COMMISSIONER OF INCOME TAX/WEALTH TAX COMPANIES ZONE FAISALABAD VS CRESCENT FLOUR MILLS (PVT.) LTD., FAISALABAD, 2009 PTD-LAHORE-HIGH-COURT-LAHORE 1167 (2009)

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

----Ss. 50(4) & 52---Deduction under section 50(4), Income Tax Ordinance, 1979 is clearly on the goods which a recipient has received as supply and it is not on counter-purchases or other purchases made from open market against payment of cash or even through credit---Word "cash purchase" cannot be equated with the word "supply" for the purpose of S.50(4), Income Tax Ordinance, 1979, in the case of persons declared to be deducting authority---Terms "sale" aid "supply"---Connotation and distinction between the two terms illustrated.

The deduction under section 50(4), Income Tax Ordinance, 1979 is clearly on the goods which a recipient has received as supply and it is not on counter-purchases or other purchases made from open market against payment of cash or even through credit.

A supply, be that in consideration of cash or credit, is undoubtedly subject to withholding, tax. It is the payment on account of "supply of goods" on which the tax is to be deducted.

Provision of section 52, Income Tax Ordinance, 1979 applied on failure of an assessee to deduct tax under section 50(4).

Since the default under section 52 starts from non-deduction of tax under section 50(4) of Income Tax Ordinance, 1979 its language is the most relevant factor. Under section 50(4) a recipient of goods, infer alia, has been assigned the responsibility to deduct withholding tax while making payment to supplier of the goods.

The term "supply" has not been defined in Income Tax Ordinance, hence, normal dictionary meanings have been adopted. In general parlance the "supply" is attached with the "demand", be that in any form. It is a different connotation than the term "purchase". Purchase and sale obviously are of wide import. All supplies are sales while all sales are not supplies. The term "supply" as used in income tax proceedings is something which has a kind of permanence or a perpetuity in the relationship in the supply and the recipient. Supply is of the items demanded. If there is a demand there shall be a supply.

"Supply" is of something needed, desired or demanded before hand and is subsequently provided. It has to be a continuation for satisfaction of a requirement or the demand. While the sale on one hand includes all these means and shall also include the items purchased by a person from road sides from counters and any other place. The difference between two is very thin but they definitely are not interchangeable. The "sales" and "supply" therefore, should not be mixed with each other. They are not even synonymous in their meaning.

The "sale" as against "supply" is transfer of property or title for a price. In supply normally the demand is with specification as well as predetermined quantity and price etc. In sale one can pay and take possession of item or negotiate and refuse. In supply since it is on the basis of a before hand contract it obviously cannot be later negotiated or refused. In sale the contract of transfer is subject to payment or commitment to pay while in supply it is a continuation of an already existing contract/commitment.

Similar distinction exists in the terms supplier and salesman. "The supplier is a person engaged, directly or indirectly, in the business of making a product available to consumers". While a salesman is a person who sells items on behalf of his master and may be on his own behalf. It means he holds the status of a representative of the owner i.e. his master in the former case.

Furthermore, the supplier is mostly a person registered for the purpose of supply with the organization and is always a known person having some creditworthiness with such organization. A salesperson in most of the cases is an unknown third person having no earlier contractual relations with the buyer except to the extent of the goods sold.

The two terms are different. The supply is the action of furnishing what is wanted or a thing yielded or afforded to need. So it is a very specific and controlled transaction and remains within the parameters of demand and supply specifically. While the sale is an exchange for money and is co-related to purchase. It is definitely a wider connotation and in fact as already mentioned would include the transaction of a supply, but, however, all transactions of sale are not supplies.

One can make a purchase without demand just because the same is eye catching or one feels that it can be of some use to him but the same would not become a supply being not in compliance to its desire. The word "supply" should be given a limited and qualified sense.

(b) Words and phrases---

----"Sale" and "supply"---Connotation and distinction between the two terms illustrated.

Adnan Afzal v. Capt. Sher Afzal PLD 1969 SC 187; Black's Law dictionary Seventh Edition; Oxford English Dictionary; Commissioner of Income/Tax Wealth Tax v. Messrs Ellcot Spinning Mills Ltd. 2008 PTD 1401 and AIR 1954 Pat 14 (D.B.) ref.

