I.T.A. NO.955/KB OF 1992-93, DECIDED ON 29TH APRIL, 1993. VS I.T.A. NO.955/KB OF 1992-93, DECIDED ON 29TH APRIL, 1993., 1993 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 908 (1993)

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

----Ss. 23 & 24(a)---Constitution of Pakistan (1973), Art. 163 & Federal List Entry No. 47---West Pakistan Finance Act (XXXIV of 1964), S. 11(a) (as amended)---Professional tax paid by the assessee being not a tax on income was not hit by bar contained in S. 24(a) of the Income Tax Ordinance, 1979 and was an allowable expenditure under S. 23 of the Ordinance ---[ITA No.894/HQ of 1991 overruled].

Professional tax was levied by section 11 of West Pakistan Finance Ac;, 1964. This Act was substantially amended in 1975 and later on changes in Schedule were made.

Professional tax is not a tax on income as the Provincial Government has no powers under the Constitution to levy tax on income.

The Professional tax is not a tax on income and is not hit by the bar contained in section 24(a) of the Income Tax Ordinance, in so far as the amount of Professional tax is not relatable to profits or gains of any business and neither it is assessable as a percentage or otherwise on the basis of any such profits and gains.

Professional tax is relatable to business premises of the assessee because an assessee is liable to pay this tax if he has a registered office, any factory or business premises in the Province. In short this tax is relatable to business premises and would not be payable if a person has no business premises in the Province where this tax is levied.

Professional tax paid by the assessee is not a tax on income and is, therefore, not hit by bar contained in section 14(a) of the Income Tax Ordinance. This tax could be termed as expenditure incidental to business and is necessary for carrying on of the business and would be deemed to be laid out wholly and exclusively for the purpose of carrying on of the trade. But since there is a specific provision for this type of expenditure, therefore, this expenditure should have been claimed under that clause. However, this would not affect the allow ability of expenditure in so far as an assessing officer can always allow such reliefs which are legally due to the assessee irrespective of the fact whether such reliefs are claimed by the assessee or not. Nevertheless professional tax is an allowable expenditure and order of its disallowance cannot be sustained.

Any expenditure which is not capital expenditure or personal expenditure of the assessee if laid out or expended wholly and exclusively for the purpose of the business or profession of the assessee, would be allowed as deduction under section 23(1)(xviii) of the Income Tax Ordinance, 1979.

Any tax payable to Government in respect of business premises would be an allowable deduction under section 23(l)(ii) of the Income Tax Ordinance, 1979. The expression "in respect of is of wider connotation than word "in" or "on". No doubt the professional tax is not a direct tax on the premises but it is a tax in respect of the premises indirectly as it is payable by a person if he has any premises, within the Province being used for the purpose of carrying on the business, trade or profession.

ITA No.894/HQ of 1991 overruled.

(1972) 63 ITR 352; (1986) 160 ITR 203: C.I.T v. Saraswati Industrial Syndicate (1972) 83 ITR 350; C.I.T., Bihar & Orissa v. Chunilal Rameshwar Lal (1968) 70 ITR 167; Creaves Cotton & Crompton Parkinson Ltd. v. C.I.T. (1968) 70 ITR 181; Sanghamehwar Coffee Estates v. State of Karnataka (1986) 160 ITR 203; Badridas Daga v. Commissioner of Income Tax (1958) 34 ITR 10; General Tyre and Rubber Company v. C.I.T. 1986 PTD 52 and C.I.T. v. Chunnilal (1968) 70 ITR 167 ref.

Mehtab Khan, D.R. for Appellant.

Syed Humayun Zaidi, D.R. for Respondent.

Date of hearing: 6th March, 1993.

ORDER

SYED KABIR UL HASSAN (JUDICIAL MEMBER).---This appeal relating to assessment year 1990-91 is directed against the order of the learned CIT (A) Zone-1, Karachi dated 21-6-1992, whereby he has confirmed the disallowance of professional tax claimed by the assessee.

