1997 PLP (Trib (PTD)

11. Amount paid or payable in or outside Pakistan and the amount received or deemed to be received in Pakistan on account of: (a) Item No.8 of above ..Rs. (b) Item No.9 of above ..Rs. (c) Item. No. 10 of above ..Rs Total Rs

12. Tax payable at the rate of 8 % on aggregate of amounts in item 11 Rs ................................ (a) Tax paid ........... (b) Date of payment

13. No. and date of Port Clearance Certificate issued by the Income Tax Department .................................

14. Documents to be furnished:

(a) Freight manifest. (b) Bills of lading. (c) Charter party of fixture note, where applicable. (d) Copy of challan of payment of tax.

15. In case, the freight earnings of the vessel are claimed to be exempt under any bilateral treaty, specific article(s) of the treaty under which exemption claimed ........................... VERIFICATION I, the undersigned, solemnly declare that to the best of my knowledge and belief

(a) the information given in the return and the Annexures and statements accompanying it is correct and complete; (b) the amounts of income and other particulars are truly stated. I further declare that I am compete to make this return and verify it in my capacity as of Date .. Signature of .. Agent/Principal ... Name and address ......... . It will be seen that the amount on which tax has been held to be payable is to be quantified in terms of para. 11 of the return on the basis of information provided under paras. 8, 9 and 10 mentioned therein and the final tax liability is determined as per para. 12 of the same return. For the recovery of the liability as per subsection (3) the provisions are contained in subsections (4) and (5) of section

80. It has been laid down that the payment of tax has to be made before the departure of ship. In case this is not possible arrangement for subsequent payment should be made to the satisfaction of the department and in fact no port clearance is to be granted to the ship before such payment.

5. By virtue of the above provisions made in section 80, it becomes an independent code for both the chargeability and the recovery of the tax payable by non-residents carrying on business of operation of ship as owners or charterers. So structured it becomes a piece of presumptive taxation comparable to the provisions of section 80-A (relating to Air transport business of non-resident), 80-AA (Tax on income of non-residents from fees 8 for technical services), 80-B, (Tax on income of certain person from dividends and bank profits etc.), section 80-C (Tax on income of certain contractors and importers) and section 80-CC (Tax on income of certain exporters). All these sections which are in the nature of special non obsante clauses can be divided in two groups from the point of view of advance payment of tax or deduction of tax at source by the payer. Sections 80-B, 80-C and 80-CC fall in one group. Section 80-B taxes the block of income consisting of dividends and Bank profits where there is a prior deduction of tax at source in the following manner:

"80-B. Tax on income of certain persons from dividends and bank profits, etc. (1) ................................ (2) The amount referred to in subsection (1) shall be the following, namely:

(a) dividend or profit on which tax is deductible under subsection (6-A) of section 50; (b) interest or profit on which tax is deductible under subsection (2-A) of section 50; (bb) the amount received on encashment of bearer certificates on which tax is deductible under subsection (5-B) of section 50. (c) interest or profit on which tax is deductible under subsection (7-D) of section 50; (d) prizes and winnings on which tax is deductible or collectable under subsection (7-C) of section 50." Section 80-C taxes the block of income relating to contractors and importers in the following manner:

"80-C. Tax on income of certain contractors and importers.

(1) . (2) The amount referred to in subsection (1) shall be the following, namely: (a) Where the person is a resident

(i) the amount representing payments on which tax is deductible under subsection (4) of section 50, other than payments on account of services rendered; (ii) the amount as computed for the purpose of collection of tax under subsection (5) of section 50 in respect of goods imported, not being goods imported by an industrial undertaking as raw material for its own consumption; and (b) where the person is a non-resident, the amount representing payments on account of execution of a contract for construction, assembly or like project in Pakistan on which tax is deductible under subsection (4) of section 50." Section 80-CC taxes income of certain exporters from receipts in respect of which tax has been deducted at source under subsection (5-A) of section 50, the tax so deducted being the final discharge of tax liability. These three sections namely, 80-B, 80-C and 80-CC bring to chargeability the receipts for which deduction of tax at source has been provided for in various subsections of section

