I.T.AS. NOS.2126/KB TO 2128/KB OF 1994-95 VS I.T.AS. NOS.2126/KB TO 2128/KB OF 1994-95
1997 P T D (Trib.) 1771
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujib Ullah Siddiqui, Chairman, Muhammad Mahboob Alam, Accountant Member and Abdul Rasheed Qureshi, Judicial Member
I.T.As. Nos.2126/KB to 2128/KB of 1994-95, decided on 09/06/1997.
Per Muhammad Mujibullah Siddiqui, Chairman, partly agreeing with Muhammad Mahboob Alam, Accountant Member and partly with Abdur Rashid Qureshi, Judicial Member---
Income Tax Ordinance (XXXI of 1979)---
----Ss.50(4-A) & 52---Pakistan Insurance Corporation Act (XXXVIII of 1952), Ss.26 & 27---Pakistan Insurance Corporation Rules, 1956, R.3-- Pakistan Insurance Corporation (Compulsory Re-insurance, Regulations, 1956, Regnls. 4 & 5-A---Contract Act (IX of 1872), S.182---Deduction of tax at source ---Assessee, an insurance company---Amount; retained by the ceding parties to be treated as commission--- "Commission"--- Connotation-- Principles---Where the original assessee, to wit, general insurance companies had admittedly discharged their liabilities by offering the amount of commission received from Pakistan Insurance Corporation and the said commission after inclusion in the total income of the general insurance company had already suffered the incidence of tax, the assessee could not be held to be assessee in default---Department could not demand further tax from assessee by recourse to the provision contained in S.52, Income Tax Ordinance, 1979.
1994 PTD (Trib.) 1278; I. T. A. No. 1210/KB of 1986-87; C. I. T. v. New India Assurance Co. Ltd. (1983) 140 ITR 818; Gwalior Rayon Silk Co. Ltd. v. C.I.T. (1983) 140 ITR 832; C.I.T. v. Shri Synthetics Ltd. (1985) 15 ITR 634; C.I.T. v. M.P. Agro Murarji Fertilizers (1989) 176 ITR 282 and C.I.T. v. Kannan Devan Hill Produce Co. Ltd. (1986) 161 ITR 476 ref.
Per Muhammad Mahboob Alam, Accountant Member--
Per Abdur Rashid Oureshi, Judicial Member-----
Muhammad Farid and Muhammad Saeed for Appellant.
Muhammad Umer Farooq, D.R. and Ali Nasir Bukhari, D.R. for
Date of hearing: 6th January and 10th May, 1997.
ORDER
MUHAMMAD MAHBOOB ALAM (ACCOUNTANT MEMBER).---The appeals arise out of CIT (A)'s Order Nos. 187, 188 and 189/CIT (A)/III of 1995, dated 16-4-1995.
2. The only issue disputed in appeal relates to treatment of the appellant-company as an assessee in default under section 52 of the Income Tax Ordinance for failure to deduct tax under section 50(4-A) from payment purported to have been made on account of commission to various insurance companies offering a certain percentage of their premium to the appellant for reinsurance. Admittedly, the amount was shown as commission paid in the account of the appellant for the three years as under:
| Assessment Year | Commission paid. |
| 1992-93 | Rs.42,38,10,841 |
| 1993-94 | Rs.47,49,75,021 |
| 1994-95 | Rs.42,48,93,574 |
Admittedly also no deduction of tax under section 50(4-A) was made.
3. Before the Assessing Officer and before the CIT(A) the plea of the appellant was that the amount in dispute not a commission which attracted the provisions of section 50(4-A). It was rather a rebate directly allowed to the re-insurance companies which fell outside the purview of section 50(4-A). Both the officers below disagreed with the arguments taken by the appellant and held him in default under section 52 for non-deduction of tax under section 50(4-A). Before us the appellant has reiterated arguments that no liability accrued to him for the alleged default. The argument is based firstly on the nature of the payment involved and secondly on the relationship between the appellant and the governed insurance companies. The nature of payment as earlier submitted in writing by the appellant before the learned CIT(A), is reproduced below:
..... It is submitted that all the insurance companies carrying out general insurance business in Pakistan are required to reinsure a certain percentage of their premium with our client (a Government controlled and managed statutory Corporation). Under this arrangement normally while making payment of premium to affect reinsurance business with our client each insurance company concerned itself retains a certain percentage of premium income toward their commission for ceding reinsurance business, which i., just like a trade discount retained by the insurance company engaged in general insurance business, while making payment of premium to our client.