2. This appeal was referred to this Full Bench constituted as-per `order of the learned Chairman to consider whether the professional tax is an admissible expenditure under section 23(1)(xviii) of the Income Tax Ordinance, as Division Bench of this Tribunal expressed a view by holding that professional tax was not an allowable expenditure in ITA No.894/HQ of 1991 disposed of on 16th December, 1991. This view was expressed by the Division Bench by following a decision of Indian High Court reported as (1972) 63 ITR 352 whereas a contrary view was expressed in another, decision of the Indian High Court reported as (1986) 160 ITR 203. It is also apparent from the said order of Tribunal that the provisions of section 11(1)(a) of the West Pakistan Finance Act, 1964 which were amended in 1975 were not considered by the D.B. in the said decision.

2-A. The necessary facts for the disposal of this appeal are that during-the assessment year the assessee claimed an amount of Rs.4,100 as professional tax. This amount was disallowed by the Assessing Officer by observing:

"5. PROFESSIONAL TAX ---4,100

Professional tax being inadmissible (Punjab and Haryana, H.C. 1972/83 ITR 352) is added." 4,100.

This order was confirmed by the learned CIT (A) by following the earlier order passed on 15-11-1990 in assessee's case for the assessment year 1989-90. It would be pertinent to mention here that order relating to assessment year 1989-90 was confirmed by the D.B. of this Tribunal vide ITA No.894/KB of 1991, disposed of on 16-12-1990.

3. In support of his appeal the learned A.R. for the assessee/appellant has urged as follows:

(a) The Assessing Officer has erred in disallowing the professional tax by following Indian Case-Law of Punjab and Haryana High Court reported as (1972) 83 ITR 350 CIT v. Saraswati Industrial Syndicate, as he has not considered the other cases wherein conflicting views have been expressed.

(b) Professional tax is not a tax on income and is not hit by the bar contained in section 24(a) of the Income Tax Ordinance, 1979 as professional tax is a Provincial Tax levied by a Province and in view of Article 163 read with Item 47 of the Federal Legislative List, a Provincial Government has no power to levy tax on income and secondly it has been specifically mentioned in Article 163 that tax levied on person engaged in professions, trades, callings, or employment shall not be regarded as imposing a tax on income; and

(c) this amount of professional tax is, therefore, allowable under section 23(l)(xviii) as it, was wholly and exclusively laid out for the purpose of business. He has also relied on case-law reported as:

(1968) 70 ITR 167 CIT, Bihar & Orissa v. Chunilal Rameshwar Lal; (1968) 70 ITR 181 Greves Cotton & Crompton Parkinson Ltd. v. CIT; (1986) 160 ITR 203 Sanghamehwar Coffee Estates v. State of Karnataka.

3-A. The learned D.R on the other hand has submitted as follows:

(i) An amount paid as professional tax is hit by the provisions contained in section 24(a) of the Income Tax Ordinance; and

(ii) This expenditure or deduction is not allowable under section 23(l)(xviii) as it has not been expended "wholly and exclusively" for the purpose of business.

He has also referred to case-law quoted by the I.T.O. and also the decision of this Tribunal in the case of this assessee for the assessment year 1989-90 (supra).

4. In order to understand the nature of professional tax it would be pertinent to reproduce the relevant Article of Constitution of Islamic Republic of Pakistan, 1973 and relevant provisions of the Income Tax Ordinance. In the said Constitution for the purpose of enabling the Federal Government` and Provincial Government to exercise powers certain lists have been annexed with the Constitution wherein the powers of Federal Government and Provincial Governments to levy taxes have been prescribed. These lists are stated as Federal Legislative List and Concurrent Legislative Lists and for the matters which are not enumerated in these two lists, the Provincial Assembly by virtue of Article 142 of the Constitution is empowered to enact laws in respect of such matters. Since we are not considering the vires of professional tax, therefore, it is immaterial to dilate further on this. We would now look into the matter with limited purpose only and that is to see whether this amount of professional tax is an item of allowable expenditure under the Income Tax Ordinance. Item 47 mentioned on Federal Legislative Lists states as follows:

"47. Taxes on income other than agricultural income."

