' These Appeals have been filed by TRG Pakistan Limited (TRG) to contest the orders of the Commissioner Inland Revenue (Appeals-II) Karachi, vide Order No,44 dated 22nd July 2010 for the tax year 2003 and vide Order No,15 dated 10 September 2010 for the tax year 2004 on the following grounds: Grounds of Appeal for the Tax Year 2003 (1). That the order passed by the Commissioner Inland Revenue (CIR) Appeals-II, Karachi is bad in law and on facts. .
(2) That the CIR was not justified in holding that taxation Officer is competent to issue a notice under section 122(5A) read with section 122(9) of the Ordinance and passing an amended order under section 122(5A) of the Ordinance by assinging the powers conferred to the Commissioner Inland Revenue, for issuing such a notice and passing such an amended assessment order.
(3) That without prejudice to Ground No,2 herein above recorded, the CIR has misdirected himself in law and on facts in not allowing the claim of exemption under clause (101) of Part I of the Second Schedule to the Ordinance for the reason that the said exemption is available only to such Venture Capital Companies and Venture Capital Funds which are registered under Venture Capital Companies and Fund Management Rules, 2000.
(4) That without prejudice to Grounds Nos.2 and 3 herein above recorded, the CIR was not justified in confirming the treatment of the Taxation Officer that TRG International (a Venture Project of the appellant incorporated in Bermuda) does not qualify to be a Venture Project in terms of Rule 2(1)
(l) of the Non Banking Finance Companies (Establishment and Regulations Rules, 2003).
(5) That without prejudice to Ground No, 4 herein above recorded, the CIR has failed to appreciate that the Taxation Officer has travelled beyond his jurisdiction in holding that TRG International is a venture project of the appellant.
(6) That without prejudice to Grounds Nos.2, 3, 4 and 5 herein above recorded, the CIR was not justified in confirming the action of the Taxation Officer that the operating expenses claimed by the appellant at Rs,1,220,497 are pre-commencement expenses.
(7) That without prejudice to Ground No,6 herein above recorded, the CIR while maintaining the disallowance of operating expenses did not appreciate that the Taxation Officer had failed to confront the appellant on this issue.
(8) That without prejudice to Grounds Nos.2, 3, 4, 5, 6 and 7 herein above recorded, the CIR was not justified in confirming the action of the- Taxation Officer with, regard to treating the share issue expenses and legal and professional charges claimed by the appellant at Rs,34,969,300 and Rs,4,312,233 respectively by treating the same as capital expenditures thereby disallowing the claim Of amortization thereon.
(9) That without prejudice to Ground No,8 herein above recorded, the CIR while maintaining the disallowance of legal and professional charges did not appreciate that the Taxation Officer had failed to confront the appellant on this issue.
(10) That without prejudice to Grounds Nos.2, 3, 4, 5, 6, 7, 8, and 9 herein above recorded, the CIR has erred in confirming the action of the Taxation Officer that the income derived by the appellant from profit on debt amounting to Rs,2,752,598 is the income from other source which is liable to tax under section 39 of the Ordinance. The CIR has made this alleged observation without appreciating the fact that the entire income of the appellant is exempt from tax within the purview of clause (101) of Part I of the Second Schedule to the Ordinance which allows general exemption to the appellant.
(11) That without prejudice to Ground No,10 herein above recorded, the CIR has not given any decision against the action of the Taxation Officer for not allowing proportionate legitimate admissible deductions/ expenses against the income derived from profit the debt within the meaning of section 40 Of the Ordinance.
(12) That the CIR was not justified in confirming the action of the Taxation Officer that the appellant is not entitled to claim depreciation on fixed assets on the pretext that the appellant has not utilized any depreciably assets in deriving income chargeable to tax under the Ordinance.
Grounds of Appeal for the Tax Year 2004
(1) That the order passed by the learned Commissioner Inland Revenue (CIR) Appeals-II, Karachi is bad in law and on facts.
(2) That the learned CIR (Appeals) was not justified in holding that the Taxation Officer is competent to pass the order under section 122(5A) when the deemed order under section 120 was an order taken to have been passed by the Commissioner and therefore, the Taxation Officer being a subordinate authority cannot initiate the impugned proceedings and pass an order under section 122(5A) of the Ordinance.
