' ALVI ABDUL RAHIM (ACCOUNTANT MEMBER).--The Royal Insurance (Public) Company, hereinafter referred to as the appellant, has filed appeals in respect of various years. As they involve common issues we have decided to adjudicate them through this consolidated order in respect of all the years.
2. However, before we proceed to discuss various common issues we may decide the appeals in respect of assessm ent years 1968-69 and 1969-70 which are of a different nature. The original assessm ents for the two years were set aside by this Tribunal for re-examination of the case as per some directions. While giving effect to Tribunal's decision, the I.T.O. Did not allow deduction for provision for taxation amounting to Rs,57,409 and Rs,74,380 for the two years. The appellant filed appeals before the learned CIT (A). Before the appeals could be taken up for hearing, the ITO rectified his order and allowed the two sums of money. At the time of hearing before the learned CIT (A) the appellant submitted prayer for withdrawing the appeals as the cause of grievance had been removed by the I.T.O. The learned CIT (A) did not entertain this request. As per his order, under consideration, he has directed that the two sums of money should not be deducted.
3. Now we take up the ground of appeal which is common for the years 1976-77 to 1987-88. The learned CIT (A) has held that taxes deducted at source (i.e, under section 18 of the repealed Income Tax Act, 1922 and under section 50 of the now operative Income Tax Ordinance, 1979) are not to be deducted from gross receipts to arrive at taxable profits of the appellant. For assessment years 1976-77 to 1979-80 the tax deducted at source from interest and dividend income was held to be inadmissible while provisions made for taxation in respect of other types of income was held to be admissible. For subsequent years (viz 1980-81 to 1987-88) the tax deducted at source as well as provision made for such deductions as well as for tax on other types of income have been held to be inadmissible because of an amendment made in Rule 5(a) of the Fourth schedule vide Finance Ordinance of 1980.
4. The main argument of Mr. Mansoor Ahmed Khan, the learned counsel for the appellant, is that the ITO has no power to disallow income tax deducted at source, advance tax deposited by the appellant or provision made by the appellant for any tax liability arising on income earned during the year. According to him the tax on income, whether paid or provided for is neither an item of expenditure nor any allowance. According to him this amount is claimed by an insurance company because Form B requires that it should be shown in the debit side of Form B of the Second Schedule to the Insurance Act. This form contains Profit and Loss Account to be submitted to Controller of Insurance. In other words the insurance company is fulfilling its statutory requirement by claiming the amount of tax in his Profit and Loss Account. As the company is not claiming it as an expenditure the I.T.O. Has no jurisdiction to disallow it because Rule 5(a) and the corresponding provision in the repealed Insurance Act, 1922 permits the ITO to disallow items of expenditure which are inadmissible. Continuing the argument he submitted that the amendment made in 1980 in Rule 5(a) has made no difference insofar as admissibility of tax on income is concerned because, after amendment, the I.T.O. Has been given powers to disallow inadmissible reserves or provision for any expenditure. Mr. Khan submitted that the Insurance companies do not claim taxes on income because it is of an expenditure or provision for an expenditure. They claim them because Form B of the Second Schedule to the Insurance Act, 1938 requires so. The learned counsel then explained the accounting procedure adopted by the appellant to record tax payment transactions. He stated that the appellant creates provision for taxation at the beginning of the year and as and when any tax bill is received the payment is made by adjusting the provision created for this purpose. From this he concluded that the appellant does not make any claim in his Profit and Loss Account for tax actually paid; on the contrary it claims the provision made for taxation. He then cited the Sindh High Court decision in Reference Application I.T.C. No, 272 of 1974 dated 30-8-1982. It was held in this case that the I.T.O. Cannot disallow any provision for taxation which appears in the Profit and Loss Account of an insurance company in respect of assessment years 1969-70 and 1970-71. He further submitted that section 24 (a) of the Income Tax Ordinance and section 10 (4) of the repealed Act talk about tax PAID It says that tax PAID shall not be allowed as expenditure. From this he concluded that taxes which are payable can be claimed by insurance companies. Mr. MA. Khan also objected to disallowance of tax deducted at source by invoking provisions of section 10 (4) of the repealed Income Tax Act, 1922. He maintained that the I.T.O. Can disallow only those expenses which are inadmissible as per povisions of section 10 (2) of the said Act. According to him provisions of section 10 (4) cannot be invoked by the I.T.O.
5. Mr. Yousuf Sharih, the learned D.R., defended the orders passed by the I.T.O. And the learned C.I.T.
(A). He drew our attention to various recent decisions of this Tribunal whereby it has been held that taxes deducted at source are not allowable while the provision for taxes is allowable (till assessm ent year 1979-80) as held by the Hon'ble Sindh High Court in the New Jubilee Insurance Company case (I.T.C. No, 272 of 1974 dated 30-8-1982). The learned D.R. Also submitted that provision for taxation is not allowable even for earlier years upto 1979-80. It is for this reason that the department has taken up the matter to the Supreme Court. He is of the view that the amendment made in Rule 5 (b) in 1980 is of a clarificatory nature. According to him provision for taxation is inadmissible even if we ignore the amendment made in Rule 5 (b). He submitted that even if there was any doubt about inadmissibility of provision for taxation it has been removed by the amendment made in 1980.
