Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss.66‑A, 24(c) 50(1), 62 & Second Sched., Cl. (27) ‑‑‑ C.B.R Circular No. 15 of 1997, dated 6‑11‑1997‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order‑‑ Inadmissible deductions‑‑‑Payment of golden handshake scheme ‑‑‑No deduction of tax at source‑‑‑Such expenses claimed on account of "deferred cost" were allowed by the Assessing Officer‑‑‑Inspecting Additional Commissioner cancelled the assessment being erroneous and prejudicial to the interest of revenue on the ground that no tax was deducted under S.50(1) of the Income Tax Ordinance, 1979 on payment made under golden handshake scheme and such expense, therefore, was not admissible under S.24(c) of the Income Tax Ordinance, 1979‑‑ Validity‑‑‑Amount paid by the company/assessee was salary hence provisions of S.24(c) of the Income Tax Ordinance, 1979 were fully attracted‑‑Assessee having failed to deduct tax on salary paid to employees, the order was `erroneous' and prejudicial to the interest of revenue‑‑‑Cancellation of assessment under S.66‑A of the Income Tax Ordinance, 1979 was legally justified‑‑‑Such amount, however, included gratuity also and cancellation of order could not be extended up to addition of total amount‑‑‑Amount of gratuity was exempt under Cl. (27) of the Second Sched. of the Income Tax Ordinance, 1979‑‑‑Assessment was set aside for determination of total amount of gratuity paid and to what extent it was exempt wholly or partly; how many payments were above the threshold on which tax was deductible and how many employees have paid taxes on this amount by themselves‑‑‑Figures covered in such three categories were to be reduced from the figure after verification and balance if any shall be added in the income of the assessee under S.24(c) of the Income Tax Ordinance, 1979.

1997 PTD (Trib.) 879; Writ Petition No.12126 of 1998; Writ Petition No.282 of 1998; Writ Petition No. 11675 of 1998; PTCL 1998 CL 660; 1998 CLC 158; PLD 1997 Kar. 667 and 1997 SCMR 1232 ref.

2002 PTD 562 rel.

Haji Muhammad Yousaf for Appellant.

Anwar Ali Shah, D.R. for Respondent.

Date of hearing: 5th January, 2002.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).‑‑‑This appeal on behalf of the assessee‑petitioner is basically against the order under section 66A. The grounds advanced by the assessee against the order are as follows:‑‑‑

1. That order under section 66A is bad in law as same is in violation/contravention of several decisions of Hon. High Courts and Hon. Supreme Court.

2. That decision of Hon. Supreme Court relied upon for under section 66A is misconstrued and misinterpreted.

3. That original order under section 62 is neither erroneous of law nor prejudice to Revenue.

4. That order under section 66A is legally unsustainable as for who's non‑deduction assessee is penalized are already stand assessed without tax amount received under Golden Shake Hand.

5. That inherent and self‑speaking difference between salary and receipt under Golden Shake Hand is deliberately ignored and avoided to tax what is legally not taxable.

6. That I.A.C. is not justified to by‑pass previous decisions of learned Tribunal on the subject vide 1999 PTD (Trib.) 879.

7. That learned IAC made a grave error of judgment by ignoring assessee's submission that PIA/Allied Bank of Pakistan have never deducted tax from retiring employees relying on decision of Hon. High Court and without considering that no punitive action is taken against them by Department.

7‑A. That learned IAC ought to have considered and verified assessee's contention that numerous employees of Habib Bank, Lahore were refunded back the amount of tax deducted subsequent to decision of Hon. Karachi and Lahore High Court.

8. That learned IAC committed mistake of law by taxing amount recovered under Golden Shake Hand without considering that same is only of causal and non‑recurring nature and is "Capital Receipt"

9. That learned IAC failed to consider the very basic principle of taxation that only Revenue Income can be taxed which amount received under Golden Shake Hand is not.

