Deduction of tax at source

Among the salaries paid by the taxpayer (company), Officer Inland Revenue taxed the payments on account of Director' fee by holding that said payments were in nature of services and tax deduction was applicable under S. 153(1)(b) of Income Tax Ordinance, 2001

Commissioner Appeal deleted the same by observing that the fee paid to directors had been made liable to withholding tax vide Finance Act, 2014, through insertion of subsection (3) of S. 149 of the Ordinance, 2001, whereas the matter-in-hand pertained to tax year 2013

Validity

Held, that under the existing provisions of the Income Tax Ordinance , 2001 ('Ordinance 2001') at the relevant time (tax year 2013), a company, being an employer, was required to deduct tax at the time of payment of salary to its employees

However, there was no specific provision for deduction of tax on the remuneration paid to a director which was not in nature of salary

Director had not provided any technical or professional service to the assessee, therefore, payment of sitting fees did not constitute payment for rendering services under S.153(1)(b) of the Ordinance, 2001

Had it been included in S.153(1)(b) of Ordinance, there was no need of insertion of subsection (3) in S.149 of Ordinance, 2001 specifically providing the deduction of tax at the time of payment made for directorship fee

Amendment brought in tax year 2014 relating to deduction of tax on director's fee in S. 149 of Ordinance, 2001 was prospective and did not apply in the present case

Commissioner Appeals had rightly deleted the tax -in-question

Tribunal upheld the impugned order passed by the Commissioner Appeals for having been passed in accordance with law

Appeal filed by the appellant (Department) was dismissed, in circumstances.

Assessing officer worked out tax liability under Ss.161 & 205 of Income Tax Ordinance, 2001, for its failure to deduct or deposit withholding tax

Assessment for the year 1996-97 was completed on 28-06-1997, assessment for the year 1999-00 was completed on 29-03-2001, additional tax was charged upto 31-12-2002 while the order under S.161, Income Tax Ordinance, 2001, was passed on 01-01-2004

Validity

Assessing officer at the relevant time had all the information with him regarding the expenses but he had failed to use it then to determine the default of withholding tax and to recover it by passing appropriate order under S.52 of the Income Tax Ordinance, 1979, which was applicable at the relevant time

Charge of additional tax for the delay over several years was not justified especially when much of the delay was attributable to the department

Appellate Tribunal declared that the reasonable period of default would be taken to end on the dates of 28-06-1997 for the tax year 1996-97 and 29-03-2001 for assessment year 1999-00 being date on which assessment under S.62 of Income Tax Ordinance, 1979, was completed and that the rates applicable during the default period under S.86 of the Income Tax Ordinance, 1979, would be applied to determine the additional tax

Appeal was allowed accordingly.

Assessing officer worked out tax liability under Ss. 161 & 205 of Income Tax Ordinance, 2001, for its failure to deduct or deposit withholding tax

Commissioner of Inland Revenue (CIR(A)) observed that the assessment for the year 1996-97 was completed on 28-06-1997, that the assessment for the year 1999-00 was completed on 29-03-2001, that notice for the recovery of tax was issued on 15-12-2003; that the limitation as prescribed under S.156 of Income Tax Ordinance, 1979, for the assessment year 1996-97 had expired, however, confirmed the order of assessing officer for the year 1999-00

Appellate Tribunal declared the order passed for the assessment year 1999-00 to be barred by limitation on the ground that the period of limitation had to be calculated from the end of financial year and not from the date of assessment order

High Court remanded the case to the Tribunal for determination in each case regarding the reasonableness of the period within which the notices were issued and for determination whether the notices ought to be sustained on the touchstone of having been issued within a reasonable period of time or not

Validity

Assessing officer's only question was to show tax deposit challans

Taxpayer did not provide the challans

No records were being called from the taxpayer for examination

Reasonableness of time to assess or determine the amount of default on examination of documents or record was not the issue in hand, hence question of reasonableness of time or time limiting factor did not arise

No time limitation could be prescribed for recovery under S.161, Income Tax Ordinance, 2001, of withholding tax default which included a default committed under S.50 of the Income Tax Ordinance, 1979

Order passed by CIR (A) was vacated and the recovery order under S.161, Income Tax Ordinance, 2001, was upheld.

