ABDUL RAUF (ACCOUNTANT MEMBER).---Through their respective appeals for the tax year, 2003 both the taxpayer and the Revenue have assailed the order of the CIT (Appeals) dated 21-8-2008 whereas remaining appeals for the years 2004, 2006, 2007 and 2008 have been filed by the Revenue contesting the order of CIT (Appeals) dated 28-8-2009. The Revenue feels aggrieved by the direction of the first appellate authority in all the years to assign the status of AOP to the taxpayer for the purpose of rate of tax whereas the taxpayer has assailed the appellate order for the tax year, 2003 on the following grounds:--
(i) That the notice issued under section 122(9) is unlawful and against the provisions of section 122 of the Income Tax Ordinance, 2001.
(ii) That the learned CIT (Appeals) was not justified in upholding the treatment regarding the receipts of Rs,20,923,000 from NECHS as contractual receipts which was actually a facilitation fee against a construction contract awarded to some other companies through us.
(iii) That the CIT (Appeals) was not justified in confirming the allocation of expenses of Rs,25,476,064 against receipts from NECHS of Rs,20,923,000 on pro rata basis.
(iv) That the learned CIT (Appeals) has failed to consider our Ground No,6 regarding the disallowance of adjustment entry of rental expenses of Rs,265,000 with the observation that no tax was deducted on payment of rent.
(v) That the learned CIT (Appeals) was not justified in upholding the addition of Rs,382,000 under the head excess perquisites: 3(sic) Initiating the departmental appeals for all the tax years under consideration the learned DR contended that as per section 80(2)(b)(v) of the Income Tax Ordinance, 2001 a cooperative society has been included within the definition of a company and as such the Taxation Officer had valid reasons to charge tax on the income of the taxpayer at the rate applicable to a company. When the attention of the learned DR was drawn to Paragraph (ii) of Division-II of Part-I of the First Schedule to the Income Tax Ordinance, 2001 wherein it was provided that the income of a finance society, a cooperative society and any other society was to be charged to tax at rate applicable to a company or an individual whichever was beneficial to the taxpayer the learned DR pleaded that by virtue of section 80(2)(b)(v) a cooperative society was specifically included within the ambit of a company and consequently the rate of tax provided in the Paragraph (ii) of Division-II of Part-I of the First Schedule to the Income Tax Ordinance, 2001 was no longer applicable to its income. This stance of the learned DR, we are afraid to observe, is against the well-recognized principle of harmonious construction of fiscal statutes because acceptance of the contention of the learned DR would work havoc with the basic structure of the income tax law and render exemptions, concessions and exclusions provided in different parts of the second schedule not only redundant but a nullity in the eye of law. Such an intention can, by no logic, be attributed to the legislature. It is also to be appreciated that in the modern era tax is not only a source of generation of revenue for the State but also a very effective tool for balanced economic growth. To achieve this objective the State levies relatively higher tax on fairly developed and stable sectors of the economy whereas incentives and concessions are provided to the comparatively nascent sectors and backward areas by way of exemptions and reduced rates of taxation etc. Etc in order to encourage their growth. Viewed against this background, the intention of the legislature in providing beneficial rates of taxation for the cooperative societies seems to be to encourage the growth of cooperative societies which aim at welfare and relief of the common man. We are of the considered opinion that notwithstanding the fact that a cooperative society has been clothed with the status of a company as per section 80(2)(b)(v) of the Income Tax Ordinance, 2001, its income is proposed to be taxed at a relatively lower rate in order to ensure the growth and expansion of the Cooperative Societies. There is thus no conflict between section 80(2) and Paragraph (ii) of Division-II of Part I of the First Schedule to the Income Tax Ordinance, 2001, and both the provisions are applicable simultaneously. We, therefore, find no legal infirmity in the order of the first appellate authority as far as direction regarding charging of tax as per Paragraph (ii) of Division-II of Part-I of the First Schedule to the Income Tax Ordinance, 2001 is concerned.
4. Coming to the taxpayer's appeal the first ground agitated by the taxpayer relates to the assessm ent of receipts of Rs,20,923,000 from NECHS for execution of civil work under a contract under PTR. The learned AR of the appellant-company explained that although contract was executed between the appellant and the NECHS, the former had confined itself only to the rendering of supervisory services and the entire civil work had been sublet to various sub- contractors who submitted regular bills to the appellant-company for the work done by them. At the time of making payment to the sub-contractors the appellant company deducted tax from their bills under section 153(1)(c) of the Income Tax Ordinance, 2001, which constituted final discharge of liability in their cases. The learned AR further explained that the appellant company had neither the requisite paraphernalia nor the manpower to execute the contract. In keeping with the role of the appellant, the learned AR stated, receipts from the project were shown by the company as consultancy services fee in the audited statements of accounts from year to year and were also assessed under the normal tax regime by the department.
5. The learned DR, on the other hand, supported the orders of the taxation officer as well as the CIT (Appeals) and contended that in view of the agreement between the appellant and the Nespak Employees Cooperative Housing Society receipts from NECHS were to be treated as contractual income and assessed under the Presumptive Tax Regime under section 153(6) of the Income Tax Ordinance, 2001.
6. We have given due consideration to the arguments of both the sides and feel persuaded to agree with the learned AR. We are of the considered opinion that in order to ascertain the nature of a receipt/ income the substance of the transaction from which it emanates is of prime importance rather than the mere form. 'No doubt the agreement between the appellant NECHS is on account of execution of contract, there is also no rebuttal to the fact that the appellant did not execute the contract itself because it did not have adequate paraphernalia for this purpose. In the Schedule of Fixed Assets, filed by the appellant along with statement of accounts the value of machinery has been shown at Rs,141,000 which is too meagre to cope with the civil work worth millions of rupees.
