1999 PT D 4138
[Lahore High Court]
Before Nasim Sikandar, J
J. A. TEXTILE MILLS LIMITED through Company Secretary
Versus
CENTRAL BOARD OF REVENUE through
Chairman, Islamabad and 12 others
Writ Petition No. 12594 of 1999, decided on 19/08/1999.
(a) Income Tax Ordinance (XXXI of 1979)---
-----S.50(5-A) & Sched. VIII, Parts I, II, III---Constitution of Pakistan (1973), Art.199---Constitutional petition---Deduction of income-tax at source---Cotton yarn not included in "specified goods" as mentioned in Part I of Sched. VIII of Income Tax Ordinance, 1979---Cotton yarn was covered by Part II being goods manufactured in Pakistan, same could not be considered to be a "textile made-ups" and the same was not one of the "specified goods" to attract the deduction rate of tax at source---Any such deduction at the rate of 1 % of export proceeds of cotton yarn, thus, was against law---Department was directed to discontinue deduction of income-tax at source on the export proceeds of cotton yarn.
(b) Income Tax Ordinance (XXXI of 1979)---
----Sched. VIII, Parts I, II & III---Cotton yarn did not fall within category of "textile made-ups"---Cotton yam in all textile made-ups could be one of more of the contents---Cotton yarn, in its simpler form, cannot be treated as a textile made-ups same being the next stage or converted form of yarn into something which amongst other characteristics was available for such use-- "Textile made-up" as mentioned in Sched. VIII, Part I of Income Tax Ordinance, 1979 referred to items of dressings, bed spreads or household clothing etc.---Cotton yarn was placed between raw cotton and the textile made-ups and could conveniently be taken as a "goods manufactured" as the same travelled from various stages to acquire such form.
(c) Words and phrases---
----"Manufacturing"---Meaning and applicability---As a general rule manufacturing is applied to conversion or process of a material or materials into refiner forms of the raw material or the making of an altogether different thing.
(d) Income Tax Ordinance (XXXI of 1979)---
----Sched. VIII, Parts II & III---Inclusion of an item in both Parts II & III of Sched. VIII of Income Tax Ordinance, 1979---Where both the Parts cover any item then Part II being more specific will have to be given preference against Part III as the latter is residual in nature.
(e) Interpretation of statutes---
---- Fiscal statutes should be interpreted strictly in accordance with letter of law used and the words employed.
Collector of Customs, Karachi and others v. Messrs Abdul Majeed Khan and others 1977 SCMR 371; Mehran Associates Limited v. Commissioner of Income-tax, Karachi 1993 SCMR 274 = 1993 PTD 69; Abdul Rehman v. Inspector-General of Police, Punjab, Lahore and 2 others PLD 1995 SC 546 and CIT, East Pakistan N~ Messrs Hossen Kasan Dada. Karachi PLD 1961 SC 375 ref.
(f) Income-tax---
----Income-tax tariff---Applicability---Where an article or income can equally he placed under two heads of income or tariff, then the one favourable to the taxpayer should be adopted---Where an item of income etc. expressly falls into one clause then its placing into another clause will be unjustified, all the moreso, when the other cause is subject to higher rate of tax
Omer Aziz Khan for Petitioner.
Mian Subah Sadiq Klasson for Respondents.
ORDER
Sections 9, 10 and 50 of the Income Tax Ordinance, 1979 (for short the Ordinance) respectively provide for charge of income-tax, charge of super-tax and surcharge and deduction of tax at source. Subsection (5-A) of section 50 provides that "any person being an authorised dealer in foreign exchange shall, at the time of realization of foreign exchange proceeds on account of export of goods by a person being an exporter, deduct tax at the rates specified in First Schedule". The First Schedule to the Ordinance with reference to the provisions contained in the aforesaid three sections prescribes rates of income-tax chargeable to various categories of assessees. The opening words of paragraph A of that Schedule exclude the rates stated therein in cases of income to which sections 80-B, 80-C and 80-CC are applicable. Section 80-CC is 'one of the various provisions added to the Ordinance by Finance Act, 1992 introducing presumptive tax regime. This section provides that where any amount referred to in subsection (5A) of section 50 is received by any person, the whole of such amount shall be deemed to be the income of such person and tax thereon shall be charged at the rates specified in the First Schedule. Paragraph FF, Part I of the Schedule provides for three different rates for collection of income-tax at source. These being at 0.50 % , 0.75 % and 1 % of income derived by an assessee and categorised respectively in Parts I, II and Part III of the Eighth Schedule to the Ordinance. The Eighth Schedule in turn inter alia divides and places specified goods manufactured in Pakistan. Under Part I, goods manufactured in Pakistan under Part II and goods not covered by both Parts I and II in Part III. Part III therefore, is a residuary clause, which also reserves a power for the Central Board of Revenue to notify any goods for their placement in this part.