Assessee entered into different agreements with certain companies based in United Kingdom and United States and in that behalf made payments to them but no withholding tax was deducted under S.50(3) of the Income Tax Ordinance, 1979

Stance of assessee was that the payments were covered by "Avoidance of Double Taxation Treaties executed between Pakistan, USA and UK"

Validity

All the fora below except the Taxation Officer had concluded that the entities with which the respondent had been dealing did not have permanent establishment in Pakistan, hence payments made were covered under the Treaty

High Court could not enter into the facts finding mission regarding the place of establishment of the parties with whom the respondent had been dealing

No question of law had arisen in the facts and circumstances of the case to be framed and answered by the High Court

Reference application by the department was dismissed.

Petitioner non-resident company, sought refund of amount of tax deducted at source on payments made to it by respondent company, inter alia, on ground that as non-resident company it had no income tax liability and such amount was due back to petitioner

Question before High Court was whether the tax deposited by respondent company, after deduction of tax at source for payments made to non-resident company, could be adjusted against sales tax liability of said respondent company under provisions of S. 48(1) of Sales Tax Act, 1990 read with R.71(1) of Sales Tax Rules, 2006

Held, that respondent company by deducting tax at source on payments made to petitioner non-resident company, did not discharge its own tax liability but acted as a withholding agent for Department, and therefore said amount could not be adjusted against such respondent company's sales tax liability

Such deduction of tax at source was in discharge of tax liability (if any) of petitioner non-resident company, and since such deduction of tax at source was made from payments due to petitioner, therefore rightful ultimate receipt of refund of said amount would also be the petitioner, and said amount could not be adjusted against the independent tax liability of the withholding agent

Constitutional petition was allowed, accordingly.

Customs Authorities were aggrieved of order passed by Income Tax Appellate Tribunal deciding appeals filed by assessees which were remanded by Supreme Court

Validity

Absurdity could not be attributed to any legislation at the altar of literal interpretation

Court was to harmonize and save the law

Word 'person responsible' defined in S.50(9) of Income Tax Ordinance, 1979, was only for the purpose of making payment and withholding tax on behalf of a company, local authority or an association of persons, as envisaged under S.50(4) of Income Tax Ordinance, 1979

Assessee could not be proceeded against under S.52 of Income Tax Ordinance, 1979, for recovery of tax not withheld

High Court set aside the order passed by Income Tax Appellate Tribunal and remanded the matter to the Tribunal for decision afresh

Reference was allowed accordingly.

Section 153 of Income Tax Ordinance, 2001 dealt mainly with deduction of tax at source on transactions specified in S. 153(1) of Income Tax Ordinance, 2001

Under S. 153(6) of Income Tax Ordinance, 2001 deducted tax was final tax on transactions except transactions under S. 153(1)(b) of Income Tax Ordinance, 2001

Person falling under Final Tax Regime had to file statement under S. 115 of Income Tax Ordinance, 2001 instead of Normal Tax Return under S. 114 of Income Tax Ordinance, 2001

Under S. 169(3) of Income Tax Ordinance, 2001 tax deducted at source was taken to be assessment order under S. 120 of Income Tax Ordinance, 2001 in the same way as return filed under S. 114 of Income Tax Ordinance, 2001 was taken to be an assessment order for all purposes of Income Tax Ordinance, 2001.

