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

----S.13---Deemed income---Unexplained investment ---Assessee has to be asked to explain how his wealth was relatable to income on which he had paid tax---Section 13, Income Tax Ordinance, 1979 empowers the revenue for such purpose; if assessee failed to explain and satisfy the Assessing Officer the sum credited, investment made or money required on which no tax had been paid, to treat the same as his income.

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

----S.165----C.B.R. Circulars---Power of C.B.R. to make rules, issue circulars and notifications---C.B.R. has no power to interpret provisions of law, its Circulars can be used only as an aid to the interpretation of statutory provisions ---C.B.R. by issuing Circulars cannot raise tax liability of citizens which the words of statute do not raise against law.

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

----Ss.80C(5) & 50(4)---Tax on contractors and importers ---Scope-- Presumptive tax regime (PTR)---Assessee made supplies to the tune of Rs.79,30,021 on which company responsible making payment to the assessee deducted advance tax amount to Rs.1,98,251 as required by S.50(4) of the Income Tax Ordinance, 1979 and paid it to Revenue on behalf of assessee-- Assessee in his account books showed profit of Rs.20,75,730 for making supplies---Revenue Authorities were of the view that in view of provisions of S.80C(5), Income Tax Ordinance, 1979 advance tax paid by assessee would cover only Rs.3,60,456 out of the assessee's declared profit from supplies and he was required to pay tax on the balance of his declared profit vii., Rs.20,75,730 and the amount covered by advance tax vii., Rs.3,60,456 (which is equal to Rs.17,15,272)---Validity---Held, there was no support from the provisions of S.80C(5) of the Income flax Ordinance, 1979 for the proposition that assessee's profit which was not relatable to advance tax was chargeable to tax under S.80-C(5) of the Ordinance---Tax deducted under S.50 of the Ordinance would be deemed to be final discharge of assessee's tax liability---Purpose of provisions of S.80C(5) of the Ordinance was not to levy tax on the amount of profit which was not covered by advance tax-- Provisions of S.80C(5) of the Ordinance would be attracted only if the Revenue was not satisfied that the declared profit was not genuine profit or suspected that assessee had inflated his declared profit by adding to his other taxable income not properly covered by presumptive tax regime (PTR) suspecting on which tax has not been paid.

Symons v. Weeks 1983 STC 951; Gresham Life Assurance Society v. Styles 1892 AC 309; Russell v. Town and Country Bank 1888 AC 418 and Prince Glass Works Ltd. v. C.B.R. 1995 PTD 856 ref.

Masoom Akhtar, F.C.A. and Shabbar Hussain Naqvi, A. C. A. for Appellant.

Abdul Hafeez, D.R. for Respondent.

Date of hearing: 7th October, 1996.

ORDER

CH. IRSHAD AHMAD (JUDICIAL MEMBER).---The assessee a private limited company derives income from snaking supplies and rendering technical services to oil companies. During the period relevant to the assessment year 1992-93 the assessee made supplies to the tune of Rs.79,30,021 on which the companies responsible for making the payments to the assessee on account of supplies deducted advance tax @ 2.5 % of the payments as required by subsection (4) of section 50 of the Income Tax Ordinance, 1979 (the ordinance. The total advance tax deducted from the assessee amounted to Rs.1,98,251. The said amount was paid by the said companies to the Revenue on behalf of the assessee The assessee in its books of accounts showed that it had earned a profit of Rs.20,75,730 for making the supplies which was computed as under:--

Supplies :Rs.79,30,021

Expenses:Rs.58,54,291

Profit : Rs.20,75,730.

2. The assessing officer and the appeal commissioner are of the view that in view of the provision of subsection (5) of section 80C of the Ordinance the advance tax paid by the assessee would cover only Rs.3,60,456 [i.e. the income at which the assessee would have paid Rs.1,98,251 as tax calculated at the rate of 55% 'he assessee being a company) applicable to it in the absence of the provisions of subsections (1) and (4) of section 80C of the Ordinance] out of the assessee's declared profit from supplies and he is required to pay tax on the balance of its total declared profit Rs.20,75,730 and the amount covered by advance tax (Rs.3,60,456 which is equal to Rs.17,15,272.

3. The assessee has objected to the order of the tax authorities on the ground that it is not liable to pay tax as decided by the assessing officer and the appeal commissioner. The assessee's contention is that the advance tax paid on the payments received by it on account of supplies in accordance with the provisions of section 50(4) of the Ordinance is final discharge of its tax liability in respect of its profit from supplies whatever the amount of such profit may be. No tax, according to the assessee, except that paid as advance tax is leviable on profit from supplies as provide for under subsections (1) and (4) of section 80C read with section 143E of the Ordinance. The provisions of subsection (5) of section 80C of the Ordinance would apply only if the tax authorities are not satisfied that any sum in the assessee's books of accounts was not its real or genuine profit from supplies, the assessee contends.