6. We have pondered over the issue of admissibility of tax on income as deduction from gross receipts in the case of insurance companies for quite some time. We will, therefore, like to discuss the matter in a some what detailed manner. It is mentioned in section 10 (4) of the repealed Income Tax Act and section 24 (a) of the now operative Income Tax Ordinance, 1979, that any tax levied on the profit of any business shall not be allowed as a deductible expenditure from gross receipts for calculating taxable income. There exists a controversy as to whether these provisions of law are applicable in the case of insurance companies. This is because income of insurance companies is computed in a manner different from the method of computing income adopted for other types of business activities. Taxable income of insurance companies is computed as per provisions contained in the Fourth Schedule to the Income Tax Ordinance which has been made in pursuance of section 26 (a) of the Income Tax Ordinance. In the repealed Income Tax Act, 1922 the provisions were contained in section 10 (7) and the First Schedule to the Income Tax Act. But for an amendment made in 1980 which we will discuss later on, the provisions in the two statutes are similar. According to section 26 (a), the profits and gains of insurance business and the tax payable thereon is to be computed in accordance with the rules contained in the Fourth Schedule.
Section 26 (a) is reproduced below:-- " 26 (a) The profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Fourth Schedule ; "
' Rule 5 of the Fourth Schedule deals with General Insurance Business. This is relevant for our purposes because the appellant-company is earning income from this source. Rule 5 (a), as it stood before amendment in 1980, is reproduced below :-- " 5 General insurance, The profits and gains of any business of insurance other than life insurance shall be taken to be 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 which is not deductible in computing the income chargeable under the head " income from business or profession" shall be excluded."
' In 1980, Rule 5 (a) was amended. The amended subrule is as under: "5 (a) any expenditure or allowance or any reserve or provision for any expenditure, or the amount of any tax deducted at source from any dividend or interest received which is not deductible in computing the income chargeable under the head "income from business or profession" shall be excluded ; "
7. While examining cases of insurance companies the I.T.O. Disallowed taxes on income, whether they were on account of deductions at source or a provision was created for tax liability. This was done by invoking the provisions contained in section 10 (4) of the Income Tax Act. The matter was agitated before superior Law Courts and ultimately it was held by the Sindh High Court that provision made for taxation could not be disallowed by the I.-T.O. Because the relevant rule governing computation of income of insurance companies, authorised the I.T.O. To disallow only the expenditure or the allowance which is inadmissible. In other words if an insurance company claims a provision for any expenditure which is inadmissible, the I.-T.O. Had to allow it because he was competent to disallow inadmissible expenditure only. It was held that a provision for taxation is not an expenditure; therefore, the I.-T.O. Has no power to disallow the provision for taxation. The Department has taken up the matter to the Supreme Court. Then an amendment was made in Rule 5 (a) to empower the I.-T.O. To disallow any reserve or provision for any expenditure which is not admissible and also to disallow the amount of tax deducted at source from any dividend or interest. Following the decision of Hon'ble High Court this Tribunal, in its recent decisions, has been holding that till the assessm ent year 1979-80 provisions for taxation cannot be disallowed by the I.- T.O. Though the amount of tax deducted at source can be disallowed because it is not a provision for taxation but actual paymant of tax.
8. Before we proceed further we have to ascertain the nature of tax on income. Mr. Mansoor Ahmed Khan has stated that it is not an item of business expenditure. According to him it is a part of income which is set apart for making a liability. He concluded that as tax on income is not an item of exenditure it cannot be disallowed. On querry as to why should the tax on income be deducted from gross receipts if it is not spent as an expenditure to earn it he stated that the same is deductible because an insurance company is required vide Form B of the Second Schedule to the Insurance Act to claim it as a deduction. Let us see what does accountancy, the language of businessm en, say on the subject. In Pakistan tax on income as well as provision for taxation is always shown in the Profit and Loss Account. As a matter of fact we follow the practice prevailing in England and other countries. Spicer and Pegler's Book-Keeping and Accounts , a standard text- book on the subject, is quoted below :-- "(m) Treatment of taxation in the accounts of companies : ' The amount of the charge for United Kingdom corporation tax (together with a note of the amount it would have been but double taxation relief), the amount of the charge for United Kingdom income-tax, and the amount of overseas taxation on profits, income and (so far as charged to revenue capital gains, must be respectively disclosed in the Profit and Loss) Account. It is also necessary to disclose by way of note (if not otherwise shown) the basis on which these charges (other than in respect of capital gains) are computed, and any special circumstances which affect liability in respect of taxation of profits, income or capital gains for the financial year, or which will affect it in succeeding years [Schedule 8 to Companies Act 1948, as amended, paragraphs 12 (c), 14 (3) and (3A)1.