(3) That without prejudice to Ground No,2 hereinabove recorded, the learned CIR (Appeals) has misdirected himself in law and on facts in not allowing the claim of exemption under clause (101) of Part I of the Second Schedule to the Ordinance for the reason that the said exemption is available only to such Venture Capital Companies and Venture Capital Funds which are registered "Under Venture Capital Companies and Fund Management Rules, 2000.
(4) That without prejudice to Ground No,3 supra, the learned CIR (Appeals) was not justified in confirming the treatment of the Taxation Officer that TRG International (a Venture Project of the appellant incorporated in Bermuda) does not qualify to be a Venture Project in terms of Rule 2(1)
(1) of the Non Banking Finance Companies (Establishment and Regulations) Rules, 2003).
(5) That without prejudice to Ground No, 4 hereinabove recorded, the learned CIR (Appeals) has failed to appreciate that the Taxation Officer has travelled beyond his jurisdiction in holding that TRG International is a venture project of the appellant.
(6) That without prejudice to Grounds Nos.4 and 5 hereinabove recorded, the learned CIR (Appeals) has failed to appreciate that the Taxation Officer did not confront the appellant on the issue of eligibility of TRG International to be treated as a Venture project of the appellant.
(7) That the learned CIR (Appeals) was not justified in confirming the action of the Taxation Officer with regard to treating the share issue expenses and expenses on issuance of TFCs claimed by the appellant at Rs, 34,969,576 and Rs, 1,126,000 respectively by treating the same as capital expenditures thereby disallowing the claim of amortization thereon.
(8) That the learned CIR (Appeals) has erred in maintaining the levy of minimum tax of Rs,88,303 without appreciating the fact that being a venture capital company, the appellant is exempt from the levy of minimum tax in terms of sub-clause (xii) of Part IV of the Second Schedule to the Ordinance and without giving cognizance to the fact that the Taxation Officer failed to confront the appellant on the levy of minimum tax.
(9) That without prejudice to grounds recorded hereinabove, the CIR (Appeals) has erred in confirming the action of the Taxation Officer that the become derived by the appellant from profit on debt and interest on advances amounting to Rs,8,777,504 and Rs,67,610 are the income from other sources which are liable to tax under section 39 of the Ordinance, without appreciating that the entire income of the appellant is exempt from to within the purview of clause (101) of Part I of the Second Schedule to the Ordinance.
(10) That without prejudice to Ground No,9 above, the learned CIR (Appeals) has not given any decision against the action of the Taxation Officer for not allowing proportionate legitimate admissible deductions/ expenses against the income derived from profit on debt and interest on advances within the meaning of section 40 of the Ordinance.
3. Since most of the grounds of appeal in both the tax years are common, therefore, the appeals are being disposed off through a single order.
4. Brief facts of the case are common in both the years; the taxpayer company was disallowed the claim of exemption as a venture capital company under relevant provisions of law. It was also found by the Assessing Officer that the company is violating the provisions of law permitting it to carry out business in Pakistan. The officer also proceeded to disallow or re-characterize some expenses claim in the accounts. The treatment meted out by officer through order under section 122(5A) was endorsed by the CIR(A) through his order No,44 dated 22-7-2010 and Order No, 15 dated 10-9-2010. Therefore, the taxpayer has come up to this forum for redressel of his grievances.
5. As regards Ground 2 of appeals for the tax years 2003 and 2004, Mr. Usman Ali Khan, A. R. Has not argued this ground and has only drawn our attention to a judgment of the learned ITAT bearing I.T.A. No,370/LB/09 dated 16 May 2009 and contended that the learned ITAT has held that if the original order is passed by the Commissioner under Section 120 of the Ordinance, the Additional Commissioner in such case cannot amend the said order under section 122(5A) of the Ordinance.
