MUHAMMAD JAWED ZAKARIA. JUDICIAL MEMBER:- This appeal arises out of the order No.20, dated 10.10.2015 passed by the learned Commissioner Inland' Revenue (Appeals-II), Karachi, for the tax year 2010 passed under section 122(5A) of the Income Tax Ordinance, 2001. The taxpayer/ appellant has agitated the following grounds of appeal: "1. That the order passed of the Commissioner Inland Revenue, Appeals [CIR(A)] is bad in law and on facts.
2. That the order of the CIR(A) is illegal, ultra vires, void and without any justification.
3. That the CIR(A) has erred in confirming the action of ACIR in treating the heads of income as single basket income. It is contended that the action of the CIR(A) is bad in law and on facts.
I. Dividend Income Rs. 307,376,841 2. Property Income Rs. 54,665,226 4.That the CIR(A) has erred in not giving the decision with regards to chargin g of Workers Welfare Fund at Rs.10,780,628/-. It is contended that the action of the CIR(A) is bad in law and on facts.
5. That the Appellant craves leave, to add to amend, to alter or to substitute the above grounds of appeal before or at the time of hearing."
BRIEF F ACTS / Background of the instant case
2. The background of the case is that the taxpayer/ appellant was incorporated in Pakistan on March 30, 2000 as a Public Limited Company under the Companies Ordinance, 1984. Its shares is quote d on Pakistan Stock Exchange.
The object of the Company is the development of insurance and reinsurance business in Pakistan and to carry on reinsurance business. The return of income for the tax year 2010 was e-filed on 19.10.2010 declaring loss for the year at Rs.494,962,469/-, dividend income at Rs. 307,376,841/- and property income at Rs.54,665,226/- both offered at reduced rate of tax and thereby claimed refund at Rs. 41,014,495/-. The return of income was amended under section 122(5A) of the Ordinance which was invoked vide amended order No. D.C. No.08/46 and taxable income of Rs. 528,250,773 was assess ed with tax payable at Rs. 97,552,964.Additional Commissioner Inland Revenue (ACIR), in the amended assessment order , had taxed dividend income and property income at standard rate of 35% for companies, on the grounds that all incomes of insurance companies are "one basket income", taxable at standard rate of tax, and that reduced rates of tax for Dividend income and Income from property under First Schedule to the Ordinance are not applicable to profits and gains of insura nce companies. ACIR had also levied federal Workers Welfare Fund (WWF) of Rs. 10,780,628 in the amended assessment order . Being aggrieved from the order , the taxpayer filed an appeal against the amended assessment order before CIR(A), who vide appellate order dated October 10, 2015 affirmed the treatment meted out by the ACIR, in respect of taxation of dividend income and property income, hence the instant appeal before this Tribunal.
3. On the date of hearing, Mr. Atif Mufassir , FCA and Safdar Imam, ACMA appeared on behalf of the taxpayer/ Appellant as AR and argued the case while Mr . Abdul Salam represented the Department as DR. ARGUMENTS A.R's Arguments
4. Before us, the learned counsel vehemently assailed the findings of officers below that the rate of taxation for companies given under First Schedule to the Ordinance differs from that of repealed Ordinance, due to the reason that a separate rate of tax is prescribed for dividend under section 5 of the Ordinance which starts with wordings "Subject to this Ordinance", which means that if any other treatment is prescribed for taxation of Dividend income such as for insurance companies under the Fourth Schedule to the Ordinance, then in that case, the said treatment would apply rather than section 5 of the Ordinance. The learned counsel for the Taxpayer has also referred the findings of the learned CIR(A) that judgment of Hon'ble Supreme Court reported as 1997 PTD 1693 as referred by the Appellant would not be applicable in the present case, as the said decision relates to the repealed Ordinance.
The learned counsel submitted that the following issues arise in this appeal:
(i) Treatment of dividend income and property income as single basket income and taxing the same at general corporate tax rate of 33% instead of reduced tax rate of 10% prescribed in Division III of Part I of First Schedule to the Ordinance; and
(ii) Levy of federal WWF .
5. During the course of hearing, the learned ARs argued that the order of the Com missioner IR (A) is illegal, ultra vires, void and without any justification. Following issues were raised and discussed during the hearing and are decided by this Court as follows: i) Dividend income and Income from property
6. The learned AR has vehemently argued that the CIR(A) has erred in confirming the action of ACIR in treating the heads of income as single basket income. The learned A.R. has submitted that section 99 of the Ordinance clearly states that provisions contained in Fourth Schedule to the Ordinance are for the purpose of computation of profits and gains of insurance business and not for the purpose of computation or imposition of tax. As such, the benefit of reduced rate of taxation to Dividend income and Income from property given under First schedule cannot be denied to the Appellant being an insurance Company unless the law is suitably amended.
Case laws relied by the learned AR
7. In support of contention, the learned AR placed reliance on the judgment by the Hon'ble Supreme Court of Pakistan vide judgment in the case of EFU General Insurance Company Limited reported as 1997 PTD 1693 . The relevant part of the judgment is reproduced below; "Section 26(a) of the Ordinance, inter alia, provides that notwithstanding anything contained in the Ordinance, the profits and gains of any business of insur ance 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 with apply . The intention of the legislature is clear and that is that income from general insurance shall be subje ct 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 not 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 First Schedule of the Ordinance can be denied to general insurance companies by suitably amending the law .
