnish to the Controller of Insurance a certified copy of every report on the affairs of the concern which is submitted to the members or policy holders of the insurance; (iv) Section 21 enables the Controller of Insurance to call for such further information from the insurer in respect of the return furnished by it if he feels that the same is inaccurate or defective in any manner; (v) He can examine the books of accounts, registers and documents as well as any officer of the insurer; (vi) He is empowered to decline to accept any return unless the inaccuracy has been corrected or the deficiency has been supplied and in case the Controller of Insurance declined to accept any return, the insurer shall be deemed to have failed to comply with the provisions of section 15 of the Insurance Act relating to the furnishing of return. After referring to these provisions of the Insurance Act, it was then observed by this Court that it was in this context that finality has been given to the accounts for purposes of Rule 6 of the First Schedule to the Act (Rule 5 of the Fourth Schedule to the Ordinance). It was held that the Income Tax Officer was not competent to upset the integrity of the accounts submitted by the assessee under the Insurance Act, 1938 by applying the ordinary rules for computation of profits and accounts and for assessment of tax in the light of the provisions of Income Tax law in respect of the income in regard to the head "business". It was also held that there was no substance in the contention that the combined effect of section 10(7) read with Rule 6 of the First Schedule to the Act section 26(a) read with Rule 5 of the Fourth Schedule to the Ordinance was that the Income Tax Officer was vested with the power to probe into the accounts submitted by the insurance company with a view to determining the real nature of any item of such accounts for purpose of excluding it in order to adjust the balance of profits. (14) We have also examined all the above provisions of law and hardly find any material difference in the repealed Ordinance and the new Ordinance. The gist of section 26 remained same as that of section 99, whereas Fourth Schedule also had almost remained the same both in the old Ordinance and the new Ordinance. We, therefore, do not agree with the contention raised by Mr. Abbasi that there is a material difference in the provisions of law of the repealed Ordinance and the new Ordinance. So Jar as the provisions of section 67 of the new Ordinance are concerned we would like to observe that this section starts with the words "Subject to this Ordinance" meaning thereby that this section appears to be a subservient section as it possess the words "subject to this Ordinance" meaning thereby that if something contrary is provided under the Ordinance the same would prevail over this section 67. (15) Now if a closer look is taken to the Fourth Schedule of the Ordinance it will be seen that it states that the same deals with the rules for the computation of the profits and gains of the insurance business meaning thereby that it is a special provision of law which would prevail over the general provisions of the same Ordinance. There is nothing under the Fourth Schedule of the Ordinance which speaks of proration of any expense hence, enlarging said provisions of the law and applying the same to the profits and gains computable for the Insurance Company is beyond the spirit of law. The business income of the insurance and computation of its income is governed by the special provisions of section 99 of the Ordinance read with rules contained in Fourth Schedule and cannot be given a meaning to consider it at par with the computation and taxability of the normal business as an Insurance Company is required to maintain its accounts as per the Insurance Ordinance, 2000, which are to he furnished to the Securities and Exchange Commission of Pakistan who is their monitoring head to examine whether the accounts kept by an Insurance Company are in accordance with the Insurance Ordinance, 2000, or not and as per that Ordinance profits of insurance business are to be computed as one basket income which concept is not a new concept and has been recognized in a number of judgments, mentioned above. (20) We also observe that in the Seventh Schedule of the new Ordinance, which deals with the computation of income of Banking Companies only, there is a specific Rule 9 which states that the provisions of the Ordinance would apply to the Seventh Schedule whereas no such rule is available in the Fourth Schedule meaning thereby that the taxability of an Insurance Company, has to he dealt with in accordance with the rules prescribed there under only. The Rule 6A of the Fourth Schedule specifically deals with the capital gain earned by an Insurance Company which exempts the same from the levy of the tax as though the same are exempt from tax under the Second Schedule but after the announcement of the decision by the Hon'ble Supreme Court of Pakistan, mentioned above, specific exemption under Fourth Schedule is also necessary for exempting income under the head capital gain also. The Fourth Schedule being special provision overrides the other provision and the profits and gains of Insurance Company are to be made in accordance with the Fourth Schedule only and as there is no mention of section 67 of the Ordinance in the Fourth Schedule the provision of section 67 could not he applied so far as working out the profits and gains of an Insurance Company under the Fourth Schedule."

10. The learned counsel therefore, contended that in the instant appeal, Fourth Schedule being special in character as held by the Hon'ble High Court in the case reported 2011 PTD 2042 and by the Hon'ble Supreme Court in earlier cases 1993 SCMR 1232 = 1993 PTD 766 and 1997 PTD 1693 (SC Pak), the exercise of invoking Section 109 and making addition is ab initio illegal and without jurisdiction.

11. Elaborating legislative history right from the Income Tax Act, 1922 on this point it was under the Income Tax Act, 1922 and Repealed Income Tax Ordinance, 1979, attempts were made by the Department to invoke other provisions of the respective statutes, which action was always disapproved by the Hon'ble Superior Courts. Reliance was placed on the following cases. (a) 1989 PTD 142 CIT v. Mercantile Fire and Central Insurance (b) 1991 PTD 401 CIT v. International General Insurance Co., Karachi. (c) 1998 PTD (Trib.) 1103. (d) 2003 PTD 1321 CIT v. Central Insurance Co Ltd. (e) 2011 PTD 2042 Commissioner (Legal) LTU, Karachi v. EFU General Insurance Ltd.

12. Pointing out the main issues involved in the above referred judgments the learned counsel submitted that in the first case i.e. 1989 PTD 142 CIT v. Mercantile Fire and Central Insurance Co., Ltd., section 10(2A) of the Income Tax Act,1922 was invoked by the department and the Hon'ble High Court disapproved the same on the strength of the judgment of Hon'ble Supreme Court in the case of CIT v. Alpha Insurance Co. Ltd. reported in PLD 1981 SC

