(a) Income Tax Ordinance (XXXI of 1979)-----

----Ss. 50(7D) & 2(16)(b)(a)---Deduction of tax at source---" Company"- Definition---Words 'instrument of any kind issued' have been used within the context of such instrument issued by any banking company, arty company referred to in sub-clauses (a) & (b) of cl. (16) of S.2 of the Income Tax Ordinance, 1979 'relating to the definition of a "company".

(b) Income Tax Ordinance (XXXI of 1979)-----

----S. 50(7D)---Deduction of tax at source---Instrument---Resolution of Board of Directors---Relationship between the holding company and the subsidiary company or two sister companies for making payment of borrowed sums or making payment of interest on the borrowed sums would stand covered by the provisions of S.50(7D) of the Income Tax Ordinance, 1979 which arrangement was created by a resolution of the Board of Directors and such resolution fell within, the scope of instrument stated in the provisions of S.50(7D) of the Income Tax Ordinance, 1979.

Black's Law Dictionary and Law Lexicon ref.

(c) Income Tax Ordinance (XXXI of 1979)---

----Ss. 24(c) & 50(7D)---Deductions not admissible---Financial expenses/charges claimed, which were paid by the assessee to its holding company on the balance due to it on account of funds borrowed after adjustment -of sales, was disallowed---Addition was deleted by the First Appellate Authority---Appeal by Department ---Assessee contended that the recipient had discharged its liability and the addition under S.24(c) of the Income Tax Ordinance, 1979 could not be made ---Validity-- Matter was to be re-thrashed and re-probed for a decision afresh---Issue was set aside with the direction that the Assessing Officer will consider the contentions of the assessee after affording him proper opportunity and to verify the facts as alleged before the Assessing Officer from the record of assessment of the holding company and also to verify the evidence already produced by the assessee or which might be produced by the assessee from the assessment record of the holding company which could be summoned which NTN was available on record on the certificate issued from the holding company---Order was modified to the extent of issue of deletion of addition under S.24(c) of the Income Tax Ordinance, 1979 and the issue was set aside for the de novo consideration by the Appellate Tribunal.

79 Tax 267 (Trib.) rel.

I.T.A. No.660/IB of 1997-98 ref.

Abdul Jaleel, D.R. for Appellant.

Abdul Basit, FCA for Respondent.

Date of hearing:, 9th, January, 2003.

ORDER

The department through this appeal has assailed an order, dated 15-5-2001 (hereinafter referred to as the impugned order) passed by the learned Appeal Commissioner, Islamabad.

2. Besides terming the impugned order, as, bad in law and against the facts of the case, the department has contested the same on the following grounds:--

(i)that, the learned CIT(A) was not justified to delete the addition trade under section 24(c);

(ii)that the learned CIT(A) was nor justified to restrict the addition on account of Printing & Stationery, Transport & Conveyance and Traveling to 10%; and

(iii)that. the learned CIT(A) was not justified in deleting the addition on account of Head Office expenses.

3. Hence the prayer through this appeal for the vacation of the impugned order and restoration of that of the Assessing Officer.

4. We have heard the learned representatives of the parties and have gone through the orders of the forums below.

5. Briefly the relevant facts with regard to issue raised in the appeal are that the Assessing Officer passed an assessment order under section 62 of the then Income Tax Ordinance, 1979 (hereinafter called "the then Ordinance) and disallowed the financial expenses/charges claimed by the assessee at Rs.3,367,018 which were paid by the assessee to its holding company/PSO (Pakistan State Oil) on the balance due to it on account of funds borrowed from PSO after adjustment of sales and also made add-backs in P&L accounts. The Assessing Officer processed the assessment of the assessee-Company stated to be deriving income from manufacturing and sale of lubricating oil to PSO. The assessee declared the income in the following manner:--

(Amount Rs.)

