Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss. 66‑A, 80‑C, 80‑D, 50(4) & 50(4‑A)‑‑‑C.B.R. Circular No.12 of 1991, dated 30‑6‑1991‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order ‑‑‑Assessee was a distributor of goods‑‑‑Cancellation of assessment on the ground that deduction made on supplies was liable to be assessed under S.80‑C of the Income Tax Ordinance, 1979 and turnover tax under S.80‑D of the Income Tax Ordinance, 1979 was also applicable as company had debited purchases in the assessee's account‑‑‑Validity‑‑‑Receipts or turnover of assessee was his commission and as such he could not be put to charge under S.80‑D of the Income Tax Ordinance, 1979 on the amount paid by the buyer/assessee to his principal and amount of commission declared by the assessee stood certified by the principal‑‑‑Under S.80‑D of the Income Tax Ordinance, 1979 the requirement of law was that if the assessed tax otherwise fell less than % of this amount, he was liable to pay the balance, if the amount paid by the assessee fell short of his commission, he shall make good the deficiency and if otherwise tax paid by him was already in excess of % of his commission amount he shall not be asked to pay the balance‑‑‑Order of Inspecting Additional Commissioner passed under S.66‑A of the Income Tax Ordinance, 1979 was not justified and the same was cancelled by the Appellate Tribunal.  

Muhammad Ijaz Ali Bhatti for Appellant.

Mrs. Sabiha Mujahid, D.R. for Respondent.

Date of hearing: 3rd May, 2002.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER). ‑‑‑These appeals have been filed by the assessee. They are against the order under section 66‑A passed by the learned IAC. The main objections mentioned by IAC are as follows:‑‑‑

(1) As the assessee has made supplies at Rs.63,840 and deduction of Income Tax at Rs.1,596 for assessment year 1993‑94 and Rs.37,320 and income‑tax deduction amounting to Rs.933 for assessment year 1994‑95 respectively. (challans available with the returns) in the name of assessee, therefore, the assessment was to be finalized under the provisions of section 80C read with Circular No. 12 of 1991.

(2) Income Tax at Rs.1,12,060 and Rs.80,180 was to be credited in the profit and loss account of the assessee for the assessment years 1993‑94 and 1994‑95 respectively.

(3) Freight rebate at Rs.273, 170 and Rs.479,757 for assessment years 1993‑94 and 1994‑95 respectively was to be credited to the profit and loss account.

(4) Turnover tax under section 80‑D was applicable as company has debited purchases in the assessee's account at Rs.37,55,709 and Rs.32,45.8103 for assessment years 1993‑94 and 1994‑95 respectively and assessee has made the sales accordingly.

It is on the basis of above that the order of the Income Tax Ordinance has subsequently been cancelled for de novo, assessment by the Assessing Officer. The AR says that all the above four presumptions are on incorrect appreciation of the facts of the case. He rebutted the same, firstly by saying that the assessee is not at all a supplier but a distributor of the Ittehad Chemicals Ltd. The tax in his case has been deducted by Ittehad Chemicals by treating his commission as supply which income is not covered within the purview of section 80C and has been so assessed by the Assessing Officer. Income‑tax amounting to Rs.1,12,060 and Rs.80,180 he said had no relation with this assessee and therefore, there was no question of its credit id the P&L account. He remarked that under a misconception the company deducted this tax for the earlier year, which practice was subsequently dropped. It was pointed out to the company that the assessee is only their distributor hence tax on purchases from them which are sold, to a third person, does not amount to supply. Even otherwise, the Ittehad Chemicals in this case is the seller and third persons are buyers. This company works as their distributor and for this purpose take commission and tax @ 10% is deductible from the commission amount. The Company by mistake had charged more tax from this assessee which subsequently has been rectified. Regarding treatment of freight the assessee says that its addition in P&L account is also a misconception. It is in fact reimbursement of the actual expenditure which may not be reflected in the account of this assessee. It is not a receipt but reimbursement of the expenditures incurred for freight during supply of the goods.

Coming to the last objection i.e. with regard to turnover tax, he said that the assessee is only a distributor and his turnover is his commission. There is, therefore, no reason to consider the assessee as chargeable for the amount sold through him as a distributor, as turnover.

The learned DR said that during the proceedings before IAC the assessee remained very non‑cooperative. He did not supply complete information. Even the principal company i.e. Ittehad Chemicals has failed to produce the challans of deductions of tax. Moreover, if the Assessee has received freight charges from the company declaration of the same in receipt and expenditures statement alone is pointer of the position of his accounts. The assessee is supplier hence should have been assessed under section 80C. Furthermore, he made purchases from Ittehad Chemicals and supplies the same to other parties. He, therefore, would be charged to tax under section 80‑D on his total turnover.

