BEFORE MUHAMMAD SHARIF CHAUDHRY, ACCOUNTANT MEMBER AND MUHAMMAD TAUQIR AFZAL MALIK, JUDICIAL MEMBER VS BEFORE MUHAMMAD SHARIF CHAUDHRY, ACCOUNTANT MEMBER AND MUHAMMAD TAUQIR AFZAL MALIK, JUDICIAL MEMBER
2002 P T D (Trib.) 364
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Sharif Chaudhry, Accountant Member and Muhammad Tauqir Afzal Malik, Judicial Member
I.T.As. Nos. 4082/LB and 4148/LB of 2000, decided on 25/06/2001.
Income Tax Ordinance (XXXI of 1979)---
----Ss. 24(fff) & 16(2)(e)---Salary paid to Directors ---Deductions-- Admissibility---Salary paid in cash to the Directors of the company was disallowed by the Assessing Officer being not paid through a crossed cheque or transferred to the employee's Bank account as provided in S.24(fff) of the Ordinance, 1979---Assessee contended that Director was not an employee of the company for the purpose of S.24(fff) of the Income Tax Ordinance, 1979 rather he was a shareholder and owner of the company---Validity---Word "employee" as defined in S.16(2)(e) of the Income Tax Ordinance, 1979 includes a Managing Director or any other individual who, irrespective of his designation, performs any duties or functions in connection with the management of affairs of the company---Directors of the assessee-company were, no doubt, performing duties or functions in connection with the management of the affairs of the company and were being paid salaries and remunerations for their services---Revenue was justified to treat the Directors of the company as "employees" and to disallow the salaries paid to these Directors under S.24(fff) of the Income Tax Ordinance, 1979 because the conditions of payment of salaries through crossed cheques or through transfer to their Bank accounts as required by law, had not been fulfilled.
(1977) 36 Tax 223 and 2000 PTD (Trib.) 2883 distinguished.
Muhammad Saleem Ch. for Appellant (in I.T.A. No. 4082/LB of 2000).
Shahid Zaheer, D.R. for Respondent (in I.T.A. No. 4082/LB of 2000).
Shahid Zaheer, D.R. for Appellant (in I.T.A. No. 4148/LB of 2000).
Muhammad Saleem Ch. for Respondent (in I.T.A. No. 4148/LB of 2000)
Date of hearing: 30th May, 2001
ORDER
MUHAMMAD SHARIF CHAUDHRY (ACCOUNTANT MEMBER).---
Cross-appeals have been filed for the assessment year 1999-2000 by Revenue as well as by the assessee, to challenge appellate order, dated 30-8-2000 passed by Commissioner of Income Tax, (Appeals Zone-I), Lahore under section 132 of the Income Tax Ordinance on estimation of sales and add backs from profit and loss account expenses. The assessee contends that even the sales as reduced by the Commissioner are on the higher side, and confirmation by the Commissioner of profit and loss account add backs is also unjustified. On the other hand, the Revenue feels dissatisfied with the order of the Commissioner on the reduction of sales in both the trading accounts. Both the appeals are taken-up and decided in this consolidated order after considering the facts on record and pleading made at the bar as under.
2. Heard D.R. far the departmental and A.R. for the assessee. Available records perused. Estimation of Sales.
3. The assessee in the instant case is a Private Limited Company which derives income from manufacturing and sale of bakery produces besides purchase and sale of general provision items. The first issue raised by both the parties in their grounds of appeal relates to determination of sales by the Commissioner under the head bakery account and provision account. The position of declared sales, sales estimated by the Assessing Officer and sales reduced by the Commissioner under both the accounts is as follows:
| | Sales declared | Sales assessed | Sales reduced by CIT(A) |
| Bakery Account | 52,452,478 | 57,000,000 | 54,600,000 |
| Provision Account | 29,868,084 | 30,700,000 | 30,500,000 |
The assessee contends that the estimation of sales as reduced by the Commissioner under both the accounts is still excessive whereas the Revenue contends that the CIT has reduced the sales without any justification.
Authorized Representatives of both the parties have strongly pleaded the cases of their clients. From the perusal of the impugned appellate order, it transpires that the learned Commissioner has determined the sales in both the accounts on the basis of the history of the case and the relief given in appeals in the preceding assessment years. Having considered the action of the learned Commissioner in the light of the relevant facts, we are of the view that the treatment given by the learned Commissioner to the assessed sales is fair and correct. Both the parties have failed before us to provide any justification or any cogent reason for deviation from the history of the case. It would, therefore, meet the ends of justice if the impugned appellate order on the issue of sales is maintained and appeals of both the parties having no merits and substance are rejected.