' In the Balance Sheet or by way of note or report annexed thereto:
(a) If a sum set aside for the purpose of its being used to prevent undue fluctuations in charges for taxation has been used during the financial year for another purpose the amount thereof and the fact that it has been so used (para. 11 (8A).
(b) If an amount is set aside for the purpose of its being used to prevent undue fluctuations in charges for taxation, it shall be stated (para. 7A).
' Corporation tax and income tax are the two principal taxes affecting company records: company profits are subject to corporation tax; companies must deduct, and account to the Inland Revenue for income tax at the standard rate when paying dividends and annual charges; companies normally receive their investment income after income tax has been deducted.
Corporation tax.
' The charge for corporation tax shown in the Profit and Loss Account is based on profits for the year; the rate of tax, e.g. 45 per cent. At which the charge has been computed must be shown inset.
If the rate of corporation tax is not known for the whole or part of the period covered by the accounts, the latest known rate should be used and disclosed. Over provisions and under provisions for corporation tax in previous years will be added to, or substracted from, as appropriate, the profits brought forward from previous years in the Profit and Loss Appropriation Account." ' accounts has also been examined by the International Accounting Standards Committee (IASC).
It has issued International accounting Standard No, 12 on the subject of "Accounting for taxes on Income". This IAS has been circulated by Pakistan Institute of Chartered Accountants. Paras 33 and 34 of IAS 12 are reproduced below:- "Financial Statement Presentation
33. Taxes on income are generally accounted for as tax expense in the determination of net income of the enterprise. However, in some circumstances in which the effect of a transaction is charged or credited directly to shareholders' interests, the related tax effect of the transaction is accounted for and disclosed in the same manner so that the taxes may be directly related to the item to which they apply.
34. The tax expense related to accounting income from the ordinary activities of the enterprise is usually presented as a separate item in the income statement. The tax attributable to an unusual item is included with that item because it directly relates to it. Disclosure is made of this related tax amount."
10. The practice of Accountancy in Pakistan as well as the above-mentioned two quotations leave no doubt in our mind that tax on income is treated as expense incurred for the purpose of earning income. They are, therefore, debited to Profit and Loss Account and not reflected in the Profit and Loss Appropriation, which shows application of income for different purposes. Though taxes on income are business expenses they are not allowed as admissible deduction because of provisions of sections 10(4) of the repealed Income Tax Act and section 26(a) of the Ordinance, 1979. The debit entry in the Profit and Loss Account of an insurance company (viz. Form T') in respect of taxes on income is, therefore, not an abnormality required by law in the cases of insurance companies only. Taxes on income are shown as debit entry in the Profit and Loss Account of every company which earns income from any source. The ITO, has, therefore, to consider taxes on income as expenses to earn income and not as some statutory requirement of law as maintained by Mr. Mansoor Ahmed Khan. As taxes on income fall in the category of expenses the ITO can invoke provisions of Rule 5(a) of the Fourth Schedule-.
11. During the course of his arguments the learned counsel for the appellant stated that the ITO can disallow taxes which are claimed on the basis of actual payment but he cannot disallow a claim on account of provision made for taxation. In support he cited the decisions of Hon'ble Sindh High Court and also drew our attention to the word "paid" used by section 24 (a) of the Income Tax Ordinance, 1979. There is no doubt that this subsection say that the taxes paid are inadmissible expenses. However, Explanation (b) to section 23 (1) states that the expression 'paid' as used in 18, 23, 24, and 31 means actually paid or incurred according to method of accounting upon the basis of which income is computed. Part (b) of the Explanation to section 23 is reproduced below:-- "Explanation : (a)................................................................................................................
(b) the expression "paid", as used in this section and sections 18, 24, and 31, means actually paid or incurred according to the method of accounting upon the basis of which the income is computed."
' It is clear from above that the argument of the learned counsel, in so far as it refers to the language of the section 24 (a) of the Income Tax Ordinance is not convincing. As far as the New Jubilee Insurance Company case (Reference Application I.-T.O. No,272 of 1974) cited by Mr. MA.Khan is concerned the ruling is binding till assessment year 1979-80. For 1980-81 and onwards the I.-T.O. Can disallow taxes actually paid as well as the provision for taxation because Rule 5 (a) has been modified to read as under:"
"5 (a) any expenditure or allowance or 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:"
' Before this amendment the I.-T.O. Could disallow the "expenditure" and not any "provision for taxation". The amendment in 1980 has made the New Jubilee Insurance Co. Case inapplicable for assessm ent years 1980-81 and onwards. We may also mention here that the appeal, on this issue, for assessm ent years 1980-81 and 1981-82 cannot be entertained because in these years the I.T.O.
Did not disallow any claim made by the appellant. The I.-T.O. Accepted income declared by the appellant under the Self Assessm ent Scheme. As no disallowance was made by the I.-T.O. The learned C.I.T.(A) has erred in mentioning in his order that disallowance on account of provision for taxation is in order.
12. The learned C.I.T. (A)'s finding about taxes deducted at source in assessment years 1976-77 to 1979-80 has been challenged by Mr.MA. Khan on the ground that taxes on income are inadmissible as per provisions of subsection (4) of section 10 and not as per subsection (2) of section 10.
