I.T.As. Nos. 5263/LB to 5265/LB of 2004 and 5986/LB, 7231/LB of 2005, decided on 3rd March, 2007. VS I.T.As. Nos. 5263/LB to 5265/LB of 2004 and 5986/LB, 7231/LB of 2005, decided on 3rd March, 2007., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1959 (2007)

(a) Income Tax Ordinance (XLIX of 2001)---

----S. 122(5)---Amendment of assessment---Definite information---Contention was that order passed under S.122(5) of the Income Tax Ordinance, 2001 could not sustain being passed by the Taxation Officer without having. in his possession the definite information---Validity---No definite information had been mentioned in the order passed under S.122---If the order had been passed under S.122(5) of the Income Tax Ordinance, 2001 there must be definite information mentioned in the order specifically---Nothing appeared in the order under S.122 of the Income Tax Ordinance, 2001 that the already completed assessments were erroneous in as much as those were prejudicial to the interest of revenue---No justification existed for amending the order under S.122 of the Income Tax Ordinance, 2001 in circumstances---Order of the First Appellate Authority was vacated and order passed by the Taxation Officer under S.122 of the Income Tax Ordinance, 2001 was cancelled and assessments were restored by the Appellate Tribunal accordingly.

I.T.A. No.416/LB of 2000-01 rel.

2005 PTD 1316 ref.

(b) Income Tax Ordinance (XLIX of 2001)---

----S. 122(5)(5A)---Amendment of assessment---Scope of S.122(5) & (5A), Income Tax Ordinance, 2001---No order under S.122 of the Income Tax Ordinance, 2001 could be made without specifically mentioning in the order the subsections mentioned in the section or the ingredients of the subsection as both the subsections (5) & (5A) had the distinct characteristics---Subsection 5(A) could be invoked only by the higher authority to the authority passing the assessment order and the basic ingredient of this section was that the assessment already made was erroneous insofar it was prejudicial to the interest of revenue while the subsection (5) could be invoked by the Taxation Officer passing the assessment order on the basis of definite information acquired from an audit or otherwise regarding the involvement in three deficiencies in the already completed assessment (i) any income chargeable to tax had been escaped assessment; or (ii) total income has been, under-assessed, or assessed at too low a rate, or has been the subject of excessive relies' or refund; or (iii) any amount under a head of income had been miss-classified.

(c) Income Tax Ordinance (XLIX of 2001)---

----S. 122(8)---Amendment of assessment---Definite information---Explanation---Section 122 (8) of the Income Tax Ordinance, 2001, specifically provided that for the purpose of this section, "definite information" includes information on sales or purchases of any goods made by the taxpayer, receipts of the taxpayer from services rendered or any other receipts that may be chargeable to tax under the Income Tax Ordinance, 2001 and on the acquisition, possession or disposal of any money, assets, valuable article or investment made or expenditure incurred by the tax payer.

Asim Zulifqar, ACA for Appellant (in I.T.As. Nos.5263/LB to 5265/LB of 2004).

Javaid Iqbal Rana, DR for Respondent (in I.T.As. Nos.5263/LB to 5265/LB of 2004).

Javaid Iqbal Rana, DR for Appellant (in I.T. As. Nos.5986/LB and 7231/LB of 2005).

Asim Zulifqar, ACA for Respondent (in I.T.As. Nos.5986/LB and 7231/LB of 2005)

ORDER

Out of these five appeals, two have been filed by the department against the two separate impugned orders of the learned CIT(A), dated 25-6-2005 for the assessment year 1999-2000 declaring the order passed under section 221 of the Ordinance, 2001 as null and void end the impugned order, dated 14-9-2005 for the tax year, 2003 vacating the order on the issue of application of tax rate on dividend income. While the remaining three appeals have been filed by the assessee against the consolidated impugned order of the learned CIT(A), dated 30-8-2004 for the assessment years 2000-2001 to 2002-2003 objecting the following common grounds for all the three years:--

"(1) That the appellate order, dated August 30, 2004 issued by the learned CIT(A) under section 132 of the repealed Income Tax Ordinance, 1979 is bad in law and against the facts of the case.