Net profit as per profit and loss account3,417,577

Add: Accounting depreciation432,942

3,441,519

Less: Admissible depreciation408,529

Total income3,441,990

Less: Workers Welfare Fund68,840

Taxation income3,373,150

Minimum tax liability

Turn-over138,530,440

Income Tax on above @ .5 %692,652

Statutory notices were issued to the assessee time and again and. then a detailed notice under. section 62, dated 24-4-2000 was issued to the assessee as reproduced in the assessment order mainly requiring the assessee to give details of the liabilities and to submit as to whether withholding tax was deducted from the claim of financial charges with regard to payment of amount of interest of PSO. The Assessing Officer also required the assessee for filing the original payment proof/challans in case of deduction of withholding tax or otherwise section 24(c) of the then Ordinance would be invoked. The Assessing Officer also called for other details as described in the notice reproduced in the assessment. order. The assessee in response thereto submitted details of other liabilities but -disputed the issue with regard to deduction of tax at source out of the payment of interest to PSO. The assessee informed that certificate of balance due to PSO has already been filed. Thereafter, another notice under section 62, dated 5-5-2000 was issued requiring the assessee to provide evidence with regard tQ agreement/ resolution on the authority of which the assessee was. paying interest @ 15 % to PSO. In response thereto, the assessee made reply dated 13-5-2000 contending that the provision of section 50(7D). were not applicable to his case. The Assessing Officer then finalized the assessment by accepting the sales as declared being verifiable and cost of sales also being verifiable. However, in respect of financial expenses/charges, the Assessing Officer came to the conclusion that the assessee was obliged to deduct tax under section 50(7D) on the interest payment to PSO but the same was not done. Hence section 24(c) of the then Ordinance was invoked. The Assessing Officer was of the view that the arrangement between the two parties (assessee borrowing fund from PSO and paying interest thereon) was governed by an agreement/resolution of Board of Directors and that arrangement agreement was definitely an instrument agreed upon by the two parties and accordingly the section 50(7D) was attracted. Accordingly, the Assessing Officer disallowed the claim and added back the amount of financial expenses/charges under section 24(c) of the then Ordinance. In respect of claim of P&L account expenses, the Assessing Officer totally disallowed the claim of expenses under the head of Head Office expenses - and then disallowed 15% of the claim for Communication, 40% for Printing and Stationery, 30% for Transport and Conveyadce, 20% for. Traveling and Rs.4,000 for other expenses due to unverifiability of the said claims. The Assessing Officer then computed total income of the assessee at Rs.7,342,420.

6. Against the above treatment; the assessee preferred appeal before the first appellate forum contesting the addition under section 24(c) and add-backs out of P&L account expenses: The learned Appeal Commissioner vide impugned order deleted the addition as made under section 24(c) while placing reliance on the case reported as 79 Tax 267 (Trib). In respect of P&L account expenses, the learned Appeal Commissioner deleted the addition on account of Head Office expenses while relying on the order of the Tribunal in respect of. earlier assessment years and then restricted the disallowances to 10% on account of Printing and Stationery, Transport and Conveyance and Traveling while confirming the addition under the head "Telephone' and other expenses.

7. Now the department has contested before us the said action of the learned Appeal Commissioner of allowing relief to the assessee.

8. The learned DR, while taking up the issue with regard to ground as raised against the action of learned Appeal Commissioner for deleting the addition made under section 24(c) of the Ordinance, contended that the provisions of section 50(7D) of the Ordinance were very clear and the assessee was under obligation to deduct tax on the interest paid to its holding company PSO and the Assessing, Officer rightly disallowed the financial charges as claimed by the assessee and added back the same under section 24(c) of the then Ordinance. With regard to the ground in respect of action of the learned Appeal Commissioner for restricting the addition on account of Printing and Stationery, Transport and Conveyance and Traveling to 10%, we learned DR contended that the Assessing Officer made add backs under the said heads due to unveriffability and unvouchness of the claims and there was no justification with the learned Appeal Commissioner to restrict the same to the extent as indicated above. Respecting the issue with regard to deletion of addition on account of Head Office expenses, the learned DR objected to the action of the learned Appeal Commissioner on the ground that the said disallowance/addition was made by the Assessing Officer while keeping in view the history of the case and the learned Appeal Commissioner unjustifiably deleted the said addition.