(Emphasis is ours)
Reference was also made to the judgment of Hon'ble Lahore High Court in the case of Muslim Insurance Co. Ltd. reported as 2002 PTD 577, wherein relying on the above judgment of Hon'ble Supreme Court, it was held that concessional tax rate given under First Schedule to the repealed Ordinance would be applicable for taxation of Dividend income of insurance companies.
The learned A.R. also referred to the Department's appeal for subsequent assessm ent years in the case of Muslim Insurance Company Limited, wherein Hon'ble Lahore High Court through judgment reported as 2004 PTD 2707 took a similar position on this issue. The learned AR humbly submitted that althoug h the above referred judgments related to the repealed Ordinance, howe ver, the principle enunciated therefrom are squarely applicable for the purposes of the Ordinance and in respect of Income from property . The above stance is also affirmed by Hon'ble Tribunal in its full bench decision in the case of Security General Insurance Company Limited reported as 2017 PTD 495 . The relevant portion of the decision is reproduced below: "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 the Fourth Schedule, in section 99 of the 2001 Ordinance, with exclusion of phrase 'tax 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 ."
Regarding assertions of the learned CIR(A) that Hon'ble Supreme Court's judgment relating to the repealed Ordinance referred to above is not relevant under the Ordinance due to separate taxation mechanism for Dividend income and use of words "Subject to this Ordinance" under the Ordinance, AR referred to the aforesaid decision of the learned Appellate Tribunal's full bench, in the case of Security General Insurance Company Limited reported as 2017 PTD 495 wherein the above position of learned CIR(A) has been rebutted and it is held that Dividend income of insurance companies remain chargeable to tax at reduced rate as specified in Division III of Part I of First Schedule to the Ordinance. The relevant part of the decision is quoted below: "The reliance of Revenue on expressio n "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 Divisions III of Part I of the First Schedule to the Ordnance.
This position amplifies that even by use of the expression in section 5 of the Ordinance the applicability .of Division III of Part I of the First Schedule could not be denied to the insurance company ."
DR'S ARGUMENTS
8. On the other hand, the learned DR opposed the contention made by the learned AR. He argued that the order passed by the learned CIR(A) is well within the framework of law and there is no illegality , irregularity and infirmity .
He contended that the earlier judgments of the Tribunal as well as the Hon'ble superior courts relied upon by the learned counsel are distinguishable in as much as they relate to Insurance Companies but the instant taxpayer is indulged in reinsurance business. The learned D.R. submitted that in the earlier years though the issue was decided in respect of insurance yet neither any issue of reinsurance was decided nor raised. The learned DR further argued that the decision of CIR(A) is totally justified in stating that the aforesaid judgment of Hon'ble Supreme Court is related to the repealed Ordinance and is not relevant under the Ordinance due to separate taxation mechanism for Dividend income and use of words "Subject to this Ordinance" under the Ordinance. He further argued that it is a public compa ny and not fully owned Government entity . He submitted that declared dividend income of Rs.307,376,841/- with tax payable at 10%. Similarly , the taxpay er had declared property income of Rs.54,665,226/- with tax payable at 5%. Thus the taxpayer had declared both dividend income and property income as separate block of income and subjected these income to reduced rate of tax. However , as per Fourth Schedule to the Ordinance, profits and gains as per Audited Accounts are to be taken as income from business subject to some adjustments of expenses which are inadmissible as deduction in computing income from business.
Hence, in terms of section 99 read with Fourth Schedule of the Ordinance the income of the insurance company is to be computed as "one basket income" without bifurcation of the income into other "Heads of Income". The Hon'ble Supreme Court of Pakistan in the case reported as 1993 PTD 766 = 1993 SCMR 1232 and Hon'ble High Court of Sindh in the case reported as 2011 PTD 2042 held this view. Therefore, the dividend income declared by the appellant insurance company does not fall under section 5 of the Ordinance and similarly property income declared does not fall in the head "Income from property" under section 15 of the Ordinance. Instead, entire income is covered under Fourth Schedule of the Ordinance as "Income from business". The total income as per accounts after adjustments of admissible/inadmissible expenses is, therefore, required to be taxed at the rate of 35% instead of reduced rates applied on dividend and property income. He therefore, prayed for upholding the orders of the officers below .
REJOINDER / REBUTT AL BY THE LEARNED A.R
9. In rebuttal of learned DR's above contention, the learned AR urged that the recent decision of full bench of this Tribunal, as referred supra as reported as 2017 PTD 495 has already resolved the issue and held that Dividend income of insurance companies remain chargeable to tax at reduced rate as specified in Division III of Part I of First Schedule to the Ordinance. The learned AR further submitted that changes were made in Rule 6B of Fourth Schedule to the Ordinance through the Finance Act, 2016, which are applicable from Tax Year 2017 and onwards, whereby , inter-alia Dividend income derived by insurance companies from listed companies are taxable at standard corporate tax rate. The learned A.R. further went to say that it is settled princ iple that any change in law is applicable prospectively unless it is specifically stated so or if the amendment is of rectificatory nature. Rule 6B of the Fourth Schedule and amendments therein through the Finance Act, 2016 are clearly substantive provisions relating to enhancement of taxation of insurance business instead of clarificatory / benevolent amendments. The learned AR also referred to judgment of Hon'ble Lahore High Court reported as 2016 PTD 910 wherein it was held that law is always applicable prospectively unless specifically stated otherwi se. Relevant part of which is reproduced below: "5. .............The notification is dated 29.6.2013 and the Act came into force on 01-07-2013. The question that arises is whether the Respondents can recover agricultural income tax on the strength of Section 38 of the Act for the assessment years 2012, 2013 and 2014 given that it came into effect On 01.07.2013. A tax statute Operates prospectively and nor retrospectively unless clearly intended and it is only where the legislative intent is clearly provided to give retrospective effect to a statutory provision, then the tax can apply with retrospective effect.
