I.T.AS. NOS.763/IB TO 765/113 OF 1998-99, DECIDED ON 18TH JANUARY, 1999. VS I.T.AS. NOS.763/IB TO 765/113 OF 1998-99, DECIDED ON 18TH JANUARY, 1999.
1999 P T D (Trib.) 2152
[Income-tax Appellate Tribunal Pakistan]
Before Mansoor Ahmed, Accountant Member and Syed Masood-ul-Hassan Shah, Judicial Member
I.T.As. Nos.763/IB to 765/113 of 1998-99, decided on 18/01/1999.
Income Tax Ordinance (XXXI of 1979)---
----Ss.50(3), 52 & 86---Deduction of tax at source---Failure to deduct tax-- Charge of tax---Additional tax---Power generation project---Substantial expenditure/project development cost was incurred by the sponsor to develop the project ---Assessee owned the project and issued share to the sponsor at 10% discount in lieu of re-imbursement of development cost---Tax under S.50(3), Income Tax Ordinance, 1979 was not deducted by the assessee while issuing share to the sponsor---Assessing Officer holding the assessee as an assessee-in-default under S.52, Income Tax Ordinance, 1979 charged the tax as the assessee had failed to deduct tax under S.50(3) of the Ordinance and also charged additional tax under S.86, Income Tax Ordinance, 1979-- First Appellate Authority upheld the order of the Assessing Officer-- Contention of assessee was that S.50(3) of the Ordinance comes into operation only when money (cash) was paid to the sponsor---Validity---Held, that the sponsor, in settlement of his claim, accepted shares of the assessee company which amounted to receipts of cash---If the shares acquired were retained, that would simply amount to reinvestment of money in the shares---Issuance of shares in lieu of money, which the assessee company owed to sponsor, amounted to payment of "sum" i.e. money---Order of Assessing Officer was upheld by the Income-tax Appellate Tribunal.
1969 PTD 267; I.T.A. No.321/KB of 1997-98; CIT v. Amonbolu Rajiah (1974) 1 ITJ 185 = (1976) 102 ITR 403; Commissioner of Income tax, East Pakistan, Dacca v. A. Khaleque (1968) 18 Tax 8; CIT v. Aloo Supply Company (1979) 121 ITR 680; CIT v. Associated Cement Co. Ltd. (1968) 68 ITR 478; CIT v. Bangalore Woollen, Cotton and Silk Mills Co. Ltd. (1973) 91 ITR 166; CIT v. Traub (India) P. Ltd. (1979) 118 ITR 525; Seth Kishori Lai Babulal v. CIT, U.P. (1963) 49 ITR 502; Gulberg Textile Mills v. CIT 1978 PTD 126; The Laxmi Insurance Company Ltd. v. CIT AIR 1931 Lah. 441; Aggarwal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lai (1958) 33 ITR 245; CIT v. Esso Pakistan Fertilizer Ltd. 1990 PTD 787; P.C. Ray & Co. v. A. C. Aiukerjee AIR 1959 Cal. 131 and Inland Revenue Commissioners v. Wesleyan General Assurance Society (1948) 16 ITR 101 ref.
CIT, Peshawar Zone, Peshawar v. Siemens A. G. 1991 PTD 488 = 1991 PTD 368 and Noon Sugar Mills v. CIT, Rawalpindi PLD 1990 SC 1156 = 1990 PTD 768 = 1990 MLD 1977 distinguished.
Iqbal Naeem Pasha for Appellant.
Mansoor Ahmed, L.A. and Abdul Shakoor, D. R. for Respondent.
Date of hearing: 24th December, 1998.
ORDER
MANSOOR AHMED (ACCOUNTANT MEMBER). ---These three appeals by the assessee company are directed against the consolidated order, dated 5-11-1998 by the learned CIT(A)-I, Islamabad in respect of assessment years 1992-93, 1993-94 and 1996-97.
2. Mr. lqbal Naeem Pasha, Advocate, on behalf of the assessee/appellant and Mr. Mansoor Ahmed, Legal Adviser, and Mr. Abdul Shakoor, D.R., present on behalf of the Department.
3. The brief facts of the case, according to the learned A.R. of the assessee, are that the Government of Pakistan issued a policy statement in 1985 for promoting and generating electricity in Pakistan by private sector. Pursuant to this policy, the original sponsors made a proposal to the Government of Pakistan for construction and operation of a power generation project. In April, 1988, the Government of Pakistan issued letters of intent to the original sponsors. The original sponsors put together a group known as the Hub River Power Group (HRPG) for the implementation of the project. Subsequently, in 1991, the Hub Power Company Ltd. (HUBCO) was incorporated in Pakistan to own and manage the project. Prior to the formation of this company, the sponsors incurred substantial expenditure to develop the project. It was agreed between the sponsors and the Government of Pakistan (through the Ministry of Water and Power) that the project development costs incurred by the sponsors, i.e. HRPG, would be recognized as contributions towards equity in the project company (i.e. HUBCO). This fact is verifiable from a letter, dated 16-1-1992 issued by the Ministry of Water and Power, a copy of which has been produced by the learned A.R. The Corporate Law Authority, through their letter, dated 13-5-1992, issued permission for issuance of shares to foreign collaborators. The assessee company entered into an agreement with HRPG on 7-6-1992, under which it was agreed that the assessee company may reimburse the project development costs to HRPG in the form of fully paid-up shares issued at a discount. In pursuance of this agreement, the assessee company issued shares to HRPG during the periods relevant to the assessment years 1992-93, 1993-94 and 1996-97.