9. On the other hand, the learned AR of the assessee in respect of issue of addition under section 24(c) of the Ordinance contended that the learned Appeal Commissioner has passed a comprehensive order in that, respect and has finally with sound reasons while relying on a case-law reported as (1999) 79 Tax 267 (Trib.) deleted the addition as. being not maintainable. He further contended that PSO was a listed-company and the assessee-Company was a subsidiary company of PSO and a certificate of PSO in that regard was produced before the Assessing Officer and the Assessing Officer could easily obtain the copies of audited accounts of PSO but he did do the same. While explaining the business relationship. of the assessee-Company with PSO, the, learned AR stated that. PSO was providing crude oil to the assessee-Company and then the assessee Company was refining the crude oil for to- be sold in the market. He further stated that there was a resolution of the Board of Directors through which the relationship between the assessee-Company and PSO in respect of manner of payment with regard to borrowed sum has been regulated and such a resolution could not be equated with the term 'instrument' as. mentioned in the provisions of section 50(7D) of the Ordinance. He then quoted the example of Term Finance Certificate/ TFC which can be named as an instrument with regard to payment of profit or interest thereon for equating the same with the word 'instrument' as used in section 50(7D) of the then Ordinance. He also referred section 50(2A) before its amendment by the Finance Act 1995 and stated that the said provision was covering the situation of the case in hand but now it has been done away with through the amendment made by the Finance Act, 1995 making it applicable only to the banking companies or financial institutions. With regard to other grounds of appeal raised by the department the learned AR of the assessee referred an order of the Tribunal, dated 24-2-2001 passed in I.T.A. No.660/IB of 1997-98 in the case of the assessee-Company for the assessment year 1994-95 and contended that a similar relief was given by the learned Appeal Commissioner to the assessee-Company in respect of issue of addition of Head Office expenses, and add-backs in the Profit & Loss account expenses and the order of the learned Appeal Commissioner was confirmed by the Tribunal and therefore, the impugned action in that regard is liable to be affirmed in view of established history upto the level of the Tribunal.

10. Before taking up the pivotal issue with regard to addition under section 24(c) of the Ordinance as was made by the Assessing Officer and deleted by the learned Appeal Commissioner, we may like. to take up the ground of the department respecting action of the learned Appeal Commissioner of the deletion of addition on account of Head Office expenses and restriction of addition to 10% on account of Printing and Stationery, Transport and Conveyance and Traveling P & L account expenses. The learned AR of the assessee referred an order dated 24-2-2001 passed by the Tribunal in the case of the assessee for the assessment year 1994-95 vide I.T.A. No. 660/113 of 1997-98 and contended that similar relief was granted by the learned Appeal Commissioner in respect of said additions and the Tribunal maintained the order of the learned Appeal Commissioner for the said year. The learned DR has been unable to distinguish or differentiate the facts and circumstances of the case involved in the year under consideration with that of the assessment. year 1994-95 in which the Tribunal has- maintained the order of the first appellate forum of allowing relief to the assessee in respect of Head Office expenses and Printing and Stationary. In the case in hand also similar is the position with regard to claims of Head Office expenses and of other expenses under the P&L account and the learned Appeal Commissioner has categorically held in the impugned order for the case in hand that the addition on account of Head Office expenses represents deviation from history of the case and that the similar addition made in the earlier years stand deleted in first appeal and confirmed by the ITAT. In these circumstances, as nothing distinguishable has been argued by the learned DR to depart from the established history with regard to issue of Head Office expenses, therefore, we have no reason to interfere with the impugned action of the learned Appeal Commissioner to that effect which is accordingly affirmed. With regard to the issue of restriction of addition on account of Printing and Stationery, Transport and Conveyance and Travelling, we again see no reason to differ with the relief allowed by the learned Appeal Commissioner because nothing plausible has been argued to controvert the findings of the learned Appeal Commissioner in that behalf and hence the same are also maintained.

11. Now, we proceed to discuss the pivotal issue as raised in ground No.(ii) by the department to the effect that the learned CIT(A) was not justified to delete the addition under section 24(c) of the then Ordinance. We have already stated above the respective contentions of the parties on the 'issue. In order to have a clear view of the relevant provisions of section 50(7D) and section 24(c) of the then Ordinance, we may like to reproduce the said provisions as under:--

S.50(7D):Any person responsible for making any payment by way of profit or interest on bonds, certificates, debentures, securities or instruments of any kind issued by any banking company, or any company referred to in sub clause (a) or sub-clause (b) of Clause (16) of section 2, or any local authority, or, any finance society, shall deduct advance tax, at the time of making such payment, at the rate specified in the First Schedule .

S.24(c)Deduction not admissible. ---Nothing contained in section 23 shall be so construed as to authorize the allowance or deduction of ........................

(a) .:

(b)..........................................................