Under the arrangement, as explained above, our client, therefore, does not make any payment of commission to the insurance companies ceding reinsurance to our client. Consequently, the provisions of subsection (4-A) of section 50 are not attracted. "
4. Keeping in view the above nature of transaction obtaining between the appellant company and the other Insurance Companies it has been submitted that relationship obtaining between the two is not that of principal and agent. The governed insurance companies are not acting as insurance brokers for the appellant company. They are only ceding apart of their premium to the company under the law provided in this regard, and in turn being allowed to retain a portion of the ceded premium towards meeting their expenses. Since the relationship, between the two is not that of principal and agent the amount retained does not acquire the nature of commission which would attract the provision of section 50(4-A). The argument of the appellant takes us first to the provision of section 50 (4-A) and secondly towards the understanding of the nature of amount ceded by the governed insurance companies and the percentage retained out of the amount so ceded by the insuring companies. Section 50(4-A) is reproduced below:
"50(4-A). Any person responsible for making any payment in full or in part (including a payment by 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. "
5. From a plain reading of the above section; it is clear that the payment attracting liability for deduction of tax has to be brokerage or commission. The two words having not been defined in the Ordinance, they have to be taken in their common trade meaning. In the case reported as 1994 PTD (Trib) 1278 the nature and character of the term "Commission" as differentiated from the term "discount" as commonly known in trade has been discussed at length by this Tribunal. It will be worthwhile to reproduce paras. 12 and 13 of the said order:
"12. The word 'commission' has been defined in words and phrases Volume 7-A 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 is commission but. were that is intended the expression of the parties must be clear.
(ii) "Commission is percentage or allowance to factor or agent for transacting business for another.
(iii) "Commission" is compensation paid to another for service rendered in the hendling of another's business or property and based proportionately upon tile amount or value thereof.
This word has also been defined in corpus juris secundum. Volume 15-A. as under:---
(i) The percentage brokerage or allowance made to a factor or agent for transacting business for another.
(ii) Compensation to brokers is know, not only to the layman but also to the law, as 'Commission'.
(iii) "Compensation paid for work measured by results achieved.
(iv) 'Commission' generally denotes the compensation which can agent receives on sales.'
The word 'discount' has been defined in 'words and phrases' Volume 12-A. as under:---
(i) 'Discount is an abatement from the face of the account and the remainder is the actual purchase price of the goods charged in the account, so that a buyer entitled to discounts never as 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 corpus juris scumdum Volume 12-A. as under:---
(i) in a general sense the term may be understand as a counting off 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 different between the sellers price and the price at which he actually sell 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" 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.
6. In the said order at para. " 15" it has finally been held that "Commission is always payable on sales made to third party through the efforts of distributor or agent".
7. The next issue that has to be considered is the nature of payment which is being called "commission" by the department and trade discount by the appellant. The payment has its origin in section 26 of the Pakistan. Insurance Corporation Act of 1952 which is reproduced as under:
"Compulsory re-insurance.---(1) Every insurer shall reinsure with the Corporation not less than such proportion subject to the maximum of 20% on any individual risk, of the sums assured on all policies other than reinsurance policies issued by the insurer in Pakistan as may, from time to time, be fixed by the Federal Government.
