KARACHI HOSPITAL LTD. VS COMMISSIONER OF INCOME-TAX, CENTRAL ZONE A- (NOW, COMPANIES (III)), KCY)
2001 P T D 609
[Karachi High Court]
Before, Saiyed Saeed Ashhad and Raja Qureshi, JJ
Messrs KARACHI HOSPITAL LTD.
versus
COMMISSIONER INCOME TAX, CENTRAL ZONE A (NOW COMPANIES
(III), KCY.
I.T.C. Nos.49 to 52 of 1990, decided on 24/07/1998.
(a) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑S.136‑‑‑Appeal to High Court‑‑‑Maintainability‑‑Where the decision rests on examination of the facts on record, the same would be a question of law as the question whether inference framed from given facts or not was a question of law.
N.M. Khan and another v. The Chief Settlement and Rehabilitation Commissioner, Pakistan 1970 SCMR 158 ref.
(b) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑S.23(i)(xviii)‑‑‑Deduction‑‑‑Expenditure not incidental to business‑‑ Refusal to allow such expenditure as deductions under S.23 of Income Tax Ordinance, 1979‑‑‑Expenditure of salaries made by the assessee was not deducted by the Income Tax Authorities as the assessee failed to establish that the disputed amount was paid to its employees as salary‑‑‑Appellate Authority as well as Appellate Tribunal upheld the findings of the Income Tax Authorities‑‑‑Validity‑‑‑Mere fact that the assessee had deducted income tax from the amount paid to the employees as salaries was not a sufficient ground or circumstance which would establish the employees in question to have been employed for performing the work incidental to or connected with the business or affairs with the assessee's company as the same was required to be established by the assessee before it could claim the deduction thereof as "business expenditure" ‑‑‑Forums below were justified in disallowing the said amount to have been paid by the assessee as salaries to its employees during the assessment years‑‑‑ Order of the Appellate Tribunal was upheld.
S.M. Ilyas & Sons v. C.I.T., Lahore PLD 1982 SC 259 ref.
Rehan Hassan Naqvi for Applicant.
Nasrullah Awan for Respondent.
Date of hearing: 8th July, 1998.
JUDGMENT
SAIYED SAEED ASHHAD, J.‑‑‑The aforesaid four applications under section 136(2) of the Income Tax Ordinance, have been filed by the applicant/assessee relative to four assessment years as the Income Tax Appellate Tribunal refused to refer the question of law which had arisen on account of dismissal of the second appeals of the applicant/assessee by the Income Tax Appellate Tribunal. The question framed by the applicant/assessee in the aforesaid applications is as under:‑‑
"Whether on the facts and in the circumstances of the case the learned Income‑tax Appellate Tribunal was justified in holding that the Commissioner of Income Tax (Appeals) was justified in confirming the disallowance of salaries of the employees as made by the learned Income Tax Officer although the tax was deducted from the salaries paid to the employees are assessed as such under the Head Salaries.
The facts leading to the filing of the aforesaid four applications are that the Income‑tax Officer, disallowed a sum of Rs.317,350 in the assessment year 1981‑82, Rs.2,74,200 in the assessment year 1983‑84, Rs.1,60,250 in the assessment year 1984‑85 and Rs.1,17,600 in the assessment year 1985‑&6 paid by the applicant/assessee by way of salaries to its employees. The aforesaid disallowances were confirmed by the Income tax Commissioner (Appeals) as well as by the Appellate Tribunal in the second appeals. The applicant/assessee feeling aggrieved and dissatisfied with the consolidated order of the Income‑tax Tribunal in aforesaid four appeals moved an application under section 136(1) of the Income Tax Ordinance praying therein that the question of law mentioned in the aforesaid four applications be referred to the High Court for its opinion. The Appellate Tribunal by its order, dated 9‑10‑1989 refused to refer the question of law in accordance with the provisions of section 136(1) of the Income‑tax Ordinance, on the ground that the question of law sought to be referred in all the aforesaid four applications under section 136(1) of the Income Tax Ordinance, moved before the Appellate Tribunal was purely a question of fact and dismissed all the aforesaid four applications under section 136(1) of the Income Tax Ordinance. The applicant/assessee was not satisfied with the order of dismissal passed by the Appellate Tribunal refusing to refer the question to the High Court, approached the Court directly under section 136(2) of the Income Tax Ordinance, for the opinion and advice of this Court on the question of law aforementioned.
We have heard the arguments of Mr. Refhan Hassan Naqvi, learned counsel for the applicant and Mr. Nasrullah Awan, learned counsel for the respondent/department and we have also perused the material on record as well as the relevant provisions of law applicable to the facts and the circumstances of the aforesaid four applications.
Learned counsel for the respondent/department raised preliminary objection with regard to the maintainability of the aforesaid applications under section 136(2) of the Income‑tax Ordinance on the ground that the question of law on which the applicant/assessee had sought the advice/opinion of this Court is purely question of fact which, according to the provision of section 136 of the Income Tax Ordinance could neither be referred to this Court, nor this Court would to proceed to consider the same for giving its advice/opinion. He further submitted that under section 136 of the Income Tax Ordinance, advisory jurisdiction of this Court could only be invoked in respect of a question of law and a bare perusal of question on which the applicant/assessee is seeking the advice/opinion of this Court would appear to be a question of fact.
