COMMISSIONER INLAND REVENUE, ZONE-I VS INDUSTRIAL CHEMICALS (PVT.) LTD., 2017 PTD-KARACHI-HIGH-COURT-SINDH 756 (2016)

Income Tax Ordinance (XLIX of 2001)---

----Ss. 149 & 133---Reference---Factual controversy---Tax deduction---Salaries of daily wages employees---Concurrent findings of facts by two forums below---Authorities were aggrieved of concurrent findings of Commissioner Inland Revenue (Appeals) and Appellate Tribunal Inland Revenue, regarding disallowance of staff salaries when the same was based upon erroneous belief that the staff welfare and bonuses paid to daily wage employees did not come under the purview of tax deduction under S.149 of Income Tax Ordinance, 2001---Validity---Concerned authority could not satisfactorily dispute factual and legal position nor could point out any error or illegality in the orders passed by two forums below on the matters which were based on appreciation of facts---Concurrent findings as recorded by Commissioner Inland Revenue (Appeals) as well as Appellate Tribunal Inland Revenue were findings of facts, and no substantial legal question of law had arisen from orders by Appellate Tribunal Inland Revenue---Reference was dismissed in circumstances.

Jawaid Farooqui for Applicant.

ORDER

Since common questions of law have been proposed in the aforesaid two reference applications, filed against a common impugned order dated 10th March 2016, passed by the Appellate Tribunal, Inland Revenue (Pakistan), Karachi in I.T.A. No.519/KB of 2013 (Tax Year 2007) and I.T.A. No. 520/KB of 2013 (Tax year 2009), therefore, the same are being taken up for hearing together.

2.Learned counsel for the applicant submits that he would press only three common questions i.e. questions Nos. 2, 3 and 5 as proposed in the aforesaid reference applications which, according to the learned counsel, are questions of law arising from the impugned order as referred to hereinabove and require opinion of this Court in terms of section 133 of the Income Tax Ordinance, 2001. The said questions are reproduced hereunder:--

"2. Whether under the facts and circumstances of the case, the learned Tribunal was justified to maintain the order of the learned Commissioner (Appeals) regarding disallowance of bad debts amounting to Rs.83,455/- when the tax payer had not shown any efforts at recovery, and hence it could not be said that the last ray of hope of recovery had been lost?

3. Whether under the facts and circumstances of the case, the learned Tribunal was justified to maintain the order of the learned Commissioner (Appeals) regarding disallowance of staff salaries when the same was based upon erroneous belief that the staff welfare and bonuses paid to the daily wage employees did not come under the purview of tax deduction under section 149?

5. Whether under the facts and circumstances of the case, the learned Tribunal was justified to maintain the order of the learned Commissioner (Appeals) regarding addition made under section 21(1), which was passed relying merely on the submission of the taxpayer, without taking into consideration the details of expenditure falling within the ambit of the provision narrated on page numbers 17 to 19 of the amended assessment order under section 122(1)/(5)?"

3.Learned counsel for the applicant has read out the impugned order passed by the Appellate Tribunal, Inland Revenue as well as the orders of the CIT (Appeals) and DICT in the aforesaid matters and submits that DICT was justified to disallow subject expenses and to make additions in respect of bad debts, staff salaries and expenses falling under section 21(1) of the Income Tax Ordinance, 2001, whereas, Per learned counsel, the CIT (Appeals) and the Appellate Tribunal, Inland Revenue, have deleted such additions without proper application of mind. It has been prayed that the questions proposed hereinabove are questions of law which may be answered in negative in favour of the applicant and the order passed by the DICT in both the petitions may be restored.

4.We have heard the learned counsel for the applicant, perused the impugned order passed by the Appellate Tribunal, Inland Revenue as well as the orders passed by CIT (Appeals) and DCIT in the aforesaid matters with his assistance and have also examined the relevant provisions of law.

From perusal of the order passed by the DCIT, it appears that while disallowing the aforesaid expenses and making additions pursuant to such disallowance, the DICT did not examine with due care the relevant provisions of law as there are certain conditions for disallowing bad debts, expenses towards staff salaries or expenditure under the provisions of section 21(1) of the Income Tax Ordinance, 2001. The explanation offered by the taxpayer in respect of such expenditures, which has duly been considered by the Commissioner (Appeals) in both the orders, depicts the correct factual and legal position according to which the amount claimed as bad debt could not possibly be recovered as the company against whom such amount was outstanding was wound up, whereas, the amount of wages paid to daily-wage employees, could not be treated as salary of a regular employee therefore, the tax could not be withheld on payment made to daily wage workers. Similarly, the amount which has been disallowed by invoicing the provisions of section 21(1) of the Income Tax Ordinance, 2001, falls within the category of expenditure covered by 2nd proviso to section 21(1) i.e. expenditure not exceeding Rs.10,000, utility bills, freight charges, travel fare, postage and payment of taxes, duties, fines or any statutory obligation, therefore, such disallowance was also not justified in facts and law. Similarly, disallowance made by invoking the provisions of section 21(c) was also not justified under the facts and circumstances of the case. It would be advantageous to reproduce the relevant finding of the Commissioner (Appeals) in respect of the aforesaid disallowance, which reads as under:

"Disallowance on non-deduction of tax on salaries to staff

As regards of the disallowance of the amount of Rs. 1,138,000/- under section 21(c) of the Ordinance in respect of non-deduction of withholding tax on various allowances given to the daily wages staff of the appellant, I have considered the details submitted to the Assessing Officer at the time of audit proceedings which have been mentioned in assessment order. After examining the details submitted before me, I found the allowances given to the daily wages employees on account of staff welfare and bonuses do not come under the purview of withholding of tax under section 149 of the Ordinance either due to not to be considered as salary income like contribution to SESSI and EOBI and others or the amount of the salaries after adding the given allowance to the salary income the resultant amount of salary income is below then the threshold limited provided under the Ordinance for withholding of tax under section 149 of the Ordinance. Further, the basis adopted by the Assessing Officer while making disallowance on page No.10 of the amended assessment order were vague and not tenable in the eyes of law since stock phase like the reply of the AR of the taxpayer was unsatisfactory. Accordingly, I delete the addition of Rs.1,138,000.- under section 21(c) of the Ordinance on account of non-deduction of tax under section 149 of the Ordinance.

Disallowance of salary of factory manager due to un-verifiability

As regards of disallowance of Rs.850,000/- representing the salary given to Major Ayaz Khan, a factory manager of the Company, the AR of the appellant has argued that while making disallowance the Assessing Officer on page No. 10 of the assessment order has stated that the said amount is being disallowed under section 174(2) of the Ordinance being unverifiable. Further, the Assessing Officer has also mentioned the provision of section 21(c) of the Ordinance. The AR of the appellant stated that the Assessing Officer was himself not clear whether the said sum should be disallowed under section 21(c) of the Ordinance or section 174(2) of the Ordinance. Further, the said amount of the salary was given to such employee through a bank account maintained in the name of the appellant with a commercial bank United Bank Limited, Chaklala, Rawalpindi, since the said sum was transferred through Companies bank account to the bank account of the employee therefore, question of unverifiability does not arise. Further, the Assessing Officer has only considered the withholding statement in respect of daily wages employees of the Company and not considered all the payroll sheets provided to him.

Disallowance under section 21(1) of the Ordinance

The Assessing Officer has made the addition under section 21(1) of the Ordinance by taking the difference of the cash expenses incurred by the appellant and the amount worked out by him by taking the tax credit under section 231A of the Ordinance on cash withdrawal made by the appellant during the year. However, the Assessing Officer has considered the rectification application of the appellant whereby they have pointed out that the provision of section 2(1) of the Ordinance is not applicable on freight charges. However, he has not considered that the said provision is not applicable on expenditure not exceeding Rs.10,000/-, utility bills, travel fare, postage and payment of taxes, duties, fines or any other statutory obligations. The AR of the appellant has submitted at during the proceedings of the assessment, the details of cash expenses upto Rs.13,085,738/- has been submitted to the Officer Inland Revenue which has not been considered by him despite of the fact that it is reproduced by him on pages Nos.17 to 19 of the text of the assessment order. Accordingly, I direct to delete the addition made by him on account of cash expenses under section 21(1) of the Ordinance since the appellant has incurred the same on the exclusions provided in section 21(1) of the Ordinance."

5.While confronted with the above factual and legal position, learned counsel for the applicant could not satisfactorily dispute such position nor could point out any error or illegality in the impugned orders passed by CIT (Appeals) and Appellate Tribunal, Inland Revenue, in the aforesaid matters which are based on appreciation of facts.

In view of the hereinabove facts and circumstances, we are of the opinion that the concurrent findings as recorded by the Commissioner (Appeals) as well as the Appellate Tribunal, Inland Revenue in the aforesaid matters are findings of fact, whereas, no substantial question of law arises from the order passed by the appellate tribunal in the instant case. Accordingly, we do not find any substance in the aforesaid reference applications which are dismissed in limine together with listed application.

MH/C-11/Sindh Reference dismissed.