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[Karachi High Court]
Reference Application No. 335 of 1972, decided on 13th April, 1983.
S. 10 (4) (a)‑Income‑tat Act (XI of 1922), Ss. 16 (I) (b) & 55 Divisible income, calculation of‑Income‑tax Officer to consider only amount of super‑tax payable by firm‑Deduction or rebate admissible by virtue of export sale in accordance with S. 10 (4) (a) of Finance Ordinance, 1969, held, could not be taken into consideration for determining amount of super‑tax payable by firm.
S. 10 (4) (a) read with circular issued by Central Board of Revenue, dated 20‑3‑79‑Super‑tax‑Section 10 does not provide any mode for determination of super‑tax payable‑Lays down manner of calculation of rebate on account of export sales which an assessee entitled to deduct from his overall tax liability under Ordinance‑Calculation of super‑tax after deduction of rebates admissible, hell, not proper‑Rebates to be deducted out of total tax liability which includes super‑tax.
I. T. R. No. 112 of 1973 ref.
Waheed Farooqui for Appellant.
Ali Ather for Respondent.
Date of hearing : 13th April, 1983.
This direct reference under section 66 (1) of the Income‑tax Act is filed by the Commissioner of Income‑tax (East), Karachi, referring the following questions for our decision :‑
"Whether on the facts and under the circumstances of the case, the Tribunal was justified in holding that super tax payable by the firm under section 16 (1) of the Income‑tax Act means super tax worked out on the total income without considering any rebate admissible "
The respondent is a registered firm and during the assessment year 1969‑70 most of its income arose from export sales. The total income shown by the respondent for the assessment year 1969‑70, in its return of income‑tax was Rs. 1,74,863 on which the total super tax worked out to Rs. 34,208. Under Finance Act of 1969 the respondent was entitled to rebate on tax payable under the Act on account of export sales made by it during the financial year under consideration. This rebate in accordance with the formulas given in section 10 (4) (a) of the Finance Act worked out at Rs. 23,873. The Income‑tax Officer who dealt with the return of respondent for the above period first calculated the income of the respondent as follows :‑
| Total Income | Rs. 1,74,863.00 |
| Less : Super Tax | Rs. 34,204.00 |
| Income | Rs.1,40,655.00 |
After determining the Income of respondent as aforesaid the Income‑tax Officer proceeded to reduce the rebate admissible to the respondent (Rs. 23,873) on account of export sales under section 10(4) (a) of the Finance Act, from the amount of super‑tax payable by respondent (Rs. 34,204) and arrived at a figure of Rs. 10,335 which was determined a3 the super‑tax payable by the respondent and accordingly the divisible income of respondent was computed by the Income‑tax Officer as follows :‑
| Total Income | Rs. 1,74,863.00 |
| Less : Super tax payable by Firm after allowing rebate | Rs. 10,335.00 .; |
| Divisible Income | Rs. 1,64,528.00 |
The respondent was therefore called upon to pay the tax on the above divisible income. The respondent challenged the above calculation made by the I. T. O. in appeal before the Appellate Assistant Commissioner, who however, agreed with the manner of calculation done by the I. T. O, and dismissed the appeal of respondent but on a further appeal the Income‑tax Appellate Tribunal set aside the assessment order and directed that the divisible income of the respondent should be determined by allowing deduction of the amount of super tax payable by the respondent from its total income without taking into account the amount of rebate admissible to the respondent on account of export sales. The Tribunal took the view that the super tax payable by respondent is not the same which is worked out by reducing the rebate on account of export performance from the amount of super tax payable. The Commissioner of Income‑tax has challenged the decision of Income‑tax Appellate Tribunal and has referred us the question stated above for our decision.
