JUDGMENT NASIR ASLAM ZAHID, J.- This judgment will dispose of the following Civil Appeals filed by the Eastern Federal Union Insurance Company Limited (EFU), Adamjee Insurance Company Limited (Adamjee), Habib Insurance Company Limited (Habib), East West Insurance Company Limited (East-West), Central Insurance Company Limited (Central), New Jubilee Insurance Company Lirn-ted (New Jubilee), International General Insurance Company Limited (International), Pakistan Insurance Corporation, Premier Insurance Company Limited (Premier) and Reliance Insurance Company Limited (Reliance), as the) involve common questions of law:- ______________________________________________________________________________________________ Appeal No. Name of Assessm ent All of Karachi Appellant year ______________________________________________________________________________________________
1. 933/95 EFU 1986-1987
2. 934/95 EFU 1987-1988
3. 935/95 EFU 1988-1989
4. 936/95 EFU 1989-1990
5. 937/95 EFU 1990-1991
6. 938/95 EFU 1991-1992
7. 939/95 EFU 1992-1993
8. 940/95 EFU 1993-1994
9. 941/95 Adamjee 1990-1991
10. 942/95 Adamjee 1989-1990
11. 943/95 Adamjee 1988-1989
12. 94 1/95 Adamjee 1987-1988
13. 945/95 Adamjee 1986-1987
11. 916/95 Habib 1987-1988
15. 947/95 Habib 1990-1991
16. 948/95 Habib 1988-1989
17. 949/95 Habib 1986-1987
18. 950/95 Habib 1989-1990
19. 951/95 East-West(u/s 66 A) 1990-1991
20. 952/95 East-WesL(u/s 60 A) 1992-1993
21. 953/95 East-West(u/s 66 A) 1989-1990
22. 954/95 East,-Wost(u/s 66 A) 1991-1992
23. 955/95 Central 1986-1987 to 1988-1989
24. 1136/95 Central 1991-1992
25. 956/95 New Jubilee 1986-1987
25. 957/95 New Jubilee 1987-1988
27. 958/95 New Jubilee 1988-1989
28. 959/95 New Jubilee 1989-1990
29. 1118/95 International 1987-1988
30. 1119/95 International 1986-1987
31. 11.20/95 International 1988-1989
32. 1121/95 International 1990-1991
33. 1135/95 International 1189-1990
34. 1137/95 Pakistan Isu. Corporation 1986-1987 to 1990-1991
35. 1138/95 Premier 1986-1987
36. 1139/95 Premier 1991-1992 ________________________________________________________________________________________________ Appeal No. Name of Assessm ent All of Karachi Appellant year ________________________________________________________________________________________________
37. 1110/95 Premier 1990-1991
38. 1141/05 Premier 1987-1988
39. 1142/95 Premier 1989-1990
40. 1113/95 Premier 1988-1989
41. 1111/95 Reliance 1986-1987
42. 1115/95 Reliance 1987-1988
43. 1140/95 Reliance 1988-1989
44. 1147/95 Reliance 1989-1990
45. 1148/95 Reliance 1990-1991 _______________________________________________________________________________________________
2. Appellant companies are engaged in the business of general insurance. Respondents are the concerned Income Tax Officer/Inspecting Assistant Commissioners and Commissioners of Income Tax, Karachi. It may be mentioned here that by the Finance Act 1993, I.T.Os. Have been redesignated as Deputy Commissioners. Assessment years are 1986- 1987 to 1990-1991, but, in the case of Eastern Federal Union Insurance Company, their appeals also relate to assessment years 1991-1992, 1992-1993 and 1993-1994; in the case of East West Insurance Company 1991-1992 and 1992- 1993, and in the case of Central Insurance Company and Premier Insurance Company 1991-1992 also.
In many of these appeals, the appellants had approached the High Court under Article 199 of the Constitution in Constitutional Petitions on notice being issued for additional assessment under Section 65 of the Income Tax Ordinance, 1979 (hereinafter referred to as "the Ordinance"), but in other cases appellants approached the High Court after revised assessment orders had been made pursuant to the issuance of notices under Section 65. In some cases, appellants have approached the High Court on notices being issued under Section 66- A by the Inspecting Asstt. Commissioners and thereafter assessments being revised. There
3. In all these appeals, the question involved is whether the Income Tax Officials could lawfully reopen the assessments, already made, for assessm ent of tax on dividend income of the appellants on a higher rate than charged during the relevant assessment years bringing the rate at par with the normal rate of tax on other income from general insurance business of the appellants, as the entire balance of profits of the general insurance companies were chargeable to tax as a single unit, on the basis of the decision of the Sindh High Court in the case of Adamjee Insurance Company Ltd. v. Central Board of Revenue (1989 PTD 1090). Arguments of learned counsel for the appellants and the department were heard at length. On behalf of the appellants, arguments were addressed by Mr. Fakhruddin G. Ebrahim, Senior A.S.C.; ill/s. Iqbal Naim Pasha, Muhammad Nasim, Muhammad Ali Sayeed, Sirajul Haq Memon, M. Athar Saeed and Muhammad parid (with special permission) A.S.Cs. M/s. Fakhruddin G. Ebrahim and Yasan Faruqui also submitted written arguments. On behalf of the department, arguments were addressed by Mr. Shaik Haider, A.S.C.
