I.T.As. Nos. 357/LB to 360/LB of 2003, decided on 9th August, 2006. VS I.T.As. Nos. 357/LB to 360/LB of 2003, decided on 9th August, 2006., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2869 (2006)

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

----Ss. 52, 50(7D), 50(8), 2(32), 9, 151, Second Sched., Part-I, Cls. (115-A), (79A) & (79B)---Sales of Goods Act (III of 1930), S.2(7)---Pakistan Water and Power Development Act (XXXI of 1958)---Liability of persons failing to deduct or pay tax---Exemptions---Institutions of WAPDA like WAPDA Pension Fund, WAPDA G.P. Fund, WAPDA Welfare Fund, which were not trusts or otherwise independent legal entities, acquired the bonds directly from the Directorate of Bonds and interests thereon was credited to their account without deduction of tax---Assessing Officer found the appellant as assessee in default for not deducting tax on profits paid to WAPDA formations and employees---Validity---If one branch of the assessee earns a profit of an amount in its books, an equal amount was shown as expense by the Directorate of Bonds---Sum of both the entries was zero---Assessee, being the owner of the income and loss of the transactions, earns no income---No charge of tax was created under the charging section---Deduction of tax was mode of recovery to satisfy the charge created by law and there being no charge of tax on the internal transaction of the same person, question of deduction of tax would not arise---Assessee, in the present case, owned income or loss of all the transactions and payees were acting on behalf of the assessee having no claim on the profit of the transactions, there being no charge on the inter-departmental transactions-of the assessee, payer and payee being the same person, question of default would not arise---Assessing Officer acted illegally in holding the appellant as assessee in default for not deducting tax on profit paid in books to its own formations---Payees were employees of WAPDA and the Assessing Officer did not establish that the payees received any amount as income which was owned by them in their personal capacity, in case, they were not chargeable to tax in respect of the payments in question, question of adjustment or tax in terms of S.50(8) of the Income Tax Ordinance, 1979 would not arise---Such a situation is contradiction in terms---Payees were not assessable in respect of the profit on bonds still tax was deducted on the payment of such profit was adjustable in their cases under the law---Payee's identification for credit in terms of S.50(8) of the Income Tax Ordinance, 1979 should be made to establish default---Assessee itself being the payer and the payee, was not liable to deduct tax on the inter-departmental payments in its own offices---Order of the Assessing Officer was annulled by the Appellate Tribunal.

PLD 1985 SC 109; 1972 (83) ITR 211 particularly at page 214; Haji Ibrahim Ishaq Johri v. The Commissioner of Income Tax 1993 SCMR 287; Patiala State Bank's Case AIR 1941 Born. 94; (1990) 62 Tax 74 (SC Pak); Union Bank Ltd. v. The Federation of Pakistan 1998 PTD 2116; Board of Intermediate and Secondary Education v. Central Board of Revenue and others 1998 PTD 2012 and PLD 1990 SC 399 ref.

(2004) 89 Tax 430 (Trib.); 2003 PTD (Trib.) 2689 and 2003 PTD (Trib.) 405 rel.

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

----S.52---Liability of persons failing to deduct or pay tax---Assessee in default---Burden of proof--Before holding a person as defaulter, revenue was required to discharge the initial burden to show that such person was required under the law to deduct tax from the payments made to the payees.?

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

----Second Sched., Part-I---Exemption presuppose charge---If there was no charge of tax, question of exemption would not arise---Question of extension of exemption from original recipient to subsequent recipients would not arise.?

Messrs Julian Hoshang Dinshaw Trust and others v. ITO 1992 SCMR 250 rel.

Mian Ashiq Hussain for Appellant.

Ghazanfar Hussain, D.R. for Respondent.

ORDER

The appellant, in these four appeals, has pressed common grounds of appeal to question the action of CIT(A) in setting aside the impugned consolidated order under section 52 of the repealed Income Tax Ordinance, 1979 instead of annulling the same. The appellant-WAPDA, a statutory corporation created under the Pakistan Water and Power Development Act, 1958, issued bonds to raise funds. The profit payable on the bonds issued prior to 1-7-1991 was exempt from Income Tax under Clauses (79A) and (79B) of Part-I of the Second Schedule to the repealed Ordinance. The 4th to 7th issues of these bonds were floated after that date and the profit thereon was liable to tax. The appellant sold the bonds through a number of authorized banks. The bank branches deducted Income Tax @ 10% of the profit paid on the bonds as required under section 50(7D) of the repealed Ordinance. Some bonds were sold directly by the appellant to some Government Sectors Corporations etc. Tax was deducted by the appellant from the profit paid to them and deposited in the Government Exchequer. Some of the WAPDA formations themselves acquired the bonds. The book profit paid on these bonds to WAPDA's own formations was not subjected to deduction of tax. 'The AR submitted that funds received from Government or other International Institutions for various projects were allocated by WAPDA to the relevant formations. Where these funds or any part thereof was not immediately required by these formations, they deposited such funds in the WAPDA's Directorate (bonds) instead of depositing them in banks bearing much less profit rates. Likewise there are institutions of WAPDA like WAPDA Pension Fund, WAPDA G.P. Fund, WAPDA Welfare Fund which are not trusts or otherwise independent legal entities who have funds available with them. 'They acquired the bonds directly from the Directorate of bonds and interest thereon is credited to their account without deduction of tax. The Assessing Officer, however, held the appellant as assessee in default for not deducting tax on profits paid to WAPDA formations and employees. The First Appellate Authority set aside the impugned orders for making the order afresh.

