1. ' JAWAD MASOOD TAHIR BHATTI (JUDICIAL MEMBER).---The Department through these two appeals has objected against the consolidated impugned order of the learned CIRCA) dated 28-2-201 1 for the tax years 2008 and 2009 on the following commons grounds:- "(2) That, the learned C1R(A) has grossly erred in treating income from Continuous Funding System (CFS) or Carry Over Trade (COT) as profit on debt as defined in section 2(46) of the Income Tax Ordinance, 2001 when both the transactions are poles apart from each other .
(3) That, the learned CIRCA) has grossly erred by holding that ' the transactions referred to in clause (d) of subsection (1) of section 233A of the Income Tax Ordinance, 2001, are in the nature of "profit on debt" as defined under section 2(46) read with section 151 of the Income Tax Ordinance, 2001.
(4) That, the learned CIR(A) has erred in appreciating that withholding tax on CFS/Badla transactions falling under clause (d) of section 233A(1) are at par with section 151 of the Income Tax Ordina nce, 2001 whereas withholding tax on these transactions is exclusively dealt with under section 233A(1)(d) of the Income T ax Ordinance, 2001.
(5) That, the learned CIR(A) was not justified in holding that tax withheld a 10% on CFS/Badla income is the final tax liability when admittedly such tax was collected under section 233A(1)(d) which is outside the purview of final tax regime under section 169 of the Income Tax Ordinance, 2001.
(6) That, the learned CIR(A) has failed to appreciate that the "CFS income" and "profit on debt" are two distinct types of income and subjected to withholding tax under different sections i,e, 233A(1)
(d) and 151 of the Income Tax Ordinance, 2001.
(7) That, the order of the learned CIR(A) being patently illegal and against the provision of law may be vacated and the amended order passed by the Additional Commissioner Inland Revenue under section 122(SA) of the Income Tax Ordinance, 2001 be restored."
2. The brief facts of the case are that the respondent/taxpayer an individual, being a director of a private limited company is engaged in the business of running a brokerage house in Karachi Stock Exchange. For the tax years 2008 and 2009 under appeal, had earned income from dividend and profit on debt. On profit on debts, tax had been deducted 10% of the profit which had been claimed as final discharge of tax liability . The profit on debt during both the years was from bank and from Continuous Funding System (CFS) which as explained is a financing instrument managed by Karachi Stock Exchange and on such yield as in respect of yield on bank debt tax is deducted @ 10%. The Return of income tiled for both the Tax Years under appeal become a deemed assessment order under section 120(1) of the Income Tax Ordinance, 2001.
2. The Additional Commissioner of Income Tax assumed jurisdiction under section 122(5A) of the Ordinance, 2001 and issued notices under section 122(9) dated 6-1-201 1 asking the appellant to show cause as to why income earned under CFS which in his opinion was Rs,8745476 and Rs,3835293 in Tax Years 2008 and 2009 respectively should not be taxes at normal rate as in his opinion the same fell under sectio n 233A(1)(d) read with section 233A(2) of the Income Tax Ordinance, 2001 as the tax deducted was adjustable.
3. ' The respondent/taxpayer submitted his reply vide letter dated 20-1-201 1 explain ing that CFS income is interest income, and even in Return of income for Tax Year 2009, "profit on debts" and "CFS profit" are bracketed together and shown in Column of "Final Tax". Further it was submitted that tax deducted on income arising under section 233A(1)(d) is not adjustable tax as has incorrectly been stated by ACIR in the show-cause notice. Other arguments were also advanced. In relation to Tax Year 2009 the ACIR was informed that Rs,3835293 is not income from CFS but the breakup is: Rs,2294145 CFS and Rs,1541 148 profit on debt. The respondent/taxpayer submitted that he has declared true and correct income and paid correct tax and requested dropping of the proceedings initiated.
4. The ACIR did not agree with the argume nts of the taxpayer and subjected the CFS income to normal rate of tax with argument that tax deducted on income under section 233A(1)(d) was "adjustable tax" in Tax year 2008 and minimum tax in Tax Year 2009. In addition the ACIR discussed section 151 and section 233A of the Ordinance, 2001 to justify his stance.
5. ' Against the said order the respondent preferred first appeals before the learned CIR(A). The learned CIR(A) in the impugned order dated 28-2-201 1 have given detailed findings and has held that the contention of the respondent was correct and directed that tax on CFS Deducted 10% be treated as final discharge of tax liability . The learned CIR(A) elaborately discussed the nature and species of Continuous Funding Scheme (CFS) in light of definition of profit on debt contained in section 2(46) of Income Tax Ordinance, 2001 and has held that income from CFS falls under definition of profit on debts. The learned CIR(A) also held that in section 233A(1) only the treatment of tax deducted under subsections (a) to (a) of section 233A(1) have been defined in section 233A(2) which were final tax, minimum tax and adjustable tax in different tax year, but the treatment of tax deducted on income under section 233(A)(1)(d) has not been touched and logically so as the nature of the income falling under section 233(A)
6. (1)(d) being in nature of profit on debt had already been taken care of under section 2(46) read with section 151 of the Income Tax Ordinance, 2001. The learned CIR(A) also relied on section 136 of the Income Tax Ordinance, 2001 and nature and characteristics of CFS transactions to arrive at his findings.
