MUHAMMAD ASIF, ACCOUNTANT MEMBER.---The titled five income tax appeals have been filed, at the instance of the appellant/taxpayer, against the order passed by the learned Commissioner Inland Revenue (Appeals-I), Lahore against the Order Nos.28, 29, 26, 27 and 25 all dated 25.05.2015 pertaining to tax years 2009, 2011, 2012, 2013 and 2014 respectively. All the appeals are disposed of through this consolidated order as common issue is involved.
2. The appellant is an unquoted public limited company engaged in general (non-life) insurance business. The appellant/company filed returns of income for the tax years under reference declaring income at Rs.365,827,245/-, Rs.396.223,904/-, Rs.517,932,795/-, Rs.127,270,589/- and Rs.618,562,492,/- for the tax years 2009, 2011, 2012, 2013 and 2014 respectively. The returns so filed were treated as the assessm ent order in terms of section 120(1) of the Income Tax Ordinance, 2001.
The learned Commissioner Inland Revenue, Zone-III, LTU, Lahore [the CIR] found that deemed assessm ents were erroneous in so far as prejudicial to the interest of revenue, in terms of . Section 122(5A). This view was mainly based on the offer of tax on dividend earned by the Company at reduced rate of 10% whereas in his opinion it should have been offerred at the normal rate applicable to the business income of the appellant/company. He made reference to Rule 5 of Fourth Schedule that is reproduced for the sake of convenience as under:- "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 to be furnished to the Securities and Exchange Commission of Pakistan".
(emphasis supplied)
3. He, therefore, confronted the appellant with the proposition that his entire income dividend income was liable to be determined as profits and gains of insurance business except for capital gain.
4. In response the appellant submitted that the provisions contained in Fourth Schedule were for the purposes of computation of profits and gains of general insurance business only and not for computation/ imposition of tax, therefore. The dividend income would be subjected to tax in accordance with the tax rates provided in the First Schedule. He placed reliance on the case law reported as PLD 199.7 SC 700 = 1997 PTD 1693 in the case of EFU General Insurance Limited [to be discussed later in this order]
5. The learned CIR was ntt impressed-with this reply. He opined that the Honorable Supreme Court of Pakistan had held that other provisions of the Ordinance would not be applicable in case of insurance company (except those contained in the relevant schedule). For this he placed reliance on PLD 1981 SC 293 [Alpha Insurance case and further 1993 PTD 766 [Central Insurance Case and 1997 PTD 1693 EFU Case]. He also placed reliance on 2011 PTD 2042 [Sindh] [EFU Case], and finally 1989 PTD 1090 Sindh [Adam Jee Insurance case]. In the last mentioned case, it was held confirmation of income 1989 PTD 1090 that any income which was included in the balance of profit lost its character and became part and parcel of profit and gains of insurance business. He also referred the an old FBR Circular No. 4/1988 wherein it was held that all accounts Of insurance company would constitute insurance income regardless of their nature and character.
6. The learned CIR further observed that the aspect that dividend income was part and parcel of insurance business was not dilated upon in PLD 1997 SC 700 = 1997 PTD 1693 on which the reliance was placed by the appellant and hence was not applicable to the circumstances of the case in 2014 PTD 2043 [Lah.] [Insurance Investment Bank case] it was held that banking being a composite business the dividend earned was earning from its banking business and therefore should have been assessed as normal business and not as a separate block of income. He also compared Fourth Schedule with Seventh Schedule that deals with banking business and found that in Seventh Schedule specific treatment regarding chargeablity of dividend income was provided whereas the Fourth Schedule did not stipulate any separate treatment. He further went on to observe tdhat in 2011 PTD 2042 Sindh [EFU Case] , the Honourable Court did not approve reference to section 67 by the Department for the purposes of proration of expenses. Drawing analogy from this observation, the learned CIR held that section 5 dealing with chargeablity of dividend income was not applicable in the case.
7. On appeal the appellant before the learned Commissioner [appeals] placing reliance on PLD 1997 SC 700 = 1997 PTD 1693 argued in the Absence of tax rates for insurance companies, the reduced rate of tax on dividend income would apply. Further reliance was placed on 2011 PTD 2042 [Sindh] and 2002 PTD 577 [LHC], in the case of Muslim Insurance Company. The applicant further referred to the tax rates under Division III, Part I, First Schedule, applicable to dividend receipts by insurance company.
8. Conversely, the Department placed reliance on 2011 PTD 2042 and reference was made to omission of reduced rate of tax on dividend in case of insurance and public companies by Finance Act, 2007. In departments view after this omission the dividend was subject to normal rate applicable to the business income of a company. Besides, section 5 being a subordinate section was not applicable in case of insurance companies that were dealt with under a separate schedule i.e. Is Fourth Schedule.
9. The learned CIR[A] observed after reading the provision contained in clause 5 that profit and gains before tax computed under the provisions of Insurance Ordinance, 2000 were the income in case of General Insurance Business for tax purposes. The learned CIR placed reliance on Note 2.1 to the Final accounts for the year ended December, 2011 to hold that the Profit and Loss accounts of the appellant depicted the profit and gains of the appellant in terms of Rule 5 of the Fourth Schedule for taxation purposes. He went further to place reliance on 2011 PTD 2042 (Sindh) and 2013 PTD (Trib.)
116. In the first case, it was held that all types of income of a general insurance companies were to be treated as One basket income and none of the items could be subjected to separate consideration/ taxation. In the second case, it was held by the tribunal that none of the general provisions of the Ordinance would be applied to an insurance company. Finally, the learned CIR[A], concluded that neither section 5 was applicable for taxation of general insurance business nor the case law PLD 1997 SC 700 = 1999 PTD 1693 mentioned supra. He finely held that under the repealed Ordinance, 1979, the dividend received by an insurance company was subject to normal rate upto 30.06.2001 reduced rate was specified under the present Ordinance upto 30.06.2007 and thereafter at the normal rate applicable to the business income of a company.
Hence this appeal.
10. In response to call notice, Mr. Asim Zulfiqar, FCA appeared on behalf of the taxpayer while Mr. M.
Asim Haleem, D.R (LTU) was present on behalf of the Department. Both of them were heard.
11. The learned AR starting his arguments submitted that the observation of the learned Commissioner in that the dividend income in case of general insurance company lost its character and became part and parcal of business income was incorrect. Under the law the dividend income always retains its original character and does not transform into any other category of income. The clear and unambiguous position emanating from express language of law is such that dividend income derived by any taxpayer, including those in whose case income is computed under Schedule regime (like insurance companies), always retains its original character.
12. Further explaining this point he submitted that dividend income in the case of an insurance company had always been intended by legislature to be taxed at rate prescribed under/ Division III of Part I of First Schedule vis-a-vis section 5 of the Ordinance. The fact that there had been no- change, whatsoever, since promulgation of 2001 Ordinance in the operative part of section 5 and section 99 of the Ordinance, that is to say, section 5 throughout had been using the expression "subject to the Ordinance......, when one refers to following contents of Division III of Part I of First Schedule, as had remained applicable during the period July 1, 2002 to June 30, 2007, it becomes abundantly clear that, in case of insurance companies, legislature never intended to transform the character of dividend income into any other category of income and hence always intended to charge the same at tax rate generally applicable on dividend income and not at corporate tax rate prescribed under Division II of Part I of First Schedule: DIVISION III RATE OF DIVIDEND TAX The rate of tax imposed under section 5 on dividend received from a company shall be--
(a) in the case of dividend received by a public company or an insurance company or any other resident company, 5% of the gross amount of the dividend; or
(b) in any other case, 10% of the gross amount of dividend.