4. In most of these appeals, for the relevant assessment years, the appellant insurance companies had filled tax returns and assessment orders had been passed by the concerned Income Tax Officer and the tax had also been assessed in accordance with the applicable provisions of the Income Tax Ordinance. In some cases, appellants had filed appeals before the higher forum which were pending or had been decided. In some cases fresh assessments have been made after 1991. Oh 18.11.1991, the concerned Income Tax Officer issued the following identical notice to most of the appellants:- "OFFICE OF THE INCOME TAX OFFICER CIRCLE A.I. COMPANIES. Il KYC. NO.CIR.A-1 COS.III/65/91-92 dt.18.4.1991 To, M/s........ -........ SUBJECT. NOTICE UNDER- SECTION 65 OF THE INCOME TAX ORDINANCE, 1979, ' ASSESSMENT YEAR 1986-87 TO 1990-91- TAXATION OF DIVIDEND INCOME, The Honourable High Court of Sindh have held in C.P. No.537 of 1980 that in the case of a company engaged in general Insurance Business any income which is included in the balance of profit declared by it in its annual account submitted to Controller of Insurance' under the Insurance Act 1938 loses its character and becomes a part of profits and gains of Insurance Business as one unit of income which is not capable of being bifurcated for the purpose so charging to tax into different heads of income categorized under Section 15 of the Income Tax Ordinance, 1979.
In view of above judicial finding the dividend income which stands included in the balance of profits declared in . Its annual account submitted to Controller of Insurance under the Insurance Act 1938 loses its character and becomes part of profit and gain of insurance business and chargeable to tax as one unit of income at normal rate and not as a separate book of income at reduced rate. Thus the dividend income has been assessed at too low a rate which calls for action u/s. 65 'of the Income Tax Ordinance, 1979. Accordingly notices u/s.65 of the Income Tax Ord.1979 for compliance by 18.12.91 are enclosed.
Sd-/ (A.A.JAFRI)
INCOME TAX OFFICER CIRCLE A.I.COS.III, KARACHI."
Apart from the above notices for assessment years 1986-87 to 1990- 91, the Income Tax Officer also issued separate notices on prescribed forms to the appellants for each relevant assessment year pointing out that assessments had been made, at a lower rate and, therefore, the Income Tax Officer had decided to make revised assessments. In some cases, as observed, notices were issued under Section 66-A by the Inspecting Assistant Commissioners, but reason for issue of notices was the same i.e. Assessments by the I.T.O, had been made at a lower rate and the basis was the judgment in the "ase of Adamjee Insurance Company Ltd. Referred herein above. In some cases, assessments had been finalised after the decision of Adamjee Insurance Company case.
5. Section 65 of the Ordinance, as it stood during the relevant period, read as follows:- "65. Additional assessm ent.-(1) If, in any year, for any reason:-
(a) any income chargeable to tax under this Ordinance has escaped assessment, or
(b) : the total income of an assessee has been under assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund under this Ordinance, or ,
(c) the total income of an assessee nr the tax payable by him has been assessed or determined under sub-section 59A or deemed to have been so assessed or determined under sub-section (1) of Section 59 or Section 59A.
The Income Tax Officer may, at any time, subject to the provisions of sub-section (2), (3) and (4) issue a notice to the assessee containing all or any of the requirements of a notice under Section 56 and may proceed to assess or determine, by an order in writing, the total income of the assessee or the tax payable by him, as the case may be, and all the provisions of this Ordinance shall, so far as may be, apply accordingly; Provided that the tax shall be charged at the rate or rate applicable to the assessment year for which the assessment is made.
(2) No proceedings under sub-section (1) shall be initiated unless definite information has come into the possession of the Income Tax Officer and he has obtained the previous approval of the Inspecting Assistant Commissioner of Income Tax in writing to do so.
Explanation.- As used in this sub-section, "definite information" includes information in respect of sale s and purchases, of any goods, and any information regarding acquisition, possession or transfer, by the assessee, of any money, asset or valuable article, or any investment made or expenditure incurred by him.
(3) .................................... (3A)................................ (4) ..................................... (underlining is for emphasis.)
6. Reference to Section 65(1) shows that, intenable, for the reason that any income chargeable to tax has escaped assessment or the total income of an assessee has been under assessed, or assessed at too low a rate, the Income Tax Officer can make an additional assessment for the relevant year or years after issuance of a notice under Section 56, but subject to the provisions of sub-section (2), (3) and (4) of Section 65. Sub-section (2) of Section 65 provides that no proceedings under sub-section (1) shall be initiated unless "definite information" has come to the possession of the Income Tax Officer and he has obtained the previous approval of the Inspecting Commissioner of Income Tax in writing to do so. To put it in a nutshell, the stand of the Department is that the judgment in the case of Adamjee Insurance Company, where it was, inter alia, observed that in case of a company engaged in general insurance business, income which is included in the balance of profits declared by it in its annual account submitted to the Controller of Insurance loses its original character and becomes part of the profits and gains of such insurance business and thus the whole of it is to be taxed accordingly and, therefore, the entire balance of profits declared by a general insurance company could not be bifurcated under different heads for charging different rates of income tax and the entire balance of profits was chargeable to tax as a single unit, whereas, prior to the judgment in the case of Adamjee Insurance Company, dividend income of the general insurance companies, which was part of their 'balance of profits, was being taxed separately at a lower rate according to the First Schedule to the Ordinance. It was argued on behalf of the department that in view of the judgment in the case of Adamjee Insurance Company, the entire balance of profits is chargeable to tax as a single unit according to the
7. Under the Act as well as the Ordinance, special 'provisions existed/exist with regard to general insurance business. Comparative position of the said provisions in the Act and the Ordinance is detailed as below:- COMPARATIVE POSITION OF PROVISIONS IN THE ACT 7 THE ORDINANCE RELATING TO INSURANCE BLUSINESS normal rate applicable to all companies mentioned in the First Schedule to the Ordinance, but dividend income of the general insurance e companies was being charged to a lower rate of tax as per the provisions contained in the First Schedule, which was not correct. According to the department, the decision in the case of Adamjee Insurance Company, amounted to "definite information" under sub-section (2) of Section 65 of the Ordinance and thus provided a legal basis for initiation of action under Section 65(1) or Section 66A of the Ordinance for additional assessm ent or reopening of the assessment already made in respect of the relevant assessment years.