4. We have heard Mr. Masoom Akhtar, FCA & Mr. Shabbar Hussain Naqvi, ACA for the assessee and Mr. Abdul Hafeez. D.R. for the ITO.

5. Subsection (1) of section 80C of the Ordinance provides that notwithstanding anything contained in the Ordinance or all other law for the time being in force where any amount referred to in subsection (2) is received by or accrues or arises or is deemed to accrue or arise to any person the whole of such amount shall be deemed to be the income of the said person and the tax thereon ;hail be charged at the rate specified in the First Schedule to the Ordinance, subsection (2) provides that the amounts referred to in subsection (1) shall be the amount representing payments oil which advance tax is. deductible under subsection (4) of section 50 of the Ordinance, subsection (4) of section 50 of the Ordinance refers, among others, to payments made to any person on account of supplies etc. subsection :3) of section 80C provides that nothing contained in the Ordinance shall be construed as to authorize any allowance or deduction against the income as determined tinder subsection (1). Subsection (4) of section 80C provides that where the assessee has no income other than the income referred to in subsection (1) in respect of which the tax has been deducted or collected the tax deducted or collected under section 50 shall be deemed to be the final discharge of his tax liability under the Ordinance and he is not required to file the return of his total income under section 55 of the Ordinance. The charge and the levy of the tax in accordance with the above provisions in known as the "presumptive tax regime" (the PTR).

6. For the purpose of income tax it is well established that any profits or losses should not be anticipated (Symons v. Weeks 1983 STC 951 and profits and gains from 'a business shall be determined by applying the ordinary principles of commercial accountancy plus special statutory provisions. Profits or gains are to be understood in their natural and proper sense-in the sense which a commercial man would understand the phrase-- and are ascertained by the application of ordinary principle of commercial trading (Lord Halsbury in Gresham Life Assurance Society v. Styles 1892 AC 309) and basically they are the surplus by which the receipts of the trade, business or profession exceed the expenditure necessary for the purpose of earning those receipts (per Lord Herschel L.C. in Russell v. Town and Country Bank 1888 AC 418). But in PTR the receipts of the trade; business or profession are presumed to be the income of the assessee and no expenses incurred to earn the said receipts are allowed. The gross receipts have been presumed as income for the purposes of income tax are of course, subjected to lower rate of tax. Although rate of tax in PTR is specified by the will of legislature but it is presumed to have been specified keeping in view the average rate of net profit that ordinarily accrues in the trade subjected to PTR and the tax ordinarily payable in respect of that profit. The PTR may also operate prejudicially against the Revenue in two ways. One if profit and gains of an assessee from any business or profession ascertained by applying the ordinary principles of commercial accountancy plus the special statutory provisions are higher than the assumed average rate of net profit on the basis of which tax rate in PTR was specified the Revenue will not be collecting full tax, and two, an unscrupulous assessee may, by diverting his income from sources not subject to PTR, show untrue higher supplies from the receipts subject to PTR to explain with impunity the ownership of wealth on which proper taxes have not been paid.

7. The best way to catch a tax evader particularly in undocumented economies, is to ask him to explain how his wealth was relatable to the income on which he had paid to proper tax. For this purpose section 13 of the Ordinance empowers the Revenue to ask any assessee to explain how any sum found to be credited in his books of accounts, any investment made or property acquired or the expenditure incurred was referable to his income on which he had paid the tax, and if he fails to explain that the sum credited, the investment made or the money acquired was relatable to his income on "which either no tax was payable or proper tax has been paid the said sum, or the value of the investment etc, shall be deemed to be the income of the assessee. To suppress the mischief of ;ax evasion and to advance the remedy provided in section 13 of the Ordinance it has been provided in sub section (5) of section 80C of the Ordinance that where an assessee while explaining the nature and source of any sum. investment, money, valuable article, excess amount or expenditure referred to in section 13 of the Ordinance taxes into account any source of income which is subject to tax in accordance with the provisions of the section he shall not be entitled to take credit of any sum as is in excess of an amount which if taxed at a rate or rates, chargeable to tax under this section would have resulted in tax liability equal to the tax payable in respect of the income under this section.

8. As noted earlier a sum of Rs.1,98,251 has been deducted as advance tax on the payments made to the assessee on account of supplies. The tax authorities on the basis of subsection (5) of section 80C of the Ordinance are of the view that if the assessee's tax liability would not have been determined under the presumptive tax regime he would have paid the above amount of tax on its net income of Rs.3,60,450. According to the said authorities the balance of the total declared profit from supplies and the amount covered by advance tax was the assessee's income on which tax was payable on the basis of the provisions of subsection (5) of section 80C of the Ordinance. Support for the above view is also sought from the CBR's Circular No. 12 of 1991 issued on 30-6-1991.

