MR. NASIR MAHMUD (JUDICIAL MEMBER). (1). M/s. Adamjee Insurance Limited "the taxpayer/appellant" assails the impugned appellate order dated April 17, 2023, passed by the learned Commissioner Inland Revenue, Appeals-I, Lahore whereby the imposition of super tax by the Deputy Commissioner Inland Revenue, Unit-01, Audit-I, LTO, Lahore ("DCIR/assessing officer"), through order dated January 19, 2023, under section 4C of the Ordinance was confirmed in the case of the appellant for tax year 2022.
2. The succinct fact of the case are that the appellant is a listed public company engaged in the business of general insurance. The `profits and gains' of the appellant are computed in terms of the special provisions contained in the Fourth Schedule read with section 99 of the Ordinance. It is a well-settled and well-accepted position in the case of insurance companies that the provisions of the Fourth Schedule to the Ordinance are self-contained in so far as computation of profits and gains and tax liability thereon is concerned. Therefore, when super tax was imposed vide Finance Act, 2022, by enactment of section 4C of the Income Tax Ordinance, 2001 "Ordinance" a corresponding amendment was also made in the Fourth Schedule to the Ordinance by insertion of Rule (6DA).
3. The department after enactment of section 4C implemented the section 4C from the tax year 2022. However, it is the case of the appellant that there is a stark difference in the applicability timeframe of both the provisions i.e., ['Section 4C and Rule 6(DA)'] as section 4C of the Ordinance is applicable from tax year 2022 and onwards whereas Rule 6(DA) makes it applicable in the case of insurance companies from tax year 2022 onwards. It is the case of the taxpayer that, the absence of word "and" in Rule 6(DA) of the Fourth Schedule makes it manifestly clear that super tax is leviable on insurance companies from tax year 2023 thereby excluding tax year 2022 from its scope. Based on this appreciation of law, the appellant did not admit super tax while filing income tax return for tax year 2022. However, the learned assessing officer, not agreeing with this assertion and the treatment, went on to impose super tax on the appellant vide impugned assessment order dated January 19, 2023, which action was later on also confirmed by the learned first appellate authority i.e. Commissioner Inland revenue (Appeals) through appellate order dated April 17, 2023.
Having grievance against the order dated April 17, 2023, the appellant preferred second appeal before this Tribunal on facts and grounds enumerated in the grounds of appeal.
4. The learned AR appearing on behalf of the appellant argued that the levying of Super Tax u/s 4C of the Ordinance without appreciating and ignoring the explicit language of Rule 6(DA) of the Fourth Schedule to the Ordinance is not legally sustainable and Section 4C is not applicable for the tax year 2022 in cases of the Insurance Company. The learned AR in order to lend credence to this argument sought reliance on language of Section 4, 4C, 9, 99 and, Fourth Schedule of the Ordinance. The learned AR further contended that the interpretation made by the Department to Rule 6 (DA) is not in consonances with law as it is settled law that Schedule is a part of the main statute. The learned AR averred that no redundancy could lawfully be attributed to the legislation and Rule 6(DA) is a legislation for all intent and purposes and cannot be treated to be redundant and ineffective qua Insurance Company. The learned AR further argued that it is trite law laid down by the Superior Courts that where two interpretations are possible, the one which favours the subject should be adopted. The learned AR in order to lend support to his arguments relied on 1997 PTD 1693(SC); 2003 PTD 1321 (HC); 2001 PTD 2042 (HC); 2022 PTD 618 (HC); PLD 1975 Lah 65(HC) and judgement rendered by the honourable Sindh High Court dated 22-12-2022 passed in CPD 5842 of 2022 "Shell Pakistan Ltd Vs. Federation of Pakistan" wherein the honorable Sindh High Court has held that "Section 4C of the Income Tax Ordinance, 2001 is applicable from the tax year 2023.
5. The learned AR lastly averred that in the subsistence of the referred judgement passed by the Sindh High Court and in view of explicit language of Rule 6(DA) of the Fourth Schedule of Ordinance the order passed by the Officers below merits to be annulled.