On the other hand, it was argued on behalf of the appellant insurance companies that, since at least 1967, when the judgment of the High Court (from Karachi) came in the case of Commissioner of Income Tax u. American Life Insurance Company (1967) 15 Tax 268, dividend income of the insurance companies was being subjected to lower rates as per the rates provided in the Fourth Schedule to the repealed Income Tax Act, 1922 (hereinafter referred to as "the Act") (Now the First Schedule to the Ordinance) and that this view had been followed by the department consistently till 1991, when the impugned notices were issued. It was further contended that the case of Adamjee Insurance Company decided in July, 1989, was neither relevant nor applicable to the question involved in these appeals.
It was also argued that there was no "definite information" which had come to the knowledge of the Income Tax officials on the basis of which they could reopen the assessments of the appellants and make additional assessments under Section 65(1) or revise assessments under Section 66A of the Ordinance.
INCOME TAX ACT, 1922 S.10(7) "Notwithstanding' anything to the contrary contained in Section 8,9,10,12 and 18 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 First Schedule to this Act.
FIRST SCHEDULE (Rules 1 to 5 Relate to Life Insurance Business)
6(1). The profits and gains of any business of insurance other than life insurance shall be taken to 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 investment, and depreciation and appreciation of the value of investment shall' be dealt with as provided in rule 3 for the business of life insurance.
(2) "Where a company sets aside a portion of its income, profits and gains to meet exceptional losses so much of such portion as does not exceed ten per cent of the premium income of the year in which it is set aside shall be deducted from, the balance-of the profits.
INCOME TAX ORDINANCE, 1979 S.26. "Special provisions regarding business of insurance and production of oil and naturel gas and exploration and extraction of other mineral deposits (etc): Notwithstanding anything contained in this Ordinance:-
(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;
(b) Petroleum& natural gas.
(c) Exploration & extraction.
FOURTH SCHEDULE (Rules 1 to 4 Relate to life Insurance Business)
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 fallowing adjustments, namely: -
(a) any expenditure or allowance for any reserve or provision for any expenditure, or the amount of any tax deducted at source from any dividends or interest received which is not deductible in computing the income chargeable under the head "income from business or profession" shall be excluded.
(b) any amount either written OF or taken to reserve to meet depreciation or loss on the realisation of investments shall be referred to in sub- rule(l)
(3) "The amount deducted under sub-rule (2) in any year, together with the amounts, if any, deducted or carried to a reserve in earlier years to meet exceptional losses (as reduced by the amounts, if any, paid out of such amounts or reserve to meet exceptional losses shall not exceed- the _ premium income of that year or the average premium income of the three years immediately preceding that year, whichever is the higher,"
(1) Notwithstanding anything to the contrary contained in this Act, where any amount is paid, appropriated or diverted j out of or from the amounts deducted, under sub-rule(2) for ' purposes other than the meeting of an execeptional loss, such amount shall, together with the other premium income, if any, of the company for the year in which such payment, appropriation or diversion takes place, be deemed to be the premium income of the company for that year, and in the event of the liquidation of the company or the discontinuance of the business to which this rule applies, whichever is the earlier, the aggregate of the amounts' deducted under sub- rule^) as reduced by the payments made out of such amounts to meet exceptional losses shall together with the other income, if any of the company for the year in which it goes into liquidation or in which such business is discontinued be deemed to be the income of the company for that year.
(5) The term "exceptional loss", as used in this rule means the amount by which the aggregate loss in any year exceeds fifty per cent of the premium income of that year or fifty per cent of the average premium income of the three years immediately proceeding that year, whichever is the higher allowed as a deduction and any sums taken credit for in the accounts on account of appreciation, or gains on the realisation, of investment 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 OF or taken to reserve in the accounts to meet depreciation, or loss on the realisation, of investment as the case may be."
6. Mutual Insurance Association.
7. Definitions:
(a) Investments
(b) Life Insurance Business.
8. Application of this Schedule:- "The provisions of this Schedule shall apply notwithstanding anything contained in this Ordinance or any law for the time being in force.
The basic difference in the two Sections is that, in Section 10(7) of the Act, the non-obstante clause refers to Section 8,9,10, 12 and 18 -of the Act, whereas in Section 26 these Sections are not mentioned and it is provided that "Notwithstanding any thing contained in this Ordinance".
8. It is an admitted position of the appellants as well as the department that though Section 10(7) of the Act and Section 26(a) of the Ordinance provide that the profits and gains as well as the tax payable thereon shall be computed in accordance with the rules contained in the First Schedule to the Act and, under Section 26(a), in the Fourth Schedule to the Ordinance, neither in the First Schedule to the Act nor in the Fourth Schedule to the Ordinance, there is any provision for computation of the tax payable by the insurance companies. In absence of any provision in the said rules regarding computation of the tax payable by the insurance companies, an attempt was made on behalf of the appellants to argue that, in view of the non-obstante clause, insurance companies cannot be subject to tax, but the contention was not pressed with any seriousness. All the counsel for the appellants as also Mr. Shaik Haider, learned counsel for the department, eventually conceded that, in the absence of the required provisions in the Rules regarding computation of tax payable by insurance companies, the general provisions in the Income Tax laws providing for computation of income tax on business income of companies shall apply and that, under the Income Tax Ordinance, 1979, these general provisions are contained in the First Schedule. Now, Part I of the First Schedule of the Income Tax Ordinance inter alia provides the rates of income tax payable on the total income of every company excluding such part of the total income as consists of any dividend etc., and, Part II of the First Schedule inter alia provides rates of super-tax for dividend income at a much lower rate than the said rates in Part I.
