UNITED BANK LIMITED through Group Executive VS DEPUTY COMMISSIONER INLAND REVENUE, 2010 PTD-KARACHI-HIGH-COURT-SINDH 1772 (2010)

Income Tax Ordinance (XLIX of 2001)---

----Ss.21(c), 31,151,158(a), 161 & 205---Constitution of Pakistan (1973), Art.199---Constitutional petition---Amounts of profit charged by Bank in respect of term deposits of its customers and credited to its profit and loss account and ledger accounts of respective customers---Non-deduction and non-deposit of tax amount by bank in Federal Treasury---Demand of tax amount by Revenue along with default surcharge from Bank---Plea that Banks were maintaining their accounts on accrual basis and at close of each financial year, mark up was accrued on estimated return on profit for unpaid period of deposit in financial statement; and that mere credit entries in ledger accounts would not entitle customers to withdraw such amount and withdrawal could only be made or claimed at time of maturity of deposit---Plea of Revenue that Bank was enjoying benefits under S.31 of Income Tax Ordinance, 2001 by showing ledger entries as their liability, but refusal to deduct and pay tax in respect of ledger entries was not permissible under law; and that Revenue would seek permission to proceed against Bank for misusing provisions of S.31 of Income Tax Ordinance, 2001 in violation of S.21(c) thereof---Validity---Phrase `to the account of recipients' as used in S. 158 of Income Tax Ordinance, 2001 would imply that deduction required thereunder would be made when amount was either paid or credited to account of recipient, wherefrom he might withdraw amount falling within his power and control---Bank had not effected any credit entries in respective accounts of their customers, but had effected same in ledger accounts---High Court quashed impugned demand after declaring same to be illegal and allowed Revenue to proceed against Bank for misusing provisions of S.31 of Income Tax Ordinance, 2001 in violation of S. 21(c) thereof---Principles.

Naveed A. Andrabi for the Petitioner.

Ali Mumtaz Shaikh for Respondent.

ORDER

MAQBOOL BAQAR, J.---1 & 2. Through the above petitions, the petitioner banks have challenged notices under sections 161/205 of the Income Tax Ordinance, 2001 ('The Ordinance'), whereby the respondents have called upon the petitioners to explain as to why tax defaulted/not deducted in respect of the various term deposits as required under section 151 of the Ordinance may not be recovered under section 161 of the Ordinance along with default surcharge under section 205 of the Ordinance.

It is alleged by the respondents that though the petitioners have charged/credited the amounts of profit in respect of term deposits of their customers/depositors, to profit and loss account and have credited such amounts to the ledger accounts of the respective customers/depositors, but have failed to deduct/withhold and deposit the corresponding tax amount in the State treasury within seven (7) days of such entries. Whereas, according to the petitioners it is contended that as per section 150(a) of the Ordinance, the time for deduction of tax on profits on debts is the time when the profit is paid or credited to the account of the recipient, whichever is earlier and that the petitioners while making such payments under section 151 of the Ordinance, have been withholding tax as prescribed. It is further contended that the petitioners are maintaining their accounts on accrual basis and therefore, at the close of each accounting year i.e. December 31st, markup is accrued on the estimated return on profit for the unpaid period of the deposit in the financial statement, so as to reach a correct income for the years. It is further contended that the accrued profit in the accounts is neither paid nor credited to the account of the depositors and thus no tax is deducted till the condition laid down under section 158 of the Ordinance are met. It is upon maturity that the actual profit payable to the customer/depositor is worked out on the approved rates and its either paid or credited to the specific accounts of the customers/depositors maintained with the bank and it is at this point in time that the petitioner banks withhold/deduct tax at the rate of 10% of the profit/return under section 151 read with section 158 of the Ordinance and deposit the same in the Federal Treasury within the prescribed period.

In order to resolve the controversy, it would be appropriate to refer to the provisions of section 158 of the Ordinance, which reads as follows:-

"158. Time of deduction of tax.---A person required to deduct tax from an amount paid by the persons shall deduct tax:-

(a) in the case of deduction under section 151, at the time the amount is [paid or] credited to the account of recipient [whichever is earlier]; and

(b) in other cases, at the time the amount is actually paid.]"

The language employed in the above provision is so simple and explicit that it does not give room for any ambiguity. It clearly requires deduction under section 151 of the Ordinance at the time the amount is paid or is credited to the account of the recipient and as rightly emphasized by Mr. Sirajul Haq Memon, Advocate who is present in Court in some other case and has assisted this Court in analyzing and interpreting section 158 of the Ordinance in the present context, that the word "recipient", as used in the above section has its own significance which implies that it is only at the time the credit entry is effected in such account wherefrom the accountholder/recipient may withdraw the amount and as such the amount credited falls within the power and control of the recipient that the petitioners become liable to deduct and deposit the tax in terms of section 151 of the Ordinance, whereas no such credit entries have been effected by the petitioners in the respective accounts of their customers/depositors and according to the petitioners the credit entries in question have been effected merely in the ledger accounts which entries do not entitle the customers/depositors to withdraw such amount and the withdrawal can only be made/claimed at the time of maturity of the deposit.

Mr. Andrabi, the learned counsel for the petitioners submits that whenever such amount has become due and payable to the customers/ depositors corresponding, credit entries have been effected in their respective accounts and tax thereon has been withheld and paid accordingly.