(2) That the learned CIT(A) has. erred in rejecting the appellant's plea challenging the amended assessment order on the grounds that the jurisdiction was assumed under section 122 of the Income Tax Ordinance, 2001 without any prior `definite information.

(3) Without prejudice to ground of appeal No.2, the learned CIT(A) has., erred in upholding the amended assessment order issued by the Taxation Officer under section 122 of the Ordinance through which he applied a tax rate of 14.0265 % as against 8.75 and on the dividend income derived by the appellant company."

Regarding two appeals filed by the department, we have found that the assessee in this case being a non-resident majority shareholders in resident public listed company is deriving inter alia dividend income.

The Taxation Officer for both the years has made amended orders for the two years. I.e. assessment year 1998-99 under section 221 rectifying the previous order while for the tax years; 2003, the order has been amended under section 122(5) of the Ordinance, 2001. The assessee in this case is a Japanese resident company and as such its taxation is governed by Avoidance of Double Taxation between Pakistan and Japan. During the two years the assessee company has received dividend which was offered for tax @ 8.75 % for the assessment year 1998-99 and 3.75 % for the tax year, 2003 being the original rate offered by the Pakistan and Japan double Taxation Treaty. The Taxation Officer while finalizing the original assessment proceedings assessed the aforesaid dividend income 15% against which the assessee filed a rectification application alleging that incorrect rate of tax has been applied and thus requested for application of correct tax rate of 8.75 % as provided for in the Double Tax Treaty but the Taxation (Officer in the rectification order applied tax rate of 14.0625 % by pressing the relevant article of the Double 'Taxation Treaty permitting a reduction of 0.9375% as against 6.25% from the applicable tax rate of 150. The assessee against this treatment of the Taxation Officer has riled appeal before the learned CIT(A) who has declared the treatment meted out by the Taxation Officer to be null and void and has upheld the contention of the assessee placing reliance on the decision of this Tribunal, dated 5-10-2002 in I.T.A. No.416/KB of 2000-2001.

On behalf of the department, the learned DR has contended that the learned CIT(A) has declared the order passed by the Taxation Officer null and void on the basis of the decision of this Tribunal, dated 5-10-2002 but there are other certain judgments which have not been considered. According to the learned DR, therefore, there is no justification for the learned CIT(A) for cancelling of the order made by the Taxation.

We, however, find no warrant for interference in the impugned order as no contradictory order in this respect has been placed before this Bench and the facts and circumstances are similar. Even the wording of the Double Taxation Treaty in this regard are similar therefore, we are of the view that the learned CIT(A) has rightly following the decision of this Tribunal upheld the impugned order of the learned CIT(A). Both the appeals filed by the department for the assessment year 1998-99 and tax year 2003 are, therefore, dismissed.

Regarding the three appeals filed by the assessee, Mr. Asim Zulfiqar, ACA has appealed on behalf of the assessee and has contended that the assessee in this case is anon-resident company incorporated under the Japanes law in Tokyo. Its sources of income in Pakistan are free for technical services, royalties and dividend income received from Messrs Honda Atlas Car (Pak.)' Ltd. The assessments for the years under review were finalized on 23-4-2001 for the assessment year 2000-2001 and on 19-4-2003 for the assessment years 2001-2002 and 2002-2003, but later on the Taxation Officer has re-opened the case on the alleged .reason, that tax rate on dividend income was not applied properly while finalizing the assessments for all these three years in view of the Article VI of "convention between Pakistan and Japan for the avoidance of double taxation and fiscal evasion with respect to taxes on income", and through consolidated order, dated 30-6-2003 the already finalized assessments have been amended through order under section 122 of the Income Tax Ordinance, 2001.