Provided that the Federal Government may, by notification in the official Gazette, direct that an insurer, in the case of general insurance business, shall reinsure with the Corporation on such terms and conditions and in such manner such proportion of the business which is in excess of the aggregate of insurer s net retention and the sum required to be reinsured under subsection (1), as may be specified in such notification. "
8. The rate of premium and commission is governed by rule 5-A of the Pakistan Insurance Corporation (Compulsory Re-insurance) Regulation 1956 which is reproduced below:
"Rates of premiums and commission. ---Every insurer shall cede to the Corporation its proportion of original gross premium in accordance with the rates filed with the Corporation under rule 3 of the Pakistan Insurance Corporation Rules, 1953. On the premium thus ceded Corporation shall pay commission and profit commission at such rate or rates as may be fixed by the Corporation from time to time. "
9. From reading of the above provision regulating the surrendering of premium by the insuring companies and allowance of a sum to them as commission the question that has now to be determined is whether there is any relationship of "Principal" and "Agent" between the two. The definition of Agent as per the section 182 of the Contract Act is that "An agent is a person employed to do any act for another or to represent another in dealing with third person". The person for whom such act is done or who is represented is called a "Principal". With this definition of principal and agent we do not find the insuring companies as representing the appellant for procuring any business. As the practice goes the insuring companies procure their own business. Of the sums so assured by them a fixed percentage has to be reinsured with the appellant compulsorily under law. The percentage does not vary with the volume of business. No incentive is offered for procuring more business, for reinsuring with the appellant. The insurer companies do not represent the appellant in any way while dealing with their own insuring clients or the policy holders. Their dealing with their own clients is quite independent of their dealing with the Appellant Company. The law only binds them compulsorily to reinsurer with the appellant a portion of the sum assured. This compulsorily ceding does not place them as agents of the principal vis-a-vis their dealing with their individual insuring clients. What then is the actual nature of the "commission" allowed by the appellant on the ceded premium to the insurer companies? For this we have to look at the actual manner in which this "Commission" is related to the sum re-insured with the appellant. It is admitted that the amount which is a percentage of the sum ceded is retained by insurer companies themselves from the sum offered for reinsurance. In other words it partakes the nature of "discount" which is taken off the face value of the sum ceded. It is not a percentage of any proceed. from the sale of any policy on behalf of the appellant. Recalling the definition of Commission as per Tribunal's order quoted supra that "Commission is always payable on sales made to third party through the efforts of distributor or agent", the nature of payment made by the appellant to the reinsuring companies does not fit in this definition of Commission. It fits more into the definition of "trade discount" being a percentage taken from the face value of the sum offered for reinsurance with the appellant. This being the true nature the mere description of the amount as a commission in assessee's a/c does not change its character. Reliance is placed on the Tribunal's- order decided at Income Tax Act No. 1210/KB of 1986-87, dated 20-12-1990, wherein it has been held that "the wrong use of any expression terms or entry is immaterial and the assessing authorities are required to look into the real nature of the claim. Whether an assessee is entitled to a particular deduction or not will depend on the real nature of 8 transaction-and on the provision of law relating thereto and not on the view which is taken by the assessee of the expression or entry made in the books of accounts. "' We, therefore, tend to agree with contention of the appellant that mere naming the portion of amount retained by the ceding parties as commission when it is not actually so does not saddle the assessee with any liability for deduction of tax under section 50(4-A). As such the action under section 52 by the Department does not have any legal force and the orders under section 52 for all the three years consequently stand cancelled.
10. The appeals succeed.
(MUHAMMAD MAHBOOB ALAM),
ACCOUNTANT MEMBER
(ABDUL RASHEED QURESHI),
JUDICIAL MEMBER.
ABDUL RASHEED QURESHI (JUDICIAL MEMBER).---I have minutely gone through the order passed by my learned brother, but with utmost respect and regard, I differ Irshad with him on the following reasons:
1. The order passed by my learned friend revolves around the arguments advanced by the learned counsel for the appellant and the Tribunal order decided in I.T.A. No.1210/KB of 1986-87, dated 20-12-1990. The mode of payment does not change the nature of the payments. Whether the commission was paid by the appellant company itself to the ceding companies or whether the commission was deducted by those companies establishes the fact that the amount was paid as commission. It is admitted that the amount was shown as-commission paid in the account of the appellant for all the three years. It is also admitted that no deduction of tax under section 50(4-A) of the Income Tax Ordinance, 1979 was made. Meaning of the word "commission" cannot be permitted to disappear behind the bush of the words. If the ceded amount was of "trade discount" then the word "commission" should have been substituted by the word "trade discount". There is admission by the assessee with regard to the amount of commission and after making an admission no other plea can be taken. A person after the commission of an offence cannot claim to be exonerated. Retaining a certain percentage of premium income for ceding reinsurance business cannot be treated trade discount. The existence of relationship as principal and agent is not relevant in the instant case. Only the word "Commission" is of vital importance. So far as the admission with regard to the commission is on the record, I do not feel myself inclined to agree with the arguments advanced .by the learned counsel, the order passed by my learned brother and the earlier order passed by this Tribunal. A portion of amount retained by the ceding parties as commission saddles the assessee with liability for deduction of tax under section 50(4-A) and as such the action under section 52 by the Department proves to be legal and the orders under section, 52 for all the three years consequently stand upheld.
