I.T.A. No. 683/PB of 2004, decided on 12th September, 2005. VS I.T.A. No. 683/PB of 2004, decided on 12th September, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2095 (2005)

Income Tax Ordinance (XLIX of 2001)---

----Ss. 153, 165 & 80---C.B.R. Circular C. No.1(17)WTH-91-Pt. dated 2-11-2002---Payments for goods and services---Assessee was an Association of Persons, deriving income from construction and sale of shops/flats---Levy of tax and additional tax on the ground that assessee being an Association of Persons came under the definition of "prescribed person" under S.80 of the Income Tax Ordinance, 2001 due to which it was required to have deducted tax under S.153(9) of the Income Tax Ordinance, 2001 but had failed to deduct such tax---Assessee contended that it was an Association of Persons but not constituted by or under the law. as it was not resultant of any legal enactment or statute, hence was not liable to deduct advance tax at the time of payment to the contractors---Validity---Prescribed persons who had liability to deduct tax were Federal government companies, including modarabas, trust, cooperative or finance and other societies which were assigned as status of Association of Persons through the judicial fora foreign contracts or consultancy and consortium or joint ventures registered as well as unregistered firms and such other Association of Persons as were constituted by or under the law---Association of Persons as were not constituted under any specific enactment would not be obliged to deduct advance tax under S.153(9) of the Income Tax Ordinance, 2001---Only those Associations of Persons which were directly created by or under law came under the ambit of S.153 of the Income Tax Ordinance, 2001---In the case of present asessee formation of Association of Persons was not result of any legal elictment---Assessee did not fall under the definition of body constituted by or under the law, thus was not liable to deduction of advance tax.

1993 SCMR 1232 =1993 PTD 766; 2000- PTD 3388; 2003 PTD 1264; 1992 SCMR 250 = 1992 PTD 1; 2002 PTD 63; Oxford English

Dictionary Second Edition at page 308 and New Lexicon Webster Dictionary, p.369 rel.

Zahidur Rehman, I.T.P. for Appellant.

Yousaf Ghaffar, D.R. for Respondent.

ORDER

JAVED IQBAL (JUDICIAL MEMBER).---This assessee's appeal is directed against the impugned order arising out of Appeal No.1836, dated 19-2-2004.

2. Brief relevant facts of the case are that appellant is an AOP, deriving income from construction and sale of shops/flats in compact building known as Deans Plaza under the name and style of Messrs Shahad Gul and Brothers. For the assessment year 2002-2003 and for tax year 2003 Taxation Officer, Circle-3, Peshawar initiated proceedings under section 165 of Income Tax Ordinance, 2001 hereinafter called (2001 Ordinance) wherein annual statements for those years were asked to file by the assessee, in response it was submitted on behalf of appellant that they were not required to deduct the tax under section 153, hence were not required to deduct the tax under section 153 of 2001, Ordinance. Therefore, they are not required to submit the statements under the aforementioned section. For assessment year 2002-2003 proceedings were dropped on accepted the plea of appellant that since the Income Tax Ordinance, 2001 has become effective from 1st day of July, 2002, while for tax year, 2003 tax and additional tax was levied. Feeling aggrieved with the assessment order, assessee approached the first appellate authority, who vide appellate order No.1836, dated 19-10-2004, rejected the appeal of assessee by referring the section 80 of 2001 Ordinance and denying the contention of the learned A.R. of the assessee regarding Circular C. No. 1(17) WTH-91-Pt. dated 2-11-2002. Learned CIT(A) while deciding the appeal has also quoted the judgment of Hon'ble Supreme Court in a case reported as (1993) 68 Taxation 86 (S.C.) aggrieved with the order of first appellate authority. Through this further appeal assessee has assailed the impugned finding by raising the following objections:--

(a) That conclusion and confirmation by L/CIT (A) on the basis definition of "person" as given in section 80 of 2001 Ordinance. is illegal.

(b) That non-observance of the C.B.R. Circular by the Taxo ..lion Officer which according to section `ff6' 206(2) was bindimnal.ng on the Assessing Officer and the L/CIT(A) confirming on thi,ing1-s Point is against the judgment of Apex Courts.

(c) That circulars relied upon by assessee have not been commented upon by the learned CIT(A).

(d) That reliance of learned CIT(A) on. a judgment of apex Court was based on the provision of repealed Ordinance whereas the case under appeal was under the provision of 2001 Ordinance, while the provision of both Ordinances are at variance.