10. That decision of Hon. High Court, vide C.P. 1155 of 1998, C.P. 14445 of 1998, C.P. No.1141 of 1998 and many more never appealed against at Supreme Court, hence attain finality and become binding vide Article 201 of the Constitution of Islamic Republic of Pakistan.

11. That amount received vide Golden Shake Hand was taxed vide Circular No.15 of 1997, hence not taxable vide any other provision of Income Tax Ordinance, 1979 in the light of several decisions of Hon. Supreme Court/Hon. High Court/learned Tribunal that "specific law prevails over General Law.

12. That learned IAC acted violative to the decision of Hon. Supreme Court about to treat amount received under Golden Shake Hand as "Salary" without actually working and determining whether is it indeed salary as per direction of Hon. Supreme Court.

14. That Department acted illegally to treat amount received under Golden Shake Hand as Salary as opportunity to determine this issue within 4 months was given vide C.P. No.1455 of 1998, of Sindh High Court, which stand expired and neither any decision taken nor case was appealed against.

15. That learned committed grave error of law by not giving effect to Point to law decided vide several decisions of High Court vide amendment in Finance Ordinance, 2000 to give effect to point of law decided by Tribunal/High Court though same is appeal against.

16. That the learned I.A.C. acted against the amendment of Finance Ordinance, 2000 which become effective on 1‑7‑2000 to the extent of giving effect to point of laws already decided Hon. Sindh and Lahore High Courts whereas he resorted to order under section 66A on 8‑7‑2000.

17. That assessee crave the permission to add, alter, amend or submit ground before the date of hearing.

The above grounds are argumentative and in contravention to rules of the ITAT; however, keeping in view the nature of the issues involved and importance of the matter we ignore the same.

Brief facts leading to this appeal are that the assessee a public limited company non‑listed declared a loss of Rs.1‑3,19,05,634 which was supported by necessary documents. The loss of the assessee was accepted subject to certain adjustments in the accounts in the head of depreciation and certain other expenses in the P&L Account. The manufacturing account of the assessee with special reference to purchase as well as sale account was accepted. The assessee had a claim of Rs.13,12,49,576 as deferred cost. The Assessing Officer through a notice under section 62 confronted the assessee as to why, this amount should not be disallowed. In reply the assessee explained that the industry has been purchased from the Privatization Commission through Ministry of Finance and this deferred cost is the amount paid to employees as a result of Golden Hand Shake and voluntary retirement from service. The assessee amortized a sum of Rs.2,62,951 but, however, on the direction of the ITAT vide I.T.As. Nos. 5977 and 6591/LB of 1996 the entire expenses were claimed in the year of payment. In this regard the direction given by the Tribunal as reproduced by the Assessing Officer in its order under section 62 speaks as follows:‑‑‑

"The apportionment of expenses on account of Golden Shake Hand is not sustainable in law, addition has been deleted and entire claim on account of Golden Shake Hand is to be allowed."

On the basis of this explanation the Assessing Officer allowed the expenses for the impugned year, which has subsequently been considered as erroneous and prejudicial to the interest of Revenue.

The learned IAC while invoking his jurisdiction under section 66A considered this allowance to be as unjustified and confronted the assessee with the notice bearing following language:‑‑‑

"You declared `declared cost' as per Note No. 10 Audited Accounts for the assessment year 1996‑97 as under:

You deducted above mentioned 'declared cost' amounting to Rs.13,12,49,756 from your total income and declared loss of Rs.7,66,53,945. Your assessment for the year 1996‑97 was framed under section 62 of the Income Tax Ordinance, 1979 vide order dated 15‑5‑1999 to determine loss at Rs.1,20,71,076. The expenses claimed on account of "deferred cost" has been allowed by the Assessing Officer.

The record shows that no income tax was deducted by you under section 50(1) of the Income Tax Ordinance, 1979 on the payments made under golden handshake schemes.

As such the expense was not admissible under the Income Tax Law as clearly laid down in section 24(c) of the Income Tax Ordinance."