Mr.. Rehan Hassan Naqvi, vehemently controverted the objection and the arguments submitted by Mr. Nasrullah Awan and contended that the question whether the lower forums and the Appellate Tribunal was justified in disallowing four amounts claimed as salaries paid to the employees by the applicant/assessee required examination and consideration of the material facts on record as well as the relevant provisions of the Income Tax Ordinance under which the applicant/assessee was entitled to claim the aforesaid amounts as an expenditure to be deducted from its gross earning/profits for the purpose of determining the taxable income. He further submitted that drawing or following an inference from examination and consideration of the facts on record is a question of law and in support of above contention he placed reliance on the case of N.M. Khan and another v. The Chief Settlement and Rehabilitation Commissioner, Pakistan, 1970 SCMR 158. In order to resolve the issue regarding the objection with regard to the maintainability of the aforesaid four applications, it is sufficient to re produce the relevant portion from the afore-cited judgment which is as under:‑‑‑
"The question whether an inference follows from certain facts or not, is a question of law and on this question these two learned officers appear to have misdirected themselves."
The observation made by the Hon'ble Supreme Court of Pakistan leaves no doubt that the question referred to in the aforesaid four applications is a question of law as the decision thereof rests on examination of the facts on record. Accordingly, we overrule the preliminary objection raised by Mr. Nasrullah Awan, regarding the maintainability of these applications.
Coming to the merits of the case, it is to be observed that the Income‑tax Officer had disallowed the aforesaid amounts on the following grounds;‑‑
(1) There was no master and servant relationship;
(2) The above persons had not rendered any services to the company;
(3) Mst. Qudsia Khatoon was born in 1915 and her age at the time of service was 66 years, she was neither an employee of the company nor did she rendered any service to the company; and
(4) The expenditure shown was not incidental to business and could not be allowed under section 23 (i) (xviii) of the Income Tax Ordinance.
For the above disallowances the Income‑tax Officer had placed reliance on the case of S.M. Ilyas & Sons v. CIT, Lahore, reported in PLD 1982 SC 259 Pakistan. This disallowances in all the aforesaid four assessment years were made on the ground enumerated above. The applicant/assessee was asked to bring evidence to establish that the employees who were paid the aforesaid amounts were employed by it for rendering services and performing duties incidental to and connected with the business of the applicant/assessee but it failed to produce on record reliable and satisfactory evidence in support of its contention. The sole ground which was vehemently pressed by the applicant/ assessee in this regard was that it had deducted tax under section 50(4) (a) of the Income Tax Ordinance at source on the aforesaid amounts which were paid by it by way of salaries to its aforesaid employees and had deposited the same in the treasury/State Bank of Pakistan, which fact was fully established to the satisfaction of the forums below as well as the Appellate Tribunal and which fact was sufficient to establish beyond the slightest doubt the payment of the salaries by the applicant/assessee before the Commissioner of Income tax (Appeals) and the Appellate Tribunal. Both the forums below as well as the Appellate Tribunal was fully justified in disallowing the aforesaid amounts during the aforesaid four assessment years as the applicant/assessee failed to establish that the employees who had been paid salary out of the aforesaid amounts were employed for the purpose of managing, looking after or carrying on the business and affairs of the applicant/asses see company and that there employment was incidental to or connected with the performance of acts relating to the business and management of affairs of the applicant's company so as to entitle it to claim the same as business expenditure for deduction from its gross earning/profits. The mere fact that the applicant had deducted income tax from the amount paid to the said employees as salaries is not a sufficient ground or circumstance which would establish the employees in question to have been employee for performing the work incidental to or connecting with the business or affairs with the applicant's company which was necessarily required to be established by the applicant/ assessee before it could claim the deduction thereof as the business expenditure.
Upon the above discussions, we have come to the conclusion that the Income Tax Officer was justified in disallowing the aforesaid four amounts claimed to have been paid by the applicant/assessee as salaries to its said employees during the aforesaid four assessment years and the Commissioner of the Income‑tax (Appeals) as well as the Appellate Tribunal was absolutely right and justified in up‑holding the finding of the Income Tax Officer disallowing the aforesaid amounts in all the above four assessment years. However, the appellate tribunal was not justified in dismissing the applications of the applicant/assessee under section 136(1) of the Income Tax Ordinance and refusing to refer the question contained therein for advice/opinion of this Court on the ground that .the same was purely a question of fact and the Appellate Tribunal ought to have referred the question on which advice/opinion was sought by the applicant/assessee. Accordingly, we, dismissed all the four applications and answer the question in the affirmative. The order of the Appellate Tribunal in upholding disallowances of the above aforesaid four amounts as business expenditure is not required to be interfered with and is upheld.
Q.M.H./M.A.K./K‑21/KReference dismissed.