' However, the issue of powers of the Commissioner delegated to the Taxation Officer under section 210 of the Income Tax Ordinance, 2001 and amendment of assessment under section 122(5A) by the Additional Commissioner is laid to rest by the Honourable Islamabad High Court in Writ Petition No,653 of 2009 dated 2-7-2001 which has been approved by the Honourable Supreme Court while deciding the C.Ps. Nos.1664-1665 of 2009 dated 11-9-2009. The ratio of the above judgment is that the Additional Commissioner under delegated authority can perform the function and exercise the powers of the Commissioner with specific reference to section 122(5A) of the Ordinance. In view of the above judgment, the order under section 122(5A) is legal and within a lawful authority. Hence the plea of the learned AR of the appellant on this score is failed.
6. With regard to Ground No,3 of appeals for the tax years 2003 and 2004, the learned AR submitted that the appellant's first year of business is tax year 2003 (covering period from 2 December, 2002 through 30 June 2003) for which a return of income claiming exemption from tax under clause (101) of Part I of the Second Schedule to the Ordinance was duly filed. The said clause before the amendment as made through the Finance Act, 2006 read as under:- Clause (101), Part 1, Second Schedule "profits and gains' derived between the first day of July, 2000 and the thirtieth day of June, 2007 both days inclusive, by a venture capital company and venture capital fund registered under Venture Capital Companies and Fund Management Rules, 2000"
7. The learned Additional Commissioner had issued a notice dated 20 December, 2005 under the provisions of section 122(5A) read with section 122(9) of the Ordinance in which the exemption claimed by the appellant under clause (101) ibid had been challenged by observing the following:- - "Tax year 2003 is the first year of assessment. Return of income filed on 29-12-2003 discloses loss of Rs,7,151,358 claimed to be exempt under clause 101 of Part I of 2nd Schedule on the basis that the company carries "Venture Project" under the Venture Capital Company and Venture Capital Fund Rules, 2001. Whereas clause 101 ibid: provides that only those Venture Capital Companies would enjoy exemption which are registered under the "Venture Capital Companies and Fund Management Rules, 2000". Hence, according to criteria prescribed by clause 101 of Part I of 2nd"
Schedule, your case does not qualify for exemption."
8. The appellant was granted a license on 16 January 2003 to operate as a Venture Capital Company under the Venture Capital Companies and Venture Capital Funds Management Rules, 2001. These Rules were notified/gazetted by the Securities and Exchange Commission of Pakistan
(SECP) through S.R.O. 131(1)/2001 dated 27th February 2001 (copy provided). Prior to finalization and notification of these Rules, the SECP issued draft Rules titled as "Venture Capital Companies and Venture Capital Funds Rules, 2000" vide S.R.O. 553(1)/2000 dated August 1, 2000 (copy provided) for circulation so as to gather the feedback and input from the stakeholders concerned, of any suitable amendments/ changes as requested by section 39(2) of the Securities and Exchange Commission of Pakistan Act, 1997. However, the final Rules were notified/gazetted by the SECP through S.R.O. 131(1)/2001 dated 27th February, 2001 as "Venture Capital Company and Venture Capital Fund Rules, 2001". This gave the misleading impression that these are two distinct and separate sets of Rules. However, perusal of both sets of Rules shows that the actual Rules notified in the year 2001 were completely those which were circulated in the year 2000 in draft form. The AR further argued that in the exemption clause [clause (102G) of Part I, Second Schedule to the Income Tax Ordinance, 1979 (since repealed)] reference was made to "Venture Capital Companies and Fund Management Rules, 2000", which were the draft Rules. The provisions of clause (102G) of the repealed Ordinance are reproduced as under for ease of reference:-- Clause (102G), Part I, Second Schedule "Profits and gains derived between the first day of July, 2000 and the thirtieth day of June, 2007, both days inclusive, by a venture capital company and venture capital fund registered under Venture Capital Company and Fund Management Rules, 2000."
9. The AR further argued that clause (102G) was inserted in the repealed Ordinance through S.R.O.
894(1)/2000 dated 18 December, 2000 i,e, on the basis of the draft Rules. However, after finalization of the draft Rules, no corresponding amendment was made in clause (102G) of Part I, Second Schedule to the repealed Ordinance, which is treated as an advertence.