2. All the three appeals are dismissed as being devoid of force and merits:
(ABDUL RASHEED QURESHI)
JUDICIAL MEMBER
As the difference of opinion has arisen between us, therefore, all the appeals are sent to the learned Chairman for exercising his powers under section 133(7) of the Income Tax Ordinance, 1979 for the determination of the following question:
"Whether the amount retained by the ceding parties. is to be treated as commission and if so with what effect?"
(Muhammad Mahboob Alam)(Abdul Rasheed Qureshi)
Accountant Member Judicial Member
MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN) ---The following question has been referred by the learned Members of the Bench for resolving the difference opinion:
"Whether the amount retained by the ceding parties is to be treated as commission and if so with what effect. "
The relevant facts have been' recorded by the learned Accountant Member and, therefore, I would not like to repeat the said facts for the sake of brevity.
Heard M/s. Muhammad Ali Saeed and Muhammad Farid, learned Advocates for the appellant and Mr. Ali Nasir Bukhari, learned representative for the department. Mr. Muhammad Ali Saeed has addressed very able arguments on the points as to what is meant by "commission" and the principles of interpretation of statute. His main contention is that the words used in a particular statute, law or transaction take their colour from the context in which they have been used. After hearing the entire appeal I am of the considered opinion that notwithstanding the valuable argument advanced by Mr. Muhammad Ali Saeed they have been rendered of academic interest only in the circumstances of this case. The reason being that it has been stated at Bar during the course of arguments that the general insurance companies who are the recipients in the present case have themselves treated the amount retained by them, as commission and have offered the said amount for tax. Thus, there remains no dispute on this point requiring any adjudication by this Tribunal. The learned Advocates for the appellant were pointed out that the original parties are the Income Tax Department and the general insurance companies who reinsured the insurance policies with the Pakistan Insurance Corporation and ceded to the Pakistan Insurance Corporation its proportion of original gross premium in accordance with the rates filed with the Corporation under Rule 3 of the Pakistan Insurance Corporation Rules, 1953 and in turn were paid commission and profit commission at such rate as fixed by the Pakistan Insurance Corporation. The Pakistan Insurance Corporation was required to make a deduction under section 50(4-A) which is mode of recovery only, and the deduction was to be made on behalf of department while deduction so made was to be treated as payment of tax on behalf of assessee by virtue of the provision contained in subsection 8(b) of section 50 of the Income Tax Ordinance, 1979. When the original assessees have themselves conceded to the position that amount received by them from the Pakistan Insurance Corporation, in pursuance of compulsory reinsurance under section 26 of the Pakistan Insurance Corporation Act, 1952 read with Rule 5-A of the Pakistan Insurance Corporation (Compulsory Reinsurance) Regulations 1956, is commission there is no question of raising any dispute in this behalf. Thus, in the facts and circumstances of the present case the entire controversy going on before the lower forums and before the learned Division Bench as of no consequence. In the facts of the present case it is held that when the original assessees themselves had treated the amount received by them as commission and have offered the same to tax and the receipts have suffered the incidence of tax as commission, without any dispute or controversy no finding to the contrary can be given. However, since some confusion is likely to arise on the issue, therefore, I would like to make very brief observation in this behalf. The compulsory reinsurance is governed by section 26 of the Pakistan Insurance Corporation Act, 1952 and it is provided in subsection (1) thereof that every insurer shall reinsure with the Corporation not less than such proportion subject to maximum of 30% (now the limit has been reduced to 20 %) on any individual risk, of the sums assured on all policies other than reinsurance policies issued by the insurer in Pakistan as may, from time to time, be fixed by the Federal Government. Under section 46 of the Pakistan Insurance Act, 1952 the Board of Directors of the Corporation with the previous sanction of the Federal Government is empowered to make regulations for the purpose of giving effect to the provisions of the Act and one of the specific subject is the manner and condition subject to which Corporation may enter into reinsurance treaties and arrangements. The Board of Directors of the Pakistan Insurance Corporation framed the regulations for compulsory reinsurance in the year 1956 and under Regulation 5-A every insurer shall cede to the Corporation its proportion of original gross