13. From the above express position, in particular a categorical inclusion of insurance companies in the Division, there was no doubt that 'one basket' form of income of an insurance company does not change the character of dividend income for the purposes of application of tax rate. The stance taken by Revenue, it follows, glaringly contradicts the unambiguous statutory position and remains unsustainable when one takes into account the fact that aforesaid position was adopted by legislature in the presence of language of section 5 and section 99 of the Ordinance as is currently prevailing. That is to say, dividend income of an insurance company was categorically prescribed by the legislature to be taxed under section 5 read with Division III of Part I of First Schedule to the Ordinance in the presence of expression "subject to this Ordinance"
14. Vide Finance-Act-, 2007 certain amendments were introduced in the aforesaid Division 111 of Part I of First Schedule in consequense to which following position emerged effective July 1, 2007 which principally remained unaltered until June 30, 2015 i.e. Covering all years in appeal: DIVISION III RATE OF DIVIDEND TAX The rate of tax imposed under section 5 on dividend received from a company shall be 10%.
15. The effect of aforesaid amendment is simply that the tax rate in all cases, including those for which- tax rate of 5% (like for public companies and insurance companies etc.) was previously prescribed, became 10%. Only effect of the amendment was to prescribe a uniform tax rate for all taxpayers, in respect of whom section 5 read with Division III of Part I was previously setting out different rates, and under no circumstances the same be interpreted to have an effect of excluding insurance companies from the scope of section 5 of the Ordinance. This position is evidently clear from following excerpts of Circular No. 1 of 2007 dated July 2, 2007, wherein Federal Board of Revenue clarified the purpose of amendment:
16. He further submitted that in the case before Sindh High Court. 2011 PTD 2012 on which the Revenue has placed reliance, applicability or otherwise of section 67 of the Ordinance, dealing with apportionment of common expenses, to an insurance company covered by section 99 of the Ordinance read with Fourth Schedule to the Ordinance. It is in this background that Sindh High Court observed that by use of expression "subject to this Ordinance,..." in section 67 of the Ordinance the legislature has made the same subservient to section 99 of the Ordinance, a special provision. This conclusion emerged because both section 67 of the Ordinance and section 99 of the Ordinance deal with computation of income. Under no circumstances the principles settled in this judgment support or permit juxtaposing two independent provisions, one dealing with computation of income and the other relating to computation of tax under section 5 with each other. The special provisions of section 99 read with Fourth Schedule to the Ordinance, setting out exclusively the principles for computation of income, would only prevail over general provisions of the Ordinance dealing with this issue. The reliance of Revenue is, thus, misconceived.
17. The controversy that whether the dividend income of an insurance company would attract concessional tax rate or, alternatively, would remain chargeable to tax at corporate rate of tax is not new. The dispute arose in the context of repealed 1979 Ordinance and was finally settled by Supreme Court of Pakistan PLD 1997 SC 700 = 1997 PTD 1693 in the case of EFU General Insurance Company Limited. The controversy was settled in the favour of taxpayers by the Honourable Supreme Court of Pakistan after carrying out a thorough and an in-depth analysis of the then prevailing relevant statutory provisions. The operative part of judgment is reproduced hereunder for the ease of quick reference: "19........... ....Section 26(a) of the Ordinance, inter alia provides that notwithstanding anything contained in the Ordinance, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Fourth Schedule. Computation of profits and gains and computation of tax payable are two different concepts altogether. In rule 5 of the Fourth Schedule special provisions exist for computation of income from general insurance 'business, but there are no provisions at all in the rule for computation of tax on such income. This could lead to two interpretations. There being no provision in the Fourth Schedule for computation of tax, such income cannot be subject to tax or, in the absence of taxing provisions, general taxing provisions contained in the First Schedule for business income of companies will apply. The intention of the legislature is clear and that is that income from general insurance shall be subject to tax under the Income Tax Ordinance. The interpretation that such income will be tax free is, therefore, to be rejected. Special provisions are, however, silent regarding computation of tax on such income. To give effect to the intention of the legislature and to harmonize different provisions of the Ordinance, the interpretation will be that for taxing such income the general provisions contained in the First Schedule providing for computation of tax or income of companies from business shall apply, and, while- applying the provisions of the First Schedule for computation of tax on such income, if any benefit in the rate of tax is provided on any kind of income, general insurance companies cannot be deprived of such benefit in the absence of any provision that such benefit shall not be extended in respect of income from general insurance business. Admittedly, no such special provision appears in the First Schedule or in any provision of the Income Tax Law to deny the said benefit to the general insurance companies. There is no provision in the Ordinance or the Schedules that only one part of the First Schedule shall apply and the other shall not in the case of general insurance companies. Benefit in the rates of tax available under the First Schedule of the Ordinance can only be denied to the general insurance companies by suitably amending the law.
20. In the circumstances, we are of the view that assessments of the appellants which has already been made inter alia extending benefit of extending benefit of lower tax on dividends on the basis of the rule laid down in the American Life Insurance Company case could not be re-opened under section 65(1) of the Income Tax Ordinance, 1979 ...."
18. The aforesaid authoritative judgment, unequivocally settling the controversy, squarely applies to the case under consideration. The provisions of Fourth Schedule of the repealed Ordinance are pari materia to provisions of Fourth Schedule to 2001 Ordinance and thus, the principles settled by the Honourable Apex Court, in the context of repealed Ordinance, fully apply to cases covered by the new Ordinance. In the aforesaid excerpts, the honourable Apex Court had inter alia decided following two fundamental points:
(i) Firstly, it has been settled that since Fourth Schedule deals only with "computation of income", and did not in itself contain any taxation provisions, therefore, for the purposes of determining the incidence of tax on dividend income of an insurance company one would have to refer to general rates for tax on dividend income. The position is absolutely the same in 2001 Ordinance, therefore, the ratio would constitute a relevant and a binding precedent for the purposes of dividend income derived by an insurance company post year 2002; and ii) Secondly, the court has also settled that if an insurance company is to be deprived of the benefit of reduced rate specific provisions have to be incorporated in the statute, in the absence of which the general concessional rate would remain applicable. This finding also favours the case of the appellant. In this respect, it is pointed out that after the aforesaid judgment, the legislature, vide Finance Act, 1999, had introduced specific provisions in Para D of Part V of First Schedule to repealed Ordinance prescribing full corporate tax rate for dividend income of insurance companies. In the absence of any such insertions in 2001 Ordinance, it follows that general rate of tax for dividend income remains applicable to such income derived by an insurance company.
19. Elaborating further on the aforesaid judgment of the apex court, it would not be out of context if the fundamental issue, as was being examined by court, is also referred to. In the case before the Honourable apex court the primary contention of the Revenue was as under: "...To put in the nutshell, the stand of the Department is that the judgment in the case of Adamjee Insurance Company, where it was, inter alia, observed that in case of a company engaged in general insurance business, income which is included in the balance of profits declared by it in its annual account submitted to the Controller of Insurance loses its original character and becomes part of the profits and gains of such insurance business and the whole of it is to by taxed accordingly and, therefore, the entire balance of profits declared by a general insurance company could not be bifurcated under different heads for charging different rates of income lax and entire balance of profits was chargeable to tax as a single unit..."
