1989 PLP (Trib (PTD)

These three departmental appeals call in question the validity of the order; dated 29-6-1987 of the learned A.A.C. recorded in Appeals Nos. 1659, 1660 and 1661 for the charge years 1984-85, 1985-86 and 1986-87 whereby deletion of the whole amount of income of the assessee-respondent was ordered. The facts giving rise to these appeals are that assessee hereinafter referred, as respondent is an individual deriving income from salary as an employee of Habib Bank Ltd., Mingora Swat. Income Tax Officer, Circle-I, Mardan on the basis of information received in the statement under section 139 f the Income Tax Ordinance (hereinafter referred as an Ordinance) booked the case. Accordingly, notices under sections 56 and 61 of the Ordinance were issued. In response to the notices most of the employees in Malakand, Dir, Swat and Chitral submitted that they were serving in non-taxable area hence were not liable to pay the tax. Even the Zonal Chief did not provide statement under section 139 of the Ordinance on the plea that employees were serving in non taxable area. The assessing officer again referred the case: to higher authorities because Notification No.IT-JU-3 (2)/76, dated 17-9-1985 covered the cases of bank employees serving in Swat as liable to tax under section 12 (1) of the Ordinance. No reply was received from the higher authorities. The assessing officer was left with no option but to assess the income, which he did under section 63 of the Ordinance. He passed ex parte order and assessed income of the assessee as under: 1984-85 Rs.72,000 1985-86 Rs.73,950 1986-87 Rs.81,740 The assessment order was challenged by the respondent in appeal before the learned A A C who vide impugned order deleted the whole amount of income and criticized the course adopted by the assessing officer by not appreciating the Circulars issued from time to time in respect of persons resident in non-taxable territories. While referring to the Circular No.32-I.T./J.I/76, dated 22-3-1987 learned A A C observed as follows: "In this circular it has been clearly mentioned that a person who is non resident in Pakistan and is employed in a nationalized bank, then his salary will be exempt from income tax. As the appellant has produced a certificate, to the effect that he is non-resident to Pakistan during the period under review; therefore, the assessments to income tax of the appellant's salary income cannot be sustainable in law. The assessing officer is, therefore, directed to delete the whole amount of income-tax demand created against the appellant for the assessment years 1984-85 to 1986-87." It is against the aforesaid order of learned A A C that the department has come in further appeal before the Tribunal. Mr. Zar Khalil, learned D.R. relying on Section 12 of the Ordinance argued that respondent's income chargeable under head salary shall be deemed to accrue or arise in Pakistan though paid in Swat and also that it is paid by or on behalf of the Government of Pakistan, to the respondent who is in service -of the Government as bank employee. Mr. Khurshid Majid, learned A.R. contended that unless law is extended to Tribal area under Article 247 of the Constitution of Islamic Republic of Pakistan it cannot be enforced and that Income Tax Ordinance having not been extended to the area of Swat, the tax liability of the respondent does not arise. He also produced photo copy of Circular No.3 (2) TT Jl/76 of 1987 in support of the contention that income-tax is leviable on the basis of residential status of a person under section 2 (40) of the Ordinance. Having considered the respective contentions of the learned counsel for the parties and having given our careful consideration to the issue involved in these appeals, we are of the view that residential status of an individual assessee should govern his liability for payment of tax. Section 9 provides for charge of income tax in respect of total income of the income year or years as the case may be of every person at the rate or rates specified in the First Schedule. The word person is defined in section 2, clause 32 of the Ordinance as follows: Section 2 (32): Person includes an individual, a firm, an association of persons, a Hindu undivided family, a company, a local authority and every other artificial juridical person." The definition of person includes individual whose liability for payment of tax shall be determined in view of his being resident in relation to any income year. Section 2 (40) defines resident as follows: Section 2 (40): "resident", in relation to any income year, means (a) an individual, who- (i) is in Pakistan in that year for a period of, or for periods, amounting in all to, one hundred and eighty two days or more; or (ii) is in Pakistan for a period of, or periods amounting in all to, ninety days or more in that year and who, within the four years preceding that year, has been in Pakistan for a period of, or periods amounting in all to, three hundred and sixty-five days or more; or (b) a Hindu undivided family, firm, or other association of persons, the control and management of whose affairs is situated wholly or partly in Pakistan .in that year, or (c) a Pakistani company or any other company, the control and management of whose affairs is situated wholly in Pakistan in that year." The aforementioned provisions of the Ordinance would show that income tax in respect of the total income of the income year or years as the case may be of every person at the rate or rates specified in the First Schedule is to be charged, levied and paid for each assessment year. Resident in relation to any income year means an individual who is in Pakistan in that year for a period of or periods amounting in all to, one hundred and eighty-two days or more, or is in Pakistan for a period of, or periods amounting in all to, ninety days or more in that year and who within the four years preceding that year, has been in Pakistan for a period of, or periods amounting m all to