293. In the second case, i.e. 1991 PTD 401 CIT v. International General Insurance Co. Ltd., section 10(2A) of the Income Tax Act, 1922 was invoked by the department and the Hon'ble High Court disapproved the same. The relevant passage from the above judgment is reproduced as under:-- "The company carried on life insurance business which is governed by the Rules mentioned in the First Schedule to the Act. Rules 1 to 5 applied to the life insurance business. The assessment of life insurance business was to be made according to the First Schedule to the Income Tax Act. The accounting year of an insurance company is the calendar year as provided by the Insurance Act. According to the First Schedule the assessment is to be made on the basis of Annual Average of the surplus disclosed by acturial valuation. It is not the actual income of the previous year but the notional income as determined by actuarial valuation which is the basis for framing assessment. Only such adjustments can be made which are permissible under the Rules. The Assessing Officer has thus to take into account the actuarial valuation and cannot make any change or alteration except as provided by the Rules contained in the First Schedule. In Commissioner of Income Tax v. Alpha Insurance Company Limited, PLD 1981 SC 293 it was observed that "the rules contained in the First Schedule to the Income-tax Act completely, exhaustively and to the exclusion of every other provision not expressly incorporated, govern the computation of the Profits and Gains of insurance business." In Calcutta Insurance Company Limited v. Commissioner of Income-tax reported as (1952) 21 ITR 404 it was observed that "the Scheme of Schedule obviously is that subject to the adjustments specifically indicated' the actuarial surplus must stand" According to Kanga and Palkivala "it is not open to the Department to make any additions to the surplus other than the adjustments specifically provided in the Schedule, even if an item of income escapes tax as a result of not being taken into account in making the actuarial valuation." The Income-tax Officer, therefore cannot make adjustment on any basis except as provided by the Rules. The alteration sought to be made by the department will interfere with the actuarial valuation which is not permissible. Where entire basis of assessment is on notional and not real income actual calculations have no part to play."

13. In the third case, the learned Income Tax Appellate Tribunal, while examining number of issues of Insurance companies in more than 100 appeals held that provisions like section 10(2A) of the Income Tax Act, 1922 and section 25(c) and section 12(9) of the Income Tax Ordinance, 1979 cannot be invoked.

14. The learned counsel argued that it is now well established that accounts submitted by the Insurance Company under the Fourth Schedule Rule 5 has sanctity attached to it and cannot be disturbed. In this connection he placed reliance on the judgment of the Hon'ble High Court of Sindh in the case of Adamjee Insurance Company Limited, Karachi v. Central Board of Revenue Islamabad and others reported in 1989 PTD 1090 upheld the action of issuance of notice under section 65 and also upheld the concept of one unit of income and sanctity attached to the accounts submitted. For the convenience and facility, ratio decidendi on the concept of and sanctity of the accounts is reproduced hereunder:-- " From the above discussion, it clearly emerges that in determining the profits and gains of an Insurance business and the tax payable thereon under the Ordinance only section 26 and Rules contained in the Fourth Schedule ibid are applicable and other provisions of the Ordinance do not apply. It therefore, follows that the balance of profit declared by an Insurance company in its annual account which is submitted to Controller of Insurance under the Insurance Act, 1938, is to be accepted by the Income Tax Officer as the profits and gains of insurance business for the relevant year without any further probe or enquiry, except to the extent permitted by sub-clauses (a) and (b) of Rule 5 ibid."

15. The Insurance companies challenged the decision of the Hon'ble High Court of Sindh before the Hon'ble Supreme Court of Pakistan (Central Insurance Company Ltd. and others v. Central Board of Revenue 1993 SCMR 1232 = 1993 PTD

766. In the Messrs Central Insurance case referred above, the Hon'ble Supreme Court of Pakistan observed that authenticity and finality of accounts submitted by assessee under the Insurance Act has sanctity attached and cannot be disturbed, and the jurisdiction of the Assessing Officer is limited. The relevant paragraphs from the judgment of Hon'ble Supreme Court for ready reference and facility are reproduced:-- "

11. The ratio of the above judgments of this Court seems to be that profit and loss accounts submitted by an insurance company under the Insurance Act, 1938, to the Controller of Insurance, are to be accepted and to be made basis for the purposes of computing profits and gains of insurance business and the amount of tax payable thereon in terms of section 10(7) read with Rule 6 of the First Schedule to the late Act. The above provisions have been treated as complete, self-contained and exhaustive to the exclusion of every other provision not expressly incorporated, and therefore, the other provisions relating to the working out of profits and gains and the amount of tax payable contained inter alia in sections 8, 9, 10, 12 or 18 of the late Act, are not applicable in case of an insurance company except that by virtue of above Rule 6, Section 10 of the above Act has been brought back for limited purpose of adding back expenditure not permissible under the above Section. The Income Tax Officer, in face of the above statutory provisions, is not competent to undermine the authenticity/finality of the accounts submitted by the assessee under the Insurance Act by ordinary rules for computation of profits and gains and for assessment of tax thereon in the light of other provisions of the late Act. But, his jurisdiction is limited to add back items of expenditure not admissible as above. (12) It may be stated that section 26(a) and Rule 5 of the Fourth Schedule to the Ordinance correspond with above section 10(7) and rule 6 of the First Schedule to the late Act as stated above and, therefore, the ratio of the above cases can be pressed into service while construing the above provisions of the Ordinance." Similar view was re-iterated in subsequent judgment in the case reported as EFU General Insurance Company Limited v. Federation of Pakistan reported as 1997 PTD 1693 SC. The relevant portion from the judgment is reproduced below for convenience and facility:-- "

9. From section 26(a) of the Ordinance, section 10(7) of the Act read with rule 5 of the Fourth Schedule (First Schedule of the Act) and the relevant provisions of the Insurance Act, 1938, it would follow that the Income Tax Officer have very limited jurisdiction to challenge the accounts submitted by a company dealing in Insurance business. The jurisdiction of the Income Tax Officer is limited to the clauses (a) and (b) of rule 5 of the Fourth Schedule to the Ordinance (and provided in rule 6 of the First Schedule to the Act). Subject to the above, the Income Tax Officer is not competent to challenge the accounts submitted by the assessee under the Insurance Act, 1938. The Income Tax Officer cannot go behind such accounts. This question has been considered in sufficient detail by this Court in an earlier judgment in the case of Commissioner of Income Tax v. Phoenix Assurance Company Limited 1991 SCMR 2485. It was inter alia noted in the said judgment as follows:-- (i) Under section 11 of the Insurance Act, 1938, every Insurance Company has to prepare, at the expiration of each calendar year, a balance-sheet, a profit and loss account and a revenue account in the prescribed form to be authenticated; (ii) Under section 15, such audited accounts and statements have to be furnished to the Controller of Insurance as returns; (iii) Section 18 of the Insurance Act requires every insurance company to furnish to the Controller of Insurance a certified copy of every report on the affairs of the concern which is submitted to the members or policy holders of the insurance; (iv) Section 21 enables the Controller of Insurance to call for such further information from the insurer in respect of the return furnished by it if he feels that the same is inaccurate or defective in any manner; (v) He can examine the books of accounts, registers and documents as well as any officer of the insurer; (vi) He is empowered to decline to accept any return unless the inaccuracy has been corrected or the deficiency has been supplied and in case the Controller of Insurance declined to accept any return, the insurer shall be deemed to have failed to comply with the provisions of section 15 of the Insurance Act relating to the furnishing of return. After referring to these provisions of the Insurance Act, it was then observed by this Court that it was in this context that finality has been given to the accounts for purposes of rule 6 of the First Schedule to the Act (Rule 5 of the Fourth Schedule to the Ordinance). It was held that the Income Tax Officer was not competent to upset the integrity of the accounts submitted by the assessee under the Insurance Act, 1938 by applying the ordinary rules for computation of profits and accounts and for assessment of tax in the light of the provisions of Income Tax law in respect of the income in regard to the head "business". It was also held that there was no substance in the contention that the combined effect of section 10(7) read with Rule 6 of the First Schedule to the Act section 26(a) read with Rule 5 of the Fourth Schedule to the Ordinance was that the Income Tax Officer was vested with the power to probe into the accounts submitted by the insurance company with a view to determining the real nature of any item of such accounts for purpose of excluding it in order to adjust the balance of profits."