50. The deduction defines their character and determines their chargeability or otherwise to tax. The rate of deduction is invariably given for each item in the First Schedule. Conversely it lays responsibility on the paying agency to deduct tax at the prescribed rates, such deduction being a final discharge of liability to the extent of that portion of income. In contrast to this there is the other group consisting of sections 80, 80-A, 80-AA where the statute does not precondition the chargeability or receipts with such deduction at source at the paying stage. Under section 80 the Master of the Ship shall prepare the return of income as laid down in subsection (2), and make payment of tax in terms of subsection (3) 8 % of the income so determined, before departure of the ship from the Port in Pakistan. Where the filing of such return and payment of tax is not so possible by the Master of Ship the law requires in term of subsection (4) of the section 80, for satisfactory arrangements to be made for filing of the return and under subsection (5) for payment of tax by the authorised agent., In other words from filing of return to the payment of tax only the person of the non-resident owner or charterer is involved. There is no provision in section 80 which burdens the person paying for the carriage of passengers, live stock, mail or goods shipped to deduct any tax while making such payment. Since there is no provision for any pre-payment of tax or deduction at source there is no mention of any adjustment of the same towards the final liability of the non-resident charterer. In brief there is neither any concept of deduction of tax at source nor of consequential adjustment towards final liability of tax of the non-resident 'Principal' in respect of income from business of operation of 'ships' in terms of section 80 of the Income Tax Ordinance. The question then arises as to whether there is any such concept in terms of section 50(3). It is the provision of this section 50(3) which has been totally relied upon by the assessing officer for the purpose of deduction of tax at source. Section 50(3) reads as under:

"50(3). Any person responsible for paying to a non-resident any sum chargeable under the provisions of this Ordinance/(other than income to which subsection (1) or subsection (2) or subsection (2-A) or subsection (3-A) or subsection (4) or subsection (4-A) or subsection (3-A) or subsection (4) or subsection (4-A) or subsection (3-A) or subsection (4-A) or subsection (6-A) or subsection (7-A) or subsection (7-C) or subsection (7-D) applies/shall unless such person is himself liable to pay tax thereon as an agent, deduct, at the time of payment, tax at the rates specified in the First Schedule." It may be noted that while the rate as given in Para. DDD to Part I of First Schedule for deduction of tax under subsection (3) of section 50 is I given as "30%" of the sum chargeable or the rate applicable to a resident' person whichever is greater, the rate prescribed under section 80 is 8% of the sum chargeable under the said section. This difference having been noted the main question now is as to how the receipts of the non-resident shipping 'Principal' attract the provision of section 50(3). It has already been held by this Tribunal vide order in I.T.A. No.279/KB of 1994-95 reported as 1996 PTD (Trib.) 1128 where the learned Chairman held that:

"On perusal of entire provisions contained in Chapter VI of the Income Tax Ordinance which deals with the payment of tax before assessment and the provisions relating to the deduction of tax at source and advance payment of tax, I am of the considered opinion that these provisions are not independent in nature and have not to be read in isolation. The provisions contained in Chapter VI of the Income Tax Ordinance relating to deduction of tax at source and advance payment of tax are to be read with the relevant provisions in the Income Tax Ordinance whereby total income from various sources are detained and are subjected to tax. The deduction at source and advance payment of tax are to be adjusted from the final tax liability on completion of assessment. " Following this decision the provisions of section 50(3) will become operative only if it has been established independently that the relevant payment on which it is to be applied is taxable in the hands of the recipient. As is the position obtaining in the instant case the recipient is a non-resident owner or charterer carrying on business of operation of ships. The business that he carried was carriage of oil to Pakistan from a destination port abroad. As per the Scheme of section 80 the amount to be considered for levy of tax was to be determined as per subsection (2) while it was to be charged to tax at the rate prescribed under subsection (3) and tax so worked out was to be collected as per subsections (4) and (5). It is not controverted by the department that no assessment, levy and collection of tax has been made in respect of the period relevant to the assessment year in appeal in the manner laid down under section

