IRFAN SAADA T KHAN, J.----This instant Income tax Reference Application (ITRA) was filed for the Advisory Jurisdiction of this Court to answer the following question of law raised in the instant application:- "Whether on the facts and in the circumstances of the case the learned Tribunal was justified to delete addition made under Section 108 of Income Tax Ordinance, 2001, by placing reliance on the decision of Honourable Sindh High Court reported as 2011 PTD 2042 based upon proration of expenses under subservient Section 67 of the Income T ax Ordinance, 2001 ?"
2. Briefly stated the facts of the case are that the taxpayer is a non-life insurance company . Return of taxable income for the tax year 2010 was e-filed by declaring an income of Rs.230,024,137/-. The said return was treated as an Assessment Order . Thereafter the department came to the conclusion that since the assessment was erroneous and prejudicial to the interest of revenue, the same was then amended under Section 122(5A) of the Income Tax Ordinance, 2001 (hereinafter referred to as the Ordinance). The Asses sing Authority (AA) while making the assessment found out that the assesse has given an undue advantage to its associated company , namely , New Jubilee Life Insurance Company Limited (NJLICL), which is liable to be taxed under Section 108 of the Ordinance.
The AA confronted the taxpayer for making an addition of Rs.7,68,000/- to its income. The assesse filed its reply but the department did not accept the same and added the said amount to the income of the applicant, vide order under Section 122(5A) of the Ordinance dated 31.12.2010. Being aggrieved with the said order an appeal thereafter was filed before the Commissioner Inland Revenue (Appeals-I) Karachi (CIRA), who decided the same against the taxpayer and in favour of the department by confirming the addition made in this behalf. Being aggrieved with the said treatment meted out by the CIRA the assesse preferred an appeal before the Appellate Tribunal Inland Revenue of Pakistan (ATIR) bearing I.T.A. No.564/KB-201 1, who heard the matter on 15.6.2012 and allowed the same vide order dated 18.9.2012 by deleting the addition made by the AA and affirmed by the CIRA. It was then the present ITRA has been filed by raising certain questions of law but only the above referred question of law was agitated, whereas the rest of the questions raised by the department were not pressed.
3. Mr. Kafeel Ahmed Abbasi Advocate has appeared on behalf of the department and stated that the ATIR was not justified in deleting the addition made by the department and has incorrectly placed reliance on the decision given in the case of Commissioner (Legal) Inland Revenue v. Messrs EFU General Insurance Ltd. (2011 PTD 2042 )
(authored by one of us, namely , Irfan Saadat Khan, J.). He stated that the issue decided by this Court is different from the issue raised in the instant matter . According to him the provisions of Section 26A read with 4th Schedule to the Income Tax Ordinance, 1979 (now repealed) were distinguishable from the provisions of Section 99 read with 4th Schedule of the Ordinance. The learned counsel also read out the provisions of Section 108 of the Ordinance and stated that since the said section does not start either with any non-obstante clause or with the term subject to this Ordinance, which is very much appearing in Section 67 of the Ordinance, hence this section cannot be termed to be not applicable to the taxpayer , henc e according to him for all practical purpo ses the provision of Section 108 of the Ordinance is to be considered as fully applicable to the insurance companies also and, therefore, the same has to be applied to the case of the taxpayer . He further stated that Section 108 of the Ordinance specifically talks about giving advantage to the associate concern and if any taxpayer has given any undue advantage to its associate concern or undertaking the provision of Section 108 of the Ordinance; irrespective whether its a normal business concern or an insurance company would be applied.
4. Mr. Abbasi stated that since in the instant matter an undue advantage has been given by the present respondent to its associate concern/undertaking, therefore, the addition made by the was fully justified and the ATIR was, firstly , not justified in deleting the said addition and, secondly , placing incorrect reliance on the above referred judgment of the High Court, which according to him is not only distinguishable but also on different aspect and factual position.
According to him the Income Tax Department has the authority under Rule 5A of the 4th Schedule to make certain adjustments, which they consider to be reasonable. He stated that, no doubt, the decision of the High Court explains about Section 67 read with 4th Schedule of the Ordinance but according to him the law has substantially changed and if the 4th Schedule of the repealed Ordinance, 1979 is compared with the 4th Schedule of the new Ordinance, 2001 the difference could easily be noted. He stated that in computing the income of insurance companies the key words used in the 4th Schedule "subject to following adjustment" are of prime, importance, which have to be taken into consideration. He, therefore, has finally prayed that the answer to the question, raised in the instant ITRA may be given in negative i.e. in favour of the department and against the taxpayer .
5. Mr. Arshad Siraj Advocate, on the other hand, has appeared on behalf of the respondent/taxpayer and submitted that the department has incorrectly placed reliance on Section 108 of the Ordinance by totaling ignoring Section 99 of the Ordinance. He then read out the said provision and stated that the assessme nt of an insurance business has to be made as per the rules contained in the 4th Schedule to the Ordinance and the provision of Section 108 of the Ordinance could not be applied in the case of an insurance business. He stated that Section 99 of the Ordinance clearly stipulates that the profits and gains of an insurance business would be computed in accordance with the rules of 4th Schedule meaning thereby that the said provision being special has to be applied in the case of insurance business and the other provisions are ousted in the case of an insurance business. He further added that exactly similar situation came-up for hearing before this Court in the above referred judgment wherein it was categorically observed that in the case of insurance companies the profits and gains have to be computed in accordance with the rules of 4th Schedule only. Mr. Arshad also read out various paragraphs of the said judgment to substantiate his view point.