Besides the appellant's assertion that the it has sub-let the entire civil work to various 'sub- contractors and tax is also being regularly deducted from the payments made to them under section 153 of the Income Tax Ordinance, 2001 and deposited in State Exchequer can also not be brushed aside casually. We are of the view that the interests of revenue are being adequately safeguarded by the appellant by way of compliance with the provisions of section 153(1)(c) of the Income Tax Ordinance, 2001 vis-a-vis the payments made to the sub-contractors. Under these circumstances, we hold that both the Taxation Officer and the first appellate authority were not justified in treating the receipts of the appellant from the NECHS as income from the execution of contracts assessable under the Presumptive Tax Regime because assessment of receipts from NECHS under Presumptive Tax Regime in the hands of appellant company would result in double taxation first in the hands of the appellant and then in the hands of the subcontractors which is not countenanced by law. We, therefore, vacate the orders of the authorities below and direct that the consultancy services fee be assessed as normal law income of the appellant.
7. Next grievance of the appellant pertains to the proration of administrative and general expenses.
From the perusal of the order of the taxation officer it transpires that the payments made to the subcontractors and sub-consultants amounting to Rs,18,796,000 and Rs,57,33,000, respectively, were treated as income of the appellant assessable under the Presumptive Tax Regime, and therefore, held to be inadmissible deductions from its income in view of section 169(2)(b) of the Income Tax Ordinance, 2001. The balance expenses were prorated between the presumptive and normal law income on the basis of ratio of quantum of receipts assessable under the respective tax regimes. The learned AR vehemently pleaded that the taxation officer was not justified in treating the receipts from NECHS as contractual income because the appellant had not executed the contract itself. The entire civil work was, as a matter of fact, sublet to different contractors and 90% of the amount was, passed on to them in consideration of the work done by them whereas the appellant's share was only a paltry amount of about 10% for rendering supervisory services.
8. We have, for reasons discussed above, accepted the plea of the taxpayer company and held that the nature of transactions between the appellant and the NECHS is to be determined with reference to the substance rather than the exterior form of the transaction. Since we have not concurred with the findings of the authorities below regarding the treatment of receipts from NECHS, proration of administrative and general expenses between the PTR income and normal law income, as an inevitable corollary, is also not sustainable. We, therefore, direct that all the administrative and general expenses be treated as having been claimed by the appellant against normal law income in the audited statements of accounts.
9. Next grievance of the taxpayer company pertains to the disallowance of rent paid by the appellant company to Nespak amounting to Rs,265,000 because the appellant allegedly failed to deduct tax under section 155 of the Income Tax Ordinance, 2001. From the perusal of the orders of the authorities below it appears that the appellant has occupied space in the Nespak House for which the rent of Rs,265,000 has been paid. Admittedly no tax has been deducted from this payment and as a consequence the expense was not held to be an admissible deduction under section 21(c) of the Income Tax Ordinance, 2001. The appellant's plea for non-deduction of tax is that it is engaged in multiple business dealings with Nespak for which regular exchange of amount takes place between the two. The amount in question, the learned AR stated, was adjusted in these inter-company transactions and actual payment of cash was not made on this account. The learned AR further argued that under section 153 of the Income Tax Ordinance, 2001 deduction of tax is to be made at the time of actual payment and in the absence of actual payment the provisions of withholding tax were not applicable. The learned DR, on the other hand, argued that the amount of rent was liable to withholding tax because the appellant, being a prescribed person, was legally obliged to deduct tax under section 155 of the Income Tax Ordinance, 2001.
10. We have given due consideration to the arguments of both the sides and feel persuaded to agree with the learned DR of the department because actual delivery of amount is not the only mode of payment; even passing of a debit entry in the books of account amounts to payment.
While making adjustment in the books of accounts by way of passing debit entries the appellant was legally obliged to reduce the amount of debit by the amount of withholding tax because the amount of expense recorded in the books of accounts through a debit entry amounts to making payment. The appellant, having failed to discharge its legal obligation of withholding tax was bound to suffer the consequence as laid down in section 21(c) of the Income Tax Ordinance, 2001.
We, therefore, uphold the disallowance of Rs,265,000 having been made in accordance with the provisions of section 21(c) of the Income Tax Ordinance, 2001.
11. The last ground pertains to the disallowance of excess perquisites of Rs,382,386 under section 21(k) of the Income Tax-Ordinance, 2001 which has been worked out as under:-- Basic Pay/Wages Rs.6,522,308 50% of Basic Pay Rs.3,261,154 Total of allowance (Excluding Utilities) Rs.3,643,540 Allowances exceeding 50% of Basic Pay Rs. 382,386 From the perusal of the amended assessment order it transpires that the amount of excess perquisites has been worked out with reference to the consolidated figure of emoluments of all the employee rather than on the basis of identification of excess payment of perquisites and allowances on case to case basis. As per provisions of section 21(k) of the Income Tax Ordinance, 2001, the taxation officer was required to identify the amount of excess allowances and perquisites in the case of each employee and then make the addition of the aggregate excess amount so identified to the income of the appellant company. This exercise does not appear to have been done during the course of assessm ent and an easy way of calculating excess perquisites was found by taking the figures representing the sum total of the payments made to the employees under various heads. This way of calculating the excess is not in accordance with law and, therefore, not sustainable. We, therefore, set aside the assessment on this point and remand the case to the taxation officer for examination and determination of the excess amount of perquisites in the light of above observations.
12. As a consequence of above discussion all the departmental appeals stand dismissed whereas the appeal of the appellant for the tax year 2003 succeeds partly.