Income Tax Ordinance (XXXI of 1979)---

----Second Sched: Part-I, cl. (78E)---Establishment of Office of Federal Ombudsman Ordinance (XXXV of 2000), S. 2(3)---C.B.R. U.O.No.4(32)TP-1/90-Pt. 1, dated 16-9-1999---Exemption---Regular Income Certificate ---Chargeability of profit received by the person whose name jointly appeared with the name of the person who converted his foreign currency account into such Regular Income Certificate---Validity---Once it was ascertained that certificates were being purchased or created by conversion of foreign. currency account then profits accruing on it will be exempt from tax irrespective of the fact whether it accrues to the account holder himself or to him jointly with his mother or any other person---Clarification issued by the Central Board of Revenue was arbitrary, contrary to law and based on irrelevant ground falling under the term "maladministration"---Federal Tax Ombudsman recommended that the Revenue Division should withdraw the clarification issued to the Central Directorate of National Savings vide U.O. No.4(32)TP-1/90Pt. 1, dated 16-9-1999.

Ijaz Ahmad Azad for Complainant.

Saeedullah Khan, Secretary C.B.R. for Respondent

FINDINGS/DECISION

Maladministration is alleged in the instant complaint against C.B.R. for exceeding their authority by issuing U.O. No.4(32)TP-I/90Pt. 1, dated 16-9-1999 to the Central Directorate of National Savings (CDNS), Ministry of Finance, Islamabad making following comment on the clarification sought by CDNS through their U.O. Note No.F.9(1) S.I/Cert./99. dated 26-8-1999:

2. It is further alleged that besides the fact that the foregoing comment is contrary to law, it has been offered by C.B.R. without invoking any provision of law authorising the C.B.R. to issue clarifications tantamounting to interpretation of law.

3. The complainant has further alleged that the aforementioned act of C.B.R. has caused harassment and mental agony to him as well as to his old mother because the National Saving Centre, Aabpara, Islamabad has started to withhold tax under section 50(2) of the Income Tax Ordinance, 1979 (repealed Ordinance) on 50% proceeds of the profit on the following Regular Income Certificates (RICs) issued on 29th March 2000 with exemption from tax under Registration No. 3160:

No. C 541214Rs.500,000 (Rupees Five hundred thousand)

No. B 875182Rs.100,000 (Rupees One hundred thousand)

No. B 875183Rs.100,000 (Rupees One hundred thousand)

No. AA 423624Rs. 50,000 (Rupees Fifty thousand)

4. Brief facts about the nature of Regular Income 'Certificates purchased by the complainant are that he is UN Diplomat and serving in the United Nations Mission, Sarajevo, Bosnia and Herzegovina. He was operating US$ A/c No.0211010391 with Untied Bank Limited, Aabpara Branch, Islamabad. After Nuclear Test by Pakistan on 28th May 1998, his Foreign Currency Account under reference was frozen by the Government of Pakistan. He got the encashment in Pakistan Rupees in lieu of US dollars from the frozen Dollar Account and his banker issued him a Certificate of Encashment on 29th March, 2000. On the same day i.e. on 29th March, 2000 he approached Ms. Ruqaya Batool, National Savings Officer, National Savings Centre, Aabpara, Islamabad for the purchase of Regular Income Certificates amounting to Rs.7,50,000 and requested her that his old mother Mrs. Feroza Begum should get the profit of this amount. In this connection he wanted to submit the Power of Attorney in the name of his mother to National Savings Centre, Aabpara, Islamabad but Ms. Ruqaya Batool. stated that Power of Attorney was not acceptable by her in this regard but the name of his mother could be incorporated in the Application for the purchase of Regular Income Certificates. Ms. Ruqaya Batool advised that entire encashed money amounting to Rs.7,50,000 drawn from frozen dollar Account exclusively belongs to him; hence it does not fall within the purview of Withholding Tax. The Complainant purchased the Regular Income Certificates amounting to Rs.7,50,000 in the joint names (Syed Ashfaq Ali Azad and Mrs. Feroza Begum). His mother Mrs. Feroza Begum had been receiving the Profit on the said. Certificates without deduction of any withholding tax. But for the last about one year, National Savings Officer has started to withhold tax on 50% profit under duress. Responding to his complaint the Central Directorate, of National Savings informed him vide their Letter No. F.8(2) S.1/Cent/98, dated 3rd December, 2001 that the he should take up the case with Central Board of Revenue. They also forwarded a copy of C.B.R.'s U.O. No. 4(32)TP-1/90Pt.1, dated 16-9-1999, vide their letter No. F. 8(2)S.1/Cent/98, dated January 9, 2002.