20. The apex court while settling the controversy principally upheld an earlier decision of Sindh High Court delivered in the case of American Life Insurance Company reported as (1967) 15 TAX 268 by observing that "view taken in the case of American Life Insurance Company is correct and it equally applies to Income from General Insurance Business....... In the said judgment, it was, for the first time and that too in the context of repealed Income Tax Act, 1922, held that dividend income of an insurance company attracts general concessional/reduced rate of tax.
21. The Appellate Tribunal Inland Revenue, in a decision reported as 1987 PTD 613 [later on upheld by the Lahore High Court in 1996 PTD 276], while referring to the aforesaid decision in American Life Insurance Company case, summed up the ratio in the said decision as follows:- It may be noted here that section 10(7) of the repealed Act provided that business of Insurance companies was to be computed under First Schedule of the Repealed Income Tax Act which, inter alia, provided that such an income was chargeable under the head Income from business or profession irrespective of the source from which the same was derived. In the present case, dividend income, rightly or wrongly, has been assessed by the assessing officer as 'business income' while in the cited case, the insurance company's income under law was assessed as an income from business from whatever source derived. It is in these circumstances that the High Court held that rate of tax applicable on dividend income would be as provided in the Schedule and the dividend income continued to carry the label of dividend income. Consequently, in the concluding paragraph of the judgment, the High Court observed.... "
22. The observations of Appellate Tribunal are unambiguous and reaffirm the position that in the case of insurance companies no matter the aggregate income is classifiable as 'business income', the component constituting 'dividend income' retains its original character/label and hence could not be subjected to tax at corporate rate of tax on the grounds of its classification as one basket/unit.
23. The fact that the position is un-changed under the new Ordinance is further fortified from observations recorded in EFU General Insurance Company case, reported as 2011 PTD 2042, relied upon by the Revenue, wherein the Court has categorically confirmed continuity of taxation scheme from 1979 Ordinance to 2001 Ordinance for insurance companies. In order to support this, reference may be made to paragraph 12 of the judgment, also reproduced by learned first appellate authority in the impugned orders, stating as follows:
12. We also would like to observe that the concept of one basket income so far as the case of Insurance Company is concerned is still in vogue. The capital gains/dividends income like other profits of the Insurance business are its one unit. It is the Controller of the Insurance under the insurance Ordinance, 2000, who has the authority wider the law to report the income of insurance Company. The principle of one unit/single basket income is not a new concept in the case or Insurance business, this principle has been upheld by the superior Courts in a number of Judgments, already in field in this regard."
24. The aspect of retention of original character for 'dividend income' is further strengthened from provisions contained in Seventh Schedule to the Ordinance which is again a special provision but contrary to Fourth Schedule, simultaneously deals with both 'computation of 'income' and 'computation of tax liability'. In this Schedule, though again one basket income concept is adopted.
However 'dividend income' has always been and still described as dividend income, for which a reduced had been applicable upto June 30, 2015. In other words, the scheme canvassed in this Ordinance ensures that original character of income is retained in all cases.
25. Case law 2014 PTD 2043 in Crescent Investment Bank Limited, relied upon by the Revenue is distinguishable because.
(a) The case pertains to a banking company with regard to assessments governed by repealed 1979 Ordinance whereunder both the computation of income and computation of tax liability was required to be carried out under the general law as against insurance companies for which computation of income was governed by a special law. The two cases being not absolutely comparable, the decisions delivered in relation to insurance companies, would take precedence over any decision rendered in the case of a banking company. This is without prejudice to the fact that the decision, referred to above [PLD 1997 SC 700 = 1997 PTD 1693], expressly deals with the matter involved in these appeals and has been rendered by Supreme Court, which, in any case, would have an overriding effect over the above referred decision.
(a) In the case of banking companies, the position under the 2001 Ordinance, effective tax year 2009, is different as since then both 'computation of income and 'computation of tax liability' are governed by Seventh Schedule to the Ordinance. In the present case, since issue in appeals pertains to tax year 2009 and onwards, therefore, any decision of a Court delivered in the case of a banking company, would be relevant if the same deals with comparable provisions in two schedules and, of course, comparable period;
(b) The dispute before Lahore High Court pertained to interpretation of Part V of First Schedule to the repealed Ordinance, whereunder for the purposes of applicability of rate of tax, three distinct categories of companies were prescribed viz. 'banking company', 'public company' and any other company'. The issue before the High Court was whether 'investment bank was classifiable as a 'banking company or a 'public company', and that it the same was held to be a 'banking company' whether reduced rate of tax on dividends was applicable to the same. The 'court after considering the relevant law and taking into account other banking legislations concluded that investment banks could not be assigned a status of a public company and were classifiable as a banking company. This controversy/ambiguity, as discussed above, has cautiously been redressed in new 2001 Ordinance, notwithstanding the fact that this is ab initio not relevant for an insurance company.
26. The Revenue has submitted that for the purpose of computing the profits of General Insurance Business, balance of profit as disclosed by the annual accounts prepared under the Insurance Ordinance, 2001 is to be taken as income subject to the adjustments as enumerated in Rules 5 and 6 above. The Fourth Schedule being a special provision of law prevails over general provisions of law. The controversy, whether the department can invoke the other general provisions of the Ordinance while making assessm ent of an Insurance Company came into consideration before the August Court time and again and it was held by the honourable Supreme Court of Pakistan 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 on an Insurance business. Reliance in this regard is placed on the judgment of M/s. Alpha Insurance, reported as PLD 1981 SC 293 where the Honourable Supreme Court of Pakistan held that Rules contained in the First Schedule (which is identical to the fourth Schedule to the 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 M/s Alpha Insurance case was reaffirmed by the Honourable Supreme Court of Pakistan in subsequent judgment of Central Insurance Company case reported as 1993 PTD 766 and M/s. EFU General Insurance Company reported as 1997 PTD 1693. Recently, the Honourable High Court in the case of EFU General Insurance Company reported as 2011 PTD 2042 has categorically held that no other provisions of the Ordinance, are applicable and only the provisions mentioned in the Fourth Schedule would only apply to the insurance companies.
27. Now coming to the adjustments permitted to be made against the profits disclosed in the annual accounts by the insurance companies the same are analyzed as under: a. Under sub-rule (a) of Rule 5, adjustment can be made to exclude any expenditure or allowance or any reserve or provision 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.
This means that declared balance of profit by the insurance companies are subject to provisions of sections 20, 21 22 of the Income Tax Ordinance, 2001. b. According to Sub-rule (b) of Rule 5, any amount of Investment written off shall be allowed as a deduction but any amount taken to reserve to meet depreciation of investment is not admissible deduction. The Rule further stipulates that any sum taken credit for in the account on account of appreciation of investment shall not be treated as part of the profit and gains unless these have been crystallized as gains or losses on the realization of investments. c. 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 Commissioner of Pakistan. d. Sub-rule (d) described that any expenditure incurred on account of insurance premium or re- insurance premium paid to an overseas insurance company is not admissible until tax at the rate of 5% is withheld on the gross amount of insurance and reinsurance. The issue regarding deductible expenses came into consideration before the High Court in the case of Home Insurance Company Ltd. Reported as 1992 PTD 1177 and the court held that expenses which are not admissible against income from business or profession is required to be disallowed under Rule 5(a) of the Fourth Schedule to the Income Tax Ordinance, 1979.
