2024 PLP 584 (PTD)

SYED ARSHAD ALI, J.

This consolidated judgment of us is aimed to dispose of the present Tax Reference as well as the connected Tax Reference No.10-P of 2021 because common questions of law has been raised by the department in all the tax references.

2. Briefly stated facts of the case as evident from record are that the taxpayer/respondent, an individual, deriving income from running a CNG Filling Station at By Pass Road Thana, Malakand filed return for the tax year under consideration claiming refund of Rs.863,261/- and Rs.345,859/- respectively, on the basis of exemption allowed under Clause 126-F of 2nd Schedule to the Income Tax Ordinance, 2001 ("Ordinance") which was treated to be an assessment order in terms of Section 120 of the Ordinance. Though, the refund claimed was issued to the taxpayer/respondent, but subsequently, the Additional Commissioner Inland Revenue found the deemed assessment order erroneous in so far as prejudicial to the interest of revenue in view of the judgment of Appellate Tribunal delivered in the case of "M/s Inter-Construct (Pvt.) Ltd. and clarification Circular" dated 07.06.2013 issued by the FBR. Accordingly, he amended the deemed assessment order by resorting to provisions of Section 122(5A) of the Ordinance by considering case of the taxpayer being not entitled to exemption as the commission income fell under the Presumptive Tax Regime (PTR). Feeling aggrieved, the taxpayer/respondent preferred appeal before Commissioner Inland Revenue (Appeals), Peshawar who vide order dated 31.07.2017 allowed the appeal of the respondent and annulled the order of the Additional Commissioner, Mardan.

3. Against that, the department filed appeal before the learned Appellate Tribunal and the learned Tribunal dismissed the appeal; hence the instant Tax Reference.

4. Arguments heard and record of the case was perused.

5. The essential issue is the entitlement of exemption to the respondent in terms of Clause (126-F) ibid. Clause (126-F) was inserted in Part-I of the 2nd Schedule of the Ordinance through Finance Act, 2010 to grant fiscal relief to the taxpayers whose business were adversely effected in the Province of Khyber Pakhtunkhwa, Federal Administered Tribal Area and Provincial Administered Tribal Area for a period of three years with effect from tax year 2010. The said clause reads as under: - "(126-F) Profits and gains derived by a taxpayer located in the most affected and moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA for a period of three years starting from the tax year 2010. Provided that this concession shall not be available to the manufacturers and suppliers of cement, sugar, beverages and cigarettes."

6. The Federal Board of Revenue to further clarify the position had issued Circular No.14 of 2011 on 06.10.2011 which is reproduced as under: - Circular No. 14 of 2011 (Income Tax) Subject: Exemption under Clause (126F) of Part I of Second Schedule to the Income Tax Ordinance, 2001 - Clarifications Regarding Clause (126F) was inserted in Part I of Second Schedule to the Income Tax Ordinance, 2001, through Finance Act, 2010, to grant fiscal relief to the taxpayers whose businesses were adversely affected during the ongoing strife in the Khyber Pakhtunkhwa (KPK), Federally Administered Tribal Areas (FATA), and the Provincially Administered Tribal Areas (PA TA), for a period of three years w.e.f. Tax Year 2010. In follow up thereto, a number of communications were issued by the Board to define and clarify the parameters of Clause (126F) including SROs, Circulars, and letters, which being prone to varying interpretations, may have caused certain degree of confusion in some respects.

2. Queries have been received in the Board as regards the availability of exemption under Clause (126F) with reference to the location of the taxpayer, the location of the business, and other allied matters. In supersession of all earlier clarifications issued by the Board, in order to streamline the operation of Clause (126F), and ensure its standardized implementation across the board, the instructions as contained in the succeeding paragraphs will henceforth apply.

3. The word "located" as used in Clause (126F) can possibly have more than one dimension. The relevant scenario along with the corresponding exemption / taxable status are outlined below: - Sr# Situation Exemption/Taxability (i) The taxpayer is located inside the affected and moderately affected areas (hereinafter 'the specified areas'), and his business is also carried on inside the specified areas Exempt (ii) The taxpayer is located outside the specified areas but his business is carried on within the specified areas. Exempt (iii) The taxpayer is located inside the specified areas, but his business is carried on outside the specified areas. Taxable (iv) The taxpayer is located outside the specified areas, but his business is partly carried on inside the specified areas. Exempt to the extent of the income attributable to the business operations carried on inside the specified areas.