4. The Deputy Commissioner of Income-tax, Companies Circle 01, Islamabad issued three identical show-cause notices, dated 26-8-1998, in respect of the three years under appeal, asking the assessee company to show cause as to why it should not be treated as an assessee in default under section 52 for not deducting tax under section 50(3) while issuing shares to HRPG. In reply, the learned A.R. of the assessee contended that the shares have been issued for the specific costs incurred by the sponsors and that these costs do not contain any element of profit as the Corporate Law Authority has examined the costs before granting consent to issue shares to the sponsors. It was argued that since there was no element of income involved in the transaction, tax under section 50(3) was not deductible. The Assessing Officer did not accept the assessee's contentions on the following grounds:---
(a) The mere fact that the reimbursement of costs has been regarded as contribution towards equity of the sponsors does not absolve the company of its liability to deduct tax under section 50.
(b) The acceptance of shares by HRPG in lieu of reimbursement of project development expenditure involves two transactions. First, the HRPG "sold" project development costs to the assessee company.' Then, HRPG "paid" the amount received in consideration of project development expenditure to the assessee company and got the shares allotted. The first part i.e. sale of project development expenditure to the assessee company attracts the provisions of section 50(3).
(c) The HRPG were allotted shares at 10 % discount which proves that there is an element of income. The assessee has not established that there is no element of profit in transfer of project development expenditure to the assessee company. In support of the authenticity of the expenditure, no expense vouchers or audited accounts of HRPG were produced. The scrutiny of expenditure by WAPDA or Corporate Law Authority is not binding on the tax authorities and, that the expenditure has to be proved before the relevant tax authority.
The Assessing Officer thus held the assessee company as an assessee in default under section 52 and charged the tax that it had failed to deduct under section 50(3), and also additional tax under section 86. The learned C.I.T.(A) upheld the orders of the Assessing ,Officer. Hence the present appeals.
5. Mr. Iqbal Naeem Pasha, the learned A.R. of the assessee states that in the show-cause notices, dated 26-8-1998, the Assessing Officer mentioned that the shares have been allotted in consideration of the services rendered by Messrs Hub River Power Ltd., in the shape of development costs. He says that in this situation, the rate of tax is only 15 %. After going through the show-cause notices, we find that the Assessing Officer did not intend to treat the payment as consideration for any services rendered by the foreign company, for the simple reason that in the opening paragraph of the said notices, the Assessing Officer has clearly indicated the consideration for which the shares have been allotted as the reimbursement of development costs. Further, he had clearly shown his intention to apply the provisions of section 54(3). The assessee was in no doubt about the nature of transaction which the Assessing Officer had in mind while issuing show-cause notices. This is evident from the reply of the assessee to the show-cause notices wherein it gave reasons for non-application of the provisions of section 50(3). Therefore, we do not see any material defect in the show-cause notices. The learned A.R. also objects to the manner in which the orders were passed by the Assessing Officer. He states that the show-cause notices were issued on 26-8-1998 which were served on the appellant on 28-8-1998 and the orders under section 52/86 were passed on 11-9-1998. He contends that the said orders were passed within a short span of only fourteen days from the date of service of the show-cause notices which shows a hasty decision by the Assessing Officer without application of mind. We find this objection to be without any substance. In response to the show-cause notices, the assessee company had filed a written reply the relevant portion of which has been incorporated in the orders and duly considered by the Assessing Officer who has given his reasons for not accepting the assessee's contentions. The learned A.R. of the assessee further argues that in the impugned orders, the Assessing Officer has taken up new grounds on which the assessee was not given an opportunity of being heard. He has pointed out that on page 4 of the impugned orders, the Assessing Officer states that the issuance of shares to HRPG involves two transactions. First, the Hub River Group "sold" development expenditure to the assessee company. Then. the amount so received was "paid" by the HRPG for allotment of shares of assessee company. It is stated that on this ground the assessee was not confronted. Similarly, on page 5 of the impugned orders, the Assessing Officer has held that the issuance of shares at 10% discount means that the recipient had earned income to the extent of 10 % of the value of shares. The Assessing Officer has further observed that as no evidence of project development expenditure was produced, the assessee has not established that there is no element of profit in transfer of such expenditure to the assessee company. The learned A.R. contends that on the point of extent of profit alleged to have been made by HRPG, the assessee was not heard. Thus the learned A.R. states that the impugned orders are violative of the principle of natural justice and, therefore, should be struck down. In this connection. the learned A.R. has referred to a case cited as 1969 PTD 267 on the point that rules of natural justice are to be read as part and parcel of every statute unless and until there is a specific provision in a particular statute to the contrary. He has further referred to an order of this Tribunal, dated 13-4-1998 in I.T.A. No,321/KB of 1997-98 (Assessment Year 1990-91). In that case; the facts were that a particular amount of income was not taxed in the original assessment order. The learned IAC was of the opinion that the said amount was in the nature of revenue receipts and should have been assessed. Accordingly, action under section 66-A was initiated. After hearing the assessee, the learned JAC was satisfied that the disputed amount was not revenue receipt but a capital receipt. However, while passing the order under section 66-A, he held that the said amount represented capital gains and was liable to be taxed. But, on the point of treatment of the amount as capital gains, the assessee was not given any show-cause notice. In appeal, this Tribunal cancelled the impugned order by holding that it was without jurisdiction. However, we find that in the present case, the situation is quite different. The impugned orders clearly show that the two points referred to by the learned A.R. are not additional grounds but are only the views and opinion of the Assessing Officer about the nature of transaction and the applicability of the provisions of section 50(3). The observations of the Assessing Officer are in fact the reasons given by him in rebuttal of the assessee's contentions given in the reply to the show-cause notices. Therefore, we do not consider that the Assessing Officer had based his orders on any new issue on which the assessee was required to be heard. The assessee had been given adequate opportunity of being heard on the point at issue and the Assessing Officer, after having duly considered the reply, had given his own reasons for not accepting the assessee's contentions. Therefore, we find that neither the rules of natural justice have been violated nor the impugned orders have been made in an undue haste and without applications of mind.
6. The learned A.R. argues that section 50(3) comes into operation only when some money (cash) is paid to the non-resident. He has drawn our attention to the opening part of section 50(3) which reads as under:---
"(3) Any person responsible for paying to a non-resident any sum chargeable under the provisions of this Ordinance . . . . . . . . . ." (Emphasis added).
The learned A.R. asserts that payment is linked to "sum" and word "sum" means money and not anything else. He takes us to the meaning of this word as described in Venkataramaiya's Law Lexicon (Vol. III 1996 Edn.), as under:---
Sum. --- The word "sum" as used in section 88 of the Income Tax Act, 1961, can only mean payment in cash. According to the Chamber's 20th Century Dictionary, the word "sum" means a quantity of money. It can admit of no meaning which would include within its fold property or thing also."
The above description has been quoted from a case of Indian jurisdiction in re: CIT v. Amonbolu Rajiah (1974) 1 ITJ 185 = (1976) 102 ITR 403.
Another case relied upon is cited as Commissioner of Income-tax, East Pakistan, Dacca v. A. Khaleque (1968) 18 Tax 8, wherein it was held that the expression "sums paid" occurring in section 15D (of repealed Income-tax Act, 1922) means a particular amount of money paid in cash. A third case quoted by the learned A.R. is cited as CIT v. Aloo Supply Company (1979) 121 ITR 680, wherein it was held that the word "sum" in section 40A(3), second proviso of (Indian) Income Tax Act, 1961, is used only to indicate an amount of money and does not refer to the totality of expenditure. On the strength of these cases, the learned A.R. asserts that the word "sum", used in section 50(3), means money (cash) only. The learned Legal Adviser of the Department, on the other hand, argues that payment means discharge of an obligation and it is immaterial whether the payment is made in cash or by any other mode. He insists that the word "sum" should not be interpreted independently of the factum of payment. He is of the view that the main emphasis in section 50(3) is on payment and the word "sum" denotes the quantum or value of consideration paid, whether in cash or in kind. He says that there are several modes of payments such as cash, bank cheque or draft, promissory notes etc., and it would not be logical to exclude modes other than cash, as it would be against the spirit and intent of the provision of law.