premium in accordance with the rates filed with the Corporation under Rule 3 of the Pakistan Insurance Corporation Rules, 1953. On the premium thus ceded the Corporation shall pay commission and profit commission at such rate or rates as may be fixed by the Corporation from time to time. Thus, it is provided by the Board of Directors of the Pakistan Insurance Corporation itself, in the Compulsory Reinsurance Regulation, 1956 that the Corporation shall pay commission and profit commission to every insurer which shall cede to the Corporation its proportion of original gross premium and thus Pakistan Insurance Corporation cannot be allowed to argue that the amount paid to the general insurance, companies is not commission. In fact in the present case there is no room for any interpretation because everywhere in the Pakistan Insurance Act of 1952 as well as the Pakistan Insurance Corporation (Compulsory. Reinsurance) Regulation, 1956 the expression used is commission. The expression has been used in various regulations and I would make reference to Regulation 4 only in which it is provided that every insurer operating in Pakistan shall prepare and furnish to the Corporation certified statements relating to the business reinsured with the Corporation Q under subsection (1) of section 26 of the Act which shall include:
(i) Quarterly statement of fire insurance premium, looses and commission.
(ii) Quarterly statement of marine, cargo insurance premium, loses and commission.
(iii) Quarterly statement of marine Hull insurance premium and commission.
In section 27 of the Pakistan Insurance Act, 1952 also it is provided that the Corporation may enter into reinsurance treaty or arrange facultative reinsurance on a commission on reciprocal basis with any insurer incorporated within or without Pakistan or with any reinsurer or group of reinsurers. In a retrocession agreement entered into between Pakistan Insurance Corporation and the Khyber Insurance Co. Ltd. entered into in 1961 it is provided in Article 4 as follows:
"The Corporation shall pay to the retrocessionaire its proportion of the gross premium receipts and the retrocessionaire shall pay to the Corporation its proportion or original losses, commission, profit commission terms and any other charges paid to the ceding companies by the Corporation in respect of risks ceded under this agreement.
The retrocessionaire shall also pay to the Corporation a overriding commission of one and one-half per cent calculated on the origin gross premiums for covering the management expenses of the Corporation. "
A perusal of the above Article shows that if anything over and above the Commission or profit commission is to be received or paid it has been specifically mentioned*as overriding commission which is meant for covering the management expenses. In reinsurance agreement with the same insurance company, to wit, Khyber Insurance Co. Ltd. the statutory cession to Pakistan Insurance Corporation under subsection (1) of section 26 of the Pakistan Insurance Corporation Act it has been referred specifically and it is provided in Article IX of the reinsurance agreement that, "reinsurer shall allow the company commission at the rate specified in the attached schedule, on the premium and deductions accruing to the reinsurer under this agreement as defined in Article IV". It is further provided in Article X that the reinsurer shall also pay to the company a profit commission on the annual profits of the business under this agreement, calculated at the end of each calendar year as specified in the attached schedule. This agreement has been executed between the Pakistan Insurance Corporation and the Khyber Insurance Co. Ltd. on 27th day of May, 1972. It is pertinent to note that in the reinsurance agreement there is no stipulation about payment of any overriding commission to cover the management expenses of the insurance company. Thus, the contention raised on behalf of the appellant before us that the amount paid to the general insurance companies was not a commission and was meant to reimburse the expenses is not available to them at all.
I would like to clarify that a confusion appears to be there that in order to constitute a receipt as Commission there should always be a relationship of principal and agent. This impression is not correct. Another impression that in order to constitute a receipt as commission, services of brokerage should always be rendered is also incorrect. The commission is a term of very wide import and has been defined as follows in the Legal Thesaurus by William C. Burton, 1980 Edition:
"Commission: allotment, allowance, bonus, compensation; consideration, defrayment disbursement, dividend, earnings, emolument, extra-compensation, increment, interest, pay, pay-off, payment, percentage, percentage compensation, portion, proceeds, profit, recompense, reimbursement, remuneration, repayment, return, reward salary, share of profits, stipend, subsidy, wage
Associated Concepts: broker's commission, commission merchant; compensation, fees, finder's commission profits".
