I.T.AS. NOS.6183/LB, 6182/LB, 6180/LB, 6181/LB, 853/LB AND 854/LB OF 1999 VS I.T.AS. NOS.6183/LB, 6182/LB, 6180/LB, 6181/LB, 853/LB AND 854/LB OF 1999
2001 P T D (Trib.) 2086
[Income-tax Appellate Tribunal Pakistan]
Before Inam Ellahi Sheikh, Chairman and
Javed Masood Tahir Bhatti, Judicial Member.
I.T.A. No.22/KB of 1999-2000, decided on 13/03/2001.
(a) Income-tax---
----Word "payment" ---Definition.
(b) Income Tax Ordinance (XXXI of 1979)---
----Ss.80-C, 143-B & 50(4)---C.B.R. Letter C.No. 1(l7) WHT/91-F1T (iv), dated 28-4-1992---Tax on income of certain contractors and importers---Levy of tax on cost of material supplied by the client---Validity---Tax on the cost of material supplied by the client could not be levied as the title of such material had not been passed to the assessee and there was no evidence of any obligation which would render such transaction to be a 'payment'---Assessee had rendered, construction contracting services and in the performance of such contracts the assessee had used certain materials provided by its clients---Such materials, as per agreement, were to be supplied at a fixed price and the client was to deduct/recover the value of such materials at the same fixed price from the bills presented by the assessee to the client------ Question arose as to whether the assessee had become the owner of such materials and whether he was receiving payments against such material-- Held, if the assessee was making the purchase of such material from the client, then the title should have passed to the assessee while there was nothing mentioned in letter of intent of passing the title in such materials or to hold the assessee to be responsible for any losses in such materials, there being no evidence of any obligation which could render such transactions to be a payment---Treatment given by the departmental officials in respect of the materials supplied by the client of the assessee as part of the receipts taxable under S.80-C of the Income Tax Ordinance, 1979 was not approved by the Appellate Tribunal and addition made in respect of the materials supplied by the client of the assessee was deleted in circumstances.
Black's Law Dictionary, 6th Edn. ref.
(c) Income-tax---
----Central Board of Revenue---Authority to go beyond the law or extend its application---Central Board of Revenue had no authority to go beyond the law to extend the application of any law unless the law authorises it to do so.
(d) Income Tax Ordinance (XXXI of 1979)---
----Ss.143-B, 80-C & 61---Statement regarding certain assessees---Statement under S. 143-B of the Income Tax Ordinance, 1979 as well as return showing nil income to declare the- exempt income was filed---Department issued notice under S.61 of the Income Tax Ordinance, 1979 in respect of income covered under S.80-C of the Ordinance declared in a statement filed under 5.143-B of the Income Tax Ordinance, 1979----Validity---Notice under S.61 of the Income Tax Ordinance, 1979 could not be issued in those cases where no other income had been declared whereas in the present case the assessee had declared income from Defence Saving Certificates although the same was claimed to be exempt.
1998 PTD (Trib.) 1201 and I.T.A. No.3359/KB of 1986-87 distinguished.
Salman Pasha for Appellant.
Vishno Raja Qavi, D.R. for Respondent.
Date of hearing: 13th January, 2001.
ORDER
This farther appeal of a private limited company has been filed against an order, dated 19-4-1999 of the learned CIT(A), Zone-IV, Karachi to agitate the issuance of notices under section 61 of the Income-tax Ordinance, 1979 (hereinafter called the Ordinance) and the levy of tax on the cost of material supplied by the client as used in the contracts executed by the assessee company.