28. The appellate courts disapproved application of other provisions of law which have not been dealt in Fourth Schedule. Reference is made to the following decisions:
1. 2011 PTD 2042 [H.C. Kar) EFU General Insurance High Court disapproved invocation of S. 67 of the Income Tax Ordinance, 2001 to the insurance company holding that S. 99 of the Income Tax Ordinance, 2001 read with Fourth Schedule were special provisions applicable to insurance company and general provision of the Income Tax Ordinance, 2001 are not to be applicable in case of insurance companies
2. 2013 PTD (Trib.) 116 - IJI Insurance Co.
The learned ATIR held that provisions of S. 109 of the Income Tax Ordinance, 2001, are not applicable to the taxpayer being a general insurance company assessable under S. 99 read with Fourth Schedule to the Income Tax Ordinance, 2001.-
3. 1998 PTD (Trib.) 1103 Deeming provisions are not applicable to Insurance Companies.
From the above it can be analyzed that under Rule 5 of the Fourth Schedule, there is limited scope of adjustment in respect of transaction referred to in sub-rules (1), (b) and (c). The honourable Supreme Court of Pakistan in the case of EFU Insurance Company reported as 1997 PTD 1693 (SC Pak) 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."
29. The Insurance companies cannot take refuge of section 5 of the Income Tax Ordinance, 2001, for taxation of dividend income at reduced rate of tax on account of the following reasons:
1. As explained above, the department attempted time and again to invoke the general provision of law, other than contained in the Fourth Schedule, but all efforts remained fruitless as the higher appellate fora categorically held that the Fourth Schedule being a special provision of law prevails over general provisions of law.
2. All income of insurance company is 'one basket income' which cannot be bifurcated in different heads of income. The Honourable High Court of Sindh in the case of M/s. Adamjee Insurance Company Ltd reported as 1989 PTD 1990 held that in the case of a company engaged in general Insurance Business any income which is included in the balance of profit declared by it in its annual account submitted to Controller of Insurance under the Insurance Act, 1938 loses its character and becomes a part of profits and gains of Insurance Business as of income which is not capable of being bifurcated for the purpose of charging to tax into different heads of income categorized under section 15 of the Income Tax Ordinance, 1979. The Federal Board of Revenue, vide Circular No.4 of 1988 dated 19-04-1988 also clarified that receipts of all kinds of insurance companies constitutes one unit income. For facility of reference the relevant part of the said circular is reproduced as under: "It is thus evident that special provision has been made in the Ordinance for the computation of the profits and gains of insurance business. This means whatever may be constituents of the receipts of an insurance company, the balance disclosed in the annual accounts constitutes insurance income. Thus in the case of insurance company all the receipts whether from property, business, interest on securities, capital gains on sale of stocks and shares, dividends, yield of National Savings or Defence Certificates, etc. Will constitute insurance income and will be liable to tax. In such cases provisions of the Second Schedule to Income Tax Ordinance, 1979 will not be applicable to the individual receipts created to the accounts."
Recently, the honourble Sindh High Court in the case of M/s. EFU General Insurance Company, reported as 2011 PTD 2042 has held that all income of Insurance companies is to be treated as one basket income.
3. Capital gains and dividend income being an integral part of insurance business cannot be bifurcated for the purpose of separate chargeability of tax. Specific treatment regarding taxability of capital gains has been provided in Fourth Schedule to the Income Tax Ordinance, 2001, however, the Fourth Schedule is silent about any specific treatment regarding chargeability of dividend income. This leaves no doubt that the legislature intends to tax the dividend income, being a composite business income of insurance companies, at normal rate of tax instead of fix/final taxation under section 5 of the Income Tax Ordinance, 2001.
4. In the Seventh Schedule to the Income Tax Ordinance, 2001, deals with computation of income from banking companies, there is a specific Rule 9 which states that the provisions of the Ordinance not specifically dealt with in the said rules, shall apply, mutatis mutandis, to the banking companies. Whereas no such rule is available in the fourth Schedule which means that the taxability of an Insurance company has to be dealt with in accordance with the Rules prescribed thereunder and general provisions contained in the Ordinance, are not applicable. The Honourble Sindh High Court in the case of M/s. EFU General Insurance Company reported as 2011 PTD 2042 has also endorsed this point of view vide Para 20 of the judgment which is reproduced as under: "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 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 be dealt with in accordance with rules prescribed there under only."
5. In the Seventh Schedule to the Income Tax Ordinance, 2001, specific treatment has been provided regarding chargeability of dividend income, whereas Fourth Schedule does not stipulate any treatment for chargeability of dividend income meaning thereby the legislature intends to tax dividend income in the case of insurance companies at normal rate of tax.
6. Very recently, the honourable Lahore High Court, in the case of M/s. Crescent Investment Bank Ltd., reported as (2014) PTD 2043 (Lahore High Court) has held that banking being a composite business profit/dividends earned by the taxpayer were nothing but earning from its business which is banking business and therefore, it should have been assessed as normal business and not as separate block of income. Similarly, the dividend income in case of Insurance companies is an integral part of main business stream and the same should be charged to tax at normal rate of tax.
7. The Department invoked the provisions of section 67 of the Income Tax Ordinance, 2001, in the case of M/s. EFU General Insurance Company. However, the honourable Sindh High Court vide its decision reported as 2011 PTD 2042 disapproved the action of the department with the observation that "So far 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 possesses 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. Similarly, section 5 of the Income Tax Ordinance, 2001, start with the words 'Subject to this Ordinance" and hence the same does not overrides the special provisions contained in section 99 read with Fourth Schedule to the Income Tax Ordinance, 2001.
8. The decision of the honourable Supreme Court of Pakistan reported as 1997 PTD 1693 regarding chargeability of dividend income at reduced rate is not applicable as the same was delivered in the context of repealed Ordinance, 1979, whereby the dividend income was chargeable to tax under normal tax regime and general rate applicable to all companies provided reduced rate for dividend income. The relevant part of the decision of the honourable Supreme Court of Pakistan is reproduced as under:- "To give effect to the intention of the legislature and to harmonize different provisions of the Ordinance, the interpretation will be that for taxing such income the general provisions contained in the First Schedule providing for computation of tax or income of companies from business shall apply, and, while applying the provisions of the First Schedule for computation of tax on such income, if any benefit in the rate of tax is provided on any kind of income, general insurance companies cannot be deprived of such benefit shall not be extended in respect of income from general insurance business. Admittedly, no such special provision appears in the First Schedule or in any provision of the Income Tax Law to deny the said benefit to the general insurance companies. There is no provision in the Ordinance or the Schedules that only one part of the First Schedule shall apply and the other shall not in the case of general insurance companies. Benefit in the rates of tax available under the First Schedule of the Ordinance can only be denied to the general insurance companies by suitably amending the law". (Emphasis supplied)
Under the scheme of new Ordinance, 2001, the facility of reduced rate on dividend income is available under the umbrella of provisions of section 5 of the Income Tax Ordinance, 2001 and a specific Division-III has been inserted in Part-1 of the Income Tax Ordinance, 2001 which is reproduced below for facility of reference: "Division III Rate of Dividend Tax The rate of tax imposed under section 5 on dividend received from a company shall be-
(a) 7.5% in the case of dividends declared or distributed by purchaser of a power project privatized by WAPDA or on shares of a company set up for power generation or on shares of a company, supplying coal exclusively to power generation projects; and
(b) 10% in all other cases; From the above, it is evident that without application of provisions of section 5 of the Income Tax Ordinance, 2001, the taxpayer is not entitled to avail benefit of reduced rate on dividend income.
