1986 PLP (Trib (PTD)

FARHAT ALI KHAN (MEMBER)‑These four cross‑appeals relating assessment years 1977‑78 and 1976‑79 are arising out of the consolidated order of learned Commissioner Income‑tax (Appeals) recorded by him on 15th August', 1982.

2. The brief facts giving rise to these appeals are that the assessee, a public limited company and hereinafter referred to as the "appellant", claimed to assessment year 1977‑73, deduction of Rs. 36,000 and Rs. 30,000 paid as consultation fees to Messrs H. I. and A S. C., respectively. The Income‑tax Officer, however, was of the view that since aforesaid Messrs Rehmatullah and Chinoy did not render practically any service to the appellant and because no tax was deducted at source under section 18, the appellant was not entitled to the clawed deduction. Etc, therefore, added back total amount of Rs. 66,001, to the total income of the appellant.

3. Similarly in assessment year 1978‑79, the appellant showed in its books a provision amounting to Rs. 12,20,832 which was regarding a demand raised by the, Sales Tax Officer regarding sales tax liability of the appellant. But the Income‑tax Officer was of the view that since the sales tax liability was neither accepted nor paid the appellant was not justified in making provision for it in its account books. He, therefore, added back this amount also to the total Income of the appellant.

4. In assessment year .1978 79 the appellant teas also claimed payment of Rs. 8,5611 as capital gain tax on sale of land but the Income‑tax Officer disallowed it holding it to been expenditure of capital nature.

5. Moreover, in assessment years 1977‑78 and 1978‑79, the Income‑tax Officer determined the tax at Rs, 1,12,17.945 and Rs. 93,04,041 and then treating it as unretained income levied surcharge amounting to Rs. 7,27,755 and Rs. 8,01,478, respectively. The appellant having been aggrieved and dissatisfied by all the abovementioned findings of the Income‑tax Officer went up in appeal. Regarding payment of consulta tion fees, it was contended that singe tile payment was made under sec tion 18(3‑BB) of the repealed Income‑tax Act (hereinafter referred to as "the Act" therefore, no deduction of tax tat source was made to terms of the provisions of aforesaid section. Regarding provision of Rs. 12,20,832 ,it was canvassed before learned Commissioner of Income‑tax (Appeal that it was a determined tax liability, hence was riot a mere provision, In this connection reliance was placed on a decision of this Tribunal reported as (1960) 2 Taxation

405. About disallowance of Rs. 8 500 the argument advanced at 1st appellate forum was that firstly, it was not an expen diture of capital nature and, Secondly, that it was already taxed in earlier assessment year, namely 1977‑

78. As for as the levy of surcharge was concerned the reliance was placed on (1979) 40 Taxation 47 (Trib.) and it was urged that no surcharge could be levied on the amount of tax payable. The learned Commissioner of Income‑tax (A) rejected the first submission regarding consultation fee: and confirmed the disallowances of Rs. 66,

000. Nevertheless accepting the contention of the appellant regarding sales liability the appeal was allowed and the addition of Rs. 12,20,832 was ordered to be deleted. Regarding add‑ba (sic) of Rs. 8,500 the learned Commissioner of Income-tax (Appeals) was pleased to set aside the order of the Income-tax Officer and sent the matter back to him with the direction that he should investigate as to whether the same amount was disallowed regarding same asset in the preceding year. As far as levy of surcharge was concerned, the learned Officer below followed decision of this Tribunal as mentioned above and directed the Income‑tax Officer to follow it accordingly. Now the appellant has come up in appeal regarding disallow of Rs. 66,000 paid to Messrs R .and C .. in assessment year 1917‑

78. Regarding assessment year 1978‑79, the direction of learned Commissioner of Income‑tax (Appeals) about re investigation of the claim of Rs. 8,500 has been challenged in the second appeal. The Department, on the other hand, has as usual, filed both the appears regarding direction of learned Commissioner of Income‑tax (Appeals) about levy of surcharge. Moreover, in assessment year 1979‑80, the deletion of Rs. 12,20,832 has further been challenged.

