PRIME COMMERCIAL BANK LTD. VS INCOME TAX APPELLATE TRIBUNAL, LAHORE, 2016 PTD-LAHORE-HIGH-COURT-LAHORE 2091 (2016)

(a) Income Tax Ordinance (XXXI of 1979)---

----Ss. 24, 133 & Cl. 3 of Part IV of the Second Schedule ---- Deductions not admissible ---- Allowance of perquisites paid by certain corporations ---Interpretation of exemption contained in clause 3 of Part IV of the Second Schedule to the Income Tax Ordinance, 1979 ---- Question before the High Court was whether the exemption contained in clause 3 of Part IV of the Second Schedule to the Income Tax Ordinance, 1979 applied only to banking companies and Financial Institutions owned and controlled by the Federal Government and in particular whether the word "or" contained therein, was used conjunctively or disjunctively --- Held, that upon holistic reading of said clause it was clear that the said clause applied only to a banking company which was owned and controlled by the Federal Government only and not to any other banking company --- High Court observed that it was not necessary to see whether the term "or" in the said clause was to be read disjunctively or conjunctively as the intention of the Legislature was clear that the clause should apply to banking companies owned and controlled by Federal Government only---When Clause 3 of Part IV of the Second Schedule to the Income Tax Ordinance, 1979 was enacted, only banking companies which were wholly owned and controlled by the Federal Government existed, as a result of the nationalization of banking companies --- Privatization process of banking companies commenced at a much later stage and thus only banking companies in contemplation of the Legislature while enacting said clause, were banking companies owned and controlled by the Federal Government---Use of the term "or" merely accentuated and emphasized the separate nature of the two entities, that were, banking companies and financial institutions and must not be confused to lay a distinction between "or" as categorizing banking companies on the one hand and financial institutions wholly owned and controlled by the Federal Government on the other ---Words "owned and controlled by the Federal Government" were intended to attach to both the terms and the word "or" has been used in a disjunctive sense for the limited purpose of bringing home the legislative intent that one juristic person may not include the other, and there could be no doubt that the legislative intent was clear and did not require the Court to read "or" as "and" in the said clause---Reference was answered accordingly.

Commissioner of Income Tax v. Habib Bank Ltd., and ANZ Grindlays Bank 2014 SCMR 1557; Sutherland, Statutory Construction 3rd Edition Part-3 Page 296 and Muhammad Arif and others v. District and Sessions Judge, Sialkot and others 2011 SCMR 1591 rel.

(b) Interpretation of statutes---

----Taxing Statute/Rules---Exemptions---Exemptions, under taxing statutes, should be construed strictly---As a general rule, grant of exemption should be construed in such a way which gives rigid interpretation against assertion of the taxpayer, and in favour of the taking power, and basis of said rule was the same as that supporting rule of strict construction of positive revenue loss; that burden of taxation should be distributed equally and fairly among members of the society.

Sutherland, Statutory Construction 3rd Edition Part-3 Page 296 rel.

Dr. Ikram ul Haq for Petitioner.

Liaqat Ali Choudhary for Respondents.

Date of hearing: 1st March, 2016.

JUDGMENT

SHAHID KARIM, J.---This is an application by way of a reference under section 133 of the Income Tax Ordinance, 1979 ('Ordinance') against the order dated 24.09.2005 ('impugned order') of the learned Income Tax Appellate Tribunal, Lahore Bench, Lahore ('Tribunal').

2. This judgment shall also decide connected reference applications bearing PTRs Nos.270 and 272 of 2005.

3. The following question of law is asserted to have arisen out of the impugned order.

(i)Whether the Tribunal was correct in law to hold that sections 46B and 54A of the State Bank of Pakistan Act, 1956 and section 35 read with section 91A of the Banking Companies Ordinance, 1962 do not override any conflicting provisions of Income Tax Ordinance, 1979, misconstruing that it was promulgated later in time?

(ii)Whether the Tribunal was correct to hold. that specific non-obstante provisions of special laws namely the State Bank of Pakistan Act of 1956 and the Banking Companies Ordinance, 1962 do not override conflicting provision of a general law, namely Income Tax Ordinance, 1979?

(iii)Whether the Tribunal was right in applying section 3 of Income Tax Ordinance, 2001 on an assessment completed under the repealed Income Tax Ordinance, 1979 wherein no such parallel provision was available?