Reliance is placed on the cases titled "Zila Council, Sialkot through Administrator v. Abdul Ghani Proprietor lqbal Brothers, Sialkot and others" (PLD 2004 SC 425) and "Muhammad Ilyas v. The State" (2009 SCMR 1042 ). In this case there is no such intent. Hence the provisions of the Act will apply prospectively ."
(Emphasis is ours)
10. The learned AR further submitted that the issue is recently decided by Tribunal in favour of Appellant in its own case for Tax Years 2009 and 2011 through separate appellate orders. Relevant parts of the decisions for Tax Years 2009. and 201 1 are reproduced below: I.T.A. No. 101/KB of 2016 dated April 13, 2017-T ax Year 2009 "After perusal of above detailed decision of learned Full Bench ATIR Lahore, we are of the clear opinion that this decision squarely applicable on the issue in hand. Order of ADCIR, for application of rate of 35% on dividend income earned by the appellant and confirmation thereof by the CIR(A) is not sustainable in law. Hence the impugned order of CIR(A) is annulled and appeal of the appellant is allowed."
M.A. (Rect.) No. 868/KB/2017 in I.T .A. No. 101/KB of 2016 dated June 16, 2017-T ax Year 2009 "The principles laid down for dividend income in order dated 13.4.2017 will be applicable on the income from a property because section 99 of the Ordinance, special provision applicable to insurance companies, deals with the computation of income and no rates of tax has been prescribed there, accordingly , the interpretation could either be that income insurance companies would either go un-taxed are for computation' of tax, general tax rate provided in first schedule has to be adopted. The tax rate for property income provided in division-5 Part-Ill of first schedule therefore, the Assessing Officer is directed to work out liability under the said provision."
I.T.A. No. 102/KB of 2016 dated June 12, 2017-T ax Year 201 1 "After hearing both the parties and perusing the material record, we observe that in the case of dividend income, the matter stands decided in favour of the appellant in the above quoted decision of the Full Bench. Following the decision of ATIR Lahore vide I.T.As. Nos. 1274 to 1278, we have no hesitation in holding that this decision squarely applies to the issue at hand regarding the tax rate applicable on dividend income in the case of insurance companies. More recently this Tribunal, relying on the decisions of higher forums, again decided the issue in favour of the tax payer in LT.A. No 101/KB of 2016. The order of ACIR for application of rate of 35% on dividend income of the appellant and confirmation thereof by the CIR(A), is therefore not sustainable in law ."
On the basis of the above arguments, the learned counsel prayed that the orders of the officers below may be vacated.
11. We have heard both the learned representatives and have perused the records of the case as well as case laws cited at bar and so also the amendment made in the Fourth Schedule vide Finance Act, 2016.
Elongate concept of Reinsurance v . Insurance
12. The mute point involved, as contended supra, in this appeal as to whether Insurance and Re-insurance may be treated differently and different (Taxation) treatment may be accorded, therefore, before proceed further we have to look at the elongate definition of Reinsurance and Insurance as provided in the Insurance Law which is being discussed hereunder: ANAL YSIS OF REINSURANCE VIS-A-VIS INSURANCE : Definition of Reinsurance : It is a process whereby one entity (the reinsurer) takes on all or part of the risk covered under a policy issued by an insurance company in consideration of a premium payment. In other words, it is a form of an insurance cover for insurance companies. Under sub-clause (lii) of section 2 of the Insurance Ordinance, 2000 the reinsurance has been defined as under: 2(lii) "reinsurance" means a contract of insurance under which the event, specified in the contract, contigent upon the happening of which, payment is promised to be made to the policy-holder there under , is payment by the policy holder of a claim or claim made against that policy holder under another contract or contracts of insurance issued by that policy holder ."
Arrangement of Reinsurance has been described in the Part VI under section 41 of Insurance Ordinance, 2001 as under: 41". Requirement to effect and maintain reinsurance arrangements .---(1) An insurer shall effect and shall at all times maintain such reinsurance arrangements as are, in the opinion of the directors (or such other person or body responsible for conducting the management and business of the insurer), formed on reasonable grounds, having regard to the exposures of the insurer in respect of individual contracts accepted and in respect of aggregate losses arising out of individual events, adequate to ensure continuing compliance by the insurer with the provisions of this Ordinance relating to solvency .
(2) Every insure shall submit to the Commission, in the manner prescribed by the commission and not less than one month prior to the coming into effect, or as soon as practicable therea fter, of any treaty reinsurance arrangement entered into by the insurer as cedant, such features of that reinsurance arrangement as may be prescribed by the Commission.