Mian Yousaf Umar for Petitioner.

Ch. Shehram Sarwar for Respondent.

Date of hearing: 14th January, 2009.

JUDGMENT

KHAWAJA FAROOQ SAEED, J.---This is a P.T.R. filed by the Income Tax Department through which following questions of law have been proposed for adjudication:--

(i) Whether the word "cash purchases" can be equated with the word "supply for the purpose of section 50(4) of the Income Tax Ordinance, 1979, in the case of persons declared to be deducting authority.

(ii) Whether under the facts and circumstances of the case the learned ITAT was justified to hold that explanation added to subsection (4) of section 50 was not retrospective in application.

2. Learned counsel for the department Mr. Yousaf Umar, Advocate, states that the term `supply' for the purpose of section 50(4) of the Income Tax Ordinance, 1979, includes the cash purchases and this has been so included by virtue of the explanation added under the said section. As a result of the same all the supplies have become chargeable to deduction under the provisions of section 50(4), hence, learned Income Tax Appellate Tribunal was not justified in holding that the deduction in respect of' the supplies received by the present petitioner was not subject to withholding tax.

3. Further, the provision being an explanation which is always retrospective, the finding that it was not applicable for the assessment year 1996-97 by the learned Income Tax Appellate Tribunal is not justified. By placing reliance on the judgment reported as (PLD 1969 Supreme Court 187) re: "Adnan Afzal v. Capt. Sher Afzal" he said that the general principle with regard to interpretation is that if the question relates to interpretation of a procedural provision of law, it is always retrospective. Similarly, an explanation also is always treated as retrospective.

4. Before discussing other aspects of the case recapitulating the facts of the case shall be of help. The assessee, a Private Limited company during the assessment year under discussion made payment of Rs.54,70,741 for purchase of bardana, sootri and vehicles and statedly failed to deduct tax under section 50(4) of the Income Tax Ordinance, 1979. He was treated as an assessee in default by the Assessing Officer and a demand was created under section 52/86 of the Income .Tax Ordinance, 1979. An appeal was filed before the Commissioner of Income Tax (Appeals) who cancelled the said order passed under section 52/86. The department preferred an appeal, wherein, the departmental appeal was dismissed.

5. The findings of the Tribunal while confirmation of the order of Commissioner of Income Tax (Appeals) are as follows:--

"The D.R. was unable to disapprove the finding of CIT (Appeals) that purchases were made on cash from open market.

(2) We are also not in agreement with the contention of the revenue that the explanation added to section 52 of the Ordinance through Finance Act was effective retrospectively. It may be pertinent to mention here that the provisions of section 50 of the Income Tax Ordinance, 1979, impose a liability on the authority or agency or the assessee making certain payments to deduct tax therefrom and also there are provisions which require it or him to pay over such deducted tax in the Government Treasury to file various statements. Any default in discharging these responsibilities is subject to heavy penalties and liabilities, the provisions of section 52 create a liability on the person against the responsibility or payment of tax by another person. Thus the creation of the liability under section 52 of the Ordinance is a sort of penalty or fine for non-deduction/payment of tax which originally is the liability of another person. In our view, the amendment brought through explanation added to subsection (4) of section 50 through Finance Act, 1998 in the provision of law being penal in nature is not retrospectively effective."

6. The department of Income Tax filed a reference application under section 136(1) of the Income Tax Ordinance, 1979, which has been rejected on the basis of following observations:--

"Arguments of both the parties have been heard. In our opinion there is no need to refer the questions of law proposed by the CIT(Appeals) to the High Court. The Tribunal upheld the orders of the CIT(Appeals) because the change made in the expression "supply of goods" used in the subsection (4) of section 50 through Finance Act, 1998, was not effective retrospectively since it also entails penal liability under section 52 of the Ordinance in case of default in deduction of tax. The reference application of the revenue is rejected."

7. Consequently this Court has been approached now under section 136(2). As already mentioned the claim of the department remains that the petitioner having purchased bardana, sootri, vehicles etc., was liable to deduct tax while making such payments. Further that the supply be that on credit or on cash payment in subject to the deduction of tax by virtue of amendment in section 50(4).