(iv)If answers to Questions Nos. (i), (ii) and (iii) are in negative; whether the Tribunal was right in disallowing the amount claimed as diminution in value of investment as inadmissible allowance?

(v)Whether the Tribunal was correct in law to hold that word "or" appearing in clause (3) of Part-IV of Second Schedule to the Income Tax Ordinance, 1979 between two distinct entitles i.e. "Banking Company" and "Financial Institution" is conjunctive?

(vi)Whether the Tribunal was justified to deny exemption under clause (3) Part-IV of Second Schedule to Income Tax Ordinance, 1979 to the petitioner?"

4. According to the learned counsel for the parties it's common ground that first four questions of law are related to PTR No.271 of 2005 while the questions of law Nos.(v) & (vi) are involved in all three reference applications.

5. We have heard the learned counsel for the parties. With regard to questions Nos. (i) to (iv), the learned counsel for the parties have conceded to the position that the matter ought to be remanded to the learned Tribunal for decision on merits of the case as clearly the learned Tribunal has mis-directed itself in adverting to the wrong question before the Tribunal. The question before the learned Tribunal was not whether the provisions of State Bank of Pakistan Act 1956 and the Banking Companies Ordinance, 1962 had overriding effect on the provisions of the Income Tax Ordinance, 1979 ('repealed Ordinance') and whether, the former two laws were special laws and therefore ought to take precedent over the general law which was Ordinance, 1979. In this regard section 32 of the repealed Ordinance is very clear and we are in no manner of doubt that there was no controversy in real sense as to which method of accounting was to be made and whether provisions of repealed Ordinance prescribed a different method of accounting from the one consistently made use of by the Banking Companies like the applicant before us. The real question before the learned Tribunal was whether the assessee had made a provision of Rs.2420000/- for diminution in value of investment and the Assessing Officer had disallowed it by stating that it was purely a provision and therefore disallowance was made by the Assessing. Officer and which was affirmed by the CIT(A). The amount was therefore added back. This issue was not dilated upon by the learned Tribunal and the learned Tribunal adverted its attention to the issue relating to special and general provisions and whether one of the enactment would have the overriding effect upon the other. We may also refer the judgment of Supreme Court of Pakistan in this regard reported as Commissioner of Income Tax v. Habib Bank Limited and ANZ Grindlays Bank (2014 SCMR 1557) in which the effect of section 32 of the repealed Ordinance considered and it was held that, "In these circumstances, the impugned judgments rendered by the High Court have in our opinion correctly held that the respondent-banks were justified in adopting the method of accounting which was hybrid and had been consistently used by the respondent-Banks since long".

6.The portion of the impugned order of the learned Tribunal on this issue is therefore set aside and the matter is remanded to the learned Tribunal for determining on the merit of the case viz whether the provisions made by the assesses for diminution in value of investment ought to be allowed or not. In short, the learned Tribunal will determine whether the investment for which the provision was made was a capital loss or revenue loss and thus proceed to determine as to whether allowance should be made or not.

7.As to issues Nos.(v) & (vi) any decision on these issues will depend upon determination of clause 3 of Part IV of Second Schedule to the repealed Ordinance. The said clause reads as under:

"Allowance of Perquisites paid by certain corporations.---The provisions of clause (i) of Section 24 shall not apply to any expenditure incurred by a banking company or a financial institution (owned and) controlled by the Federal Government on the provisions of perquisites, allowances or other benefits to any employee in pursuance of any law."

8.It is clear from reading of the clause 3, reproduced above, that provisions of clause (i) of section 24 shall not apply to any expenditure incurred by a banking company or a financial institution owned and controlled by the Federal Government for the provisions of perquisites, allowances or other benefits to any employee in pursuance of any law. Clearly, this provision grants exemption in favour of certain legal entities. The real issue is whether banking company or a financial institution mentioned in clause 3 are both entitled to the exemption as being institutions owned and controlled by the Federal Government or it is merely the financial institution to which the said condition is attached. The learned counsel for the applicant submits that the word "or" occurring between the words banking company and financial institution ought to be read disjunctively and not in a conjunctive manner and therefore any banking company is entitled to the benefit of clause 3 of Part IV of Second Schedule to the repealed Ordinance. On the other hand, the case of the department is that in order to avail the benefit of clause 3 the banking company must be owned and controlled by the Federal Government and it is not that any banking company is entitled to such benefit. In other words according to the departmental view, the banking company which is not owned and controlled by the Federal Government is caught by the mischief of clause (i) of section 24 of the repealed Ordinance.