(e) That unlike the repealed Ordinance, in 2001 Ordinance the legislature has given power to Court to issue circular setting out interpretation of the Ordinance.

(f) That order has been passed on Messrs Deans Trade Centre, whereas there is no such entity in existence, therefore, orders of both the authorities are against law.

(g) That orders have been passed for assessment year 2003-2004, whereas in the law there is no such assessment year, therefore, the orders of learned CIT(A) as well as Assessing Officer are not maintainable in law.

The L/AR of assessee reiterated his contentions as per grounds of appeal, while the same arguments as were submitted before the 1st appellate authority which have been incorporated in the impugned order, while on the other hand learned D.R. supported the impugned order and read out the following portion of impugned order:

In compliance to call notice Mr. Zahidur Rehman, ITP/AR attended. He was heard and assessment record examined. Written comments were also filed on 6-10-2004 wherein the learned A. R. of the appellant pleaded that his client is an AOP to which the provisions of section 153 of the Income Tax Ordinance, 2001 are not applicable by virtue of C.B.R. Circular No.l(17)WHT-91.Pt, dated 29-8-2002. When questioned the legal position of this Circular learned A.R. of the appellant pleaded that the application of provisions of section 153 is only, not extended to the ordinary AOP but even to the AOP registered under the Partnership Act. Claim was also made that according to section 206(2) of the Income Tax Ordinance, 2001 the C.B.R. Circulars are binding on the Assessing Officers and since the Taxation Officer has not followed the C.B.R. Circular, therefore, the order under consideration is not maintainable in law hence ought to be annulled. A copy of these written comments of the learned A.R. of the appellant was forwarded to the Assessing Officer (presently posted as Taxation Officer, Companies Circle-12, Peshawar) who vide his letter No.244, dated 16-10-2004 pleaded that an AOP comes under the definition of prescribed person under section 80 due to which appellant was required to have deducted tax under section 153(9) but has failed to deduct such tax by placing wrong reliance on C.B.R. Circular, dated 29-8-2002. The Taxation Officer further claimed that appellant's contention that most of the contractors/ suppliers filed their returns in Income Tax Department or were exempt from tax the same was accepted to the extent of furnishing of documentary evidence and a rectification order, dated 30-6-2004 was passed under section 221(1) on the basis of assessee's application for rectification due to which the tax demand was reduced to RS.56,68,599. These contentions raised by the Taxation Officer were brought to the notice of the learned A.R. of the appellant. In response in his counter written comments filed on 19-10-2004 reliance was again placed on C.B.R. Circular C. No. 1(17)WTH-91-Pt, dated 29-8-2004 and C. No.1(17) WTH-91-PT, dated 2-11-2002 and pleaded that since the provisions of section 153 are not applicable in the case of an AOP due to which the Assessing Officer was not justified to pass default order under sections 161/205 with creation of demand to the extent of Rs.78,17,998.

As against appellant's reliance on C.B.R. above referred circulars, definition of the person given in section 80 states that the following shall be treated as persons for the purposes of this Ordinance, namely;

(a) Individual.

(b) Company or association of persons incorporated, formed, organized or established in Pakistan or elsewhere.

(c)The Federal Government, a foreign Government, a political sub-division of a foreign Government or public international organization.

When questioned that in presence of the AOP included in the definition of person as stated above what is the legal position of C.B.R. Circulars referred to above. In response the learned A.R. of the appellant repeated his arguments that such circulars issued by C.B.R. under section 206 of the Income Tax Ordinance, 2001 are binding on the C.B.R. other than Commissioner Appeals nor on a taxpayer. However, he was not able to quote any parallel case wherein in similar circumstances, tax has not been withheld under section 153 of the Income Tax Ordinance, 2001 read with section 50(4) of the Income Tax Ordinance, 1979 (Repealed).

After giving due consideration to the facts of the case as stated above and placing reliance on case law reported as 1993 SCMR 1232 = 1993 PTD 766 I find myself not justified to agree with the claim of non-applicability of provisions of section 153 of the Income Tax Ordinance, 2001 in this case as in fact the C.B.R. has administrative control over its functionaries discharging their junctions under this Ordinance but the C.B.R. does not figure in the hierarchy of the forums provided for adjudication on tax leviable on an assessee under Income Tax Ordinance, 2001 cannot be treated as an order by a forum competent to adjudicate upon such an issue judicially or quasi judicially. Moreover, the instructions and directions of the C.B.R., are binding on its functionaries discharging their functions so long as they are confined to the administrative matters while the interpretation of any provisions of the Ordinance can be rendered judicially by the hierarchy of the forums provided for under the provisions of the Income Tax Ordinance, 2001 itself. Since the status of the appellant, being an AOP, is included in the definition of person under section 80 of the Income Tax Ordinance, 2001, the appellant was, therefore, liable to deduct/withheld tax under section 153 of the Income Tax Ordinance, 2001 but has failed to do so hence the default of non-collection of tax under section 153 of the Income Tax Ordinance, 2001 is established due to which this appeal failed and thus the impugned default order passed under sections 161/205 for the tax year 2003 is hereby confirmed."