Add Backs out of Profit and Loss Account Expenses:
4. The assessee, in its grounds of appeals, is dissatisfied with the impugned appellate order on the issue of confirmation of add backs out of profit and loss account expenses under the following heads:
(1) Postage, Telegraph and Telephone:
(2) Travelling and Conveyance.
(3) Packing Materials.
(4) Repairs and Maintenance.
(5) Printing and Stationery.
(6) Miscellaneous.
Having gone through the history of the case regarding add backs out of profit and loss account expenses, and having considered the add backs made by the ITO under the abovementioned heads in the light of the facts discussed in the assessment order, we are of the view that the treatment of the learned Commissioner on this issue is also justified which does not warrant any interference. Hence assessee's appeal on the issue of add backs is rejected and order passed by the Commissioner is upheld.
Add back under section 24(fff)
5. The main grievance of the assessee in its appeal relates to the add backs amounting to Rs. 880,000 under section 24(fff) of the Income Tax Ordinance. According to section 24(fff), no expenditure to an assessee ca:, be allowed on account of payment of salary to an employee if it is not paid through a crossed cheque or transferred to the employee's bank account. The Assessing Officer, during the examination of the accounts of the assessee, found that the assessee had not paid salaries to its directors through crossed bank cheques although the salaries exceeded Rs. 5,000 in each case. He, therefore, invoked the provisions of section 24(fff) and disallowed the salaries paid to the directors. In appeal, the first Appellate Authority has confirmed the action of the Assessing Officer.
6. It has been contended by the learned A.R., of the assessee that director is not an employee of the company, rather he is shareholder and owner of the company. For the purpose of section 24(fff), according to the learned A.R., the definition of director given under section 2(18) of the Income Tax Ordinance is meaningful. Section 2(18) defines `director' and `manager' in relation to a company to have the meaning assigned to them in the Companies Act, 1913. The learned A.R. has conceded, however, that the Managing Director may be an employee, but in his view a director is not at all an employee for the purpose of section 24(fff) of the Income Tax Ordinance. It has been submitted by him that the definition of `employee' which includes directors of a company who are connected with the management of the company given in section 16(2) is not relevant for the issue under consideration, because the company which is the payer of salary to the directors is assessed under section 22 and disallowance of salaries to the company is being made under section 24(fff) for the company's failure to have made the payment through crossed cheques.
For assertion of his contention that the directors are not employees of the company, the learned A.R. quotes following judgments and authorities:
(i) Ghulab Singh v. The Punjab Zamindara Bank Ltd., Lyallpur and others:
It was held by the High Court that Managing Director was not entitled to injunction against company where contract between them contained terms governed by section 21 of the Specific Relief Act.
(ii) (1977) 36 Tax 223 (H.C. Lahore):
It was held in this judgment by the Honourable High Court that no relationship of master and servant between the director and the assessee-company existed, hence provisions of section 10(4)(a) of the Income-tax Act, 1922 were not attracted in cases of such directors. It was also observed by the Honourable High Court that by virtue of clause 18 of Articles of Association of the Company, the Managing Director, who was appointed for life and had exclusive control over the management of the company, was employee of the company because relationship of master and servant between the company existed.
The learned A.R. has further submitted that if at all the directors are to be treated as employees, even then provisions of section 24(fff) of the Income Tax Ordinance cannot be attracted and salaries paid to the directors cannot be added back because the directors have filed their returns of income in respect of salaries received by them and they have paid tax thereon. In support of this contention, the learned A.R. has relied on a judgment of the I.T.A.T. reported as 2000 PTD (Trib.) 2883. In this judgment, it was held:
"Whether Assessing Officer, while passing order under section 52, was required to examine, if tax liability stood discharged either on account of offering amount under consideration for tax or on account of recovery of tax not deducted under section 50 by initiation of proceedings under section 52A---Held yes---Whether once the tax had been deducted or collected from one person, it could not be deducted or collected from another person-Held yes."
7. The abovementioned contentions of the assessee and the pleadings of the learned A.R. have been strongly rebutted by the learned D.R. who pleaded the case of the Revenue. The learned D.R. has submitted that director is an employee under Income Tax Ordinance as salary received by him is assessed under section 16 of this Ordinance and tax is deducted from his salary like any other employee under section 50(1). The definition of `employee' recorded in section 16 includes a director connected with the management of the company. The main emphasis of the learned D.R. is thus on -section 16 and section 50 of the Income Tax Ordinance and also on the definition of employee as given in section 16(2)(e).