7. We have carefully considered the arguments of both sides in this regard. It would be pertinent to examine the facts of the cases cited by Mr. I. N. Pasha. As stated earlier, the meaning of the word "sum" in Law Lexicon, referred to by the learned A.R., is taken from the case of CIT v. Amonbolu Rajiah. In that case, the assessee made donation to a local authority (Zilla Parishad) by way of construction of a school building at his expense, and claimed tax exemption under section 88 of the (Indian) Income Tax Act, 1961. It was held that in order to claim the benefit of section 88 (now section 80G) the donation to the Government or the local authority should be given in cash and not in kind. However, the assessee was allowed exemption on the ground that amount paid by the assessee to the contractor (who constructed the school building) would amount to payment of money to the Zilla Parishad, and hence the assessee was entitled to exemption under section 88 in respect of the amount donated. In the second case, i.e. CIT v. A. Khaleque, again the issue related to donation made by the assessee to a charitable institution. The assessee had transferred shares, by way of donation, to an approved charitable institution, and he claimed tax rebate under section 15D of the repealed Income-tax Act, 1922. Considering the popular and literal meaning of the words "sums paid", it was held that the said words, occurring in section 15D, mean a particular amount of money paid in cash. In the third case, CIT v. Aloo Supply Company, the assessee incurred business expenditure in cash in excess of the statutory limit of Rs.2,500 under section 40A(3) of the (Indian) Income Tax Act, 1961 which stipulated that where an assessee incurred expenditure in a sum exceeding Rs.2,500, otherwise than by a crossed cheque drawn on a bank or a crossed bank draft, such expenditure shall not be allowed as a deduction. The issue raised was whether the limit on "sum" of Rs.2,500 applied to total expenditure (i.e. aggregate of payments) or to each individual payment. It was held that the statutory limit of Rs.2,500 applied to payment made to a party at a time and not to the aggregate of payments made to a party in the course of a day as recorded in the cash book. This case is not relevant to the issue in hand, i.e. distinction between payment in cash and payment in kind, although it does refer to dictionary meaning of the word "sum" but only in the context of distinction between the two connotations of this word i.e. (i) a definite amount; and (ii) an addition of individual amounts to create a 'sum. The decisions in these three cases are based on the dictionary and literal meaning of the word "sum". However, we would like to mention that now the Courts tend to adopt a more purposive approach towards interpretation of a provision of law with a view to conforming it to the apparent intent of the Legislature and, where necessary, to make the provision workable. I have been able to lay hands on a few cases of Indian jurisdiction which dealt with the issue of tax rebate on donations made in kind. In the first case cited as CIT v. Associated Cement Co. Ltd. (1968) 68 ITR 478, the assessee company had constructed, as a donation, an experimental rotary kiln for Bombay University and claimed rebate under section 15-B (of the Indian Income-tax Act, 1922) in respect of expenditure incurred. It was held that the rebate was properly allowable under section 15-B. In the second case, cited as CIT v. Bangalore Woollen, Cotton and Silk Mills Co. Ltd. (1973) 91 ITR 166, the assessee company, carrying on the manufacture of woollen and cotton fabrics, donated some cloth to various charitable institutions. It was held that the assessee was eligible for rebate under section 88 (now section 80G) of the (Indian) Income Tax Act, 1961, though the donation was not given in cash. In the third case cited as CIT v. Traub (India) P. Ltd. (1979) 118 ITR 525, the assessee donated some machinery to Government Poly Technical Institute and claimed tax rebate under section 80G of (Indian) income Tax Act, 1961. It was held that the assessee was entitled to deduction even though the donation was in kind and not in cash. In these cases what the Courts looked at was the substance of the transaction and did not restrict the exemption to donations m the shape of actual cash only.
8. Having the cases discussed above in mind, we may now look at the substance of the transaction between the assessee and the non-resident company (HRPG). As a result of an agreement, dated 7-6-1992, the assessee company acknowledged the development costs incurred by HRPG and agreed to reimburse such costs. The HRPG agreed to accept such reimbursement in the form of fully paid-up shares of the assessee company issued at a discount. Thus it is obvious that the substance of the transaction is payment of money for discharge of liability payable to HRPG. The shares were issued in lieu of money, in agreement with the creditor i.e. HRPG. Therefore, it is, in essence, a case of payment of cash (sum) in the form of shares. To elucidate this point further, we may state that receipt in kind is as good as receipt of cash in an amount equal to the value of kind. Here, I may refer to a case of Indian jurisdiction in re: Seth Kishori Lal Babulal v: CIT, U.P. (1963) 49 ITR 502. In that case, the assessee had received U.P. Government Bonds under a decree against a landlord who had obtained loan from the assessee and the principal amount with interest was payable to the assessee. The assessee encashed some of the bonds soon after receipt, but remaining bonds were encashed on a date falling in the next income year. The reason for doing so was that the assessee wanted to spread the interest received on encashment of bonds in two years and not be taxed on such income in one year. The assessee did not declare the value of all bonds in the year of receipt, on the ground that bonds received were not cash and since the cash was received only by sale of bonds, the receipts were to be shown in the year of sale. This argument was not accepted and it was held that even though the assessee kept the accounts on cash system, he must be deemed to have received the entire sum in cash when the bonds were accepted by him. While discussing the facts of the case, his Lordship, Brijlal Gupta, J. observed as under:--
"The rule is firmly fixed that where in settlement of a claim a creditor accepts money's worth or in other words payment in kind,it is just the same as if he has received cash payment and where he chooses to retain the thing which he has received it merely amounts to re-investment of money in the thing acquired. "
The above-cited case has been discussed at some length, in the hope that it will explain the position of law with reference to the facts of the case we, are presently dealing with. In the present case also, the HRPG, in settlement of their claim, accepted shares of the assessee company and hence, it amounts to receipt of cash. If the shares so acquired are retained, it simply amounts to reinvestment of money in the shares, Seen in this perspective, it is clear that issuance of shares in lieu of money, which the assessee company owed to HRPG, amounts to payment of "sum" i.e. money.
