IRFAN SAADA T KHAN, J.----Through this Income Tax Reference (ITR) the following question of law has been referred by the Income Tax Appellate Tribunal (ITAT) through R.A. No.9/KB of 1993- 94 to R.A. No.12/KB of 1993-
94. The assessment years under question are assessment years 1972-73, 1977-78, 1978-79 and 1979-80:- "Whether on the facts of the case the learned Tribunal was justified in confirming the order of the learned CIT(A) by following the decisions reported as 1992 PTD 1177 which is not attracted to the facts of this case and do not justify the reopening of assessment under Section 65 of the Income T ax Ordinance?"
2. Briefly stated, the facts of the case are that the applicant is a non-resident company engaged in insurance business. The original assessment for the year 1972-73 was made on 10.12.1974 under Section 23(3) of the Income Tax Act, 1922 (Repealed Act). Thereafter the department reopened the matter under Section 65 of the Income Tax Ordinance, 1979 (Repealed Ordinance), on the ground that the income tax paid and the taxes deducted at source of the applicant should not have been claimed as an admissible deduction, hence an incorrect relief was obtained by the applicant by charging them under "provision for taxes" . Similar treatments were given in respect of the assessment years 1977-78, 1978-79 and 1979-80, as the assessment for these years were also reopened under Section 65 of the Repealed Ordinance on the same ground. Being aggrieved with the treatment meted out by the Assessing Officer (AO) appeals were preferred before the Commissioner of Income Tax (Appeals)
(CITA), who vide order dated 04.08.1986, pertaining to the assessment year 1972-73, and vide order dated 27.12.1988, pertaining to the assessment years 1977-78, 1978-79 and 1979-80, upheld the treatment of the-AO and dismissed' the appeals filed by the applicant. Being aggrieved with the orders of the CITA, appeals were preferred before the Income Tax Appellate Tribunal (ITAT), who also vide order dated 15.2.1993 dismissed the appeals filed by the applicant. Thereafter , Reference Applications (RA) were filed before the ITAT, who vide order dated 19.12.1993, referred the above mentioned question, under the advisory jurisdiction of this Court.
3. Syed Irtaza Hussain Zaidi, Advocate, has appeared on behalf of the applicant and stated that the ITAT has erred in following the decision given by this Court in the case of Messrs Home Insurance Co. Ltd., Karachi v.
Commissioner of Income Tax, Companies Range III, Karachi (1992 PTD 1177), which was not attracted to the facts of the case. He stated that the taxability of an insurance company is be governed by Fourth Schedule to the Repealed Ordinance and since in the said Schedule there is no bar with regard to allowability of the taxes paid by the company , therefore, the action of the department in reopening the matter and thereafter taxing the amounts of the taxes paid by the company , as inadmissible expenditure, is not in accordance with law. He stated that the decision given in the case of HOME INSURANCE is on a different footing, which has not only been incorrectly applied but incorrectly interpreted by the ITAT. The-learned counsel also read out some portions of the above referred decision to augment his submissions. He stated that Clause 5(a) of the Fourth Schedule to the Repealed Ordinance stood amended in the year 1980 whereas the present matters concern the assessments prior to that amendment, hence the amount of taxes paid by the company has to be allowed as an admissible deduction in the hands of the company and, thus, the department not only erred in reopening the matters but also erred in adding the amounts in the years under discussion, in the hands of the company . He, therefore, stated that the answer to the question may be given in negative i.e. in favour of the applicant/taxpayer and against the respondent/department.
4. Mr. Kafeel Ahrned Abbasi Advocate has appeared on behalf of the respondent/department and stated that the orders of the AO, CITA and ITAT are in accordance with law. While elaborating his view point, he stated that the department was fully justified in reopenin g the matter as the applicant had not disclosed the proper facts to the department and obtained a relief, in respec4 of the taxes actually paid by them and deducted at source as an expenditure by charging them to "provision of taxes", which was not allowable. Thus, the original assessments framed in the above years, according to Mr. Abbasi, were rightly reopened, as income of the applicant chargeable to tax had escaped proper assessment due to the incorrect disclosures made in the accounts of the applicant. He submitted that the department was justified in reopening the matter as the amounts of taxes actually paid by the company was an inadmissible deduction, as per Section 10(4) of the Act which is para-materia to Section 24(a) of the Repealed Ordinance and Section 21 of the Income Tax Ordinance, 2001. Hence, according to Mr. Abbasi the matters were rightly reopened and the amounts of taxes actually paid, being inadmissible deductions, were rightly added to the incomes of the applicant. Mr.Kafeel Abbasi further stated that as per the judgment given in the case of HOME INSURANCE the AO was required to disallow any amount, which was not admissible under the law. He stated that in the present matters the department has disallowed the amounts of taxes actually paid, which were not allowable expenditure and, thus, the CITA and ITAT quite rightly dismissed the appeals filed by the applicant.