The provisions of section 5 are general in nature and subservient to the special provisions contained in the Fourth Schedule to the Income Tax Ordinance, 2001.
9. If, for the sake of argument, it is considered that section 5 of the Income Tax Ordinance, 2001, being a general provision of law, is applicable in the case of Insurance companies, there would remain no justification for non-applicability of other general provisions of law specifically section 67 of the Income Tax Ordinance, 2001. However, such treatment has not approved by the appellate courts. ##TS ##30. We have recorded the arguments of both the parties in detail. #TBE lthough, the discussion has been advanced too far on the strength of a number of case laws of the superior courts by both the parties. The issue is short and focused and that is in view of the express language of clause 5 of Fourth Schedule to the Income Tax Ordinance, 2001, whether the income declared/submitted to SECP, including dividend income A would be subject to normal rate of tax in case of companies or the dividend income would be taxed at reduced rates in accordance with First Schedule, Part-III?
31. Perusal of Rule 5 clearly shows that whatever may be the source and nature of the income declared in the Profit and Loss Account before tax it would be treated as profits and gains of business of insurance. To repeat Rule 5, reads "the profits and gains of any business of insurance shall be taken to be the balance of the profit disclosed by the annual accounts". To wit, there is no ambiguity whatsoever as the language of this Rule is very clear and it is a rule of interpretation that in the interpretation of fiscal statute the plain language of the statute has to be kept in view. This view finds support from the finding of the Honorable Karachi High Court in the case of Adamjee Insurance mentioned supra. In that case, the issue before the Court was whether the interest received by the insurance company on account of investment in Khas Deposit Certificates was rightly claimed exempt in view of the Second Schedule to the Income Tax Ordinance, 1979. The Honorable Court categorically held that the interest earned became part of profits and gains of insurance business and as such was liable to tax and exemption claim was legally incorrect. For the sake of convenience the relevant observation of the court is reproduced as under:- "It, therefore, follows that the balance of profit declared by an Insurance company in its annual account which is submitted to Controller of 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. Accordingly; the interest income on securities derived by an insurance company which is included in the balance of profit declared by it in its annual account submitted to Controller of Insurance under the Insurance Act, 1938, losses its character as 'interest income on securities' and becomes part of profits and gains of insurance business, and as such is liable to charge of the tax under the Ordinance accordingly. In our view, as soon as the profits and gains of insurance business are computed in accordance with the provision of section 26 read with Rule 5 of the IV Schedule ibid, it becomes one unit of income which is not capable of being bifurcated for the purposes of charging to tax into different heads of income categorized in section 15 of the Ordinance. We, accordingly, hold that the interest received by the petitioners in the above cases on investments made by them in Khas Deposit Certificates which was included in the annual accounts submitted by them to Controller of Insurance under the Insurance Act of 1938, and shown in the balance of profit was not exempted from tax under the Ordinance."
This was challenged before the Apex Court and the Honorable Apex Court in the case of EFU General insurance mentioned supra, by making reference to the case of Central Insurance, reaffirmed this view.
32. In the case of EFU General Insurance, on which much emphasis was placed by the learned AR the issue was whether the entire profits and gains of the general insurance companies, including the dividend income were chargeable to tax at the normal rates or to the extent of dividend income at the lower rate. The Honorable Apex Court held that the dividend income was chargeable at the lower rate. It is therefore obvious that the issue in this appeal was neither discussed nor decided in this case. We are, therefore, clear in our mind that the dividend income losses its character in case of insurance companies and becomes part and parcel of its business income due to fiat of law. However, the question that remains to be addressed is: if it is so, why the separate rate of taxation of dividend in the case of insurance company was specified in the First Schedule upto the tax year 2007. What was the intention of the Legislature? In our view, there was a clear conflict in Rule 5 and the paragraph of dealing with rate of tax on dividend income in case of insurance companies upto 2007. How this conflict was to be resolved, is no more relevant question as the present appeals do not pertain to tax year 2007 or before. By omission of the rate of tax in case of dividend earned by an insurance company, this conflict has been removed. The position that emerges is that there having been no separate rate of taxation in case of dividend earned by an insurance company, the contention of the department that normal rate was applicable could not be repelled.
33. We are appreciative of the argument of the learned AR that if the intention of the legislature was not to tax dividend at the specified rate for dividend, there was no need to specify the rate of 43% for dividend subsequent to the judgment of the Apex Court mentioned supra. However, we are not inclined to accept this view because of the reason that for the years under consideration there is no rate of taxation for dividend in the case of insurance companies. The question would certainly have been puzzling if there was a rate of taxation in case of insurance companies as it was upto tax year 2007. This argument of the learned AR, therefore, is repelled and we record our concurrence with the observation of the learned CIR/author of the order that is reproduced as under:- "The business model of insurance clearly shows that the dividend income earned is part and parcel of insurance business and therefore while taxing the same when we resort to provisions of First Schedule to the Income Tax Ordinance, 2001 the same has to be treated as business income a fact which was neither dilated upon nor the Honourable august Supreme Court was assisted while delivering the judgment reported as PLD 1997 SC 700 = 1997 PTD 1693 handed down in the case of M/s. EFU General Insurance Limited, and hence completely overlooked. As such the rate of tax to be applicable is the corporate tax rate of 35%. Hence the ratio of the case law referred by the taxpayer is not applicable to circumstances of the case."
34. We have also noticed that the treatment given by the appellant himself while computing the taxable income contradicts his claim that dividend income would be taxed separately and as dividend. The appellant has not allocated/deducted any expenses to the dividend income meaning thereby that the expenses pertaining to dividend income have also been charged to business income, thus incorrectly reducing the profits and gains of business. This treatment to state the obvious leads to absurdity and thus cannot be approved.
35. Consequently, the appeal on this score fails.
B. APPLICABILITY OF MINIMUM TAX UNDER SECTION 113 OF THE ORDINANCE AND COMPUTATION OF 'TURNOVER' - TAX YEARS 2011, 2012 AND 2013 C. This ground has become redundant because we have held that section 5 is not applicable in he case of insurance companies.
NON ALLOWABIILTY OF CREDIT FOR UNADJUSTED REFUNDS FROM PRIOR YEARS - TAX YEAR 2014.
36. The learned assessing officer, while concluding the amendment proceedings, disallowed the adjustment of determined refunds, to the tune of Rs. 40,586,252, available from prior years, claimed by the appellant in the return of income, without recording any reason for such action.
Consequently, the matter was assailed by the appellant before the learned first appellate authority, who has not adjudicated such issue whilst passing the impugned appellate order.
37. Since these refunds represent legitimate amounts, verifiable from departmental records and also available to appellant's credit, it is prayed that directions are issued for allowance of credit of such refunds while computing the company's tax liability for the subject tax year
38. This plea of the appellant is valid. The department is directed to IF allow the credit for refund as per law and facts of the case.
Sd/- Muhammad Asif, Accountant Member Sd/- Muhammad Waseem Ch., Judicial Member Per Muhammad Waseem Ch.,Judicial Member
39. I have gone through the judgment authored by my learned brother, Accountant Member but express my inability to agree with his findings for the following reasons:-
40. With due respect, I am not inclined to agree to his conclusion that the dividend income is to be taxed at rate of tax applicable to other business income and not at the rate applicable to the dividend income given in Division III of Part I of the First Schedule to the income Tax Ordinance, 2001.