three hundred and sixty-five days or more. Viewed thus the respondent's status is not that of a resident as defined in the Ordinance, He being non-resident his income from salary was not chargeable to tax. The area of Swat District where the respondent assessee is employed no doubt forms part of Pakistan territories under Article 1 (2) of the Constitution but its tribal status has also been acknowledged under Article 246 of the Constitution ibid. A person residing in tribal area will be liable to pay tax provided the status is covered by the definition of the word resident given in Section 2 (40) of the Ordinance. In I.TA. No.1202 (PB) of 1979-80 to which reference, is made in the grounds of appeal, the case before the learned Division Bench of the Tribunal was of a registered firm engaged in felling of trees at Basha, a place in Hazara Hill tracts and timber was sold at Dargai m Malakand Division of NWFP. Both these places were in the Provincially Administered Tribal areas. The assessee in that case filed a return in respect of the charge year Pakistan Tax Decisions 1989 1978-79 to declare net profit of Rs.8,

763. The I T O after rejecting disclosed version computed income of the assessee under sub-section (3) of section 23 of the repealed Income Tax Act, 1922. Income so assesseed was contested in appeal before the learned A A C who by virtue .of appeal No.31, dated 6-2-198() on preliminary legal objection held that income of the assessee resident in Nowshera from felling of trees and subsequently their sales within the Provincially Administered Tribal Area was exempt from tax. The department took exception to tire findings and went in second appeal before the Tribunal. The objection of the department before the Tribunal is set out below: "That the learned A A C while exempting income of the assessee on the ground that it was earned in a non-taxable territory ignored the fact that the assessee is a resident and ordinary resident of Nowshera. It 'was accordingly submitted that income earned by it is taxable on the basis of its status as resident and ordinarily resident." Learned Division Bench of the Tribunal after examining relevant provisions of the Constitution defining the territories of Pakistan, Tribal Areas, Provincially Administered Tribal Areas and Federally Administered Tribal Areas and application of laws to these Areas reached the following conclusion: "The department charged to tax income of the assessee earned in the Provincially Administered Tribal Area of N.W.F.P. on the ground that as its status is resident and ordinarily resident, income received by it from such an area was liable to be included in its total world income. This action in view of the Constitutional position is misconceived. We say so as status of a person residing in the settled districts and that of a person living m the Provincially Administered Tribal Areas is Pakistani. Both of them are Pakistanis according to clause (bi of Article 246 of the Constitution ibid and President's Order ibid. Therefore, a person residing in Nowshera, or in the Provincially Administered Tribal area will have earned income in Pakistan on the ground that it is not received here but arose and accrued here from the very beginning. Normally, such income whether earned in Nowshera or in Provincially Administered Tribal Area, will be liable to tax but for the protection given to income earned in a Provincially Administered Tribal Area by virtue of clause (3) of Article 247 of the Constitution ibid. Before closing, it is necessary for us to dispel the notion with regard to non-taxable and taxable territories with a view to charging to tax income of the assessee from z Provincially Administered Tribal Area. We have already stated above that Tribal Areas according to Article 1 (2) read with Article 246 (b) of the Constitution ibid are a part of Pakistan. Therefore, there is no distinction with regard to the status of a person resident' in a settled district and that of a person who lives in a Provincially or Federally Administered Tribal Area. Both are Pakistanis subject to the exception that by virtue of clause (3) of Article 247 of the Constitution ibid, no Act of Parliament or of a Provincial Legislature is applicable to a Provincially or Federally Administered Tribal area. Similarly, a person residing in A Formally or Provincially Administered Tribal Area, will become liable to tax the moment he carries on business in a settled district. It is accordingly held that in the present case, income earned by the assessee from the Provincials Administered Tribal Area of NWFP is exempt from tax on count of the constitutional and legal position explained heretrobefore. In this view of the matter, departmental appeal being devoid of any merit is hereby dismissed. It would therefore be seen that decision arrived at by the Tribunal was with respect to the applicability of the Ordinance to the Tribal Areas which would be enforced only when extended under Article 247 of the Constitution ibid. On that score the assessee respondent's income could not be charged to tax as the Ordinance has not so far been extended to the area of Swat. In so far as the a findings that income whether earned in Nowshera or in Provincially Administered Tribal Areas will be liable to tax we are not inclined to subscribe to the view inasmuch as the issue involving the interpretation of Section 2 (32) & (4o) and Section 9 of the Ordinance was neither raised' nor discussed by the learned Division Bench of the Tribunal. Central Board of Revenue vide Circular No.3 (2) TT-JI/76 of 1987 has also taken the view that income tax is liable on the basis of original status of a person as laid `down under Section 2 (40). It was however clarified that the determination of the residential status being a question of fact; the question of exemption has to be decided on case to case basis. For the foregoing reasons we find no merit in these appeals and the same are hereby dismissed. M.B.A./631/T Appeals dismissed.