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

----Ss. 50 (4A)(9), 52 & 57---Deduction of tax at source ---Company---Assessee in default---Company itself as well as its principal officer can be treated as assessee in default under S. 52 of the Income Tax Ordinance, 1979---Words "includes" and "means" in S. 50 (4-A)---Connotation.

Any person responsible for making payment is definitely the person who is required to pay under the law. In case of company, it is the company who is responsible for making any payment. In subsection (9) of section 50, it has been mentioned that " person responsible " means the prescribed person and includes in case of a company, local authority or an association of persons the principal officer thereof. This would mean that "person responsible" is the prescribed person under the law and that prescribed person is definitely the company, local authority or an association of persons. It has been further stated that it would include a principal officer in case of a company. The meaning so conveyed would be that in case of a company, the company as well as the principal officer may be treated an assessee-in-default. The word "includes" is used as word of enlargement and ordinarily implies that something else has been given beyond the general language, which precedes it. In short, the word "means" is used to restrict the scope of the word, whereas the word "includes " is used to enlarge the meaning of the word so defined.

In case of a company, the company itself as well as its principal officer can be treated an assessee-in-default under section 52 of the Income Tax Ordinance, 1979.

(1975) 99 TTR 419; (1959) 36 ITR 449 and (1950) 18 ITR 991 ref.

(b) Interpretation of statutes---

---- Word "includes" is, used in an enactment as word -of enlargement and ordinarily implies that something else has been given beyond the general language, which precedes it.

(c) Interpretation of statutes---

--- Word "means" is used in an enactment to restrict the scope of word.

(d) Words and phrases---

Includes"---Meaning.

(e) Words and phrases---

----"Means"---Meaning.

(f) Words and phrases---

---- Words "discount" and "commission"---Meanings and distinction.

The word "discount" is not synonymous with the word "commission" as discount is a percentage taken from the face value of the security or property negotiated, whereas the "commission" if taken in ordinary sense, generally signifies a percentage upon the amount involved in the transaction. These words may appear similar but they are not identical.

"Words and Phrases", Volume 7A; "Corpus Juris Secundum", Volume 15A; "Words and Phrases" Volume 12A and "Corpus Juris Secudum", Volume 12A ref.

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

----S. 50(4A) & 52---Deduction of tax at source ---Assessee a company manufacturer of pharmaceutical goods having distributors for sale of its goods---Fifteen percent. deduction allowed to the distributor from the sale figure was a "trade discount" and was not "commission" and the provision of Ss.50(4A) & 52 of the Income Tax Ordinance, 1979 were not attracted in case of assessee company.

1993 P T D .22; "Words and Phrases", Volume 7-A; "Corpus Juris Secundum", Volume 15A; "Words and Phrases" Volume 12-A and "Corpus Juris Secudum", Volume 12-A

I.N. Pasha for Appellant.

Saleem Butt, D.R. for Respondent.

Date of hearing: 28th February, 1994.

ORDER

SYED KABIRUL HASAN, (JUDICIAL MEMBER): --These appeals relating to assessment years 1990-91 and 1991-92 are directed against the order of learned C.I.T. (A). Zone-11, Karachi dated 15-7-1993. The appellant has contested the appellate orders on various grounds.

2. The brief facts, briefly stated, are that the assessee is a public limited company and is a manufacturer of pharmaceutical goods such as intravenous infusions and other pharmaceutical preparation. During the assessment year, the assessee supplied some goods to M/s. Hospital Supply Corporation who was said to be the distributor of the assessee-company and paid commission amounting to Rs.21,33,169. According to the Income Tax Officer, the assessee company had not deducted any tax under section 50(4A), therefore, the assessee-company was treated as assessee-in-default under section 52 of the Income tax Ordinance The tax so charged in assessment year 1990-91 was Rs.2,13,317 and Rs.10,32.912 in assessment year 1991-92.

3. The assessee-company filed appeal against the order of the ITO before learned C.I.T.(A), who vide his said order confirmed the finding relating to treatment of assessee-company as assessee-in-default. Thereafter the assessee-company has preferred these appeals.

