1981 PLP (Trib (PTD)

GHULAM MURTAZA KHAN (MEMBER).‑

In this departmental appeal against the order of the learned A. A. C., objections have been taken against the deletion of an amount of Rs. 3,42,41'58 which was added back by the L.‑T. O. as respondent's own income. The respondent, a public limited Company, derives income from the manufacture and sale of Cement. The affairs of the Company are controlled by the Federal Government through the S. C. C., of P. L., a wholly government owned Corporation. The respondent exported Rs. 2,76,659 tons of Cement valued at Rs. 9,56,22,

554. The S. C. C. of P. L. allowed the respondent to retain sale proceeds of Cement at the rate of 350 per ton anal the amount in excess of the aforesaid rate being Rs. 3,42,41,587 was retained by the S. C. C. of P. The I.‑T. O. was of the opinion that the amount retained by the S. C. C., of P. was simply an application of income by the respondent Company and could not be allowed as a deduc tion against the become. The

1. T. O., therefore, served a notice under sec tion 23(3) of the Income‑tax Act to the respondent on this issue. Ho received the explanation wherein it was inter alia, stated that the affairs of the Company were under the control of the Federal Government through the S. C. C. of P. It was also stated that the Ministry of production, Government of Pakistan, vide its letter No. 44/ASP/PI/74, dated 9th July, 1974 directed the S. C. C. of P. L., in future all export of Cement will be made only through S. C. C. of P. L., and not be individuals opera ting units because the shipping Schedule of various companies resulted in local shortages, and created other problems. In pursuance to this order the respondent got instructions from the S. C. C. of P. L. in the matter regarding the implementation of Government's instruc tions. In fact, according to the auditors report vide note 16(b) it was mentioned that 2,76,548 tons of cement was exported through S. C. C. of P. L the managing agents, of the respondent under an arrange ment, whereby the respondent‑Company received Rs. 350 per ton or actual sales proceeds which ever was lower inclusive of export charges. The proceeds in excess as retained by the S. C. C. of P. L were. Rs. 5,42,41,

587. The respondent explained that the S. C. C. of P. L., retained the amount in consideration of the services rendered by them in nego tiating terms and conditions of the export agreements enter with the foreign buyers. It was also explained that the agreement, port documents, invoice bills of lading etc. were also in the name of S. C. C. of P. L. Under the circumstances of the case it was explained that the income retained by the S. C. C. of P. L. did not belong to the respondent Company and should not be taxed in its hands.

2. The Income‑tax Officer, however did not agree with the contention of the respondent‑Company and relying on some decisions of the Indian Supreme Court and a decision of the Privy Council in the famous case of Pandichery Railway Company Limited v. Commissioner of Income‑tax observed' that the true test for the application of the rule of diversion of income by overriding title is whether the amount sought to be deducted in fact never reached the respondent‑Company as its income, either on account of agreement between the parties or due to the operation of law. Relying on the decision in the case stated by him, in his order the Income‑tax Officer added Rs. 6,42,41,567 to the income of the respondent Company.

3. In appeal the learned A.A.C. agreed with the view that the S. C. C. of P. actually received or retained tae export proceeds in consideration of the services rendered by them. In negotiating the export deals the foreign buyers and taking other steps. For this reason the learned A. A. C. held that that the income retained by the S. C. C. of P. could not be considered part of the income of the respondent‑Company. The Authorised Representa tive of the respondent also explained to the learned A, A. C., that the amount received by the S. C. C. of P. had actually been assessed in their hands in both the charge years namely 1976‑76 and 1976‑

77. The nature and character of these receipts by in the hands of S. C. C. of P., during the two years were identical. In view of this fact, the learned Authorised Representative con tends, that once an amount has already been subject to tax as income in the hands of S. C. C. of P. L., the question of subjecting to tax the same amount in the hands of the appellant‑Company cannot arise. He, therefore, submits that the learned A. A. C.'s order being in accordance with the law, does not call for any interference.

4. We have heard both the sides and have also gone through the facts of the case. It appears to us that the Income‑tax Officer treated the payment by the respondent to the S. C. C. of P. as an application of income and in order to establish his case, he put reliance on various decisions of Superior Courts cited by him in his order. In the instant ease, the position is that the Managing Company, namely, S. C. C. of P. arranged the exports of the respondent‑Company in such a manner‑that a portion of the income was deducted by the S. C. C. of P. L. and only the balance was passed on to the managed respondent‑Company. In this manner the income retained by the S. C. C. of P. did not accrue at all in the bands of the managed respondent company and as such the question of its application or diversion does not arise. Secondly, from the observations reproduced by the Income‑tax Officer from the decision of the superior Court of India, reported as (1971) 41 1 T R 367: "There is a difference between an account which a person is obliged to pay out of his income and an amount which, by the nature of the obli gation, cannot be said to be a part of the income of the assessee. Whereby the obligation, income is diverted before it reaches the assessee, it is deductible, but where the income is required to be applied to discharge in law, does not follow. "

5. In the instant case, the facts are that as a Managing Company the C. C. of P. took over the functions of exports and for the service rendered, which have been discussed in detail in earlier paragraphs, they retained a certain portion of the income. According to the ratio of deci sion in the case cited above it is obvious that through an obligation, income was diverted before it reached the respondent‑Company and, as such it was clearly deductible and could .not be subjected to tax in the hands of the res pondent‑company.

6. It was through the enactment of West Pakistan Industrial Develop ment Corporation (Transfer of Projects and Companies) Act, 1974, that the respondent-company became a Managed Company of Messrs S. C. C. of K Ltd. and by virtue of powers vested with them, they could control the affairs of the Company as managing agents. Thus if the S. C. C. of P. L., made contracts for exports and thereafter retained a portion of the pro ceeds for the services rendered, then it had the authority to do so and the res pondent‑Company was obliged to accept it. In view of these facts and also keeping in view the treatment meted out by the Income‑tax Officer, Central Circle-III, Lahore in matter of subjecting to tax the income of S. C. C. of P. L. we are clearly of the opinion that the impugned amount could not be taxed in the hands of respondent‑Company, and, as such, the order of the learned A. C. stands confirmed. We may also state that contents of the Central Board of Revenue's Circular C. No. 3 (12)‑IT‑7/7‑YPT, dated 23‑5‑1979 appear to have been misconceived by the Income‑tax Officer because that circular appears to be relevant for purposes of Cement Development surcharge.

7. In the result, the appeal is disposed of as indicated above. Order accordingly.