According to him the I.-T.O. Can disallow only those items of expenditure which are inadmissible as per provisions of section 10 (2). The argument is not convincing. Rule 6 (1) of the First Schedule to the repealed Income Tax Act speaks about inadmissilbility as per section 10. In other words inadmissibility is not restricted to provisions of subsection (2) or to any other subsection. The provisions of the entire section 10 can be invoked by the I.-T.O. Rule 6 (1) is reproduced below : "6 (1). 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, copies of which are required under the Insurance Act, 1938, to be furnished to the Controller of Insurance after adjusting such balance so as to exclude from it any expenditure, other than expenditure which may under the provisions of section 10 of this Act be allowed for in computing the profits and gains of business. Profits and losses on the realisation of investments, and depreciation and appreciation of the value of investments shall be dealt with as provided in rule 3 for the business of life insurance."
13. Before parting with this issue we may also examine the types of taxes on income and see if a provision can be created in respect of every type of tax due under the Income Tax Ordinance.
Taxes on income are paid in the following four manners :
(a) Tax is deducted by withholding agent from any taxable receipt as soon as the taxable receipt comes into the hands of a taxpayer.
(b) Advance tax is deposited under section 53 of the Income Tax Ordinance in four specified dates, namely, 15th September, 15th December, 15th March and 15th June of each fmancial year.
(c) Tax is deposited under section 54 ; and
(d) Tax is deposited in response to notice of demand issued under section 85.
' As far as the tax deducted at source in pursuance of section 50 and advance tax deposited under section 53 are concernd, they are deducted and paid as soon as the liability for the same arises. In other words, there is no time lag between the accrual of tax liability under section 50 and section 53 and payment of the liability. Therefore, question of creating a provision for payments under section 50 and 53 does not arise. As far as tax due under section 54 is concerned, a provision has to be made because tax has to be paid after income is earned. Therefore, in the books of accounts for the relevant year the liability for such tax can be claimed in the form of provision for tax only.
The last category of tax is the one which is due under a demand notice issued by the I.-T.O. Under section 85. This demand is in respect of a liability which can never be envisaged by a taxpayer during the year when income is being earned. No provision can be created in respect of this liability because this liability does not arise on account of income declared by an assessee. It arises only when the I.-T.O. Enhances the declared income. It is clear from this discussion that provision for taxation is made for tax due under section 54 and not in respect of tax due under sections 50, 53, and 85. The finding of the Hon'ble High Court in the case of New Jubilee Insurance Co is, therefore, binding in respect of provision made for tax due under section 54. If an assessee makes provision for taxes due under section 50, 53 or 85 this will not be governed by the New Jubilee Insurance Company's case. The nature of the transaction does not depend on the name given to it by a taxpayer. The nature of a transaction has to be ascertained from its facts. The provisions of law discussed above calearly show that question of creating provision for taxes due under section 50 and 53 does not arise because there is no time lag between the date on which tax liabilities under these sections arise and the payment of these liabilities. Tax liability under section 85 cannot be envisaged; therefore, no provision can be created for the same. Even if it is envisaged it cannot be quantified with any degree of accuracy. It is for this reason that this Tribunal has been holding that tax deducted at source from dividends income and interest income received by an insurance company are inadmissible expenses and are not governed by the decision in the New Jubilee Insurance case.
14. In the light of discussion in the preceding paras we hold that tax deducted at source from interest and dividend has been rightly disallowed by the I.-T.O. And the learned C.I.T. (A) in assessm ent years 1976-77, 1977-78, 1978-79 and 1979-80. In view of amendment made in Rule 5 (a) in 1980, the I.-T.O. And the learned C.I.T. (A) have rightly held for assessment years 1982-83 to 1987- 88 that neither taxes withheld from interest and dividend income nor provision made for taxation is admissible to the appellant. The appeals on this issue fail. The appeals for 1980-81 and 1981-82 are misconceived because I.-T.O. Has not disallowed any claim. The I.-T.O. Has accepted the declared income. Even if the I.-T.O. Had disallowed provision for taxation, the action would have been justified on account of amendment in Rule 5 (a) .
SURCHARGE (ASSESSMENT YEARS 1977-78 TO 19'41-82:
15. The second common issue is in respect of surcharge levied for assessment years 1977-78 to 1981-82. The appellant has objected to the finding of the learned C.I.T. (A) to the effect that the difference between income returned and income assessed be treated as "unretained income" for the purpose of calculation of surcharge. Recently the Hon'ble Sindh High Court in the case reported as (1988) P.T.D. 66 (H.C.) has examined the issue in detail. We direct that surcharge liability for the years in appeal should be datermined in the light of directions contained in this case. The assessm ent orders are set aside on this issue for re-examination and determination of surcharge liability in the light of directions of the Hon'ble Sindh High Court.