9. Another argument advanced by the learned A.R. is that the agreement dated 7-6-1992 between the assessee and HRPG clearly provides for reimbursement to HRPG of development costs in the form of shares of assessee company. Therefore, the Department cannot interfere with the terms of this agreement by holding that the assessee company paid sum (i.e. cash) to HRPG. In this connection, the learned A.R. referred to a case reported as CIT, Peshawar Zone, Peshawar v. Siemens A. G. 1991 PTD 488 = 1991 PTD 368. In that case, the Government of Pakistan, M/s. Siemens A. G. and Farid Sons Ltd., entered into an agreement for setting up a limited company under the title "Telephone Industries of Pakistan". The agreement provided for payment of dividend on paid-up capital. With the expansion of the venture, additional capital was required and the parties amended the agreement. The assessee company (M/s. Siemens A.G.) agreed to contribute additional capital subject to the condition that a fair return would be allowed on such investment. As agreed, the assessee was granted return at a certain percentage. The assessee company declared the amount received as income from dividends. The Assessing Officer held that the amount in question is interest and not dividend. The controversy involved the meaning and connotation of the word "return" which was guaranteed under the agreement. The Hon' able Supreme Court held the amount to be dividend. It was observed that when two contracting parties agree to do something by a mutual valid contract or intend doing so, and it is not prohibited by Islam, a third party like the Income-tax Department or for that matter the Court has no authority to modify either the contract or with what they intended to do with it. This observation appears to have been made in the context of the terms of agreement between the parties. The agreement provided for grant of fair return on additional capital supplied by the assessee company and with this intention of the parties in view, the only reasonable interpretation of the term "return" could be the dividends, which is normally construed as return on capital by way of a share in profits. In this connection it was held that a third party cannot modify the terms of contract or the intent of the parties to the agreement. This judgment, in our view, is not applicable to the facts of the case before us. In the present case, there is no dispute about the interpretation of any word or term of the agreement between the assessee company and the non-resident company (HRPG). There is no attempt to modify the terms of agreement, under which the assessee company issued shares in lieu of the amount payable, on account of development costs, to the non-resident company. The department did not hold that the assessee company had actually paid cash to the non-resident company. The issue is whether the provisions of section 50(3) apply where a payment in kind is made to a non-resident and this issue has been dealt with in the preceding paragraphs.
10. The learned A.R. further argues that the intention of the Legislature to restrict the application of the provisions of section 50(3) to payment in cash only is apparent from the fact that in section 50(7C), which deals with prizes on prize bonds and winnings from a raffle, lottery and cross-word puzzle, the law requires "deduction" of tax if payment is made in cash, and "collection" of tax in case payment is made in any other form. It is contended that had the Legislature intended to bring payment in kind also within the ambit of section 50(3), it could have specifically so provided, as it has done in section 50(7C). Therefore, in the view of the learned A.R. section 50(3) applies to payments in cash only. To lend further support to this view, he points out that in various subsections of section 50, the words "deduct" or "collect", in the context of tax withholding, has been used keeping in view the nature of transaction. Where payment in cash is involved, as in sections 50(1), 50(2), 50(3), 50(4), etc., paying person is required to "deduct" tax from payment made. On the other hand, where there is no cash payment, the relevant person is required to "collect" tax in respect of transaction involved, as in sections 50(5) and 50(6) etc. It is urged that since section 50(3) requires deduction of tax, it means that only payment in cash is envisaged in this provision of law. We will now examine these points made by Mr. 1. N. Pasha.
11. As regards the first point, we find that the provisions of sections 50(3) and 50(7C) envisage quite different situations. The provisions of section 50(3) relate to payments to the non-resident, which could be in the shape of cash or in any other form but in substance being cash. On the other hand, section 50(7C) contemplates payment of prizes or winnings of two separate and distinct types: (i) prizes or winnings of cash; and (ii) prizes and winnings of anything of value, other than cash. As one can easily see a prize or winning of a valuable article is distinct from a cash prize and is not a substitute of cash prize. That is why it was necessary to specify the mode of payment of the two types of prizes and winnings, and the requirement of deduction of tax from a cash prize or winning, and collection of tax in case of a prize or winning of a valuable thing, other than cash. Therefore, the provisions of section 50(7C) do not lend support to Mr. Pasha's view that the provisions of section 50(3) contemplate actual cash payments only. As regards the second point regarding requirement of deduction of tax under section 50(3), we have already clarified that this provision of law relates to payment to a non-resident, either in the shape of cash or in any other form which is, in substance, cash payment. That being the case, the requirement of "deduction" of tax has been properly provided for.
