I.T.As. Nos. 1058/LB to 1060/LB, 6947/LB and 6948/LB of 2003, decided on 26th April, 2006. VS I.T.As. Nos. 1058/LB to 1060/LB, 6947/LB and 6948/LB of 2003, decided on 26th April, 2006.
2007 P T D (Trib.) 9
[Income-tax Appellate Tribunal Pakistan]
Before Jawaid Masood Tahir Bhatti, Judicial Member and Shaheen Iqbal, Accountant Member
I.T.As. Nos. 1058/LB to 1060/LB, 6947/LB and 6948/LB of 2003, decided on 26/04/2006.
(a) Income Tax Ordinance (XXXI of 1979)---
----Fourth Sched. R.5(c)---Insurance Ordinance (XXXIX of 2000), Preamble---Computation of profits and gains of insurance business---General insurance---Curtailment of management expenses---Assessee contended that assessments framed after the promulgation of the Insurance Ordinance, 2000 were not maintainable in law on the issue of curtailment management expenses as. no limits had been prescribed in this respect in the Insurance Ordinance, 2000 thus making the applicability of R.5(c) of the Fourth Schedule to the Income Tax Ordinance, 1979 to be of no legal effect---Department could not controvert such factual position of the assessee, Appellate Tribunal deleted the management expenses in circumstances.
I.T.A. No. 2172/12B of 2001 and 2005 PTD (Trib.) 474 rel.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 62---Assessment on production of accounts, evidence etc.--Disallowence---Assessee contended that disallowances were made without specifying and identifying element of personal nature expenses---Department supported the finding of First Appellate Authority that disallowances had been made in line with the history of the case as evolved at the level of Appellate Tribunal---Assertion of department was found correct and appeal of the assessee on the issue was dismissed by the Appellate Tribunal.
2002 PTD 1496 rel.
(c) Income Tax Ordinance (XXXI of 1979)---
----Ss. 24(c) & 50--Deduction not admissible---Re-insurance premium payments on commission---Disallowance was made for failure to withhold tax on re-insurance premium payments on commission payable to Pakistan Insurance Corporation---Assessee contended that no payment was made but the total claim represented accrued amounts and no question of deduction of tax could arise---Validity---Pakistan Insurance Corporation was taxpayer and was paying tax on its income which included receipts from re-insurance premium commission---Appellate Tribunal directed to delete the addition made under S.24(c) of the Income Tax Ordinance, 1979.
(d) Income Tax Ordinance (XXXI of 1979)---
----Ss. 52 & 50---Liability of persons failing to deduct or pay tax---Assessee contended that Assessing Officer was not justified to pass the orders under S.52 of the Income Tax Ordinance, 1979 in order to collect the tax on re-insurance premium commission due under S.50 of the Income Tax Ordinance, 1979; as the recipient had duly paid tax in respect of the receipt, the withholding agent could not be required to pay related amount of tax not withheld by him as it would amount to double taxation---Validity---Through an order under S.52 of the Income Tax Ordinance, 1979 the Assessing Officer was empowered to declare a person to be an assessee in default in respect of tax not withheld by it under provision of S.50 of the Income Tax Ordinance, 1979, recovery proceedings could be initiated to recover the amount of tax in respect of which an assessee was held to be an assessee in default---Assessing Officer was justified in passing the order under S.52 of the Income Tax Ordinance, 1979 to demand the tax not withheld by the assessee--Recipient of the commission on re-insurance premium having paid tax on its income inclusive of these receipts, the Assessing Officer could not pass order under S.52 of the Income Tax Ordinance, 1979 to recover the amount of tax not withheld by the assessee---Appellate Tribunal vacated the order of First Appellate Authority and directed to cancel the orders framed under S.52 of the Income Tax Ordinance, 1979.
2001 PTD 570; (1999) 80 Tax 282; 87 Tax 89 (Trib.) and I.T.A. No. 6341/LB of 2004 ref.
Imran Afza, F.C.A. for Appellant.
Sabiha Mujahid, D.R. for Respondent.
ORDER
This order will dispose of the captioned appeals of the appellant Insurance Company which are arising from the following orders of CIT(A):---.