The learned counsel has contended that as the assessments in this case have already been finalized before 1-7-2003, therefore, these cannot be re-opened under subsection (5A) of section 122 of the Ordinance as already been held by the Hon'ble Karachi High Court in a case reported as 2005 PTD 1316, holding that the provisions contained in subsection (5A)of section 122 of the Income Tax Ordinance, 2001 inserted from 1-7-2003 is nit retrospective in operation consequently the assessments .finalized before 1-7-2003 cannot be re-opened/revised/amended in exercise of jurisdiction under the above provisions. The Learned counsel is of the view that if the assessment has been amended under subsection (5) of section 122 then there -must be a `definite information' in the possession of the Taxation Officer regarding escaped assessment, under assessed or assessed at too low a rate or has been the subject of excessive relief or refund or the income has beery mis classified. The learned counsel is of the view that in the present case no definite information has been referred by the Taxation Officer. Whatsoever Information has been mentioned by the Taxation Officer is from the assessment record itself and he has amended the order on the basis of the scrutiny of the assessment order and or whole of the consolidated order, dated 30-6-2004 under section 122 nowhere the Taxation Officer has mentioned that any definite information for the audit or else-where has come in his possession. He is, therefore, of the view that the order even if passed under section 122(5) cannot sustain being passed by the Taxation Officer without having in his possession the definite information. The learned counsel has contended that the Taxation Officer should have to mention in the assessment order a specific provision under which he has passed the order and even in the notices issued in this regard he has not mentioned any specified provision of the section relevant in the matter.

On merits of the case, the learned counsel has contended that the Article VI of the Treaty between Pakistan and Japan specifically provides that where a Japanes corporation or a group of Japanese corporations, being a public company or a group of public companies, as the case may, owns not less than one-third of the voting shares of a Pakistani company engaged in an industrial undertaking, the rate of Pakistan super tax on dividends paid to the Japanese corporation by the Pakistan company shall be reduced by one anna in the rupee (i.e. 6.25 per cent), if the recipient of the dividends has no permanent establishment in Pakistan. He has contended that in the similar manner the Article VI of the Treaty between Pakistan and United States of America provides that "the rate of super tax otherwise payable with respect of dividends paid by such company to such corporation shall be reduced by 1 anna in the rupee". He is, therefore, of the view that as the provisions regarding the rates of tax in both 'the treaties are similar,' therefore, the procedure of calculating the tax as laid down by this Tribunal vide order, dated 5-10-2002 in I.T.A. No.416/KB of 2000-2001 (Assessment year 1999-2000) in the case of M/Smith Kline Beecham Holding Corp., U.S.A. will hold the field. The learned counsel in this regard explaining the position has contended that the treaty was implemented on 4th June, 1959 when the revoked Income Tax Act, 1922 was in the field. Like-wise the dividend was in tax calculated through rupee and anna and in the treaty considering the Income Tax Act, 1922 in the treaty the rate was considered in the annas. He is of the view that without going to the legislative history of the treaty and the Income Tax Ordinance just conclusion cannot be drawn. The learned counsel has contended that the treaty with US is para materia with the above mentioned treaty with the Japan mentioning one anna in the rupee. He has, therefore, contended that there is no justification for applying tax rate of 14.0625 % as against 8.75 % applied by the assessee.

On the other hand, the learned DR is supporting the impugned orders of the officers below and has contended that the matter of rates of tax has already been decided in the case of Messrs Hino Motors Limited Japan and Messrs Toyota Tsusto Corporation, Japan through Advance Ruling under section 206A of the Income Tax Ordinance, 2001 exactly on the same issues by retraining from giving the rule because the matter is subjudiced before the honourable High Court. He has contended that the department has already challenged the decision of this Tribunal, dated 5-10-2005 in I.T.A. No. 416/KB of 2000-2001 before the Hon'ble High Court, therefore, no reliance can be placed by the assessee because it has overruled the judgment of a DB without referring the matter for constitution of the larger bench. According to learned counsel even otherwise the scheme of the fiscal law always provides relief in the amount of tax rather than the tax rate. He has contended that there was no exigency in Double Taxation Treaty to deviate from the general accepted scheme of fiscal legislation. The scheme was followed in the revoked Income Tax Act, 1922, repealed Income Tax Ordinance, 1979 and the present Income Tax Ordinance, 2001. He has or this respect referred the Part-III of Second Schedule to the Income Tax Ordinance, 2002.

The learned counsel regarding the tax rate has demonstrated before us the following two propositions:--

PROPOSITION NO.1

and would exactly be 6.25 % as has been stated by the Treaty between Japan and Pakistan.