The above connotations of the expression commission shows that it may differ from case to case, transaction to transaction, circumstances to circumstances and law to law depending on the context in which the expression is used. As already observed in the present case the Pakistan Insurance Corporation (appellant) whenever intended to agree for a payment of amount to meet expenses it has described it as overriding commission. Thus, making a distinction in the expressions commission, profit commission and overriding commission. It is also pertinent to note that a particular transaction in a particular line of business is to be construed in accordance with the prevailing interpretation by the persons concerned. In the present case the general insurance companies have all along taken this amount as commission received by them and have offered the same to tax and as such no other view can possibly be taken. After coming to the conclusion that amount retained by the ceding parties is commission. I advert to the second part of the question referred to me, as to what is the effect.
As already observed earlier the general insurance companies who are the original assessees have treated the -amount received by them as commission and have offered the said amount to tax and it has also suffered the incidence of tax. Now question arises whether recourse can be made to the provision contained in section 52 and the appellant can be treated as assessee in default anti any recovery can be made from the appellant. In order to answer the question it is imperative to clarify the concepts about two aspects, first nature of provisions contained in Chapter VI of the Income Tax Ordinance, 1979 which comprises sections 50 to 54 and the provisions contained in Chapter IX of the Income Tax Ordinance consisting of sections 85 to 95. Secondly, the ultimate destination of the tax deducted at source and the extent of liability of the original assessee and the assessee in default. Some of the aspects have been considered in earlier judgments and succinctly I would like to observe that all the provisions contained in Chapter VI and Chapter IX of the Income Tax Ordinance, 1979 are in the nature of recovery proceedings. The title of Chapter IX itself is, "recovery of tax". However, the title of Chapter VI is, "payment of tax before assessment". In fact both the Chapters deal with the recovery of tax. The provisions contained in Chapter VI comprising sections 50 to 54 deals with recovery of tax before the assessment while Chapter IX comprising sections 65 to 95 contains the provision for recovery of tax after the assessment, and various measures deemed fit for the purpose of recovery of tax. Thus, none of the provisions contained in Chapters VI and IX are in the nature of charging provisions and do not create any liability. It is specifically provided in subsection (8)(b) of section 50 that any sum deducted or collected under section 50 shall be treated as payment of tax on behalf of assessee. It means that every deduction or collection made under section 50 except in cases falling under the presumptive tax regime is requested to be adjusted towards the tax liability of an assessee when the final tax liability is assessed on completion of assessment order. Thus, the question arises if an assessee has already discharged his final tax liability and no tax is to be recovered from him or in the ultimate analysis no tax is to be paid by an assessee whether the provision contained in section 52 can still be invoked and recovery can be made from an assessee in default who either failed to deduct or collect advance tax or having deducted or collected the advance tax failed to pay the tax or the tax deducted or collected, is in the opinion of assessing officer less than the tax required to be deducted or collected.