4. In support of these appeals, Mr. I.N. Pasha, the learned counsel for the assessee, has urged as follows:--

(a) In view of specific previsions of section 52 of the Income Tax Ordinance, the assessee, company cannot be treated as assessee-in default, because the person who is responsible to deduct-tax is the principle officer of the company and he is personally liable and not the company;

(b) The provisions of section 50(4-A) were not applicable in case of assessee-company, as no payment was made to M/s. Hospital Supply Corporation and hence the question of deduction under section 50(4A) did not arise; and

(c) Alternatively he has submitted that the provisions of section 50(4A) were not attracted in case of assessee-company, as the payment made to Messrs Hospital Supply Corporation was not commission but was a trade discount and as such the assessee-company was not liable to deduct tax thereon.

5. In support of his first contention, the learned counsel for the assessee has referred to section 52 and subsections (4A) and (9) of section 50 of the Income Tax Ordinance and has stated that the person responsible for making any payment in full or in part to any person on account of brokerage or commission on behalf of a company is the principal officer thereof, therefore, the company cannot be treated as assessee-in-default. In order to understand this view-point, it would be appropriate to reproduce the relevant provisions relied upon by learned counsel for the assessee:--

"Section 50:-

(4-A) Any person responsible for making any payment in full or in part (including a payment be way of an advance to any person, on account of brokerage or commission on behalf of Government, a local authority, a company (a registered firm), a foreign contractor or consortium shall deduct advance tax, at the time of making such payment, at the rate specified in the First Schedule and credit for the tax so deducted in any financial year shall, subject to the provisions of section 53, be given in computing the tax payable by the recipient for the assessment year commencing on the first day of July next following the said financial year, or in the case of an assessee to whom section 72 or section 81 applies, the assessment year, if any in which the "said date" as referred to therein, falls, whichever is the later."

"(9) For the purpose of this section,--

"Person responsible " means the prescribed person and includes,--

(i) in the case of a company, local authority or an association of persons, the principal officer thereof (only relevant portion has been reproduced)

"52.Liability of persons failing to deduct or pay tax: -Where any person fails to deduct or collect, or having deducted or collected, as the case may be, fails to pay the tax as required by, or under section 50, he shall, without prejudice to any other liability which he may incur this Ordinance, be deemed to be an assessee in default in respect of such tax.",

6. Elaborating his contention, the learned counsel for the assessee has relied on the word "he used in section 52 and according to him it referred to a living person and in any case it does not refer to a juristic person like company and in view of this, his contention is that the assessee-company cannot be treated as assessee-in-default, as the person responsible for deducting tax under sections 50(4A) was the principal officer of the company and that person should be treated as assessee-in-default. This contention of the assessee prima facie appears to be technical because of the fact that the tax is payable by the company and not by principal officer. The principal officer is only an agent who acts on behalf of the company for the purpose of receiving summons or notices. Moreover, if we minutely examine the subsections (4A) and (9) of section 50 then it would appear that any person responsible for making payment is definitely the person who is required to pay under the law. In case of company, it is the company who is responsible for making any payment. In subsection (3) of section 50 it has been mentioned that "person responsible" means the prescribed person and includes in case of a company. Local authority or an association of persons the principal officer thereof. This would mean that "person responsible " is the prescribed person under the law and that prescribed person is definitely the company, local authority or an association of persons. It has been further stated that it would include a principal officer in case of a company. The meaning so conveyed would be that in case of a company, the company as well as the principal officer may be treated an assessee-in-default. It is a well-known rule of interpretation that the word "includes" is used as word of enlargement and ordinarily implies that something else has been given beyond the general language which precedes it. In short, the word "means" is used to restrict the scope of. word, whereas the word "includes" is used to enlarge the meaning of the word so defined. Reference can be made to a decision of Madras High Court reported as (1975),99 ITR 419. Reference can also be made to a single Bench decision of Calcutta High Court reported as (1959) 36 (ITR) 449, where in this issue was discussed specifically and it is mentioned on page 450 as under:

" It is argued that the expression " person responsible for paying in this case "means company itself and not be principal officer of the company as described. The point is too technical to be either sound or good. By an explanation to section 18, which was introduced subsequent to the assessments in question, the expression "person responsible for paying is expressly now included to mean the principal officer of a company. It is said that the subsequent amendment of the law cannot affect the proceedings before the amendment took place. I am not impressed by that argument because the amendmentonly an amendment by way of an explanation saying that the expression, person responsible for paying" means something. That does not mean that it did not mean that thing before. Besides, on the merits, the actual description in this case was not merely the particular officer by name. In fact, the name of any particular officer was not given. What was given was the description. `The principal officer, M/s. John Patterson and Co. (1) Ltd: Therefore, the company itself was also mentioned both in the notice and the certificate. The company always acts through certain human agency. The principal officer is the human agency who under the law generally is the person most competent to act for the company.

Reliance was placed on an old decision of the East Punjab High Court in Tanda Rubber Works Ltd. v. Income Tax Officer. In that case, the argument was the other way about. The argument was that the company as such could not be called upon to pay and the principal officer should be the person who should be named. The Court repelled that argument by holding that the word `person' in section 18 of the Income-tax Act included the company."

Similar view was held by East Punjab High Court in a case reported as (1950) 18 ITR 591, wherein on page 963 it is observed:--

"His submission amounts to this that the mention of the person and the company in subsection (7) implies that where the default is in a regard to matters given in subsections (3-D) and (3-E) the liability is of the principal officer as well as of the company, but in other matters the liability is only of the principal officer. I am unable to agree with the contention of Mr. Chawla. In my opinion, even though this point is not strictly before me, the submission of Mr. Chawla cannot be given effect to. The opening words of subsection (2) are any person responsible for paying any income chargeable under the head "Salaries" shall, at the time of payment deduct income-tax. The person who is responsible for paying the amount is the company and not the principal officer and the person within the meaning of the General Clauses Act includes a company and the proviso to subsection (7) also, in my opinion, contemplates that the company has to deduct and is liable if it does not do so. The penalty contemplated by subsection (7) is to be imposed upon the payer if he does not make deduction, and if after deducting fails to remit the amount within the time fixed.

In support of his argument that the person responsible for paying mentioned in subsection (2) of Section 18 means the person responsible for making the payment and not the person, responsible for bearing the official liability, Mr. Chawla relied on the opinion of Sundaram in his Law of Income-tax in India, 6th Edition, page 793. If the contention of Mr. Chawla was correct, then all that a company has to do is to make an impecunious person the principal officer and then with impunity either to misappropriate the tax which has been deducted from the salaries of its servants or not to make any deductions at all and thus nullify the law and the liability being only of such an impecunious person the object of the legislature will be defeated. This, in my opinion, cannot be a correct view of the law."

(Both these citations refer to section 18(7) of the Repealed Act, which is equivalent to section 52 of the Income-tax Ordinance).

7. The interpretation of the word "he" used in section 52 of the Ordinance by learned counsel for the assessee appears to be incorrect in so far as it is a general rule, however, that relative and qualifying or modifying words, phrases and clauses should be referred to words, phrases or clauses with which they are grammatically connected. In this case, the word "he" refers to any person, therefore, it would be interpreted to mean. the person so defined in the Ordinance. In our opinion, the word "he" is a relative word and must be constructed in accordance with the requirement of "any person" used in this section.

8. In view of whatever stated above, the first contention of learned counsel for the assessee is not tenable and is repelled. In our view in case of a company, the company itself as well as its principal officer can be treated an assessee-in-default under section 52 of the Income Tax Ordinance.