On 30-3‑1983, when we heard Mr. Waheed Farooqi Advocate, the learned counsel for the department, we felt the necessity of hearing some other counsel in the case as an amicus in view of the general importance of the question referred to us and particularly for the reason that the respondent's counsel did not appear in the case and therefore we did not have the advantage of hearing the other view. We accordingly passed a detailed order on that date setting out the controversy in the above case and requested Mr. Ali Athar Advocate to appear and assist us it the case as an amicus. In response to our request Mr. Ali Athar appeared before us on 13‑4‑1983 and placed his views on the point of controversy in the case. We record our thanks to the learned amicus for rendering useful assistance to us in resolving the issue before us.
Mr. Waheed Farooqui, the learned counsel for the department mainly contended before us that the Super tax' payable by the respondent under section 55 of the Act ;vas that which was actually paid after getting allowance for the export sales under section l6(4)(a) of the Finance Act and therefore the I. T. O. while computing the divisible income of the respondent rightly took into consideration the deductions which were permissible to respondents under the Finance Act of 1969. Mr. Ali Athar, the learned amicus on the other hand contended that the divisible income of a firm is calculated in accord ance with section 16 (1) (b) of the Income-tax Act which provides that while calculating the divisible income of a firm the super tax payable by it is to be deducted from the total income. Super tax, it is urged by the learned amicus is that which is provided in section 55 of the Income‑tax Act. Therefore, it is contended that the Income‑tax Authorities while calculating the divisible income of a firm should not look into or take into consideration the amount of rebate which an assessee may be entitled under the law on account of some special circumstances of the case, as in the present case the respondent was entiled to certain amount of rebate under section 10 (4) (a) of the Finance Act on account of Export sales made by it during the financial year under consideration. The learned amicus further contended that if the view convassed on behalf of the department is .4ccepted then the benefit of rebate make available to an assessee under section 10(4)(a) of the Finance Act of 1969 will become meaningless as the amount of rebate admissible to him is added to its divisible income thus the relief against the tax which is allowable to an assessee under the law is considerably reduced which could not be the intention of the legislation.
After careful examination of the arguments advanced before us we find ourselves in agreement with the position taken by the learned amicus in the above case.
The divisible income of a firm is computed is accordance with section 16 (1) (b) while the super tax is charged under section 55 of the Income‑tax Act.
The two provisions of law are as follows :‑
"16 (1) (b) ‑When the assessee is a partner of a firm, then, whether the firm has made a profit, or a loss, his share (whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of the previous year increased or decreased respectively by his share in the balance of the profit or loss of the firm after the deduction of (super tax payable by the firm, if any, and) any interest, salary commission or other remuneration payable to any partner in respect of the previous year :
Provided that if his share so computed is a loss.
such loss may be set off or carried forward and set off in accordance with the provisions of section 24."
. . . . .. .. . . .
. . . . .. .. . . .
'55.‑(1) In addition to the income‑tax charged for any year, there shall be charged, levied and paid for that year in respect of the total income of the previous year (or previous years, as the case may be), of any (individual, Hindu undivided family, company local authority, unregis tered firm, registered firm, or other association of persons) (or the partners of the firth or members of the association individually) an additional duty of income-tax (in this Act referred to as "super tax) at the rate or rates laid down for that year by (the Central Act)
(Provided further that where the profits and gains of an unregistered firm or other association of persons (not being either a company or a registered firm) have been assessed to super-tax. super-tax shall not be payable by a partner of the firm or a member of the association, as the case may be, in respect of the amount of such profits and gains which M proportionate to his share.)
(Provided further that-super-tax shall not be payable by a registered firm in respect of the income, profits and gains derived by it from the exercise of a profession, if such income, profits and gains depend wholly or mainly on the personal qualifications of its partners who are prevented by any law for the time being in force or by convention or rules or regulations of the professional association, society or similar body of which they are members to constitute themselves into a corporate body with a limited liability which can be registered as a company under the VII of Companies Act, 1913, unless such profession consists wholly or mainly in the making of contracts on behalf of the other persons or the giving to other persons of advice of a commercial nature in connection with making of contracts.)