At the very outset, the AR of the appellant stated that he did not press the grounds regarding territorial jurisdiction. The controversy boils down to the point whether appellant could be held as assessee in default for not deducting tax under section 50(7D) of the repealed Ordinance on the profit paid to its own departments and employees carrying on activities on behalf of the appellant itself. The AR submitted that inter-departmental transactions, even if termed as sales or purchases for accounting purposes were not subject to Income Tax in terms of section 9 of the repealed Ordinance nor inter-departmental payments were subject to withholding tax in terms of section 50 thereof. It was explained if in a business, transactions are made between various branches of an assessee who charge profit from one another such profit is not treated as income of the branches under the Income Tax Law notwithstanding such transactions may be treated as sales and purchases resulting into profit under the accounting principles. He relied upon the judgment of the Honourable Supreme Court of Pakistan cited as PLD 1985 Supreme Court 109 to highlight that substance of a transaction has to be determined according to relevant provisions of law irrespective of its treatment in the accounts. In the words of Honourable Supreme Court, "in Revenue cases one must look at the substance of the thing and not at the manner in which the account is stated".

The AR further explained that under section 2(7) of the Sales of Goods Act, 1930, bonds constitute goods. Under the said Act, the transaction of sales requires a seller and a buyer. There can be no sale if the buyer is the same person. Thus where a formation of WAPDA acquires the bonds issued by WAPDA, it does not constitute a sale. Reliance was placed on the judgment of honourable Supreme Court of India cited as 1972 (83) ITR 211 particularly at page 214 it was held "No one can sell his goods to himself. A sale contemplates a seller and a purchaser. If a person revalues his goods and shows a higher value for them in his books, he cannot be considered as having sold these goods and make profit therefrom." Reference was invited to section 9 of the repealed Ordinance to point out that the charge of Income Tax is on the income owned by a person. Reliance was placed on the judgment of honourable Supreme Court of Pakistan cited as 1993 SCMR 287 the case of Haji Ibrahim Ishaq Johri v. The Commissioner of Income Tax in the case of Patiala State Bank (AIR 1941 Bombay 94) reproduced below:--

??????????? "I think that, properly considered, Income Tax is a tax on a person in relation to ??????????? his income. The tax is not imposed on income generally; it is imposed on the ???????? income of a person, natural or artificial, as defined in section 3. The assessment ????? has to be made against a person, and the tax has to be collected from the assessee. ?????? The tax is not made a charge on the income, upon which it is levied, and I think, ????? broadly speaking, it is accurate to say that Income Tax is a tax imposed upon a ????? person in relation to his income".

It was explained that inter-departmental transactions did not result into any income in the hands of WAPDA. Debit and credit entries made by the Directorate of Bonds and other departments resulted into nil income in the hands of the appellant; attracting no charge of Income Tax as book profit of one department was the expense of the other department cancelling the effect of the respective entries in the hands of the appellant. As the payments were not covered under the charging sections, assessment and recovery sections were not applicable to such transactions. Thus, these book transactions were not payments in terms of section 50(7D) of the repealed Ordinance. Hence, tax was not deductible thereon. The AR pointed out that section 50(8) expressly laid down that tax deducted was to be treated as payment of tax on behalf of the assessee (the payee). The payees, being employees of the appellant, did not own any income from the transactions in question, hence question of payment of tax by them did not arise. It was pointed out that these employees had never been assessed to tax in respect of the alleged profit arising from the transactions in question nor they could be assessed to tax being out of the purview of section 9 of the repealed Ordinance. Thus deduction of tax would result into an absurd position as the tax deducted from the appellant would be refundable to it involving no revenue gain but resulting into immense cost and inconvenience to the appellant for which there is no legal sanction. Reliance was also placed on the judgment of the honourable Supreme Court of Pakistan cited as (1990) 62 Tax. 74 (SC Pak) to support the contention that assessment is only a consequence of the charge of tax and deduction of tax liability of the payee. This aspect of the case was summed up that there being no charge of tax on the inter-branch transactions of the appellant, as payer and payee both act on its behalf, the impugned order under section 52 was misconceived and liable to be annulled. The above legal position being admitted. The learned CIT(A) should have annulled the impugned order instead of opening another round of cumbersome illegal proceedings.