2. The; relevant facts in brief are that the assessee derived income from construction contracting business of industrial project and filed statement under section 143-B of the Ordinance to show the receipts at Rs. 3,040,577. A return was also filed showing nil income to declare the exempt income of Defence Saving Certificates. The Assessing Officer discovered that the receipts shown by the assessee in the statement under section 143-B of the Ordinance were not inclusive of the materials supplied by the assessee's clients amounting to Rs 10,335,750. The Assessing Officer issued a notice under section 61 of the Ordinance and the assessee was confronted with the proposal to subject such amounts representing the materials to tax under section 80-C of the Ordinance: The assessee filed copies of bills and agreements and details of materials supplied but, according to the assessment order, no explanation, was made as to whether there was any element of profit. The Assessing Officer also observed that the assessee had not made any claim for the exclusion of the receipts representing cost of material supplied nor it was explained whether there was any element of profit, as required by the C.B.R. Letter C.No. 1(17) WHT/91-PT(IV), dated
1x 4-1992. After examination of the contracts the Assessing Officer levied the tax on such amounts in the following manner:---
| "Receipts representing material supplied by client for pending project.Rs.1,467,740 Receipts representing material supplied by client for completed project.Rs.9,002,360 Receipts offered for tax as per form under section 143-B.Rs.3,040,577 Total taxable receipts.Rs.16,551,264 Tax on above 5 %Rs. 827,563 Less : PaidRs.165,228 Balance PayableRs.662.275 |
Such treatment was upheld by the learned CIT(A) against which the assessee is aggrieved.
3. The learned counsel of the assessee has strongly argued that the Assessing Officer was not justified in issuing a notice under section 61 of the Ordinance in respect of the income covered under section 80-C of the Ordinance. Reliance was placed on a decision of Tribunal reported as 1998 PTD (Trib.) 1201. The learned counsel of the assessee further argued that this issue had been decided in favour of assessee in the earlier years. A copy of the Tribunal's order recorded in I.T.A. No. 3359/KB of 1986-87 relating to assessment year 1984-85 has been filed to support this contention. Another contention of the learned counsel is that this issue was also decided by the Tribunal in the assessment year 1978-79 but no copy of such order has been filed. Although the learned counsel was asked to file a copy of such order. Another contention of the learned counsel is that in the immediately preceding year the Assessing Officer did not make any charge of tax on such amount although this issue was discussed in the assessment order and the Assessing Officer had concluded that such transactions were taxable. Again no copy of the order was filed by the learned counsel. In the assessment year 1994-95 again such transactions were not said to have been taxed and the assessment was said to have been made on agreement basis. Again no copy of the order was filed. It is also not understood as to how an agreed assessment could be made under section 80-C of the Ordinance. The learned counsel of the assessee has filed copies of certain contracts with the clients and. also copies of some of the bills as well as working of the rate charged to the client of the assessee. As per the assessment order, the assessee had filed the copies of the bills and contracts. We do not find any mention of the job costing showing the treatment of cost of material, in the assessment order. The learned counsel of the assesses has submitted that there was no element of profit on the material supplied by the client. However, a perusal of the cost sheet, as supplied by the learned counsel, shows that there is a leading in respect of wastage, overheads and profit (on such overheads) to the cost, at which material has been supplied by the client to the assessee, as compared to the amount included in the bill. The learned D.R. has, however, expressed there is an element of profit in the material supplied by the client to the assessee and used in the contracts.
4. We have considered the submissions of both the parties. We do not find any substance in the submission of the learned counsel of the assessee that there is no element of profit in the billing of material supplied by the assessee's client. We have already mentioned above that the cost analysis of some material shows loading for wastage and profit etc. For instance in the case of the Shah Jewena Textile Mills the client is supplying the assessee with the steel at Rs.11,000 per ton and the assessee is charging the same to the client at Rs. 12,800 per ton in the Invoices. The difference of Rs. 1,800 includes handling, wastage (5%) binding charges including wire, labour, cement blocks, social security, EQB I Supervision and overheads (Rs. 150 per ton) and 10% of expenditure incurred by the assessee as profit. However, it is a different question as to whether such profit on the material has already been subjected to tax under section 80-C of the Ordinance or not. A perusal of the Bill No. SJTM/B-6 dated 21-10-1991 shows the charge of such steel at Rs.12,800 per ton and this charge is included in the total gross amount of Rs. 17,095,738 from which the material supplied by the client has been deducted at Rs. 8,868,000, leaving a balance of Rs. 8,277,738 from which the payments received up to 15-5-1991 and the verified outstandings against Bill No. 5 have been deducted.. However, as the date of the bill (21-10-1991) suggests, this is not relevant at all to the income year under consideration and shows an improper assistance to the Court. The learned A.R. of the assessee has also filed another Bill No. AKT/B-4 (Final), dated 24-3-1997 in respect of Al-Karam Textiles. This shows the charge of Rs.29,100 per ton for Torsteel to the client whereas the deduction has been shows at Rs. 24,500 per ton. The cost analysis of this item again shows the loading of wastage, binding, social security and profit. This would again show that the element of profits although nominal, is included in the billing on account of material supplied by the client and again the question remarks whether such profit is included in the receipts and already taxed or the cost of material has to be taxed under section 80-C of the Ordinance. We have also perused the Circular of the C.B.R., dated 28-4-1992 on which the Assessing Officer has relied. This Circular appears to have been issued after representations made by the contractors on this issue. After deliberation the C.B.R. has given the following decision. "It has, therefore, been decided that a contractor asking for such exclusion shall apply to the Income Tax Officer giving complete details of facts supported by the documentary evidence who after proper examination/verification may allow the same with the prior approval of the Commissioner of Income-tax".