9.Upon holistic reading of part-3 of second schedule, reproduced above, we are in no manner of doubt that the said clause applied to a banking company which is owned and controlled by the Federal Government only and not to any other banking company. For the purpose we need not engage ourselves in the discussion whether the term "or" is to be read disjunctively and conjunctively as the intention of the legislature is quite clear and in our opinion the intent was that it should apply to banking companies owned and controlled by the Federal Government only. Firstly, clause 3 of Part IV of Second Schedule is part of the repealed Ordinance and when the said clause was enacted the only banking companies which were operating at that point in time were wholly owned and controlled by the Federal Government as a result of nationalization of the banking companies. Privatization process of the banking companies commenced at a much later stage and thus the only banking companies in the contemplation of the legislature while enacting clause 3 were the banking companies owned and controlled by the Federal Government, therefore, the benefit was proposed to be extended only to banking companies owned and controlled by the Federal Government and could not have possibly been extended to any other company.

10.Secondly, by clause 3 of Part IV of Second Schedule to the repealed Ordinance an exemption sought to be availed by the applicant which is admittedly not a banking company owned and controlled by the Federal Government. The law relating to exemption is very clear and it has been laid down in cluster of judgments that exemption should be construed strictly and in particular exemption under taxing statutes. As stated by (Sutherland, Statutory Construction 3rd Edition Part-3 Page 296);

"As a general rule grant of tax exemption which gives rigid interpretation against assertion of the tax payer and in favour of the taking power. The basis for the rule is the same as that supporting the rule of strict construction of positive revenue loss that burden of taxation should be distributed equally and fairly amongst the members of the society."

11.Any interpretation therefore of clause-3 will have to be put by keeping in mind the above rule regarding exemption. Also the rule as to whether the word "or" should be read disjunctively or conjunctively has been discussed and dilated upon in Muhammad Arif and others versus District and Sessions Judge, Sialkot and others (2011 SCMR 1591) by the august Supreme Court of Pakistan and the following principles have been laid down:

"When the sense so requires 'and' may be read as 'or', and 'or' read as 'and' in ordinary use the word "OR" is disjunctive while word 'AND' is conjunctive, However, the word 'or' and the word 'and' are often used interchangeably. As a result of this common and careless use of the two words in legislation, there are occasions when the court, through construction, may change one to the other. This cannot be done it the statutes' meaning is clear, or it' the alteration operates to change the meaning of the law. It is proper only in order to more accurately express, or to carry out the obvious intent of the legislature, when the statute itself furnishes cogent proof of the error of the legislature, and especially where it will avoid absurd or impossible consequences, or operate to harmonize the statute and give effect to all of its provisions to carry out the intention of the legislation it may be necessary to read "and" as "or" and vice versa."

12.In the context of clause 3 above, it is evident that term "or" merely accentuates and emphasizes the separate nature of the two entitles viz banking companies and financial institutions and must not be confused to lay a distinction between or as categorizing banking companies on the one hand and financial institution wholly owned and controlled by the Federal Government on the other. There is no such categorization in our opinion, The words "owned and controlled by the Federal Government" were intended to attach to both terms i.e. banking companies as well as financial institutions and the word "or" has been used in disjunctive sense for the limited purpose for bringing home the legislative intent that one juristic person may not include the other and so lest there by any doubt both have been included as such. There is no doubt in our mind that intention is very clear and does not require us to read "or" as "and" to give full effect to that intention.

13.In view of above, the question of law Nos.(v) and (vi) are answered in affirmative and against the applicant. The reference application to that extent is dismissed.

14.The matter is remanded to the Appellate Tribunal for decision afresh on the basis of answer on issues Nos.(i) to (iv).

15.Office shall send a copy of this order under seal of the Court to the learned Appellate Tribunal as per section 133(5) of the Income Tax Ordinance, 2001.

KMZ/P-11/LOrder accordingly.