6. Mr. K. S ..appeared for the appellant and Mr. Muhammad Farid, the learned Departmental Representative appeared for the Department. Consultancy fee Mr. K. S

the learned counsel for the appellant argued that the finding of learned Commissioner of Income‑tax (Appeals) that section 18(3‑BB) of the Act was not attracted under the facts and circum‑ stances of the case was erroneous. Mr. M

F

the learned Departmental Representative, on the contrary, argued that the case of the. appellant fell under section l8t2) of the Act read with section 10(4(u) and Explanation I appended thereto. Before examining the merits of the respective contentions of the carried counsel for the appel lant as well as the learned Departmental Representative, it would be advan tageous if the relevant provisions of law are reproduced hereinafter. We start with section 18(3‑BB) and it reads: ‑ "18(3‑BB). Any person responsible fur making any payment in full or in part (including a payment by way of an advance) to "the recipient", on account of the supply of goods or execution of a contract or for services rendered to, or with, the Federal Govern ment, a Provincial Government, or a local authority or a statu tory body or corporation or a foreign contractor or consultant or consortiam shall deduct on account of the tax payable by him, where the total value of such goods, supplied or services rendered exceeds fifty thousand of the said payment and all such deduc tions or collections shall be deemed to be payments of tax made by the assessee and shall be given credit for in his assessments: Provided that the Commissioner may, on an application made by any recipient and after making such enquiry as he considers neces sary, allow by an order in writing, any person responsible for making such payment not deduct any tax from any payment or payments made to such recipient, responsible for making any payment until such order is cancelled, shall make such payment without deduc tion of tax under this section. Provided further that nothing in this subsection shall apply to any class of persons receiving such payments specified in this behalf by the Central Board of Revenue by notification in the official Gazette. Explanation. The expression "payment", as used in this subsection, does not include payment made on account of the refund of any security deposit." Now we come to section 18(2) and it is as follows: ‑ "18 (2) any person responsible for, paying any income chargeable under the head "Salaries" shall, at the time of payment deduct Income- tax on the amount payable at a rate representing the average of the estimated total income of the assessee under this head From perusal of aforesaid section 18(2) of the Act' it appears that a person responsible for paying any income chargeable under the head "Salaries" is responsible for making deduction of income‑tax at source. Since it talks of income chargeable under the head "Salaries", it, there for, becomes necessary to refer to section 7 of the Act, which is as follows: ‑ "

7. Salaries.‑‑(1) The tax shall be payable by an assessee under the head 'Salaries' in respect of any salary or wages, any annuity, pension, or gratuity, and any fees, commission, perquisites, profits in lieu of, or in addition to, any salary or wages, which are due to him from, whether paid or not or are paid by or on behalf of Government, a local authority, a company, or any other public body or association, or any private employer ; and for the pur poses of this subsection advances by way of loan or otherwise of income chargeable under this head shall be deemed to be salary due on the date when the advance is received. Provided that the tax shall not be payable in respect of any sum deducted from the salary payable by or on behalf of the Government to any individual, being a sum deducted in accordance with the conditions of his service for the purpose of securing to him a deferred annuity or of making provision for his wife or children, provided that the sum so deducted shall not exceed one‑fifth of the salary: Provided further that ay respects any assessment year beginning on the first day of July, 1967, and for any year thereafter the sum so deducted shall not exceed the sum computed in the manner laid down in subsection (3), section 15 had such salary for the purposes of such computation under that section, been his total income. Provided further that the tax shall not be payable by an indivi dual in respect of any sum paid, in order to make provision for his wife, children or other persons dependent on him, to a bene volent fund or any premium paid under a ground insurance scheme, if such fund or scheme is approved by the Central Board of Revenue for the purpose of this proviso. Provided further that where tax is deductible at the source under section 18, the assessee shall not be called upon to pay the tax himself unless he has received the salary without such deduction. Explanation 1.‑The right of a person to occupy free of rent as a place of residence any premises provided by his employer is a perquisite for the purposes of this subsection. Explanation 2.‑A payment due to or received by any assessee from an employer or former employer including compensation due to or received by him at, or in connection with the termination of his employment or the modification of the terms or conditions of his employment or other fund shall to the extent to which it does consist of contribution by the assessee or interest on such contribu tions be deemed to be a profit received in lieu of salary far the pur poses of this subsection. Provided that nothing herein contained shall render liable to income -tax any payment from a provident fund to which the Provident Funds Act, 1925, applied or any payment from a recognised pro vident fund within the meaning of Chapter IX‑A if such payment is exempted from payment of income‑tax under the provisions of Chapter 1X‑A, or any payment from an approved superannuation fund within the meaning of Chapter IX‑A made on the death of a beneficiary or in lieu of or in commutation of an annuity, or by way of refund of contributions on the death of a beneficiary or on his leaving the employments in connection with which the fund is established ;" Since section 7 talks of perquisites also, therefore, clause (d) of sub section (4) of section 10 of the Act, alongwith its three Explana tions appears to be relevant and is reproduced hereinbelow: ‑ "10

