IN THE HIGH COURT OF SINDH AT KARACHI

 

ITR No.45 Of 1996

 

Present:

 

Mr. Justice  Muhammad Ather Saeed, and

Mr. Justice Irfan Saadat Khan.

      

 

For the Applicant: Ms. Jawaid Farooqui, Advocate.

 

For the Respondent: Mr. Lubna Pervez, Advocate

 

Date of hearing:   21.04.2011.

 

 

 

J U D G M E N T

 

 

 

IRFAN SAADAT KHAN, J: This Income Tax Reference (ITR) has been referred by the Income Tax Appellate Tribunal (ITAT) vide its order dated 30.09.1993 in R.A. No.276/KB of 1992-93 whereby the ITAT has referred the following question, said to be arising from its order dated 26.12.1992 in ITA No.8095/KB of 1992-93, for the opinion of this Court:

 

“Whether in the facts and circumstance of the case, Income-tax Appellate Tribunal was justified in treating the Modaraba as a legal person in the status of ‘body corporate’ and therefore a company under the Income-tax Ordinance, 1979?”

 

 

2.   Briefly stated the facts of the case are that the assessee is a Modaraba Management Company of B.R.R. Capital Modaraba filed its return of total income by declaring an income of Rs.535168/- and dividend income of Rs.2,572,283/-. In response to statutory notice issued under Section 61 of the Income Tax Ordinance 1979 (repealed Ordinance) necessary details were filed. The Inspecting Assistant Commissioner (IAC) vide his order under Section 62 of the repealed Ordinance finalized the assessment at an income of Rs.1,222,835/-. The case thereafter was reopened under the provisions of Section 66-A read with Section 51(c) of the repealed Ordinance whereby the income earned by the assessee on sale of certificates of B.R.R. Capital Modaraba amounting to Rs.13,326,070/- were treated as taxable income. An appeal thereafter was filed before the ITAT agitating that the Commissioner was not justified to treat the gain on sale of Modaraba Certificate as taxable, as according to the assessee the same was exempt under Clause 116 of the Second Schedule to the Ordinance (clause 116). It was also agitated that even if it is assumed that the said amount was taxable then the rates as applicable to capital gain would be applied rather than applying the normal business tax rates. The matter thereafter was heard by the ITAT on 09.12.1992, which vide its order dated 26.12.1992 allowed the appeal by observing as under:-

 

“13.     The Modaraba Ordinance as well as the prospectus of B.R.R. Capital Modaraba and B.R.R. Second Modaraba show that each modaraba has its own corporate name and each modaraba has its own specific objects and purposes. The modaraba certificates are transferable and are listed on the Stock Exchange. It is provided in the prospectus of B.R.R. Capital Modaraba that in terms of the Company Ordinance 1984 and Rules 22 of Modaraba Companies and Modaraba Rules, 1981 the modaraba certificates are freely transferable through execution of proper instruments of transfer and their registration. The Karachi Stock Exchange has approved the licence of M/s. B.R.R. Capital Modaraba and B.R.R. Second Modaraba and quotations of share of the company on Stock Exchange. The Karachi Stock Exchange has also described the two modarabas as company. The description given by the Stock Exchange has although no legal validity but I would like to add that under the provisions of Modaraba Ordinance the Modaraba Certificate has been defined to mean a certificate of modaraba acknowledging receipt of money subscribed by him. I would also like to point out that modaraba is a separate distinct legal personality other than modaraba company and prospectus is issued separately for each modaraba. A modaraba certificate is issued separately for each modaraba and periodical reports are to be submitted to the certificate holders in respect of each modaraba separately and the annual balance sheet of each modaraba separately and the annual balance sheet of each modaraba is to be prepared separately and the audit of each modaraba is also to be held separately. Thus, it will be seen that the modaraba is incorporated under the authority of Modaraba Ordinance. It is a combination of number of persons who participate in the business with money, effort and skill. The modaraba is entitled to purchase, sell and hold property. It has its own legal personality which can sue and be sued in its own name and has perpetual succession.

 

14.       For the foregoing reasons we are persuaded to agree with the contention of Mr. Akber Merchant that even before the insertion of clause (cc) in section 2 (16) of the Income-tax Ordinance a modaraba enjoyed the status of company being a body corporate formed under modaraba Ordinance and as such the income from sale of modaraba certificates enjoyed exemption under clause 116 of the Second Schedule to the Income-tax Ordinance. 1979. The exemption was rightly allowed by the I.T.O. and the learned C.I.T. was not justified in holding that modaraba was not a company and the certificates were not shares covered by clause 116 of the Second Scheduled to the Ordinance. The exemption allowed by the assessing officer was neither erroneous nor pre-judicial to the interest of revenue and consequently the revision order passed by the learned Commissioner of Income-tax under section 66A of the Income-tax Ordinance is hereby vacated and the exemption as allowed by the I.T.O. is hereby restored.

