I.T.As. Nos. 5857/LB to 4859/LB and 2086/LB to 2088/LB of 2004, decided on 30th May, 2005. VS I.T.As. Nos. 5857/LB to 4859/LB and 2086/LB to 2088/LB of 2004, decided on 30th May, 2005.
2006 P T D (Trib.) 1270
[Income-tax Appellate Tribunal Pakistan]
Before Mazhar Farooq Shirazi, Accountant Member and Zafar Ali Thaheem, Judicial Member
I.T.As. Nos. 5857/LB to 4859/LB and 2086/LB to 2088/LB of 2004, decided on 30/05/2005.
(a) Income Tax Ordinance (XXXI of 1979)---
----Second Sched., Part-II, cl. (110)---Exemption---Assessing Officer refused to. grant exemption from tax on share income received by the assessee-company as member of association of persons on the ground that the same was not available to the company as a member of association of persons---Validity---Words "on which tax has already been paid by the association" occurring in cl. (110) clearly indicate that the sole purpose of said clause was to save the member of the association from double taxation, one in the hands of association of persons and again in the hands of member---Clause showed that the words in parenthesis refer to the term "association of persons" and not to the term "member", maximum that could be said about the view of the Revenue was that their interpretation of the provision was also possible, but then it was an accepted rule of construction that where there were two interpretations of the provision, one that favours the subject shall prevail for that reason also view of the Department was not supported by the Appellate Tribunal---Assessee/company's claim for exemption was justified and same was allowed by the Appellate Tribunal.
2000 PTD (Trib.) 2664; 2001 PTD (Trib.) 2605 and 2003 PTD (Trib.) 1167 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.52---Liability of persons failing to deduct or pay tax---Limitation---Assessing Officer could not go beyond the period of four years for the call for books of accounts----First Appellate Authority decided that order passed under S.52 of the Income Tax Ordinance, 1979 were hit by limitation and these were accordingly annulled---Order of First Appellate Authority was in accordance with a settled law.
2003 PTD (Trib.) 1167 rel.
(c) Income Tax Ordinance (XXXI of 1979)---
----S.52---Liability of persons failing to deduct or pay tax---Tax was charged on 10% of payments made towards purchases---First Appellate Authority described such levy as being improper and illegal---Observation of the First Appellate Authority was strengthened by judgment of Appellate Tribunal in which it was held that the information for holding assessee as "assessee in default" required even stronger evidence than for reopening of the case under S.65 of the Income Tax Ordinance, 1979 in terms of definite information---Action on the part of Assessing Officer on charging tax on 10% payments made by the assessee-company for purchases was illegal and accordingly deleted---Order of First Appellate Authority was justified by law and the same was maintained by the Appellate Tribunal.
2003 PTD (Trib.) 1167 rel.
Ibrar Hussain Naqvi for Appellant/Assessee.
Ahmad Kamal, D.R. for Respondent/Department.
Date of hearing: 21st May, 2005.
ORDER
MAZHAR FAROOQ SHIRAZI (ACCOUNTANT MEMBER).--These are six appeals, filed by assessee-appellant as well as Revenue, against the orders of the learned CIT/WT (Appeals-Zone-I), Lahore recorded on 30-9-2004 for the assessment years 2000-2001 to 2002-2003 and order, dated 17-2-2004 in respect of assessment years 1996-97 to 1998-99. The main grounds of appeals as raised by the assessee-appellant against the orders passed by the authorities supra are common one in all the three years under appeal which are summarized as under:
Assessee's Grounds of Appeals for assessment years 2000-2001 to 2002-2003 : --
"That the learned CIT(A) has erred legally and factually in upholding the disallowance of exemption under clause 110 of the Second Schedule to the repealed Income Tax Ordinance, 1979."
On the other hand, the Revenue had raised the following common issue in respect of assessment years, 1996-97 to 2000-2001 under sections 52/86:
"That the learned CIT(A) was not justified to delete tax levied under sections 52/86 in toto without any cogent reasons."