(4)

(d) any allowance in respect of so much of the expenditure incurred by an assessee on the provisions of perquisites or other benefits to any employees as exceeds thirty per cent. of the salary of such employee Provided that in the case of an employee whose contract service has been approved under clause (xiii) of subsection (3) of section 4, this clause shall not apply for a period of five years commencing next after the expiry of three years since the date of his arrival in Pakistan. Explanation I.‑The expression 'salary', as used in this clause, means remuneration or compensation for services rendered, paid or to be paid at regular intervals and includes dearness, grain compensation or cost of' living allowance and bonus and commis sion which are payable to an employee in accordance with the terms of his employment as remuneration or compensation for services but does got include the employer's contribution to a recognised provident or superannuation fund op any other sum which does not enter into the computations for pensionary or retirement benefits. Explanation 2.‑The expression 'employee' where the assessee is a company, includes a director thereof. Explanation 3.‑The expression "perquisites or other benefits", as used in this clause, does not include employer's contribution to a recognised provident fund or to an approved superannuation fund." Now turning to the merits of the respective contentions of the learned counsel for the appellant as well as the learned Departmental Representative, we start with the finding of the assessing officer. He disallowed Rs. 66,000 with the following observation "Consultation fees paid to H. I. Rehmatullah, Mr. A. S. Chinoy for having rendered practically no services and non‑deduction of tact under section 18

