SYED NADEEM SAQLAIN (JUDICIAL MEMBER).---The captioned appeal, filed by a quoted public limited company engaged in the business of distribution and supply of natural gas to residential, domestic, commercial and industrial consumers, impugns appellate order dated 13-6-2009 passed by the first appellate authority in respect of tax year 2007. The impugned order emanates from an earlier -appeal filed by the taxpayer in respect of amendment order dated 25-4-2009 passed by the Additional Commissioner, Large Taxpayers Unit, Lahore under section 122(5A) of the Income Tax Ordinance, 2001 ('new Ordinance').
2. This appeal was fixed for hearing on many occasions, however, on the requests of respective D.Rs. The appeal was adjourned for one reason or the other, so the same could not be disposed of.
Finally, in view of directions of honourable Lahore High Court, contained in its decision (whereby this Tribunal was directed to dispose of the appeal by 26-2-2010) dated 9-2-2010, in respect of Writ Petition No. 2219 of 2010, the subject appeal was fixed for hearing on 16-2-2010.
3. On 16-2-2010, while the appellant was represented by Syed Shabbar Zaidi, FCA and Mr. Asim Zulfiqar Ali, FCA, the departmental position was defended by Mr. Sajjad Haider Rizvi, Advocate ('LA') along with Mr. Muhammad Asif, Additional Commissioner, Legal Division, Large Taxpayer Unit, Lahore ('DR'). At the inception of appeal proceedings, the learned DR submitted that since the author of the order, giving rise to the present appeal, had undertaken to supplement the departmental arguments and the submissions contained in the amendment order, by way of a personal appearance before this Tribunal, and since he is stuck up due to some official engagement, he would be available to argue the case around 11 a.m., therefore, the proceedings may kindly be adjourned for couple of hours. The learned AR did not oppose to such request made by the DR and confirmed his availability. The request was acceded to and the case was adjourned till 11-30 a.m. The same day. It is pertinent to mention here that in the interest of justice and to afford full opportunity of being heard and to put forth departmental view the court allowed extra half an hour against the time asked for by the learned D.R. The bench was reconvened at the said pre-agreed time, however, the learned DR informed that the author of the order would not be joining the proceedings and as such this Tribunal may proceed in the matter after hearing the arguments of both the parties and after considering the orders of the authorities below.
4. Since the honourable High Court has given deadline i.e. 26-2-2010 to dispose of the appeal, the court at the request of the learned L.A. And learned D.R. Gave ample opportunity so that author of the impugned order who wanted to defend his case would not feel deprived. However, the learned L.A. And learned D.R. Both were left in the lurch due to pre-engagement of the officer (author of the order). It seemed that the learned L.A. And D.R., both were caught unaware with regard to giving full assistance to the court since they had been given understanding that author of the order in question wished to argue the case himself Since, it is a direction cage, we have no option but to proceed with the case to decide the case as per deadline given by the honourable High Court i.e. 26-2-2010.
5. Initiating his arguments, the learned AR for the appellant sought permission to the grounds of Appeals Nos. 2 and 3 which is allowed and these grounds of appeal having become infructuous are not taken up for disposal.
6. The arguments of the respective parties have been heard and due consideration has been given to the facts of the case as well as the supportive decisions relied upon by the parties. The grounds of appeal, in the light of the pleadings of the learned representatives, are taken up and disposed of in terms of observation recorded as under.
Ground of appeal No. 4 - Gas bills collection charges 7. Brief facts are the appellant company allegedly failed to deduct withholding tax under section 153 of the Income Tax Ordinance, 2001 (hereinafter called the Ordinance) in respect of 'gas bill collection charges' incurred in connection with services rendered by various institutions/banks in collecting the gas-bills and hence under provisions of section 21(c) of the Ordinance were ,invoked by the Additional Commissioner to disallow such collection charges. The AR of the appellant informed that similar disallowances were made in respect of tax years 2003 through 2006 in the appellant's on case regarding which this Tribunal, through order dated 16-10-2009 in I.T.As. Nos. 871-874/LB of 2008, after analyzing the matter from various aspects, held that appellant was not obliged to withhold tax in respect of collection charges and as such the disallowances made in preceding years were annulled.
8. In view of the fact that there is no difference in facts and circumstances , as were prevailing in the preceding years and as are involved in the current year, and since the matter has already been decided in appellant's favour, disallowance on this account is deleted by following the already available decision of the this Tribunal on the matter cited supra.
Ground of Appeal No. 5 - Post retirement employee benefits 9. The facts relevant to this issue are that during the year the appellant, in the financial statements, charged expense on account, of following:--
(i) Rs.250.279 million regarding post retirement employee benefit .Relating to medical facility; and
(ii) Rs.81.475 million in respect of post retirement employee benefit regarding free provision of gas.
10. The Additional Commissioner, .In the amendment order, disallowed both the amounts by invoking the provisions of section 21(e) of the new Ordinance by holding that the accumulation of provisions under the aforesaid heads tantamount to creation of a 'fund' which not being an approved fund attracted the mischief of aforesaid provisions of law. In this respect, reliance was placed by the Additional Commissioner on 2006 PTD 460, a decision of Sindh High Court, in which the issue was determination of allowability of 'provision for gratuity'.