The scanning of all the case law discussed in the preceding paras presented during the hearing leads me to the conclusion that the principles decided by the Hon'ble Supreme Court of Pakistan in the case reported as 1997 PTD 1693 are squarely applicable to the circumstances of the case. The very initiation of proceedings is ba,sed on interpretation of Rule 5 of the Fourth Schedule to the Income Tax Ordinance, 2001 and the ultimate conclusion of the author of the original order under section 122(5A) was that "the business model of insurance clearly shows that the dividend income earned is part and parcel of insurance business and therefore taxing the same when we resort to the provisions of First Schedule to the Income Tax Ordinance, 2001 the same has to be treated as business income a fact which was neither dilated upon nor the Hon'ble august Supreme Court was assisted while ' delivering the judgment reported as PLD 1997 SC 700 = 1997 PTD 1693 handed down in the case of M/s. EFU General Insurance Ltd, and hence completely overlooked. As such the rate of tax to be applicable is the corporate tax rate of 35%. Hence the ratio of the case law referred by the taxpayer is not applicable to circumstances of the case".
41. I have gone through rule 5 of the Fourth Schedule both in the repealed Ordinance, to which judgment of the Hon'ble Supreme Court' relates to, and the Income Tax Ordinance, 2001. For the purposes of controversy under issue they have the same scope and are the similarly worded as under: Income Tax Ordinance, 1979 Income Tax Ordinance, 2001 Rule 5. General Insurance.- 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 Act, 1938 (IV of 1938) to be furnished to the Controller of Insurance, subject to the following adjustments, namely:-Rule 5. General Insurance 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 -- The above comparison shows that scope of rule 5 in both the Ordinances is the same. Hence, the ratio decidendi of the above referred judgment of the Hon' ble Supreme Court of Pakistan delivered in the context of the repealed Ordinance shall be applicable to the instant case too. The Hon'ble Supreme Court in para 19 of the judgment referred above have dealt with this issue as under: "Section 26(a) of the [repealed] Ordinance, inter alia provides that notwithstanding anything contained in the Ordinance, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Fourth Schedule.
Computation of profits and gains and computation of tax payable are two different concepts altogether. In rule 5 of the Fourth Schedule special provisions exist for computation of income from general insurance business but there are no provisions at all in the rule for computation of tax on such income. This could lead to two interpretations. There being no provision in the Fourth Schedule for computation of tax, such income cannot be subject to tax or in the absence of taxing provisions, general taxing provisions contained in the First Schedule for business income of companies will apply. The intention of the legislature is clear and that is that income from general insurance shall be subject to tax under the Income Tax Ordinance. The interpretation that such income will be tax free, is, therefore to be rejected. Special provisions are, however, silent regarding computation of tax on such income. To give effect to the intention of the legislature and to harmonise different provisions of the Ordinance, the interpretation will be that for taxing such income the general provisions contained in the First Schedule providing for computation of tax or income of companies from business shall apply, and, while applying the provisions of the First Schedule for computation of tax on such income, if any benefit in the rate of tax is provided on any kind of income, general insurance companies cannot be deprived of such benefit, in the absence of any provision that such benefit shall not be extended in respect of income from general insurance business.
Admittedly no such special provision appears in the First Schedule or in any provision of the Income Tax Law to deny the said benefit to the general insurance companies. There is no provision in the Ordinance or the Schedules that only one part of the First Schedule shall apply and the other shall not in the case of general insurance companies. Benefit in the rates of tax available under the First Schedule of the Ordinance can only be denied to the general insurance companies by suitably amending the law.
42. In the circumstances, I am of the view that deemed assessments of the appellant already made inter alia extending benefit of lower tax on dividends on the basis of the dictum laid down in PLD 1997 SC 700 = 1997 PTD 1693 could not be amended under section 122 of the Income Tax Ordinance, 2001.
43. It is evident from above that the Hon'ble Apex Court has settled the issued in unequivocal terms and that in the absence of amendment in the law, the reduced rate of tax given in the First Schedule for the dividend income shall be applicable to Insurance Companies as well. As reproduced above, the learned author of the order under section 122(5A) did not follow the judgment of the Hon'ble Supreme Court of Pakistan on the plea that "the dividend income earned is part and parcel of insurance business and therefore taxing the same when we resort to the provisions of First Schedule to the Income Tax Ordinance, 2001 the same has to be treated as business income a fact which was neither dilated upon nor the Hon'ble august Supreme Court was assisted while delivering the judgment reported as PLD 1997 SC 700 = 1997 PTD 1693". This is simply incorrect. The issue, before the honourable apex Court, as could be seen from notice issued by Revenue in that case and reproduced in para 4 of the judgment, was exactly the same. In that case, the Revenue by relying upon the judgment of Sindh High Court in M/s. Adamjee Insurance Limited, 1989 PTD 1090, argued that under the law, dividend income derived by an insurance company loses its character and becomes part and parcel of profit and gains of insurance business and hence, taxable at rate applicable to business income. The apex Court, in para 14 of the judgment, disapproved such contention of Revenue by categorically observing that reliance on the case of M/s. Adamjee Insurance vis-a-vis the issue was misplaced. It is after recording this observation that apex Court, at para 19, reproduced supra, concluded that the benefit of the reduced rate could not be denied to an insurance company simply for the reason that the provisions of the Fourth Schedule deal exclusively with "computation of income". Accordingly, in my view, the observation of the taxation officer that "this fact was neither dilated upon nor the Hon'ble august Supreme Court was assisted" is contrary to facts and position on record.
44. Therefore, it is crystal clear that the judgment of the Hon'ble Supreme Court was delivered after taking into account this aspect of compositeness of income of the insurance companies. The judgment is clear and is fully applicable to the circumstances of the case and respectfully following the same, I am of the opinion that dividend income was to be taxed at the reduced rate of 10%. The provisions of Division III of Part I of First Schedule, as had remained applicable upto 30.06.2007, when considered as a whole in the background of aforesaid interpretation advanced by apex Court, fortify this position and as such the amendments inserted therein vide 'Finance Act, 2007, in my considered view, do not alter the applicable legal position except that the rate of 5% got enhanced to 10%.
45. In my view, the dictum laid down by Sindh High Court in 2011 PTD 2042 does not contradict the aforesaid ratio of the apex Court and hence, supports the case of the taxpayer/appellant. The matter before the Sindh High Court pertained to 'computation of income', i.e. The subject of the Fourth Schedule and therefore, it is incorrect to infer from the same that all incomes of insurance company including dividend income could be taxed at corporate rate of tax by reference to this case. As regards comments of my learned brother on allocation of expenses to dividend income, this issue is not subject matter of appeal and need not to be commented upon.
Sd/- Muhammad Waseem Ch., Judicial Member
46. Since, in view of above, a difference of opinion has arisen, therefore, following question is referred to worthy Chairperson for appointment of a reference member for adjudication thereof Whether on the facts and circumstances of the case the judgment of the Hon'ble Supreme Court of Pakistan reported as PLD 1997 SC 700 = 1997 PTD 1693 is applicable to the instant case leading to taxation of dividend income at reduced rate of tax at 10% in the case of insurance companies?
Sd/- Muhammad Waseem Ch., Judicial Member Sd/ Muhammad Asif, Accountant Member I have no objection to the question framed by my learned brother, Judicial Member, but it seems that learned JM was not aware that in the meantime a Division Bench (DB) of this Tribunal has decided the same issue in I.T.A. Nos. 1290 to 1295/LB/2015 [Tax Years 2009 to 2014], Dated 28.09.2015.
