The FTO gave this ruling while disposing of a complaint by Reckit Benckiser against the judgement of Income Tax Appellate Tribunal, copy of which was made available to Business Recorder here on Tuesday.
He said that the jurisdiction of the FTO extends to proceedings within Revenue Division and its officers and not to the Income Tax Appellate Tribunal, which is an independent judicial body set up under the Income Tax Ordinance of 1979 and its decisions are immune from challenge before the FTO.
According to FTO''s detailed judgement, Reckit Benckiser UK (RCPPL), a non-resident company in the United Kingdom, was a shareholder in a company known as Reckitt & Colman (Pvt) Limited and held 5,562,959 ordinary shares of Rs 10 each.
The company was merged with Reckitt & Colman of Pakistan Limited (RCPL) under a ''Scheme of arrangement'' for amalgamation under Sections 284 to 288 of the Companies Ordinance, 1984, approved through judgement dated 27-11-1996 of the Sindh High Court, Karachi, passed in J.Misc. Application No 204 of 1996.
According to this Scheme, the whole undertaking of RCPPL, together with all its properties, assets, rights and liabilities as described in pargraph-2 thereof, stood transferred and vested in RCPL under Section 287 (1)(a) of the Companies Ordinance, 1984.
The RCPL was required to allot 1.5 ordinary shares of the nominal value of Rs 10 each credited as fully paid up qua the shares of the nominal value of Rs 10 each to the registered holders of those shares in RCPPL and RCPPL stood dissolved upon the allotment of shares without winding up under Section 287(1)(d) of the Companies Ordinance, 1984. As a consequence thereof, the complainant company was allotted 8,344,438 ordinary shares of RCPL and RCPPL stood dissolved automatically without winding up.
In the Income Tax Return for the assessment year 1997-98 filed by the complainant company, merger was duly disclosed.
The Deputy Commissioner Income Tax (DCIT), in the assessment framed for the said assessment year under section 62 of the ITO, 1979 on 10-6-2000 treated the allotment of above mentioned shares as capital gain under section 27 of the said ITO, 1979 and assessed a sum of Rs 536,825,508 thereof, raising tax demand.
The judgement said that it appeared that while assessing the said amount, it was assumed that value of allotted shares was far in excess of par value which was cost of shares of RCPPL held previously from which it appears that difference of the alleged value of the shares already held by the complainant company before the merger in RCPPL and those allotted under the Scheme of Arrangement considering its market value was taken to be the capital gain/income on transfer of capital assets as contemplated by Section 27 of the ITO, 1979.
The appeal filed by the complainant company was dismissed by the Commissioner Income Tax Appeal (CIT) (A) Zone- 1, Karachi through order dated 14-5-2001. Further appeal filed by the complainant before the Income Tax Appellate Tribunal was also rejected through order dated 20-6-2005.
The FTO said that this complaint had been filed alleging that firstly the complainant had been discriminated inasmuch as the allotment of shares to the shareholders other than the complainant were not subjected to assessment of capital gain as was done in the case of the complainant.
Therefore, it constituted maladministration as envisaged by section 2(3) (i)(b) and a clear departure from the established law, practice and procedure as provided in Section 2(3)(i)(a)(b) of the Establishment of Office of FTO 2000.
On merits it was argued by the learned counsel for the complainant that in the case of amalgamation of one company with another with all its assets and adjustment or allotment of shares of the company with which it was amalgamated did not legally amount to transfer of capital assets as provided by Section 27 ibid; therefore, the provisions thereof were not attracted.
According to him, with the amalgamation of RCPPL with entire assets, etc with RCPL, the former stood dissolved without winding up, which was permissible under the Companies Ordinance, 1984.
On the other hand, counsel of the Revenue Division submitted that jurisdiction of the FTO is barred in the matter under Section 9 of the FTO Ordinance in that firstly the FTO has no jurisdiction to make any recommendation as regards decision or judgement of a judicial Tribunal set up under the Income Tax Ordinance which is not part of the Revenue Division; therefore, the judgement passed in this case by the Income Tax Appellate Tribunal through which the appeal filed by the complainant has been dismissed, is immune from challenge before the FTO.
He further argued that under Section 9(2) of the FTO Ordinance, the question of assessment and quantum of income is also out of the purview of jurisdiction of the FTO; therefore, the complaint is liable to be dismissed.
The FTO observed that in order to appreciate properly the contentions raised by the counsel for the complainant, it would be useful to keep in view the relevant provisions of Sections 27, 28 and 29 of the ITO of 1979 which are reproduced below in extenso
"27.Capital gains.- (1) Any profits or gains arising from the transfer of a capital asset shall be chargeable under the head "Capital gains" and shall be deemed to be income of the income year in which the transfer took place.