7. ' Against the above referred impugned order of the learned CIR(A), the tax departm ent has preferred appeal before this Tribunal.
3. The Learned Departmental representative has argued that CFS income is covered under section 233(1)(d) and is to be taxed at normal rate of tax. He has argued that the tax deducted under section 233(1)(d) is adjustable and minimum tax in tax years 2008 and 2009 as has correctly been held by ACIR and is clear from section 233(A)(2) of the Income Tax Ordinance, 2001. He has supported the order of the ACIR and prayed that order of ACIR be restored. To a query from the bench that there is no mention about treatment of tax deducted under section 233A(1)(d) in section 233(2) and in fact there is no mention of Continuous Funding Scheme (CFS) in section 233A(1)(d) the Learned D.R agreed that neither was CFS mentioned in section 233A(1)(d) nor was treatment of tax deducted under section 233A(1)(d) covered or mentioned in section 233A(2) of the Income Tax Ordinance, 2001 as evidently incorrectly stated by the ACIR in his order .
4. On the other side the learned counsel of the Taxpayer/ Respondent at the very outset raised preliminary objection that the appeal filed by the department in both the years is time barred and as such liable to be dismissed. In support of his arguments he has filed copy of Letter No,CIR(A-1 1)2010/201 1/239 dated March 2, 2011 of office of Commissioner Inland Revenue (Appeals-II) Karachi whereby he forwarded copies of appeal orders passed in month of February , 2011 to the Commissioner of Inland Revenue (Legal) Division, Regional Tax Office-1, Karachi and to Director General, RTO-1; Karachi. In the list of appeal orders, the appeal orders of respondent was also enclosed and appears at Serial Nos. 5 and 6 in respect of both years under appeal.
8. ' The said letter along with the orders was delivered on 3 March, 2011 both in the office Director General RTO-1, Karachi and Commissioner of Inland Revenue (Legal) Division, Regional Tax Office-1, Karachi. The receipt bears seal and also initials. The present appeals have been filed before this Tribunal on 5-5-201 1. As such both the appeals are time barred by two days. The Learned AR in this respect relied upon various case-laws viz. 2007 PTD 1387 (SCP), (1980) 42 Tax 140 (SCP) 1995 PTD 1085 (Lahore High Court), 1992 PTD 37 (Karachi High Court), 2005 PTD 1650 , 2010 PTD 1739 , 2008 PTD 1203 , AIR 1998 SC 2276, wherein it has been held that time barred appeals are liable to be dismissed. He has argued that no written application for condo nation of delay has been file by the department, in fact the department prima facie has attempted to mislead by writing the date of receipt of orders in appeals memo. As 7-3-201 1 which is incorrect and contrary to the facts as are clear from letter of CIR (Appeals-II) referred supra.
5. On the merits of the case, the learned AR argued that the ACIR has not appreciated the nature and characteristic of Continuous Funding System (CFS). He has confused and mixed it up with Badla and Carry Over Transactions (COT). In COT, bids and offers were in terms of purchase price of a particular share of day 1 and simultaneous resale of the same shares at different price for day 2, the difference being COT income. In CFS on the other hand, bids and offers between lenders (seller of shares) and borrower (purchaser of shares) are stated in terms of percentage of interest on annualized basis and tax is collected at 10 percent at source by Karachi Stock Exchange on the basis of interest so earned by lender . A sample copy of one days CFS activity extracted from Karachi Stock Exchange reporting system and a certificate dated 7-4-2008 from Karachi Stock Exchange duly certifying that CFS are settled in terms of percentage of interest on annualized basis and tax is collected by Karachi Stock Exchange on the basis of the intere st so earned by the lender was submitte d to ACIR vide letter reply dated 20-1-201 1 in support of submission that characteristics of transaction has to be looked into to determine the nature and CFS earning was nothing but interest income, As per CFS regulations, CFS profit were restricted to a minimum of KIBOR and maximum of 18%, hence this further supports the argument that CFS profit was annualized interest and clearly profit on debt.
9. ' The learned AR has argued that it is a settled law that the sole criteria to classify income under different heads of income is the source and/or nature of the activity and conduct where from and/or whereby the particular income is being generated. As long as source can factually be found, circumstances seldom have any bearing on the characteristics of the income. In this respect reliance was placed on decision of honourable Karachi High Court in case CIT v. Gelcaps (Pvt.) Ltd. Reported as 2009 PTD 331. The learned AR also placed reliance on decision of the Honourable Supreme Court of Pakistan reported as 2004 PTD 2255 (SCP) and 2010 PTD 1809 (SCP) in support of his argument that interest earned on capital is in interest income (profit on debt) and falls under the head "income from other sources". He further argued that the nature of earning on CFS clearly is profit on debt as defined in section 2(46) of the Income Tax Ordinance, 2001 and this profit is clearly covered under section 151(1)
(d) of the Income Tax Ordinance, 2001 and tax so deducted is covered under section 151(3) of the Income Tax Ordinance, 2001 as final discharge of tax liability .
