MR. JUSTICE MUHAMMAD ATHAR SAEED.-(1). All the 49 appeals have been disposed of by the Income Tax Appellate Tribunal alongwith ten other appeals which have not been fixed for hearing today vide a common order, dated 10-2-2001 in LT.A. No. 342/KB of 2000-2001 to I.T.A. No. 377/KB of 2000-2001 and I.T.A. No. 80/KB of 2000-2001 to 1. T.A. No. 97/KB of 2000-2001. The Tribunal vide its common order in I.R.A. No. 328/KB of 2001 and others have referred the following common questions for the opinion of this Court:- "(4) Whether in the facts and circumstances of the case the Tribunal was justified in dismissing the arguments of the A.R. Of the applicant that there cannot be any gain on the sale of shares when the date of applicant's becoming owner of the shares at the date of the sale of those shares is the same as the applicant became the owner of the these shares on exercise of stock option and after this exercise the shares were sold on that very date.
(5) Whether in the facts and circumstances of the case the Tribunal was justified in not accepting the claim of the applicant that since profit earned on the sale of stock share came to Pakistan in shape of foreign exchange and the applicant opened dollar account in a commercial bank it was exempt under sections 4 and 5 of Protection of Economic Reforms Act, 1992 and clause (6A) of Part IV of Second Schedule of the Income Tax Ordinance, 1979."
2. The brief facts of the case are that the applicants were then employees of Merck Sharp and Dohme Pakistan Limited, a subsidiary of Merck Incorporation USA and had filed their returns of the income showing their salary income and all the returns were accepted under section 59(A) of the Income Tax Ordinance, 1979. However later on definite information came in the possession of the D.C.I.T, regarding the exercise of stock option by all these employees for 100 shares of Merck incorporated in U.S.A, and that allotment and sales of the said shares and gains arising from such shares were not reported by the said employees in their income tax returns. Action was, therefore, taken under section 65 and the cases of these employees were reopened. According to the further facts divulged in the assessment order, a scheme of stock option was offered by the employer informing the employees that a one-time option grant that entitled them to acquire 100 shares of Merck common stock at a fixed price between 6-9-1996 to 5-9-2001 at a purchase value which was fixed to be the selling price of Merck common stock on September 6, 1996. All the above employees were eligible to exercise that option and this option was exercised by them. The fixed price of the Merck shares in 1991 was US $ 127.25 per share whereas the prevailing market price at the time the option was exercised was USS 166.50 which resulted in a gain of 39.25 US $ per share which on 100 shares came to be 3925 US $. All the applicants exercised this option in accordance with the formula of stock split of three for one share i.e. 300 shares were allotted to each employee at a price of 42.417 US $ per share which were not physically transferred to the optees but were sold through Messrs Merrill Lynch and Co., the stock broker nominated by the parent company to represent the optees at a price of US $ 80.100 per share. Thus, the employees became entitled to a gain of $37.68 per share resulting in overall gain of $ 11,305 on 300 share which when converted into Pakistani currency, came to Rs. 312,018 and after granting them exemption of 60% of such income to which they were entitled under the domestic law of Pakistan, the rest of the amount was taxed by D.C.I.T.
3. Being aggrieved by this order, the applicants filed appeals before the C.I.T. Appeals who vide various orders dismissed the appeals against which the appeals were filed before the Tribunal which was also dismissed by the impugned order. The applicants then filed I.T.R. As before the Income Tax Appellate Tribunal under section 136(1) of the Income Tax Ordinance, 1979 requesting therein to refer the following five questions for the opinion of this Court:-- "(1) Whether in the facts and circumstances of the case the learned Tribunal was justified in holding that the applicant had earned capital gain on the sale of shares offered to him without any cost/free of cost by the American company namely, Merck Incorporation (USA) which is the parent company of the Pakistani company namely Messrs Merck Sharp and Dohme - Pakistan Limited, who is the employer of the applicant.