Appeals for assessment years 2000-2001 and 2001-2002 arise from order recorded by the CIT(A) on 16-1-2003 which disposed of assessee's appeal against assessment orders framed under section 62 for these assessment years.
Appeal for assessment year 2002-2003 arises from order recorded by the CIT(A) on 29-9-2004 adjudicating assessee's appeal against assessment order framed under section 62 for the year.
Appeal for assessment year 2001-2002 impugns order, dated 16-1-2003 recorded by the CIT(A) adjudicating appeal against an order framed under section 52 of the Income Tax Ordinance, 1979.
Appeal against order under section 52 relating to Assessment year 2002-2003 arising from order, dated 21-9-2004 recorded by the CIT(A).
2. We will first take up the appeals relating to assessment years 2000-2001, 2001-2002 and 2002-2003 relating to assessment orders framed under section 62 of the Income Tax Ordinance, 1979.
3. The related grounds of appeal raised by the appellant assessee for the impugned assessment years are as follows:--
Common Grounds for the Assessment years 2000-2001 and 2001-2002
(i) That the officers below erred in assuming that withholding tax provisions are applicableon commission payable on re-insurance premium.
(ii) That the curtailment of the management expenses being illegal, merited to be allowed as claimed.
(iii) That the disallowances of expenditure claimed under the head telephone expenses being illegal, merits deletion.
Assessment year 2002-2003
(i) That the disallqwances of depreciation on assets transferred from assets subject to finance lease is incorrect and illegal.
(ii) That the curtailment of the management expenses being illegal, merits to be deleted.
(iii) That the disallowances of expenses under the head vehicle running and telephone expenses are arbitrary and unjustified.
4. We have heard both sides and have also gone through the relevant record available on file. The objections raised are discussed and disposed of in the following manner.
5. We will first take up the common objection relating to CIT(A)'s action of maintaining Assessing Officer's action for the curtailment of management expenses claimed by the assessee appellant for the three impugned years under appeal. In this connection the AR of the assessee assails the impugned finding of the two officers below on the basis of the following arguments:--
6. (i) Insurance Act, 1938 has been repealed and Insurance Ordinance, 2000 was promulgated on August, 2000. Consequently, the impugned assessments framed after the promulgation of the Insurance Ordinance, 2000 are not maintainable in the law on the issue of curtailment management expenses as no limits have been prescribed in this respect in the Insurance Ordinance, 2000 thus making the applicability of Rule 5(c) of the Fourth Schedule to the Income Tax Ordinance, 1979 to be of no legal effect. It is further submitted that the issue already stands decided at I.T.A.T. level in respect of assessment year, 2000-2001 vide order, dated 30-3-2002 in I.T.A. No.2172/LB of 2001. It is further submitted that the learned I.T.A.T. in judgment reported as 2005 PTD (Trib.) 474 has also followed the finding on the issue in the aforecited I.T.A.T. judgment. The related finding from the reported judgment relied upon is as follows:--
"(13) The learned CIT(A) erred in relying on I.T.A.T. judgment No.1320/KB of 2001, dated 29-11-2001 which related to assessment year 1999-2000 whereas the assessment under appeal relates to assessment year 2001-2002 i.e. after promulgation of new Insurance Ordinance. Although in Rule 5(c) of the Fourth Schedule to the Income Tax Ordinance, 1979 words Insurance Act, 1938 have not been replaced by Insurance Ordinance, 2000 yet according to section 8(2) of General Clauses Act, 1897 when an enactment is repealed and re-enacted, any reference to repealed Act would be construed as reference to new Act.
(14) It is worth-mentioning that the author of above judgment was the same learned member who earlier authored the judgment in I.T.A. No. 1320/KB of 2000-2001-Assessment year 1999-2000 on which the learned CIT(A) placed reliance.
(15) It is our considered view that the principle enunciated in I.T.A. No.2172/KB of 2001 that after promulgation of Insurance Ordinance, 2000, which has repealed the Insurance Act, 1938, addition confirmed by CIT(A) referring to the provisions of repealed Act is of no legal effect. We reaffirm the view already given by this Tribunal in the above referred judgment that since Insurance Ordinance, 2000 contains no saving vis-a-vis section 26(a) of the repealed Act, therefore Rule 5(c) of Fourth Schedule to the Income Tax Ordinance, 1979 is not applicable for the assessment year under review. Resultantly, the addition made under rule 5(c) of Fourth Schedule to Income Tax Ordinance, 1979 is not maintainable hence ordered to be deleted."
