2002 PLP 2768 (PTD)

(i) The Income Tax Ordinance was extended to Northern Areas in 1981 which was prospectively withdrawn from 3‑4‑1999. (ii) The Ordinance was not applicable to Tribal Areas. (iii) The income from Securities purchased during the period 1981 to 1999 is chargeable to income‑tax. (iv) There is no prohibition that non‑residents cannot invest in the Securities and, therefore, the income from securities shall be liable to tax. It was clarified that "the said advice does not mean that a non resident" investing in the securities issued by the National Saving Centres at a place where the income‑tax law is not in force, shall be compelled to pay income‑tax merely on the ground that the interest on securities is paid by the Government of Pakistan. Income‑tax can never be charged on the source of payment but it is charged on the income of the person liable to income‑tax.

6. The question for consideration is whether the withholding tax can be deducted from the profits accruing on certificates issued by the National Savings Centres in Tribal Areas to its residents. The first point, which is very clear, is that Income Tax Ordinance was never extended to Tribal Areas including Tribal Areas of Balochistan. The complainant had referred to C.B.R.'s Letter No. SMO 1(8)WHT/94, dated 27‑2‑1995 referred above. It clearly stated that the provisions of section 50 of the Income Tax Ordinance are not applicable to the Branches of Pakistan Banks located in the Tribal Areas.

7. The C.B.R. has referred to subsections (3) and (6) of section 12 of the Income Tax Ordinance in support of its contention that the profits accruing on the certificates of National Savings Scheme purchased in Tribal Areas withholding tax is chargeable. Section 12, .subsection (3) reads as follows:‑‑ "(3) Any income by way of interest payable by‑‑‑ (a) a person who is a resident except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside Pakistan or for the purposes of making or earning any income from any source outside Pakistan; (b) a person who is a non‑resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in Pakistan or for the purposes of making or earning any income from any source in Pakistan, hall be deemed to accrue or arise in Pakistan." Subsection (6) reads as follows:‑‑ (6) As used in subsections (3), (4) and (5), the expression `a person who is resident' includes Government.

8. The effect of subsection (3‑a) is that any income accruing by way of interest payable by a person who is a resident shall be deemed to accrue or arise in Pakistan. Under subsection (6) the expression "a person who is resident" includes the Government. Therefore, the income by way of interest payable by the Government shall be deemed to accrue or arise in Pakistan. Section 12 by fiction of law considers income by way of interest payable by the Government to be an income arising in Pakistan. Any income, which arises in Pakistan to any person, is subject to income‑tax. The main emphasis is on the accrual of income from a resident and not the residence of the person to whom the income accrues.

9. Under‑ section 9 of the Income Tax Ordinance, income‑tax is chargeable in respect of the total income of the income year. Scope of the term "total income" has been defined under section 11 according to which the total income of a person who is a resident in any assessment year includes all income from whatever source derived which: ‑‑ (i) is received or is deemed to be received, or (ii) accrues or arises or is deemed to accrue or arise in Pakistan, or (iii) accrues or arises outside Pakistan. The total income of a non‑resident includes all income from whatever source derived which‑‑ (i) is received or deemed to be received in Pakistan, or (ii) accrues or arises or is deemed to arise to him in Pakistan. Thus in respect of a resident irrespective of the‑source, of income, any income which is received or deemed to be received, accrues, arises or is deemed to arise in Pakistan or accrues or arises outside Pakistan is included in the total income. The treatment to non‑resident is the same except that income which accrues or arises to him outside Pakistan is not included in his total income

10. The term "income deemed to accrue or arise in Pakistan" has been defined in section 12 of the Ordinance. According to subsection (2) of section 12 any income accruing or arising, whether directly, or indirectly, through or from (a) any business connection in Pakistan, (b) any asset, property or source of income in Pakistan, shall be deemed to accrue in Pakistan. 'Subsection (3) of section 12 further provides that any income by way of interest except those specified therein payable by "a person who is a resident" shall be deemed to accrue or arise in Pakistan. In the present case as the Government has paid the interest, can it be treated as a person resident m Pakistan? This aspect has been taken‑ care of by subsection (6) of section 12 which expressly states that this term includes Government. The cumulative effect of the above provisions is that the interest paid by the Government on certificates issued by or under the National Savings Scheme shall be deemed to accrue or arise to a resident in Pakistan whether interest is paid in the Tribal Areas or outside Pakistan. The same treatment will be given to a non‑resident as he is a recipient of income accruing or arising from an asset or source of income in Pakistan. The fact that Income Tax Ordinance is not applicable in Tribal Areas does not affect the chargeability as by fiction of law such income is deemed to accrue in Pakistan which would mean an area where Income Tax Ordinance is applicable. The total income of every person, including payment of interest by the Government on the Savings Certificates or on Schemes issued by the National Saving Centre is chargeable to income‑tax.

11. It is pertinent to point out that so fat Regular Income Certificates are concerned under Rule 9 of Regular Income Certificate Rules, 1993 the profits earned under the Rules is subject to withholding tax at the rate of 10% at source.

12. Where on Savings Certificates or similar securities, interest is paid by the Government to a person residing in Tribal Area such income shall be deemed to accrue to him in Pakistan. Once it is established that income arising from such payment of interest is deemed to accrue or received in Pakistan, tax will be chargeable. Because the basis of chargeability of tax in such cases is the place of accrual of income and not the residence of the assessee. The complaint has no merit and is closed. C.M.A./M.A.K./411/FTO Complaint closed.