16. The learned counsel contended that income which is included in the balance of profits disclosed in the annual accounts furnished to the Security and Exchange Commission of Pakistan, has sanctity attached to it which cannot be disturbed subject to rules providing adjustments and that profit and gains disclosed in the annual accounts furnished to the Security and Exchange Commission of Pakistan, loses its character and becomes a part of profit and gains of Insurance business which is not capable of being bifurcated for the purposes of charging to tax under different heads. (commonly known as One Unit Concept) The sanctity of the accounts submitted to the Controller could not be disturbed except making adjustments as per rules of Fourth Schedule. Further, Rule 5 governs the taxation of a company engaged in the business of General Insurance.

17. Analyzing Rule 5 of the Fourth Schedule, the learned counsel submitted that it will be seen that under Sub-Rule (a) of Rule 5, adjustment can be made to exclude any expenditure or allowance or any reserve or provisions for any expenditure or the amount of any tax deducted at source from dividend or profit on debt received, which is not deductible under the head "income from business". It may be noted that under Sub-Rule (b) of Rule 5, the adjustment would be in respect of an amount either written off or taken to reserve to meet the depreciation or loss in the realization of investment, which shall be allowed as a deduction. The Rule further stipulates that any sum taken credit for in the accounts on account of appreciation, or gain on realization of the investment, shall be treated as part of the profit or gains provided that the Commissioner considers the amount to be reasonable. Sub-Rule (c) of Rule 5 stipulates about the adjustment of any amount in excess of the limits laid down in the Insurance Ordinance, 2000, unless the excess is allowed by the Security and Exchange Commission of Pakistan (for the present controversy, Sub-Rule (c) of Rule 5 is not relevant). The resume of above analysis would show that under Rule 5 of Fourth Schedule, there is limited scope of adjustment in respect of transaction refereed in sub-rules (a), (b) and (c) respectively of Rule 5.

18. It was submitted by the learned counsel that in view of the above Rule 5, the Taxation Officer has failed to appreciate the legislative history as analyzed and propounded/adjudicated by the Hon'ble Supreme Court of Pakistan and various High Courts of the country and the learned Income Tax Appellate Tribunal. It was further submitted that it has been recently held in the EFU General Case reported in 2011 PTD 2042 that section 99 read with Fourth Schedule is a special provision and general provision would not be attracted and in fact are ousted. Further to above, there are other judgments to the same affect. It is well-established principle of law that where specific provision is made to deal with particular situation then it supersedes the general provision to the same effect. Reliance is placed to the case reported as Messrs Sapphire Textile Mills Ltd. v. Collector of Central Excise and Inland Customs, Hyderabad 1990 CLC

456. Their Lordships of Hon'ble High Court of Sindh observed at page 478 as under:-- "Where specific provision is made to deal with a particular situation, then it supersedes the general provisions to the same effect."

19. In the present case, the income from business is dealt by general provision as well as special law i.e. under section 99 and on the basis of dictum referred above, the provisions of section 99 would prevail. Similar view has been expressed by the Hon'ble Supreme Court of Pakistan in the case of The State v. Zia-ur-Rehman PLD 1973 (SC) 49 where their Lordships of the apex Court observed as under:-- "Where in a statute, there are both general provisions as well as special provisions for meeting a particular situation, then it is a special provision which must be applied to that particular case or situation instead of general provisions."

20. It was submitted that above view has been reiterated by the Hon'ble Supreme Court in number of cases. Reliance is place on the case of Golden Oraphies (Pvt.) Ltd. and others v. Director of Vigilance, Central Excise, Custom and Sales Tax and others reported in 1973 SCMR 1635 where their lordships observed as under:-- " .. the well settled rule of construction of legal instruments that when a special provision has been made on a subject and there is also a general provision susceptible of covering the same field and the matter is covered by both the provisions, the presumption would be that the general provision is not intended to interfere with the operation of the special provision and the case shall have to be dealt with under the latter provision."

21. It was therefore, vehemently argued that it follows that special provision of section 99 read with relevant Rules of Fourth Schedule shall be applicable and no other provision of general law would be applicable.

22. The learned counsel further submitted that it is now well-established principle of interpretation that to find real intention of law, the statutory provisions have to be read as a whole and in its entirety. The learned counsel submitted that the Taxation Officer cannot travel beyond the provisions of the Fourth Schedule is also supported by the scheme of the Ordinance. There is a marked difference in jurisdiction available to the Taxation Officer when the Rules framed under Fourth Schedule (applicable to Insurance Companies) are compared with the Rules framed under Seventh Schedule which are applicable to the banks. It will be noticed that Rule 9 of the Seventh Schedule gives extended jurisdiction to the Taxation Officer to resort to the other provisions contained in the Ordinance if such provisions are not specifically dealt within the Seventh Schedule. For ready reference Rule 9 of the Seventh Schedule is reproduced as under:-- "

9. Provision of Ordinance to apply.

The provisions of the Ordinance not specifically dealt with in the aforesaid rules apply, mutatis mutandis, to the banking company."

23. It was submitted that the Taxation Officer has tried to justify his action by stating in the order that he has an authority to adjust the things. There is no cavil to the proposition that he has the authority to adjust the things. However, as stated above, under Rule 5(a), such adjustment is restricted to disallowance of expenditure or provision for expenditure or reserve for inadmissible expenditure. In this connection the judgment of Hon'ble Sindh High Court in the case of Messrs Home Insurance reported as 1992 PTD 1177 has also been discussed.

24. The learned counsel argued that perusal of Rule 5(b), as reproduced above clearly restricts the jurisdiction to the adjustment on account of:-- (i) any amount either written off or taken to reserve to meet depreciation, or loss on the realization of the investment, which shall be allowed as deduction, (ii) and any sum taken for in the accounts on account of appreciation, or gain on realization of the investment, which shall be treated as part of profit and gains provided that the Commissioner considers the amount as reasonable. It was stated that authority of adjustment in respect of Rule 5(b) is restricted to the consideration by the Commissioner the reasonableness of any sum taken credit for in the accounts on account of appreciation or gain on realization of investment. It may be submitted that in so far as realization of investment on account of loss or gain is concerned, the same can be adjusted to the extent of the reasonableness, but, the character of the loss or gain cannot be changed.