10. The AR further contended that while promulgating the 2001 Ordinance, the exemption provided under clause (102G) of the repealed Ordinance was incorporated via clause (101) of Part I of its Second Schedule. However, in clause (101), reference was also made to "Venture Capital Companies and Fund Management Rules, 2000" instead of "Venture Capital Companies and Venture Capital Fund Rules, 2001" as was the case with clause (102G) referred above.
11. The AR further argued that subsequently the Rules inter alia, regulating the business of venture capital companies have been incorporated in the statute whereby the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (NBFC Rules) have been promulgated through S.R.O. 310(1)/2003 dated April 1, 2003 which are also applicable to a Venture Capital Company. Effectively, the NBFC Rules have replaced the "Venture Capital Company and Venture Capital Fund Rules, 2001".
12. In connection with the above, the AR has also drawn our attention to clause (74) of section 2 of the Income Tax Ordinance, 2001 which before amendment, as made by the Finance Act, 2004, was read as under-
(74) "Venture Capital Company" and "Venture Capital Fund" shall have the same meanings as are assigned to them under the Venture Capital Company and Venture Capital Fund, Rules, 2001."
13. Through the Finance Act, 2004 the aforesaid clause was amended to give effect to the promulgation of the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 in the following manner -
(74) "Venture Capital Company" and "Venture Capital Fund" shall have the same meanings as are assigned to them under the Non-Banking Finance Companies (Establishment and Regulation)
Rules, 2003."
14. The AR argued that the Ordinance itself has correctly defined in section 2(74) the Venture Capital Company to mean a Company formed under the Venture Capital Companies and Fund Management Rules, 2001 which definition was further amended to incorporate the change of regulation as discussed above. Therefore, it is quite obvious that there being no Rules gazetted as "Venture Capital Companies and Fund Management Rules, 2000", the reference to such Rules in the Second Schedule is due to some sight of the Legislature, the consequences of which cannot render the claim of exemption of the appellant invalid.
15. The AR further argued that in view of the above legal position, it is evident that the Rules referred to in Clause (101) above are the "Venture Capital Company and Venture Capital Fund Rules, 2001" which are duly gazetted Rules which were in force at the time of introduction of the exemption in the Ordinance. Therefore, the appellant being a company formed under the Venture Capital Company and Venture Capital Fund Rules, 2001 is squarely covered under clause (101) Part I of the Second Schedule to the Income Tax Ordinance, 2001 and therefore qualifies for exemption,
16. The AR further contended that the Government intends to fortify and foster the business of Venture Capital Companies and Funds and therefore the exemption available as per clause (101)
Part I of the Second Schedule has been proposed to be extended from June 30, 2007 to June 30, 2014 through an amendment in the said clause via the Finance Act, 2006. The extract of FBR's Circular No,1 of 2006 dated 1 July 2006 is reproduced hereunder: "Exemption to profits and gains derived by the Venture Capital Company (VCC) and Venture Capital Fund (VCF) registered under Venture Capital Companies and Funds Management Rules, 2000, was introduced in the Repealed Income Tax Ordinance, 1979 (being repealed) for a period of seven years effective from 1st July 2000. This sector is not fully developed so far. Therefore, exemption to income of Venture Capital Companies and has been extended upto 2014."
17. The AR further argued that effectively, the NBFC Rules have replaced the "Venture Capital Company and Venture Capital Fund Rules, 2001". However, the corresponding change has still not been made in clause (101) which still grants exemption to the "Venture Capital Companies and Fund Management Rules, 2000".
18. In this connection, he referred to the cardinal rules of interpretation of statutes as enunciated by the Superior Courts. The progressive approach of interpreting the statutes as observed by the Courts, is that the interpretation should be made in such a manner so as to make the statutes workable since the Legislature does not make statutes that could be termed as superfluous. The AR further argued that while interpreting a statute, the intention of the Legislature has to be seen to find out the basic reason for enactment of the statute. In the famous publication -Interpretation of Indian Statutes by Sward up at page 8, the following is observed:-- "The main object or purpose of all construction or interpretation is to ascertain the intention of the law-makers. In the construction of statutes the intent of the legislature is of supreme importance.
Consequently, it becomes pertinent to enquire what the legislative intent is. Is it a thing that actually exists? Is it something that can be ascertained or discovered? And, if capable of being ascertained, how do we know when we have discovered it."