To my humble mind the proposition is very simple and clear. Once we arrive at the conclusion that basically the payment of tax is the liability' and obligation of an assessee and that the advance deduction/collection of tax is a part of recovery proceedings, the next logical conclusion is that no independent tax liability is created against assessee in default., The original and real liability to pay tax is of an assessee and the responsibility of deducting or collecting the advance tax under section 50 saddled on another person is co-extensive with the original assessee. Although strictly speaking the assessee. in default is not a guarantor as envisaged under section 126 of the Contract Act, 1872 and the provisions of Contract Act are not applicable to the Income-tax proceedings get for the sake of convenience and for understanding the principles governing liability of assessee in default under section 52 of the Income Tax Ordinance, the principles contained in the Contract Act, 1872 in this behalf can be adhered to. I will briefly refer to the provisions contained in this behalf in Contract, 1872. It is provided in section 126 of the Contract Act that a contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety and person in respect of whose default, guarantee is given is called the principal-debtor. At this stage I would like to reiterate that the provisions contained in the Contract Act, 1872 are not applicable to the Income-tax proceedings but they are being referred just for drawing analogical comparison. It is further provided in section 128 of the Contract Act that the liability of surety is co extensive with that of the principal-debtor unless it is otherwise provided by the contract. It is further provided in section 134 of the Contract Act that the surety is discharged by any contract between the creditor and the principal -debtor, by which the principal debtor is released, or by any act or omission of the creditor the legal consequence of which is the discharge of the principal-debtor. By analogical deduction it can be deduced that the liability of an assessee in default in the Income-tax proceedings is also co-extensive with the liability of an assessee and thus the primary liability to pay the tax is vested in an assessee. Thus, once an assessee who is a principal debtor to the Income Tax Department has either, discharged his liability or in the final analysis on completion of assessment is found not liable to pay any tax, the liability of assessee in default shall automatically be discharged. I have not been able to lay hand on any judgment in this behalf by the Income-tax Appellate Tribunal in Pakistan or from any superior Court from Pakistan jurisdiction. However, I have been able to lay hand on some rulings in this behalf from Indian jurisdiction. Section 52 of the Income Tax Ordinance, 1979 reads as follows:
"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 he may incur under this Ordinance, be deemed to be an assessee in default in respect of such tax".
A similar provision is contained in section 2010) of the Indian Income Tax Act, 1961 which reads as follows:
"If any such person and in the cases referred to in section 194, the principal officer of the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any insignificance which he or it may incur, be deemed to be an assessee in default in respect of the tax."
The point under consideration before me was considered by Madhya Pradesh High Court in the case of C.I.T. v. Madhya Pradesh State Cooperative Development Bank Ltd. (1982) 137 ITR 230. In this case the relevant facts were that the I.T.O. found that the tax deducted under the Income Tax Act was not properly deducted by employer in respect of 23 employees. It was held by Indian Income Tax Appellate Tribunal that where the assessment of an employee was completed by the competent I.T.O. and the tax was also fully recovered on his assessed income no action against, the employer under section 201 of the Act can be taken in the light of the scheme of Chapter XVII. (Chapter XVII of the Indian Income Tax Act, 1961 contains similar provisions as in Chapter VI of the Income Tax Ordinance, 1979). At the instant of department following question was referred to High Court:
"Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that where regular assessment of an employee has been completed and the amount of tax fully paid by him, the I.T.O. Salary Circle (TDS), has no jurisdiction under section 201 of the Act of 1961 to demand further tax from the employer in respect of the tax short deducted relating to such employees?"
It was held by Madyha Pradesh High Court as follows:
"Section 4 of the Income Tax Act is the charging section which provides that income-tax should be charged for every assessment year in respect of the total income of the previous year of every person. Subsection (2) of section 4 provides that income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of the said Act. The principal liability for payment of income taxis, therefore, that of the person who receives income, Chapter XVII of the Act provides for deduction of tax at source. Section 192(1) lays down that any person responsible for paying any income chargeable under the head salaries' shall, at the time of payment, deduct income-tax computed on the basis of the rates in force, on the estimated income of the assessee under this head for that financial year. Section 201(1) of the Act provides that if such person (person responsible for paying salary and deducting tax at source) does not deduct or after deducting fails to pay tax, he will be deemed to be an assessee in default in respect of the tax. In the case under reference it was not the case of the department that the assessee, i.e., the Manager, M.P. State Cooperative Development Bank Ltd. Bhopal, did not deduct tax at source from the salary paid to his employees. The I.T.O., in charge of T.D.S. however, was not satisfied with the various deductions which were taken into consideration at the time of computing the tax payable at source. Further, as the statement of case shows the regular assessment of the employees had been completed and the amount of tax was fully paid by them. The I.T.O., salaries Circle (T.D.S.), could not, therefore, demand further tax from the employer in respect of the income of the employees, which was the salary of the employees chargeable to tax when the same had been fully paid.
We, therefore, hold that the Tribunal was right in taking the view that where the regular assessment of an employee had completed and the amount of the tax fully paid by him, the I.T.O., Salaries Circle (T.D.S.) had no jurisdiction under section 201 of the Act to demand further tax from the employer in respect of the tax short deducted relating to such employees. The question is answered in the affirmative and against the department."