We have heard both. Before giving our finding it will be appropriate to go through the relevant facts giving rise to this appeal the nature of assessee business is that he works as distributor of Ittehad Chemicals for which they have agreed on an agreement vide No.MKT/2207, dated 23‑6‑1987. Clause 5 of the said agreement stipulated as follows:‑‑‑

The prices, commissions and allowances admissible will be notified to you through our Marketing Circulars from time to time and the same shall be read as part of this letter;

Later the company issued them a certificate, dated 5‑8‑1992 Reference No. IC/FSD/28‑A through which they certified that for the assessment year 1992‑93 Messrs. Hamid Traders, Faisalabad have earned Rs.679, 865 as aggregate commission @ 2% of the basic price. The company early presuming them as chargeable to withholding tax deducted 1‑1/2% tax on the total amount of the products supplied by Ittehad Chemicals to the third party through Hamid Traders. The applicant by using its goods offices succeeded in making the company 'Miser that on commission of 2% deduction @ 2.50% shall practical mean a loss for the work done. Moreover, the applicant does not supply anything to the company and in fact sells their items to third parties on their behalf. In these circumstances, the assessee relationship with Ittehad Chemicals does not become of a supply contractor and recipient. The provisions section 50(4) by no means come into picture in this relationship. The company subsequently started charging tax @ 10% of the commission amount payable to this assessee on which section 50(4A) was applicable. This change in the relationship is fortified from Certificate No.ICL/FSD/H‑1/734, dated 23‑5‑1996 issued by the company in favour of this assessee. So, the factual position is that in the earlier two years the deduction made under section 50(4) was under a Misconception of the provisions of law. It is true that the learned IAC to some extent has succeeded in complicating the matter and has tried to create the impression that the assessee did make arrangements, which were erroneous and prejudicial to the interest of revenue. However, from the above facts and the arguments this impression is nullified. There is no reason for us to hold that this assessee comes within the definition of a supplier. In view of its relationship as distributor of the company, there is no question of its chargeability to withholding tax under section 50(4). Even if it is presumed that the assessee make purchases from them and that purchases form relationship of supply and recipient it is this assessee who would be required to deduct tax from the payments made by him to Ittehad Chemicals. The subsequent amendment in the method of deduction also supports above findings.

Regarding issue as to whether total purchases of the assessee from Ittehad Chemicals is liable to turnover tax or not this matter has been decided in a number of cases.

For example in the case of Messrs Razak International reported as I.T.A. No. 2392/LB of 1992‑93 order, dated 27‑2‑1997 this Tribunal after putting reliance upon 1994‑PTD 758 have held that in the case of' dealer of medicines turnover is its commission and not the amount of medicines sold. Similar view has been taken' in PLD 1994 758. This is where reference not the actual provision shall be of relevance. Section 80‑D speaks as follows:‑‑‑

"(80D) Minimum tax on income of certain persons.‑‑‑(1) Notwithstanding anything contained in this Ordinance or any other law for the time being in force, where no tax is payable or paid by a company or a registered firm, an individual, an association of persons, an unregistered firm or a Hindu undivided family half per cent of the amount representing its turnover from all sources, the aggregate of the declared turnover shall be deemed to be the income of the said company or a registered firm, an individual, an association of persons, an unregistered firm or a Hindu undivided family and tax thereon shall be charged in the manner specified in subsection (2)."

Plain reading of the above makes it clear that the Legislature with all intentions and purposes has used the word `turnover'. Obviously there was no bar is using the word `sale'. Turnover is a wide connotation and it includes sales, commission receipt. agency commission as distributor to someone etc. Another important aspect which is equally prominent is that this charge has been created on the aggregate of declared turnover. The judgment referred by learned AR in term of I.T.A. No.111/LB of 2000 for the assessment year 1985‑86 order 20‑1‑2001 further confirms our observations. In this order this Tribunal has relied upon certain other judgments on the subject.

The result of the above discussion, therefore, is obvious. In the present case assessee is a distributor of "items, which pertains to its principal". The rates of the items are fixed by the principal company and the assessee does not have any role to play in, it. He does not make payments on purchase of the items as he is not a buyer and that he is not selling it to a third party on his own behalf. Any problem with regard to the weight, quality at the times of sale is to be solved by' principal company, i.e., Ittehad Chemicals. The role .of this assessee is of a mediator whom we technically call as distributor. Moreover, the assessee relationship with the company i.e. of principal, and agent is subject to whims of the company. This dealership can be terminated at any stage as per terms of the contract, which also explains the actual role of the assessee, under discussion. His receipt or turnover is his commission and as such he cannot be put to charge under section 80D on the amount paid by the Buyer to the Ittehad Chemicals. The amount of commission declared by him stands further certified by the principal. On this under section 80D the requirement of law is that if the assessee tax otherwise falls less than % of this amount, he is liable to pay the balance. In this case, therefore, if the amount paid by the assessee falls short of his commission, he shall make good the deficiency. If otherwise tax paid by him is already in excess of % of his commission amount he shall not be asked to pay the balance.

The result is obvious. The order of the IAC to cancel the assessment by invocation of 66A is not justified, hence cancelled. The assessee appeal is allowed.

C.M.A./593/Tax (Trib.) Appeal allowed.