10. ' The learned AR has contended that the definition of "profit on debt" as contained in section 2(46) of the Income Tax Ordinance, 2001 shows that profit on debt means any profit yield, interest, discount, premium owning under debt, any service fee or charges in respect of debt other than return of capital. The learned CIR(A) has also discussed this aspect in this order . The Learned AR also relied upon decision of the Indian jurisdiction in case of.
11. Viswapriya Finance Services and Securities Ltd. v . CIT reported as 258 ITR 496 in support of his arguments.
12. ' The learned AR has submitted that the legislature while inserting section 233A(1) of the Income Tax Ordinance, 2001 placed the transactions from subsec tions (a) to (c) of section 233A(1) first as final and then as minimum and vide Finance Act, 2010 as adjustable but the legislature did not touch or classify the treatment of receipts from clause (d) of section 233A(1) because the nature and species of the transaction being in nature of profit on debt and the same already had been taken care of and addressed in terms section 2(46) read with section 151 of the Income Tax Ordinance, 2001.
13. ' The learned AR in support of his submission that tax on income arising out of section 233A(1)(d) is final discharge of tax liability and has always been so, argued that the legislature has held tax on income arising out of section 233A(1) clauses (a) to (c) held the same to be "adjustable", hence logically the tax on income under section 233A(1)(d) is not "adjustable" and hence " final tax".
14. ' The learned AR as an alternate argument has submitted that there is no controversy that the earnings are from Continuous Financing System (CFS). In both years under appeal, CFS has not been mentioned in section 233(1)
(d) of the Income Tax Ordinance, 2001. As such the emphasis of ACIR is totally in correct as he is reading into section what has specifically not been provided for .
15. ' He has contended that it is a settled law that even if two possible interpretation were possible one in favour of tax payer it to be adopted---reliance in this respect was placed on case reported as 2002 PTD 877 (SCP), 2004 PTD 2479 (SC) and 1997 PTD 1724 (H.C. Lah).
6. I have heard the learned representatives from both the sides and have also perused the consolidated impugned order of the learned CIR(A), the orders of the ACIR, the available record of the case, the relevant provisions of law and the case-law referred by the learned counsel.
16. ' On the preliminary legal objection raised by the learned AR, I find that the Learned CIR(Appeal-II) had served the appeal orders on the Director General RTO-1, Karachi and Commission of Inland Revenue (Legal) RTO-1, Karachi vide his cover Letter No, CIR(A-II)2010/ 2011/239 dated 2-3-201 1 on 3-3-201 1. The cover letter has stamp of office and initials of functionary the order being received on 3-3-201 1. Unfortunately and incorrectly on appeal memo.
17. Date of receipt of order has been show n as 7-3-201 1 by the tax department. This is contrary to the facts and evidence. No application in writing has been moved for condonation neither satisfactory cause for delay has been advance. Both the appeals were filed on 5-5-201 1 in the office of this Tribunal. As the date of service of appeal order as is clear from evidence filed, is 3-3-201 1 and appeals have been filed on 5-5-201 1 both the appeals are clearly time barred by two days. Reliance in this respect is placed on decision of the Honourable Supreme Court of Pakistan reported as 2007 PTD 1387 (SCP) wherein the court has held that even a delay of one day in filing of appeal creates a right in favour of opposite party . Reliance can also be placed on the following case-laws (1980) 42 Tax 140 (SCP), 1994 PTD 1085, 1992 PTD 37, 2005 PTD 1650 , 2010 PTD 1739 , 2008 PTD 1203 wherein it has been held that the time barred appeals are liable to be dismissed. I have no hesita tion in holding that both appeals are clearly time barred and are dismissed.
18. ' Even on the merits and facts of the case the arguments of the learned AR have lot of force and I agree that learned CIR(A) has correctly after discussing all the aspects of the case and nature of CFS has held that the nature and species of CFS is profit on debt and same is covered under section 2(46) and is also covered under sections 151(d) and 151(3) of the Income Tax Ordinance, 2001 and tax deducted on CFS @ 10% in case of individual is final discharge of tax liability . The learned CIR(A) also has elaborately discussed that tax on income arising out of section 233A(1)(d) is final discharge of tax liability and has always been so, and that the legislature has held tax on income arising out of section 233A(1) clauses (a) to (c) and held the same to be "adjustable" hence logically the tax on income under section 233A(1)(d) is not "adjustable" and hence "final tax". The order of the learned CIR(A) is well reasoned and correct and calls for no interference.
19. ' The ACIR clearly has fallen into error by misreading the provisions of law and misunderstanding the nature of CFS.
20. ' I find no warrant for interference in the impugned order , which is upheld and both the departmental appeals are therefore dismissed.