5. The respondent has submitted, in response to notice under section 10(4) of Ordinance XXXV of 2000 that credit for investment in regular income Certificates can only be allowed to the person in whose name Foreign currency Account was maintained. Since mother of the application was not holder of the Foreign Currency Account in the instant case, therefore, she was not entitled to exemption under clause (78E) of part-I of the Second Schedule to the repealed Income Tax Ordinance, 1979. The exemption, according to respondent, is available only to the account holders of Foreign Currency.

6. The matter has been considered. The C.B.R.'s comments referred to in para 1 above are neither, relevant to the query of DNS nor 'to the present ease. The query related to the chargeability of the profit accrued to or received by the person whose name jointly appears with the name of the person who converted his foreign currency account (FCA) or deposit, specified under the law, into such PICs. The C.B.R., in their comments, clarified that `credit for investment" in RICs and only be allowed to the person in whose name the FCA was maintained. This obviously refers to a possible probe regarding the source of investment and it does not relate to tax exemption for the income from RICs.

7. In this case the claim is to be considered in the light of the Clauses (78) and (78E) of the Second Schedule, Part-I to the repealed Ordinance. The interest/profit on FCA deposits with bank enjoyed exemption under clause (78) of Part I of the Second Schedule. The certificates were purchased by conversion of encashment of such FCA deposits. The question warranting an answer, therefore, is whether the profit derived from the R.I. Certificates, purchased out of encashment of FCA Deposit, in the hands of his mother as joint holder, will be exempt from tax. A reference to Clause (78E) ibid is required, which reads as follows:---

"(78E), Any profit or interest derived from Pak rupees account or certificates of deposits which have been created by conversion of a foreign currency account or deposit held on the 28th day of May, 1998, with a bank authorised under the Foreign Currency Accounts Scheme of State Bank of Pakistan:

Provided that nothing contained in this clause shall apply to such Pak rupee account or certificates which are created out of foreign currency deposits which are not exempt under clause (78) and 78B".

8. It clearly provides that the profits or interest from certificates which have been created by conversion of foreign currency account or deposit hold on 28-5-1998 with a bank authorised under the Foreign Currency accounts scheme of State Bank of Pakistan will be exempted from tax. Therefore, the exemption from tax on profit is allowed with reference to particular certificates created by conversion of foreign currency account or deposit as specified above without any reference to the person holding such certificates. Saving Centres do make an entry in their record where certificate of encashment of FCA is produced for creation of RICs by conversion of FCA deposits. It follows that once it is ascertained by, CDNS that the certificates are being purchased or created by conversion of foreign currency account as provided in clause (78E) then profits accruing or it will' be exempt from tax-irrespective of the fact whether it accrues to the account holder himself or to him jointly with his mother or any other person.

9. In the light of the unambiguous provision of law on the issue involved in the complaint the clarification issued by the C.B.R. is arbitrary contrary to law and based on irrelevant ground falling under the term maladministration. The alleged maladministration is proved.

10. It is recommended that:

(i)The Revenue Division to withdraw the clarification issued to the Central Directorate of National Savings vide U.O. No.4(32)TP-1/90-Pt. I dated 16-9-1999.

(ii)Compliance be reported within 30 days.

C.M.A./839/FTOOrder accordingly.