Rs. 66.000." The learned Commissioner of Income‑tax (Appeals), however, admitted that the services were actually rendered by both the gentlemen mentioned above when he observed "There is weight in contention? of learned counsel regarding the services rendered, the payment of remuneration to above persons who are non‑Executive Directors of the company is also authoris ed by the Controller of Capital Issues @ Rs. 2,500 per month to Mr. Amir S. Chinoy and Rs. 3,000 per month to Mr. H. I. Rehmatullah vide their letter, dated 13th August, 1975." However, after discussing the provisions of section 18(2) and Expla nation 1 appended to section 10(4)(d) he made the following observa tion. "In view of section 18(2) read with section 10(4)(x) the inescap able conclusion is that the default of non‑deduction of tax under section 18 is well‑established. The disallowance of Rs. 66,000 on this count is, therefore, upheld in both the years." With due respect to him we think that the learned Commissioner of Income‑tact (Appeals) failed to appreciate the law correctly. Before pro ceeding further let us mention that explanation I appended to clause (d) of subsection (4) of section 10 of the Act is strictly confined to clause (d). The word, used in this Explanation, viz. "salary" as used in this clause surely refer to clause (d) which, in turn, deals with restriction on allowance of perquisites and other benefits to 30% of the salary, Simi larly, Explanation 2 includes the Director of a company within the meaning of word `‑employee" again for the purposes of restricting the per quisites. Although the words "in this clause" have not been used in Explanation 2 but Explanation 1, which follows Explanation 2, deals again with perquisites and other benefits and since Explanation 1 refers to clause (d), as a necessary corollary, the word "employee" which finds place in Explanation 2 must refer to the word "employee" as used in clause (d) of subsection (4) of section 10 of the Act. However, the matter does not end here and now we would have to turn to sections 18(2) and I8(3‑BB) of the Act. From comparison of both subsections it appears that subsection (2) deals with the deduction of income‑tax regarding income chargeable under the head "salaries" but, on the contrary, subsection (3‑BB) enjoins upon a person responsible for making any payment to make deduction of tax at source. As is obvious under subsection (2) it is the duty of an employer to deduct the tax at source whereas under subsection (3‑BB) he need not be an employer. Again, subsection (2) deals with the payment of salaries whereas sub section (3‑BB) is concerned with "any payment". Let us mention at this juncture that section 7 of the Act makes the income chargeable under the head "salaries" and when we read it with Explanation (1) of section 10(4) of the Act, it appears that the term "salary" includes wages, annuity, pension, gratuity, any fees, commissions, perquisites, other profits in lieu of or in addition to any salary or wages etc. The term "salary" has not been defined by section 7 or elsewhere in the Act except by Explanation 1 appended to clause (d) of subsection (4) of section 10 of the Act, but, as we have discussed above, it is restricted to the calculation of the permissible perquisites. If we look to dictionary meaning of the word, we find that according to Oxford Twentieth Century Dictionary, it means "a fixed and periodical payment made to a person for rendering some services other than manual or mechanical work". It is important to note that the concept of salary envisages an employer and an employee, a written or an implied contract of service and a periodi cal payment in return for services. The word "remuneration", to which we shall be referring subsequently, is a wider term than salary and it means a quid pro quo. Whatever consideration a person gets for giving his services seem to be a remuneration for them. Sometimes the word "remuneration" is used as synonym of word "salary". Be it as it may, reverting back to subsection (2) and subsection (3‑BB) of section 18 of the Act, it appears that in the case of former the payment is made to an employee and tax is deducted before making such payment. But, in the case of latter, the tax is deducted while making payment to a "recipi ent" who need not necessarily be an employee. Again, the salary is paid for rendering services whereas under subsection (3‑BB) the payment is made either for (1) supply of goods, or (2) execution of a contract, or (3) for services rendered. Thus, here again, a distinction has been maintained between the two sub sections. It is true that payment is made for services rendered under sub section (3‑BB) as well as it is made as salary again for services rendered. Furthermore, the tax under subsection (2) is deducted on the average rate applicable to the estimated total income of the assessee provided his salary is above the exempted limit. On the other hand, under subsec tion (3‑BB) the tax at source is deducted @ 3 % only when the value of such goods supplied or services rendered exceeds Rs. 50,

000. Thus, it is very clear that both subsections of section 18 of the Act‑are meant for different type of persons and different type of income. Mr. K. S.

the learned counsel for the appellant argued that since aforesaid Rehmatullah and A. S. Chinoy were paid remune ration for services rendered and that too with the approval of Controller of Capital Issue;, hence subsection (3‑BB) applied. The learned counsel relying upon Commissioner of Income‑tax v. Lady Navaj Bai, R. A. Tata ((1947) 15 1 T R 8), further submitted that the remuneration received by a director is taxable under section 12 and nut under section 7, because he is not an employee of a company. On the contrary, Mr. M

F the learned Departmental Representative, argued that since salary means something paid in return of services rendered, the remuneration paid to aforesaid gentlemen was nothing but salary chargeable under section 7 as such, the appellant must have made deduction under subsection (2) of section

18. AS far as the Lads, Nawaj Bai's case is concerned, with due respect to learned counsel for the appellant, it does not apply under the facts and circumstances of the case of' the appellant. In that case, the lady had no contract of employment with the company and the money paid to her was not treated to be salary. However, in the case of the appellant, Mr. K