12. This brings us to another point raised by the learned A.R. which relates to the method of deduction of tax where no actual cash payment to a non-resident is made. He argues that since the assessee company did not pay any cash to the non-resident company, it was not possible for the assessee to deduct any tax as envisaged in section 50(3). On the other hand, the Legal Adviser of the department states that under the law, it was the assessee's responsibility to deduct tax while making payment, in whatever form, and the assessee company has to pay the tax which it had failed to so deduct. He further states that the assessee company has the financial means to pay the aforesaid tax. As we have already held that even when payment is made in kind which, in substance, is cash payment, tax, under section 50(3) is required to be deducted. Therefore, it means that here the paying person makes payment in the form of anything valuable, other than cash, in satisfaction of the gross amount payable, the value of the aforesaid thing has to be equal to the net amount after deduction of tax. The difference between the gross amount and the net amount represents the amount of tax which is to be deposited into Government account by the paying person. In the present case, the 'assessee company issued shares in lieu of the amount payable to the foreign company (HRPG). Had the HRPG not agreed to this mode of payment, the assessee company would have paid cash to discharge the liability. By issuance of shares in lieu of cash, it had retained the money and yet discharged the liability. The assessee company should have issued shares of the value of net amount after deduction of tax under section 50(3) from the gross amount payable. The amount of tax so deducted should have been deposited into Government account as per the prescribed procedure.
13. Mr. Pasha has raised another objection with regard to application of the provisions of section 50(3) to the entire amount representing the value of shares issued to the foreign company. He argues that the words "sum chargeable" as used in the said section, refer to income and not to total payment which may include some portion as income or profit of the non resident. In other words, he is of the view that the tax under section 50(3) can be deducted in. respect of only shat portion of the gross payment as represents income of the non-resident because only such income and not the gross receipts are chargeable to tax in the hands of the recipient. Referring to the impugned orders under section 52186, the learned A.R. states that the Assessing Officer has himself mentioned that the issuance of shares to HRPG at 10 % discount means that recipient had earned income to the extent of 10 % of total value of shares. He says that the Assessing Officer further observed that it is not established by the assessee that there is no element of profit in transfer of project development expenditure to the assessee by the HRPG. Therefore, the Assessing Officer should have first determined the income of the non-resident (HRPG) arising out of this transaction and then charged tax under section 52 from the assessee. The learned A.R. supports this view by referring to a case cited as Gulberg Textile Mills v. CIT 1978 PTD 126 (H. C. Kar.) and draws our attention to the following observations:---
"Section 18(3B) is expressed in the widest possible terms. It covers all sums (other than "interest on securities") chargeable under the provisions of the Act and payable to a non-resident, which are in the nature of income, that is pure income, as opposed to payment of a sum which in the hands of the recipient is a trading receipt, e.g., price of goods sold paid to a non-resident seller. In the former case, payment of a sum which is pure income profit, the payer is bound to make deduction of tax at the time of payment to the non-resident and he is not concerned with the ultimate result of the assessment of the non-resident person to whom the payment is made, which is a matter between the non-resident and the Revenue."
The learned A.R. thus states that tax under section 50(3) can be deducted only if the payment to the non-resident is in the nature of pure income or profit. The learned Legal Adviser of the Department, on the other hand, argues that total payment made to a non-resident is subject to deduction of tax under section 50(3). He argues that the words "sum chargeable" mean that the amount paid is of a nature which is taxable under the Income Tax Ordinance. He asserts that the expression "chargeable" is not synonymous to the word "payable". The latter expression, according to him, would apply in respect of income on which tax would be payable by the non-resident. He states that by using the expression "chargeable" the law makes the payment subject to deduction of tax and it needs no determination of the income on which tax is payable because the payability, is through the machinery provided under the Income Tax Ordinance. In this connection, he refers to a case in re: The Laxmi Insurance Company Ltd. v. CIT AIR 1931 Lah. 441. In that case, the assessee company started insurance business in 1924 and its first Actuarial Report was prepared in 1928 and the first assessment made was for assessment year 1928-29. Rule 25 of the Income-tax Rules governed the method of computation of income from insurance business on the basis of Actuarial Report. The Assessing Officer proceeded under section 34 to assess the income for the assessment year 1927-28. It was held that there being no machinery provided by the law during the year 1927-28 for ascertaining or assessing the income of the company in accordance with the provisions of rule 25, no income escaped assessment within the meaning of section 34 and hence the assessment for 1927-28 was illegal. The Legal Adviser, therefore, asserts that although the income in that case was chargeable to tax for assessment year 1927-28 but there being no machinery provided for that year, the tax was not payable, as it was not assessable.