COMMISSION EXPENSES ( ASSESSMENT YEAR 1977-78)
16. In respect of assessm ent year 1977-78 two more issues have been raised. Firstly, commission expenses amounting to Rs,29,329 have been disallowed for the reason they are not verifiable. The learned C.I.T.(A) has confirmed this addition by rejecting the contention of the appellant that the entire claim should be allowed in full, even if addresses of recipient of commission are not known.
The bona fide of payments to such persons has been supported by the fact that no such disallowance was made in the Past. The learned D.R. Produced assessment record to show that the appellant was asked to furnish addresses of the persons to whom the commission was allegedly paid. As addresses were not furnished in respect of Rs,29,329 the I.-T.O. Disallowed the same. In order to claim an expenditure the assessee has to produce evidence. Until and unless he discharges the burden of proof lying on him the expenditure cannot be allowed. As sufficient opportunity was given to the appellant for producing necessary details we confirm the action taken by the two officers below and reject the appeal filed on this issue.
APPRECIATION IN VALUE OF ASSETS: (ASSESSMENT YEAR 1977-78)
17. The second issue pertaining to 1977-78 is in respect of appreciation in value of assets. The I.-T.O.
Made an addition of Rs,3,09,655 for the following reasons : "(a) A copy of form AA. Has been filed. The book value of investment is Rs,86,52,138 whereas the market value is Rs,89,61,793. There is thus appreciation in the value of investment amounting to Rs, 3,09,655.
(b) The assessee-company was required to state as to why the appreciation in the value of assets may not be taxed. The reply received is not satisfactory. Addition of Rs,3,09,655 is, therefore, made in the total income under clause 3-B of the First Schedule to the Income Tax Act."
' The learned C.I.T. (A) has confirmed the addition after making the following observations : "Addition in value of assets (77-78)
' It is observed by the I.-T.O. That the book value of investment is Rs,86,52,138 whereas the market value is Rs,89,61,793. There is thus appreciation in the value of investment at Rs,3,09,655. The assessee was required to state as to why the appreciation in the value of investment may not be taxed. The reply received is not convincing.
' Addition of Rs3,09,655 is accordingly made in the total income under clause 3 (b) of the First Schedule to the Act.
' The contention of the learned counsel is as under: ' This is the first time in history of the appellant that the value of assets shown in the audited A/C submitted to the Controller of Insurance, has not been accepted by the I.-T.O. Also in the subsequent assessm ent years such value has not been disputed by the learned I.T.O. And no addition to income in respect of value of assets has been made. Under the First Schedule to the Act read with section 10 (7), the addition to income is not permitted under the law. The I.T.O. Has no option but to accept the accounts subject to disallowance of expenditure inadmissible under section 10 (2) of the Act.
' The I.T.O. Has referred to rule 6 (1) of the First Schedule read with rule 3 (b) which in his view permits him to tax the difference of book value of assets and its market value. It is contended that from rule 3 (b) it is evident that the amount envisaged to be included in surplus and taxed is the sum taken credit for in the accounts. Thus the law does not empower the I.T.O. To do anything outside the accounts. The I.T.O in this case has taxed an amount credit for which it was never taken in the accounts. Credit was not taken for the excess of market value over cost of assets because this against the accepted principles of accounting is based on conservatim. The I.T.O. By changing the value of assets has revalued the assets which is not permissible under the law. Reliance is also placed on the case of Pandyan Insurance Co. Ltd v. C.I.T. (1965) 11 I.T.R 371.
' The contentions are examined. Rule 3 (b) read with rule 6 of the First Schedule of the Act provides for the allowance of reserves to meet the depreciation or loss or realisation and simultaneously holds the sums taken credit for in the accounts on account of appreciation or gains on realisation of the securities or other assets as part of surplus. It thus takes into account both the appreciation of the value of investments as well as the factual gains on realization of the profit. The I.T.O. In fact has not revalued tha assse ts as contended. The book value and market value is taken from form AA filed by the appellant himself. In view of the clear provision of law, the addition made by the I.T.O. Is confirmed."
18. The two officers below have erred in invoking the provisions of sub-rule 3 (b). This sub-rule is applicable where assets are revalued and the revaluation is reflected in the financial books of accounts. The D.R. Admits that no such revaluation was recorded in the books of account maintained for the year under consideration. The I.T.O. Has invoked the provisions of the sub-rule on the ground that market value recorded in form AA is more than its cost price. Form AA is not a part of book of accounts which are maintained to record historical cost of transactions. Form AA is prescribed by the Insurances Act to show comparative position of the book value and the market value of various assets of an insurance company. As this form is not a part of the financial accounts and as no sum has been taken credit in the accounts for appreciation in investment, the I.T.O. Is not authorised to make this addition of Rs,3,09,655. The addition is, therefore, deleted.
' PROVISION FOR GRATUITY: (ASSESSMENT YEARS 1980-81 TO 1982-83)
19. The next ground of appeal relates to Provision for Gratuity pertaining to assessment years 1980- 81,1981-82 and 1982-83. Returns of income for assessment years 1980-81 and 1981-82 were furnished by the appellant under the Self Assessment Scheme. An appeal was filed before the learned C.I.T.