9. From Section 26(a) of the Ordinance (Section 10.(7) of the Act) read with rule 5 of the Fourth Schedule (First Schedule of the Act) and the relevant provisions of the Insurance Act, 1938, it would follow that the Income Tax Officers have very limited jurisdiction to challenge the accounts submitted by a company dealing in insurance business. The jurisdiction of the Income Tax Officer is limited to the clauses (a) and
(b) of rule 5 of the First Schedule to the Ordinance (and provided in rule 6 of the First Schedule to the Act). Subject to the above, the Income Tax Officer is not competent to challenge the accounts submitted by the assessee under the Insurance Act, 1938. The Income Tax Officer cannot go behind such accounts. This question has been considered in sufficient detail by this Court in an earlier judgment in the case of Commissioner of Income Tax v. Phoenix Assurance Company Limited (991 SCMR 2485). It was inter alia noted in the said judgment as follows:-
(1) Under Section 11 of the Insurance Act, 1938 every Insurance Company has to prepare, at the expiration of each calender year, a balance- sheet, a profit and loss account and a revenue account in the prescribed form to reauthenticated;
(ii) Under Section 15, such audited accounts and statements have to be furnished to the Controller of Insurance as returns; (i.e) Section 18 of the Insurance Act requires every insurance company to furnish to the Controller of Insurance a certified copy of every' report on the affairs of the Concern which is submitted to the members or policy holders of the insurance:
(iv) Section 21 enables the Controller of Insurance to call for such further information from the insurer in respect of the return furnished by it if he feels that the same is inaccurate or defective in any manner;
(v) He can examine the books of accounts, registers and documents as well as any officer of the insurer:
(vi) He is empowered to decline to accept any return unless the inaccuracy has been corrected or the deficiency has been supplied and in case the Controller of Insurance declined to accept any return, the insurer shall be deemed to have failed to comply with the provisions of section 15 of the Insurance Act relating to the furnishing of return.
After, referring to these provisions of the Insurance Act, it was then observed by this Court that it was in this context that finality has been given to the accounts for purpose of rule 6 of the First Schedule to the At (rule 5 of the Fourth Schedule to the Ordinance). It was held that the Income Tax Officer was not competent to upset the integrity of the accounts submitted by the asse^see under the Insurance Act 1938 by applying the ordinary rules for computation of profits and accounts and for assessment of tax in the light of the provisions of Income Tax law in respect of the income in regard to the head 'business". It was also held that there was no substance in the contention that the combined effect of Section 10(7) read with rule 6 of the First Schedule to the Act (Section 26(a) read with rule 5 of the Fourth Schedule to the Ordinance) was that the Income Tax Officer was vested the power to probe into the accounts submitted by the insurance company with a view to determining the real nature of any item of such accounts for purpose of excluding it in order to adjust the balance of profits.
10. Another question debated during the hearing of these appeals was whether binding judgment. Nt of the Courts come within the term "better information" employed in section 65(2) of the Income Tax Ordinance. As has been observed, section 65(1) gives powers to the Income Tax Officer to reopen assessm ents in cases of under assessment of escaped assessment etc., but sub-section (2) of the section places and embargo upon the Income Tax Officer to reopen assessment in cases of under assessment or escaped assessment etc., hut- section (2) of the section places an embargo upon the Income Tax officer by providing that no proceedings for reopening the assessment shall be initiated unless definite information has come into the possession of the Income Tax Officer.
In a later judgment of this Court in the case of Central Insurance Company u. C.B.R. (1993 SCM R 1232), decided on 4.4.1993, this Court, inter alia, dealt in great detail with the . Expression definite information in section 65(2) of the Ordinance. It was observed that the words definite information are the key-words for the purposes of justifying action under sub-section (1) and, as the said words had not been defined in the Ordinance, they will carry their literary meanings. It was observed that every information cannot be treated as the basis for reopening of the assessm ent but the information should be of the nature which should qualify as "definite information" and that the expression definite information could not be given a universal meaning but it will have to be construed in each case, it was further observed that where an assessee discloses all the material facts without any concealment and the assessment had been consciously completed by the Income Tax Officer, in such a case, in the absence of the discovery of any new facts which can be treated as "definite information", there cannot be any scope for reopening of the assessment under Section 65. It was further observed that any change of opinion on the basis of the same material by the Income Tax Officer will not warrant pressing into service the said provision. It was observed that a Circular from the Board of Revenue interpreting any provision of a law was hot a "definite information" for reopening of assessment by an Income Tax Officer. It was then observed that expression "definite information" will include factual information as well as information about the existence of a binding judgment of a competent Court of law/forum for the purposes of section 65 of the Ordinance, but any interpretation of a provision of law by a functionary which has not been entrusted with the function o interpret such provision judicially cannot be treated as a "definite information."
An interpretation by a functionary of the revenue department or a change in the interpretation of any provision by any functionary of the department including the Central Board of Revenue is not "definite information" for being made a lawful basis for reopening an assessment already made. In regard to the points in issue in these appeals, there are three main judgments of our Superior courts namely American Life Insurance Co., Adamjee Insurance Company and Central Insurance Company. The first two are of the High Court (from Karachi) and the third is of this Court.