8. Having considered the contentions of the assessee in the light of the assessment order of the I.T.O. and the impugned appellate order of the learned Commissioner, and having also considered the rival arguments of the authorized representatives of the contending parties, we feel inclined to hold that section 24(fff) has rightly been invoked in the case of the assessee. Our reasoning for arriving at this conclusion is discussed hereunder:
9. Section 24 and its clause (fff) reads as follows:,.
"24. Deductions not admissible. ---Nothing contained in section 23 shall be so construed as to authorize the allowance or deduction of- ..
(fff) Notwithstanding anything contained in clause (ff), any payment made on or after the first day of July, 1998, on account of salary if-
(i) it exceeds five thousand rupees, through a crossed cheque or transfer to the employee's batik account, or
(ii) it does not exceed five thousand rupees, made through a bearer cheque."
Thus the above mentioned section and its clause (fff) does not authorize any allowance in respect of any payment on account of salary, after first day of July, 1998 if in case of being more than 5,000 rupees it has not been made through a crossed cheque or transferred to the employee's bank account and if in case of being less than 5,000 rupees it has no; been made through a: bearer cheque. The emphasis in this clause is on 'salary' and `employee'. Neither the word `salary' nor the word `employee' has been defined in this clause. Therefore; we have to look to some other provisions of Income Tax Ordinance, 1979 in order to see the meaning of these expressions particularly the word `employee's which is the bone of contention between the assessee and the Revenue. The main section which deals with the concept of salaries and that of employee is section 16 of this Ordinance. Since the word `salary' is not in dispute, we would only concentrate on understanding the `employee'. The word `employee' has been defined by clause (e) of subsection (2) of section 16 as follows:---
"(e) `employee', in relation to a company, includes a managing director or any other director or other individual, who, irrespective of his designation, performs any duties or functions in connection with the management of the affairs of the company."
Thus the word `employee' as defined by the above provision of law includes a Managing Director or any other individual who, irrespective of his designation, performs any duties of functions in connection with the management of the affairs of the company. The directors of the assessee-company are, no doubt; performing duties or functions in connection with the management of the affairs of the company and are being paid salaries and remunerations for their services. The Revenue is, therefore, justified to treat the directors of the company as employees and to disallow the salaries paid to these directors under section 24(fff) of the Income Tax Ordinance because the conditions of payment of salaries through crossed cheques or through transfer to their bank accounts has not been fulfilled.
10. We do not agree with the learned A.R. of the assessee that definition of `employee' as given under section 16(2)(e) of the Income tax Act should not be relied upon, rather definition of director given under section 2(1) of the Income Tax Ordinance, 1979 and section 2(13) of the Companies Ordinance, 1984 should be considered. It is because of the fact that question before us is the payment of salaries to employees under section 24(fff) of the Income Tax Ordinance and we are basically concerned with the issue as to who is an employee and not with the issue as to who is a director. The word `employee', in connection with salaries, has been defined by section 16(2)(e) of the Income Tax Ordinance and it includes directors of a company who are rendering some functions or duties in connection with the management of a company. For the sake of argument, if the contention of learned A.R. is accepted and for the definition of director we resort to provisions of law quoted by the learned A.R., even then the case of the assessee does not get any strength. Section 2(18) of the Income Tax Ordinance defines a director, in relation to a company, to have the meaning assigned to the term in the Companies Act, 1913 (now Companies Ordinance, 1984). According to section 2(13) of the Companies Ordinance, 1984 the expression `director' includes any person occupying the position of a director, by whatever name called. Thus the definition of director given in these two enactments does not promote the cause of assessee in any way. Needless to point out that the argument of the learned A.R. that directors are shareholders and owners of the company and not employees of the company is again of no avail because treatment of directors as employees under the Income Tax Ordinance for the purpose of payment of salaries to them for their services and for the purpose of assessment of these salaries to tax, does not in any way affect the position of directors as shareholders and owners of the company. Every enactment defines certain expressions and terms for its own purpose and when we are concerned with a particular enactment for a particular purpose we have to depend on the definition given by that particular enactment instead of looking elsewhere. The Income Tax Ordinance of 1979 with which we are concerned at the moment, uses the word `employees' in its section 24(fff) for the purpose of payment of salaries and -defines this word in its section 16(2)(e). The directors who render services and get salaries from their companies are treated as employees and are charged to income-tax as salaried persons under section 16 of the Income Tax Ordinance. It would be, therefore, preposterous to say that the directors are not employees when it comes to the payment of salaries to them under section 24(fff) of the Income Tax Ordinance but they are employees when it comes to payment of income-tax on their salaries under section 16.