(c) any sum paid to any person on account of salary, interest or profit, services. rendered', brokerage or commission or rent of house property on which tax is deductible under section 50, unless such tax has been paid or deducted and paid under section 50, as the case may be.

12. From the above provisions of section 50(7D) of the then Ordinance, it was obvious that the words 'instrument of any kind issue' A have been used within the context of such instrument issued by any banking company or any company referred to in sub-clause (a) of sub clause (b) of clause (16) of section 2 of the then Ordinance relating to the definition of a company. Therefore, we have to see as to whether the resolution of Board of Directors of a company can be termed as an instrument as mentioned in the said provisions of law. There are various definitions given to this term in the Black's Law Dictionary which include as 'any other writing which evidences a right to the payment of money and is not itself a security agreement or lease and is of a type which is a ordinary course of business transferred by delivery with any necessary endorsement or assignment and as 'a document or writing which gives formal expression to a legal act or agreement or as 'anything reduced to writing.'. In the Law Lexican, the said term has defined variously and also as "An instrument is one who or that which is made a means or caused to serve a purpose' and further 'a writing expression of some act." Now if a resolution of Board of Directors of a company is in fact creating evidence or a right to the payment of money then it would amount to an instrument because the instrument which has been referred in the said provisions of law had been designed. to have an effect on a person responsible for any payment by way of profit or interest and such instrument has been issued by a company. In these circumstances, the relationship between the holding company and the subsidiary company or two sister companies for making payment of borrowed sums or making a payment of interest' on the borrowed sums would stand covered by the B provisions of section 50(7D) of the then Ordinance arrangement was created by a resolution of Board of Directors and the such resolution was obviously falling within the scope of instrument stated in the said provisions. As far as the other reasons Advanced by the learned Appeal Commissioner with regard to the applicability of subsection (2A) of section 50 'before its amendment/substitution, the same have no validity because the provisions of section 50(7D) were inserted through the Finance Act, 1991 and would be applicable to the year under consideration. However, the other plea taken before the learned Appeal Commissioner to the effect that the recipient has discharged its liability and the addition under section 24(c) of the then Ordinance could not be made by placing reliance-on (1999) 79 Tax 267 (Trib) was tenable in the eyes of law. While going through the said case-law, we have noticed that the Tribunal proceeded to set aside the assessment order for de novo consideration and the assessee was directed to produce necessary evidence before the Assessing Officer for verification of the fact that the rent paid to the CAA has already suffered incidence of tax. It was further directed by the Tribunal in the said case that the Assessing Officer can verify the assertion and evidence produced by the assessee including any certificate form CAA from the assessment record of CAA, the NTN of CAA is already available on record.

13. As the reliance has been placed by the learned Appeal Commissioner on the said case-laws in which the assessment was set aside for verification of the certificate from the assessment record of the assessee/CAA, therefore, the action of the learned Appeal Commissioner by outrightly deleting the addition made by the Assessing Officer under section 24(c) of the then Ordinance was not a proper course because such type of plea or contentions' of the assessee required were tti, be considered at the assessment stage by the Assessing Officer and the facts alleged were to be verified from the assessment record of the holding company/PSO with regard to incidence, of taxation of the said amount. The facts of this case are to some extent similar to the facts of the reported case and hence similar action is required to be taken in the case in hand while deciding the issue in-question. In these circumstances. Now we need not to dilate upon the issue any further by giving minute details of the case and think it suffice to say that the matter is to be re-thrashed and re-probed for a decision afresh. Therefore, it would be appropriate to set aside the issue with the direction that the Assessing Officer will consider the contentions of the assessee after affording him proper opportunity and to verify the facts as alleged before the Assessing Officer from the record of Assessment of the holding company/PSO and,, also to verify the evidence already produced by the assessee or which, may be produced by the assessee from the assessment record of the PSO, which can be summoned of which NTN was available on record on the certificate issued from the PSO. The impugned order, is accordingly modified to the extent of issue of deletion of addition under section 24(c) and. the issue shall stand, set aside for de novo consideration with the above directions. However, the other part of the impugned order with regard to deletion of additions under the heads. Head Office expenses and restriction of additions with regard to Printing and Stationery, Transport and Conveyance and Traveling shall stand affirmed in view of earlier decision of the Tribunal as referred above.

14. As a result of above, the departmental appeal partly succeeds to the extent and in the manner as indicated above.

C.M.A./693/Tax(Trib.)Appeal partly accepted.