Briefly stated the facts of the case are that the Assessing Officer issued notice to the assessee-appellant for submission of proof of deduction/deposit of tax on payments made under different heads and after lengthy assessment proceedings in a combined assessment order for the assessment years 1996-97 to 1998-99 charged the tax under sections 52/86 of the repealed Ordinance for non-deduction of tax according to the provisions of section 50(4) of the repealed Ordinance:
| A/Y | Tax u/s 52 Rs. | Tax u/s 86 Rs. | Total Rs. |
| 96/97 | Rs.57,854 | 90,252 | 1,48,106 |
| 97-98 | 26,229 | 34,622 | 60,851 |
| 98-99 | 534,324 | 570,070 | 1,111,394 |
During the assessment years 2000-2001 to 2002-2003, the appellant as member of AOP, claimed exemption from tax in respect of share of income received from AOP. The Assessing Officer discussed that tax exemption according to provisions of clause 110 of the Second Schedule to the repealed Ordinance was not available to the company as a member of AOP and the Assessing Officer finally refused to grant exemption from tax on the share income received by the assessee as member of AOP.
On being aggrieved with this treatment, the assessee-appellant, a private limited company, went in appeal proceedings before the learned first appellate authority who vide his order, dated 17-2-2004 for the assessment years 1996-97 to 1998-99, deleted the charge of tax under section 52 of the repealed Ordinance, 1979 on 10% payments made for purchases by following the ratio of judgments reported as (2000) 81 Tax 289 (Trib.), (2001) 83 Tax 227 (Trib.) and (2003) 87 Tax 89 (Trib.). Regarding the matter of disallowance of exemption under clause (110) of the Second Schedule to the repealed Income Tax Ordinance, 1979, the learned CIT(Appeals) vide order, dated 30-9-2004, confirmed the action of the Assessing Officer by not granting exemption to the company in the assessment years 2000-2001 to 2002-2003 by observing the fact that clause (110) of the Second Schedule to the I.T. Ordinance specifically excludes companies from grant of exemption from tax of sum received as a member of AOP and the rationale of legislature for exclusion of company was the rates of tax which were different for the AOP and company. So, the intention of the legislature for exclusion of company from grant of tax exemption in respect of shares received from AOP was quite clear and finally the learned first appellate authority made no interference and confirmed the action of the Assessing Officer accordingly in all the three years under appeal.
We have heard the arguments of both the sides. The learned AR of the assessee-company argued at length on the merits and demerits of taxation of an AOP before us. According to the learned AR in the legal parlance, an association of persons `AOP' means an association in which two or more persons join in a common purpose or common action, the object of which is to derive income, profits or gains. He further argued that an AOP either can be taxed or its members but taxation simultaneously of the AOP and its members is against the spirit of taxation as this would amount to double taxation which is not the intention of the legislature. In support of his contention, the learned AR cited a number of cases of Indian jurisdiction in which it has been held that either an AOP can be taxed or its members. In the present case before us, the learned AR pointed out that the Assessing Officer ignored this basic concept of taxation while taxing both the AOP and its members which was the appellant-company.
The learned DR supported the orders passed by the authorities below.
In the case before us, the appellant-company is a member of association ,of persons which was assessed to tax on an income of Rs.50,00,000. The appellant's share of profit from the AOP amounted to Rs.15,38,000. The appellant claimed before the Assessing Officer that the said share of profit was exempt from tax under clause (110) of Part-II of the Second Schedule to the I.T. Ordinance, 1979. The Assessing Officer however, held that a company was not eligible for an exemption granted by the said clause and charged the said amount of Rs.15,38,000 to tax.
On appeal by the assessee-company, the learned CIT (Appeals) agreed with the Assessing Officer. and rejected the appeal. For the sake of convenience, we are of the view that the relevant clause may be reproduced which reads as under:--
"(110) Any sum which the assessee is entitled to receive out of the income of an association of persons (other than a Hindu undivided family), a company or a firm on which tax has already been paid by the association:
Provided that such sum shall be included in the total income of the assessee for computing the average rate of tax applicable to the total income excluding such sum'."
The place at which these words appear in the clause clearly shows that these words refer to the term "assessee". If the intention of the lawmaker was to qualify the term "assessee", the formulation of the clause would have been as under:--
"(110) Any sum which the assessee is entitled to receive out of the income of an association of persons (other than a Hindu undivided family), a company or a firm on which tax has already been paid by the association:
The formulation as obtaining in the instant case means that the said words relate to the term "association of persons."
In our considered judgment, the object of this clause also supports the case of the appellant:
The words "on which tax has already been paid by the association" appearing in this clause clearly indicate that the sole purpose of this clause is to save the member of the association from double taxation---one in the hands of the AOP and again in the hands of the member. If the interpretation of the revenue is accepted, it defeats the sole purpose of the clause and the company suffers tax twice in respect of the same income. The view of the department is, therefore, not correct.