Therefore, the Honourable Chairman is also requested to took into this matter to see whether this matter may be referred to third Member.
Sd/- Muhammad Asif Accountant Member This full bench has been constituted to resolve the difference of opinion that has arisen between the learned members of the Division Bench while disposing of subject appeals filed by a general insurance company and in this respect the learned members have framed the following question: "Whether on the facts and circumstances of the case the judgment of the honourable Supreme Court of Pakistan reported as PLD 1997 SC 700 = 1997 PTD 1693 is applicable to the instant case leading to taxation of dividend income at reduced rate of tax at 10% in the case of insurance companies".
2. The learned Accountant Member While concurring with the above referred question, (who agreed with departmental contentions) drew attention towards the fact that another bench comprising of himself and another learned judicial member had then recently decided the matter in favour of department (in I.T.As. Nos. 1290,1291,1292,1293,1294 and 1295/LB/2015) for appropriate consideration of the worthy Chairman. In view of such situation, this full bench has been constituted to deliberate upon the controversy/question in terms of provisions of section 130(10) of the Income Tax Ordinance, 2001 ('hereinafter referred to as 'Ordinance').
3. In response to call notices, while the taxpayer company was represented before us by Mr. Asim Zulfiqar Ali, FCA (hereinafter collectively referred to as 'AR'), departmental case was presented byMr. Muhammad Tariq Chaudhry, Commissioner Inland Revenue, Large Taxpayers Unit. Lahore along with Mr. Ali Adnan Khan, Deputy Commissioner Inland Revenue, Large Taxpayers Unit, Lahore (hereinafter collectively referred to as 'DR'). In proceedings before us, learned AR and DR primarily gave the same arguments as were advanced before the learned Division Bench that differed on the subject. Since, arguments have been spelled out comprehensively by learned members and are available on record, thus for brevity's sake, we do not consider it desirable to reiterate the same here.
4. Admittedly taxpayer, for the tax years involved in these appeals, filed returns of total income claiming benefit of reduced rate of taxation of 10% on 'dividend income' under section 5 read with Division III of Part I of First Schedule to the Ordinance. Such returns were deemed to be assessment orders issued under section 120 of the Ordinance. Later on, department invoked the provisions of section 122(5A) of the Ordinance asserting the position that since taxpayer company was an 'insurance company', taxation of its income was to be carried out under section 99 read with Fourth Schedule to the Ordinance and thus provisions of section 5 of the Ordinance, providing for reduced rate of taxation for dividend income, did not apply in its case as entire income, including dividend income, was required to be treated as 'income from business' chargeable to tax at full rate of corporate tax. In this regard, the Revenue heavily relied upon expression "Subject to this 'Ordinance, as used in section 5 of the Ordinance and argued that by use of this expression the legislature had conceived the provisions of section 5 of the Ordinance to be subservient to section 99 of the Ordinance and since the taxation of insurance companies is governed exclusively under section.
99 of the Ordinance, special provisions applicable to insurance companies, therefore the benefit of reduced rate specified in section 5 of the Ordinance, general provisions, could not be extended to insurance companies. While, for tax years 2012, 2013 and 2014, the amendment proceedings, as aforesaid, were taken up and concluded by Additional Commissioner Inland Revenue, Large Taxpayers Unit, Lahore, for tax years 2009 and 2011, such action was taken by Commissioner Inland Revenue, Large Taxpayers Unit Lahore exercising original jurisdiction available under section 122(5A) of the Ordinance.
5. Before us, representatives of both the parties had a consensus that in the context of provisions of repealed Income Tax Ordinance, 1979 ('repealed Ordinance'), similar controversy, as is on hand i,e, availability of benefit of reduced rate of taxation of dividend income to insurance companies, was resolved by august Supreme of Court of Pakistan in the favour of insurance companies through judgment reported as PLD 1997 SC 700 = 1997 PTD 1693. In these circumstances, what needs to be deliberated upon by us is whether there is any material change in the corresponding provisions contained in 2001 Ordinance that render the aforesaid judgment inapplicable now. This precisely is also the question referred to us by learned members for resolution/deliberation.
6. We have minutely gone through the provisions of sections 5 and 99 and those contained in Division III of Part I of First Schedule and Fourth Schedule to the 2001 Ordinance and consider that there is only one 'material change' in such provisions vis-a-vis corresponding provisions of repealed Ordinance. Such 'material change', we observe is in section 99 of 2001 Ordinance vis-a- vis section 26(a) of the repealed Ordinance and in order to make conspicuous such change both the corresponding provisions are reproduced hereunder in a comparative table: Section 26(a) of the repealed Ordinance Section 99 of 2001 Ordinance The profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Fourth Schedule;The profits and gains of any insurance business shall be computed in accordance with the rules in the Fourth Schedule (emphasis supplied)(sic.)
7. As is obvious from the above, while in section 26(a) of the repealed Ordinance, 'tax on income' was also prescribed to be determinable under Fourth Schedule, in section 99 of the 2001 Ordinance, with exclusion of phrase lax payable thereon', it has been made clear by the legislature that Fourth Schedule would only be referred to for computation of 'profit and gains' of an insurance company.
8. In such background, we now revert to analyze the dictum laid down in honorable Supreme Court of Pakistan's judgment reported as PLD 1997 SC 700 = 1997 PTD 1693. In the authoritative judgment, their lordships observed that while governing provision, section 26(a) of the repealed Ordinance, speak of determination of 'tax payable' under Fourth Schedule, no rates of tax have been prescribed in such Schedule. Accordingly, the interpretation could either be that income of insurance companies would either go untaxed or for computation of tax, general tax rates provided in First Schedule had to be adopted. In this context, honorable apex Court ruled that in absence of tax rates in Fourth Schedule, a resort must be made to provisions of First Schedule and rates prescribed therein in respect of various streams of income must be applied and thus in respect of 'dividend income' of insurance companies, reduced rate of tax would remain applicable.
The relevant excerpts from the decision of the apex court, though also quoted by both the learned members, are again reproduced hereunder for the ease of a quick reference: "19... ....Section 26(a) of the Ordinance, inter alia, provides that notwithstanding anything contained in the Ordinance, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Fourth Schedule. Computation of profits and gains and computation of tax payable are two different concepts altogether. In rule 5 of the Fourth Schedule special provisions exist for computation of income from general insurance business, but there are no provisions at all in the rule for computation of tax on such income. This could lead to two interpretations. There being no provision in the Fourth Schedule for computation of tax, such income cannot be subject to tax or, in the absence of taxing provisions, general taxing provisions contained in the First Schedule for business income of companies will apply. The intention of the legislature is clear and that is that income from general insurance shall be subject to tax under the Income Tax Ordinance. The interpretation that such income will be tax free is, therefore, to be rejected. Special provisions are, however, silent regarding computation of tax on such income. To give effect to the intention of the legislature and to harmonise different provisions of the Ordinance, the interpretation will be that for taxing such income the general provisions contained in the First Schedule providing for computation of tax or income of companies from business shall apply, and, while applying the provisions of the First Schedule for computation of tax on such income, if any benefit in the rate of tax is provided on any kind of income, general insurance companies cannot be deprived of such benefit in the absence of any provision that such benefit shall not be extended in respect of income from general insurance business. Admittedly, no such special provision appears in the First Schedule or in any provision of the Income Tax Law to deny the said benefit to the general insurance companies. There is no provision in the Ordinance or the Schedules that only one part of the First Schedule shall apply and the other shall not in the case of general insurance companies. Benefit in the rates of tax available under the First Schedule of the Ordinance can only be denied to the general insurance companies by suitably amending the law."