We have heard the arguments of the rival parties and have perused the orders of the officers below and have also taken into account the relevant provision of law. The L/AR of assessee argued the case on the same footing as it was argued before the 1st appellate authority, the arguments have been incorporated in the impugned order. The emphasis of the L/AR arguments is that assessee is an AOP but not constituted by or under the law as it is not the resultant of any legal enactment or statute, hence not liable to deduct advance tax at the time of payment to the contractors. To explain his view he read out the section 153 and also relied the circulars and clarification of C.B.R. Regarding the binding force of C.B.R. Circular, the learned AR of the assessee relied upon the reported judgments, reported as 2000 PTD 3388 and 2003 PTD 1264 and contended that the C.B.R. Circulars referred by him are in consonance with the interpretation made by Hon'ble upper Courts. To this context he also referred section 206 of 2001 Ordinance by contending that section 206 empowered the C.B.R. to issue interpretation of the Ordinance through circulars. While making comments on the Judgment of Hon'ble Supreme Court as recorded in the impugned order by learned CIT(A), the learned A.R. of the assessee contended that the issue then before the Hon'ble Supreme Court of Pakistan was regarding the matter under the provisions of the repealed Income Tax Ordinance, 1979 whereas in the present case the matter is regarding the provision of Income Tax Ordinance, 2001 which is different from the provision of repealed Income Tax Ordinance. He also referred the judgments of Hon'ble Supreme Court reported as 1992 SCMR 250 = 1992 PTD 1 and 2002 PTD 63 of Hon'ble Peshawar High Court.

Learned A.R. of the assessee further argued the meaning of the phrase "constituted by or under law" used in clause (c) of subsection (9) of section 153 of the Income Tax Ordinance, 2001. To this context he argued that as per Oxford English Dictionary Second Edition at page 308 the word constituted means set up:

(1) be the component or essence of

(2) formerly established

(3) give legal or constitutional form to, established by law.

As per new lexicon Webster dictionary, page 369 the word form has been defined, to make shape, to put together to form a sentence, to mould, to develop, to receive, to organize into or become arrange as to constitute. Thus the words; "constitute" or "formed" both have the same meaning and are interchangeable. Therefore the phrase "constituted by law" can be safely changed for the "phrase formed by law", while "constituted by law" or "formed by law" means directly created by law or enactment, and not formed by the individual and then incorporated or registered under the law. According to section 153 it has made obligatory that at time of payment of goods supplied or on account of services or on execution of contracts certain prescribed persons are held liable to make the deduction of tax, which also include the AOP but constituted deduction of tax, which also include the AOP but constituted under the law, whereas in the present case main contention on behalf of assessee is that the AOP is not constituted by or under the law, therefore was not liable to deduct the advance tax and the Assessing Officer has wrongly treated him as defaulter of section 153 (9), which for useful purpose is reproduced as under:--

Section 153 of 2001 Ordinance.

Payments for goods and services.---(1) Every prescribed person making a payment in full or part including a payment by way of advance to a resident person or permanent establishment in Pakistan of a non-resident person:

(a)?..?

(b)?..

(2)?.. ?

(3)?..

(4)?..

(5)?..

(6)?..

(7)?..

(8)?..?

(9) In this section

"Prescribed person" means

(a) the Federal Government,

(b) a company,

(c) an association of persons (constituted by, or under), law,

(d) a foreign contractor or consultant, or

(e) a consortium or joint venture;"

To clarify the status of the AOP falling under the purview of section 153(9) of 2001 Ordinance to deduct withholding tax, C.B.R. has issued following notification:

C.No.1(17)WHT/91-Pt

Government of Pakistan Revenue Division

Islamabad, the 29th August, 2002

All the Regional Commissioners of Income Tax.

Subject: ?????????? Status of an AOP with respects to withholding of tax under section153 of the Income Tax Ordinance, 2001 --Clarification regarding.