2. The petitioner is a listed Company engaged in manufacture and export of cotton yarn and received export proceeds through its bankers arrayed as respondents Nos.5 to 11 in this petition. It is claimed that at the instructions of respondent No.3---Central Board of Revenue, the bankers of the company are deducting tax at a rate of 1 % of the export proceeds of cotton yarn. It is stated that the amount received on such account is at best covered by Part II of the Eighth Schedule to the Ordinance. It is further explained that cotton yarn manufactured by the petitioner and exported is covered by Serial No. 1 of Part II which is designed to include export of goods manufactured in Pakistan. It is also stated that neither any other provision of the Schedule nor the Central Board of Revenue in exercise of the aforesaid powers vest in it under Serial No.3 of Part III to the Schedule has notified cotton yarn as an article to fall in Part III. On the basis of the claim that the item manufactured and exported by the petitioner-company is covered by Part II, it is asserted that the same could not be placed into the residuary Part III which is meant for goods not covered under Part I and Part II.
3. It appears that the petitioner earlier filed Writ Petition No. 4890 of 1999 which was disposed of on 19-3-1999 with a direction to the R.C.I.T., Multan to decide its representation made in this regard and to determine the liability of the petitioner accordingly. The representation was disposed of and conveyed to the petitioner on 10-5-1999. In the letter so addressed to the Chartered Accountant of the petitioner, a reference was made to C.B.R. Circular No.6 of 1994, dated July 10 of 1994 and another alleged clarification issued by the same authority through Letter No. 1 (14) WHT/1992, dated 15-12-1998. Being dissatisfied with the rejection the petitioner is again before this Court.
4. Parties have been heard. The learned counsel for the petitioner argues that even a cursory glance at the aforesaid provisions of the Ordinance read with the clauses of the said two Schedules, particularly the Eighth Schedule makes it absolutely clear that the item exported by the petitioner squarely falls in Part II of the Schedule. He claims that in the first instance cotton yarn being exported by the petitioner-company may very well fall within the generic term "textile made-ups", as given in Part I of the Schedule which is subject to a rate of 0.50% of the proceeds of export. At any rate, the item cotton yarn cannot be stated to be covered only in the residuary clause as it fairly falls under Serial No.1 of Part II which covers "export of goods manufactured in Pakistan". The item cotton yarn being exported by the assessee, the learned counsel claims is certainly of the kind contemplated in Part II and therefore, is at best subject to the deduction at sources at the rate of 0.75% of the proceeds instead of 1% as being charged from it. Therefore, he contends that the direction on the part of respondent No.3, Central Board of Revenue to the bankers of the petitioner to make deduction under subsection (5-A) of section 50 of the Ordinance at the rate of 1 % is totally illegal and unconstitutional. The interpretation placed by the respondents Nos. l to 4, the Revenue Authorities, on the aforesaid provisions of the Ordinance is described malicious, incorrect, and, therefore, against law.
5. The learned counsel for the respondents-Revenue, in terms of the written reply, states that C.B.R. Circular No. 20 of 1992, dated 1-7-1992 explained the procedure for deduction of tax at source from Export of Yarn. Also that in terms of Circular No.6 of 1994, dated 10-7-1994, the prescribed rate for cotton yarn is 1 % for the reason that the facility of export rebate was withdrawn w.e.f. the date of that Circular. .
6. After considering the submissions made at the bar for the parties, I entertain no doubt that the deduction at sources of 1 % and any direction issued for that purpose is against the letter of law. Even the last mentioned Circular No. 6 of 1994 rather negates the stand taken by the Revenue. This circular was issued to explain important provisions of the Finance Act, 1994 which carried amendments made in Ordinance. Para. 24 of the Circular which is being relied upon by the Revenue is reproduced for facility of reference:---
"24. Removal of redundant reference to cotton yarn in Eighth Schedule to the Income Tax Ordinance. 1979.--Income from export of cotton yarn enjoys a tax rebate equivalent to 25 % . With the introduction in 1992 of presumptive tax regime applicable to the export sector, only two types of reduced rates of withholding tax are applicable i.e., 0.50 % and 0.75 %. The obsolete reference to export rebate on cotton yam has, therefore, been deleted. "
7. The above wording of the Circular by no imagination can be extended to charge rate of 1 % on the kind of proceeds being received by the petitioner-company. In my way of reading and reasoning the Circular simply states that reference to export rebate in the Eighth Schedule had been deleted as after introduction of presumptive tax regime the rates on proceeds of cotton yarn exports had been curtailed to 0.5 % and 0.75 %. The rate applied at 1 % in this case was obviously not mentioned. The reason simply being that cotton yarn products are covered in Part I as specified goods manufactured in Pakistan and cotton yarn as such was covered by Part II being "goods manufactured in Pakistan". The three parts of the Eighth Schedule do not appear uncertain or ambiguous. Not at least to the extent of the item in question. Part I of the Schedule is titled "specified goods manufactured in Pakistan". At Serial No. 1, Leather and Textile made ups have been made subject to the levy of a rate of 0.50 % . The item cotton yarn cannot be considered to be a "textile made-up". At least nothing has been brought home to support the claim that it does so. Therefore, it is not one of the "specified goods" to attract the deduction rate of tax at source at 0.5%. However, without any iota of doubt Part II, which titles "goods manufactured in Pakistan" covers the item in question. Serial No. 1 contemplates the proceeds of export of goods manufactured in Pakistan subject to the other provisions of this Schedule. Neither any of the aforesaid circular nor by any other document, direction or instruction the Central Board of Revenue appears to have objected to item of cotton yarn being taken as "goods manufactured" in Pakistan. The R.C.I.T., Multan in its reply to the application made by the present petitioner did not care to make a clear reply or to support it with any legal provisions. He contended himself with a simple reference of the aforesaid circular. That circular as we have already seen does not support the stand taken by the Revenue. It rather runs counter to their view and helps the position adopted by the assessee. To place cotton yarn in Part III which is meant for the "goods not covered by Parts I and II", the Revenue had to establish that the item cotton yarn was not a "goods" manufactured in Pakistan. It is also not the case of the Revenue that the C.B.R. in exercise of the powers vested in it at Serial No.3 of Part III of the Eighth Schedule had notified cotton yarn as an item to be taken under Part III of the said Schedule.