9. First few words about the efficacy of the CBR's Circular No. 12 of 1991. By now it is established by firm judicial authority that CBR has no power to interpret provision of law. Its circulars can be used only as an aid to the interpretation of statutory provision. The CBR cannot, by issuing circulars, giving instruction or directions raise tax liability against a citizen which the words of the statute do not raise against him. We are unable to discern support from the provisions of section 80C for the proposition that the assessee's profit from the supplies which is not relatable to advance tax is chargeable to tax under subsection (5) of section 80C subsection (4) of section 80C of the Ordinance clearly provides that the tax deducted or collected under section 50 shall be deemed to be the final discharge of assessee's tax liability under the Ordinance in respect of his income referred to in subsection (1) of that section . The purpose of the provision of subsection (5) of section 80C is not to levy tax on the amount of profit which is not covered by advance tax. The provision of subsection (5) of section 80C would be attracted only if the Revenue is not satisfied that the assessee's declared profit is the genuine profit or it suspects that the assessee has inflated his declared profit by adding to it other taxable income not properly covered by the PTR and in respect of which proper tax has not been paid. Otherwise, the conclusion will not only be against the plain language of subsection (4) of section 80C of the Ordinance but will also be irrational and unreasonable. Irrationality or unreasonableness of any provision cannot be attributed to the legislature. The point can be illustrated by a simple example. An assessee engaged in the business of making supplies of imported motor cars had purchased a car fir half million rupees. Due to a sudden devaluation of currency, ban on imports of cars or any other reasons the prices of imported cars double. He supplies a car purchased for half million for one million rupees and earns a profit of half million rupees. The person making the payment to the assessee on account of the supply of the car shall deduct a sum of Rs.25,000 (specified rate of advance tax being assumed at 2.5 % of the payment made on account of supplies) as advance tax. Naturally, the assessee would be having with him half million rupees minus Rs.25,000 (paid as advance tax) as his real profit. If the assessee has that amount with him and the Revenue accepts that it is the said amount in there is no basis for asking him to pay Tax equal to the amount he would have paid if the PTR would not have been introduced. The taking of the income from the receipt subject to the PTR under subsection (5) of section 80C varies with the variation of the assessee's status. For example, if an assessee is an individual it will be worked out by applying the tax rate given in Part 1 of the First Schedule to the Ordinance but if the assessee is a company ii will be worked out by applying the rate of tax given in Part IV Of the said Schedule. It is difficult to understand how it can be assumed that two or more persons, being an individual, a firm or a company, engaged in the same trade would be earning different amount of profit to explain their source of wealth. The plain and simple meanings of the provision of subsection (5) of section 80C of the Ordinance are that if an assessee is asked to explain his source of wealth and he explains that he has acquired it from the profit he-earned from the business subject to the PTR the tax authorities will not ask him to furnish any proof in support of his explanation if the value of the wealth, sought to be explained is equal to the amount on which he would have paid that amount of the tax which he had paid as advance tax had the PTR not been applicable. However, if the claimed profit was more than that then the tax authorities will call for the proof. If they are satisfied that the assessee had really earned the profit to the tune of the sum he had recorded in his books of accounts or for which he had made any investment or acquired any wealth or incurred any expenditure etc. they will not charge him any tax. The excess amount will be charged to tax only if the tax authorities are not satisfied that the assessee's wealth does not commensurate with his genuine profit. The above exposition is the only rational interpretation of the provision. of subsection (5) of section 80C. Because subsection (4) of section 80C also mandates that the assessee shall not be required to file the return in respect of the income on which the PTR applies. If an assessee is not required to file the return of his income to which the PTR applies he has no chance or opportunity to pay the tax suo motu on the excess amount as worked out in the CBR's Circular. The High Court of Sindh in case Prince Glass Works Ltd. v. C.B.R. reported 1995 PTD 856 has also held that the provision of subsection (5) of section 80C of the Ordinance cannot be applied to charge tax on an amount which is not covered by the amount calculated with reference to the amount of the advance tax as provided in that subsection but the said provision can be invoked only if an assessee is required to explain the presence of any sum in his books of accounts or expenditure on investment or otherwise.

11. This order will not, however, debar the tax authorities to ask the assessee to show if its declared profit from supplies did not include any receipt which really was not its profit from supplies, and nothing in law will debar the assessee to explain that its declared profit from the supply was the real and genuine profit notwithstanding that the profit worked out on the basis of advance tax in accordance with the provision of subsection (5) of section 80C was much less. And, if the- tax authorities are not satisfied that the assessees declared profit or any part thereof was its, real or genuine profit from supplies they will be entitled to charge tax on that amount or part of it as was in excess of the provide profit (not being less than the amount calculated under subsection (4) of section 80C of the Ordinance).

C.M.S./394/Trib Order accordingly.