I am directed to say that queries have been received in the Board about the status of an AOP with respect to withholding of tax under section 153 of the Income Tax Ordinance, 2001. The issue has been examined in the light of provisions of subsection (9) of section 153 of the Income Tax Ordinance, 2001.

(2) It is clarified that an ordinary AOP:-

(l) I am directed to say that queries have been received in the Board about the status of AOP with respect of withholding of tax under section 153 of the Income Tax Ordinance, 2001. The issue has been examined in the light of provision of subsection (9) of section 153 of 2001 Ordinance.

(2) It is clarified that an ordinary AOP, which is created by an agreement, does not fall within definition of (prescribed person) given in subsection (9) of section 153 of Income Tax Ordinance, 2001. Only those AOPs which are created by, or under the law, which would be a very few liable to be deducted tax as withholding agent under section 153 of the said Ordinance. Only those AOPs which are created by, or under the law, which would be a very few, are liable to deduct tax as withholding agents under section 153 of the said Ordinance.

Government of Pakistan

Revenue Division

Central Board of Revenue

C. No. 1(17)WHT/91-Pt.??????????????????????????????????????????? Islamabad, November, 2, 2002.

Mr. Abdul Qadir Memon

President,

The Income Tax Bar Association Karachi, Bar Chamber Ground Floor,

Income Tax Building,

Shahrah-e-Kamal Ataturk,

Karachi-4200.

SUBJECT: WITHHOLDING OF TAX BY "ASSOCIATION OF PERSONS" UNDER SECTION 153 OF THE INCOME TAX ORDINANCE, 2001.

I am directed to refer to your letter, dated 4-10-2002 on the above subject and to say that, in continuation of Board's earlier clarification vide letter of even number, dated 29-8-2002, it is further clarified that a partnership of individuals constituted through an instrument of partnership deed and registered with the Registrar of Firms under the Partnership Act, 1932 does not fall within the meaning of the "Prescribed Persons" as given in subsection (9) of Income Tax Ordinance.

(Sd.)

(Abdul Ghani Chaudhry)

Secretary (Withholding Taxes)

The honourable higher Courts of Lahore and Karachi on the issue of "constituted by or under the law" have given their finding, the relevant paras of which are reproduced 2000 PTD 3388 in this reported judgment of honourable Lahore High Court at para 18 it has been held that:

As mentioned earlier, it is not disputed by the L/counsel ofappellant that all those bodies which have been created directly by an enactment with a corporate status are the bodies "formed by the law" and covered under section 2(16)(b).

However, his discard is on the point that even if a body has been constituted by the individual, through a private instrument of treaty, under the relevant law, would make it a body formed under such law. To our mind this plea is not well-founded. Where a corporate body is directly constituted having its origin in a statute, without any reference or the role of private individual, it is only such body, which is formed by or under the law. These two words are synonymous. The expression law in force for the time being also relates to a particular institute through which a body is directly established and to no other law. The intention of legislature is to embed on the such corporate bodies into definition of a company, which are directly established, constituted and created by the relevant statute itself. However, where the body has been formed by private individuals and subsequently registered under the relevant law, it would not be a body formed under the law, rather would be a body formed otherwise but registered under the law.

The honourable Sindh High Court in its judgment reported as 2003 PTD 1264 on an identical issue, relying on judgment of Lahore High Court held as under:--

"Learned counsel for the appellant's contention was that because the respondent are registered under the Societies Registration Act, as such would be company as defined under section 2 (16)(b) of the Ordinance. If the provision of sub-clause (b) is interpreted as suggested to Mr. Javed Farooqui then the clause (a) would be redundant and no redundancy can be attributed to the Legislature, we are of the view that sub-clause (a) covers the Companies registered under the Companies Ordinance, 1984, whereas, clause (b) orders the other institutions i.e. Corporation incorporated by or under an enactment, such as, (1) National Bank of Pakistan, (2) Pakistan Insurance Corporation, (3) Industrial Development Bank of Pakistan, (4) Agricultural Development Bank of Pakistan, (5) Pakistan International Airlines. These are the statutory corporate bodies, which are covered by section 2(16)(b). The similar question was addressed by a Bench of Lahore High Court and conclusion drawn was that the term `by' or `under' are synonymous and interchangeable terms.??????

The expression law in force for the time being also relates to a particular statute through which a body is directly established and to no other law. The intention of the Legislature is to embed only such corporate bodies into the definition of company, which are directly established, constituted, and created by the relevant statute itself. However, where the body has been formed by private individual and subsequently, registered under the relevant law, it would not be a body formed under the law, rather would be a body formed otherwise, but registered under the law."