The assessee in reply whereof said that neither the order is erroneous nor prejudicial to the interest of revenue. The main thrust of his arguments was that the amount paid is under special circumstances in‑compliance with the direction of the privatization Commission and on the basis of contract between the two parties. The amount paid against voluntary retirement scheme to the employees is not salary; hence the provision of section 24(c) does not apply in the circumstances. The learned IAC, however, did not consider the argument of the assessee to be as forceful and held that the amount in question was fully covered within the definition of section 60 and was a salary. This way he considered the order to be as erroneous and prejudicial to the interest of revenue and later made an assessment himself in the following manner: ‑‑

"In view of the detailed discussion recorded above, the order of the DCIT‑03 for 1996‑97 is held as erroneous in so far as prejudicial to the interest of revenue. The provisions of section 66A of the Income Tax Ordinance, 1979 are invoked and order referred to above is modified as under:‑‑‑

Before us this case has been argued at length by the learned A.R. on the strength of various judgments on the subject by a Single Bench of Lahore High Court, Lahore; and then by a Division Bench. The case was heard on 3‑12‑1999 and the order was released on 10‑12‑1999. The. Honourable Mr. Justice Muhammad Nawaz' Abbasi in this petition held the payment under Golden Hand shake to be as "compensation" in lieu of "future salary" for unserved period of employment surrendered by an employee. Further held that it is not strictly in lieu of salary and, therefore, Circular No. 15/97 issued by the C.B.R. cannot represent the tax liability on the salary. After giving above finding the Honourable High Court later directed the Department to refund the tax already deducted from such employees forthwith. Subsequently, in another judgment in Writ Petition No. 12126 of 1998, which was heard on 1‑3‑2000, Mr. Justice Malik Muhammad Qayyum followed the earlier judgment by Mr. Justice Muhammad Nawaz Abbasi and held that the lump sum payment made to an employee by his employer under Golden Handshake Scheme is a "compensation for loss of service" and was "income" on which "deduction at source" could be made, therefore, the view taken in Writ Petition No.282 of 1998 on the subject was followed without any distinction. The Honourable Mr. Justice Malik Muhammad Qayyum allowed the petition and held that the respondent (C.B.R.) etc. are not entitled to charge income‑tax on the amount/compensation under the Golden Handshake Scheme. It was further directed that, deduction, if any made by the Bank from the Department should be refunded to the petitioner.

In the meantime the Department had moved a Civil Petition for Leave to Appeal vide No. 114‑L of 1998. This was against the judgment dated 9‑6‑1998 of the Lahore High Court, passed in Writ Petition No.11675. The Honourable Supreme Court of Pakistan while granting eave to appeal and admitting the case for regular hearing gave the following observations:‑‑‑

"Leave to appeal is granted to consider whether in these circumstances, any direction could be made in the Constitutional petition for the refund of the amount before adjudication made by the competent authority as to whether income‑tax was deductible from the amounts payable under the Golden Handshake Scheme and the said amounts fall within the ambit of the term, `salary' under the Income Tax Ordinance. Status quo as regards amount deducted shall be maintained till. the disposal of the appeal.

During the pendency of the appeal, this order shall not operate as bar either against the petitioner to approach the Adjudicating Authority of the Income‑tax Department or the Adjudicating Authority itself from proceeding with the matter and determining as to whether income‑tax was payable on the amount payable to the employees of the petitioner‑corporation and the same was salary under the Income Tax Ordinance. If any adjudication is made, the aggrieved party may seek remedy against the same and the amount already deducted shall be dealt with accordingly."

On this subject some other judgments were also referred, however, the judgment of the Supreme Court being by the higher forum of the country we need not discuss the same. Having referred these judgments the learned A.R. then embarked upon the principle of

stare decisis. His thrust was on the point that the judgment of the Lahore Bench of the Honourable High Court is binding on us and that we have no option but to accept the same and ignore all others, if any on the subject. Without pointing out as to how in the presence of the direction of the august body that the issue regarding definition of salary and charge can be decided independently by the forums like Assessing Officer, First Appellate Authority and the ITAT, the judgment of High Court should be followed? He remarked that no such impression comes from the order of the Supreme Court of Pakistan. He; therefore, vehemently stated that the Tribunal does not have any option but to hold that this amount is not salary and the cancellation of the order under section 66A is unjustified. He has referred PTCL 1998 CL 660, 1998 CLC 158 and 1997 PTD (Trib.) 879. The learned A.R. further said that the grant of leave of the Supreme Court is an interim order, hence the order of the Lahore High Court, Lahore shall hold field till there is a final order. In this regard he referred PLD 1997 Kar. 667. The above referred judgment by him speaks as follows:‑‑‑