(3) Where any reinsurance treaty the particulars of which have been submitted to the Commission under subsection (2) is altered or any new treaty reinsurance arrangement is made after the submission of the information under subsection (2), the insurere concerned shall submit to the Commission, in the manner prescribed by the Commission, particulars of such alteration in the treaty or such new treaty reinsurance arrangement within one month of such alteration or arrangement and shall submit such further information or clarification as the Commission may require.
(4) The Commission may at any time and after giving the insurer an opportunity of being heard, for reasons to be recorded in writing, direct the insurer to make such modifications in his reinsurance arrangements as the Commission may specify .
(5) The Federal Government may make rules, not inconsistent with subsection (1), governing the reinsurance outside Pakistan, other than on a treaty basis, of insurance business underwritten by an insurer in Pakistan."
It is mandatory upon every insurer to offer reinsure with the company as envisaged under section 42 ibid which is also reproduced hereunder: "42. Compulsory cession.---
(2) The Federal Government may by notification in the official Gazette, direct that every insurer shall offer to reinsure with the Company such proportio n as is determined on such basis as may be specified in such notification of this direct non-life insurance business which is in excess of the aggregate of: a) The insurer's net retention; b) The sum insured required to be reinsured under subsection (1); and c) The sum insured otherwise reinsured with the Company or with any other insurer in Pakistan but excluding any part reinsured outside Pakistan.
(3) The reinsurance set out in subsection 4(2) shall for the purposes of this Ordinan ce constitute a treaty contract of reinsurance between the insurer and the company , operating on a risks attaching basis.
(4) Whoever contravenes the forgoing provisions of this section shall be punishable with a fine which may extend to ten thousand rupees and with a further fine which may extend to one thousand rupees for every day after the day on which the contravention continues.
(5) The Federal Government may be notification in the official Gazette and on reasonable grounds, exempt any insurer and the Company from the preceding requirements of this section so far as concerts any part of any class or subclass of business"
Description:
13. Unlike co-insurance where several insurance companies come together to issue one single risk, reinsurers are typically the insurers of the last resort. The insurance business is based on laws of probability which presupposes that only a fraction of the policies issued would result in claims. As a result, the total sum insured by an insurance company would be several times its net worth. It is based on this same probability of loss that insurance companies fix the insurance premium. The premiums are fixed in such a manner that the total premium collected would be enough to pay for the total claims incurred after providing for expenses. However , there is a possibility that in a bad year, the total value of claims may be much more than the premium collected. If the losses are of a very large magnitude, there is a chance that the net worth of the company would be wiped out. It is to avoid such risks that insurance companies take out policies. Secondly , insurance companies take the support of reinsurers when they do not have the capacity to provide a cover on their own. Broadly , reinsurance can be classified under two heads - treaty reinsurance and facultative reinsurance.
Brief history of Reinsurance
14. A brief history of reinsurance business is given in following paragraphs as to the purpose of reinsurance, how it was initiated and why the need for reinsu rance arose. Reinsurance, also known as insurance for insurers or stop- loss insurance, is the practice of insurers transferring portions of risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim. The party that diversifies its insurance portfolio is know n as the ceding party . The party that accepts a portion of the potential obligation in exchange for a share of the insurance premium is known as the reinsu rer. Reinsurance allows insurers to remain solvent by recovering some or all of amounts paid to claimants. Reinsurance reduces net liability on individual risks and catastrophe protection from large or multiple losses. It also provides ceding companies the capacity to increase their underwriting capabilities in terms of the number and size of risks.
Class of Reinsurance :
15. The Class of Reinsurance has been defined under subsection (3) Clause (b) of section 4 of Insurance Ordinance, 2002, which is reproduced hereunder: "4. Classes of life and non-life insurance business---(1) For the purposes of this Ordinance, the following shall be the classes of business into which life insurance business is divided.
(a) Class 1 being ordinary life business;
(b) Class 2 being capital redemption business;
(c) Class 3 being pension fund business; and
(d) Class 4 being accident and health business, (2). For the purpose of subsection (1)---- (a). " ordinary life business" means effecting and carrying out constructs of life insurance other than contracts included in Class 2. Class 3 or Class 4: (b). "capital redemption business" means effecting carrying out capital redemption contracts; (c). "pension fund business" means effect ing and carrying out contracts of life insurance that are maintained for the purpose of a pension or retirement scheme and are owned by trustees under the scheme; and (d). "accident and health business" means effecting and carrying out contracts of insurance providing fixed pecuniary benefits or benefits in the nature of indemnity or a combination of both, against risks of the policy-holder or a person for whose benefit the contract was made----
(i) sustaining injury as a result of an accident;
(ii) becoming incapacitated in consequence of an accident or disease; or
(iii) suffering loss, including medical expenses, attributable to accident, sickness or infirmity .
(3) For the purpose of this Ordinance, the following shall be the classes of business into which non-life insurance business is divided:
(a) for direct and facultative reinsurance business;
(i) Class 1 being fire and property damage business;
(ii) Class 2 being marine, aviation and transport business;
(iii) Class 3 being motor third party compulsory business;
(iv) Class 4 being liability business;
(v) Class 5 being workers' compensation business;
(vi) Class 6 being credit and suretyship business;
(vii) Class 7 being accident and health business; and
(viii) Class 8 being agriculture insurance including crop insurance;
(ix) Class 9 being miscellaneous business;
(b) for treaty reinsurance business;
(i) Class 9 being proportional treaty business; and (ii) Class 10 being non proportional treaty business.