6. Mr. Arshad further submitted that the view of the department that some undue advantage has been given to the associate concern is also incorrect, he invited our attention to Section 85 of the Ordinance to substantiate that, firstly; no advantage has been given to the associate concern as an investment has been made in the share capital of the associate company , which could not be considered to be giving an advantage to the associate concern/company within the meaning of the said Section. He next submitted that the computation of income and gains of the insurance companies, being special provision, for all practical purposes has to be given a different treatment and the income has to be assessed on the basis of the rules provided under the 4th Schedule. Mr. Arshad then Submitted that some amendments have been made with regar d to taxability of the banking companies, which are also special provisions of the law, and by virtue of those amendments made under rules of the 7th Schedule, which deals with the taxability of banking companies, no corresponding amendment has been made in the 4th Schedule pertaining to the insurance business meaning thereby that the law framers did not want to disturb the taxability method and process of the insurance companies, which has to be strictly as per the rules of the 4th Schedule to the Ordinance. He again invited our attention to certain paragraphs of the decision referred above to substantiate his claim with regard to the taxability of the insurance companies, which has to be made, according to him, as per the 4th Schedu le alone and being a special provision of law the provisions relating to ordinary business cannot be applied to the insurance business. He finally submitted that the answer to the question raised in the instant application may, therefore, be given in affirmative i.e. in favour of the taxpayer and against the department.
7. We have heard both the learned counsel at considerable length and have perused the record and the decision relied upon by them.
8. Before proceeding any further we deem it expedient to quote below the relevant provisions of the law and a paragraph of the above said decision:- "99. Special provisions relating to insurance business.--- The profits and gains of any insurance business shall be computed in accordance with the rules in the Fourth Schedule."
"108. Transactions between associates .---(1) The Commissioner may, in respect of any transaction between persons who are associates, distribute, apportion or allocate income, deductions or tax credits between the persons as is necessary to reflect the income that the persons would have realised in an arm's length transaction.
(2) In making any adjustment under subsection (1), the Commissioner may determined the source of income and the nature of any payment or loss as revenue, capital or otherwise.
(3) Every taxpayer who has entered into a transaction with its associate shall:
(a) maintain a master file and a local file containing documents and information as may be prescribed;
(b) Keep maintain and furnish to the Board prescribed country-by-country report, where applicable;
(c) keep and maintain any other information and document in respect of transaction with its associate as may be prescribed; and
(d) keep the files, documents, informatio n and reports specified in clauses (a) to (c) for the period as may be prescribed.
(4) A taxpayer who has entered into a transaction with its associate shall furnish, within thirty days the documents and information to be kept and maintained under clauses (a), (c) or (d) of subsection (3) if required by the Commissioner in the course of any proceedings under this Ordinance.
(5) The Commissioner may, by an order in writing, grant the taxpayer an extension of time for furnishing the documents and information under subsection (4), if the taxpayer applies in writing to the Commissioner for an extension of time to furnish the said documents or information: Provided that the Commissioner shall not grant an extension of more than forty-five days, when such information or documents were required to be furnished under subsection (4), unless there are exceptional circumstances justifying a longer extension of time.
Extract from the judgment of the High Court: "20 The Fourth Schedule being special provision overrides the other provision and the profits and gains of Insurance Company are to be made i:z accordance with the Fourth Schedule only and as there is no mention of section 67 of the Ordinance in the Fourth Schedule the provision of section 67 could not be applied so far as working out the profits and gains of an Insurance Company under the Fourth Schedule."
9. The Income Tax Ordinance deals with the taxability of the incomes earned by certain persons. It deals with the taxability in a normal manner and the taxability in a specialized manner . The income earned in a normal course of business are usually made as per the normal methods and modes, as provided under the Ordinance, whereas, in respect of certain businesses the taxabil ity, being specialized, has been provided in the Schedules. For instance computation of profits and gains of an insurance business are dealt with in the 4th Schedule. The profits and gains of the companies engaged in exploration and prediction of petrol and extraction of mineral deposits in 5th Schedule. Banking in 7th Schedule, etc.
10. In the present matter we are saddled with the responsibility to consider the issue of determination of the profits and gains of an insurance company . Section 99 of the Ordinance, as reproduced above, clearly stipulates that the profits and gains of an insurance business, being special in nature, have to be made in accordance with the rules of the 4th Schedule. Perusal of 4th Schedule reveals that the profits and gains of an insurance business are to be dealt with in accordance with the rules provided therein. The purpose of Section 99 of the Ordinance and 4th Schedule would be frustrated, if the profits and gains of an insurance business are computed in an ordinary manner i.e. like an ordinary business falling under the Ordinance.