80. In fact no assessment has been made in this regard so far. In other words the chargeability to tax of the receipts of the non-resident "Principal" has not yet been independently established by the department. This being the position the provisions of section 50(3) cannot be' invoked in isolation of the main charge on the recipient. For these reasons it is held that the assessing officer had travelled far beyond his jurisdiction in I saddling the resident payer with the burden of deduction under section 50(3). The resident payer is further exonerated from this burden for the simple reason that the scheme of section 80 does not envisage deduction of any sort of tax at any stage and lays responsibility squarely on the Master of Ship for submitting the return and on the Income Tax Officer and the Controller of Customs having authority over the relevant port to the effect that the recovery or some arrangements for recovery is made before the ship leaves the Port. This being the scheme of section 80 the provision of section 50(3) are not at all attracted in respect of the payment made to non-resident principal by the resident payer. Since the payment did not attract the provisions of section 50(3), it could not be disallowed as an expenditure for any default on this ground in terms of section 24(b) of the Income Tax Ordinance.

6. In order to be more explicit and precise we would like to observe that the arrangement for payment and recovery of tax is contained in section 80 itself. The provisions contained in section 50 are also designed and intended in the same direction and same purposes. The provisions contained in section 24(b) is in the nature of penalty for default of the obligation under section

50. When the Legislature has provided for special arrangement under section 80, is shall exclude the normal and general provision in this regard. In the case of shipping business, there being no responsibility in law for making any deduction at source under section 50, and there being no arrangement for subsequent adjustment for such deduction towards the tax liability in normal course and in the absence of any provision treating the deduction under section 50 as the full and final discharge of tax liability under section 80, there shall be no default on the part of resident payer and consequently no penalty shall be entailed.

7. The other issue pressed by the appellant relates to disallowance of interest on Workers' Profit Participation Fund amounting to Rs.8,90,

872. The amount was claimed by way of financial charges and was disallowed by the assessing officer with the following observations: " .... It was observed that there was no justification for the assessee- Company to utilise the balances of W.P.P.F. in spite of sufficient liquid funds available with the Company in the shape of cash, bank balances, advances and receivables. When confronted through notice under section 62, the assessee could not furnish any plausible explanation. The claimed payment of interest on W.P.P.F. at Rs.890,872 is, therefore, disallowed and added towards total income as in last year. " Before the C.I.T. (A) the learned counsel for the appellant took the plea that such additions were made in respect of earlier year also but deleted by the C.I.T. (A). The learned C.I.T. (A) however, upheld the addition for the year under appeal on the ground that the finding of the assessing officer regarding utilisation of Workers' Profit Participation Fund being a sham 'transaction was not rebutted by the appellant.

8. The matter has been considered by us. It is not the case of the Department that the interest on Workers' Profit Participation Fund was not paid. Instead the ground taken by the Department is that there was no justification for utilising the balance in Workers' Profit Participation Fund in spite of sufficient liquid funds being there available with the company in the shape of cash, bank balances, advances and receivables. In other words the Department has questioned the right of the assessee to utilise the balances under the head Workers' Profit Participation Fund. This right to so question, we are afraid, is not given by the Legislature to the Department. The appellant has the option to arrange funds from any source for its business so long as the source is identifiable. It can only be a sham transaction if the source of finance is not identifiable so that the payment of interest also becomes questionable. This is not the position in the present case. The source of finance is identifiable and payment of interest is confirmed by documents. The Department has not proved that the payment was not related to the business of the appellant and, therefore, the disallowance is without any justification. The order of the officers below is modified to this extent and the addition is deleted.

9. The appeal succeeds M.B.A./276/Trib. Appeal allowed.