On the other hand, Mr. Ali Mumtaz Shaikh, the learned counsel for the respondents, submits that even credit entries effected in the ledger accounts would mean making a credit in favour of the customer/ depositor whether they become entitled to withdraw the same or not, and that in any event the petitioners were/are liable to withhold and deposit the tax in respect of the amounts in question, at least on the basis of the minimum rate of return, as even in case of a premature encashment the petitioner banks are liable to pay returns/profits, though such return may be at a rate lesser than the rates which are to be applied at the time of maturity. He submits that the various schemes/products whereunder term deposits are made also provides for the rates of return/income that the customer/depositor become entitled to upon premature encashment.

Whereas, Mr. Andrabi, learned counsel for the petitioners controverts the claim that the rates of return/profits in case of premature encashment are pre-determined.

However, without going into the controversy as to whether or not the petitioner banks, in terms of their various products/schemes are liable to pay returns/profits on term deposit upon their encashment on pre-determined rates, we are of the view that in terms of section 158 of the Ordinance the time prescribed for withholding/deducting and paying tax on returns/profits in respect of the term deposits is the time when the amount of return/profit is credited to the accounts of the recipient. The above view also finds support in the judgment in the case of Habib Bank Ltd, Karachi v. Deputy Commissioner of Income Tax, Companies-I, Karachi (2009) 99 Tax 326 (H.C. Kar.), wherein a Division Bench of this Court, whilst addressing the issue as to whether the Tribunal has rightly held in that case, that income under the head interest on securities under section 17 of the Income Tax Ordinance, 1979 is chargeable to tax on accrual basis, held that interest on time bound security, which is not payable before the fixed date accrues on the day it becomes due and is receivable. The contention of the appellant in the above cited case was that the Government securities purchased are time bound, and as such, returns thereon are receivable by the appellant on the date of their maturity only. It was further submitted that under International Accounting Standards so the appellant has to calculate the profit which is accrued to him on those securities till the last day of accounting year and declare it as accrued income in the account but the real fact of the matter is that no interest accrues before the date of maturity of the securities and the interest thereon is receivable by the appellant on the date of maturity only, whereas, the respondents instance was that the interest on securities is assessable in accordance with the method of accounts regularly maintained by the assessee, and since admittedly the appellant is maintaining its accounts on accrual basis therefore the forum below had rightly taxed the interest on securities on accrual basis and not on cash basis as declared by the assessee. After hearing the parties, the Division Bench, whilst holding that under section 17(1) (1) returns on any securities of the Federal Government or Provincial Government "receivable" by the tax payer in any income year is chargeable under the head `interest on securities'. It was observed that the word `receivable' is the important word in the above subsection and that such income can only be charged under the head `interest of securities" in the income year in which it is receivable by an assessee.

Mr. Ali Mumtaz Shaikh in his attempt to distinguish the above case from the present one, has submitted that the case under reference is based on a judgment of the Indian Supreme Court which has been rendered on the basis of Indian law and that the judgment is in respect of the provisions of Income Tax Ordinance, 1979 and is therefore, not applicable to the present case.

In the above referred judgment, the Court has analyzed and interpreted section 17(1)(a) of the Income Tax Ordinance, 1979, which reads as follows:-

Section 17(1)(a) of the Income Tax Ordinance, 1979.

Interestsecurities.---(1) The following incomes shall be chargeable under the head interest on securities, namely:

(a) Interest on any securities of the Federal Government or a Provincial Government receivable by an assessee in any income years; and;

However, in our opinion, the analogy between the provisions of the above section and section 158 of the present Ordinance can be drawn from the word "receivable" used in section 17(1)(a) of the Ordinance, 1979 and the phrase "to the account of recipient", employed in section 158 of the present Ordinance and thus the principle as laid down in the above cited judgment that in view of the word "receivable" used under section 17(1)(a) of the Ordinance, 1979 income can only be charged under the head interest on securities in the income year in which it is receivable by an assessee is equally applicable to a case under section 158 of the present Ordinance, as in terms thereof and in view of the above phrase used therein the petitioners become liable to withhold/ deduct the tax in question and to deposit the same with the State treasury only at the time of maturity of the deposit and when the same is accordingly credited to the respective account of the customer/depositor. We would, therefore, hold that the impugned demand, from the Income Tax Authorities is illegal, without any justification and quash the impugned notices and set-aside the orders passed in pursuance thereof.

As regards the contention of Mr. Ali Mumtaz Shaikh that on the one hand the petitioner banks are enjoying the benefits under section 31 of the Income Tax Ordinance, 2001 by showing the ledger entries in question as their liability and on the other are refusing to withhold and pay the prescribed tax in respect of such entries by contending that the same have not become due and payable, which is wholly unfair rather preposterous and is not permissible under the Law. He submits that in all fairness the Income Tax Authorities should be allowed to proceed against the petitioner banks for misusing the provisions of section 31 in violation of section 21(c) of the Ordinance, we may observe that in case the official respondents find it appropriate to proceed against the petitioners in that regard, they are at liberty to initiate such proceedings in accordance with Law.

The petitions along with the pending applications stand disposed of in the foregoing terms.

S.A.K./U-5/KOrder accordingly.