25. It was further contended by the learned counsel that expressions like "appreciation" and "realisation" has to be examined to find the intention of the legislature. Since these expressions have not been defined in the Ordinance of 2001, its connotation in common parlance has to be taken. It was argued that to further substantiate reference to the definitions of terms "appreciation" and "realization" has been taken note as both the terms / expressions have not been defined under the Income Tax Ordinance, 2001. According to the well established principle of law, the ordinary dictionary meaning has to be taken. The word "appreciation" has been defined by various dictionaries in the following manner:-- "Black's Law Dictionary (Sixth Edition) Appreciate. To estimate justly; to set a price or value on. When used with reference to the nature and affect of an act, "appreciate" may be synonymous with "known" or "understand" or "realize". Appreciation in value. Increase in the market value of an asset (e.g., real estate) over its value at some earlier time. May be due from inflation and / or increased market demand for asset. The Concise Oxford Dictionary of Current English (Seventh Edition) Appreciation. Estimation, judgment; dequate recognition; rise in value; (usu. Favourable) review of book etc. [F, f LL appretiatio-onis (as perc.; see-ATION)]. Advanced Law Lexicon (The Encyclopedic Law Dictionary with Legal maxims, latin terms and words and Phrases. Appreciation in value. Increase in the market value of an asset (e.g. real estate) over its value at some earlier time. May be due from inflation and / or increased market demand for asset. Stock appreciation. Increase in the worth of a company's stock (inventory), general because of inflation. (Business Term)." Similarly, the expression "realization" has also been defined by the dictionaries in the following manner:-- "Black's Law Dictionary (Sixth Edition) Realize. To convert any kind of property into money; but specially to receive the returns from an investment. Realized. Term, in tax law, means received, paid, debted or incurred, in accordance with method of accounting authorized for use by taxpayer. Altsuler v. Peters, 190 Neb. 113, 206 N.W.2d 570,

577. Realized gain or loss. Gain (or loss) resulting from an identifiable event, such as a sale or an exchange of property. The amount of realized gain from the sale or other disposition of property is the excess of the amount realized over the adjusted basis of the property; the amount of realized loss is the excess of the property's adjusted basis over the amount realized. I.R.C. 1001. See also Recognized gain or loss. The Concise Oxford Dictionary of Current English (Seventh Edition) Realize, - is. 1. (usu. in pass) convert (hope, plan, etc.) into fact; (Mus.) reconstruct (part) in full from figured bass. 2. give apparent reality to, make realistic, present as real (these details help to realize the same). 3. conceive as real, apprehend clearly on in detail (fact, that, how, etc.) 4. convert (securities, property, or abs.) into money; amass (fortune, specified profit); fetch as price.

5. Hence - ABLE a., - A"TION n. [f.Real + IZE, after F. realised. LAW TERMS AND PHRASES -- JUDICIALLY INTERPRETED with Legal maxims and Foreign Legal words and Phrases in Ordinary usage. Realization is a conversion into actual cash of what was previously contingent or doubtful a process that may result in gain on original cost according to the state of the market. Advanced Law Lexicon (The Encyclopedic Law Dictionary with Legal maxims, latin terms and words and Phrases. Realisation. Conversion into actual cash of what was previously contingent or doubtful. The action of obtaining or acquiring [S. 73(1), C.P.C. (5 of 1908). LAW TERMS AND PHRASES - JUDICIALLY INTERPRETED with Legal maxims and Foreign Legal words and Phrases in Ordinary usage. Realisation. is a conversion into actual cash of what was previously contingent or doubtful a process that may result in gain on original cost according to the state of the market."

26. The learned counsel further elaborated that if the definitions of the expressions "appreciation" and "realization" is compared, it will be seen that the "appreciation" relates to notionalality, whereas realization connotes actuality. It is, therefore, obvious that under Rule 5(b), the Commissioner can only make the adjustment in respect of:-- (i) any amount either written off or taken to reserve to meet the depreciation or loss on the realization of the investment if the same is consider to be unreasonable. (ii) any sum credited for in the accounts on account of appreciation if the same is consider unreasonable by the Commissioner. (iii) any sum taken credit for in the accounts on account of gains on the realization of investment if same is consider an unreasonable by the Commissioner. The distinction elaborated above in respect of connotation of expressions "appreciation" and "realization" amply proves that the adjustment provided under Rule 5 read with sub-rule (b) of Rule 5 can only be made when either depreciation or loss on realization of investment, amount of appreciation of investment or gains on realization of investment is considered to be unreasonable. It is further submitted that so far as actual realization of investment is concerned, in the case of depreciation or losses on realization of investment, the legislature has allowed it as a deduction and in case gain on realization of investment, the same has been exempted under Rule 6A of the Fourth Schedule. Since in the present case, the Commissioner / Taxation Officer has not considered the gain on realization as unreasonable, the Taxation Officer has no authority whatsoever to disturb the sanctity attached to the accounts furnished to the Security and Exchange Commission of Pakistan.

27. In order to understand this issue properly, the nature and manner of application of Rule 5(b) would have to be properly appreciated. The income of the insurance company is the 'profit and loss' as disclosed in the profit and loss prepared for the purposes of the Insurance Ordinance. This is the final position. It settles the character and nature of all transactions recorded in the books. Rule 5(b) inter alia states that whilst taxing the said profit 'adjustment' can be made for: (1) Investment written off or taken to reserve for depreciation in the value of investment or loss on sale of investments [not included in the profit and loss account]; or (2) Appreciation or gain on sale of investment [not included in the profit and loss account].

27. The learned counsel argued that the aforesaid shall be added to determine the taxable income. This means that it is an adjustment for amount though included in the 'accounts' but not included in the profit and loss account under the Accounts prepared under the Insurance Ordinance. In other words this Rule states that appreciation in the value of investment or gain on the sale of shares can be taxed in addition to the amount of profit as disclosed in the accounts. The words used are "and any sums taken credit for in the accounts on account of appreciation, or gains on realization of investments". What is being missed in the whole deliberation by the taxation officer and Commissioner of Income Tax (Appeals) are the words "credit for in the accounts". This means that the sum is already in the accounts but by virtue of special treatments is not to be included in the profit for the year.

