1. MR. S. HASAN IMAM, JUDICIAL MEMBER.-(1).We would prefer to decide by this order, cross appeals, pertaining to assessm ent years 2001-2002. The assessee has taken objection to the order dated 31.10.2002 maintaining the disallowance of provision for taxation of Rs. 12,34,294/- (Rs. 1,155,524/- + Rs. 78,770/-) and disallowances of provision for diminution in the value of investments amounting to Rs. 30,022/-.
2. Contrary to above grounds the department has challenged the order directing to apply concessional tax rate of 25% of capital gain on sale of shares.
2. 3.Facts in brief leading to present appeal are that assessee a branch of Foreign Company engaged in the general insurance business furnished return declaring total income of Rs.
3. 14,69,448/- on 27.9.2001 accompanied with statement of accounts and balance sheet. Later on A. R.
4. Of the assessee in compliance of directions furnished further details and documents as requisitioned through letter dated 16.10.2001. The case of the assessee was examined keeping in view the provisions of section 26A and the Rules contained in the Fourth Schedule to the Income Tax Ordinance, 1979:- "The assessee is a branch of Foreign Company engaged in the general insurance business. The case has been examined in the light of provisions of section 26(a) and the Rules contained in the Fourth Schedule to the Income Tax Ordinance, 1979. The admissibility/ inadmissibility of various claims is discussed as under:-
(1) PROVISION FOR TAXATION: The assessee has made 'provision for taxation' and debited the same to the profit & loss account as under:- Provision for taxation on insurer's profits.
5. 78,770/-Rs. 737,807/- Provision for taxation on investment. Rs. 496,487/- Less: Income tax deducted at source. Rs. 417,717/- Total: Rs. 1,155,524/- 4.The assessing officer disallowed the claim observing that the provision for taxation is inadmissible deduction under Rule 5(a) of the 4th Schedule to the Income Tax Ordinance, 1979. He also disallowed claim related to Income Tax deducted at source from interest and dividend amounting to Rs. 78,770/- charged to the profit and loss account being inadmissible deduction under Rule 26A as well as 59(a) of the 4th Schedule. The leamed CIT(A) confirmed the order observing that it is a decided issue in view of the order of the learned I.T.A.T. Reported as (1998) 77 Tax 35 page 53 (Trib.). Since the issue related to provision for tax Rs. 78,770/- in respect of interest and dividend income also stands covered in the above said decision the treatment meted out in the context was also confirmed.
6. 5.The learned CIT(A) has confirmed the additions in the head provision for taxation (Rs. 11,55,524/-) and provision for tax (Rs. 78.770/-) in respect of interest and dividend income in view of the decision of the I.T.A.T. Reported as (1998) 77 Tax 35. (The issue regarding provision for tax has been discussed in detail at page-53 whereas the issue regarding provision for tax in respect of interest and dividend income stands covered in the aforesaid decision at page-15). Since the leamed counsel for the assessee has not been able to rebut the findings and to make out the case that the facts of the present assessee are different from the facts of the reported judgment, we therefore, find reasons to confirm the order in this context.
7. 6.The next issue pertains to upholding the disallowance of provision for diminution in the value of investments amounting to Rs. 30.022/-. The learned assessing officer placing reliance on Rule 5(a) made in the condition disallowing the provision made for diminution in the value of investment, assessed, amounting to Rs. 30,022/-. Before the leamed CIT(A) it was vehemently urged that allowances are covered under Rule 5(b) and Rule 5(a) has nothing to do in the present case.
8. However, the learned CIT(A) disagreed with the contention and maintained the treatment of the learned DCIT.
9. 7.Heard the learned representatives of the two parties. It is argued that order confirming the treatment placing reliance on Rule 5(a) instead of Rule 5(b) is erroneous. Before making any further discussion, it would be appropriate to reproduce Rule 5(a) and 5(b) of Fourth Schedule to the Income Tax Ordinance, 1979:-- CL. 263 "Rule 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.
10. Rules 5(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 investment shall be treated as part of the profits and gains."
11. 8.Rule 5(a) provides exclusion of an expenditure or allowance or any reserve or provision for any expenditure, whereas Rule 5(b) is nothing to do with the provision. It simply referred to amount either written off or taken to reserve to meet depreciation. Assessment order reveals that assessee has made provision for diminution in the value of investment and since it is a provision for expenditure, it is inadmissible under Rule 5(a) of the Fourth Schedule to the Income Tax Ordinance, 1979 hence order of the learned CIT(A) confirming the treatment based on an order reported as (1992) 66 Tax 33 does not warrant interference.
12. 9.The department has taken objection to the order directing to apply concessional tax rate of 25% on capital gain on sale of shares. The assessee is an insurance company. The department has not challenged the verdict of the CIT(A) regarding disallowance of claim on exemption from tax to capital gains on sale of shares. The appeal has been preferred being aggrieved and dissatisfied from the order directing to charge tax at the concessional rate of 25% as against standard rate of 43%. The learned D.R. Has argued that reliance cannot be placed on decision reported as (1998) 77 Tax 66 (Trib.) as the case law above is on dividend income whereas the assessee has earned capital income. Record reveals that assessee has charged tax on capital gain on sale of shares of Habib Insurance held by the company for more than 3 years at the rate 43% applicable to business income instead of rate applicable to capital gain. The action of ACIT appears to be contrary to the provisions of the aforesaid Part-IV of First Schedule wherein the lower rate of 25% is provided. The case law reported as Civil Appeals No. 933 to 940 of 1995 in a case of M/s. E.F.U. General Insurance Ltd. And others Vs. Federation of Pakistan and others (Supreme Court of Pakistan) is applicable in the present case. The I.T.A.T's decision referred above to is also based on the Supreme Court Judgment and ratio of the order stood as under:- "The department has applied rate of tax on the dividend income in the normal course as applied to the income derived from general insurance business. The assessee are aggrieved with this statement. The point in issue stands decided in favour of assessee in the recent judgment dated 3.6.1997 in the case of M/s. E. F. U. General Insurance Limited and others v. Federation of Pakistan and others in Civil Appeals No. 933 to 940 of 1995 and others. The Hon'ble Supreme Court of Pakistan has held that the insurance companies are entitled to the benefit of lower rate of tax available to other assessee in relation to the dividend income under the First Schedule to the Income Tax Ordinance. This issue is decided accordingly in favour of the assessee."
13. 10.The ratio of the order is sufficient to direct to tax capital gain arising on sale of shares at 25%. The order of the learned CIT(A) in the circumstances supra does not warrant interference.