5. In order to resolve the question whether the sums representing the material supplied by the client to the assessee for use in the contract are to be treated as payment under section 50 of the Ordinance, we need to refer the relevant provisions of law. In order to resolve this question we need to consider the following provisions of law:--
"Section 80C: Tax on income of certain contractors and importers.---(1) Notwithstanding anything contained in this Ordinance or any 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 income of the said person and tax thereon shall be charged at the rate specified in the First Schedule.
Section 80C(2)(a)(i).---The amount representing payments on which tax is deductible under subsection (4) of section 50, other than payments on account of services rendered.
Section 50(4)6).---Any person responsible for making any payment in full or in part (including a payment by way of an advance) to any person being resident (hereinafter referred to respectively as 'payer' and 'recipient') on account of the supply of goods or for service rendered to, or the execution of a contract with the Government, or a MOM authority, or a company, or a registered firm or any foreign "contractor or consultant or consortium shall, deduct advance tax at the time of making such payment, at the rate specified in the First Schedule, and.
(Explanation.---For the purposes of clause (a) the expression 'supply of goods' includes both cash and credit purchases of goods by the payer, whether under a contract or not, on credit or in cash.)"
6. In plain words, the amounts representing payments on which tax is deductible under subsection (4) of section 50 of the Ordinance are to be treated as the income of the assessee under section 80-C of the Ordinance and are to be subjected to fixed rate of tax without any deductions by way of expenditure etc. Subsection (1) of section 80-C of the Ordinance also extends the scope of this treatment to such amounts so as to include any amounts which are deemed to accrue or arise to a recipient. Subsection (4) of section 50 of the Ordinance requires any person responsible for making any payment (payer) to any person (recipient) on account of execution of contracts with a company to deduct tax from such payments, including payments made by way of advance The key word in the 1Sresent situation is the 'payment' which has not been defined in the Ordinance. In the Black's Law Dictionary, 6th Edition, the term "payment" has been defined. For the purpose of the present appeal the following part of this definition is found to be relevant:---
"The fulfilment of a promise, or the performance of an agreement. A discharge of an obligation of debt, and part payment, if accepted, is a discharge pro tanto. "
The words as discharge of an obligation or debt' requires our consideration presently. The assessee has rendered construction contracting services and in the performance of such contracts the assessee has used certain materials provided by its clients. As per the terms of contract such materials were to be supplied at a fixed price and the client was to deduct/recover the value of such materials at the same fixed price from the billing rendered by the assessee to the client. A question arises as to whether the assessee-appellant has become the owner of such materials and whether he is receiving payments against such materials. It is nobody's case that the assessee appellant is making the payment to the clients for the supply of these materials. If the assessee-appellant was making the purchase of such material from the client, then the title should pass to the assessee-appellant. However, a perusal of the letter of award, dated 8-9-1996 written by Al-Karam Textile Mills Limited does not show that there was any intention to pass the title in such material to the assessee-appellant. The relevant clause 7 of such letter of award reads as follows:---
"7. You will be supplied following material at site and the amount as rated against each will be recovered from your bills.
| (i) CementRs.4,000 per ton (ii) Plain MS Bars Rs.24,000 per MT (iii) Toresteel BarsRs.24,500 per MT" |
We did not find any mention in this letter of intent of passing the title in such materials or to hold the assessee-appellant to be responsible for any losses in such materials. Thus, we did not find any evidence of any obligation which could render this transactions to be a payment as given in the Black's Law Dictionary.