(A) on the issue of surcharge and fiscal status. At the time of hearing additional grounds in respect of provision for taxation and provision for gratuity were also taken up. The learned C.I.T. (A) has confirmed order passed by the I.T.O. In respect of provision for gratuity by stating that the disallowances made by the I.T.O. In respect of assessment years 1980-81 to 1982-83 are confirmed.
Against this finding the appellant has come to us. As mentioned earlier the assessments were framed under Section 59 (1) of the Income-tax Ordinance; and the declared income was accepted without any modification. Thus, the I.T.O. Made no disallowances out of any claim. As no disallowance was made by the I.T.O. The question of maintaining any disallowances by the learned C.I.T. (A) does not arise. We, therefore, hold that the assessment orders passed by the I.T.O. In respect of 1980-81 and 1981-82 need no amendment. The finding of the learned C.I.T. (A) on the issue is deleted in respect of assessment years 1980-81 and 1981-82. The appeal filed before us is misconceived. As far as assessm ent year 1982-83 is concerned we set aside the order on this issue with the directions that the I.T.O. Should examine the claim in the light of the following three principles: #TBS (a) #TBE The gratuity is usually payable after a minimum period of service is completed by the employees. Before reaching this thresholding no liability arises. However, as soon as the employee crosses the threshold liability for payment of gratuity arises. If the appellant-company has made any provision during the pre-threshold period, the same is not allowable because no liability arose at that point of time. But the provision made in the post-threshold period is allowable.
(b) Payment of gratuity is usually linked with retirement after completing satisfactory service or accident or death. In most of the gratuity schemes J an employee who is dismissed for misconduct is not entitled to gratuity. If there is any such condition the provisions made for gratuity will not be an admissible expenditure because no liability accrues in such cases until and unless the date of retirement, death, accident etc.
(a) In any case only that type of provision for gratuity will be admissible deduction which is calculated with reference to terms and conditions of each employee. A general provision created with reference to total wage bill etc is not admissible because in such a case a reserve of general nature is created without reference to any specific liability. The I.-T.O. Should examine the gratuity scheme and then decide to what extent the total claim under the head of Provision for gratuity is allowable.
RETURN ON KHAS DEPOSIT CERTIFICATES: (ASSESSMENT YEAR 1987-88)
20. The appellant received Rs,4,725,881 by way of return on Khas Deposit Certificates. Exemption was claimed under clause 72 of the Second Schedule to the Income Tax Ordinance. The exemption has been denied by the I.-T.O. And the learned C.I.T. (A) on the ground that provisions of the Second Schedule are not applicable in the case of an insurance company because profits and gains of insurance business are computed in accordance with Rule 5 contained in the Fourth Schedule to the Income Tax Ordinance, 1979. The department's case in nutshell is as follows : " Special provision has been made in the Ordinance for the computation of the profits and gains of insurance business. This means that whatever may be constituents of the receipts of an insurance company, the balance disclosed in the annual accounts constitutes insurance income. Thus in the case of insurance company all the receipts whatever from property, business, interest on securities, capital gains on sale of stocks and shares, dividends, yield of National Savings or Defence Certficates, etc. Will constitute insurance income and will be liable to tax. In such cases provisions of the Second Schedule to Income Tax Ordinance, 1979 will not be applicable to the individual receipts credited to the account."
' The learned C.I.T. (A) has confirmed the I.-T.O.'s order by making the following observations : ' In view of the fact that the provisions of section 26 (a), which are of a special nature and which deal with cases of General Insurance, overriding in nature and have to be given effect to notwithstanding anything contained to the contrary in any other provisions of the Ordinance, 79 therefore the action of the I.-T.O. Was justified. Subsec. (a) of section 26 of the Ordinance, 79, prescribes that the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the Rules contained in the Fourth Schedule. The Fourth Schedule in turn, vide its Rule 5, clearly prescribes that 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, furnished to the Controller of Insurance under the Insurance Act, 1938, subject to adjustments mentioned therein. Thus, in the case of General insurance business the law prescribes that whatever be the nature and source of income/exempt non-exempt/appreciation of or gain on the realization of investments -- that any amount taken credit in the accounts as furnished to the Controller of Insurance, the surplus so disclosed shall be treated as part of the assessable profits and gains of the Insurance business. Therefore, the treatment meted out to the appellant was justified and calls for no interference."
21. Mr.MA. Khan while presenting case of the appellant before us argued that benefits listed in the Second Schedule are available to insurance companies. According to him section 26 (a) has excluded operations of only those sections which deal with computation of business income; these sections being 23, 24 and 25 only. According to the learned counsel all other provisions of law including the Second Schedule are applicable in the case of insurance companies. He invited our attention to the words "Notwithstanding any thing contained in this Ordinance" used in section 14, under which Second Schedule has been introduced in the statute. From this he concluded that the Second Schedule is applicable even if income is computed under the Fourth Schedule. Mr. Yousuf Sharih has also relied on similar words used in section 26 (a) to argue that the provisions of the Second Schedule are not applicable in the case of insurance companies.