28. The aforesaid status consequentially and necessarily means and leads to the conclusion that this adjustment is only for what is there in the accounts. In this case there is a 'realized gain' which is there in the accounts. This amount is taxable under Rule

5. However, the same has been separately exempted under Rule 6A of the Fourth Schedule. Furthermore, on account of being realized gain the same has been so accepted to be included for the preparation of accounts under the Insurance Ordinance. Unrealised gain [appreciation] was not allowed to be included in accounts for reasons explained in the aforesaid paragraphs. Thus the question that has been completely ignored by the Assessing Officer is that section 5(b) allows what has been taken into accounts. That sum is the realized gain. That gain is part of balance of profit disclosed in account. However, the same is specifically exempt under Rule 6A, if, it relates to gain on sale of listed securities. Unrealised appreciation is not allowed to be taken into account therefore its inclusion in Rule 5(b) is ab-initio not possible.

29. Referring to the order of the Tribunal the learned counsel argued that the Commissioner (Appeals) has totally misdirected himself in relying on the decision of the Honourable Tribunal dated July 14, 2010, in case of Adamjee Insurance Company Limited (I.T.A. No. 767/KB of 2006 Tax Year 2004, to hold that even the appreciation that has not been taken credit of in the accounts is liable to be taxed under Rule 5(b) of the Fourth Schedule of the Ordinance. The case of the appellant is different from the facts that prevailed in the aforesaid decision. In the aforesaid decision, there was a qualification by the Auditors relating to misclassification of shares as 'Available for Sale' which were actually classifiable as 'held for trading'. If the classification was correctly done then the appreciation thereof was to be accounted for in the profit and loss account. In the case of present appellant, there is no dispute that strategic investments have been correctly classified as 'held for sale' in the accounts. The appreciation of such investments which were "Available for sale" as per the insurance regulations could not be taken into account. The relevant facts of the case in the aforesaid decision as given on page 9 of the Tribunal's Order are reproduced below:-- "(ii) the company has categorized investment in the quoted shares of an investee company as "available for sale" and valued the same at its cost of Rs.29.809 million in the accompanying financial statements, as opposed to categorizing the said investment as "held for trading" and remeasuring the same to its fair value of Rs.95.600 million prevailing at the balance sheet date, as required under International Accounting Standard (IAS) - 39 "Financial Instruments: Recognition and Measurement" (revised 2000), resulting in non-recognition of unrealized gain of Rs.65.791 million in the financial statements of the current year for the reasons disclosed by the management in note 13.6. Had the company followed he requirement for the above referred IAS, profit before tax for the current year and investments at the end of the year would have increased by Rs.65.791 million each."

30. In the light of the aforesaid position none of the treatment allows to include the amount that is not there in the accounts under Rule 5(b). Accordingly notwithstanding all other arguments the action of any addition in this case under Rule 5(b) is ab-initio invalid. Even if all the above arguments of the company are not accepted the fundamental question to answer is what has been taxed? The Assessing Officer after mis-routing the whole issue reached to the conclusion that it is an "Appreciation" that was taxable under Rule 5(b) of Fourth Schedule to the Ordinance. Even if this presumption is accepted it would lead to the following incontrovertible facts:-- (1) Whether or not such appreciation has arisen during the year or it is accumulated over the years. If accumulated over the years then why the same was not taxed earlier; and (2) Whether or not taxation under the Fourth Schedule to the Income Tax Ordinance, 2001 where taxation officer is bound to accept the accounting treatment adopted for the purposes of preparation of accounts for SECP permits adjustments for appreciation on strategic investment.

31. The learned counsel submitted that in this particular case, as explained above, the fact is that investment was made in strategic shares a very long period of time ago. Over the decades the value of investment has appreciated against cost. Such appreciation is definitely not an event 'for the year' under consideration. The appreciation on yearly basis has been disclosed in the financial statements and also furnished in the form of table showing Appreciation on Yearly basis. Thus if for any argument such appreciation is to be taxed then that has to be done in that earlier years. There is no event during the year that has increased the value of investment. What has been done is the `realization' of appreciation. Such realization converts the appreciation into sale of investment which in the case of listed securities is exempt from tax under Rule 6A. The taxation officer has to draw a line where to stop. At one time there is statement that this is an appreciation whilst on the other there is no denial that appreciation has not occurred during the year. Thus if the Assessing Officer is allowed to recharacterise the realized appreciation into unrealized appreciation by invoking section 109 then he would be blowing hot and cold under the same breath. In that situation appreciation would have to be taxed if any during the period when it has arisen, which is definitely not the 'Tax Year 2007'. Accordingly it can assertively be concluded that in all circumstances this appreciation is not an event for Tax Year 2007 and in no manner it can be brought into tax for this year.

32. The next fundamental question is why such appreciation was not taxed under Rule 5(b) in earlier year when there was actual appreciation when the same was disclosed in the financial statements by way of the note. The answer is quite simple and straight forward. Under the Insurance Ordinance read with SEC (Insurance) Rules, 2002 and the Accounting Standards, appreciation on strategic investment can not be recorded in the financial statements therefore the same can not be taxed under Rule 5(b). This is an accepted and correct practice under the law and has not been denied by the Assessing Officer in this and other cases. The question is whether appreciation arising in whatsoever manner [whether or not through recharacterisation] can now be taxed. The answer is emphatic in negative for the reason that in the case of strategic investment Insurance Ordinance read with the Accounting Standards does not allow including the same in financial statements and consequently such appreciation in the value of strategic investment can not be taxed under rule 5(b) of the Fourth Schedule.

33. The learned counsel submitted that cumulative application of these provisions leads to the conclusion that even after applying section 109 the hands of Assessing Officer are tied by special provisions of the Insurance Ordinance read with SECP (Insurance) Rules, 2002 and the Accounting Standards which are binding under the Fourth Schedule. In view of the same it is clear that action of taxing appreciation relating to earlier years that was duly, perfectly and completely disclosed in this particular year is invalid and wrong. In none of circumstances [even the application of section 109] such appreciation in value of strategic investment can be brought into 'Reserves'. Accordingly Rule 5(b) can not apply in this situation in any manner.

34. The learned counsel argued that Rule 5(b) allows 'adjustments' to the profit and loss account for the year for two kinds of income in relation to investments namely:-- (1) Appreciation [being unrealized gain]; (2) Gain on sale of investment. In this particular case the only controversy is that as per company's contention this amount represents gain on sale of investment whereas according to taxation officer this represents appreciation in the value of investment. The first one is exempt under Rule 6A of the Fourth Schedule to the Ordinance and in order to deny that exemption to the company the taxation officer has endeavoured to place it within the ambit of 'Appreciation'. Accordingly notwithstanding the company's argument that even appreciation in this case is not taxable for the reason explained above, this represent a realized gain. This leads to the fundamental academic and legal question for identifying the tests to determine when and on what basis such distinction between a realized [gain on sale of investment] and unrealized [appreciation in the value of investment] is made. There are two non-controversial tests for the same. These are: (1) Gain on sale is fixed and crystallized and amount or sum can not change; and (2) the gain on sale is 'distributable' as income under the Companies Ordinance and Accounting Standards.