Article 163 of the Constitution states as under:

"163. A Provincial Assembly may by Act impose taxes, not exceeding such limits as may from time to time be fixed by Act of (Majlis-e-?Shoora (Parliament), on persons engaged in professions, trades, callings or employments, and no such Act of the Assembly shall be regarded as imposing a tax on income."

From the reading of the above provisions the contention of the learned A.R. appears to be well founded. It would appear that the Constitution has empowered the Federal Government to levy tax on income other than Agricultural income as mentioned in Entry No.47 of Federal Legislative List (supra), therefore, Article 163 has strictly made it clear that any tax levied on professions, trades, callings or employments shall not be regarded as tax on income. In Am of this the contention of the learned A.R. is correct that this tax is not a tax on income as the Provincial Government has no powers under the Constitution to levy tax on income.

5. Now we would further examine the nature of professional tax and bar contained in section 24(a) of the Ordinance.

6. The tax which is known as professional tax was levied by section 11 of West Pakistan Finance Act, 1964. This Act was substantially amended in 1975 and later on changes in the Schedule were made. The relevant amended provisions of this Act are as under:

"(1) There shall be levied and collected an annual tax from the class of persons shown in column 2 of the Seventh Schedule to this Act in respect of their professions, trades, callings; and employments at the rate shown in column 3 of that Schedule, in addition to any tax, rate, duty or fee that may be payable under any other law except the trade, professions, calling and employment in rural areas (the areas other than rating areas prescribed under the Sindh Urban Immovable Property Tax Act, 1958) listed at serial 5 to 44 of the Schedule; provided that the person liable to pay tax only in respect of more than one profession, trade, calling or employment shall pay the tax only in respect of one such profession, trade, calling or employment of which rate of tax is higher."

In Seventh Schedule attached with this section various categories of professions, trades, callings or employment were mentioned and in case of assessee category 3(a) is relevant which is as under:

"SEVENTH SCHEDULE

(See section 11)

Serial No. ??????? Categories??????????????????????????????????????????????????????????????????? Rate of tax per annum

3(a)????????????????? All Private Limited and Foreign Companies?????????????????? 3,500.00"

(Only relevant portion has been reproduced)

The bar contained for allowability of deduction in section 24(a) of the Income Tax. Ordinance is as under:--

"Section 24(a)

Deductions not admissible. Nothing contained in section 23 shall be so construed as to authorise the allowance or deduction of--

(a) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed as a percentage, or otherwise on the basis, of any such profits or gains;"

7. From the above provision of professional tax, the Income Tax Ordinance, 1979 and Article 163 of the Constitution read with Entry No.47 of the Federal Legislative List, it would appear that the professional tax is not a tax on income and is not hit by the bar contained in section 24(a) of the Ordinance, in so far as the amount of professional tax is not relatable to profits or gains of any business and neither it is assessable as a percentage or otherwise on the basis of any such profits or gains.

8. The only question remains for consideration is that whether this amount of professional tax is allowable as deduction under section 23(1)(xviii) of the Ordinance. The contention of the learned A.R. for the assessee is that this tax was imposed by the Government of Sindh and the assessee was bound to pay such liability if he had to carry on business within the Province of Sindh, therefore, this expenditure was wholly and exclusively laid out for the carrying on of business and is allowable as deduction under section 23(1)(xviii).? He has referred to Indian case-law (supra) in support of his contention.

In (1968) 70 ITR 167 - "C.I.T. v. Chuni Lal Rameshwar Lal, the Patna High Court held that professional tax paid to Municipality under Bihar and Orissa Municipal Act, 1922 was an allowable deduction. In (1968) 70 ITR 181 Greaves Cotton & Crompton Parkinson Ltd. v. C.I.T. the Hon'ble Bombay High Court held that company tax paid under Municipal Law was an allowable expenditure. In (1986) 160 I.T.R. 203 "Sanghamehwar Coffee Estates v. State of Karnataka." Karnataka High Court held that professional tax paid was an allowable expenditure.

10. It is also relevant to observe that in the said case-law the decisions of various other High Courts were also considered and they are also supporting the case of the assessee.