6. The learned DR and learned ACIR present in court opposed the appeal and argued that the order passed by the Officers below are in consonance with law and merits to be sustained. It was vehemently opposed by the learned ACIR that the instant appeal merits to be rejected as no infraction of law is established on record. The learned DR averred that the language of 4C is express and Rule 6(DA) can not in any manner overrides the language of section 4C hence levy of Super Tax for tax year 2022 is lawful and merits to be sustained. The learned ACIR also placed on record written arguments which are replicated as under; The Appellant has placed a plethora of laws, judgments and writings on jurisprudence in support of its arguments to substantiate the claim that schedule to a statute is not subservient to the main statute i.e., Fourth Schedule to the Income Tax Ordinance, 2001 holds equal value to the main Ordinance itself. The Fourth Schedule specifies rules for computation of Profits and Gains of Insurance Business. These rules derives strength from Section 99 of the ordinance which states that "the profits and gains of any insurance business shall be computed in accordance with the rules in the fourth schedule" The scope of rules and section 99 is limited to the extent of computation of profits and gains of Insurance Business. This is in stark contrast to the enabling provisions of Seventh Schedule, Section 100A, which clearly mandates the schedule with computation of tax payable in addition to the computation of profits and gains by stating that "Subject to sub-section (2), the income, profits and gains of any banking company as defined in clause (7) of section 2 and tax payable thereon shall be computed in accordance with the rules in the seventh Schedule".
Charging of Super Tax on high earning persons under section 4C I provided in sub-section (1) of that section stating that "A super tax shall be imposed for tax year 2022 and onwards at the rates specified in Division II of part I of the First Schedule, on income of every person".
It is an established maxim that in case of conflict between the substantive law and rules, the substantive law shall prevail. Hence, a conflict between charging section 4C and Rule 6(DA) of the Fourth Schedule should be decided in favour of the charging section, which is 4C.
Further, the charging section has specifically excluded from chargeability for tax year 2022 where the intention of legislation was not to charge 4C for the Tax Year 2022. For example, proviso to sub- section (1) excludes banking companies for the Tax YEAR 2022.
The intention of legislature of giving varying treatments/ mandates to the two schedules is evident from the above. Where the intention of the legislature was to provide for taxation within the schedule, it has clearly enacted that into law. It is also pertinent to note that Section 100A was inserted in the Ordinance subsequent to the introduction of Section 99. If the intention of the legislature was to grant tax computation within the scope of words "profit and gains", as given in section 99, then there was no need to add the varied version in Section 100A where the words "tax payable thereon" appears. Consequently, it is clear that the purpose of insertion of Rule 6DA in the Fourth Schedule was to provide for the method of calculation of profits and gains for imposition of Super Tax, the charging of which is still under Section 4C.
The appellant has given the example of Rule 6B of the Fourth Schedule to advance the argument that it provides for the taxability of dividend and capital gain income, implying the meaning that the scope of the Fourth Schedule extends to taxability in addition to the computation of profits and gains. The argument is flawed, to say the least Rule 6B is reproduced for ready reference.
"In computing income under this Schedule there shall be included capital gains on disposal of shares and dividend of listed companies vouchers of Pakistan Telecommunication corporation, modarba certificate or instruments of redeemable capital and derivative products and shall be taxed at the rates specified in Division 11 of Part I of First Schedule"
Bare reading of the rule with section 4, Section 18(1)(a) and Section 99 of the Ordinance makes it abundantly clear that the rule has been inserted for the calculation of profits and gains only. The fact that the income calculated under the schedule is to be taxed under Division II of Part I of First Schedule is already obvious. This is so because the rest of the income being computed under the Fourth Schedule is also taxable under the same Division under Section 4 of the Ordinance. This part of the rule has been added only to bring clarity in no way is the charging or taxability clause for insurance companies.
Similarly, the computation on the profits and gains of insurance companies for the purposes of Section 4C has been provided for through Rule 6DA and the remaining part was only to bring clarity and by no stretch of imagination constitutes the taxability clause. The profit and gains so calculated are to be imposed super tax under section 4C and that alone. The Fourth Schedule refers back to Section 4C and not under the Fourth Schedule and purpose of Rule 6DA is removal of any doubts. The time period of applicability provided in the Schedule is therefore immaterial when the same has been provided for the charging section i.e., Section 4C.