(2) For the purposes of sub-section (1) and section 28 and 29.-
"Capital asset" does not include n (a) any asset or class of assets in respect of which the assessee is entitled to an allowance for depreciation under the Third Schedule; and (b) Any immovable property; and
"Transfer" includes the sale, disposition, exchange or relinquishment of the asset, or the extinguishments of any rights therein, but does not include- i) Any transfer by reason of the compulsory acquisition of any capital asset under any law for the time being in force; ii) Any transfer of a capital asset under a gift, bequest or will or an irrevocable trust; iii) Any distribution of the assets of a company to its shareholders on its liquidation; and iv) Any distribution of capital assets on the dissolution of a firm or other association of persons or the partition of a Hindu undivided family.
Computation of capital gains. The FTO observed that -(1) In computing the income under the head "Capital gains", the cost of acquisition of the capital asset and any expenditure incurred wholly and exclusively in connection with the transfer thereof shall be deducted.
2) The provisions of section 24 shall, so far as may be, apply to the allowances and deductions under this Section as they apply to the allowances and deductions in respect of income chargeable under the head "Income from business or profession".
Cost of acquisition, and consideration for transfer how determined.
The FTO said -(1) Where the capital asset became the property of the assessee. (a) Under a gift, bequest or will; or( b) By succession, inheritance or devolution; or (c) On any distribution of assets on the dissolution of a firm or other association of persons or the partition of a Hindu undivided family; or (c) On any distribution of assets on the liquidation of a company; or (d) Under a transfer of a revocable or an irrevocable trust, the fair market value of the Asset, as on the date an which it became the property of the assessee, shall, for the purposes of sub-section (1) of section 28, be deemed to be the cost of acquisition".
The FTO said that it was argued that a bare perusal of Section 27 ibid shows that it is profit or gain arising from the transfer of a capital asset which has been treated as capital gain or income of the assessee which is to be assessed; therefore, primarily the transfer of capital assets as provided in this Section should be by the assessee in favour of another person.
In the present case, it was stated that there is no transfer as such of capital assets or the shares held by the complainant assessee in the dissolved company with reference to which the capital gain could be said to have arisen. It is a case of amalgamation of the company in which the complainant company held specified number of shares of nominal value of Rs 10 each and under the judgement of the Sindh High Court , the same stood dissolved.
It was further argued that in the company with which the same was amalgamated, the question of allotment of shares to the complainant company arose. The High Court in its judgement dated 27-11-1996 while approving the scheme of amalgamation laid down a criterion that the shareholders of amalgamated/dissolved company should be allotted fully paid up shares of specified number and the allotment was not in consequence of transfer of capital assets of any valuable consideration in order to treat the same as capital gain or income.
The counsel for the complainant further maintained that the complainant has been discriminated in this case in that those shareholders of the dissolved company who were also allotted 33% shares in the company after amalgamation were not proceeded against under Section 27 of the ITO, 1979.
DR on the other hand submitted that that there was no discrimination inasmuch as if no proceedings were initiated against those to whom 33% shares were allotted, the same may be an act against law but could not in any manner benefit the complainant as an illegal act could not be a ground to commit another illegality. He further submitted that a letter was written to the complainant to provide particulars of those shareholders by the department but no reply was given.
Counsel for the complainant submitted that the particulars of the said shareholders could easily be obtained from the Registrar of the Companies; therefore, it was a lame excuse that the complainant did not provide particulars for the complainant was not required to know the particulars of those shareholders.
After considering the above contentions raised by the parties, the FTO said that he was inclined to agree with those raised by the l counsel for the complainant and would have proceeded further but for lack of power to make any recommendation or direction, the case could not be processed further qua judgement of the Income Tax Appellate Tribunal and objection raised by DR in this regard is hereby sustained.
" However, I am not disposed to agree with him that it was a case of bar of jurisdiction under Section 9(2) of the FTO Ordinance, being merely a case of assessment of income," he observed.
The FTO said that the complainant availed statutory remedies by filing appeal before the Commissioner Appeals against the order of the DCIT and before the Income Tax Appellate Tribunal, which were dismissed.
The jurisdiction of the FTO extends to proceedings within Revenue Division and its officers and not to the Income Tax Appellate Tribunal, which is a judicial Tribunal and not part of Revenue Division. The Tribunal is an independent body and FTO has no power to make any recommendation or pass any direction in respect of judgement passed by the said Tribunal.
Concluding the judgement, the FTO observed that the complainant if so advised may avail any other remedy available to it under the law in the circumstances of the case.