35. Illustrating further the learned counsel submitted that in this particular case shares having a cost of say Rs.100 which had a market value of Rs.1000 were sold for Rs.1000 and were repurchased for Rs.1000. This results in a gain of Rs.900 that has been disclosed as gain on sale of shares. The only question is whether Rs.900 is realized gain on sale of shares or it is an appreciation. Applying the aforesaid tests this amount of Rs.900 has crystallized and fixed, now the amount would not change on account of change in market price of share. A fixed and determined amount has to be included in the profit and loss account. Now the cost of shares is Rs.1000 as against Rs.100 earlier. The difference between the original cost and market value has been 'realized' not 'appreciated'. The second transaction of repurchasing the shares does not change the character and nature of first from being a transaction of sale of shares to an appreciation in whatsoever manner. We are not aware of any provision in any taxing, corporate, general or other law whereby a subsequent purchase of the same share would make the realized gain into a unrealized gain. Even if transaction is recharacterised in any manner the 'character' and nature of being realized can not be changed/altered. Once the amount of gain is a realized gain then notwithstanding the treatment under Rule 5(b) the same can not be taxed. Its exemption under Rule 6A can not be denied.

36. The second test is even more important. Under the law, credit can be taken to income under various accounting treatments however the same may be distributable or non-distributable. Irrespective of any other consideration, a realized amount will always distributable. In this case irrespective of any treatment by the taxing officer and presumptions made, the amount of gain is a distributable profit in every sense and this position can not change in any manner. Thus there is no doubt that the amount represents a gain on the sale of shares not being an appreciation of value of shares.

37. The aforesaid submissions prove that the amount of gain irrespective of any provisions, in any legislation, represents gain on sale of shares not being 'appreciation' even though the said and the same shares are repurchased in any manner including being allegedly under the controlled transaction. Same can not be classified as 'appreciation' in any manner. Not treating it as a gain on disposal of share is a denial of a reality. The fundamental question is not whether or not Rule 5(b) applies the question is whether it is gain or appreciation; the reality is that it is a gain on sale of shares included in Rule 5(b) which has been specifically exempted under Rule 6A.

38. As regards application of section 109 of the Income Tax Ordinance, 2001 it was submitted that entire exercise has been made by the Taxation Officer through which the actual gain on the share has been re-characterize as revaluation gain. The Taxation Officer has taken refuge of section 109, however, he has not shown under which provision of law the actual exempt gain can be treated as re-valuation gain. He has taken refuge of section 109 as the appellant during the year sold its shares and subsequently repurchased the same. Onus is on the Taxation Officer to show that Insurance Company or for that matter any taxpayer cannot re-purchase the shares after selling its shares. There is no legal bar under the Insurance Ordinance, 2000 read with relevant provision of law under Income Tax Ordinance, 2001 or any other law that debars a taxpayer to sale and re-purchase the shares.

39. It is further argued that provisions of section 109 cannot be applied to a valid and legally permissible transaction. The proposition is supported by the judgment of learned Income Tax Appellate Tribunal. In I.T.A. No. 391/KB of 2007 vide order dated 30-10-2009 while deciding a case in which section 109 was invoked, the learned Tribunal has observed as under:-- "In our opinion the action of the Taxation Officer is unfair and unjustified. A valid and legally permissible transaction cannot be hit by the provisions of section 109 of the Income Tax Ordinance, 2001."

40. It was further contended that Rule 6A of the Fourth Schedule exempts gain on sale of shares and only condition provided for exemption of capital gain being Income from sale of Modaraba certificates or any instrument of redeemable capital as defined in the Company's Ordinance, 1984 listed on Stock Exchange in Pakistan or shares of public company as defined under subsection (47) of section 2 of the Ordinance (i.e. a company whose shares were traded on Registration Stock Exchange in Pakistan at any time in the tax year and which remained listed on that exchange at the end of that year) and the Pakistan Telecommunication vouchers issued by the government of Pakistan derived up to tax year ending on 2008 (which is subsequently extended to 2010). It is submitted that actual sale of the shares cannot be re-characterized as re-valuation gain under any provision of law and under Fourth Schedule.

41. The learned counsel went to argue that even otherwise the provision of section 109 have been misapplied and misinterpreted. Since the present assessment has been made under section 122(5) which depends on the definite information no material has been placed on record that the tax payer has entered into the transaction to avoid reduction of tax when the actual gain on sale of shares under Rule 6A of the Fourth Schedule was exempt which fact has not been denied nor the transactions undertaken by the appellant have been declared to be sham transactions or that same was not legally permissible when the gain was exempt under Rule 6A of the Fourth Schedule. It was argued that pre-requisite to invoke the provision of section 109 is the existence of a tax avoidance scheme. The legislature has empowered the Commissioner to determine liability to tax under the Ordinance and he has been vested with power to re-characterize a transaction only when if it was entered into as part of tax avoidance scheme. As submitted above the capital gains on the sale of shares was exempt by virtue of Rule 6A as such, there was no occasion for the Commissioner to nullify the exemption and create an artificial and improper liability to tax under the Ordinance. There was no liability of tax on the capital gains, as same had to be excluded from income computed under Fourth Schedule. Secondly, the Taxation Officer, in the present case has not shown that the Commissioner had delegated him the powers to invoke section 109 as such the entire edifice of the action falls to the ground and thus is without jurisdiction. There is no delegation for section 109.

42. It was further submitted that one of the ingredients for re-characterizing a transaction is that where the form of the transaction does not reflect the substance. In the present case the form of the transaction duly reflects the substance as an actual sale of the shares has taken place and Capital gain has arisen. The learned counsel, therefore submitted that the action taken under section 109 by the Taxation Officer is without any basis whatsoever and in fact the provision has been misapplied by misinterpreting the section

109. Section 109 stipulates that for the purpose of determining the liability to tax under the Ordinance, the Commissioner has discretion:-- (a) to recharacterise a transaction or an element of a transaction that was entered into as part of a tax avoidance scheme; (b) disregard a transaction that does not have substantial economic effect; or (c) recharacterise a transaction where the form of the transaction does not reflect the substance.