He finally stated that the method of reopening the assessments and thereafter charging to tax the amounts of taxes actually paid being inadmissible may be upheld by answering the question raised in the instant ITR in the affirmative. In support of his above contentions the learned counsel has placed reliance on the following decisions:-
1. Commissioner Inland Revenue Zone-I, RTO, Rawalpindi v. Messrs Khan CNG Filling Station, Rawalpindi and others ( 2017 SCMR 1414 )
2. Commissioner of Income-T ax, Central Zone 'A' Karachi v. Messrs Phoenix Assurance Co. LTD. (1991 PTD 1028 )
3. Messrs Habib Insurance Co. Ltd. v . Commissioner of Income-T ax (Central), Karachi ( PLD 1985 SC 109 )
4. Commissioner of Income Tax Central Zone, 'A' Karachi v. Messrs Phoenix Assurance Co. Ltd. (1991 PTD 1028 ) (sic)
5. Tanveer Brother Oil Dealers v . The Commissioner of Income-T ax (1990 PTD 383 ).
5. We have heard both the learned counsel at considerable length and have also perused the record and the decisions relied upon by them.
6. Before proceeding further we would like to discuss hereinbelow the provisions of the law upon which the emphasis have been laid down by the counsel appearing before us.
SECTION 10(4) OF THE REPEALED INCOME T AX ACT, 1922.
"(4) Nothing in clause (ix) or clause (xvi) of subsection (2) shall be deemed to authorise the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains; and nothing in clause (xvi) of subsection (2) shall be deemed to authorise."
SECTION 24(a) OF THE INCOME' T AX ORDINANCE, 1979 (THE REPEALED ORDINANCE).
"24. Deductions not admissible. - Nothing contained in section 23 shall be so construed as to authorise the allowance or deduction of=
(a) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed as a percentage, or otherwise on the basis, of any such profits or gains."
CLAUSE 5 OF THE FOUR TH SCHEDULE T O THE REPEALED INCOME T AX ORDINANCE, 1979.
"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:-
(a) any expenditure or allowance for any reserve or provision for any expenditure, or the amount of any tax deducted at source from any dividends or interest received] which is not deductible in computing the income chargeable under the head "Income from business or profession" shall be excluded; *(Commas and words inserted by Finance Ordinance, 1980)*
(b) any amount either written off or taken to reserve to meet depreciation or loss on the realisation, of investments shall be allowed as a deduction, and any sums taken credit for in the accounts on account of appreciation, or gains on the realization of investments shall be treated as part of the profits and gains; Provided that the Deputy Commissioner is satisfied about the reasonableness of the amount written off or taken to reserve in the accounts to meet depreciation, or loss on the realisation, of investments, as the case may be.
(c) Nothing contained in this rule shall be construed to authorise deduction of any expenditure or allowance or reserve or provision in excess of the limits laid down in the Insurance Act, 19.8 (IV of 1938)".
SECTION 65 OF THE REPEALED ORDINANCE, 1979.
"65. Additional assessment.-(1) If in any year , for any reason, escaped assessment; or
(a) any income chargeable to tax under this Ordinance has escaped assessment; or
(b) the total income of an assessee has been under assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund under this Ordinance; or
(c) the total income of an assessee and the tax payable by him has been assessed or determined under subsection
(1) of section 59 or section 59A or deemed to have been so assessed or determined under subsection (1) of section 59 or section 59A, the Deputy Commissioner may, at any time, subject to the provisions of subsections (2), (3) and (4), issue a notice to the assessee containing all or any of the requirements of a notice under section 56 and may proceed to assess or determine, by an order in writing, the total income of the assessee or the tax payable by him, as the case may be, and all the provisions of this Ordinance shall, so far as may be, apply accordingly: Provided that the tax shall be charged at the rate or rates applicable to the assessment year for which the assessment is made.
(2) no proceedings under subsection (1) shall be initiated unless definite information has come into the possession of the Deputy Commissioner and he has obtained the previous approval of the Inspecting Additional Commissioner of Income T ax in writing to do so Explanation.-As used in this subsection, "definite information" includes information in respect of sales and purchases, made by the assessee, of any goods, and any information regarding acquisition, possession or transfer , by the assessee, of any money , asset or valuable article, or any investment made or expenditure incurred by him.
(3) Notice under subsection (1), in respect of any income year, may be issued within ten years from the end of the assessment year in which the total income of the said income year was first assessable.
Provided that, where the said notice is issued on or after the first day of July, 1987, this subsection shall have effect as if for the words "ten years" the words "five years" were substituted.
(3A) Where a notice under subsection (1) is issued on or matter the first day of July, 1982, no order under the said subsection shall be made after the expiration of one year from the end of the financial year in which such notice was served."