8. As noted earlier cotton yarn does not fall within the category of "textile made-ups". These words as used in Part I of the Eighth Schedule certainly refer to items of dressing, bad spreads or household clothing etc. Cotton Yarn in all Textile made-up could be one or more of the contents. In its simpler form it cannot be treated as a textile made-ups which clearly is the next stage or converted form of yarn into something which amongst other characteristics is available for the aforesaid uses. The item, however, being placed between raw cotton and the textile made-ups can conveniently be taken as a "goods manufactured" as it travels from various stages to acquire that form. The term manufacturing as a general rule is applied to conversion` or process of a material or materials into refiner forms of the raw material or the making of an altogether different thing. Another principle applied in this regard is the change in nature and use of the item which had travelled from one stage of material to another or stood converted even by simple flux of time and preservation with or without making of any human effort to affect the change.
9. The issue in hand can be seen yet from another angle. If, for argument, both Parts 11 and III cover the item in question even then Part II being more specific will have to be given preference against Part III which is residual in nature.
10. It is an established principle that fiscal statutes should be interpreted strictly in accordance with the letter of law used and the words employed. For reference see 1977 SCMR 371 re: Collector of Customs, Karachi and others v. Messrs Abdul Majeed Khan and others. Also that in case of any ambiguity or doubt arising from construction., the same should be resolved in favour of the subject. For reference see PLD 1961 SC 375 re: CIT, East Pakistan v. Messrs Hossen Kasam Dada, Karachi and others v. Messrs Abdul Majeed Khan and others (supra). The ratio settled in 1993 SCMR 274 = 1993 PTD 69 re: Mehran Associates Limited v. Commissioner of Income- tax, Karachi also supports this kind of approach in fiscal statutes. Even in cases of other laws and statutes which infringe upon the rights of a citizen or a party the apex Court In re: Abdul Rehman v. Inspector-General of Police, Punjab, Lahore and 2 others (PLD 1995 SC 5461 favoured a beneficial interpretation. The rule settled In re: CIT, East Pakistan v. Messrs Hossen Kasan Dada, Karachi (PLD 1961 SC 375) states when two equally reasonable constructions are possible one strict and other beneficial then the later should be preferred. The situation, thus, calls for employing at least two general principles. First that where an article or income can equally be placed under two heads of income or tariff then the one favourable to the tax payer should be adopted. Second where an item of income etc. expressly falls into one clause then its placing into another clause would be unjustified. All the moreso, when the other clause is subject to a higher rate of tax.
11. The learned counsel for the Revenue has not explained if the alleged withdrawal of rebate on export of cotton yarn had anything to do with the Issues in hand. Particularly after the net of section 50 had been spreaded and extended to various categories of income. All the relevant provisions namely section 50 (5-A) opening words of Part I of the First Schedule, para. FF of the same Schedule and the three parts of Eighth Schedule when read together do not create even a reasonable doubt against the submissions made at the bar for the petitioner. The aforesaid C.B.R. Circular also lends no support to the case of the Revenue that the item in question is covered only under Part III of the Eighth Schedule and, therefore, liable to deduction of tax and source at the rate of 1 %. Without any contention to the contrary and an assertion against cotton yarn being a goods manufactures, I will hold that the action on the part of the respondents Nos.1 to 4 asking the bankers to make deduction at the rate of 1 % of export proceeds of cotton yarn is against law. It shall accordingly be discontinued forthwith. The levy under the aforesaid provisions shall not exceed 0.75%. All earlier deductions made beyond that limit shall be returned to petitioner or adjusted towards future tax liability at its option.
12. Petition accepted.
Q.M.H./M.A.K./J-75/LPetition accepted.