Highlighting another aspect of the case, the AR pointed out that WAPDA's income was exempt from tax under clause 115-A of the Second Schedule to the repealed Ordinance, hence the income of the appellant was out of the purview of withholding provisions of the Ordinance. Reliance was placed on the judgment of the honourable Lahore High Court cited as 1998 PTD 2116 (Lahore High Court) in the case of Union Bank Ltd. v. The Federation of Pakistan to explain that an amount which was not chargeable to tax under the Ordinance was not subject to advance/withholding tax. Reliance was also placed on another judgment of the Honourable Lahore High Court cited as 1998 PTD 2012 (Lahore High Court) in the case of Board of Intermediate and Secondary Education v. Central Board of Revenue and others to explain that if a person is exempted from payment of Income Tax, it is not liable to tax withholding provisions as the precondition of the provision of section 50 was that one was liable to pay income tax. It was argued that the appellant and its employees, not being liable to pay income tax on the transactions in reference were not liable to deduction tax and default under section 52 of the repealed Ordinance presupposed liability to deduct tax. If a person was not liable to deduct tax, action under section 52 would be wholly unlawful.

The D.R., on the other hand, reiterated the points raised by the Assessing Officer that purchase and sale of legal instruments of WAPDA Bonds presupposed that purchaser was a different entity. Payment by one entity to another entity was fully covered under section 50(7D) of the Ordinance. The DR pointed out that the Assessing. Officer had dealt with the issue of exemption under clause 115-A of the Second Schedule and it was concluded that under section 151 of the said Ordinance exemption was limited to the original recipients of the income and such exemption did not extend to the subsequent recipients. The WAPDA formation, not being original recipients, were not covered under the aforesaid exemption clause.

To meet with the contentions of the DR, the AR submitted that the arguments. were based on presumption that the appellant and its employees/subordinate departments simultaneously owned the profit on the bonds in their personal capacities. The admitted fact is that the employees and subordinate departments acted on behalf of the appellant and profit or loss in the transactions was owned by the appellant. The presumption is, therefore, not sustainable as the status of the employees/subordinate departments has to be determined in terms of section 2(32) read with section 9 of the repealed Ordinance. The definition of entity has to be seen with reference to ownership of income and loss in terms of the charging section. The AR further argued that according to settled law onus was on the revenue to establish that the payees were independent person in terms of section 2(32) and owned income in terms of section 9 of the repealed Ordinance. Reliance was placed on judgment of Honourable Supreme Court of Pakistan cited as PLD 1990 SC 399 (418) "in all cases, in which a receipt sought to be taxed as income, the burden is on the Revenue to prove that it is within the taxing provisions".

We have heard the rival arguments and we are inclined to agree with the A.R. Before holding a person as assessing default, revenue is required to discharge the initial burden to show that such person was required under the law to deduct tax from the payments made to the payees. In the present case, the payer and the payee may be treated as separate entities in the account books but in the eyes of law it is the same person---WAPDA. Payees being employees of WAPDA act on its behalf and every receipt or payment is made on behalf of the appellant. Thus, if one branch of the appellant earns a profit of an amount in its books, an equal amount is shown as expense by the Directorate of Bonds. Sum of both the entries is zero. As a result of both the transactions, the appellant, being the owner of the income and loss of the transactions, earn no income. Hence no charge of tax is created under the charging section. Deduction of tax is a mode of recovery to satisfy the charge created by law. There being no charge of tax on the internal transaction of the same person, question of deduction of tax would not arise. The Assessing Officer's reference to section 151 of the repealed Ordinance would be relevant only in case payees were earning profit in their personal capacities. In the present case, it was the appellant which owned income or loss of all the transactions and payees were acting on behalf of the appellant having no claim on the profit of the transactions. The question of extension of exemption from original recipient to subsequent recipients would not -arise. The Honourable Supreme Court of Pakistan held in the case of Messrs Julian Hoshang Dinshaw Trust and others v. I.T.O. cited as 1992 SCMR 250 that exemption presuppose charge. If there is no charge of tax, question of exemption would not arise. There being no charge on the inter-departmental transactions of the appellant, payer and payee being the same person, question of default would not arise. The Assessing Officer acted illegally in holding the appellant as assessee in default for not deducting tax on profit paid in books to its own formations. It is the admitted position that payees were employees of WAPDA and the Assessing Officer did not establish that the payees received any amount as income which was owned by them in their personal capacity. In case, they were not chargeable to tax in respect of the payments in question, question of adjustment of tax in terms of section 50(8) of the repealed Ordinance would not arise. Such a situation is contradiction in terms the payees are not assessable in respect of the profit on bonds still tax deducted on the payment of such profit is adjustable in their cases under the law. For the similar reasons this Tribunal has held in a number, of judgments that payee's identification for credit in terms of section 50(8) should be made to establishment default. Reference may be made to the following judgments.

??????????? (i) (2004) 89 Tax 430 (Trib.); (ii) 2003 PTD (Trib.) 2689 and (iii) 2003 PTD ? (Trib.) 405

In the present case, the appellant itself being the payer and the payee was not liable to deduct tax on the inter-departmental payments in its own offices. The impugned consolidated order, subject of the appeals is, therefore, unsustainable and it is annulled.

The appeals succeed.

C.M.A./188/Tax (Trib.)??????????????????????????????????????????????????????????????????????? Appeals accepted.