Regarding binding force of circular of C.B.R. the L/R of the assessee relied upon the case-law reported as 2002 PTD 63 in which it has been held as under:--

"We feel it appropriate here to mention that circulars are issued by C.B.R. exercising the powers under section 165 of the Ordinance and the instructions contained in the circulars and notifications are under section 8 of the Ordinance binding upon the officers and persons employed in execution of Income Tax Ordinance. Section 8 of the Ordinance is reproduced hereunder for convenience.

All officers to follow the orders of the C.B.R. All officers and persons, employed in the execution of this Ordinance, shall observe and follow the orders, instructions and directions of the C.B.R. Provided that no such orders, instructions or directions shall be given so as to interfere with the discretion of the Appellate Additional Commissioner in the exercise of his appellant functions or any value in the exercise of his functions under this Ordinance.

The plain reading of the above mentioned section of law would show that all the officers and persons who have been employed in the execution of Income Tax Ordinance are bound to follow the orders and instructions issued from time to time by the C.B.R. in shape of circulars and notifications. If any case law in support of this contention is required, reliance can be placed on Messrs Julian Hoshang Dinshaw Trust and others v. Income Tax Officers, Circle XVIII, South Zone, 1992 SCMR 250 = 1992 PTD 1.

"After hearing the learned counsel for the parties we are unable to agree with the High Court. It is not disputed that Circular No.8 issued by the Central Board of Revenue was in force at the relevant time. Under section 5(8) of the Income Tax Act, 1922, and section 8 of the Income Tax Ordinance, 1979, the orders, instructions and direction of the C.B.R. are binding on all the officers entrusted with the execution of the Statute. In the circular a reference has also been made to the Commissioner of Income Tax, Punjab and N.W.F.P. and Bahawalpur v. Mrs. E.V. Miller (1959) 1 Tax 1 (S.C. Pak.) = (PLD 1959 SC (Pak) 219) in which this Court, 'while construing section 4(3)(viii) of the Act, laid down broad principle that agricultural income not chargeable to tax in the hands of a company, is not divested of its character as agricultural income when transferred to the shareholder in the agricultural shape of dividends. However, under the circular, the application of this rule to the distribution of capital gains by a company to its shareholders, on the sale of immovable property, has been excluded, and such receipt in the hands of the receiver from the company has been declared as taxable."

"In addition to above mentioned principles of interpretation it is also now established principle of law that if a circular is of benevolent nature, the same would go in the assistance of the assessee."

The words used in clause (c) of subsection (9) of section 153 of Income Tax Ordinance, 2001 describe the deduction of withholding tax from prescribed persons, who make payments for the sale of goods, for rendering of services, or on execution of contracts to deduct tax from the gross amount of payment actually made to resident persons or permanent establishment of any non-resident persons. The prescribed persons who have liability to deduct tax are Federal Govt., companies, including modarabas, trust, cooperative or finance and other societies which previously were assigned as status of AOP through the judicial fora, foreign contracts or consultancy and consortium or joint ventures registered as well as unregistered firms and such other AOPs as are constituted by or under the law. However, the AOP's as are not constituted under any specific enactment would not be obliged to deduct advance tax under the provision of section 153(9). C.B.R. vide its clarifications and notifications already reproduced supra have clarified the matter. The L/CIT(A) in the light of judgment of apex Court of the country in a case reported as 1993 SCMR 1232 = 1993 PTD 766 has held that C.B.R. has no authority to interpret the law. To this regard the honourable Peshawar High Court and the apex Court of the country in the case law the relevant portion which have already been reproduced supra have held that while interpreting the fiscal law, the clarification or notification issued by the C.B.R. beneficial to subject, same would go to favour assessee. Even otherwise in the light of judgments of Hon'ble Lahore High Court and of Sindh High Court it could easily be inferred that only those AOPs which are directly created by or under law comes under the ambit of section 153 of 2001, Ordinance. While in the case of appellant the formation of AOP is not result of any legal enactment. Therefore, the appellant does not fall under the definition of body constituted by or under the law, as contained in section 153(9)(c) of 2001 Ordinance and thus are not liable to deduct the advance tax. In a nutshell, appeal on behalf of assessee succeeds.

C.M.A./70/Tax(Trib.)?????????????????????????????????????????????????????????????????????????? Appeal accepted.