(2) Whether in the facts and circumstances of the case the applicant earned capital gain on the sale of share offered to him by American company, namely Merck Inc. (USA) on 6th Sept. 1991 without any consideration subject to the condition that (a) the applicant shall continue in the employment of Pakistani subsidiary company, namely Messrs Merck Sharp and Dohme Pakistan Ltd. For at least five years (b) that he will remain alive for full five years and (c) after completion of service for full five years unless retired only then the applicant shall become owner of the stock share offered to him provided he exercises the option to purchase these shares at the rate prevalent on 6-9-1991. If no option is exercised within five years of the vesting date the right to exercise option will be lost so also the shares.
(3) Whether in the facts and circumstances of the case the learned Tribunal was justified in holding that the profit on the sale of shares will be worked out by deducting from the sale price. The price of these stock shares as on 6th Sept. 1991 when the offer was made and not the market value of these stock shares on the date the applicant exercised the option and became the owner of these stock shares i.e. On July 3, 1997 because in between this period the applicant had no lien on these shares at all.
(4) Whether in the facts and circumstances of the case the Tribunal was justified in dismissing the arguments of the A.R. Of the applicant that there cannot be any gain on the sale of shares when the date of applicant's becoming owner of the shares at the date of the sale of those shares is the same as the applicant became the owner of these shares on exercise of stock option and after this exercise the shares were sold on that very date.
(5) WTiether in the facts and circumstances of the case the Tribunal was justified in not accepting the claim of the applicant that since profit earned on the sale of stock share came to Pakistan in shape of foreign exchange and the applicant opened dollar account in a commercial bank it was exempt under sections 4 and 5 of Protection of Economic Reforms Act, 1992 and clause 6A of Part IV of Second Schedule of the Income Tax Ordinance, 1979."
4. The Income Appellate Tribunal vide the impugned order on the reference application referred the above-stated two questions only for the opinion of these Court.
5. We have heard Mr. Muhammad Fareed, learned counsel for the applicants and Mr. Jawaid Farooqui, learned counsel for the respondents.
6. At the very outset of his arguments, the learned counsel for the applicants submitted that the Tribunal has referred only two questions and has refused to refer other questions otherwise he could have argued before this Court on the other questions and satisfied this Court that the act of taxing the gain of sale of shares received in stock option is not in accordance with law. However, since the learned counsel conceded that he had not filed any application under section 136(2) of the Income Tax Ordinance, 1979 before this Court against the order of the Tribunal refusing to refer the other questions for the opinion of this Court, there is no way for this Court to allow him to argue on any other question but the two questions which have been referred by the Tribunal.
7. As far as the first question is concerned, the learned counsel argued that if the purchase of the shares has been made on the same day when the shares were sold, how could any gain accrue on such transaction. However, he conceded that there was a difference of US $ 42.417 per share between the cost of acquiring the shares and the sale price of the shares and, therefore, the argument is not based on the facts of the case and is repelled.
8. Coming to the second argument, the learned counsel first read out before us the entire provisions of the Protection of Economic Reforms Act, 1992 (Act XII of 1992) and argued that under this Act the deposits of foreign currency made in foreign currency account is exempt from tax. In this connection he relied on the provisions of sub-section (2) of section 5 in which it has been stated that the balances in the foreign accounts and income therefrom shall continue to remain exempted from the levy of wealth tax, income tax and compulsory deduction of Zakat at source.
The learned counsel also relied on a judgment of the Lahore High Court reported in the case of Hudabiya Engineering (Pvt.) Ltd. v. Pakistan and 6 others 1998 PTD 34 in support of his arguments.
After reading out the entire judgment of the Lahore High Court in the case quoted supra, the learned counsel argued that the facts of this case were completely identical to the Hudabiya case quoted supra and in that case the learned Lahore High Court has held that all the foreign currency deposited in foreign currency accounts is exempted from the levy of income tax.