S

has produced two letters, dated 25th September, 1974, and 13th August. 1975. The first letter is addressed to the Controller of Capital Issues whereby the permission is sought for making payment of Rs. 36,000 to Mr. R

and Rs. 30,000 to Mr. Chinoy. The concluding paragraph of the letter reads. "We are sure in the light of above Explanations you will reconsider the question of remuneration of Mr. Rehmatullah and Mr. Chinoy and agree to the payment of adequate compensation for the services rendered by them. We feel that under the circumstances the following annual payments to these two directors are very reasonable (i) Mr. Habib I. Rahimtoola Rs. 36,000 per annum plus one first class return air fare to United Kingdom for wife. (ii) Mr. Amin S. Chinoy Rs. 30,000 per annum. The letter, dated 13th August, 1975, is addressed to the appellant and conveys the approval of the Controller of Capital Issues regarding payment of Rs. 3,000 and Rs. 2,509 produced before us photo copies of Minutes No.1349 and 1778 which speak of consultancy agreement and renewal of consultancy agreement. Thus, from this evidence it is full established that both Messrs R

and C

were also employee of the appellant as consultant in addition to being its non‑executive directors. Now as far as the application of subsection (2) or subsection (3‑BB) o section 18 is concerned, it is true that the words "services rendered" are used in both subsection (3‑BB) and section 7 of the Act. However, since section 7 and subsection (2) of section 18 are specifically talk in of salaries, therefore, they would govern the case of the appellant. In our judgment subsection (3‑BB) does not deal with those type of services t rendered which give rise to payment of salaries of remuneration. If we read section 7 carefully we find that such words as annuity, pension, or gratuity have been used in it. In our judgment the deliberate use of these words suggests that here salary or remuneration means and implies that type of rendition of services which are on regular and long‑term basis culminating in payment of pension or gratuity after reaching the age of superannuation. Whereas the expression "services rendered" used in subsection (3‑BB) of section 18 of the Act contemplates casual type of services of shorter duration arising out of some special contracts. As such, under the facts and circumstances of this case since the employment is of short duration without any benefit of pension or gratuity, the services rendered by both gentlemen fall under subsection (3‑BB) and the appellant was right in not making any deduction. Thus, the conclusion of learned Commissioner Income‑tax (Appeals) appears to be incorrect. We, therefore, order deletion of Rs. 66,000 for reasons as discussed above. From perusal of the record it appears that the appellant was served with a demand notice regarding payment of sales tax amounting to Rs. 12,20,

832. It further appears that though it showed aforesaid amount in its books as a liability yet it disputed it before the sales tax autho rities. The Income‑talc Officer was of the view that since the appel lant neither paid nor accepted it; it was nothing but a provision. Hence hr. disallowed it. The learned Commissioner of Income‑tax (Appeals) however, ordered its deletion by relying upon a decision of this Tribunal reported as (1960) 2 Taxation 405, Mr. M