(Provided further that where by virtue of any provision of this Act, super-tax is to be charged :-
(a) in respect of the income of a period other than the previous year or previous years, as the case may be, super-tax shall be charged accordingly ;
(b) super-tax is to be deducted at source or paid in advance, it shall be so deducted or paid, as the case may be.)"
A reading of the two provisions of the law reproduced above will show that the divisible income in case of' a firm is to be determined by excluding from the total income the super-tax payable by the firm. It is to be noted here that income of a registered firm the firm is liable to any only the super-tax while the income-tax is paid by its partner. Therefore, in our view while calculating the divisible income of respondent the income-to
officer should have considered only the amount of super-tax which was payable by the firm and the deduction or rebate which was admissible to the respondent by virtue of export sale in accordance with section 10 (4) (a) of the Finance Act of 1969 could not be taken into consideration for determining the amount of super-tax payable by respondent. The method of calculation therefore, adopted by I.T.O. to determine the amount of super-tax payable by the respondent by reducing the amount of rebate admissible under section 10 (4) (a) of the Finance Act, 1969 from the amount of super-tax payable was erroneous and unlawful. It is not disputed before us that the rebate which admissible to the respondent under the aforesaid section of the Finance Act, 1969 was dependable on the export performance of the assessee. We may reproduce here section 10 (4) (a) of the Finance Act, 1969 for a proper appreciation of the point as it was under this provision of law that certain percentage of deductions were allowed to an assessee against his liability of tax under the 1.-a. Act on account of export sales. The section is as follows
"(4) (a) In making any assessment for the year beginning on the first day of July, 1970 where the total income of an assessee, not being a company to which sub-clause (a) of clause (i) of the proviso to sub. paragraph (1) of paragraph A of Part 11 of the Fourth Schedule does not apply, includes any profits and gains derived from export of geode out of Pakistan, the tax including super-tax ;payable by him in respect of such profits and (rains shall, subject to the provisions of Clauses (b) and (c) be reduced by an amount computed in the manner specified hereunder :
| (i) Where the goods exported Amount abroad had not been manufactured by the assessee who exported them, | 15 per cent, of the tax attributable to export sales. |
| (a) and where the export sales during the relevant year exceed the export sales of the preceding year. | plus an additional 1 per ant, for every increase of 10 per cent., in export sales over those of the preceding year, subject to an overall maximum of 25 per cent. |
| (b) and where the export sales during the relevant year do not exceed the export sales of the preceding year. | minus 1 per cent, for every decrease of 10 per ant, in export sales over those of the preceding year, subject to an overall minimum of 10 per cent. |
| (ii) where the goods exported had been manufactured by the assesse who had exported them | |
| (a) where the export sales do not exceed 10 per cent of all the total | Nil. |
| (b) where the export tales exceed 10 per cent but do not exceed 20 per cent of the total sales. | 15 per cent of the tax attributable to export sales. |
| (c) where the export sales exceed 20 pee cent, but, do not exceed 30 per. Cent of the total sales. | 20 per cent, of the attributable to export sales. |
| (d) where the export sales exceed 30 per cent of the to total sales. | 25 per cent of the tax attributable |
Provided that in the case of a registered firm super-tax payable by it under paragraph C of Part Il of the Fourth Schedule shall be reduced under this clause by an amount calculated on the basis of the income-tax payable on its total income under paragraph A of Part I had it been the total income of an unregistered firm ;
(b) Nothing contained in clause (a) shall apply in respect of the following goods or class of goods, namely ---
(a) tea ;
(b) raw cotton ; (C) raw jute ;
(d) jute manufacturers ;
(e) such other goods as may be notified by the Central Beard of Revenue from time to time ;
(f) The Central Board of Revenue may make rules providing for the computation of profits and the tax attributable to export sale and for such other matters as may be necessary to the provisions of this subsection.
(5) In cases to which section 17 of the Income‑tax Act, 1922 (XI of 1922) applies the tax chargeable shall be determined as provided in hat section, bat with reference to the rates imposed by sub section (1), and in accordance, where applicable, with the revi sions of subsection (2).