9. When such observations of honorable apex Court are juxtaposed with the variance in section 99 of the 2001 Ordinance, as highlighted above, we are of the considered view that legislature has mindfully filled in the lacuna in legal provisions pointed out by honorable Supreme Court of Pakistan and thus in section 99 of the 2001 Ordinance, phrase "tax payable thereon" has been done away with. This view of ours prima facie finds strength from the fact that up until 30.06.2007, in Division III of Part I of First Schedule to the 2001 Ordinance, a separate and specific rate of tax for dividend income of 'insurance companies' was clearly prescribed. It is, therefore, evidently clear that providing for a reduced rate of taxation explicitly in Division III of Part I of First Schedule for insurance companies at the time of promulgation of the 2001 Ordinance aimed at aligning the legislation in line with principles settled by the 0 apex court in PLD 1997 SC 700 = 1997 PTD 1693. The controversy, thus, is limited to determine me effect of amendment introduced in said Division III of Part I of the Firt Schedule to the Ordinance vide Finance Act, 2007 whereby the reduced rate, inter alia for insurance companies was done away with and a uniform rate of 10% was prescribed for dividend income of all recipients.
10.The department's case rests upon the aforesaid amendment in Division III of Part I of First Schedule to the 2001 Ordinance made through Finance Act, 2007 whereby variant rates in respect of dividend income was done away with and a single uniform rate of 10% for all the recipients was introduced by the legislature. It is of utmost importance to highlight here that no amendment in section 5 or section 99 was made by the legislature while introducing a uniform rate of tax for various recipients of dividend income. Such position manifestly controverts the departmental stance that with effect from 01.07. 2007, section 5 became inapplicable as far as 'insurance companies' were concerned. Had the intention of the legislature been to tax dividend income of insurance companies at corporate rate of tax, a corresponding amendment must have been made in either section 5 of the 2001 Ordinance (by creating an exclusion of 'insurance companies') or in section 99 and Fourth Schedule providing for, application of uniform rate of taxation for all streams of income. This, not being the case, we find ourselves in full agreement with views expressed by learned Judicial member of the bench that initially dealt with the taxpayer company's appeals that honorable Supreme Court of Pakistan's judgment PLD 1997 SC 700 = 1997 PTD 1693 on all fours as regards the present controversy.
11. The view, as aforesaid, is clearly supported by the evolution of statutory provisions as have been deliberated, in detail, above The reliance of Revenue on expression "subject to this Ordinance..... ", as used in section 5 of the Ordinance, to support their contention is seriously flawed for more than one reasons. Firstly, the provisions of section 5 of the Ordinance contained this expression even at time when a specific reduced rate for insurance companies, as aforesaid, was prescribed in Division III of Part I of the First Schedule to the Ordinance. This position amplifies that even by use of this expression in section 5 of the Ordinance the applicability of Division III of Part I of the First Schedule could not be denied to an insurance company. Secondly, there is no change either in section 5 of the Ordinance or in section 99 of the Ordinance since the promulgation of 2001 Ordinance, therefore, it could not be considered that amendment in Division III vide Finance Act, 2007 changed the legal position. Thirdly, and lastly, section 99 of the Ordinance, special provision applicable to insurance companies, deals with "computation of income", therefore, it shall only prevail on general provisions of the Ordinance dealing with "computation of income". Section 5 of the Ordinance, on the other hand, deals with charge of tax and not computation of income, therefore, this could not be considered to be subservient to another provision dealing with computation of income. The argument of the Revenue, being devoid of merit is, therefore repelled.
12.We consider that revenue's officials carrying out the amendment were also mindful of relevance of apex Court's decision and thus it is for this reason that following observations were recorded in the amendment order (that were also adopted by the learned Accountant Member in his order) stating that Supreme Court was 'not assisted' and certain facts were 'overlooked' by it while giving the judgment reported as PLD 1997 SC 700 = 1997 PTD 1693.
"The business model of insurance clearly shows that the dividend income earned is part and parcel of insurance business and therefore while taxing the same when we resort to provisions of First Schedule to the Income Tax Ordinance, 2001 the same has to be treated as business income a fact which was neither dilated upon nor the Honourable august Supreme Court was assisted while delivering the judgment reported as PLD 1997 SC 700 = 1997 PTD 1693 handed down in the case of M/s. EFU General Insurance Limited, and hence completely overlooked. As such the rate of tax to be applicable is the corporate tax rate of 35%. Hence, the ratio of the case law referred by the taxpayer is not applicable to circumstances of the case."
13.The above findings speak well of revenue's officials' confusion on the matter. Department is blowing hot and cold in the same breath as on one hand it asserts that PLD 1997 SC 700 = 1997 PTD 1693 is not relevant owing to legislative amendments, while on the other hand it refuses to abide by the dictum laid down by honorable Supreme Court of Pakistan citing lack of 'assistance' and 'overlooking' of pertinent facts. This position, if endorsed, would impair the judicial discipline beyond recognition as judgments of honorable supreme Court of Pakistan are binding on all lower fora under Article 189 of the Constitution. In this respect, we concur with the reliance of learned AR on honorable Lahore High Court's judgment reported as 2004 PTD 2180 whereby a basic principle has been reaffirmed viz. a subordinate Court cannot hold a judgment of the superior court to be per incuriam and to declare a judgment per incuriam is only for the author of a judgment or a higher strength in terms of number of judges in a bench or, of course, a higher judicial authority.
14.We cannot resist observing that if we were to agree with department's interpretation on amendments made in Division III of Part I of First Schedule to the Ordinance vide Finance Act, 2007, this would imply that all categories of persons, including public companies, in respect of whom 5% reduced rate of tax was applicable on dividend income upto 30.06.2007, their dividend income with effect from 01.07.2007 would become chargeable to tax at full corporate rate of tax. During the course.of hearing, a categorical question was posed to learned DR as to whether they have charged full corporate of tax on dividend of other public companies, he could not render any explanation what to talk of a plausible reasons. We advised the learned DR to revert with a written explanation on this question, however, till the writing of this judgment, such written arguments/explanation have not been furnished which confirms that Revenue has no justification for interpreting the subject provisions the way these have been interpreted in the present case.
15.We also observe that reliance on the case of M/s. Adamjee Insurance Company (1989 PTD 1090) in the instant matter is completely misplaced. It requires no keen analysis that such judgment was relied upon by the department to tax dividend income at corporate tax rate and august Supreme Court in PLD 1997 SC 700 = 1997 PTD 1693 held that reduced rate taxation in respect of dividend income cannot be denied on the basis of judgment handed down in Adamjee Insurance Company's case. Accordingly, we are at loss to understands to how this judgment in Adamjee Insurance Company (1989 PTD 1090) has been cited to support the revenue's stance.
16.For the reasons and the observations recorded above, we agree with, the judgment proposed by the learned Judicial Member, and answer the question, referred to us, in 'affirmative' and hold that dividend income in case of insurance companies remain chargeable to tax at reduced rate specified in Division III of Part I of the First Schedule to the Income Tax Ordinance, 2001.
17. Appeals of the appellant succeed in the manner discussed above.
Sd/- Javed Iqbal, Chairman Sd/- Nazir Ahmed, Judicial Member Sd/- Masood Akhtar Shaheedi Accountant Member