14. We have examined the arguments of both sides on this point. Going through the .facts of Gulberg Textile Mills, we are not persuaded to interpret the observation, quoted in the preceding paragraph, in that case in the manner as desired by the learned A.R. of the assessee. In fact in that very case, their Lordships of the Karachi High Court have quoted a portion of a judgment of the Indian Supreme Court in re: Aggarwal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lal (1958) 33 ITR 245. In that case it was held that those persons who are bound under the Act to make deductions at the time of payment of any income, profits or gains are not concerned with the ultimate result of the assessment. Whether in the ultimate result the amount of tax deducted or any lesser or bigger amount would be payable as income-tax in accordance with the law in force would not affect the rights; liabilities and power of a person under section 18 or of the agent under sections 40(2) and 42(1). We would like to point out that in the case of Gulberg Textile Mills, it was further held that even though the commission paid to non-resident agents was not chargeable to tax in Pakistan, yet the amount paid was not allowable as deduction by virtue of section 10(4)(bb), as tax had not been deducted from the payments made. In this regard, we may also refer to a case cited as CIT v. Esso Pakistan Fertilizer Ltd. 1990 PTD 787. In that case, a reference has been made to a case of Indian jurisdiction in re: P.C. Ray & Co. v. A. C. Mukerjee AIR 1959 Cal. 131 wherein it was held that the word "chargeable" in section 18(3B) was not to be treated as equivalent of "assessable" to income-tax and connoted a sum liable in its nature to be brought into computation in an assessment, that is to say, as belonging to one or other of the heads of income as set out in section 6 of the Act. Their Lordships of the Karachi High Court held that section 18(313) of the Act is a code in itself and virtually covers all sums payable to non-resident, chargeable under that Act and such sums may or may not be of a determinate character. Absence of a provision in the statute leaves no machinery for the remitter to resort to, with a view to find out the proportionate amount chargeable and he, being not armed with the powers of an Assessing Authority, must, therefore withhold all or any sums as a whole, which have elements of chargeability or, on failure, become person liable tinder section 18(7) of the Act. It was further held that it is none of the functions of the person obliged to make disbursement under section 18(313) of the Act to sift and assess as to whether and what portion of the amount projected to be disbursed is taxable or none at all is so taxable. Having regard to the law as expounded in the said case, we are of the view that where a person is obliged to deduct tax under section 50(3), he must deduct tax from the whole of the amount to be paid. Even otherwise, the person making payment is not in a position to determine as to what is the proportion of the income/profit which the recipient has earned out of the payment received by him. The function of determining the income of non-resident recipient is to be performed by the Assessing Officer and not by the paying person. The proposition that the Assessing Officer should first determine the income of the non-resident and the tax payable thereon and then demand the tax from the paying person under section 52 is neither tenable nor practicable. The liability of the paying person to deduct tax under section 50(3) is quite distinct from the ultimate tax liability that may be determined on assessment of income of the non-resident. '
15. The learned A.R. also argued that it is the right of an assessee to conduct transactions in a manner which may result either in no tax or less tax. As the transaction in the present case was in the form of issuance of shares, tax under section 50(3) was not deductible. In this connection he referred to a case cited as Inland Revenue Commissioners v. Wesleyan General Assurance Society (1948) 16 ITR 101. In that case, it was held that a transaction, which on its true construction is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax. We find that this case is not relevant to the issue in hand because here we are not dealing with the question whether the payments received by the non-resident company (HRPG) constitute taxable receipts or not in the hands .of the said non resident company. However, we may mention that even in the said case it has been observed that name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. The question always is what is the real character of the payment, not what the parties call it. Precisely on this issue we have held that the transaction between the assessee and the non-resident company is, in substance, payment of money although in the form of issuance of shares.
16. Another point raised by the learned A.R. is that the assessee was even otherwise not required to deduct tax under section 50(3) for the reason that it is an agent of the non-resident company (HRPG). Elucidating this argument, he states that the definition of the term "agent" has been given in the Explanation to section 78, which deals with the provisions relating liability of an agent, and according to sub-clause (a)(iii) of clause (4) of the 'Explanation, any person in Pakistan from or through whom the non-resident is in receipt of any income, whether directly -or indirectly, is a statutory agent of the non-resident. He says that since the assessee company had made payment to the non-resident company, it automatically became an agent of the non-resident and consequently it was not required to deduct tax from payments made by it to the non-resident company. He further elaborates that it was not necessary for the Assessing Officer to declare the assessee as an agent because that condition, as stipulated in sub-clause (c) of clause (4) of the Explanation, is not applicable to the categories of persons listed in sub clause (a) of the said clause (4). The learned A.R. referred to a case cited as Noon Sugar Mills v. CIT, Rawalpindi PLD 1990 SC 1156 = 1990 PTD 768 = 1990 MLD 1977, wherein it was held that since the assessee company was liable to pay taxes as an agent of foreign suppliers, they were not obliged to deduct tax under section 18(313) of the Income-tax Act, 1922. On the other hand, the Legal Adviser of the Department asserts that the assessee was neither declared nor treated as an agent, nor it had at any time taken this plea before the Assessing Officer. The assessee had all along taken the stand that it had not made any payment in cash and the transaction was merely a reimbursement of expenditure incurred by the non-resident and hence tax under section 50(3) was not to be made, but now it has taken an altogether different plea. He states that the assessee never claimed to be an agent of the non-resident nor it paid tax on behalf of the non-resident.
17. We have thoroughly considered the arguments of both sides in the light of the relevant provisions of law on this point. For facility of reference, the relevant portion of section 78 is reproduced as under:---
"78.---(1) Every agent shall, in respect of the income for which he is, or is declared to be, or is treated as, an agent, be deemed to be an assessee for the purposes of this Ordinance and be subject to the same obligations and liabilities as if he were the assessee, and shall be liable to assessment in his own name in respect of that income.
(2)...........................
(3)..........................