Parallel Cases having legislative similarities-Banking and Oil Exploration Without prejudice to the argument that the Fourth Schedule relates only to computation of profits and gains Rule 6DA cannot be deemed a charging provision, in the instant case the issue is not regarding which part of the Ordinance will take precedence but regarding the intent of the legislature while imposing super tax under Section 4C.
It is important to understand the provision of the law in their specific context as decided in the several judgments of the superior courts. To understand the issue at hand, the imposition of super tax under section 4C and its various manifestations in the Income Tax Ordinance, 2001 must be investigated in detail. In addition to imposition of Super Tax through Section 4C of the Ordinance, the legislature also introduced enabling provisions regarding super tax in the Schedule containing the taxation rules for various sectors. The rule in question was verbatim inserted in Fourth Fifth and Seventh Schedule relating to taxation of Insurance, Companies, Petroleum Exploration and Production Companies and Banking Companies respectively; "The provisions of section 4C shall apply to the taxpayer under this Schedule and shall be taxed at the rates specified in Division IIB of Part I of the First Schedule from tax year 2022 onwards"
The appellant has placed reliance on the words "Tax Year 2022 onwards" in the Fourth Schedule to advance its case that the schedule being for the specific sector overrides the words "Tax Year 2022 and onwards" provided in the main statute's Section 4C. Since an inconsistency has occurred and the Section 4C read with Division IIB of Part I of First Schedule and Rule 6DA of the Fourth Schedule, the issue at hand can only be reconciled by taking into account other parallel instances where provisions relating to sector have been made part of the Ordinance, 2001.
Regarding banking companies, along with inserting the above-mentioned rule in the Seventh Schedule (Rule 7CA) the sector was specifically excluded by the following word through proviso to sub section (1) of Section 4C.
"Provided that this section shall not apply to banking company for the tax year 2022"
It makes it quite evident that where the intention of the legislature was to exclude a sector from the purview of Super Tax for the tax year 2022, it clearly manifested it through insertion of the above proviso in the main Section although, unlike Fourth Schedule for Insurance companies, seventh Schedule has been legislated to provide for the taxation of the banking sector and not just for the computation of profits and gains. It makes it abundantly clear that, while the same Rule has been inserted in Fourth, Fifth and Seventh Schedule vide Finance Act, 2022, if the intention of the legislature was to exclude any sector from the purview of the Section 4C for the Tax Year 2022 it could have been directly excluded in the same proviso is reproduced above.
On the other hand, the other sector bearing legislative similarity is that of Oil Exploration and Production which is dealt under Fifth Schedule to the Ordinance. The intention of the legislature in the expression "Tax Year 2022 onwards" can be comprehended from similar language in Rule 4AB of the Fifth Schedule which is as under; "The provision of Section 4C shall apply to the taxpayers under this Schedule and shall be taxed at the rates specified in Division IIB of Part IIB of Part I of the First Schedule from tax year 2022 onwards."
However, the first proviso in Division IIB of Part I of the Schedule specifies rates of 10% for petroleum exploration and production in the following words; "Provided that for the tax year 2022 for persons engaged whether partly or wholly in the business of airlines, automobiles, beverages, cement, chemicals, cigarette and tobacco, fertilizer, iron and steel, LNG Terminal, oil marketing, oil refining, petroleum and gas exploration and production, pharmaceutical, sugar and textiles the rates of tax shall be 10% where the income exceeds Rs. 300 million.
The rate of 10% for the tax year 2022, as stated in the proviso, indicates that the expression "2022 onwards", as appearing in the rules, was meant for inclusion of tax year 2022. It should clear any doubts that the intention of the legislature for inserting the rule in respective Schedules was to exclude the sector from the purview of Super Tax for tax year 2022, rather the main statute would have been used if any such purpose was intended, as seen in the case of banking Companies.