(6) For the purposes of making deduction of tax under section 18, the rates specified in the Fourth Schedule shall apply as respects tile year beginning on the first day of July, 1969 and ,ending on the thirtieth day of June, 1970.
(7) For the purpose of this section and of the rates of tax imposed thereby, the expression ' total income" means total income as de termined for the purposes of Income‑tax or super tax, as the case may be, in accordance with the provisions of the Income‑tax Act, 1922 (XI of 1922)."
The above provision in the Finance Act did not provide any mod for determination of the "super‑tax payable" by an assessee but it only laid down the manner of calculation of rebate on account of export sales which an assessee was entitled to deduct from his overall tax liability under the Act. It was, therefore, wholly erroneous on the part of I. T. O. to calcu late the "super‑tax payable" by the respondent after deduction of rebate which was admissible to it under section 10 (4) (a) of the Finance Act. These rebates were not allowed against the super‑tax liability of respondent but were to be deducted out of the total tax liability of an assessee whir. no doubt also included the .super‑tax payable by the respondent. The "super tax payable" by respondent for the purposes of computation of divi sible income under section 16 (1) (b) of the Income‑Tax Act should have been determined by I. T. O. without deducting the amounts of rebate admissible to respondent, on account of export sale under section 10 (4) (a) of the Finance Act from the amount of super tax calculated in accor dance with section t5 of the Act. The learned amicus was right in contending that if the argument advanced by the learned counsel for the department is accepted then the whole object of section 10 (4) (a) of the Finance Act would be rendered negatory. It is not disputed by the learn ed counsel for the department that the object of enacting section 10 of the Finance Act was to give relief to those assessees who were engaged in extort business. Taxis object of legislation could only be achieved if such assessees was subjected to a lesser incident of tax on. higher scale of income on account of export sales. In the case before us if the respondent would not have made any export the divisible income would have been worker: out at Rs.' 1,40,655 and 'it would have paid Rs. 34,208 as super tax . As a result of export sales the respondent earned a rebate of Rs. 23,873 under section 10(4) (a) of the Finance Act, 1969 against his total tax liability. Instead of allowing the benefit of this rebate the I. T. O, added this amount of rebate to the total divisible Income of Rs. 1,40,655 thus raising it to Rs. 1,64,528 which meant an higher incident of tax for each partner of respondent. This could not be intention of the legis lator in enacting section 10 (4) (a) of the Finance Act. While still on this point we may also start, here that the learned amicus drew our attention to a circular issued by the Central Board of Revenue dated 20‑3‑1979 addressed to all Commissioners of Income‑tax showing practical compu tation of divisible income under section 16 (1) (b) of the Act in the light of rebates admissible under the Finance Act on account of export sales. It will be useful to reproduce here the aforesaid circular letter of Central Board of Revenue which is as follows
"From :
Mr. Sajjad Hasan,
Chief (Income‑tax)
To
All Commissioners of Income‑tax.
Subject :
Computation of tax Payable by the firm and Export Rebate ins truction regarding.
For some time, there has been a controversy regarding the allocation o super‑tax payable by a registered firm among its partners whirl involves interpretation of section 16 (a) (b) proviso to section 9 (4 of Finance Act, 1977 and clause (iii) of proviso to paragraph 'A of Part I of the First Schedule to Finance Act, 1977. Matter has been examined in the Board and the undersigned is directed to stag as under :‑
(2) Under section 17 (2) (b), share of profits of a partner in a registered firm is determined by deducting super‑tax "pa‑able" by firm and dividing the balance among the partners in the ratio stipulated in this. The term used is the said provision is super‑tax "payable' by the firm and not paid. Thus, if for any reason no super‑tax is actually paid by R. F. or the amount paid is less than the amount payable according tee paragraph 'C' of Part II of the Fiat Schedule to Finance Act, 1977 the amount of super‑tax to be deducted for purposes of determination of share of profits of a partner shall still bi the same as was "payable" tender tl: a said paragraph 'C'.