"View taken by Court by passing interim order was always tentative any question relating to jurisdiction would be germane at the time of final determination of case."

The learned A.R. then said that the information on the basis of which the IAC has considered the order as erroneous was available at the time of original assessment. It was properly probed, discussed and then allowed by the Assessing Officer. Present change in the view is a difference of opinion and it is not covered within the definition of the word `erroneous'. If information was already on record and the Assessing Officer has consciously applied mind thereon, subsequent opinion drawn by the IAC cannot confer the jurisdiction on him to cancel an order. He has referred the famous judgment of Central Insurance Corporation reported as 1997 SCMR 1232. The judgment says that if the assessee has disclosed a materia facts and the assessment has consciously been completed by the I.T.O. in such a case in the absence of discovery of any new fact, which can be treated as definite information, there cannot be any scope for reopening of assessment under section 65. It has further been held therein that any change of opinion on the basis of the same material by the ITO will not warrant initiation of section 65(1).

Coming to the amortization, the learned A.R. said that the amount was amortized for five years keeping in. view the IAS accounting standard. He said that the relevant para. of the IAS is 9.14. The fact of the smatter is that the assessee itself has already withdrawn this amortization by claiming the entire expenses in one year. Since this is on the basis of a judgment of the ITAT mentioned by us earlier the argument and counter‑arguments were quite unnecessary.

So far as the main issue is concerned after decision in the case reported as 2002 PTD 562 and explained before us by learned L.A. we need not further load this order. The recent leave to appeal granted in the case of Cynamids (Pvt.) Ltd. By the Honourable Supreme Court of Pakistan also is of no help the assessee as it has not suspended the operation of the earlier judgments on the, subject. Even otherwise in our humble opinion the effort to define the word `termination', in, the manner as to exclude money paid against further service does not sound correct to us. However, we leave this for the Superior Courts to define the same as the matter is already sub judice.

In any case in our humble view the cases referred by learned L.A. and his arguments are more convincing. The judgment by High Court of Azad Jammu and Kashmir has given correct interpretation of the term salary and the argument of the A.R. that it is not binding is ignored in the manner that High Court Lahore has finally come up with a clear view. We have already mentioned it citation, however, relevant para. is reproduced as follows:‑‑‑

"On the other hand, according to section 16(2) `Salary' includes profits in lieu of or in addition to salary and the profits in lieu of salary includes any amount of compensation, even due to or received by an assessee in connection with the termination or modification of any terms and conditions relating to this employment.

Therefore, we are of the considered view that payments received by the petitioners from their employees are covered by the definition of then word `Salary' which is one of the heads given in section 15 under which such receipts are to be taxed." 2002 PTD 562.

In view of the above clear and unambiguous finding we hold that the amount paid by the company to its employees was salary hence provisions of section 24(c) fully attract. The assessee having failed to deduct tax on salary paid to employees the order was `erroneous' and prejudicial to the interest of revenue. The cancellation under section 66(a) is, therefore, legally justified hence cancelled.