The above judgment was followed by Madya Pradesh High Court in the following cases:
(1) CIT v. New India Assurance Co. Ltd. (1983) 140 ITR 818.
(2) Gwalior Rayon Silk Co. Ltd. v. CIT (1983) 140 ITR 832.
(3) CIT v. Shri Synthetics Ltd. (1985) 15 ITR 634 (In this case leave to appeal to Supreme Court of India was also refused).
(4) CIT v. M.P. Agro Murarji Fertilizers (1989) 176 ITR 282.
The point in issue was considered by Kerala High Court in the case of CIT v. Kannan Devan Hill Produce Co. Ltd. (1986) 161 ITR 476. In this case the Kerala High Court has held that, "the provisions of section 192 (it deals with the deduction at source in respect of salary) 201 and connected sections of the Income Tax Act, 1961 regarding deduction of tax at source and payment of tax so deducted to the revenue lay down only a mode of recovering the tax due from the employee. The duty on the employer is not an end in itself. It is only a means to an end, viz, recovery of tax payable by the employee. Tax paid over to the revenue after deduction by the employer is for and on behalf of the employee. This is subject to the ultimate assessment to be made on the employee and tax so deducted and paid is to go in adjustment of the employees liability. The liability of the employer to make deduction at source and pay over the tax to the revenue is not independent of the liability of the employee to pay tax. It is dependent entirely on the liability of the employee to pay tax. If, on the estimated income of the employee, no tax is due, the employer has no liability to deduct tax at source. The liability of the employer and the employee is inter connected and not independent of each other. Where the assessment in relation to an employee has been completed and has become final and no further tax is found due from the employee that puts an end to the liability of the employer. Thereafter, liability of the employer does not survive".
From the above discussion it is held that in the facts and circumstances of the present case where the original assessees, to wit, general insurance companies have admittedly discharged their liabilities by offering the amount of commission received from appellant, (Pakistan Insurance Corporation) so far and the said commission after inclusion in the total income of the general insurance companies has already suffered the incidence of tax, the appellant cannot be held to be assessee in default and the department cannot demand further tax from the appellant by recourse to the provision contained in section 52 of the Income Tax Ordinance, 1979. A perusal of the assessment order, under section 52 further shows that in addition to order under section 52 of the Income Tax Ordinance, 1979 treating the appellant as assessee in default and directing for issuance of demand notice and challan accordingly, the Deputy Commissioner of Income Tax observed that additional tax under section 86 of the Income Tax Ordinance, 1979 shall also be charged for default. In the present appeals the issue relating to levy of additional tax under section 86 has not been considered as it was not in issue in the present appeals. Thus I would like to clarify that the entire discussion contained in the order of Tribunal is confined to the assessment order under section 52 and shall have no bearing on an order under section 86 if any made by the department or intended to be made by the department and as and when occasion so arises the issue relating to levy of additional tax under section 86 shall be considered, for the reason that it is specifically provided in section 52 that the proceeding under section 52 shall be without prejudice to any other liability which an assessee in default may incur under the Income Tax Ordinance and it is provided in section 86 also that without prejudice to any other liability under the Ordinance a person failing to deduct or having deducted failing to pay any tax as required under section 50 shall be liable to pay additional tax under section 86. This observation has been made as a matter of precaution and clarification so that it may not be taken that the findings in this order has placed any fetter on exercise of jurisdiction under section 86 of the Income Tax Ordinance, 1979. The findings in the present order are confined to the provisions contained under section 52 only.
Consequent to above findings I partly agree with the views of learned Judicial Member who has held that the amount received by ceding parties is to be treated as commission and partly I agree with the learned Accountant Member that action under section 52 by the department does not have any legal force and the orders under section 52 for all the three years are liable to be cancelled. Thus, I agree with the conclusion drawn by the learned Judicial Member in respect of first part of the question referred to me while I agree with the operative part of the order by learned Accountant Member which is in respect of the ultimate effect in the facts and circumstances of the case.
Consequent to above findings I agree with the learned Accountant Member that the orders under section 52 are liable to be cancelled.
The appeals are allowed accordingly.
M.B.A./356/Trib Appeal allowed.