11. Now we would refer to the, contrary view expressed in (1972) 83 ITR 352 which was followed by the Tribunal in decision referred to above. In this case the Punjab and Haryana High Court has observed that the professional tax is not a kind of expenditure which an assessee has to incur to enable him to earn his income, therefore, this expenditure is not wholly or exclusively laid out for the purpose of the business.

12. We have heard the arguments of both the representatives and also gone through the relevant case-law relied upon by them. It has already been observed by us that professional tax is not a tax on income, therefore, we have to only decide whether this expenditure is allowable under section 23(1)(xviii) of the Ordinance. It would be pertinent to reproduce section 23(1)(xviii) of the Ordinance which deals with the allowability of this expenditure:

Section 23(1)(xviii):

23. Deductions.---(1) In computing the income under the head "Income from business or profession", the following allowances and deductions shall be made, namely

(xviii) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business or profession."

(Only relevant portion has been reproduced).

From the perusal of above provision it would appear that any expenditure which is not capital expenditure or personal expenditure of the assessee if laid out or expended wholly and exclusively for the purpose of the business or profession of the assessee, would be allowed as deduction under this clause. This clause has been discussed in various judgments of Indian as well as Pakistani Superior Courts. The decision of Honourable Indian Supreme Court reported as (1958) 34 ITR 10 - Badridas Daga v. Commissioner of Income Tax, explained this point in details. In this judgment on page 15, it is observed:

"The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard of accepted commercial practice and trading principles, it can be said to arise out of the carrying on the business and to be incidental to it. If that is established then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act."

The above principle has been followed in number of decisions of our superior Courts. In a judgment of Hon'ble Sindh High Court reported as 1986 PTD 52. M/s. General Tyre and Rubber Company v. C.I.T., this principle after considering the various case-law has been elaborated.

13. If we look at the nature of professional tax, then it would appear that it is relatable to business premises of the assessee because an assessee is liable to pay this tax if he has a registered office, any factory or business premises in the Province of Sindh. In short this tax is relatable to business premises and would not be payable if a person has no business premises in the Province where this tax is levied. In view of this let us consider whether this tax is allowable under any clauses provided in section 23 of the Ordinance. In our opinion the other possible clause could be clause (ii) of section 23(1) of the Ordinance, which reads as under:--

"Section 23(1)(ii):

23. Deductions.---(1) In computing the income under the head "Income from business or profession", the following allowances and deductions shall be made; namely: (i) any rent paid for the premises in which such business or profession is carried on;

-----------------------------------------------

(ii) any local rate; tax charge or cess in respect of such premises paid to any local authority or Government, not being any tax payable under this Ordinance;"

If we analyse the above provisions then it would appear that any tax payable to Government in respect of business premises would be an allowable deduction under this clause. It is well known that the expression "in respect of? is of wider connotation than word "in" or "on". No doubt the professional tax is not a direct tax on the premises but it is a tax in respect of the premises indirectly as it is payable by a person if he has any premises, within the Province of Sindh, being used for the purpose of carrying on of business, trade or profession. In this respect reference can be made to Indian Patna High Court case reported as (1968) 70 ITR 167---CIT v. Chunnilal.

14. The upshot of discussion is that professional tax paid by the assessee is not a tax on income and is, therefore, not hit by bar contained in section 24(a) of the Ordinance. It has also been observed by us that this tax could be termed as an expenditure incidental to business and is necessary for carrying on of the business and would be deemed to be laid out wholly and exclusively for the purpose of carrying on of the trade. But since there is a specific provision for this type of expenditure, therefore, this expenditure should have been claimed under that clause. However, this would not effect the allowability of expenditure in so far as an Assessing Officer can always allow such reliefs which are legally due to the assessee irrespective of the fact whether such reliefs are claimed by assessee or not. Nevertheless professional tax is an allowable expenditure and order of its disallowance by the learned CIT (A) cannot be sustained. There, the view expressed by Division Bench in ITA No.894/HQ of 1989-90 disposed of on 16-12-1991 does not state the correct law and is not approved.

15. This appeal is, therefore, allowed and the order of the learned CIT(A) is vacated.

M.B.A./2284/T??????????????????????????????????????????????????????????????????????????????????? Appeal allowed.