 

15.       As the finding on the point of status of modaraba holding the same to be a company concludes, the entire issue, therefore, we need not to dilate on the alternative pleas taken on behalf of the Respondent.

 

16.       The appeal is allowed as above”.

 

 

3.   Being aggrieved with the order passed by the ITAT, ITR under the provisions of Section 136(1) of the repealed Ordinance was filed before the ITAT. The ITAT after going through the same vide its order dated 30.09.1993 referred the above mentioned question of law for the advisory jurisdiction of this Court.

 

4.         Mr. Jawaid Farooqui, learned counsel appeared on behalf of the department and supported the order passed under Section 66-A of the repealed Ordinance. He submitted that the interpretation made by the ITAT was not in accordance with law as according to him under the provisions of law, Modaraba was not a Company uptil the amendment made in the law vide Finance Act 1992 and only after the said amendment, by fiction of law, it was held to be a company by way of adding clause (cc) in the definition of company in section 2 (16) of the repealed Ordinance. He further submitted that B.R.R. Investment (Pvt) Ltd. and B.R.R. Capital Modaraba were closely related and associate of each other as B.R.R. Capital Modaraba was floated by B.R.R. Investment (Pvt) Ltd. He submitted that stance of the assessee was not correct as on one hand it was claiming itself not to be a Company whereas on the other hand claiming Modaraba Certificates to be that of a Public Company. In support of his contentions the learned counsel has relied upon the judgments given in the case of Commissioner of Income Tax Vs. Spring Field Secondary School Karachi reported in 2003 PTD 1264 and Commissioner of Income Tax Vs. M/s. Lahore Cantt. Cooperative Housing Society reported in 2009 PTD 799, whereby it has been held that ‘body corporate’ only includes those corporate entities, which have been formed by the Act itself. In the end learned counsel submitted that Modaraba was incorrectly treated as Public Company and hence the sale of its shares can by no stretch of imagination be considered to be exempt as capital gain. Therefore, in his view, the status of ‘body corporate’ given by the ITAT was incorrect and the order passed under Section 66-A of the repealed Ordinance may be restored by answering the question raised in the present ITR in negative. i.e. in favour of the department and against the assessee.

 

5.   Ms. Lubna Pervez, learned counsel appeared on behalf of the assessee supported the order passed by the ITAT and the original order passed by the IAC under Section 62 of the repealed Ordinance and submitted that the ITAT by its exhaustive order has come to the correct conclusion that Modaraba was a ‘body corporate’ and therefore the sale of its shares by the Company would squarely fall under the ambit of capital gain, being exempt from tax. She further invited our attention to an interpretation given by the then Central Board of Revenue (CBR now Federal Board of Revenue) vide its letter No.4978/TP-1/90 dated June 17, 1993 whereby the CBR has instructed the Assessing Officers that capital gains from sale of Modaraba Certificate, prior to 30.06.1992, be treated as exempt. She further submitted that it was a beneficial instruction and will apply to all pending cases as held by the Hon’ble Supreme Court of Pakistan in the case of Commissioner of Income Tax Vs. Shahnawaz Ltd. and others reported in 1993 SCMR 73.

 

6.   While giving his rebuttal Mr. Jawaid Farooqui has relied on a judgment of the Hon’ble Supreme Court in the case of Central Insurance Co. and others Vs. Central Board of Revenue reported in 1993 SCMR 1232 by stating that CBR has no authority to interpretate the law and only the administrative instructions of CBR are binding on the department under the provisions of section 8 of the repealed Ordinance.

 

7.   We have heard both the learned counsel at length and have considered the decisions relied upon by them. In order to appreciate the facts of the case in a better perspective it would be in the fitness of things if the relevant law is first discussed:-

Section 2(12): "capital asset" means property of any kind held by an assesses, whether or not connected with his business or profession, but does not include-

 

(i) any stock-in-trade (not being stocks and shares), consumable stores or raw materials held for the purposes of his business or profession;

 

(ii) personal effects, that is to say, movable property (including wearing apparel, jewellery and furniture) held for personal use by the assesses or any member of his family dependent on him; and

 

(iii) any land from which the income derived by the assessee is agricultural income;

 

Section 2(16): "company" means-

(a) company as defined in the Companies Act, 1913 (VII of 1913); or

 

(b) a body corporate formed by or under any law for the time being in force; or

 

(bb) a trust formed by or under any law for the time being in force; or

 