In the Court Commissioner of Income Tax v. American Life . Insurance Company (1967) 15 Tax 268, the assessee, a life insurance company had claimed that its dividend income, which formed part of its profits and gains, was chargeable to a lower tax at 15% under the Third Schedule to the Finance Ordinance 1960. The Income Tax Officer rejected the plea on the ground that the profits and gains of insurance business from all sources are to be computed artificially in accordance with the Rules contained in the First Schedule to the Act and since the insurance company instead of submitting its return under the various heads as said down in Section 6 of the Act, had to submit one unit of income as provided in the First Schedule to the Act, it was to be charged as a whole and the income from the dividends included in the total income could not be separately charged as provided in the Finance Ordinance 1960. The case was taken by the assessee to the Income Tax Appellate Tribunal in a direct appeal and the Tribunal held that though the computation of income in case of the insurance business was to be computed in a particular manner, yet for charging the tax reference had to be made to the different provisions of the Schedule to section 10 of the Finance Ordinance 1960 and since it closely demarcated different rates applicable to different kinds of income, the rate .
Applicable to the dividend as such had got to be adopted in confirmity with the provisions. Reference application filed by the Department was dismissed by the High Court upholding the view of the Tribunal. It was held that section 10(7) only deals with the computation of the income of an insurance company and is not a charging section and, therefore, in order to charge an insurance company, to income tax it would be necessary, as in the case of other persons, to rely on the other provisions in the Income Tax Act which are called charging sections.
Answering the question in the Reference in favour of the assessee, it was held by the High Court as follows:- "In these circumstances, we fully agree with the observations of the Tribunal that although by artificial method the computation of income in case of life insurance business is to be made in a particular manner yet for charging the tax one should refer to the different provisions of the Schedule to section 10 of the Finance Ordinance 1960; and, since this Ordinance clearly demarcates [different rates applicable to different kinds of income, the rates applicable to the , ! Dividend !As ,such has not to be adopted in ^ confirmity with these provisions."
The judgment in American Life, Insurance Company case by a Division Bench of the High Court authored by Late Justice Wahiduddin Ahmad; as he then was, related to a life insurance company, but the principles enunciated there in fully applied to general insurance companies.
Neither in the Act nor in the Ordinance or in the schedules to these statutes, there were/are any specific or different provisions for computing the tax on the income of insurance companies, life or general. In the circumstances, it was held that tax would be charged in accordance with the general provisions regarding computation of tax on business income of companies according to which dividend income of companies was chargeable to tax at a lower rate than the normal rate of tax on other income of the companies. As noted earlier, these principles enunciated in the case of American Life Company had been followed by the Department till 1991, by which time judgment of the Sindh High Court in the case of Adamjee Insurance Company 1989 P.T.D. 1990 had been announced.
12. As observed, the tax officers reopened the assessments already finalised and made revised additional assessments relying upon the following observations in the judgment in Adamjee Insurance Co. Case:- "In our view as soon as the profits and gains of insurance business are computed accordance's with the provisions of Section 26 read with rule 6 of the IV Schedule of income which is not capable of being bifurcated for the purposes of changing the tax into different heads of income categorised in section 15 of the Ordinance."
However, judgment in the case of Adamjee Insurance Company (1989 PTD 1090), which is also the basis of the impugned judgment of the Sindh High Court in the present appeals, provisions of the First Schedule to the Ordinance were not directly under consideration. In the present appeals, the question is whether the entire profits and gains of the appellants, general insurance companies, including dividend income, are chargeable to tax at the normal rates provided in the First Schedule or to the extent dividend income is concerned, the same is chargeable to tax at the lower rate as provided in the said First Schedule.
This question was neither involved nor decided in the case of Adamjee Insurance Company. In that case, the question regarding different rates of tax in the First Schedule and their applicability to income from general business did not arise. Perhaps for this reason, judgment in the case of American Life Insurance Company was not referred in the judgment. In Adamjee Insurance Company case, the point involved was whether benefit of emption under section 14 of the Ordinance read with Item No. 72 of the Second Schedule was available to the general insurance companies and this was decided against the insurance companies by the High Court. Question under consideration was exemptions and in that context applicability of Second Schedule and section 14. Following. The past practice of the department, while making the assessm ents of the petitioners, income from Khas Deposit Certificates of the general insurance companies was not subjected to tax by the tax officers under the First Schedule to the Ordinance but was considered exempt under Section 14 read with the Second Schedule.
Assessm ents of the petitioners were reopened under section 65(1). Petitioners took the matter to the Sindh High Court. The High Court decided the petitions against the insurance companies and held that the income from Khas Deposit Certificates was part of profits and gains of the insurance companies and they cannot get benefit of the exemption under the Second Schedule. Against the common judgment of the Sindh High Court in the case of Adamjee Insurance Company, appeals were brought to this Court and judgment of this Court is reported as Central Insurance Company' Ltd. v. C.B.R. (1993 SCM R 1232). There is slight confusion in the title of the cases. Both Adamjee Insurance Company as, well as Central Insurance Company were amongst the petitioners before the High Court and the consolidated judgment in the High Court is reported as Adamjee Insurance Company v. CIT, whereas the judgment of this Court in appeal against the said Judgment of the High Court is reported as Central Insurance Company Ltd. v. C.B.R. (1993 S.C.M.R. 1232).
13. In appeals before this Court judgment in Central Insurance Company and others was authored by Amal Mian J. It was noted in the said judgment that section 14 of the Ordinance related to exemption and that item No.72 of the Second Schedule exempted income on national saving or deposited certificates including defence saving certificates as exempted. Reference was made to section 26 of the Ordinance and rule 5 of the Fourth Schedule to the Ordinance. Reference was then made to the following judgments cited during the hearing of the appeals:- i) Commissioner of Income Tax, Bombay u. New India Assurance Co. Ltd. (1967) 71 ITR 761; ii) Lakshmi Insurance Co. Ltd. u. Commissioner of Income Tax (1969)72 ITR 474; i.e) Lakshmi Insurance Co. Ltd. u. Commissioner Income Tax Punjab (AIR 1950) Lah 234) iv) Commissioner of Income Tax u. National Insurance Co. Ltd. (1968) 159 ITR314. v) Commissioner of Income Tax Central v. Alpha Insurance Co. Ltd. (PLD 1981 SC 293) vi) Habib Insurance Co. Ltd. u. Commissioner of Income Tax (Central) (PLD 1995 SC 109) vii) Commissioner of Income Tax (Central) Zone Karachi v. Phone-x Assurance Co. Ltd. (1991) 64 taxation 1739)
(viii) Commissioner of Income Tax Karachi v. Queens land Insurance Co. Ltd. (1992 SCM R 539).