(Emphasis by us)
Benefits:
16. Following may be the benefits of Reinsurance: By covering the insurer against accumulated individual commitments, reinsurance gives the insurer more security for its equity and solvency and more stable results when unusual and major events occur . Insurers may underwrite policies covering a larger quantity or volume of risks without excessively raising administrative costs to cover their solvency margins. In addition, reinsurance makes substantial liquid assets available for insurers in case of exceptional losses.
Purpose
17. Reinsurance is becoming more and more the essential element of each of the related insurance branches. It spreads risks so widely and effectively that even the largest risk can be accommodated without unduly burdening any individual.
History/Birth of Reinsurance/origin of Reinsurance/Medieval era
18. History of Reinsurance is same as for Insurance means that both have same history . Italians are supposed for the development of the earliest marine insurance policy in 1350, while the development of insurance was delayed in England and France due to the Hund red Years' War. The first formal reinsurance agreement, dated July 12, 1370, was created to cover the hazardous portion of a trip from Genoa, Italy to Bruges, Belgium, with the direct insurer transferring the risk of the more hazardous portion to another insurer , or a reinsurer . The Industrial Revolution in the 18th century changed almost every aspect of daily life, including the insurance industry . Massive production created the need for insurance in larger amounts. It is fire insurance that is believed to be responsible for the growth of reinsurance. In Europe, large city fires in Germany (1842) and Switzerland (1861) prompted the establishment of Cologne Re and Swiss Re. The U.S. was no exception. Two major fires, the Great Chicago Fire (1871) and the Great Boston Fire (1872) also validated the need for reinsurance . Some fire companies had assumed single risks which often exceede d the entire capital of the companies. The early 20th century was marked by several catastrophes which helped the insurance industry to build a reputation for its ability to pay claims. These include the Great Baltimore Fire in 1904 and the San Francisco earthquake and fire in 1906. The latter was considered the costliest insured event of the 20th century . Additionally , the sinking of the Titanic in 1912 was considered the most costly maritime insurance loss, with $4 million in life insurance and $2 million in accident insurance claims. Following World War I (1914-1918) and World War II (1939-1945), the reinsurance world was split into two camps: the supply countries and the demand countries, and the Trading with The Enemy Act of 1917 prohibited all business relations with hostile countries, limiting reinsurance suppliers to Switzerland, Spain, Britain and Denmark. The 20th century also brought new insurable assets, such as automobiles and airplanes. In 1925, Massachusetts was the first state to require insurance coverage for all drivers. Some resources account that the first celebrity to insure a body part was American comedian Ben Turpin, who insured his cross-eyes for $20,000 with Lloyd's of London, a firm that becam e known for insuring celebrity bodies - from legs and buttocks to smiles and taste buds. As of today , the most expensive celebrity body part insured is Mariah Carey's legs, covered for $1 billion.
Reinsurance and insurance Today / Modernisation of Reinsuarance and insurance:
19. Reinsurance not only allows direct writers to manage capacity , ease surplus strain, minimize fluctuations in claim payments and lapse exposure, manage their portfolios, facilitate mergers, and help facilitate business growth, but it also provides access to information and expertise. For example, a reinsurer has the capacity to review many more complex claims than a direct writer , providing a unique advantage to fully understand the exposure and to identify blind spots in an investigation. Client visits allow the reinsurer to identify best practices in fraud prevention, claims investigations, compliance, and practices and procedures. The reinsurer is also able to process metrics for thousands of claims, providing direct writers with access to valuable data which translates into assistance for product development, benchmarking, and trend analysis. Reinsurance has evolved from a risk management tool to a value added component of the insurance process, by providing primary insurers with access to expertise across multiple concentrations as well as aggregated industry data. In modern Society life can hardly be imagined without this form of risk protection. A total of USD 4613 billion is spent globally in insurance each year. From the San Francisco earthquake in 1906 to Hurrica ne Bestsy in 1965 or the attack on the World Trade Centre in 2001 the industry of insurance had to cope with unexpected enormous losses. Assessing the insured loss was a highly complex undertaking; large claims were filed for a number of seemingly unrelated risks including aviation, property , liability lines, business interruption and life insurance. After attack on Trade Towers, the insurers realized that they could not longer offer terrorism insurance on the same terms as in the past, hence the terrorism cover was immediately withdrawn by all but a handful of specialist insurers.
However , only reinsureres were able to maintain their international presence and thus helped, at least partly , to spread risks of georgraphically . Katrina first made landfalls as a Category 1 hurricane in Florida on 25 August 2005, four days later if came ashore again as a Category 4 strom. Katrina caused massive damage to New Oreleans before moving inland to wreak havoc across the southern US. Art the time, Hurricane Katrina was the most expensive catastrophe ever recorded with total losses of USD 136 billion. It has since been surpassed by the 2011 Tohokku earthquake and tsunami which caused USD 210 billion in losses, although Katrina remains the most expensive insured loss at USD 76 billion.
Types of reinsurance
20. Following are the types of Reinsurance:
(i) Facultative Facultative coverage protects an insurer for an individual or a specified risk or contract. If several risks or contracts need reinsurance, each is negotiated separately . The reinsurer has all rights for accepting or denying a facultative reinsurance proposal. A reinsurance treaty is effective for a set time period rather than on a per-risk or contract basis. The reinsurer covers all or a portion of the risks that the insurer may incur .