Explanation.---For the purposes of this section and section 80, "agent" includes--
(1) ...............................
(2)...............................
(3)...............................
(4) in respect of income of non-resident --
(a) any person in Pakistan --
(i) who is employed by, or on behalf of the non-resident; or
(ii) who has any business connection with the non-resident; or
(iii) from or through whom the non-resident is in receipt of any income, directly or indirectly; or
(iv) who holds, or controls the receipt or disposal of, any money belonging to the non-resident; or
(v) who is the trustee of the non-resident; or
(b) any person, whether a resident or non-resident, who has acquired, .t00 by means of a transfer, a capital asset in Pakistan; or
(c) any person who is declared or treated as an agent of the non resident:"
Analyzing the provisions of section 78, we find that subsection (l)-of the said section contemplates two categories of persons as agents, namely:---
(i) a person who is an agent; and
(ii) a person who is declared or treated as an agent.
Proceeding further we find that clause (4) of the Explanation to the' said section describes the persons as agents in respect of income of a non resident. Sub-clauses (a) and (b) of clause (4) specify the nature of connections with the non-resident on the basis of which a person qualifies to be an agent of the non-resident. Sub-clause (c) authorizes declaration or treatment of a person as an agent. According to Mr. Pasha, the learned A.R. of the assessee, persons mentioned in sub-clauses (a) and (b) are automatically agents of non-resident while under sub-clause (c) any other person can be declared or treated as an agent.
18. In order-to understand the requirements of law for a person to bear the burden of tax in respect of income of another person who is non-resident, it is necessary to examine the purpose and scope of the provisions of sections 50(3) and 78 in some detail. It is quite obvious that both these sections are intended to ensure collection of tax on income of a non-resident accruing or arising in Pakistan, because ordinarily such non-resident is located outside Pakistan and it is otherwise impossible to enforce the collection of tax from him. One method, as stipulated in section 50(3), is to deduct tax at source from payments made to the non-resident and this responsibility has been assigned to the payer. The second method is to shift the burden of tax of non-resident on another person who is within the jurisdiction of tax authorities in Pakistan. This purpose is achieved by treating such person as agent of the non-resident in accordance with the provisions of section 78. Now, it is quite evident that not every person can be saddled with the tax liability of the non-resident. There has to be some business connection or monetary dealing of such person with the non-resident or he may have control over the money or assets of the non-resident. That is why sub-clauses (a) and (b) of clause (4) of the Explanation to section 78 prescribe the nature of connections which a person must have with the non resident before he can be burdened with the tax liability of the non-resident as his agent. Sub-clause (c) simply provides the authority to declare or treat a person as an agent and hence it has to be read with sub-clauses (a) and (b) and not independently. Therefore, in our view only such a person can be declared or treated as an agent who falls in any of the categories specified in sub-clauses (a) and (b). there are two reasons for this interpretation. Firstly, as stated earlier, not every person can be declared or treated as an agent of the non-resident and, therefore, sub-clause (c) can only be interpreted as an enabling provision authorizing the declaration or treatment of a person as an agent. Secondly, a person, before dealing with a non-resident or making a transaction with him, has to know, in certain and unambiguous terms, the situations or conditions under which he might be declared or treated as an agent. The law specifies these situations or conditions in sub-clauses (a) and (b). Here a question may arise that if this is the correct interpretation of law, then why is it necessary to specify two types of persons as agents in subsection (1) of section 78, namely: (i) who is an agent; (ii) who is declared and treated as an agent. The answer to that question is that in respect of income of a resident person, certain persons as mentioned in clauses (1), (2) and (3) of the Explanation, are agents of such resident person. Even in the case of a non-resident, a person may be an agent of such non-resident in his own right i.e. when he is appointed by the non-resident as is agent to pay tax on his behalf. Only such a person would automatically be an agent of the non-resident. In other situations, a person would be an agent of the non resident only if he is declared or treated by the Assessing Officer as an agent of the non-resident.
19. Having the above analysis of section 78 in view, we may revert to the facts of the present case. There is nothing on record to show that the assessee was appointed by the non-resident company as its agent for tax purposes, nor it was the claim of the assessee at any time. The Assessing Officer also did not declare or treat the assessee company as an agent of the non-resident (HRPG). Even the assessee company never considered itself as an agent as is evident from its conduct. It did not file returns of income for the relevant years, in respect of income of the non-resident company, nor paid tax thereon, in fulfilment of the obligations and liabilities as an assessee in place of the non-resident, as required under the provisions of section 78. In the case of Noon Sugar Mills Ltd., referred to by the learned A.R. the assessee company was declared as an agent under section 43 of the repealed Income-tax Act, 1922, by the Assessing Officer. This is not the position in the present case. Therefore, we are not persuaded to agree that the assessee company was an agent of the non-resident company (HRPG).
20. For the aforesaid reasons, it is held that the assessee company was rightly treated as an assessee in default under section 52 and the impugned orders under section 52/86 are upheld.
21. The assessee's appeals fail.
C.M.A./23/Trib. Appeals dismissed.