11. The judgment of the High Court under "patent appeal" in case of Ghulab Singh v. The Punjab Zamindara Bank, Limited, dated 11th July, 1911 is prima facie hot relevant to the issue with which we are seized presently. So far as the judgment of the Honourable Lahore High Court cited as (199.7) 36 Tax 223 is concerned that also does not help the cause of assessee. This judgment is not relevant because it decided the status of directors of a company under section 10(4)(a) of the Income-tax Act, 1922 when controversy as to the status of directors existed in that enactment. But this controversy as to the status of a director has-now been settled once for all by Income Tax Ordinance, 1979 which defines the term `employee' in its section 16(2)(e). According to this section, as already discussed in detail above, employee includes directors of a company who perform any duties or functions in connection with the management of the affairs of that company. Since Income Tax Ordinance, 1979 is applicable to assessee's case and not section 10 (4) (a) of the Income-tax Act of 1922, so the above-cited judgment of Honourable L.H.C. is no longer relevant to assessee's case.
12. These days the only controversy which is agitated in appeals before the Courts relates to the interpretation of the term `employee' defined under clause (c) of sub-rule (2) of rule 3 of Income Tax Rules of 1982. It has been held by the Courts that only a director of a company working whole time for one company is entitled to the benefit of concessional treatment of allowances and perquisites under Income Tax Rules 4 to 18. Those directors who are working for more than one company and who are deriving salaries and emoluments from all such companies are not entitled to the concessional treatment under these Rules. But no controversy exists today as to the status of directors of companies for assessment of their salaries as employees under section 16 of the Income Tax Ordinance, 1979.
13. The alternate plea of the learned A.R., as stated earlier, is that no disallowance under section 24(fff) can be made in respect of salaries paid by the assessee to its directors because the directors have filed their, returns of income and paid tax on their salaries. In support of this plea, as mentioned supra, the learned A.R. derives support from the judgment of this Tribunal reported as 2000 PTD (Trib.) 2883. However, in our view even this plea of the learned A.R. does not help the case of the assessee in any way. The question before the learned Tribunal, in the judgment reported supra, related to action taken by the Income Tax Officer under sections 52/86 of the Income Tax Ordinance since the deducting authority had failed to deduct and pay tax under provisions of section 50. The Tribunal set aside the orders passed by the Assessing Officer under sections 52/86 as the Assessing Officer failed to do justice by ignoring the contentions of statement under section 142 and other details which were filed before him. It was also observed by the learned ITAT that action under section 52 cannot be taken if tax liability stood discharged either on account of offering amount under consideration for tax or on account of recovery of tax not deducted under section 50 by initiation of proceedings under section 52A of the Ordinance.
The facts of the assessee's case are obviously different from the facts of the case dealt by the learned ITAT referred to above. The assessee in the instant case is making payment of salaries to its employees (which include directors) without fulfilling the conditions under section 24(fff) of the Income Tax Ordinance. These conditions have been laid down by the Legislature in the interest of documentation of economy. It has been provided by law as envisaged by section 24(fff) of the Income Tax Ordinance that those persons who do not pay salaries to their employees through crossed cheques or transfer the salaries to the bank accounts of the employees, they would not be allowed expenses on account of payment of such salaries. The assessee has failed to fulfil this condition and, therefore, Revenue has rightly disallowed the expenses on account of payment of salaries to the assessee. The question of deduction of tax under section 50 or action under section 52 has not arisen in the instant case and hence the abovementioned judgment of the ITAT is not relevant.
14. In view of the foregoing discussion, we are pleased to hold that provisions of section 24(fff) of the Income Tax Ordinance have rightly been invoked by Revenue in case of the assessee, because the assessee failed to fulfil the condition of payment of salaries to its directors through crossed bank cheques, etc. Therefore, appeal filed by the assessee fails on this issue.
15. Consequently, appeals filed -by both the parties fail as discussed above.
C. M. A. /M. A. K./146/Tax(Trib.) Appeals dismissed.