PROPOSITION No.2

The provision .speaks of reduction of tax by an anna in a rupee, if the presumption is that one rupee is the rate of taxation. In this way if tax was 16 annas, in case of dividend income it would be reduced to an anna and the effective rate of 15 annas. We can workout the effective tax rate and rebate in 15 rupees, which is normal rate of tax.

Rs.15 x 16 = 240 coins 1/16 x 240 anna = 15 anna

This means that normal rate of 240 coins will be reduced by 15 annas, leaving the effective tax to be 225 annas i.e. 93.751 or 14.06 in place of Rs.15. Thus it is clear that tax should be charge @ 14.061 and not 8.751.

As regards the taxation of bonus share paid by the company and other share-holders the master may be taken up for rectification before the concerned officer according to the relevant provisions of law.

The learned counsel after demonstration of the above said propositions has contended that as regards the taxation of bonus share paid by the company and other shareholders the matter may be taken up for the rectification before the concerned officer according to the relevant provisions of law. He is of the view that the levy of additional tax under section 86 of the Income Tax Ordinance, 1979 (Repealed) is co-incident upon the failure to tax as required by section 50 of the Income Tax Ordinance, 1979 (Repealed) and it has no nexus with the wilfulness or intention. According to him it is a concomitant variable of additional tax wider section86 would occur whenever there is a default of section 50 of the Income Tax Ordinance, 1979 (Repealed) and there is no possibility of looking into intentions etc. which may be an important variable in the penal provisions.

We have heard the learned Representatives from both the parties and have also perused the impugned orders of the learned CIT(A) and the assessment order.

We have found that in this case the assessment for all the three years under review have been finalized before 9-4-2003 when the assessment for the years 2000-2001 to 2002-2003 were made while for the 2000-2001 has been made on 23-4-2001. The Taxation Officer has amended the assessment for the three years under review wider section 122 of the Income Tax Ordinance, 2001 vide consolidated order, dated 30-6-2003. While perusal of said section 122 we have found that section is regarding amendment of assessments and subsections (1) to (4A) are the procedural section defining only the process that which order can be amended through which of the officer and the manner of amending the orders. While only subsection (5) and (5A) gives the mode for amending the orders and the remaining subsections (5B) and (6 & 7) further gives the process of services of the notices, limitation regarding the orders, while through subsection (8), the definite information as mentioned in subsection (5) has been explained and the subsection (9) gives the right of opportunity of being heard to the assessee while amending the order by the Taxation Officer. We are of the view that no order under section 122 can be made without specifically mentioning in the order the subsections mentioned in his section or the ingredients of the subsections mentioned above as both the subsections (5) and (5A) have the distinct characteristics. Subsection (5A) can be invoked only by the higher authority to the authority passing the assessment order and the basic ingredient of this section is that the assessment already made is erroneous insofar it is prejudicial to the interest of revenue while the subsection (5) can be invoked by the Taxation Officer passing the assessment order on he basis of definite information acquired from an .audit or otherwise regarding the falling three deficiencies in the already completed assessment:--

(i) any income chargeable to tax has been escaped assessment; or

(ii) total income has been under-assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or

(iii) any amount under a head of income has been mis-classified.

We have further noted that under subsection (8) it has been specifically provided that for the purpose of this section, "definite information" includes information on sales or purchases of any goods made by the taxpayer, receipts of the taxpayer from services rendered or any other receipts that may be chargeable to tax under this Ordinance and on the acquisition, possession or disposal of any money, asset, valuable article or investment made or expenditure incurred by the tax payer.

We have found that in this case there is no definite information mentioned in the order passed under section 122, therefore, if the order has been passed under section 122(5) there must be definite information mentioned in the order specifically. Like-wise there is nothing in the order under section 122 that the already completed assessments were erroneous insofar prejudicial to the interest of revenue. Therefore, there is no justification for amending the order under section 122 in the present case. Even otherwise on the merits of the case we are of the view that this Tribunal has discussed this issue in detail in its order, dated 5-10-2002 in I.T.A. No.416/KB of 2000-2001 (Assessment year 1999-2000) the relevant portion of which is re-produced hereunder:--