8. The first argument of the department is more of factual nature. The tact as to whether the purchases were from open market or not, is not being denied. While making assessment it has totally been ignored that counter purchases or an open market purchase is something different from the supply of goods. The deduction under section 50(4) is clearly on the goods which a recipient has received as supply and it is not on counter-purchases or other purchases made from open market against payment of cash or even through credit.

9. Unfortunately, even while interpreting the explanation the departmental claim remained that by virtue of explanation all sorts of purchases and sales have come within the definition of supply. It has never been doubted by any Court at any stage that a supply, he that in consideration of cash or credit, is undoubtedly subject to withholding tax. The explanation, therefore, was quite-unnecessary and in fact it has not changed the situation at all. The fact remains that it is the payment on account of "supply of goods" on which the tax is to be deducted and the discussion as to whether it is an amendment or that the amendment is retrospective is unnecessary.

10. For further discussion reference to the relevant provisions shall be of help, which are reproduced as under:--

"Section 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 he, 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".

Above provision applies on failure of an assessee to deduct tax under section 50(4). The said section reads as follows:--

"Notwithstanding anything contained in this Ordinance:

(a) any person responsible for making any payment in full or in part (including a payment by way of advance) to any person, (being resident), (hereinafter referred to respectively as "payer" and "recipient"), on account of the supply of goods or for service rendered to, or the execution of a contract with the Government, or a local authority, or (a company) or a reg4stered firm or any foreign contractor or consultant or consortium shall, (xxxxx) advance tax, at the time of making such payment, at the rate specified in the First Schedule and credit for the tax so deducted in any financial year shall, subject to the provisions of section 53, be given in computing the lax payable by the recipient for the assessment year commencing on the first day of July next following the said financial years, or in the case of an assessee to whom section 72 or section 81 applies, the assessment year, if any, in which the "said date" is referred to therein, falls, whichever is the later".

Since on default of deduction under section 50(4) a formal charge in terms of recovery of additional tax has also been provided in law, reproduction of the said provision shall also be of help:--

"Section 86"

"Charge of additional tax for failure to deduct and pay tax.---Where any person fails to deduct, or having deducted, fails to pay any tax, as required by section 50, such person shall, without prejudice to any other liability which he may incur, be liable to pay additional tax at the rate of ("twenty-four") per cent per annum on the amount not paid for the period commencing from the date on which, he was required to pay such tax to the date of payment thereof."

11. Since the default under section 52 starts from non-deduction of tax under section 50(4) the language of the same is the most relevant. Under section 50(4) a recipient of goods, inter alia, has been assigned the responsibility to deduct withholding tax while making payment to supplier of the goods.

12. The term `supply' has come to discussion in a chain of judgments. The provision has not been defined in Income Tax Ordinance, hence, normal dictionary meaning have been adopted. In general parlance the "supply" is attached with the "demand", be that in any form. It is a different connotation than the term "purchase". Purchase and sale obviously are of wide import. All supplies are sales while all sales are not supplies. The term "supply" as is used in income tax proceedings is something which has a kind of permanence or a perpetually in the relationship in the supply and the recipient. Supply is of the items demanded. If there is a demand there shall be a supply.

13. If one agrees with the learned Legal Advisor then even the shopkeeper on selling items from their counter shall be called as suppliers and the goods they shall become a supply. Such transaction shall also be considered as a `supply of goods' and withholding tax shall be deducted therefrom. To understand the exact purpose of this deduction various meaning assigned to the above two terms "sale" and "supply" are reproduced:

"Supply" as defined in `Black's Law Dictionary Seventh Edition' is "the amount of goods produced or made available at a given price".

14. Similarly in "Oxford English Dictionary" the term `supply' is defined in the following manner:--

"1. make (something needed) available to someone, provide with something needed, be adequate to satisfy (a requirement or demand) 2. Archaic take over (a vacant place or rule) N. (plies) a-stock or amount of something supplied or available. The action of supplying. A person is especially a school teacher, acting as a temporary substitute for another. 3. (supplies) brit. A grant of money by Parliament for the costs of Government.

Phrases on supply (of a school teacher) acting as a temporary substitute. Supply and demand the amount of a good or service available and the desire of buyers for it, considered as factor regulating its price. Derivatives supply"

Sale on the other hand has also separately been defined in the said two dictionaries.