(ii) Under proportional reinsurance , Under proportional reinsurance the reinsurer receives a prorated share of all policy premiums sold by the insurer .
When claims are made, the reinsurer bears a portion of the losses based on a pre-negotiated percentage. The reinsurer also reimburses the insurer for processing, business acquisition, and writing costs.
(iii) With non-proportional reinsurance , In this type of Reinsurance, the reinsurer is liable if the insurer's losses exceed a specified amount, known as the priority or retention limit. As a result, the reinsurer does not have a proportional share in the insurer's premiums and losses. The priority or retention limit may be based on one type of risk or an entire risk category
(iv) Excess-of-loss reinsurance This is a type of non-proportional coverage in which the reinsurer covers the losses exceeding the insurer's retained limit. This contract is typically applied to catastrophic events, covering the insurer either on a per- occurrence basis or for the cumulative losses within a set time period.
Under risk-attaching reinsurance, all claims established during the effective period are covered, regardless of whether the losses occurred outside the coverage period. No coverage is provide d for claims originating outside the coverage period, even if the losses occurred while the contract was in ef fect.
21. W e also ventured to examine insurance and relevant provisions of law just to arrive at correct conclusion: Definition of insurance : Insurance has also been defined under the same section i.e. section 2 of the Insurance Ordinance, 2000. The relevant clause (xxvii) of section 2 is reproduced hereunder: "(xxvii) "insurance" means the business of entering into and carrying out policies or contracts, by whatever name called, whereby , in consideration of a person promises to make payment to another person contigent upon the happening of an event, specified in the contract, on the happening of which the second named person suffers loss, and includes reinsurance and restocession.
Provided that a contract of life insurance shall be deemed to be a contract of insurance notwithstanding that it may not comply with the definition set out in this clause; TYPES OF INSURANCE Following are few illustrations of the types of Insurance: Property insurance: Property insurance can be traced to the Great Fire of London which in 1666 devoured more than 13,000 houses. A number of attempted fire insurance schemes came to nothing, but in 1681, economist Nicholas Barbon and eleven associates established the first fire insurance Company , under the title "Insurance Office for Houses" at the back of Royal Exchange to insure brick and frame homes. Initially 5,000 homes were insured by his insurance office. An 18th-century fire insurance contract. In the wake of this first successful venture, many similar companies were founded in the following decades. Initia lly, each company employed its own fire department to prevent and minimize the damage from conflagrations on properties insured by them. These would be displayed prominently above the main door of the property and allowed the insurance company to posit ively identify properties that had taken out insurance with them. One such notable company was the Hand in Hand Fire & Life Insurance Society , founded in 1696 at Tom's Cof fee House in St. Martin's Lane in London.
Business Insurance : Lloyd's Coffee House was the first marine insurance company . At the same time, the first insurance schemes for the underwriting of business ventures become available. By the end of the seventeenth century , London's growing importance as a centre for trade was increasing demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house on Tower Street in London. It soon became a popular haunt for ship owners, merchants, and ships' captains, and thereby a reliable source of the latest shipping news.
Life Insurance The first life insurance policies were taken out in the early 18th century . The first company to offer life insurance was the Amicable Society for a Perpetual Assurance Office, founded in London in 1706 by William Talbot and Sir Thomas Allen. The first plan of life insurance was that each member paid a fixed annual payment per share on from one to three shares with consideration to age of the members being twelve to fifty-five. At the .end of the year a portion of the "amicable contribution" was divided amount the wives and children of deceased members and it was a proportion to the amount of shares the heirs owned. Amicable Society started with 2000 members. Amicable Society for a Perpetual Assurance of fice, established in 1706, was the first life insurance company in the world.
The first life table was written by Edmund Hally in 1693, but it was only in the 1750s that the necessary mathematical and statistical tools were in place for development of modern life insurance. James Dodson, a mathematician and actuary , tried to establish a new company that issued premiums aimed at correctly offsetting the risks of long term life assurance policies, after being refused admission to the Amicable Life Assurance Society because of his advanced age. He was unsuccessful in his attempts at procuring a character from the government before his death in 1757. His disciple, Edward Rowe Mores was finally able to establish the Society for Equitable Assurance on Lives and Survisorship in 1762. It was the world's first mutual insurer and it pioneered age based premiums based on mortality rate laying "the framework for scientific insurance practice and development" and "basis of modern life assurance upon which all life assurance schemes were subsequently based."
The upshot of the above discussion is that the reinsurance is to be accorded identical treatment (Taxation) as in the case of insurance Company , thus, the contentions of the learned D.R. is without any merit, hence repelled.
Now, we again put the cart before the horse.
OPINION / FINDINGS OF THE COURT I) DIVIDEND INCOME / PROPERTY INCOME
22. As already mentioned in paragraphs supra, AR discussed and vehemently argued that matter of application of tax payable on dividend income has already been decided in clear terms by the learned Full Bench of Tribunal Lahore reported as 2017 PTD 495 in a case of M/s. Security General Insurance Company v. CIR Zone 111, LTU Lahore , decided on 18.1 1.2015.