7. We have heard the parties at length and have perused the record. The impugned order has been perused in juxta position to the arguments advanced by the parties. From the divergent arguments following issues have arisen for determination and are discussed as follows; A. First issue whether Rule 6(DA) of the Fourth Schedule is inoperative for tax year 2022:
8. It is the case of the taxpayer that the impugned orders are founded on a plinth that it is section 4C of the Ordinance (and not Rule 6(DA) of the Fourth Schedule) which creates a charge of Super Tax in the case of insurance companies for tax year 2022. Therefore, as the assessing officer notes in the impugned order, the existence of Rule 6(DA) in the Fourth Schedule to the Ordinance is immaterial[1] and Super tax, under section 4C of the Ordinance, remains applicable in the case of the appellant company for tax year 2022 and onwards.
9. This rational on the face of it implies an admission on the part of the department that Rule 6(DA) of the Fourth Schedule to the Ordinance becomes operative from tax year 2023. Had it been the case of the department that there is no difference in the intent and effect of Rule 6(DA) and that of section 4C, the department would not have taken so much pains to construct the case that super tax shall be charged on insurance companies in terms of section 4C of the Ordinance.
10. This implied admission by the department narrows down the case to the moot question that whether it is the Fourth Schedule to the Ordinance, read with section 99, which would determine the charge of super tax on insurance companies, or it is section 4C which being a special legislation governs the charge, collection, and recovery mechanism of super tax.
B. Second issue whether Fourth Schedule lays down the rules relating to computation of 'profits and gains' as well as 'tax charge' in the case of insurance companies:
11. It is the case of the Revenue/assessing officer that unlike Section 100A (banking companies), Section 99 of the Ordinance lays down that the provisions of the Fourth Schedule shall apply for the purposes of computation of "profits and gains" of insurance business. From this comparison, the learned assessing officer draws inference that for the purposes of computation of "tax liability" of insurance companies, the provisions of the main Ordinance shall always apply.
12. This is a contradictory position on department's part which is negated by Rule 6B of the Fourth Schedule to the Ordinance. The said rule was inserted vide Finance Act, 2016 and it provides for taxability of dividend income and capital gains based on the rates specified in Division II of Part I of the First Schedule to the Ordinance (i.e., corporate rate of tax). Admittedly, there is no charging provision in the main Ordinance which provides for such enhanced taxation in the case of dividend and capital gains earned by insurance companies. Furthermore, it is the case of the taxpayer that it can also be verified from department's records that the appellant company has been offering tax on dividend and capital gains at the corporate rate ever since the introduction of this rule.
13. Now, if we go by the logic being proffered by the assessing officer (i.e., for charge of tax, main Ordinance will apply on the insurance companies), it will render Rule 6B, along with Rule 6DA, redundant leading to the conclusion that dividend and capital gains of insurance companies should also be taxed in accordance with the generally applicable scheme of reduced taxation.
Surely, this cannot be the intention of the legislature and the same cannot be read into it.
14. This leads to the inescapable, and logical, conclusion that the Fourth Schedule contains provisions for both the computation of 'profits and gains', and tax charge thereon as well. There has been a consistent stream of judicial pronouncements[2] that the Fourth Schedule is a special legislation and until and unless the schedule itself makes a provision from the main Ordinance applicable on the insurance companies, the said provision of the main Ordinance will not apply. It is settled law that while interpreting a provision the court only interpret the law and cannot legislate. If a provision of law is misused and subjected to the abuse of process of law, it is for the legislature to amend, modify or repeal it, if deemed necessary. Legislative causes omissus cannot be supported by judicial interpretive process.[3] [4]If the construction of a statutory provision on its plain reading leads to a clear meaning, such a construction has to be adopted without any external aid.
Therefore, super tax can only be charged in terms of Rule 6(DA) and, as explained in the preceding paragraphs, the said rule makes applicable from tax year 2023 and onwards.
C. Third issue whether fourth Schedule in not a subservient legislation.
15. The learned first appellate authority referred to a principle of construction that in case of an inconsistency between a schedule and the main enactment, the schedule must yield to the main enactment.
16. It is humbly clarified that this principle of construction applies to secondary legislation or rules notified by the executive. The Fourth Schedule, on the other hand, is not a secondary legislation. It is a part of the main statute, an extension of Section 99 of the Ordinance, and any amendment therein is made by the legislature through finance acts. Its placement is merely a question of drafting - a mere question of words. Thus, the rules of interpretation relating to resolution of conflicts between primary and secondary legislation or those between the enacting section and the rules made by executive cannot apply here.