However, if it is assumed that the impugned words refer to the term "association of persons" one could ask why a HUF, a company and a firm are being excluded. The reason is that the natural person a human being, whom the. Ordinance calls an "individual". All other persons are bodies or associations of individuals. However, certain laws 'recognize certain associations or bodies as separate entities and grant them the status of a person such as a company, an HUF, a firm etc. Now, if a number of individuals join hands to do business, they are called body of individuals and if the combination consists of individuals and other legal entities, they are generally referred to as association of persons. The Income Tax Act, 1922 used both the terms for such groups or combinations. However, under the Income Tax Ordinance, the generic name used for these groups of entities is "association of persons". And it is this generic name by which such groups are referred to in the Ordinance at various places. Sub-clause (b) of clause (40) of section 2, which defines the term "resident" reads as under:--
"(b) a Hindu undivided family, firm or other association of persons, the control and management of whose affairs is situated wholly or partly in Pakistan in that year; or"
The wording of this provision clearly shows that the Ordinance regards an HUF and a firm also as an "association of persons". A company is not mentioned in this sub-clause because it is separately dealt with in the sub-clause (c).
Similar formulation appears in section 27(2)(b)(iv) enumerating the events which do not fall within the definitions of the term "transfer", it specifies:--
(iv) any distribution of capital assets on the dissolution of a firm or other association of persons or the partition of a Hindu undivided family".
In this provision too, the company is not mentioned because; it has been separately dealt within the earlier sub-clause. The HUF has been separately mentioned because an HUF is not "dissolved" but "partitioned". Exactly, the same wording appears in section 29(1)(c). However, the provisions of Rule 14(1) are more illuminating. The said provision defines the word "employer" in the following terms:
(f) "employer" means any person who maintains a provident fund for the benefits of his or its employees, being an individual, a company, a Hindu undivided family, a firm or other association of persons engaged in any business or profession the profits and gains whereof are chargeable to income tax under the head "Income from business or profession";
It is, thus, clear that the Ordinance treats all groups of entities as "association of persons". If in the said clause, an HUF, a firm and a company were not excluded then the share of profits received by a member from these entities would also have been exempted, which was not the intention of the lawmaker.
The plain words of the said clause (110) clearly shows that the words in parenthesis refer to the term "association of persons" and not to the term "member". The maximum that can be said about the view of the Revenue is that their interpretation of the provision is also possible. But then it is an accepted rule of construction that where there are two interpretations of a provision, one that favours the subject shall prevail for that reason also, the view of the Department cannot be supported.
In view of the afore-mentioned facts, in our considered judgment, the appellant's claim for exemption under clause (110) of the Second Schedule to the I.T. Ordinance is justified and the same is allowed for all the three assessment years under appeal.
As regards the imposition of tax under sections 52/86 for all the three assessment years, it was pointed out by the learned AR that these proceedings were time-barred and while the grounds of the Revenue were vague and not specific. We have examined the orders of the authorities below and we are of the view that the order of the learned CIT(A) is in accordance with a number of judgments passed by the Honourable ITAT. For reference (2003) 87 Tax 89 (Trib.) where it has been held that the Assessing Officer cannot go beyond the period of four years for the call for books of accounts. Following the ratio of the above reported case, the learned CIT(A) decided that the orders passed under section 52 of the repealed Ordinance for the assessment years 1996-97 and 1997-98 on 29-6-2002 are hit by limitation and these were accordingly annulled. As far as proceedings under section 52 for assessment years 1998-99 are concerned in which the Assessing Officer charged tax on 10% of payments made towards purchases was described by the first appellate authority as being improper and illegal. This observation on the part of the first appellate authority is also strengthened by a judgment of the Honourable ITAT reported as (2003) 87 Tax 89 (Trib.) in which it was held that the information for holding the assessee as "assessee in default" requires even stronger evidence than for reopening of the case under section 65 in terms of definite information, in view of which action on the part of the Assessing Officer on charging tax on 10% payments made by the assessee-company for purchases was considered as illegal and accordingly deleted.
In our considered judgment, the order of the learned CIT(A) is justified by the law and circumstances of the case and we accordingly maintain it for all the three assessment years under appeal.
Resultantly, the appeals of the assessee-company succeed in toto in respect of assessment years 2000-2001 to 2002-2003 while the appeals of the Revenue fail for the assessment years 1996-97 to 1998-99 for the reasons as dilated supra.
C.M.A.114/Tax (Trib.)Order accordingly.