It was then observed as follows:- "11/The ratio of the above judgments of this Court seems to be that profit and loss accounts submitted by an insurance company under the Insurance Act. 1938, to the Controller of Insurance, are to be accourted and to be made basis for the purposes of computing profits and gains of insurance business and the amount of tax payable thereon in terms of section 10(7) read with Rule 6 of the First Schedule to the late Act. The above provisions have been treated as complete, self- contained and exhaustive to the exclusion of overs other provision not expressly incorporated, and therefore, the other provisions relating to the working out of profits and gains and the amount of tax payable contained inter alia in section 8, 9,10,12 or 18 of the late Act, are not-applicable in case of an insurance company except section 10 of the above Act has been brought back for limited purpose of adding back expenditure not permissible under the above section. The Income Tax Officer, in face of the above statutory provisions, is not competent to undermine the authenticity/finality of the accounts submitted by the assessee under the Insurance Act by ordinary rules for computation of profits and gains and for assessment of tax thereon n the light of other provisions of the late Act. But, his jurisdiction is limited to and back items of expenditure not admissible as above.
12. It may be stated that section 26(a) and Rule 5 of the Fourth Schedule to the Ordinance correspond with above section 10(7) and Rule;6 of the First Schedule to the later Act/ as stated above and therefore, the ratio of the above cases can be pressed into service while con stiming the above, ^/provision of the Ordinance. In the present case, it is an admitted proof that the appellants, while submitting their accounts to the Controller of Insurance in Form B in income of the Insurance Act, 1938, and shown the interest earned by them on khas Reposit Certificate/Defence Sevins Certificates during the assessment years in question and, therefore, it was part of profits and gains and, therefore, could be subject to tax. It is time that section 14 as well section 26 contained non obstante clause, but section 26, being a provision subsequent to section 14 and also being a special provision inter alia dealing with the working out of profits and gains of any business of insurance and the tax payable thereof read with Fourth Schedule; shall prevail".
But on the question of reopening of the assessments, which were finalized prior to the decision by the High Court, this Court held as follows:- "28. In the present cases .At the time of framing of the assessment orders for the assessment years in issue there was no decision of a superior Court which could be binding on the Income Tax Officer holding that section 26(b) read with Rule 5 of the Fourth Schedule to the Ordinance shall prevail on Item (72) of the Second Schedule read with section 14 of the Ordinance in order to deny the benefit of tax-free income. On the contrary, the department for a long period, had been consistently construing the above provisions in the manner as to extend the benefit of the tax-free income in the form of interest earned on the Khas Deposit Certificates/Defence Saving Certificates. The judgements of this Court referred to hereinabove, though have laid down that the provisions of the First Schedule relating to Insurance Companies on account of section 10(7) of the late Income Tax Act, were to prevail over the other provisions except to the extent which have been expressly incorporated by virtue of the above . ' relevant provisions of the First Schedule, but they have not touched upon the question, whether the tax-free earning by virtue of Item (72) of the Second Schedule read with section 14 of the Ordinance can be denied to the Insurance Companies by virtue of section 26(a) read with the Fourth Schedule to the Ordinance. There seems to be divergence of views on the above question in the Courts of Indian jurisdiction as reflected in the cases relied upon by the learned Judges of the Division Bench in the judgment under appeal and the cases cited by the learned counsel for the appellants at the Bar. The view taken by the department in the present cases cannot be-said to be perverse or such, which could not have been taken.
29. We are, therefore, of the view that there was no definite information in terms of section 65(2) of the Ordinance available before the Income Tax Office warranting issuance of the impugned notices under section 65 of the Ordinance. We would, therefore,, allow the above appeals and declare the impugned notices and the proceedings/orders passed pursuant thereof as being without lawful authority and of no legal effect. However, there will be no order as to costs."
14. After consideration of the decisions of the High Court and the Supreme Court in the cases of Adamjee Insurance Company and Central Insurance Company respectively, it may be observed that the ratio of Adamjee Insurance Company case is that, being part of profits and gains of general insurance 'business, interest on Khas Deposit Certificates/Defence Saving Certificates could not be exempt from tax under Section 14 read with the Second Schedule to the Ordinance, and this Court affirmed this view in the case of Central Insurance Company by holding that such interest being part of the profits and gains of the assessee could be subject to tax. We reiterate this view in the case of Central Insurance Company. However, neither of the two decisions is an authority for the proposition that dividend income of general insurance company is liable to tax at-, the normal rates provided in the First Schedule to the Ordinance and not at the lower rates at which the" dividend income is chargeable to tax under the same Schedule. Reliance placed by the department on- the said two cases for the aforesaid proposition is, therefore, misplaced.