This leaves us to the assessment finalized by the IAC subsequently to cancellation of the order. The IAC has added the entire amount paid by the company to its employees. No effort has been done to determine the ratio of the amount on which the provisions of law i.e. 24(c) read with section 50 are applicable. The facts of the case do warrant an exercise to determine the same. Further the case requires indulgence from another angle. The amount paid to employees is inclusive of gratuity. The ratio of which in the total is 20%, which is exempt as per clause (27) of the Second Schedule. In some cases it is 100% exempt while in certain cases it is 50%. In any case this again requires determination for which there is no data available with us. The fact, however, is evident that in this case the package is inclusive of gratuity. This is proved from the following part of the contract made on 15th day of October, 1991:‑‑‑

MEMORANDUM OF AGREEMENT

"Whereas the Inter‑Ministerial Committee appointed by the Prime Minister, under the Chairmanship of Mr. Ijaz‑ul‑Haq, Federal Minister for Labour, Manpower and Overseas Pakistanis, and comprising Minister for Interior Chaudhry Shujat Hussain, Minister for Industries Sheikh Rashid Ahmed and Chairman Privatization Commission, Senator Lt.‑Gen. (Retd.) Saeed Qadir, presenting the Government of Pakistan and the All State Enterprises Workers' Action Committee (APSEWAC), representing the employees of the state‑owned industrial units and corporations, being privatized held negotiations to enable them to arrive at an agreement to expedite the process of privatization.

Whereas the parties hereto have arrived at a settlement or the packages of measures for the benefit of workers of the state enterprises, being privatized.

Now, therefore, the following has been agreed to between the parties:‑‑‑

TERMS OF AGREEMENT

Package `B'

Employees opting for golden handshake of units and corporations may do so on the following terms:

(a) One month's gratuity for each complete year of service will be payable. Wherever this gratuity is non‑existent or less than of one month, the gratuity will be assumed to be of one month. This will be paid by the employee's unit.

(b) Four month's last drawn basic salary for each year of service will be paid in addition under arrangements of the Privatization Commission. The basic salary is defined as under:‑‑‑

(i) Where cost of living allowance and indexation is merged it will be taken as basic salary.

(ii) Wherever cost of living allowance and indexation is not merged e.g. where agreement stand against indexation this will be included for a calculation of basic salary (list of such units where this is applicable is to be given along-with date of latest Agreement)."

Above packages has distributed the amount payable to the employee in two areas. The total amount against one year service is equal to 5 months salary, which includes gratuity also. Our agreement with the IAC with regard to cancellation of the order, therefore, cannot be extended up to addition of the total amount in this case. This amount of gratuity is exempt under clause (27) of the Second Schedule. There are, however, some requirements which aspect also need further inspection of the connected details. The law provides exemption of payment of the gratuity but has fixed parameters.

There is still another fact, which has not been considered by the learned IAC. The assessee has claimed that he has not been given a chance to explain as to which part of the addition was chargeable under the provisions of section 24(c) of the Income Tax Ordinance, 1979. The section enumerates that the salary shall not be allowed to the assessee if tax is deductible on it under section 50 and such tax has been paid or deducted or paid under section 50 as the case may be. This aspect that whether the entire salary paid to the employees was liable to deduction or a part of the same was less than the threshold for charging tax has also not been checked. Still further if the employees have themselves paid the amount of tax on their taxable salaries, the provisions again becomes inoperative up to that extent. The determination of these figures, however, is neither the job of the ITAT nor do we have any figures before us. The answer, therefore, is obvious. While we are firm about our view that the amount is fully covered within the definition, of term salary as used in section 16 of the Income Tax Ordinance, 1979, we are also conscious of the requirement of section 24(c). The Assessing Officer could only add the amount on which tax was deductible. The A.R. quite vehemently claimed before us that a substantial part of the payments is not chargeable to tax in the hands of the employees. Moreover the issue that said employees have themselves paid tax or not also requires determination. The answer, therefore, is obvious. The case is set aside for determination of the following:‑‑‑

(i) The total amount of gratuity. paid and to what extent it is exempt, whole or partly:

(ii) How many payments are above the threshold on which tax was deductible:

(iii) How many employees have paid taxes‑ on this amount by themselves.

All those figures which are covered in the above three categories shall be reduced from the figure after verification. The balance if any shall be added in the income of the assessee under section 24(c).

This decides appeal of the assessee in the manner and to the extent mentioned above.

C.M.A./601/Tax(Trib.) Order accordingly.