11. Now if the facts of the instant case are examined it would reveal that the AA while computing the profits and gains of an insurance business came to the conclusion that since the present respondent, by dealing with the associate concern, has given some undue advantage to NJLICL, hence, that undue advantage after computation was considered to be taxable under the provision of Section 108 of the Ordinance, reproduced supra. If the case is examined on factual aspects it would reveal that the present respondent had invested in the capital of its associate concern, namely , NJLICL, 6.43 percent of its total capital. The associated concern deals in life insurance business whereas the assesse deals in non-life. We agree with the contention of Mr. Arashd Siraj that the two companies could not be considered to be associates of each other , if Clauses (e) and (f) of subsection (3) of Section 85 of the Ordinance are considered, which stipulate as under:- "(e) a shareholder in a company and the company , where the shareholder , either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons-- G' Fifty per cent or more of the voting power in the company;
(ii) Fifty percent or more of the rights to dividends; or
(iii) Fifty per cent or more of the rights to capital; and
(f) two companies, where a person, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons--
(I) fifty per cent or more of the voting power in both companies;
(ii) fifty percent or more of the rights to dividends in both companies; or
(iii) fifty per cent or more of the rights to capital in both companies."
12. It may be noted that the investment made by the respondent was in the capit al of NJLICL, hence investing in share capital whether would amount to an investment or giving undue advantage to the associated concern? In our view, investing in share capital could be an investment but how could it be termed to be giving an advantage to the associate concern had remained unexplained on the part of the department. It may be noted that when Mr. Arshad Siraj raised the objection with regard to the investment in the NJLICL, the same was not controverted by Mr. Kafeel Abbasi, hence on factual aspect the applicability of section 108 of the Ordinance appears to be misconceived.
13. Now if the case is examined on a legal plain. It may be noted that 4th Schedule, being special provision, overrides the other provisions and the profits and gains of an insurance company have to be computed in accordance with the rule of this schedule, alone. In our view the question raised in the instant matter stands squarely covered by the decision noted Supra. However , if the arguments of Mr. Kafeel Abbasi are considered that the provision of Section 67 of the Ordina nce, starts with the narration "subject to this Ordinance", which term is subservient to the other provisions of the Ordinance, as detailed in the above referred judgment, whereas Section 108 of the ordinance being an independent section has to be applied independently in case of all business concerns. Before proceeding further it may be noted that taxability of the profits and gains of an insurance company are governed under Section 99 read with 4th Schedule of the Ordinance, which are special provisions, and ousts the ordinary provisions of the law. Thus, Section 108 of the Ordinance, if read with rules of 4th Schedule, as pointed out by Mr. Abbasi, would not become applicable on insurance business as neither Section 99 of the Ordinance nor Rule 5 of the 4th Schedu le permits such exercise, being special law, otherwise the law framers could have inserted a proviso in. Rule 5 that the provision of Section 108 would be applicable to the insurance companies as well and thus, would have no bearing whatsoever on the taxability of the profits and gains of an insurance business.
14. It is a settled proposition of law that while interpretation taxing statues nothing is to be read in nothing is to be applied. Reference may be made to the decision given in the case of Commissioner of Income Tax v. Soli M.
Cowasje (1985 PTD 401). The whole purpose of computation of profits and gains in the case of special provision would be, as stated above, frustrated if they are treated at par with normal busine ss income tax computation and assessment.
15. It may further be noted that in the 7th Schedule, which deals with the computation of profits and gains of the banking company , Rule 9 clearly specifies that the provisions of Ordinance not specifically dealt with shall apply mutatis mutandis to a banking company . However , the said rule is missing in the 4th Schedule clearly stipulating that while computing the profits and gains of an insurance company only the rules as provided under the 4th Schedule would be applicable in their strict sense. Interestingly , this aspect was also dealt with in the judgment noted above vide paragraph No.20. Had the intention of the legislature to apply the other provisions of law to the insurance companies some amendment would have been made in the 4th Schedule, meaning thereby that the law framers were fully conscious of the fact that the profits and gains of an insurance business have to be computed under 4th Schedule alone and it has to be given a specialized treatment. It may further be noted that as per Rule 5 of the 4th Schedule certain adjustments in the computation of income has been provided with regard to taxability of an insurance business, which alone could be considered and applied and not the other provisions of the Ordinance dealing with normal business incomes and their computations. Hence, the term "subject to adjustment" relates to adjustment as provided under rules of the 4th Schedule only and does not speak of other adjustments being made in the case of other normal/ordinary businesses. Thus, in our view, the jurisdiction of assessment/adjustment by the department is restricted to the extent as provided under the relevant rules of 4th Schedule only .
16. In view of what has been discussed above, we are of the view that the ATIR was fully justified to delete the addition made under Section 108 of the Ordinance by the AA by correctly interpreting the said provision of the law and the judgment noted above.
17. We, therefore, answer the questi on raised in the instant ITRA in affirmative i.e. in favour of the taxpayer/respondent and against the department/applicant. Let a copy of this order be sent to the Registrar ATIR for information and necessary action.