23. We have gone through the above referred decision of learned Full Bench of the Tribunal, Lahore. We feel it appropriate to reproduce the operative part of this decision for ready reference, which is as under: Quote "The department's case rests upon the aforesaid amendment in Division III of Part 1 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 oftaxa 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 (if the bench that initially dealt with the taxpayer company's appeals that honourable Supreme Court of Pakistan's judgment PLD 1997 SC 700 = 1997 PTD 1693 is on all fours as regards the present controversy .
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 1 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 1 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 charged 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.
We consider that revenue's officials carrying out the amendment were also mindful of relevance of apex Court's decision and this 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 I, . 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 of the Income Tax Ordinance, 2001 the same has to be treated as business income a fact which was neither dilated upon nor the Honourable Supreme Court was assisted while delivering the judgment reported as PLD 1997 SC 700 = 1997 PTD 1693 handed down in the case of Messrs 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 ".
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 Honourable 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 Honourable 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 Honourable Lahore High Court's judgment reported as 2004 PTD 2180 whereby a basic principle has been reaffirmed viz. a subordinate Court canno t 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 .
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 response. 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.
We also observe that reliance on the case of Messrs 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 off dividend income cannot be denied on the basis of judgment "handed down in Adamjee insurance Company's case. Accordingly , we are at loss to understand as to how this judgment in Adamjee Insurance Company ( 1989 PTD 1090 ) has been cited to support the revenue's stance.
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 T ax Ordinance, 2001. "
24. After perusal of above discussion, we are of the considered opinion that contentions of the DR has already been discussed and rebutted in detail in supra Tribunal's Full bench decision wherein it has been held that decision of the Hon'ble Supreme Court is applicable under the Ordinance as it was applicable under the repealed Ordinance.
25. Moreover , Tribunal has already decided the issue in favour of Appellant in its own case relating to Tax Years 2009 and 2011 through separate appellate orders, by relying on the decisions of Hon'ble Supreme Court and Lahore Tribunal Full bench Judgment reported as 2016 PTD 2695 discussed supra. The recent changes in Rule 6B of 4th-Schedule to the Ordinance also confirms the Appellant's stance that Dividend income and Income from property are taxable at reduced rates in tax year under consideration.
AMENDMENT THROUGH FINANCE ACT, 2016
26. We have further examined the amendment made in Fourth Schedule through Finance Act, 2016 in which Rule- 6B was substituted whereby besides capital on disposal of shares, dividend of listed companies, vouchers of Pakistan Telecommunication Corporation, Modaraba certificate or instruments of redeemable capital and derivative products have also been made Part of income of Insurance Companies to be taxed which shows the expressed intention of the legislature. After the amendment in Rule-6B legislature now intends to tax dividend and capital gains received by the Insurance companies at the corporate tax rate and such intention was not earlier manifested.
27. In view of the above, we have no hesitation to hold that the learned CIR(A) has erred in treating dividend income as well as rental income of the appellant taxpayer as business income chargeable at the rate of 35% and therefore, his decision on this score is not sustainable in law. Hence the impugned orders of the authorities below are vacated and anneal of the Taxpayer/Appellant is allowed.
II) W orkers' W elfare Fund levy
28. The last ground pertains to levy of workers welfare fund. The ACIR had levied federal Workers Welfare Fund
(WWF) of Rs. 10,780,628 in the amended assessment order without confronting the Appellant through show-cause notice or otherwise. Appellant filed appeal before CIR (A) against the amended assessment, who has not adjudicated the issue.
29. The learned AR strongly agitated the levy of WWF imposed by the ACIR and confirmed by the CIR (A). The learned AR argued that the issue was never confronted through show-cause notice or otherwise and the fundamental principle of law that no one should be condemned unheard is violated. Reference is also made by Appellant to the judgment of Hon'ble Supreme Court reported as 10 TAX 49 wherei n it is held that an opportunity of being heard was essential and in its absence in the order of the Commissioner of Income-tax is void.
30. On merit of the case, the learned AR argued that the Appellant is excluded from the levy of WWF by way of clause (vi) of the definition of "industrial establishment" under section 2(f) of WWF Ordinance, whereby WWF is not applicable inter alia on concerns which are owned or established by the Government or which is owned by a corporation whose majority shares are owned by the Government. The learned AR submitted that the Appellant is incorporated under the Companies Ordinance, 1984 as a result of The Pakistan Insurance Corporation (Re- organization) Ordinance, 2000 promulgated by President of Pakistan for converting Pakistan Insurance Corporation into Pakistan Reinsurance Company Limited. The learned AR submitted a copy of Pakistan Insurance Corporation (Re-organization) Ordinance, 2000 and Appellant's Profile and History given in the financial statements, stating that the Appellant is a public sector company under the administrative control of Ministry of Commerce, which is a wing of the federal Government as supporting evidence.
31. The learned AR further submitted that majority shares of the Appellant is owned by the federal Government. AR submitted the relevant page of the financial statements showing Pattern of Shareholding, whereby the Government directly owns 45% shares of the Appellant whilst indirectly owns 24% of the shares through State Life Insurance Corporation of Pakistan, included under the broad category "Insurance Companies (Life)". The shares of State Life Insurance Corporation of Pakistan is wholly owned by the federal Government.
