IRFAN SAADA T KHAN, J.---The instant Income Tax Appeal (ITA) was filed by raising the following questions of law which were admitted for regular hearing vide order dated 29.05.2005: a) "WHETHER on the fact and in the circumstances of this case the learned Income Tax Appellate Tribunal was justified in deleting the addition on account of capital gain which was treated as normal banking business by the assessing officer , keeping in view the nature of business?" b) "WHETHER on the facts and in the circumstances of this case the learned Income Tax Appellate Tribunal was justified in holding that income of the Bank in EPZ was exempt under clause 128 of the part 1 of the 2nd Schedule to the Income T ax Ordinance. 1979?"
2. Briefly stated, the assessee is a Banking Company which filed its return on 15.09.1991 for the year under consideration i.e. assessment year 1991 -- 1992 by declaring a loss of Rs.1,030,436,634/-. The same, however , was revised on 26.03.1994 by declaring a loss of Rs.1,030,546,634/-. The Assessing Officer (AO) while making the assessment under Section 62 of the Income Tax Ordinance, 1979 (the Repealed Ordinance ) vide order dated 31.03.1994 observed that the capital gain on sale of securities claimed at Rs.6173247/- as exempt does not qualify for exemption and as such treated the same as taxable. The AO also observed that income of the bank in Export Processing Zone (EPZ) claimed to be exempt under clause 128 of Part-I of the Second Schedule to the Repealed Ordinance (hereinafter referred to as Schedule to the Repealed Ordinance) was also not justified and thereafter disallowed the claim of the exemption and added an amount of the income of the assessee. Being aggrieved with the said order an appeal thereafter was preferred before the Commissioner of Income Tax [CIT(A) ] who upheld the action of the AO so far as the issue of income from EPZ is concerned but deleted the addition made on account of capital gain. Being aggrieved with the order or the CIT(A) both the department as well as the assessee preferred appeals before the Income Tax Appellate Tribunal (ITAT) and the ITAT allowed the claim of exemption under Schedule to the Repealed Ordinance of the taxpayer and also deleted the amount added by the AO so far as capital gain is concerned. It was then the Income Tax Department, feeling aggrieved with the said order , preferred the above appeal and, as stated earlier , the above referred two questions were admitted for regular hearing.
3. Mr. Ameer Bukhsh Metlo Advocate has appeared on behalf of the department and stated that the ITAT was not justified in treating the capital gain as normal business income of the assessee. He read out the relevant portions from the assessment order , CIT(A)'s order and the ITAT's. order so also the provisions of Section 27 of the Repealed Ordinance to show that the deletion of the addition on account of capital gain by the ITAT was not in accordance with law and since the department was fully justified in adding the capital gain as normal business income of the assessee. He, while elaborating his viewpoint, submitted that the capital gain was claimed on the rollover of the National Funds Bonds, whereas capital gain could only arise on the transfer of the asset, if any, but in the instant case since no transfer took place hence the department was fully justified in making the said addition and the observations of the ITAT in this behalf were erroneous and were not in accordance with law. He, therefore, stated that the said deletion of the amount by the ITAT may be set aside and the answer to the question No.1 may be given in "Negative" i.e. in favour of the Department and against the assessee.
4. Mr. Iqbal Salman Pasha Advocate has appeared on behalf of the taxpayer and supported the order of the ITAT and stated that no doubt no sale /transfe r of the bonds took place but, in his view, since there was an increase in the value of the bonds hence the said increase would be considered as capital gain, therefore, the addition made 12y the assessing authority was not correct and therefore the answer to the question may be given in "Af firmative".
5. We have heard both the learned counsel at some length on this aspect. Before proceeding any further we deem it appropriate to reproduce herein below Section 27 of the Repealed Ordinance, which reads as under:
27. Capital gains: (1) Any profits or gains arising from the transfer of a capital asset shall be chargeable under the head "Capital gains" and shall be deemed to be income of the income year in which the transfer took place.
(2) For the purposes of subsection (1) and sections 28 and 29,(a) "capital asset" does not include--
(i) any asset or class of assets in respect of which the assessee is entitled to an allowance for depreciation under the Third Schedule; and
(ii) any immovable property; and
(b) "transfer" includes the sale, disposition, exchange or relinquishment of the asset, or the extinguishment of any rights therein, but does not include --
(i) any transfer by reason of the compuls ory acquisition of any capital asset under any law for the time being in force;
(ii) Any transfer of a capital asset under a fit, bequest or will or an irrevocable trust;
(iii) any distribution of the assets of a company to its shareholders on its liquidation; and
(iv) any distribution of capital assets on the dissolution of a firm or other associatio n of persons or the partition of a Hindu undivided family .