22. Section 26 (a) says that notwithstanding anything contained in this Ordinance profits and gains of any insurance business shall be computed in accordance with the rules contained in the Fourth Schedule. Section 26 (a) has been quoted in Para 6 of this order. A plain reading of its provisions shows that operation of every part of the Ordinance has not been excluded. The sections which have been made inoperative in the case of insurance companies are those which deal with computation of income. According to Mr. Khan the Second Schedule does not deal with computation of income' therefore, the benefits contained therein are available to an insurance company. The Second Schedule is enacted in pursuance of provisions of section 14 of the Ordinance which deals with exemption allowed to various types of income. The relevant portion of section 14 viz 14 (1) is reproduced below: "Exemption: (1) Notwithstanding anything contained in this Ordinance, the incomes or classes of income, or persons or classes of persons specified in the Second Schedule shall be
(a) exempt from tax under this Ordinance subject to the conditions and to the extent specified therein; or
(b) liable to tax at such rates, which are less than the rates specified in the First Schedule, as are specified therein; or
(c) allowed as reduction in tax liability, subject to the conditions and to the extent specified therein; or
(d) exempt from the operation of any provisions of this Ordinance, subject to the conditions and to the extent specified therein."
The Second Schedule contains provisions which helps us in determining what types of receipts are to be taken into consideration for computing taxable income. It is, therefore, a part of those provisions of Income-tax Ordinance, 1979 which deal with computation of income. In view of provisions of section 26 (a) the Second Schedule is, therefore, not applicable in the case of an insurance company. This is because all provisions of Income-tax Ordinance which deal with computation of income are not applicable in the case of insurance companies. On the other hand income of general insurance business is computed as per Rule 5 of the Fourth Schedule.
23. This Tribunal's case reported as (1964) 10 Tax 109 (Trib.) and cited in his support by Mr. Mansoor Ahmed Khan is not relevant in the case in appeal before us because it pertains to assessment years 1955-56 to 1957-58, which were governed by the now repealed Income-tax Act, 1922.
According to the repealed Act, income of an insurance business was computed in accordance with provisions of section 10 (7) and the Schedule thereunder. Section 10 (7) is reproduced below:-- "(7) Notwithstanding anything to the contrary contained in sections 8, 9, 10, 12 or 18 the gross receipts and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in First Schedule to this Act."
' It is clear from above quotation that provisions of section 4 were applicable in the case of insurance business. The only sections suspended for the purpose were sections 8, 9, 10, 12 and 18.
Section 4 (3) contained various types of exemptions. The exemption on newly constructed property was one of the concessions listed in section 4 (3). In the case under consideration at that time the issue was whether an insurance company could claim concession listed in section 4 (3). As section 4 was applicable to insurance companies; an insurance company could claim exemption available under section 4 (3). However, the provisions of law as contained in section 26 (a) are different from those contained in section 10 (7) of the repealed Act. Section 26 (a) does not list those sections of the Ordinance which are inapplicable in the case of an insurance company.
Section 10 (7) of the repealed Act did so. Section 26 (a) says that profits of insurance business shall be computed in accordance with the rules contained in the Fourth Schedule and not in accordance of general provisions relating to computation of income. Because of this difference in the two sections the decision reported at (1964) 10 Tax 10 (Trib.) is not applicable in the case before us.
24. We are of the view that instead of entering into the controversy about sections dealing with computation of income we should seek the solution of issue before us from Rule 5 of the Fourth Schedule, which contains special provisions for computing income from insurance business. The Rule is reproduced below: "Rule 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) an expenditure or allowance or any reserve or provisions for any expenditure or the amount of any tax deducted at source from any dividend or interest received which is not deductible in computing the income chargeable under the head "income from business or profession" shall be excluded;
(b) any amount either written off or taken to reserve to meet depreciation or loss on the realization, of investment shall be allowed as 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 Income-tax Officer is satisfied about the reasonableness of the amount written off or taken to reserve in the accounts to meet depreciation, or loss on the realization, of investments, as the case may be.
According to the provisions of Rule 5 of the Fourth Schedule the taxable income of general insurance business is to be computed in the following manners: The I.T.O. Is to start with the profit disclosed by the annual accounts required under the Insurance Act, 1938, to be furnished to the Controller of Insurance. The I.T.O. Can make adjustments to the profits so disclosed on account of items listed in sub-rules (a) and (b) of the Rule 5. This method of computing taxable income of an insurance company has been endorsed by the Hon'ble Sind High Court in the New Jubilee Insurance case (supra) as well as in other cases cited at Bar. None of the items listed in Rule 5 gives power to the I.T.O. To exclude a part of profit disclosed in the accounts furnished to the Controller of Insurance. As interest on Khas Deposit Certificates has been included in the annual accounts submitted to Controller of Insurance the same cannot be excluded because Rule 5 does not permit such an exclusion. Interest on Khas Deposit Certificates is a part of insurance business operations because an insurance company has to invest the amount of premium money received from its clients in various types of investments. If the funds available with an insurance company are not invested it cannot carry on'insurance business. As investment in Khas Deposit Certificates is a part of insurance business activity, returns on K.D.Cs have to be reflected in the Annual Accounts.