"The matter has been considered by us in our view it is not a simple mattes of arithmetical calculation and more a matter of proper interpretation of the method of calculation or rebate as brought :in the relevant para of the tax Treaty. The Tax Avoidance Treaty between the two countries of USA and Pakistan as concluded in July, 1957 and as pointed out by the CIT(A) in his order at the time when the Treaty was signed tax was levied in terms of annas per rupee of total income and rebate was also being allowed in terms of arenas per rupee of total income. A reference to the Tribunal's order recorded in 1963 PTD 8 (Trib.) (sic) has been-made by the assessee in this regard wherein the Tribunal while disposing of the appeal for the assessment years 1954-55 and 195-56 reproduced the relevant Finance Act fixing the rate of super tax. The same is being re-produced as under:-

"D-In the case of every company-

On the whole of total income....four annas in the rupee, Provided that"

(i) a rebate at the rate of two annas per rupee of the total income. shall be allowed in the case of any company which in respect of its profits is liable to tax under the Income Tax Act, 1922, for the year ending on 31st day of March, 1951, has made such effective arrangements as may be specified by the Central Government in this behalf for the declaration and payment in the Provinces and the Capital of the Federation of the dividends payable out of such profits and for the deduction of supr tax from such dividends;

(ii) a rebate at the rate of one alma per rupee of the total income shall be allowed in the case of any company which, not being entitled to a rebate under the preceding clauses, is

(a) a public company the shares of which were offered for sale in a recognized. stock exchange at any time during the previous year, or

(b) a company all of whose shares were held at the end of the previous year by one or more such public companies as aforesaid.

Explanation:--For the purpose of clause (ii) of the proviso a company shall be deemed to be a public company only if it is neither a private company within the meaning of the Companies Ordinance, 1913, nor a company in which shares carrying more than the percent of the total voting power were at any time during the previous year, held or controlled by less than six persons.

It is in this context of calculation of tax at the rate so much annas per rupee of total income that support is found for the conclusion arrived at by the CIT(A) in his order that the corresponding conversion of rate of 15Io in terms of rupee and annas will give tax rate of 2.4 annas per rupee against which allowance of rebate @ 1 anna per rupee will yield the effective rate of 1.4 anna per rupee which when converted into percentage will give rate of 8.75 % as effective rate of tax fixing the rebate in tax rate at 6.25%. This arguments of the learned counsel for the respondent assessee and its acceptance by the learned CIT(A) is held to be proper in the context of the relevant method of tax and rebate calculation as prevalent at the time when Treaty was signed and as' this Treaty has not gone any change in respect of rebate envisaged the effective rate tax as contended by the respondent assessee and accepted by the learned CIT(A) is held to have correctly been determined at 8.75%. We have in this regard also considered the judgment of the Tribunal in the M.A. (Rectification) referred to above relating to non-resident Japanese Company. From perusal of relevant paras. of the said order as reproduced above, we find that the working of effective rate as has been made on the basis of presumption that 16 annas be taken to be the rate of tax which was an impossibility as there could not be a 100% tax on income. We, therefore, with due respect after taking into consideration the relevant rules relating to the calculation of tax and rebate in tax on total income in terms of annas and pies as was applicable at the time when USA Pakistan Treaty was signed and which has remained un-amended so far disagree with the findings in the said order of the Tribunal and the same is not held to be applicable in the present appeal before us and the conclusions therein are therefore, not being followed as a precedent".

After considering the above said observations of this Tribunal, we are of the view that these observations are to be followed by the Taxation Officer, learned CIT(A) and this Tribunal until and unless reversed by the higher forums as the issue of the instant appeal and the facts of the case are identical to the present case.

In view of the above said discussion the impugned order of the learned CIT(A) for all the three years is vacated and the consolidated order passed by the Taxation Officer under section 122 is cancelled. The assessments, dated 23-4-2001 for the assessment year 2000-2001 and, dated 9-4-2003 for the assessment years 2001-2002 and .2002-2003 already completed for all the three years under review are restored.

All the three appeals filed by the assessee for the, assessment years 2000-2001 to 2002-2003 are allowed while the two appeals filed by the department for the assessment year 1998-99 and tax year, 2003 are dismissed.

C.M.A./52/Tax (Trib.)Order accordingly.