9. The learned counsel for the respondents, Mr. Jawaid Farooqui supported the order of the Tribunal and argued that under the Protection of Economic Reforms Act, 1992 only the balance of the foreign currency accounts and the interests on such foreign currency accounts have been exempted from tax and the protection in respect of these accounts is restricted to the condition that citizens, residents or non-residents of Pakistan who hold such foreign currency accounts shall enjoy immunity from any enquiry by the Income Tax Department or any other taxing authority and would be entitled and free to bring, hold, sell, transfer and take out foreign currency in any form and would not be required to make any foreign currency declaration at any stage nor shall be questioned in regard to the same. He further argued that the case of Hudabiya Engineering quoted supra, relied on by the learned counsel for the applicants is on completely different facts as in that case there was no finding that any income of the applicant had escaped assessment but only enquiry was being made by the taxing authorities in respect of two benami foreign currency accounts and the Lahore High Court has held that this action was in violation of the provisions of Protection of Economic Reforms Act. He also submitted that under section 11 of the Income Tax Ordinance, 1979 any income which accrues or arises to a resident of Pakistan outside the Pakistan is taxable in the year of such accrual.
10. We have examined the case in the light of the arguments of the learned counsel and have carefully perused the records of the case including the assessment order and order of the appellate authorities, the Protection of Economic Reforms Act, 1992 and the judgment relied on by the learned counsel for the applicant. The Tribunal has rejected the above arguments of the applicant's counsel in the impugned order in the following manner:- "(18) Mr. Haider Shamsi's contention that even if it is deemed as Income, it was remitted in foreign exchange to individual foreign currency account and thus it was recovered by Economic Reforms Act of 1992 and Clause (6A) of Part IV of the Second Schedule needs to be examined as mentioned in para. 13 of this Order. The said Clause reads as under:-- "(6A) The provisions of section 13, Chapter XI or Chapter XII shall not apply in respect of any amount of foreign exchange deposited in a private foreign currency account held with an authorized bank in Pakistan in accordance with the foreign currency accounts scheme introduced by the State Bank of Pakistan: Provided that the exemption under this clause shall not be available in respect of any incremental deposits made on or after the 16th day of December, 1999 in such A/cs held by a resident person or in respect of A/cs deposited in A/cs opened on or after the said date by such person." (19) The above Clause gives protection to the source of Foreign Exchange remittance deposited in a Private Foreign Currency A/cs., which means that such deposits cannot be held as unexplained deemed income. There is no question of the deposits being either unexplained or deemed income in these cases, because it is clear that income earned outside Pakistan was remitted to the Foreign Currency A/c. So section 13 was not applicable and has not been applied.
The balances in the foreign currency accounts and income therefrom shall continue to remain exempted from the levy of Wealth Tax and Income Tax and compulsory deduction of Zakat at source: Provided that such exemption shall not be available to citizens of Pakistan residing in Pakistan and to firms, companies and other bodies registered or incorporated in Pakistan in respect of any balance in a new foreign currency account opened or deposits created on or after the 16th day of December, 1999 or to incremental deposits created on or after the 16-12-1999 in an existing foreign currency A/c and income therefrom.
(20) The provisions reproduced above provide immunity from enquiry regarding source of such deposits. No enquiries have been made by the Department regarding source of these deposits. No letters were addressed to the banks to provide particulars of foreign currency accounts or the deposits. Assessm ent has been made on declared and stated facts regarding accrual of income from sale of shares. Now it is abundantly clear that income to a resident would accrue or arise outside Pakistan, always in foreign currency, and should this income be brought in Pakistan. It shall always be brought in foreign currency this does not mean that income accruing or arising would be exempt merely because it is in foreign exchange.