6. From the above provision of law it is evident that profit or gain would 'arise only from the transfer of a capital asset which would be deemed to be income of the assessee. In the instant case it is an admitted position that no transfer of the asset took place, meaning thereby that the very claim of the assessee with regard to capital gain on the said bonds appears to be misconceived and not justified. Had there been any transfer of the asset, as specifically mentioned in the above referred provision of law, then the assessee/taxpayer would have been justified in claiming that they have earned the income by way of capital gain but in the instant case since admittedly no transfer took place rather there was a rollover of the bonds, the said gain arising on the said rollover could not be considered to be capital gain and hence we find that the action of the AO in rejecting the claim of the assessee/taxpayer with regard to capital gain fully justified. We, therefore, so far as this aspect is concerned set- aside the order of the ITAT and answer the question in "Negative" i.e. in favour of the department and against the assessed. The claim of the assessee in this regard has to be treated as normal banking business.
7. So far as the issue of claim of exempti on under clause 128 of the Schedule by a branch of the bank situated in- EPZ is concerned, Mr. Ameer Bakhsh Metlo Advocate stated that exemption could only be granted if the bank itself operates in EPZ and since, in his view, only a branch has been opened in the EPZ, therefore, the claim of exemption firstly is not available and secondly approval from the Federal Government as required for an industrial undertaking since was not obtained by the bank hence they are not entitled for the exemption.
8. Mr. Iqbal Salman Pasha Advocate, on the other hand, has supported the order of the ITAT and stated that for all practical purposes a bank performing through its branch has to be considered as a bank operating itself. He then invited our attention to Section 2(e) of Export Processing Zones Authority Ordinance, 1980 (EPZA Ordinance) , wherein the term "industrial undertaking" has been defined, by pointing out that since the bank was providing services and has duly been approved by the Federal Government therefore the exemption as claimed under clause 128 of the Part-I of the Second Schedul e to the Repealed Ordinance is fully attracted in the instant matter and hence the bank is entitled to the exemption claimed by it in this behalf.
9. Again on this aspect both the learned counsel have been heard at length and here again before proceeding any further we deem it appropriate to reproduce herein below the relevant provisions of the law: Clause (128): Any income accruing or arising outside Pakistan to an industrial undertaking set up in an area declared by the Federal Government to be a 'Zone within the meaning of the Export Processing Zones Authority Ordinance, 1980 (IV of 1980), provided the said income accrues or arises from such activities of the said undertaking as are approved by the Federal Government [:] [Provided that nothing contained in this clause shall apply to an industrial undertaking set up after the 30th June, 1997.] Section 2(e) of the EPZA Ordinance: "industrial undertaking" means an indus try, undertaking or establishment engaged in the production, distribution or processing of such goods or the providing of such services as may be specified in this behalf by the Federal Government:
10. From the above provisions of the law, it is clear that any income accruing or arising to an industrial undertaking outside Pakistan set up in EPZ is exempt from tax. Needless to state that the concerns/industrial undertakings working in Zones are considered to be working outside Pakistan, hence it could easily be inferred that any industrial undertaking income of which is accruing or arising in a Zone is exempt from tax. It is also an admitted position that EPZ has been approved as a "Zone" by the Federal Government. Now if clause 128 of the Part-1 of the Second Schedule to the Repealed Ordinance is read with Section 2(e) of he EPZA Ordinance it would become clear that an industrial undertaking providing services in EPZ does fall under clause 128 of the Second Schedule and as per that clause is entitled for exemption. The submission of Metlo that there is no approval of the Federal Government does not hold ground, especially in view of the fact that EPZ has been considered to be a Zone duly notified through an Ordinance.
11. We, therefore, are of the view that the claim of the exemption of the bank in respect of its branch situated in EPZ does fall under clause 128 of the Part-I of the Second Schedule to the Repealed Ordinance, if read in conjunction with Section 2(e) of the EPZA Ordinance, hence, we uphold the order of the ITAT so far as allowing the exemption claim of the bank is concerned. We, therefore, answer this question in "Affirmative" i.e. against the department and in favour of the assessee/taxpayer . The instant IT A stands disposed of in the above manner .
12. Above are the reasons of our short order dated 27.02.2020 whereby we have answered the first question in 'Negative' and the second question in 'Af firmative'.
13. Let a copy of the order be sent to the Registrar ITAT for information and necessary action.