7. The learned D.R. of the department has not been able to controvert the above factual position as stated by the AR of the assessee. Accordingly this being a decided issue at I.T.A.T. level, we see reasons to vacate the impugned order of CIT(A) in respect of three impugned assessment years. Consequently, the management expenses disallowed by this Assessing Officer in respect of three years under appeal stand deleted.
8. The next objection relates to disallowance of expenses on telephone in respect of three impugned years at 15% of the respective claim. The AR of the assessee submits that the disallowances have been made by the Assessing Officer without specifying and identifying element of personal nature expenses included in the claims for the three impugned years under appeal. It is submitted that in view of ratio of judgment of Honourable Lahore High Court reported as 2002 PTD 1496, the disallowances cannot be based on stock phrases.
9. The DR on the other hand, supports the impugned finding of the CIT(A) by stating that disallowances have been made in line with the history of the case as evolved at the level of the I.T.A.T. On verification we find that the assertion of the learned D.R. to be correct. Accordingly, we find no merit in appellant's ground on the issue which accordingly stands dismissed for all the three years under appeal.
10. The next objection which 'relates to assessment years 2000-2001 and 2001-2002 is in respect of the disallowance made by the Assessing Officer under section 24(c) of the Income Tax Ordinance, 1979 for appellant assessees failure to withhold tax under section 50 on reinsurance premium payments on commission payable to Pakistan Insurance Corporation. The AR of the assessee submits that no payment was made by the assessee appellant for all the three impugned years under appeal to Pakistan Insurance Corporation and the total claim represents accrued amounts and no question of deduction of tax could arise. Alternatively it is further submitted that Pakistan Insurance Corporation has also duly paid tax on its related receipts and in this position both the officers below fell in error in making and upholding the impugned disallowance under section 24(c) for the two years under appeal.
11. The AR of the assessee further relies on the reported judgment 76 Tax 94 (Trib.) in support of his argument that no addition under section 24(c) could be made in appellant's case in the prevailing facts and circumstances. The related finding relied upon reads as follows:
"It is held that in the facts and circumstances of the present case where the original assessees, to wit, general insurance companies have admittedly discharged their liabilities by affording the amount of commission received from appellant, Pakistan Insurance Corporation and the said commission after inclusion in the total income of the general insurance companies has already suffered the incidence of tax, appellant cannot be held to be assessee in default and the department, cannot demand further tax from the appellant by recourse to the provision contained in section 52 of the Income Tax Ordinance, 1979."
12. After careful consideration of the facts as well as perusal of the finding of the I.T.A.T. relied upon by the AR of the assessee, we find merit in his arguments. Consequently keeping in view the admitted factual position that the Pakistan Insurance Corporation is a taxpayer and is paying tax on its income which includes receipts from reinsurance premium commission, we direct the deletion of the addition made under section 24(c) of the Income Tax Ordinance, 1979 for the two impugned years under appeal.
13. In respect of assessment year 2002-2003, objection is also taken to disallowance of the depreciation on assets transferred from lessee. The related arguments in this respect are summarized as follows:--
"The disallowance of depreciation amounting to Rs.263,546 on assets transferred to own asset from lease is incorrect and unjustified.
Depreciation is allowable on the residual value of assets transferred from lease to own assets as elaborated in second proviso to Rule 8(5)(i) of the Third Schedule to the Income Tax Ordinance, 1979.
Calculation of the allowable depreciation is annexed. Disallowance should have been to the extent of Rs.220,046."
14. In our considered view the main dispute relates to the computation of the allowance and the matter can be resolved at the end of the Assessing Officer on examination of the related facts. We are accordingly setting aside the issue for de novo proceedings. Consequently, on the issue of depreciation the order of the CIT(A) is vacated and matter sent back to the Assessing Officer for de novo proceedings after providing an opportunity of being heard to the assessee.