And once it is reflected therein it cannot be taken out therefrom because sub-rules (a) and (b) of rule 5 do not permit such exclusion. We, therefore, confirm the order passed by the I.T.O.
' ACTION UNDER SECTION 65: (ASSESSMENT YEARS 1973-74, 1976-77 TO 1979-80)
25. In respect of assessm ent years 1973-74, 1976-77, 1977-78, 1978-79 and 1979-80 the I.T.O. Re- opened the proceedings under section 65 for the reason that the appellant had concealed particulars about payment of taxes. According to the I.T.O, taxes actually paid were not claimed as tax paid but were debited to provision for Taxation Account; and provision for Taxation was claimed as deduction from gross receipts. The Provision for Taxation was allowed as deductible item in view of various decisions of this Tribunal as well as of High Court. The appellant agitated the matter before the learned C.I.T. (A) who confirmed the orders after making the following observations: "The action for concealment is also in order because the correct income was not disclosed to the department although relief was obtained by charging the taxes paid to provisions for taxation account."
' Now the issue has been brought before us.
26. Mr. M.A. Khan objected to this treatment on various grounds. The first contention is that the assessm ent order for 1973-74 could not be re-opened under section 65 because the limitation provided by the Income Tax Act, 1922 had expired before the I.T. Ordinance, 1979 came into force.
The second contention is that no particulars were concealed from the I.T.O. Every particular about payment of taxes as well as pertaining to provision for taxation was brought to the notice of the I.T.O. Thirdly, it was contended that the Provision for Taxation has rightly been allowed and the appellant has rightly debited the amount of taxes paid to the provision account. In fact this aspect of the argument of the learned counsel has already been discussed in the earlier part of this order while dealing with the subject of provision for taxation and impact of amendment made in 1980 on the same. In view of all these arguments the learned counsel concluded that re-assessment for the reasons that particulars were concealed from the I.T.O. Is nothing but harassment of the appellant who always discloses his true particulars to the I.T.O. On the other hand Mr. Yousuf Sharih, the learned D.R. Has supported the two offices below.
27. The contention about limitation of proceedings is not convincing. According to section 34 (1) (A)
(b) of the repealed Act the assessm ent could be re-opened within six years from the end of the year in which the assessm ent for such year was made. The first assessment under section 23 (3) of the repealed Income-tax Act was made on 30-1-1979. Thus, the repealed Act authorised the I.T.O.
To re-open the assessm ent till 30th June, 1985. When the new Income Tax Ordinance came in force on 1st July, 1979, the limitation under the old Act had not expired. For this reason the provisions for section 65 are applicable in this case. Now we take up the second argument of the learned counsel. A taxpayer can conceal any transaction between him and the third party. However, he cannot conceal from I.T.O. a transaction between him and the Income-tax Department. When he makes any tax payment the fact is reflected in the record of the Income-tax Department. The I.T.O.
Can, therefore, always verify particulars about the payment of tax. As a matter of fact the appellant has been disclosing full facts about the quantum of tax deducted at source, quantum of advance tax deposited and the amount of provisions for taxation made. These particulars are given not only in the annual returns of income but also in the Income Computation Sheets attached with the returns. The learned D.R. Has admitted that these facts have clearly been mentioned in the annual returns of income as well as in the Income Computation Sheets attached to the returns. When these facts have clearly been mentioned how can it be said that particulars about the payment of taxes were concealed. The department representative has submitted that concealment of particulars took place because the appellant debited the tax paid to the Provision for Taxation Account instead of declaring them as taxes paid. This at the most can he treated as presentation of transactions in a form which is contrary to the views of the assessing officer. There is nothing in law which forces an assessee to present a particular transaction in a particular manner. If an expenditure of capital nature is reflected in P & L Account, and not in the Balance Sheet, it cannot be said that the assessee is guilty of concealment of facts. The assessing officer may or may not agree with the views of an assessee about the nature of a transaction. But so far as any transaction is recorded in the books of accounts, which are produced before the assessing officer, it cannot be said that the transaction has been concealed. We are, therefore, unable to agree with the contention of the assessing officer that the appellant had concealed particulars of taxes actually paid during all these years. The quantum of advance tax under section 18-A and tax deducted under Section 18, as mentioned in the annual returns of income, is different from the amount of such taxes added by the I.T.O. In his orders under section 65. This is because the assessee maintains accounts on calendar year basis whereas credit for taxes under sections 18 and 18A is given on financial year basis. In view of above discussion the assessing officer had no authority to invoke provisions of section 65. As the I.T.O. Initiated action without there being any concealment of facts by the appellant his action cannot be upheld. We, therefore, annul the orders passed under section 65 in respect of assessment years 1973-74, 76-77,77-78,78-79 and 79-80.
28. The various appeals are disposed off in the manner and to the extent indicated above.