15. As already mentioned 'supply' is of something needed, desired or demanded before hand and is subsequently provided. It has to be a continuation for satisfaction of a requirement or the demand. While the sale on one hand includes all these means and shall also include the items purchased by a person from road sides from counters and any other place. The difference between two is very thin but they definitely are not interchangeable. The "sales" and "supply" therefore, should not be mixed with each other. They are not even synonymous in their meaning.

16. As per the Oxford English Dictionary on historical principles printed in 1961, the term supply was firstly used in 1840. Reference is made to 1840 J.F. Cooper Pathfinder-II ix. in which this was firstly used in following manner:--

"we shall lie in wait----to intercept their supply boats.

Then in 1866 A.D. Richardson Secret Service xix 241, it was used in following sentence:--

"that their retreat was a stampede leaving behind great quantities of ammunitions, supply wagons and ambulances". Similarly, in 1862, O.W. Norten Army Lett. The term was used again, "They followed up in our rear and cut off our supply train." (under lining is for emphasis).

17. As is evident from the above, the said connotation earlier was used in respect of the supply to the armed forces through means of transport in terms of trains, boats, wagons, and even supply stations etc. The basic concept, therefore, had no relationship with the word "Sale". Its use in English language earlier is in the context of providing of goods including food, ammunition and all other items required for a group, Army, citizens, cities, countries etc. etc. Seen from the said angle, it is totally different from the concept of `sale' altogether. For example, if one city of this country is in shortage of some item and the Government arranges to send supply from another city through any means like train, air road etc., the same would be known as either supply train or supply aeroplane or supply bus as the case may be. Would such an arrangement be called a sale does not need any discussion. The same would only becomes a sale when a consideration is paid against the said supply. Supply as such is a transaction in which goods are provided on demand, made available on requirement, provisions or stores arranged on request for utilization or distribution.

18. The sale as against "supply" is transfer of property or title for a price. In supply normally the demand is with specification as well as predetermined quantity and price etc. In sale one can pay and take possession of item or negotiate and refuse. In supply since it is on the basis of a before hand contract it obviously cannot be later negotiated or refused. In sale the contract of transfer is subject to payment or commitment to pay while in supply it is a continuation of an already existing contract/commitment.

19. Similar distinction exists in the terms supplier and salesman. "The supplier is a person engaged, directly or indirectly, in the business of making a product available to consumers". While a salesman is a person who sells items on behalf of his master and may be on his own behalf. It means he holds the status of a representative of the owner i.e. his master in the former case.

20. Furthermore, the supplier is mostly a person registered for the purpose of supply with the organization and is always a known person having some creditworthiness with such organization. A salesperson in most of the cases is an unknown third person having no earlier contractual relations with the buyer except to the extent of the goods sold.

21. In fact this Court has already while dealing with a matter of lease and purchase back arrangement discussed in detail the distinction between term `supply' and `sales'. Incidentally, the judgment is by this Division Bench and is reported as (2008 PTD 1401) re: "Commissioner of Income Tax/Wealth Tax v. Messrs Ellcot Spinning Mills Ltd".

22. This Court in paras. Nos. 13, 14, 15 and 16 has further dilated the two connotations in the light of the ordinary dictionary as well as the case-law available. The consensus, therefore, remains that the two terms are different. The supply is the action of furnishing what is wanted or a thing yielded or afforded to need. So it is a very specific and controlled transaction and remains within the parameters of demand and supply specifically. While the sale is an exchange for money and is co related to purchase. It is definitely a wider connotation and in fact as already mentioned would include the transaction of a supply, but, however, all transactions of sale are not supply.

23. One can make a purchase without demand just because the same is eye catching or one feels that it can be of sonic use to him but the same would not become a supply being not in compliance to its desire. The fact that the word `supply' should he given a limited and qualified sense has the support of the judgment reported as (AIR 1954 Pat 14 (D.B.) also.

24. The upshot of the above discussion therefore is obvious. This Court does not have any doubt with regard to the impugned judgment of the Income Tax Appellate Tribunal and hold that the same is fully justified. As a result, the question No.1 is replied in negative, while, question No.2 practically stands answered in discussion above. The observation of this Court that the explanation added to subsection (4) of section 50 was quite unnecessary as it has not explained something which was not already known.

25. Dismissed.

M.B.A./C-7/LReference dismissed.