15. As regards the ground raised in respect of confirmation of disallowance of Rs. 50,000 out of the claim of vehicle running expenses of Rs. 824,538 is concerned, we find the related finding of the Assessing Officer as recorded in the assessment order, to be as follows : --
"Complete vouchers/receipts have' not been produced in respect of expenses claimed under the head `vehicle running' at Rs.824,538. Through notice under section 62, intention was shown to disallow a portion of these expenses being inadmissible/un-vouched/unverifiable. In response thereto, the AR of the assessee submitted vouchers/receipt in support of these expenses. Examination of vouchers/receipts has revealed that in quite a few cases the , internal vouchers were not supported with bills. In view of this fact, expenses are not fully verifiable so, a sum' of Rs.50,000 is disallowed being inadmissible/unverifiable."
The CIT(A) has confirmed the disallowance after finding the action of the Assessing Officer to be reasonable.
16. After careful consideration of the facts as available in the assessment order, we find that the learned CIT(A) impugned direction to be based relevant on cogent reasons. Accordingly, we see no reason to interfere in the matter. Consequently, the related objection raised by the assessee appellant in respect of disallowance of vehicle running expenses stands dismissed.'
17. We now take up the appeals in respect of assessment years 2001-2002 and 2002-2003 which agitate the CIT(A)'s action of confirming the orders passed by the Assessing Officer under sections 52, 52A and 86 of the Income Tax Ordinance, 1979 for the impugned years under appeal. The grounds of appeals which are common for the two impugned years read as follows:
(i) That the provisions of withholding tax are not applicable on payment made on account of re-insurance.
(ii) That the provisions of section 52 are not attracted in case both the recipient and payer of commission of reinsurance are taxpayers.
(iii) Without prejudice to above, the provisions of section 52 do not authorize the Assessing Officer to recover the principal amount of tax deductible under section 50.
18. It appears from the above grounds of appeal that the assessee appellant has challenged the CIT(A)'s finding in respect of orders passed by the Assessing Officer under sections 52, 52A and 86 of the Income Tax Ordinance, 1979. However, in our considered view the appellant was required to file three separate appeals against the CIT(A) order confirming the related orders of the Assessing Officer. Since only one. appeal has been filed we are treating this appeal as an appeal against order under section 52 and we are proceeding to adjudicate only the related grounds in this order.
19. The AR of the assessee appellant has been heard who has raised legal as well as factual objections regarding treatment meted out by the two officers below.
20. He has stated that the Assessing Officer in his impugned orders under section 52 of the Income Tax Ordinance, 1979 has raised demands in respect of amount of tax which in his view was required to be with-held by the appellant from the payment of re-insurance premium on commission paid to Messrs Pakistan Insurance Corporation. In this connection the legal objection raised are to the following effect:
The Assessing Officer has not been empowered under section 52 to charge and recover the principal amount of tax deductible from the collecting agent.
Corresponding sections of the Statutes i.e. 1922 Act, 1979 Ordinance and Ordinance of 2001 are different in construction as evident from their plain reading.
Section 18(7) of the Income Tax Act, 1922
18(7) if any such person does not deduct or after deducting, fails to pay the tax as required by or under this section he, and in cases specified in subsection (3-C) the company of which he is the principal officer shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax and shall, in addition to such tax, pay an amount at the rate of the two per cent per month of such tax, for the period commencing on the date following the expiry of the prescribed time referred to in subsection (6) and ending on the date of the actual payment of the tax.
Section 52 of Income Tax Ordinance, 1979
(52) Where any person fails to deduct or collect, or having deducted or collected, as the case may be, fails to pay the tax as required by, or under section 50, he shall, without prejudice to any other liability which he may incur under this Ordinance, be deemed to be an assessee in default in respect of such tax.
Section 161 of Income Tax Ordinance, 2001
(1) Where a person---
(a) fails to collect tax as required under Division II of this part of Chapter XII or deduct tax from a payment as required under Division III of this part (or chapter XII) (or as required under section 50 of the repealed Ordinance); or
(b) having collected tax under Division II of this Part (for Chapter XII) or deducted tax under Division III of this Part (or Chapter XII) fails to pay the tax to the Commissioner as required under section 160, (or having collected tax under section 50 of the repealed Ordinance pay to the credit of the Federal Government as required under subsection (8) of section 50 of the repealed Ordinance).
the person shall be personally liable to pay the amount of tax to the Commissioner (who may pass an order to that effect and) proceed to recover the same.