(3) Such a situation obtains in gases where rebate is allowed for export under section 3
(4) of the Finance Act, 1978. In such cases although the super‑tax actually to be paid is reduced by the amount of export rebate, yet the amount deductable would still be super‑tax befog allowing export rebate. This principle has already enunciated it Board's circular C. No. 3 (67)IT.1/72, dated 7tb May, 1973 is clarifies by the following example :‑‑
A. (The incorrect method being followed by some of the assessing officers).
| Rs. | Rs. | |
| Total income of the firm | 3,00,00 | |
| Super‑tax payable | 71,750 | |
| Less Export Rebate | 18,600 | |
| Balance super‑tax | 23,150 | |
| Income available amongst partners | 2,75,850 | |
| Total income of the firm | 3,00,000 | |
| Super Tax payable | 71,750 | |
| 2,28,250 | ||
| Income divisible amongst partners | 71,750 | |
| Super tax payable by the firm | 48,600 | |
| Balance Super Tax due | 23150 |
(4) The problem arises in cases which attract provisions of clause (it:) of proviso to paragraph (A) of Part I of the First Schedule i. e. Case's where the share of profits of a partner fall in the highest tax bracket. The said provisions stipulate that the Income‑tax payable on such share of profits together with the proportionate share of the partner in the super‑tax payable by the farm shall not exceed 50 % of the partners total income, The correct interpretation of this clause can be illustrated by‑ the following example with the assumption that his only source of income is from a registered firm :‑
A & B are equal partner in R. F. whose total income for 1977‑78 is Rs. 3,00,000. The entire income is derived from exports :‑
| Rs. | Rs. | |
| Total income of R. F. | 3,00,000 | |
| super‑tax payable under para. 'C' of Part II of | 71,750 | |
| First Schedule | ||
| | ||
| Income tax peyable by a U. R. F. on Rs. 3,00,000 | 1,43,500 | |
| (i) Rebate @ 50% admissible to U. R. F. | 71,750 | |
| (iii) Rebate admissible to R. F. | 71,750 | |
| Balance super‑tax to be paid by R. F. (i), (ii) | Nil | |
| Share of super‑tax nationally paid by each partner comes 1/2 of 71,750 = Rs. 35,875 | ||
| | ||
| Total income | 30,00,000 | |
| Less super tax payable | 71,750 | |
| Divisible income | 2,28,250 | |
| Share of profits of each partner Income payable on Rs. 1,14,125(Without investment Allowance) | 1,14,125 | |
| 47,137 |
(a) Correct method‑Under clause (iii) of proviso to pares. 'A' of Part 1 income‑tax payable shall be restricted to 50 % of share of profits is determined under section 16 (1) (b) i. e. 1/2 of Rs. 1,14,125=Rs. 57,062 National super tax paid by partner=Rs. 35,875 Income‑tax payable by the partner ‑ Rs. 57,062‑‑35.375= 21,187.
(b) Incorrect method‑The that tax shall be restricted to 50 % of the share of profits as receivable the partner without deduction of gums‑tax payable i.e, 1/2 of Rs. 1,5000 = 75,000
| Rs. | |
| National super tax paid by partner | 35,875 |
| Thus tax payable by the partner shall be | 75,000‑‑35,875=39,125 |
These instructions be circulated among the officers working under you.
SAJJAD HUSSAIN,
(Chief Income‑tax)
The above circular fully supports the view taken by the Tribunal which we also find in accord with the law. We may here also refer to another case 1. T. R. No. 112 of :973 decided by another Bench of this Court on 15‑11‑1982 (of which one of as Mr. Justice Saeeduzzaman Siddiqui was a number). In that case a similar question was referred to the Court for decision but the learned counsel for the department did not press that reference in view f the instruction issued by the C. B. R. which are re produced above. For the aforesaid reasons we answer the question referred to us in the alternative but leave the parties to bear their respective costs. We had disposed of the above reference by a short order dictated in Court on 13‑4‑1983 and these are our reasons.
M. z. M.
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