43. In subsection (2) of section 109, the tax avoidance scheme has been defined which stipulates that tax avoidance scheme means any transaction, where one of the main purposes of a person in entering into the transaction is the avoidance or reduction of any person's liability to tax under this Ordinance. The learned counsel, therefore, argued that none of the conditions are attracted in the case of the appellant. Since the Capital Gain was exempt under Rule 6A of the Fourth Schedule, question of any liability to tax does not arise. By placing reliance on the judgment of the Hon'ble Supreme Court in PLD 1992 SC 262, the learned counsel submitted that it is not the look out of the Department to dictate the taxpayer how to utilize its funds because after receiving the amount of sale consideration from which the capital gain has arisen, there is no provision of law in the Income Tax Ordinance, 2001 which gives the qualification or condition as to how such funds are to be utilized. The Hon'ble Supreme Court of Pakistan observed that the assessee is free to make transactions in accordance with law. Since there was no legal prohibition or bar under any law, the appellant's actual realized capital gain cannot be taxed.

44. The learned counsel lastly submitted that in view of the above submissions, entire exercise done in the impugned order is without jurisdiction and it is respectfully prayed that same be held to illegal and addition be deleted and order impugned may kindly be annulled.

45. On the other hand, the learned Legal Advisor of the department Mr. Amjad Javaid Hashmi, Advocate, fully supported the orders of the officers below. He vehemently argued that the transaction of capital gain was an artificial transaction having no commercial and economic purpose other than claiming tax exemption to ward off the awareness of the taxpayer that the Parliament might abolish the exemption of capital gain under Rule 6A from the next year i.e. tax year 2008 onwards. The transaction carried out by sale and repurchase of shares of associated undertakings was not a normal transaction but a pre-ordained scheme of tax avoidance hit by section

109. The transactions were merely a simulation having no economics substance. The substance of the scheme is that the taxpayer continued to economically own or benefit from the same asset while creating capital gain for claiming exemption.

46. The learned D.R. further cited a case-law in the case of Ali Muhammad v. Chief Settlement Commissioner reported as 1984 SCMR 94 the honourable apex Court of Pakistan held that: "sale is defined as being a transfer of ownership price. Sale is an absolute transfer of all rights in property sold and no rights are left in the transferor. Essential elements of sale are (i) the price (ii) the subject matter (iii) the transfer or conveyance (iv) price or consideration". He, therefore, submitted that it was not a real sale but a wash sale as control, title and possession did not pass on from the taxpayer to the buyer (IFSL). The following 3 questions arise for determination of true commercial purpose:-- (a) Has the right to the cash flowing through the assets expired? (b) Has the entity transferred substantially all risks and rewards? (c) Has the entity retained control of the assets? Further all the transactions were carried out in non-arms length manner and outside the regular system of Karachi Stock Exchange (off market) and without any liquidity needs in striking disregard to the taxpayer own accounting policy.

47. The learned D.R. submitted that in the instant case the taxpayer has no evidence that the consideration of Rs.8.4 billion was actually received from its sister brokerage house IFSL. The transaction was carried out in violation of the arms length principle and that the IFSL acted as an accommodating and tax indifferent party. Evidence of delivery of shares in physical or digital format to and from IFSL not produced. The taxpayer failed to produce a copy of its sub-account maintained by IFSL in its capacity as a brokerage house. The taxpayer financial position and the financial position of associate remained unchanged. IFSL (broker) violated the Karachi Stock Exchange rules underlying the principle that the seller and buyer are not known to each other.

48. The DR stated that the contention of the AR that section 99 and the Fourth Schedule being the special law applicable to an insurance company oust the application of other normal provisions of law is not based on true understanding of the law. He contended that only a law couched in a non-obstante clause is an over-riding provision and would be a special law in its effect but not otherwise. He further contended that the reliance cannot be place on the judgment of the High Court reported as 2004 PTD 2180. He stated that the finding of the High Court in the said judgment is in express defiance to the judgment of the Supreme Court in case of Central Insurance Co. and others v. CBR reported as 1993 SCMR 1232 = 1993 PTD 766, therefore, it is per incurim to hold that section 99 of the Ordinance and section 26(a) of the repealed Ordinance are almost the same in their force and effect. Exposing the per in curium nature of the finding with respect to force and effect of two provisions in a statute with or without non-obstante clause made in paragraph 20 of the EFU case; he referred to the finding of the honorable Supreme Court in the case-law of Central Insurance Co. and others v. CBR reported as 1993 SCMR 1232 = 1993 PTD 766 wherein while interpreting the over riding effect of non-obstance provisions of both section 10(7) and Rule 6 of the 1st schedule to the late Act (Income Tax Act, 1922) and section 26(a) and Rule 5 of the 4th schedule to the repealed Ordinance (Income Tax Ordinance 1979) wherein it was observed:-- "

12. It may be stated that section 26(a) and Rule 5 of the 4th schedule to the Ordinance correspond with above section 10(7) and the Rule 6 of the 1st schedule to the late Act as stated above and, therefore, the ratio of the above cases can be pressed into service while construing, the above provisions of the Ordinance. In the present case, it is an admitted position that the appellants, while submitting their accounts to the Controller of Insurance in Form B in terms of the Insurance Act, 1938, and shown the interest earned by them on has Deposit Certificate/ Defence Saving Certificates during the assessment years in question and, therefore, it was part of profits and gains and, therefore, could be subject to tax. It is true that section-14 as well as section 26 contained non-obstante clause, but as section 26 being a provision subsequent to section 14 and also being a special provisions inter alia dealing with the working out of profits and gains of any business of the insurance and the tax payable thereon read with 4th schedule shall prevail. "(emphasis provided)

49. The learned D.R. argued that the ratio of the above judgment of the Supreme Court was simple and direct. A law couched in a non-obstante clause is an over-riding provision and would be a special law in its effect but not otherwise. Self-evidently; the finding of the learned High Court Sindh in E.F.U case is in express defiance to the above finding of the Supreme Court in the Central Insurance case; therefore, it is per incuiriam to hold that section 99 of the Ordinance and the section 26(a) of the repealed Ordinance are "almost the same" in their force and effect. The DR therefore concluded that section 109 can be invoked in case of an insurance company.

50. The DR also relied on various case-laws of foreign jurisdictions to contend that abnormal and artificial transactions attract provisions of anti tax avoidance regime. He also relied on a decision of South Africa reported as Smith v. CIR 1964(1) SA 324(A) to contend that avoidance of an "anticipated tax liability" falls under the ambit of tax avoidance scheme. He therefore contended that the appellant's transaction of realizing capital gain claimed as exempt was attracted as the said transaction was to avoid tax payable in the period after expiry of the exemption. He further relied on the case-law reported as Schofield v. HMRC 2012 EWCA Civ 927, wherein the contention of the revenue was endorsed and reliance is placed on the principles of Ramsay and Dawsons. In this case the Court sided with the Revenue in dismissing a capital loss of 11m on the ground that it comprised an artificial, circular, self-cancelling scheme designed with no purpose other than to avoid tax, as is the instant case. He, therefore, prayed that the orders of the officers below be maintained.