SECTION 21(a) OF THE INCOME TAX ORDINANCE 2001.
"21. Deductions not allowed -- Except as otherwise provided in this Ordinance, no deduction shall be allowed in computing the income of a person under the head "Income from Business" for--
(a) any cess, rate or tax paid or payable by the person in Pakistan or a foreign country that is levied on the profits or gains of the business or assessed as a percentage or otherwise on the basis of such profits or gains."
7. From the reading of above provisions of the law it is clear that neither in the Act nor in the Repealed Ordinance or the Ordinance, 2001 there was any stipulation with regard to allowing any sum paid on account of tax levied on the profits and gains of any business. In the instant matters the assessments were reopened under Section 65 of the Repealed Ordinance on the ground that the amounts of taxes actually paid by the applicant, claimed as an expenditure was not a proper disclosure of income by the applicant. As per the department, due to such incorrect disclosure by the applicant their profits and gains chargeable to income tax were either under assessed or assessed at too low a rate or have been subject to excessive relief claimed in the computation of the income disclosed by them, which was not permissible under the law. It is a settled propos ition of law that the provision of Section 65 of the Repealed Ordinance is attracted when the income of an assessee has either been under assessed or assessed too low a rate or that the income has been the subject to excessive relief.
8. Perusal of the record reveals that the original assessments of the corporation/company were assessed at an income, which was not the correct income required to be disclosed by the applicant and assessed by the department. Therefore, subsequently , the matters were reopened, after fulfilling the legal and codal formalities required in this behalf, when it transpired to the department that the applicant has incorrectly claimed the benefit of the taxes actually paid including that deducted at source, which was not allowable under the law. Before us Syed Irtaza Hussain Zaidi, learned counsel for the applicant, has argued the matter that the amounts of taxes actually paid including that deducted at source by the applicant, claimed as deduction, were allowable expenditures and has emphasized that the matters were incorrectly reopened by the department under Section 65 of the Repealed Ordinance.
9. We, however , are of the view, that if the income of the assessee has been under assessed or has escaped the assessment or has incorrectly been determined by the AO, the department has the authority under Section 65 of the Ordinance, subject to fulfillment of certain legal formalities prescribed in this behalf under the law, matter could be reopened to determine the income actually required to be disclosed by the said taxpayer and to pay the correct amounts of taxes actually payable by such person by reopening the previously completed assessments. Hence, in our view, the assessments were rightly reopened under Section 65 of the Repealed Ordinance, as the incomes of those assessment years were either under assessed or assessed at too low a rate or the amounts which were not allowable under the law, being the amount of taxes actually paid by the asses see including that deducted at source, have incorrectly been allowed to the company as expenditures meaning thereby that the taxpayer has got incorrect relief, of which they were not entitled to.
10. Mr. Zaidi has submitted that since the words "or any reserve or provision for any expenditure, or the amount of any tax deducted at source from any dividends or interest received" were added vide Finance Ordinance, 1980, therefore, the legal position with regard to the law prior to Finance Ordinance, 1980 was different from that of after the said insertion. However , it may be noted that, though, the above referred words were added vide Finance Ordinance, 1980 but a reading of Sections 10(4) of the repealed Act and 24(a) of the repealed Ordinance (the law remaining the same as per Section 21 of the Ordinance, 2001) the amount of taxes paid and deducted at source were never considered by the law makers to be an admissible and allowable deduction. It has categorically been observed by the AO, CITA, and ITAT that the taxes actually paid including the taxes deducted at source could not legally be claimed under the head "provision for taxes" . Though, by virtue of the insertion of the above words vide Finance Ordinance, 1980, any reserve or provision for any amount of expenditure in respect of the amount deducted at source from any dividends or interest received was categorically termed to be inadmissible deduction but even prior to the insertion of these words while computing the profits and gains of any insurance business the amount of taxes actually paid or deducted at source were not admissible as a deduction while computing the profits and gains of an insurance company and the AO was legally required to disallow any claim/amount, which was not allowable and admissible under the law, as is evident from the wordings of Section 10(4) of the repealed Act and Section 24 of the repealed Ordinance. In the decision of HOME INSURANCE a Division Bench of this Court has also emphasized this aspect that AO is required to disallow any amount, which is not deductible udder the law .
11. We, therefore, under the circumstan ces do not find any merit in the instant ITR and, therefore, answer the question in the af firmative after re-framing the same as under:- "Whether under the facts and circumstanc es of the case the Tribunal was justified in confirming the order of CITA who rightly followed the decision reported as 1992 PTD 1177 and was justified in confirming the reope ning of the assessment made under Section 65 of the Income T ax Ordinance, 1979?"
12. In the light of the above observations , the present ITR stands decided in favou r of the respondent/department and against the applicant/taxpayer .
13. Let a copy of this order be sent to the Registrar , ITAT doing the needful in accordance with law .