[(1A) No recovery under subsection (1) shall be made unless the person referred to in subsection (I) has been provided with an opportunity of being heard.]
[(1B) Where at the time of recovery of tax under subsection (1) it is established that the tax, that was to be deduced from the payment made to a person or collected from a person has meanwhile been paid by that person, no recovery shall be made from the person who had failed to collect or deduct the tax but the said person shall be liable to pay additional tax at the rate of eighteen per cent per annum from the date he failed to collect or deduct the tax to the date the tax was paid.]
Reliance in the following case-law has also been placed by the AR of the assessee appellant on the following judgments:--
2001 PTD 570 (H.C. Kar.), (1999) 80 Tax 282 (H.C. Lah.), 87 Tax 89 (Trib.) and I.T.A. No.6341/LB of 2004.
21. On the factual plane it is argued that the appellant had not made any payment to Pakistan Insurance Corporation and therefore no question of making any tax deductions in respect of the aforecited claim of expenses could arise.
22. Without prejudice to the above it is further stated that the Pakistan Insurance Corporation is a taxpayer and is duly paying tax on its income which includes commission on re-insurance premium received by it. It is contended that in this position the Assessing Officer was not justified to pass the impugned orders under sections 52 in order to collect the tax on re-insurance premium commission allegedly due under section 50. It is further argued that it is a decided issue at the level of the I.T.A.T. that if the recipient has duly paid tax in respect of the receipt, the withholding agent cannot be required to pay the related amount of tax not withheld by him under the provisions of section 50 as it assessments to double taxation.
23. The DR for the department supports the orders of the authorities below.
24. We have heard both sides and have also gone through the relevant record along with cited judgments. As regards the legal objection that section 52 is not a charging section and no demand can be raised by passing an order by invoking provisions of the section, we find the arguments of AR of the appellant to be misconceived for the following reason:--
Through an order under section 52 the Assessing Officer is empowered to declare a person to be an assessee in default in respect of tax not withheld by it under provision of section 50. An assessee in default has been defined in section 2(6) which defines an assessee in default in following manner:-
"assessee" means a person by whom any tax or any other sum of money is payable under this Ordinance, and includes,
(a) every person in respect of whom any proceeding under this Ordinance has been taken for the assessment of his income or the income of any other person in respect of which he is assessable or of the amount of refund due to him or to such other person;
(b) every person who is required to file a return of total income under section 55, section 72 or section 81; and
(c) every person who is deemed to be an assessee, or an assessee, in default, under any provision of this Ordinance."
Section 52 of the Income Tax Ordinance, 1979 reads as follows:--
"52. Liability of persons failing to deduct or pay tax. Where any person fails to deduct or collect, or having deducted or collected, as the case may be, fails to ' pay the tax as required by, or under, section 50, he shall, without prejudice to any other liability which he may incur under this Ordinance, be deemed to be an assessee in default in respect of such tax.
(Explanation. For the purposes of this section, the Deputy Commissioner having jurisdiction under section 5 over the case of the assessee in default may initiate action.)
It is evident from the above provision of law that all the recovery proceedings of the Income Tax Ordinance, 1979 can be initiated to recover the amount of tax in respect of which an assessee is held to be an assessee in default.
25. In this position we are of the considered view that the Assessing Officer was justified in passing the impugned orders under section 52 and to demand the tax not withheld by the appellant under section 50. However, we do find force in the alternate plea of the AR of the appellant that since recipient of the commission on re-insurance premium i.e. Pakistan Insurance Corporation has duly paid tax on its income inclusive of these receipts the Assessing Officer could not pass orders under section 52 to recover the amount of tax not withheld by the assessee appellant. In this position we see reasons to vacate the impugned finding of the CIT(A) and direct the cancellation of the two impugned orders framed under section 52 of the Income Tax Ordinance, 1979 for the related assessment years under appeal.
26. All the appeals stand disposed of as above.
C.M.A./85/Tax (Trib.)Order accordingly.