4. Thus, it is apparent that the provisions of Clause (126F) have to be applied keeping in view the facts of each case.

5. Accordingly, the field formation may decide each case on merit in the light of the above instructions upon filing of a claim in this regard by the taxpayer.- sd/- (Shahid Mehmood Sheikh) Secretary-IR (Exemptions/Rules)

7. As evident from the facts of the case that the respondent was issued adjustment/refund of income tax for an amount of Rs.863,261/- and Rs. 345,859/- for the tax period 2010 relating to tax deducted under Section 234-A through an order of refund in terms of Section 126-F ibid. The said order was amended by withdrawing the said refund from the respondent on the ground that since the taxability of the respondent falls in the final tax regime (234-A of the Ordinance); hence, the provision of (126-F) ibid is not applicable to the case of petitioner. The said opinion was formed by the assessing officer in view of the judgement passed by the Hon'ble Lahore High Court in the case of "M/s. Sarwar Construction Co. (Pvt.) Ltd. v. The Appellate Tribunal Inland Revenue and others (PTR No.71 of 2014)" and the subsequent law laid down by the Apex Court in the case of "Husnain Cotex Limited v. Commissioner Inland Revenue, Lahore (2017 SCMR 822)" affirming the judgment of the Hon'ble Lahore High Court. We have perused the judgment of 'Husnain Cotex Limited' which is inapplicable to the present case because the said issue relates to the refund of advance tax deducted from the contractor who were located in Lahore, however, were providing services in the Province of Khyber Pakhtunkhwa. The issue was later elaborately decided by the Apex Court in the case of "Commissioner Inland Revenue v. The Secretary Revenue Division and others (2020 SCMR 2055)" wherein; the law relating to exemption under Clause (126-F) was expounded in the following manner:-

6. A perusal of Husnain Cotex shows, in our view, that rather than supporting the case of the department in the facts and circumstances of the present case, it is rather the case of the respondent-taxpayer that is made out. This position clearly emerges, in particular, from the portion that has been emphasized in the extracts taken above. We may note that the term "located" as used in the exemption clause was considered in the context of various scenarios in para 3 of Circular 14, which was as follows: "

3. The word "located" as used in Clause (126-F) can possibly have more than one dimension. The relevant scenario[s] along with the corresponding exemption/taxable status are outlined below:- Sr. No. Situation Exemption/Taxability (i) The taxpayer is located inside the affected and moderately affected areas (hereinafter 'the specified areas'), and his business is also carried on inside the specified areas Exempt (ii) The taxpayer is located outside the specified areas but his business is carried on within the specified areas. Exempt (iii) The taxpayer is located inside the specified areas, but his business is carried on outside the specified areas. Taxable (iv) The taxpayer is located outside the specified areas, but his business is partly carried on inside the specified areas. Exempt to the extent of the income attributable to the business operations carried on inside the specified areas. It is clear that the facts and circumstances of the taxpayers in Husnain Cotex came within the scope of situations (ii) and/or (iv) and this was the basis on which they claimed exemption. However, this Court took a contrary view and held that the interpretation put by the department on the exemption clause was not correct. We fully agree. On the other hand, the case of the present respondent falls squarely within situation (i) of the aforementioned table. It is clear that the department itself regarded the income of such taxpayers as entitled to the benefit of the exemption clause. This scenario has been clearly confirmed in para 7 of the judgment in Husnain Cotex, where such persons have been described as the "affectees" of the "adverse business environment" for whom the exemption clause was intended. In our view, the facts and circumstances of the respondent's case come within the scope of the exemption clause. We come to this view independently of what was said in Circular 14, and regardless of whether or not the department subsequently took a contrary view. We may also note that the sentence appearing in para 7, i.e., that "These taxpayers could only be the ones who fall under the 'normal tax regime'" was not, in our view, germane to the analysis and conclusions arrived at by the Court. In particular, it cannot be taken to mean that even those taxpayers who otherwise came squarely within the scope of situation (i) (i.e., the "affectees" of the "adverse business environment") had also (and only) to be those from whom tax was not being deducted as a final tax. That would create an anomalous situation by creating two classes both falling within the scope of the exemption clause in the facts and circumstances of their case, and yet the benefit thereof being extended only to the one and not the other. In our view, such a conclusion would not merely defeat the exemption clause but would also run against the tenor of Husnain Cotex when read as a whole. We may also note, with respect, that the decision in Husnain Cotex was a leave refusing order. It is now the jurisprudence of this Court that such orders do not constitute binding authority. Thus, on any view of the matter, the reliance placed by learned counsel for the department on certain portions of the judgment is, with respect, not correct."

8. In view of the above, we hold that the income of the respondent for the tax years 2010 was exempt from payment of income tax in terms of Entry 126-F of Part I to the 2nd Schedule to the Ordinance and thus the respondent was entitled to the refund of the minimum tax charged under Section 153 subsection 3(b) of the Ordinance. Thus, this Tax Reference is as well as connected Tax Reference is answer in negative. Copy of the judgment be sent to the learned Appellate Tribunal for information. MQ/28/P Reference dismisse