F

the learned Departmental Representative supported the finding of Income‑tax Officer. According to him since the appellant had disputed the liability, it was not entitled to show it in its books of account as liability and then use the amount to its own advantage. Khalifa Salahuddin, on the contrary, relied upon Shri Kant Textiles v. Commissioner of Income‑tax ((1971) 81 I T R 222) in this case the assessee firm had purchases large quantity of handloom cloth manufactured by certain groups of Heavens. However, the Central Excise Officer took the view that the cloth allegedly purchased was in fact manufactured by the weavers for and on behalf of the assessee. Con sequently they issued demand notice claiming payment of Rs. 14,95,252 within ten days from the receipt of that notice. The assessee firm on receiving the notice debited the aforesaid amount as Excise Duty payable and credited it in the Excise Duty payable account. At the same time it also disputed its tax liability. The Department by another letter brought down the demand to Rs. 2,42,090 provided the assessee agreed to pay the demand under compound levy system, The Tribunal held that as the assessee had never accepted the liability to pay Excise Duty and the assessee's objection was partly accepted by the Excise Department, the fact that the assessee had debited the full amount of Excise Duty in its books by itself cannot turn an unascertained and unaccrued liability into an ascertained and accrued liability. Hence Rs. 14,95,252 debited in the account books were not allowed as expenses. But, on reference, the High Court took the view that since the amount of Rs. 14,95,252 which was originally demanded was neither withdrawn nor cancelled but a fresh conditional offer was made, the liability to pay remained ascer tained and the assessee was allowed aforesaid sum as expenses. In the instant case also, the demand was raised and in assessment year 1978‑79, the appellant allowed it as tax liability. The fact that it neither paid nor accepted it was wholly immaterial for the simple reason that the amount was shown as tax liability which was by all means determined and ascertained as far as the sales tax demand notice was concerned. We think that the Shari Kant Textiles Mill's case also helps the appellant in addition to the decision of the Tribunal, which has been relied upon by learned Commissioner of Income‑tax (Appeals), his finding, therefore, is hereby affirmed. Payment of tax on sale of land: The Income‑tax Officer disallowed Rs. 8,500 for the reason that it was capital expenditure but the Learned Commissioner of Income‑tax. (Appeals) did not agree with the finding of Income‑tax Officer. How ever, since it was argued before him that the same amount was disallow ed as expenditure in immediately preceding year on the same asset it was doubly disallowed in assessment year 1973 79, the learned Commis sioner of Income‑tax (Appeals) set aside the order of Income‑tax Officer and sent the matter back to him. Mr. M

F

the learned Departmental Representative argued that the order of learned Commis sioner of Income‑tax (Appeal,) was, right as it required investigation of certain facts. (K

S

) on the other hand, argued that when it was known that Rs. 8,500 was disallowed earlier also, the learned Commissioner of Income‑tax (Appeals) should have deleted. We agree with the learned Departmental Representative that the matter requires investigation of facts regarding the amount of tax and the asset as well as its disallowance in the earlier year. We, therefore, confirm the finding of learned Commissioner of Income‑tax (Appeals); the Income‑tax Officer would make fresh investigations in the light of the direction of learned Commissioner of Income-tax (Appeals). Mr. M

F

the learned Departmental Representative submitted that the appellant had declared its income as Rs. 44,42,385 and Rs. 1,96,28,549 which was assessed at Rs. 249,43,75 and Rs. 2,11,10,623 in assessment years 1977.1978 and 1975‑1979 respectively. He further pointed out that the appellant had made provision for payment of taxes amounting to Rs. 73,71,0uJ and Rs. 99,40,326 in each year respectively. On the strength of these figures the learned Departmental Representative argued that the aforesaid decision of the Tribunal did not apply under the facts and circumstances of these appeals for the simple reason that the amount of tax levied on the difference between the assessed and declar ed income had not been available in the books of account of the appellant to meet working capital requirement. According to him the surcharge levied thereon was at least according to law. He further argued that since the question as to whether the amount of taxes payable was upon for levy of surcharge was pending in High Court for adjudication, the Department had tiled these appeals to safeguard the revenue interest. K

S

the learned counsel fur the appellant, on the other hand, relied upon a decision of this Tribunal recorded in I. T. A. No. 1048/KB of 1981‑82 (Assessment year 1980‑81), decided on 22nd July, 1985. We have heard both the learned Departmental Representative as well as the learned counsel for the appellant. A Division Bench of this Tribunal .in the case relies upon by learned counsel for the appellant made the following observation The learned Departmental Representative pointed out that the difference between the income declared and the income assessed could a not, in any case, be considered as retained income because such difference does not exist in the books of account. The plea taken by the learned Departmental Representative cannot be considered at this stage because the Income-tax Officer himself failed to take cognizance of this matter. The learned Commissioner of Income tax (A) also did not consider this matter and hence it does not arise out of the order of learned Commissioner of Income‑to (Appeals). The Department accordingly fails in its appeal." With due respect the same observation applies with all fours in these appeals also and we respectfully follow it. Thus, all the four appeals stand disposed of to the extent and in the manner as indicated above. M. Y. H. Order accordingly.