15. As has been noted earlier in this judgment, since at least 1967, the department has been consistently following the Provision of the High Court in the case of American Life Insurance Company (1967) 15 Tax 268. Although the said decision was in the case of a life insurance company, the principle in the judgment was that dividend income was liable to tax at a lower rate according to the applicable Schedule (now First Schedule to the Ordinance). As observed, till 1991, when notices were issued for the first time under section 65 for reopening of the assessm ents on the basis of the judgment in he case of Adamjee Insurance Company, the department had all along been consistently accepting that dividend income was not chargeable at the normal rates but was chargeable at lower rates according to the First Schedule to the Ordinance. Learned counsel appearing for the appellants had also referred the case of Commissioner of Income Tax v. Habib Insurance Company {PLD 1975 Kar 848). In this case, the following-two questions were referred to the High Court under section 66(1) of the Act for opinion:- "(1) Whether the assessee insurance company whose income from life insurance business is computed under rule 2(b) of the First Schedule read with section 10(7) of the Income Tax Act, 1922, are not entitled to exemption from tax in respect of income from newly constructed property granted by section 4(3) (xii) of the said Act for the assessment years 1960-61,1961-62 & 1962-63.
(2) Whether having regard , to sub-paragraph B of Part 1 of the Fourth Schedule to the Income Tax Act as applicable to assessment for the assessm ent year 1962-63 the assessee for the company whose income from life insurance business is computed under rule 2(b) of the First Schedule read with section 10(7) of the Income Tax Act, 1922, is liable to be charge with income tax in respect of the amount representing income from dividends."
Para 2 of the judgment of the High Court is relevant and reproduced here:- "At the outset, it may be stated that during the course of hearing of this reference, Mr. S.A. Nusrat, the learned counsel for the Department placed before the Court, a letter from the office of the Commissioner of Income-tax, Central, Karachi, and stated that it was not necessary for the Court to give its opinion on question No.2, as the Department had agreed that it was covered by a prior decision of this Court in the case of American Life Insurance Co. Ltd. (1967) 15 To 268. We would, therefore, now answer only the first question and would not, refer to the facts with regard to the second question."
The above also confirms that the department had been following the principle laid down in the case of American Life Insurance Company.
Mr. M. Athar Saeed, one of the learned counsel appearing for the appellants, had also referred to Circular No. 16-IT of 1967 issued on 29.9.1967 by the Central Board of Revenue, Govt, of Pakistan. Para 26 of this Circular reads as follows:- "26. Insurance Companies:- As announced by the Finance Minister in his 1967-68 budget speech income of arr insurance company from dividend and capital gains would be taxed at the same- rates as are applicable to the dividend income and capital gains of any other company."
Mr. M. Athar Saeed had submitted that this Circular has not been withdrawn. During the hearing of the appeals, we had asked Mr. Shaik Haider to confirm from the department whether Circular No. 16-IT of 1967, specifically paragraph 26 therein, had been withdrawn or not and he had undertaken to inform the Court accordingly. However, till the writing of the present judgment, no statement has been made on behalf of the department in this regard and, in the circumstances, it can be presumed that the said Circular has not withdrawn. This Circular also supports the stand taken on behalf of the appellants that till 1991, the department's interpretations was that income of an insurance company from dividend was liable to be taxed at the same rates as were applicable to the dividend income of any other company.
15. We may also quote here a passage cited before us from-Kanga and Pak lkhivala on the Law and Practice of Income Tax, VI edition, Vol (page 1116) as follows:- "But computation of income, and determination of the rate and quantum of tax, are separate and independent concepts and processes.
Section 44 which enjoins the computation of income of an insurance company without reference to the different heads of income, has.
Obviously a direct bearing on the process of computation of income; but it has no bearing on the determination of the rate of tax which is prescribed by the relevant Finance Act. Consequently, a non-life insurance company is entitled to the benefit of the lower tax rates contained in the various Finance Acts in respect of dividends received from Indian companies. The dividend income does not cease to be dividend income because, for the purpose of computation of income, it is treated as part of the profits of non-life ' insurance business under this rule."
16. Reference may also be made to a judgement from the Indian jurisdiction in the case of Commissioner of Income Tax u. Madras Motor & General Insurance Co. Ltd. (1975) 99 ITR 243, which was relied upon on behalf of the appellants. In that case, the relevant provision of the law under consideration was para-graph D of Part II in the Indian Finance Act 1963.
Relevant portion whereof read as follows:- "In the case of every company other than the Life Insurance Corporation of India...
(ii) a rebate... At the rate of 45 per cent on so much of the total income -as consists of dividends from any other Indian Company Shall be allowed.."
On behalf of the department it was contended that, in the general insurance business, in view of the special basis of computation of profits of insurance business under the provision of Income Tax Act 1961, no portion of the total income could be claimed as dividend become from any other Indian company and the entire total income shall be deemed to be the income from business. It was noted by the Madras High Court that the aforesaid provision was intended to give relief by way of rebate in the super tax for every company other than the Life Insurance Corporation of India at the prescribed rates and general insurance companies were not specifically excluded by such provision. It was held as follows:- "We do not find anything in the language of the relevant provision in the Finance Act to warrant an interpretation that the said provision will apply only to a company which is entitled to submit a return of its income and to be assessed in respect of such income under separate headings or sources, if we have to accept the argument of the learned counsel for their revenue we would have to read the relevant provision as in the case of every company other than the general insurance company and the Life Insurance Corporation of India" which would be re- writing the section and not giving effect to the same."
17. Mr. Shaik Haider, learned counsel appearing for the department, was not able to refer any judgment which overruled the decision in the American Life Insurance Company case and interpreted the provisions under consideration to deny the benefit of lower tax rates on that part of the profits and gains and general insurance business which comprised dividend incomes. Reliance, of course, had been placed on the decision in Adamjee Insurance Company case, but as pointed out the provisions under consideration there were section 14 and Second Schedule of the Ordinance relating to exemption from tax which were not relevant to the issue involved in the present appeals.