Taxpayer was an exporter of cloth and did not deduct advance tax under S. 50(4) of the Income Tax Ordinance, 1979 at the time of making payment to third party suppliers from whom taxpayer procured yarn; and was held in default of tax under S. 52 of the Income Tax Ordinance, 1979 by the Department

Contention of taxpayer was inter alia that the taxpayer was exempted from provisions of S. 50(4) of the Income Tax Ordinance, 1979 in view of exemption provided in S.R.O. No.368(I)/94 dated 7-5-1994

Validity

Held, S.R.O. No.368(I)/94 dated 7-5-1994 related to a person making payments against "supply of goods" but it did not exempt a person from applicability of S. 50(4) of the Income Tax Ordinance, 1979 who was making payment to a third party against service rendered or in execution of a contract

Terms "payments against supply of good" and "payment against service rendered" and "execution of contract" were three distinct and independent transactions

Taxpayer, in the present case, was not a manufacturing unit of cloth; nor was the taxpayer claiming that it purchased cloth directly form the market

Contention of the taxpayer was that he was exempted under the said S.R.O. from deduction of advance tax from payments made to weavers against manufacturing of cloth supplied by the taxpayer; and said contention was misconceived as plain reading of S.R.O. No.368(I)/94 dated 7-5-1994 showed that merely being an exporter would not ipso facto bring the taxpayer within the ambit of S.R.O. No.368(I)/94 dated 7-5-1994

Said exemption was only available to exporters who were making payment on account of supply of such goods that were purchased in respect of goods exported and any payment made against service rendered or in execution of contract, whether it brought value addition to the goods or not, would not exclude such payment from within purview of S. 50(4) of the Income Tax Ordinance, 1979

No illegality therefore existed in the impugned orders

Reference was answered, accordingly.

Conditional exemption on payment of tax on dividends in specie by virtue of Cl.(103B) of the Second Schedule to the Income Tax Ordinance, 2001

Retrospective application of such exemption

Scope

Contention of the taxpayer was that Cl.(103B) of Part I of the Second Schedule to the Income Tax Ordinance, which was introduced in the year 2010, applied retrospectively to the tax year 2008; therefore, the taxpayer was not liable to tax on payment of dividends in specie, for the tax year, 2008

Validity

Section 5 of the Income Tax Ordinance, 2001 was the charging section for the imposition of tax on dividends, and Cl. (103B) of Part I of the Second schedule to the Ordinance simply introduced a conditional exemption in the year, 2010 which did not remedy or cure any ambiguity or omission in the law, and on the contrary, provided an exemption from tax for the first time which was not in existence in the year 2008

Labeling said Cl. (103B) Part I of the Second Schedule to the Income Tax Ordinance, 2001 as remedial or curative legislation, was therefore, misconceived and it did not have a retrospective effect and had therefore, had no application to the tax year 2008

Reference was answered, accordingly.

Question before the High Court was whether a company paying dividend in specie to its directors was entitled to deduct tax in terms of S.150 of the Income Tax Ordinance, 2001

Held, that S.150 of the Income Tax Ordinance, 2001 implied that dividend should in such a form that deduction of tax therefrom was possible from the person paying the dividend

In case of dividend in specie, such deduction was not practically possible

Reference was to be made to S.156(2) of the Ordinance which stated that in case prize was not in cash, the person while giving the prize shall collect tax on the fair market value of the prize; which was similar to the case of Brokerage and Commission under S.233(2) of the Income Tax Ordinance, 2001

Therefore, unless S.150 of the Income Tax Ordinance, 2001 separately provided for collection of tax from assessee at the time of deduction of tax, the same section could not be applied to "dividend in specie"

Reference was answered, accordingly.

Conditional exemption on payment of tax on dividends in specie by virtue of Cl.(103B) of the Second Schedule to the Income Tax Ordinance, 2001

Retrospective application of such exemption

Scope

Contention of the taxpayer was that Cl.(103B) of Part I of the Second Schedule to the Income Tax Ordinance, which was introduced in the year 2010, applied retrospectively to the tax year 2008; therefore, the taxpayer was not liable to tax on payments of dividends in specie, for the tax year, 2008

Validity

Section 5 of the Income Tax Ordinance, 2001 was the charging section for the imposition of tax on dividends, and Cl.(103B) of Part I of the Second Schedule to the Ordinance simply introduced a conditional exemption in the year, 2010 which did not remedy or cure any ambiguity or omission in the law, and on the contrary, provided an exemption from tax for the first time which was not in existence in the year 2008

Labelling said Cl. (103B) Part I of the Second Schedule to the Income Tax Ordinance, 2001 as remedial or curative legislation, was therefore, misconceived and it did not have a retrospective effect and therefore, had no application to the tax year 2008

Reference was answered, accordingly.