19. In PLD 1965 Dacca 296, in the case of Mozaffar Ahmad Anwar Ali, the Honorable CJ, Mr. Murshed while speaking for the Court has observed:-- "Canons of construction and rules of interpretation are directed to one and only one end, namely, towards finding out the intention of the Legislature. When this is clear, there is no room for praying in aid any extraneous principle of interpretation or canons of construction."
' The AR has placed further reliance on the following reported cases:-PLD 1961 SC 215 (Supreme Court of Pakistan)
' (1) Government of West Pakistan
(2) Faiz Muhammad Awan - Appellants , versus
(1) Wali Muhammad Habib
(2) The Zamindari Co-operative Bank Limited ' In the above case, the Honorable Supreme Court has made the following observations:-- "The main purpose of interpretation is to ascertain the mind of the Legislature from the words used by it, and in doing so it is a well-accepted rule that we must read the words in the context in which they are used, for, the meaning of a word read out of its context may well be totally different and in different context or in different association of words may equally well have a sense which has the effect of limiting or restricting its ordinary or popular sense. The rule of noscitur a sociis is too well-established to be doubted now. Construction of words with reference to the company in which they are found, is not a method unknown to law. Thus words, which precede or succeed the word to be interpreted, may legitimately be looked at to ascertain its true meaning, for, we are likely to know it better from the associate terms in the company of which word has been used."
' 2004 PTD 921 'Commissioner of Income Tax v. Nazir Ahmed and Sons (Private) Limited ' In this case, it has been held by the Honorable High Court that:- "There is yet another principle that no absurdity or unreasonableness is to be attributed to the Legislature. Now, if the provisions contained in the explanation under consideration are held, to be retrospective in application, it will create illogical and unreasonable consequences, as the payer shall be held to be a defaulter under section 52 of the Ordinance, for not deducting the advance tax on sales treating the same as supply of goods and shall further be liable to the charge of additional tax for failure to deduct tax the advance tax under section 86 of the Ordinance for failure to deduct advance tax, as was done in the case under consideration. The case under consideration pertains to assessme nt year 1995-1996, meaning thereby the period ending 31st June 1995. The explanation has been inserted by Finance. Act, 1998, if the operation of the explanation is held to be retroactive a person would be held to be defaulter for not making compliance with law which was to be enacted after three years of the transaction taking place during the period relevant to the assessment year 1995-1996. It is inconceivable that a person can be saddled with responsibility/liability for noncompliance of which is to be enacted somewhere in future. [page 941] E"
' 1966 PTD 664 (Supreme Court of Pakistan)
' Muhammadi Steamship Co. Ltd. v. The Commissioner of Income Tax, Central Karachi ' In this case, the Honorable Supreme Court has held that:- "For ascertaining the true intendment of section 15-B it must be read as a whole giving every part thereof its ordinary grammatical sense. Read in this way it would appear that the intention of this section is to grant a special exemption from tax to a special category of assessee for a specified period in respect of such portion of their profits and gains as is equal to five percent of the capital employed which is computed in accordance with the rules framed in that behalf [p. 673] H"
' (2006) PTD 1027 (Karachi High Court)
' Pakistan Paper Products v. The Commissioner of Income-tax; ' In this case, the Honorable High Court has held-- "Fiscal matters---Function of Court---Scope---Function of Court is not to render operation of a 'statute redundant or interpret it in a manner, which may lead to evasion of tax. [p. 1033] B"
' 2002 PTD 14 (Karachi High Court)
' The Commissioner of Income Tax v. Kamran Model Factory; ' In this case, the Honorable High Court has held that-"Interpretation of statutes--- ---Words used in statute---Treating any word surplus and redundant---Every word used in a statute has to be given effect to and no word of provisions of a statute is to be treated as surplusage and redundant [p. 38] R"
' 2000 PTD 254 (Karachi High Court)
' Commissioner of Income Tax v. National Agriculture Ltd., ' In this case, the Honorable High Court has held-Interpretation of statutes-- ----"Inconsistent provisions in a statute---Effect---If there are two provisions or sections in a statute which are inconsistent or in conflict with each other then the Court is required to interpret the two provisions of the statute in harmonious manner and both the provisions should be made to work side by side and one of the two provisions or the section is to be rendered surplus or redundant. [p.261] F"
20. The AR has further apprised that on the request made by the appellant, the Director General, Regional Tax Office, Karachi has also referred the matter to the FBR seeking to resolve the legislative anomaly (copy of the DG's letter dated 30th June 2008 provided). The relevant contents from the DG's letter are reproduced below. Statedly, this query still awaits for the reply of concerned quarters:--- "4. As stated earlier TRG was granted a license to operate as a Venture Capital Company on January 16, 2003 under the Venture Capital Companies and Venture Capital Funds Rules, 2001.