9. Now we take up the second contention of learned counsel for the assessee. The learned counsel for the assessee has canvassed before us that in order to deduct tax under subsection (4A) of section 50, it is the condition precedent that any person must have made actual payment to attract these provisions, whereas in this case, no payment was made by the assessee company and hence the provisions of section 50(4A) were not attracted. He vehemently argues that in case of deduction made under section 50(4A), it is necessary that actual payment should have been made and mere any entry in books of accounts would not attract the provision of section 50(4A). In this respect, he has referred to explanation (b) added to subsection (1) of section 23 of the Income Tax Ordinance. This has been stated by him that the expression "paid" as used in sections 23, 18, 24 and 31 would mean actually paid or incurred according to method of accounting upon the basis of 'which the income is computed. He has, therefore, stated that since section 50 (4A) is not included in this explanation, therefore, it would mean actual payment.

10. We have taken into consideration the submission of learned counsel for the assessee. The similar issue was very recently discussed by the Tribunal in a case reported as 1993 PTD 722. It would be pertinent to reproduce the observation which is on page 727:--

"The attempt of the learned A.R. to differentiate between the two positions that clause (b) to the explanation to section 23(1)(xx) was a provision which was limited in scope to the extent as to determine whether the expense can be allowed or not under section 23(1)(vii), in our view is not correct. The learned A.R. has conveniently ignored the fact that when he claims such an expense as having been paid then that is treated as paid and the time of payment is the same as the date on which the credit entries are made in the books maintained by the assessee on the mercantile system. We are supported in this view by the finding of the Honorable Supreme Court of Pakistan, in the case referred to before at page 73 that sections 10 and 42 of the Repealed Income Tax Act, act and react on each other which is equally true in case of sections linked with each other have to be taken as acting and reacting on each other and the impact of clause (b) of explanation to section 23(1)(xx) cannot be taken as limited in its operation to the provisions of section 23(1) only. In view of this opinion of ours and the precedents set in we do not feel like agreeing with the further argument of the learned A.R. that if this expense claimed was not treated as having been paid as laid down under section 50(3) there will be ,ultimately no loss in revenue because any amount claimed as the expense and not actually paid could be added after three years of the expiration of the income year under section 25(c) of the Income Tax Ordinance."

Since this point is also connected with the issue whether the amount paid to M/s. Hospital Supply Corporation by the assessee-company was trade discount or commission; therefore, this point would be taken up after the disposal of third point raised by the learned counsel for the assessee.

11. Mr. I.N. Pasha, the learned counsel for the assessee, has strenuously argued that M/s. Hospital Supply Corporation was appointed as exclusive distributor of the product of the assessee-company and the assessee-company supplied its products to M/s. Hospital Supply Corporation after allowing certain trade discount. This "trade discount" was only mentioned in the distributorship agreement as "commission". His main contention is that the word "commission" used in distributorship agreement is a misnomer and it has been innumerably observed by the superior Courts that form of transaction is immaterial and it is the substance which is to be considered. In support of this, whether it was trade discount or commission, he relied on distributorship agreement and the definition of "discount" and "commission" contained in various judicial dictionaries. He has also produced the copies of invoices issued by the assessee company which show that the sale amount to M/s. Hospital Supply Corporation has been shown as not amount after deduction of trade discount. Likewise, M/s. Hospital Supply Corporation has shown same figures as their cost of purchase. In other words, cost of sales of assessee-company and cost of purchases of M/s. Hospital Supply Corporation do tally.

12. The word "commission" has been defined in "Words and Phrases" Volume 7A, as under:--

"(i) The idea of the word `commission' involves the meaning that a sum of money is paid to an agent for effecting a sale to a third person, and, while it is not customary for a seller to pay a commission to a purchaser, it is competent for a seller to offer a purchaser a rebate and call it a commission but, where that is intended, the expression of the parties must be clear.

(ii) "Commission" is percentage or allowance to factor or agent for transaction business for another.

(iii) "Commission" is compensation paid to another for service rendered in the handling of another's business or property and based proportionately upon the amount or value thereof.'

This word has also been defined in "Corpus Juris Secundum", Volume 15A, as under:--

"(i) The percentage, brokerage, or allowance made to a factor or agent for transacting business for another.

(ii) "Compensation" to brokers is known, not only to the layman but also to the law, as "commission".