32. Since the Appellant is a corporation established by Government and its majority shares are also owned by the Government, therefore, the Appellant is not liable to WWF levy. Our findings are further fortified by the judgment of Hon'ble Sindh High Court in the case of Pakistan Petroleum Limited (PPL) reported as 2009 PTD 662 wherein it was held that PPL was not liable to WWF levy since majority of its shares were owned by the Government which has been affirmed by Hon'ble Supreme Court . The relevant part of the judgment, as cited by the learned A.R. is reproduced below: "37. When we review section 2(f) (vi) of the Worker's Welfare Funds in the light of charging section 4, we arrive at the conclusion that in the case of the applicant company the industrial establishment is the oil field, which is owned and operated by the applicant company and therefore, since the industrial establishment the income of which is chargeable to Workers Welfare Fund under section 4, the applicant company is owned by government, therefore, it fallrwithin the provision of exclusion -III to clause (6) of section 2(f). "
(Emphasis is ours)
33. Further the changes made in WWF Ordinance through the Finance Act, 2008, whereby clause (iva) was inserted in the above definition so as to expand the scope of WWF , levy to all commercial and service sector entities to which West Pakistan Shops and Establishment Ordinance, 1969 had been declared as unconstitutional by Hon'ble Lahore High Court and Hon Peshawar High Court whilst Hon'ble Supreme Court through recent judgment in the case of East Pakistan Chrome Tannery (Pvt.) Limited reported as PLD 2017 SC 28 has upheld the aforesaid judgments of Hon'ble High Courts.
Case History and subsequent position in respect of WWF
34. The issue has recently been decided by Tribunal in favour of Appellant in its own case relating to Tax Years 2009 and 2011 through separate appellat e orders. Further , the department has itself accepted the Appellant's view in assessment orders with regard to Tax Years 2015 and 2016. The learned DR could not controvert the above reasoning advanced by the AR. Followin g chart (produced by the AR) represents the history of the issue and subsequent position taken.
Tax Year Status 2009 Status Decided in favour of Appellant by Tribunal vide M.A. (Rect.) No. 868/KB/2017 in I.T.A. No. 101/ KB/2016 dated June 16, 2017 2011 Decided in favour of Appellant by Tribunal in I.T.A. No. 102/KB/2016 dated June 12, 2017 2012 Pending in ATIR 2013 Pending in ATIR 2014 Pending in ATIR 2015 Appellant's view accepted by ACIR 2016 Appellant's view accepted by ACIR The relevant parts of the decisions for Tax Years 2009 and 201 1 are reproduced below: M.A. (Rect.) No. 868/KB/2017 in I.T .A. No. 101/KB of 2016 dated June 16, 2017-T ax Year 2009 "After due consideration and in line above quoted pronouncement of higher forums, particularly case reported as 100 TAX 49 in the case of Pakistan Petroleum Limited we tend to agree with the learned AR that WWF is not leviable in the instant case, hence the levy is deleted. "
I.T.A. No. 102/KB of 2016 dated June 12, 2017-T ax Year 201 1 "After due consideration and in line with above quoted pronouncement of higher forums, particularly case reported as 100 TAX 49 in the case of Pakistan Petroleum Limited we tend to agree with the learned AR that WWF is not leviable in the instant case, hence the levy is deleted."
Relevant part of amended assessment order for Tax Year 2015 is also reproduced below: Amended assessment order dated February 3, 2017-T ax Year 2015 "Based on the above, the case relied upon by the taxpayer company reported as 100 TAX 49 in the case of Pakistan Petroleum Limited (PPL) also supports its contention. In the said judgment learned Sindh High Court held that since majority of its shares are owned by the Government, therefore, PPL was not liable to WWF levy and said judgment was later upheld by Supreme Court of Pakistan."
35. Further , WWF issue was not confronted by the ACIR in the show-cause notice for passing amended assessment order in respect of Tax Year 2010. ACIR has thus now accepted that WWF is not leviable on the Appellant, being established and/or owned by Government.
36. In view of the above discussion, we are of the considered opinion that without issuance of show-cause notice, the order is not tenable in law. Hon'ble Supreme Court has clearly held in the case law referred supra that any assessment order without confronting taxpayer is void ab initio. Even on merits, as per decision of Sindh High Court stated supra, WWF is not leviable since the appellant is Government owned entity and specially excluded from the ambit of "industrial establishmen t" Tribunal has already decided the issue in Appellant's favour in its own case relating to Tax Years 2009 and 2011, by relying on the judgment of Hon'bie Sindh High Court in the case of Pakistan Petroleum Limited discussed supra. Even otherwise, the broadening of scope of industrial establishment through Finance Act, 2008 has been held as unconstitutional by Hon'ble Supreme Court in case law discussed supra.
37. For the foregoing reasons, the appeal filed by the taxpayer/ appellant stands disposed of f as indicated above.
38. Before parting with this judgment, we may observe that the tax authorities have misapplied the taxation law on insurance / reinsurance and tried to thwart the settled judgments on the tax treatment in insurance companies.
Government and statutory authorities should be model or ideal litigants and should not put forth frivolous, vexatious and unjust contention to obstruct the part of justice. A judge speaks through his judgment or orders passed by him.
If any party feels aggrieve by the order/judgment passed by a judge the remedy available to such a party is either to challenge the same by way of appea l or any other legally permissible mode. The law insists on finality of judgments and is more concerned with the strengthening of the judicial system. The courts are enjoined upon to perform their duties with the object of strengthening the confidence of the common man in the institution entrusted with the administration of justice. Any effort which weakens the system and shaken the faith of the common man in the justice dispensation system has to be discouraged.