These Rules were notified/gazetted by the SECP through S.R.O. 131(1)/2001 dated February 27, 2002.
Prior to finalization and notification of these Rules, the SECP issued draft Rules titled as "Venture Capital Company and Venture Capital Fund Rules, 2001" for circulation so as to gather feedback and input from the stakeholders concerned, for any suitable amendments/changes as requested by section 39(2) of the Securities and Exchange Commission Pakistan Act, 1997. However, the final Rules, as stated earlier, were notified/ gazetted by the SECP through S.R.O. 131(1)/2001 dated February 27, 2002 as "Venture Capital Company and Venture Capital Fund Rules, 2001". This gives the impression that these are two separate set of Rules. However, a perusal of both sets of Rules shows that the Rules notified in the year 2001 were those which were circulated in the year 2000 in draft form.
5. The issue that requires attention is that in the exemption clause (101) of Part-I of the Second Schedule to the Ordinance reference was made to "Venture Capital Companies and Fund Management Rules, 2000" which were draft Rules.
6. With the promulgation of the Income Tax Ordinance, 2001, the provisions of clause (102G) of the repealed Ordinance were incorporated via clause (101) of Part I of its Second Schedule were incorporated. However, in clause (101) also, reference was made to "Venture Capital Companies and Fund Management Rules, 2000" instead of "Venture Capital Company and Venture Capital Fund Rules, 2001."
7. It may further be noted that the Ordinance itself has correctly defined in section 2(74) that the Venture Capital Company would be a Company as formed under the Venture Capital Companies and Fund Management Rules, 2001 which definition was further amended to incorporate the change of regulation as discussed above. Therefore, it is quite obvious that there being no Rules gazetted as "Venture Capital Companies and Fund Management Rules, 2000", the reference to such Rules in the Second Schedule is due to some oversight of the Legislature or drafting error. The matter is, therefore, referred to you for removal of the legislative anomaly and clarification may kindly be issued with regard to applicability of clause (101) of 2nd Schedule on Venture Capital Company and Venture Capital Fund Rules, 2001."
21. In view of the above explained position, we are of the considered view that the Rules referred to in Clause (101) are the "Venture Capital Company and Venture Capital Fund Rules, 2001" which are the duly gazetted Rules be deemed to be in force at the time of D introduction of the exemption in the Ordinance. Therefore, TRG being a company formed under the Venture Capital Company and Venture Capital Fund Rules, 2001 is squarely covered under clause (101) of Part I of the 2nd Schedule to the Income Tax Ordinance, 2001 and qualifies for exemption in the aforesaid clause in both the tax years under consideration.
22. We are also of the view that clause (101) which grants exemption to a Venture Capital Company and Venture Capital Fund does not impose any other condition, sets out any criteria or give any authority to the revenue to examine the eligibility of a venture project for the purpose of allowing exemption under the said clause.
23. We further opine that if the revenue authorities find that the taxpayer is violating its mandate as venture capitalist, let this fact be decided by the SECP who is the enforcement agency and empower to classify the nature and characteristics of business and resultant action in case of any oscillation. Here we differ with the findings of CIR(A) as mentions on pages 9 and 10 of the impugned order and that ineligibility of the taxpayer as venture capitalist and its non-recognition as Non-Banking Finance Company or authorization of carry out the business activities should have been a matter of concern of the Assessing Offer.
24. We do not found any other ground of appeal in both the years worth further adjudication in the context of allowance of claim of exemption income of the tax payer.
25. The appeal succeeds