17. Fourth Schedule is as much part of the Ordinance as Section 4C is and since the Fourth Schedule is a special enactment, and is later in sequence, therefore in case of any conflict between it and Section 4C, it is the Fourth Schedule which shall prevail. Therefore, in terms of Rule 6(DA) of the Fourth Schedule, super tax shall become applicable in the case of insurance companies from tax year 2023 and onwards.
D. Fourth issue whether the established Rules of Statutory Interpretation favor the resolution of this controversy in Appellant's favor.
18. There are certain rules of statutory interpretation, well-established, well-accepted, of repeated, and consistently followed by the courts which require resolution of the subject controversy in appellant's favor. These rules are simply enumerated below: (a)No redundancy can be ascribed to legislature therefore Rule 6(DA) is not immaterial and must be ascribed a meaning. (PLD 2022 SC 39)
(b) Where two interpretations are possible the one favoring the taxpayer should be adopted, thus it must be held that super tax is not applicable in appellant's case for tax year 2022.
(c) Fiscal Statutes must be strictly construed, thus, Rule 6DA must be interpreted using a literal approach and the absence of the word "and" in the said rule, as juxtaposed with section 4C of the Ordinance, must be ascribed its ordinary meaning.
E. Fifth Issue that there is Inconsistency between the show cause notice issued by the Additional Commissioner Inland Revenue, Zone - I, LTD, Lahore u/s 122(SA) of the Ordinance and the impugned order under section 4C of the Ordinance.
19. The fundamental ground on which the learned assessing officer has built the entire structure of his impugned order under section 4C of the Ordinance is that the Rule 6(DA) is immaterial in the case of appellant and super tax has to be charged and recovered in terms of section 4C of the Ordinance.
20. This fundamental ground is negated by the show cause notice issued by Additional Commissioner Inland Revenue, Zone-I, LTO, Lahore (ADCIR) in terms of section 122(5A) of the Ordinance for amendment of deemed assessment in respect of the subject tax year. The learned ADCIR notes at point No 16 of his show cause notice that the appellant company has not discharged its super tax liability in terms of Section 4C of the Ordinance read with Rule 6(DA) of the Fourth Schedule. If Rule 6(DA) is immaterial, as asserted by the assessing officer, then why does the ADCIR refer to the same rule for charging super tax on the appellant. This also supports appellant's case that super tax can only be imposed on the appellant in terms of Rule 6(DA) of the Fourth Schedule to the Ordinance. The language of Section 4C per se does not make it an overriding provision and construction and interpretation of Rule 6(DA) as despise or subservient to Section 4C is not appreciable.[5] The Schedule is as much part of the Statute, and as much as enactment as any other part.
The Honourable Sindh High Court vide its judgment reported as PTCL 2023 CL. 162 "Shell Pakistan Limited Vs. Federation of Pakistan" held the Section 4C to be applicable from tax year 2023 and concluded as under; "1. Section 4C of the Income tax Ordinance, 2001 is read to reflect that the levy shall be applicable from the tax year 2023"
The bare perusal of the above pronouncement which still subsists, clearly depicts that the case of the Revenue that Section 4C of the Ordinance is applicable for the tax year 2022 stand defeated in court of law. Now the law declared by the honourable Sindh High Court if read in conjunction to the Rule 6(DA), the application of section 4C of the Ordinance from tax year 2022 is not in consonance with law.
21. Based on the above, we annul the orders passed by the learned Commissioner Inland Revenue (Appeals) dated April 17, 2023 and that passed by the learned Assessing Officer dated January 19, 2023. We order accordingly.
This order consists of fifteen (15) pages and each page bears my signatures.
1. In paragraph 3.4 of the impugned order, the learned assessing officer notes, after detailed deliberation: "... Existence of Rule 6(DA) is therefore immaterial"
2. 1997 PTD 1693, 2003 PTD 1321, 2011 PTD 2042 and 2022 PTD 618
3. Rules of interpretation of Tax Statute by Senior Advocate, Mr. N.M.Ronka.
4. (2007) 295-ITR(RAJFB)CIR vs. Rashtan Financial Corporation.
5. A.G. vs Lamplough (1873) 3Ex D.214, at P.219 per Bret.