Question before the High Court was whether a company paying dividend in specie to its directors was entitled to deduct tax in terms of S.150 of the Income Tax Ordinance, 2001

Held, that S.150 of the Income Tax Ordinance, 2001 implied that dividend should in such a form that deduction of tax therefrom was possible from the person paying the dividend

In case of dividend in specie, such deduction was not practically possible

Reference was to be made to S.156(2) of the Ordinance which stated that in case prize was not in cash, the person while giving the prize shall collect tax on the fair market value of the prize; which was similar to the case of Brokerage and Commission under S.233(2) of the income Tax Ordinance, 2001

Therefore, unless S.150 of the Income Tax Ordinance, 2001 separately provided for collection to tax from assessee at the time of deduction of tax, the same section could not be applied to "dividend in specie"

Reference was answered, accordingly.

Question before the High Court was whether a company paying dividend in specie to its directors was entitled to deduct tax in terms of S.150 of the Income Tax Ordinance, 2001

Held, that S.150 of the Income Tax Ordinance, 2001 implied that dividend should in such a form that deduction of tax therefrom was possible from the person paying the dividend

In case of dividend in specie, such deduction was not practically possible

Reference was to be made to S.156(2) of the Ordinance which stated that in case prize was not in cash, the person while giving the prize shall collect tax on the fair market value of the prize; which was similar to the case of Brokerage and Commission under S.233(2) of the income Tax Ordinance, 2001

Therefore, unless S.150 of the Income Tax Ordinance, 2001 separately provided for collection to tax from assessee at the time of deduction of tax, the same section could not be applied to "dividend in specie"

Reference was answered, accordingly.

Conditional exemption on payment of tax on dividends in specie by virtue of Cl.(103B) of the Second Schedule to the Income Tax Ordinance, 2001

Retrospective application of such exemption

Scope

Contention of the taxpayer was that Cl.(103B) of Part I of the Second Schedule to the Income Tax Ordinance, which was introduced in the year 2010, applied retrospectively to the tax year 2008; therefore, the taxpayer was not liable to tax on payments of dividends in specie, for the tax year, 2008

Validity

Section 5 of the Income Tax Ordinance, 2001 was the charging section for the imposition of tax on dividends, and Cl.(103B) of Part I of the Second schedule to the Ordinance simply introduced a conditional exemption in the year, 2010 which did not remedy or cure any ambiguity or omission in the law, and on the contrary, provided an exemption from tax for the first time which was not in existence in the year 2008

Labelling said Cl. (103B) Part I of the Second Schedule to the Income Tax Ordinance, 2001 as remedial or curative legislation, was therefore, misconceived and it did not have a retrospective effect and had therefore, had no application to the tax year 2008

Reference was answered, accordingly.

Amendment by Finance Act, 1999, through an explanation to S.52 of the Income Tax Ordinance, 1979, did not specifically say that same will cure the jurisdictional defect in any assessment orders which had already been passed

Amendment made by the Finance Act, 1999 being not applicable to the assessment orders, dated 15-9-1998, they were nullity in the eye of law

All payments were made prior to 1-7-1998 and at the time of making payments S.50(4) of the Income Tax Ordinance, 1979 did not require any tax to be deducted at source in respect of non-resident

Recipient was admittedly a non-resident and there was nothing in the statute which required deduction of tax at source in respect of non-residents

Proviso to S.50(4)(a) of the Income Tax Ordinance, 1979, which mandated the deduction of tax at source for the non-residents, was inserted on 1-7-1998, while all payments were made by the assessee before this date and there was no obligation on the part of assessee to have deducted income tax at source.