7. A question may arise as to whether such transactions could be deemed to accrue or arise to the assessee-appellant as payment as mentioned in subsection (1) of section 80-C of the Ordinance as already reproduced above. We are not inclined to agree to any such proposal in the absence of an express and clear provision in the law. If the legislature had any such intention, they would have clearly said so in the law itself as they have said in the case of subsection (4A) of section 50 of the Ordinance which reads as follows:---
"Section 50(4A).---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 the Government, a local consortium shall deduct tax, at the time of making such payment, at the rate specified in the First Schedule.
Provided that where any person receives payment on behalf of his principal and remits it after deducting his commission such commission shall be deemed to have been paid to him and the tax shall be collected by such principal."
8. It is also note worthy that the legislature has added an explanation to subsection (4) of section 50 of the Ordinance so as to extend the scope of supply of goods to include cash purchases. The C.B.R. has no authority to go beyond the law to extend the application of any law unless the law authorises it to do so.
9. Coming back to the facts of the present case and the question whether the element of profit as mentioned in paragraph 4 above has been subjected to tax or not, we would like to reproduce the cost analysis of steel which has been charged to Al-Karam Textile Mills Ltd. at Rs. 29,100 per ton against which the deduction from the bill has been made at Rs.24,500 per ton, the rate at which the client supplied to the assessee:---
Hassan Engineers (Pvt.) Limited
Steel Rate Analysis
Assessment year 1997-98
Rs.________ Cost of Steel per tonneRs.24,500.00 Expenses: (Unloading & site handling50.00 Waste - 5%1,225.00 (Overlaps, chairs, pins & rolling margin). Binding wire @ 16 Kg448.00 per tonne @ Rs.20 per Kg. Labour1,600.00 Cement spacer blocks500.00 3,823.00 Social Security, EQBI; Supervision & Overheads (10% of Rs.3,823)382.30 10% Profit on382.30 Rs.3,823.004,587.60 4,587.60 Total:29,087.60 |
Quoted Rs. 29,100 per tonne for Al-Karam Textile Mills-I, Landi Karachi"
10. A perusal of the assessee's Bill No. AKD/B-4(Final), dated 24-3-1997 shows that the client has been charged at Rs.29,100 per ton for torsteel bars and the deduction from the gross amount for the same material has been shown at Rs,24,500 per ton. Hence it can be safely presumed that the difference of Rs.4,600 per ton in respect of various loading as indicated d above is included in the invoices and consequential in the payment received by the assessee. In any case it is not the case of the department that the assessee has not shown the gross amount less deduction at cost in respect of materials in the receipts. Thus, it would appear that the element of profit added by the assessee in the shape of the loading as given in the steel rate analysis reproduced above is included in the receipts and has been subjected to tax under section 50(4) of the Ordinance.
11. In view of the above discussions we are not inclined to approve the treatment given by the departmental officials in respect of the materials supplied by the client of the assessee treating the same as -part of the receipts taxable under section 80-C of the Ordinance.
12. We would also like to deal with the objection of the assessee with regard to the issuance of the notice under section 61 of the Ordinance. The learned counsel of the assessee has referred to a decision of the Tribunal reported as 1998 PTD (Trib.) 1201 to support his contention that the notice could not be issued in the circumstances of this case. However, we find that the case relied upon by the learned counsel is distinguishable as in that case no other income had been declared whereas in the present case the assessee has declared income frown Defence Saving Certificates although the same has been claimed to be exempt.
13. The assessee's appeal succeeds to the extent that the addition made by the Assessing Officer in respect of the materials supplied by the client of the assessee is hereby deleted.
C.M.A./M.A.K.82/Tax (Trib.)Order accordingly.