(21) Such income if declared or discovered shall be taxed in the hands of the residents unless specific exempting to such income is given. The provisions discussed above do not provide any specific exemption to income accruing or arising outside Pakistan these merely provide immunity from probe to the source of deposits in Foreign Currency Account. As such this contention raised by Mr. Haider Shamsi does not hold good."
11. We find ourselves in complete agreement with the Tribunal that the provisions of the Protection of Economic Reforms Act have not been violated as no enquiry has been made by the department regarding source of these deposits and no information was requisitioned from the banks in respect of the above foreign currency accounts or the deposits made therein and the assessm ent is based on the declared, stated and admitted facts that the applicants have received capital gain on the disposal of shares received by them in respect of the shares which were acquired by them as a benefit of stock option received from their employer.
12. No arguments have been advanced before us that the amount in question is not taxable in terms of sections 11 and 16 of the Income Tax Ordinance, 1979 and, therefore, such amount has been wrongly taxed. The silence of the learned counsel for the applicants on this point leads to the presumption that he has candidly conceded that such amount would have been taxable, it did not fall under the provisions of Protection of Economic Reforms Act and was not exempt from tax. Since we are already clear in our minds that the provisions of the Protection of Economic Reforms Act have not been violated in any manner and this Act only exempts the balances in any such accounts or interests accrued on such balances, therefore it is our considered opinion that any deposit made in these accounts is taxable if without reference to these accounts and without any enquiry and on the facts acquired independently it can be related to any source of income which is taxable under the provisions of the Income Tax Ordinance, 1979.
13. We also find ourselves inclined to accept the arguments of the learned counsel for the respondents that the judgment of the Lahore High Court in the case Hudabiya Engineering, quoted supra, is on completely different facts because on a perusal of the said judgment we have seen that the learned Lahore High Court has decided this case in the following manner:-- "(31) It is also to be seen that as sections 4 and 5 of the Act, both deal with foreign currency, while interpreting section 4, section 5 of the Act cannot be lost sight of. It provides complete freedom to all citizens of Pakistan and all other persons to bring, hold, sell and take out foreign currency in any form. It specifically provides that no person shall be required to make any foreign currency declared at any stage and also ordains that no one shall be questioned in regard to the same.
That being so, no inquiry either into the source or the holding of the foreign currency can be initiated or made by any agency especially when non-obstante clause in section 3 of the Act provides that the Act shall override all other laws.
(32) On consideration of various provisions of the Protection of Economic Reforms Act, 1992, we have reached the conclusion that so far as foreign currency accounts are concerned, the holders thereof, have complete immunity from inquiry and scrutiny and complete secrecy must be maintained in respect of those account which cannot be violated by any agency or functionary.
That being so, neither the Income Tax Authorities nor Federal Investigation Agency had any jurisdiction to hold any inquiry in respect of the transactions in the foreign currency accounts nor could the same be made basis of criminal prosecution." From a perusal of the above extract it is clear that no where has the learned Lahore High Court made any observation that income other than the balances in the foreign currency accounts and the interests accruing thereon have been exempted from the levy of income tax by this Act and has only held that neither the Income Tax Authorities nor the Federal Investigation Agency have any jurisdiction to hold any enquiry in respect of the transaction in the foreign currency accounts nor could the same be made basis of a criminal prosecution.
From a perusal of the above extract it is clear that no where has the leamed Lahore High Court made any observation that income other than the balances in the foreign currency accounts and the interests accruing thereon have been exempted from the levy of income tax by this Act and has only held that neither the Income Tax Authorities nor the Federal Investigation Agency have any jurisdiction to hold any enquiry in respect of the transaction in the foreign currency accounts nor could the same be made basis of a criminal prosecution.
14. On the basis of the above discussion, we are of the considered opinion that the conclusion reached by the Tribunal is unexceptionable and no interference is called for by this Court. In view of the above opinion, we answer the questions referred for our opinion in affirmative in favour of the respondents and against the applicants. As a consequence of our above reply these Income Tax Reference Applications are dismissed.