(c) a body corporate incorporated by or under the law of a country outside Pakistan relating to incorporation of companies; or

 

(cc) a modaraba as defined in the Modaraba Companies and Modarabas (Floatation and Control) Ordinance, 1980 (XXXI of 1980);

 

(d) the Government of a Province;

 

(e) a foreign association, whether incorporated or not, which the Central Board of Revenue may, by general or special order, declare to be company for the purposes of this Ordinance for such assessment year or years (whether commencing before, on or after the first day of July, 1979) as may be specified in the said order;

 

Clause (116) – Capital gains, on sale of modaraba certificate. Following is the extract of CBR’s Letter No.4978/TP-1/90 dated June 17, 1993:-

 

“The modarabas were included in the definition of company by an amendment in the Income Tax Ordinance through the Finance Act, 1992. By virtue of this amendment the modaraba certificates are to be treated like the shares of a public company and as such the capital gains derived from the sale of modaraba certificates would enjoy exemption from tax from 1-7-1992. Since prior to this amendment, exemption on capital gains was available only to shares of public companies, the certificate of modarabas (which did not draw the status of a public company upto 30-6-1992) were not enjoying exemption in respect of capital gains derived upto 30.6-1992.

 

2.         Representations have been received from different quarters that capital gains from sale of modaraba certificates prior to 30-6-1992 may also be exempted from income tax. The matter has been considered and it has been decided that the capital gains derived from sale of modaraba certificates prior to 30-6-1992 should also be exempt.

 

3.         These instructions may please be communicated to the assessing officers immediately.”

 

(116) Any income chargeable under the head "capital gains" , being income from the sale of modaraba certificates or any instrument of redeemable capital as defined in the Companies Ordinance, 1984 (XLVII of 1984), listed on any stock exchange in Pakistan or shares of a public company (as defined in the First Schedule) and the Pakistan Telecommunications Corporation vouchers issued by the Government of Pakistan, derived by an assessee in respect of any assessment year ending on or before the thirtieth day of June, 2005. 

 

8.   From a perusal of the above law, if read in juxtaposition with the Modaraba Companies and Modaraba (Floatation & Control) Ordinance 1980, it would be seen that the assessee sold the shares certificates of B.R.R. Capital Modaraba and declared the gain arising there from amounting to Rs.13326070/- as exempt under Clause 116. The exemption was claimed primarily on the ground that Modaraba Certificates were in the nature of shares and as the Modaraba was quoted on Stock Exchange it enjoys the status of a Public Company. However the contention of the department being that as Modaraba did not file its return by claiming itself to be a Company, as defined under Section 2(16)of the repealed Ordinance as stood prior to amendment brought about by Finance Act 1992, hence it could not be considered to be a Public Company thus the sale of such shares would not be considered capital gain exempt under Clause 116.

 

9.   The department is of the opinion that the case was rightly reopened under the provisions of Section 66-A of the repealed Ordinance as the Assessing Officer had totally ignored the fact that the Modaraba was not a Company and hence the Certificates issued by it were not to be considered as shares to which exemption as spelled out in Clause 116 is applicable. Therefore as per the department the sale of Certificates of Modaraba was not be construed as shares of Public Company hence not exempt under the said Clause 116. The assessee’s assertion on the other hand was based on the fact that in the list of Companies quoted at Stock Exchange the Modaraba certificates are tradable as shares of Company and B.R.R. Capital Modaraba has been given the status of a company by the Stock Exchange itself. Necessary details in this regard was provided to the department at the assessment stage to prove that for all practical purposes Modaraba is a Company and the profit/gain from the dealings in share of a Public Company has to be considered as capital gain which is exempt under Clause 116.

 

10.  Perusal of the above Income Tax Law and the Modaraba Law, it is established that Modaraba is a Company and a body corporate and hence squarely falls under the definition of the term ‘Company’ as defined in the repealed Ordinance. It is also seen that an amendment was made in the definition of 2(16) of the repealed Ordinance whereby clause (cc) was inserted vide Finance Act 1992 which has been mentioned supra, and which amendment in our considered view appears to have been made to remove the confusion that whether a Modaraba was a Company or not. This amendment has to be considered to be clarificatory in nature and was inserted with the prime objective to clear the confusion lurking in the minds about the status of a Modaraba. In our considered view this amendment is definitely beneficial to the tax payer. It is a trite proposition of law that beneficial provisions of law are always retrospective in nature until and unless they have been made prospective by their implication. In the decision given in the case of Commissioner of Income Tax Vs. Shahnawaz and others reported in 1993 SCMR 73 it has been held as under:

“As explained in Crawford's "Statutory Construction" a statute relating to remedial law may properly, in several instances, be given retrospective operation and we are of the opinion that as the amendment in the instant case was introduced to redress an injury which in the words of Circular No.6 of 1973 (Income Tax) issued on 7th July, 1973 by the Central Board of Revenue itself was "designed to soften the law in favour of tax‑payers who could previously be charged to additional tax up to the date of assessment even though the finalisation of assessment was delayed due to no fault of theirs." This was a proper case in which retrospective operation, to the extent the High Court gave to it, could be given to the amending law”.