(iii) "Compensation" paid for work measured by result achieved.

(iv) "Commission" generally denotes the compensation which an agent receives on sales."

The word "discount" has been defined in "Words and Phrases" Volume 12A, as under:--

(i) "Discount is an abatement from the face of the account, and remainder is the actual purchase price of the goods charged in the account, so that a buyer entitled to discounts never owes the face of the bills:"

(ii) "Discount" is a percentage taken from the face value of the security or property negotiated.

The word "discount" is defined in "Coupus Juris Secundum", Volume 12A, as under:-

(i) "In a general sense, the term may be understood as a counting of, something taken off or deducted, a reduction."

(ii) "An allowance or deduction made from a gross sum of any account whatever."

(iii) "The term `trade discount' means the difference between the seller's price and the price at which he actually sells goods to the trade."

(iv) "The word `discount' means simply to buy at a reduction."

13. From the above definitions, it would appear that the word "discount" synonymous with the word "commission" as discount is a percentage taken from the face value of the security or property negotiated, whereas the "commission" if taken in ordinary sense, generally signifies a percentage upon the amount involved in the transaction. The words may appear similar but they are not identical.

14. Now it would be appropriate to reproduce the para 7 of the distributorship agreement which has created this confusion. This, para is as under:-

"7.(a) The procedures to be followed with respect to purchases by HSC for commercial quantities of the Product and the price to be paid for all quantities of the Product purchases from OPL by HSC shall be separately agreed in writing between the parties. "The distribution commission shall be fifteen percent. (15%) of Trade Price."

"Added by Addendum dated 10-12-1989."

(b) HSC shall pay OPL the purchase price within at least ninety (90) days after receipt of the Product from OPL, provided that the term of payment may, at request of either be revised to such term of payment as is agreed between the parties.

From the scrutiny of this para, it appears that the word "distribution commission" has been used but, from the sales invoices and the purchase price shown by the distributor in his books of accounts, it appears that the assessee -company has shown the net figure of sales in his books of accounts and M/s. Hospital Supply Corporation (distributor) has shown the actual purchase price minus the discount. From the books of account, therefore, it appears that the amount has been deducted from the cost of sales by the assessee-company. Therefore, the contention of learned counsel for the assessee that no commission was paid to the distributor M/s. Hospital Supply Corporation appears to be correct. In our view, no commission was paid to the distributor on purchases made by him. No doubt, this agreement was of a peculiar type but there was no element of commission involved. Let us look at this transaction from a different angle; say for example, the 15% discount paid to the distributor was deemed to have been treated as commission, then the assessee-company should have claimed the sum as commission in profit and Loss account and this discrepancy should have not affected the profit of the assessee-company. The only difference would have been that the assessee -company would have deducted tax under section 50. On the other hand, the distributor M/s. Hospital Supply Corporation should have shown the cost of purchases including the 15% commission which was deducted as discount and should have shown 15% commission as income in profit and loss account. The net result in this case also was that the profit of the company was not affected. Therefore, no evasion of tax is involved in this case.

15. 'In view of whatever stated above, we are of the view that the word used in distributorship agreement was commission but the substance of transaction is that it was a trade discount. The question that the assessee- company would not allow discount to distributor is a pure hypothetical question, as there is no bar in any law to give trade discount to distributor. However, this discrepancy was not material to affect the profit or gains of the assessee-company. Secondly, in our opinion, a distributor cannot earn commission on purchases made by him. The commission is always payable on sales made to third party through the efforts of distributor or agent.

16. After having considered the facts and circumstances of the case, we are of the view that 15% deduction allowed to the distributor from the sales figure was trade discount and was not a commission and the provisions of sections 50(4A) and 52 were not attracted in case of assessee-company. Therefore, the additions made on this account are deleted in both the assessment years.

17. In view of our above finding, there is no need to dilate upon the second contention of the learned counsel for the assessee:

18. In the result, both the Appeals are allowed.

M.BA./50/T.T.Appeals allowed.