51. We have heard the learned representatives of both the sides and have also gone through the record of the case as well as case-laws cited at bar.

52. It is obvious from the facts of the case that the transactions of sale and repurchase have taken place resulting in actual realization of capital gain which had accumulated over the years for the reason of increase in market prices of the shares over the appellant's cost of purchase. The veracity of these transactions has not been doubted by the taxation officer in his order. In fact on page 24 of the order, the taxation officer has observed that all elements of the transactions existed in this case including sale consideration, movement of funds, delivery of shares in CDC accounts, deduction of tax and CVT on the transactions. We respectfully feel that the submissions made by the learned DR on veracity of the transaction do not merit consideration.

53. In our view tax avoidance can only be done where a taxpayer has more than one modes of carrying out a particular transaction which result in different tax liabilities for each mode. In the instant case, the increase in market value of investment held for sale cannot be credited to reserve due to statutory requirement of SECP (Insurance) Rules, 2000. This position has not been disputed by the department in the appellant's case or in cases of other insurance companies when such appreciations on account of market value on investment held for sale have been disclosed in their accounts by way of notes in past years. It is admitted position that until the appreciation in value of investment is credited to reserve account (which is there in case of investment held for trading) provision of Rule 5(b) requiring such credit to be considered a part of taxable profit cannot be invoked. Accordingly, the appellant had no option but to opt for sale of the investment to realized capital gain which although form part of the balance of profit under Rule 5 of the Fourth Schedule but to exclude there from under the provision of Rule 6A of the Fourth Schedule. In other words revaluation of such investment was not possible under the statutory frame work for insurance companies and accordingly it can not be substantiated that the appellant in order to avoid tax opted for realization of capital gain by selling the securities instead of revaluing such securities. It is also worth noting that economic substance of appreciation and realization of gain are different as explained by the AR in his arguments. The real benefit of appreciation can only be crystalised by selling the securities resulting into increase in distributable reserve which can be used for dividend payments whereas revaluation could only give rise to notional gains.

54. The DR has also contended that this was a "wash sale" and as such the transactions cancelled out each other. In our view the term "wash sale" carries a special meaning when viewed with reference to tax avoidance. The wash sale is the instrument used for crystalising unrealized losses by sale of securities with the intent to offset such losses against taxable gains to reduce the tax liability. However, in such case there is a iepurchase of the same securities to maintain the same investment portfolio. In the instant case the transaction was for realization of gain which remains exempt in the year of the transaction but also subsequently up to the date.

55. The learned DR also relied on the case of Smith v. CIR (1964(1) SA 324(A) from South African jurisdiction and insisted that avoidance of an "anticipated tax" falls under the tax avoidance scheme. However, in the instant case the issue relates to availing the exemption of capital gain. The law provides for exemption/ exclusion under Rule 6A of the Fourth Schedule. We are afraid that proposition of the learned DR can not be accepted as it would mean that all transactions which are covered by time bound exemptions would fall under tax avoidance scheme. This would make exemption provided by law as redundant having no application and all such transactions would become taxable before the exemption expires.

56. This leads us to the question as to whether other provisions of the Ordinance are applicable in computation of taxable income of an insurance company assessable under section 99 read with the Fourth Schedule of the Ordinance. The AR relied on a recent judgment of the High Court in case of Commissioner (legal) v. EFU General Insurance and others reported as 2011 PTD 2042. The High Court in that case disapproved the invocation of section 67 to the insurance company holding that section 99 read with the Fourth Schedule are special provisions applicable to insurance company and therefore general provisions of the Ordinance are not to be applied in case of insurance companies. The DR is however of the view that the finding of the Court is in express defiance to the judgment of the Supreme Court in case of Central Insurance Co. and others v. CBR reported as 1993 SCMR 1232 = 1993 PTD 766 therefore, it is per incurim to hold that section 99 of the Ordinance and section 26(a) of the repealed Ordinance are almost the same in their force and effect. We are afraid that this proposition can not be accepted in view of the judgment reported as 2004 PTD 2180 wherein the High Court has inter alia ruled that the judgment sought to be declared as per incuriam must by itself be under attack before a higher strength of judges belonging to the same court or the higher court. Considering the said principle we hold that the judgment relied by the AR in case of Commissioner (legal) v. EFU General Insurance and others is binding on this tribunal. We therefore, hold that provisions of section 109 of the Ordinance are not applicable to the appellant being a general insurance company assessable under section 99 read with the Fourth Schedule of the Ordinance.

57. Lastly, we may further observe that Mr. Amjad Hashmi Legal Advisor of the department in his argument has contended that the judgment reported as 2011 PTD 2042 relied upon by Mr. Arshad Siraj, the learned counsel for the appellant as "per incuriam". As a general rule the only cases in which decisions should be held to have been given per incuriam are those of decisions given in ignorance or forgetfulness of some inconsistent statutory provision or of some authority binding on the court concerned placed reliance on the judgment reported as 2011 PTD 2042 observed at page 2061 as under:-- "Reliance in this regard may also be made to the decision given by the Hon'ble Supreme Court in the case of Central Insurance Company reported as 68 Tax 86 which was followed with approval in the case of E.F.U., cited above, therefore, the manner and mechanism of computing the income so far as Insurance Company are concerned could not now be changed."

58. From perusal of the above observations of the Hon'ble High Court it is seen that the Hon'ble High Court has approved the manner of computation of income of insurance business keeping in view the judgment of the said judgment of the apex Court. Hence, we are therefore, of the considered view that in the present case it cannot be said that any statutory provision or binding authority was overlooked by the Hon'ble High Court of Sindh while delivering its judgment. We are also of the considered opinion that the Tribunal being sub-ordinate to the Hon'ble High Court can not declare the judgment of higher appellate fora to be incuriam.

59. In view of the above discussion the entire exercise done by the DCIR is unlawful and the order passed by him is illegal and without jurisdiction and is hereby annulled and the order of the learned CIR(A) confirming the additions made is vacated.

60. Consequently, the appeal filed by the Taxpayer is hereby allowed. DEPARTMENTAL APPEAL

61. This leads us to the appeal of the department filed for the Tax Year, 2007 contesting deletion of the addition on account of apportionment of expenses. For the reasons recorded in the earlier paragraphs of this order whereby we have held that the Fourth Schedule being special provision overrides the other provision and the profits and gain of Insurance Company are to be made in accordance with Fourth Schedule only, hence provision of section 67 of the Income Tax Ordinance, 2001 cannot not be applied.

62. Resultantly, the departmental appeal is hereby dismissed being devoid of any merit. CMA/166/Tax(Trib.) Order accordingly.