Reliance had also been placed by Mr. Shaik Haider on the case of Central Insurance Company decided by this Court. This base has also been considered earlier in the present judgment and it has been observed that the same does not decide the question in issue in the present appeals. Learned counsel for the department had also referred to the case of Qursahi Saigal v. Commissioner of Income Tax (1963)48 ITR1. The said judgment does not help the case of the department in which it was observed that the provisions in a taking statute dealing with machinery for assessm ent have to be construed by the ordinary rules of construction, that is to say, in accordance with the clear intention of the legislature, which is to make a charge levied effective. Learned counsel had also referred Maxwell on .The Interpretation of Statutes (Twelve Edition). Reliance was placed on the following passage at page 76 of Maxwell:- "The words of a statute, when, there is doubt about their meaning, are to be understood in 'the sense in which they best harmonise with the subject of the . Enactment."
Neither the passage from Maxwell nor the said decision advances the case of the department.
18. Arguments had been addressed by learned counsel for the appellants as well as by Mr. Shaik haider representing, the Department on the non-obstante clause in Section 10(7) of the Act as well as Section 26(a) of the Ordinance.
A non-obstante clause is usually used in a provision to indicate that the provision .Should prevail despite anything to the contrary in the provision mentioned in such non-obstante clause. In case there is any inconsistency between the non- obstante clause and another provision, one of the objects of such a clause is to indicate that it is the non-obstante clause which would prevail over the other clause.
(Bindra on Interpretation of Statutes-7th Edition).
Both in Section 10(7) of the Act as well as in Section 26(a) of the Ordinance, there is a non-obstante clause. As noted earlier, the difference is that in Section 10(7), non-obstante clause is confined to four Sections of the Act, whereas" in Section 26(a) it is extended to the entire Ordinance. However, in neither case, the non-obstante clause ousts the specified Sections of the Act or the whole Ordinance. Mr. Fakhruddin G. Ebrahim, S.A.S.C., is correct that the effect of the non- obstante clause is that the specified Sections in the Act or the rest of the Ordinance, to the extent that these are inconsistent with Section 10(7) and First Schedule of the Act or Section 26 and the Fourth Schedule of the Ordinance, shall not be given effect to. As there is no provision in rule 6 of the First Schedule to the Act or rule 5 of the Fourth Schedule to the Ordinance providing for computation of tax on income from general insurance business, there is no inconsistency between the special provisions relating to general insurance business in the Act or Ordinance and the applicable Schedules containing general provisions for computation of tax on business. As observed earlier, such general provisions then apply of computation of tax on income from general insurance business also.
19. We find that the judgment in the case of American Life Insurance Company (1967) 15 Tax 268 has not been set aside so far. The judgment in the case of American Life Insurance. Company was followed consistently by the department since it was announced. In our view the High Court had taken the correct view in the American Life Insurance Co. Case. The impugned judgment of the Sindh High Court does not refer to this judgment.
Section 26(a) of the Ordinance, inter alia, provides that notwithstanding anything contained in the Ordinance, 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.
Computation of profits and gains and computation of tax payable are two different concepts altogether. In rule 5 of the Fourth Schedule special provisions exist for computation of income from general insurance business, but there are po provisions at all in the rule for computation of tax on such income. This could [15)97 lead to two interpretations. There being no provision in the Fourth Schedule for computation of tax, such income cannot be subject to tax or, in the absence of taxing provisions, general taxing provisions contained in First Schedule for business income of companies will apply. The intention of the legislature is clear and that is that income from general insurance shall be subject to tax under the Income Tax Ordinance. The interpretation that such income will be tax free is, therefore, to be rejected. Special provisions are,* however, silent regarding computation of tax on such income. To give effect to the intention of the legislature and to harmonise different provisions of the Ordinance, the interpretation will be that for taxing such income the general provisions contained in the First Schedule providing for computation of tax or income of companies from business shall apply, and, while applying the provisions of the First Schedule for computation of tax on such income, if any benefit in the rate of tax is provided on any kind of income, general insurance companies cannot be deprived of such benefit shall not be extended in respect of income from general insurance business. Admittedly, no such special provision appears in the First Schedule or in any provision of the Income Tax Law to deny the said benefit to the general insurance companies. There is no provision in the Ordinance or the Schedules that only one part of the First Schedule shall apply and the other shall not in the case of general insurance r companies. Benefit in the rates of tax available under the First Schedule of the Ordinance can only be denied to the general insurance companies by suitably amending the law.
20. In the circumstances, we are of the view that assessments of the appellants which had already been made inter alia extending benefit of lower tax on dividends on the basis of the rule laid down in the American Life Insurance Company case could not be reopened under Section 65(1) of the Income Tax Ordinance, 1979, and, though a binding judgment of a superior Court of the country is "definite information"-in terms of sub-section (2) of Section 65, neither the judgment in the case of Adamjee Insurance Company nor by this Court in the case of Central Insurance Company over- ruled or upset the judgment in American Life Insurance Company case. We are also of the opinion that the view taken in the case of American Life Insurance Company is correct and it equally applied to income from general insurance business and, as such, cases of the appellants reopened under Section 66 A and even fresh assessments made by the Income Tax Officers or by appellate authorities depriving the appellants of the benefit in that under the First Schedule to the Ordinance in respect of the dividend income are also liable to be' set aside. We also find that the High Court erred in treating the cases of the appellants as cases for exemption from tax whereas these cases related to the benefit of lower rate of tax available to the assessee in relation to dividend income under the First Schedule to the Income Tax Ordinance. The High Court further erred in relying on the observations made by the earlier judgment of the High Court in the case of Adamjee Insurance Company which, as observed earlier, related to different provisions. It may be observed here that no judgment has been referred which takes a different view that has been taken by the High Court in the case of American Life Insurance Company.
21. As a result, the judgment of the Sindh High Court is set aside and all these appeals are allowed. There shall be no order as to costs.