 

 

11.  The ITAT in our view has exhaustively dealt with the issue which we not need repeat and has reached to the correct conclusion that Modaraba was to be considered a Company, even prior to the amendment in law. The learned ITAT has taken pains to discuss not only the relevant provisions of Modaraba Companies Ordinance and Modaraba Rules 1981 but has exhaustively discussed the relevant provisions of Income Tax Law and the Companies Ordinance 1984 in this regard and after extensive research has come to the correct conclusion that the Modaraba enjoyed the status of Company being a body corporate formed under Modaraba Ordinance as such the income from sale of Modaraba Certificates enjoyed exemption under Clause 116. The learned ITAT has categorically observed that the said Modaraba Certificates are transferable, tradable and listed on the Stock Exchange. The learned ITAT has also observed that the two companies were two distinct and separate legal entities, which fact has not been denied by the learned counsel appearing on behalf of the department.

 

12.  During the course of arguments we had asked a specific question from Mr. Jawaid Farooqui that whether the amendment made in the law was beneficial or not in nature and whether the same could be applied retrospectively specially if viewed in the light of the judgment given by the Hon’ble Supreme Court which he could not reply satisfactorily. He however, submitted that he supports the order passed under Section 66-A of the repealed Ordinance.

 

 

13.  In our considered view nothing much is left in this case to dilate upon firstly in view of the decision of the Hon’ble Apex Court in the case of Shahnawaz Ltd., quoted supra, that remedial and curative provisions are always retrospective in nature and the present amendment made under Section 2(16) of the repealed Ordinance appears to be beneficial, which the C.B.R. itself recognized by virtue of its letter mentioned above. It is therefore our considered opinion that the capital gains derived from the sale of Modaraba Certificates prior to 30.06.1992 fall u/s clause 116 of the Second Schedule and are therefore exempt from the ambit of tax. The other decisions relied upon by the learned counsel for the department in view of the above observations were found to be distinguishable.

 

14.  In the decision given by the Hon’ble Supreme Court in the case of Central Insurance Co., mentioned above, it was decided by the Hon’ble Apex Court as under:-

 

 

“Though the Central Board of Revenue has administrative control over the functionaries discharging their function under the Ordinance, but it does not figure in the hierarchy of the forums provided for adjudication of assessee's liability as to the tax. Any interpretation placed by the Central Board of Revenue, on a statutory provision cannot be treated as a pronouncement by a forum competent to adjudicate upon such a question judicially or quasi­-judicially. The Central Board of Revenue cannot issue any administrative direction of the nature which may interfere with the judicial or quasi‑judicial functions entrusted to the various functionaries under a statute. The instructions and directions of the Central Board of Revenue are binding on the functionaries discharging their functions under the Ordinance in view of section 8 so long as they are confined to the administrative matters. The interpretation of any provision of the Ordinance can be rendered judicially by the hierarchy of the forums provided for under the above provisions of the Ordinance, namely, the Income‑tax Officer, Appellate Assistant Commissioner, Appellate Tribunal, the High Court and the Supreme Court and not by the Central Board of Revenue. In this view of the matter, the interpretation placed by the Central Board of Revenue on the relevant provisions of the Ordinance in the Circular, can be treated as administrative interpretation and not judicial interpretation”.

 

 

15.  We would at this stage refer to the judgment of this Court in the case of CIT v/s Abdul Matin where one of us that is Muhammad Athar Saeed J. while following the above judgment of the Hon’ble Supreme Court held in the above judgment that the instructions issued by the CBR while interpreting a provision of law legally and correctly need not be declared to  be without proper authority.

 

16.  We, therefore, have come to the conclusion that the ITAT was right in reaching to the conclusion that the assessee was entitled to the exemption even before the insertion of Clause (cc) in Section 2(16) of the repealed Ordinance as Modaraba enjoys the exemption being ‘body corporate’ formed under Modaraba Ordinance. This decision of Tribunal is unexceptionable and no interference is called from this Court. We, therefore, answer the question referred to us in affirmative i.e. in favour of the assessee and against the department.

 

17.  This Income Tax Reference is disposed off in the above manner.

 

JUDGE

 

 

JUDGE

Karachi.

Dated:    June, 2011.