11. While objecting to the disallowance made by Additional Commissioner and upheld by the first appellate authority, the learned AR vehemently argued that the appellant did not create any fund and as such the claim, being in the nature of an ascertained liability, qualified to be an allowable deduction on the basis of principles categorically laid down by the apex Court in 1992 PTD 668 and as such reliance by the Additional Commissioner on the decision of Sindh High Court was not valid.
The AR further submitted that reference to the cited decision of the apex court was also made before the Additional Commissioner, however, the Additional Commissioner still drew adverse inference by observing that the decision of the apex court is not a valid precedent as it was given in the context of repealed Income Tax Act, 1922 when the provisions of law did not contain any .Provision part materia to those contained in section 21(e) of the new Ordinance.
12. The AR added that while responding to this observation of the Additional Commissioner further reliance was placed on the decision of Lahore High Court, in 2001 PTD 443, in which the matter again was determination of allowability of 'provision for gratuity', and their lordships upheld the claim of deduction by following the principles laid by the apex court in the cited judgment. The AR further argued that in the case before their lordships of Lahore High Court, the legislation under consideration was the repealed Income Tax, Ordinance, 1979 ('repealed Ordinance') which contained section 24(g) (part materia to section 21(e) of the new Ordinance). On this basis, the AR submitted that when in the context of repealed Ordinance (containing part materia provisions) their lordships considered the decision of the apex Court as a relevant and valid precedent then the Additional Commissioner had no mandate to take any different view. It was the contention of the AR that regardless of any other consideration, under the principles of stare decisis the ruling of Lahore High Court would take precedence over the judgment of Sindh High Court referred by Additional Commissioner. The AR further submitted that even otherwise the judgment relied upon by the Additional Commissioner is not valid as Sindh High Court in a subsequent judgment, reported as 2008 PTD 647, has upheld the claim regarding provision of gratuity on the' same lines as was previously approved by Lahore High Court. On the basis of aforesaid arguments, the learned AR submitted that disallowance being based on improper application of law merits deletion. The learned DR on the other hand supported the orders of the authorities below.
13. We have considered the rival submissions, perused the available record and have given earnest consideration to the decisions relied upon by the parties. Interestingly, both the parties are relying upon' decisions relevant to 'provision for gratuity' and the real controversy remains as to which precedence is applicable in the present case. It does not take long for us to decide this issue. While AR's reference to principle of stare decisis, being already well settled, cannot be ignored, even if for argument's sake it is considered that decisions of Sindh High Court are relevant in the context of the present appeal, later decision i.e. 2008 PTD 647 would certainly take precedence over the earlier judgment i.e. 2006 PTD 460. We would further note that in fact this matter relates to claim of an ascertained liability regarding which the matter has already attained finality by virtue of decision of the apex court, cited supra and since this decision is being repeatedly followed by the higher courts there is no room for any other view. The disallowance made by the Additional Commissioner is held to be not tenable in the eyes of law.
14. We consider that the observation of the Additional Commissioner is strange when he states that the two judgments i.e. 2001 PTD 443 and 2008 PTD 647 relied upon by the AR, are not relevant as in both the cases their lordships of High Courts derived strength from the judgment of the apex Court which related to assessm ent year governed under Income Tax Act, 1922 when no provision pari materia to section 21(e) of the new Ordinance existed. It is suffice to state that no matter the repealed Act did not contain any pari materia provisions but provisions of section 24(g) of the repealed Ordinance were clearly pari materia to section 21(e) of the new Ordinance as is under consideration. When their lordships at High Courts regard the judgment of apex Court as being a valid precedent vis-a-vis the repealed Ordinance [which contained pari materia provisions], the Additional Commissioner is not competent to take any contrary view. The upshot of the discussion is that the provision claimed by the appellant qualify to be an admissible deduction in the light of ratio settled in 1992 PTD 668 (SC), 2001 PTD 443 (LHC) and 2008 PTD 647 and as such the disallowance made by the Additional Commissioner is deleted.
Ground of Appeal No. 6 - Government Grants 15. The relevant facts are that the Additional Commissioner in the amendment order charged to the tax the grants aggregating to Rs.3,811.477 million received by the 'appellant from the Federal Government by invoking the provisions of section 18(1)(d) of the new Ordinance. The first appellate authority upheld the action of the Additional Commissioner.
16. Elaborating the facts, the AR submitted that the appellant company regularly receives grants from Federal Government, in the same way it receives contributions from consumers, which are solely utilized towards funding of transmission and distribution lines, which are utilized to transmit natural gas to consumers. It was explained that the accounting and tax treatment of both the consumer contributions and government grants is exactly the same in the case of the appellant.
While in the financial statements these are recognized as 'deferred credit', in the tax computation these amounts are recorded as a reduction is written down value of the depreciable assets. This treatment, the AR clarified, is consistent for past many decades.
17. In this background, the AR submitted that although government grants have never been taxed in preceding years, the amounts received on account of consumer contribution was taxed for the first time in the assessm ent year 1981-1982 when the department treated the amount as a revenue receipt. The matter was finally settled in the appellant's favour when this Tribunal in its decision dated 17-1-1991 ruled that the appellant correctly reduced the, amount from the written down value of the depreciable assets and as such the amount was not a revenue receipt. It was observed by the Tribunal, the AR submitted, that where an amount is received towards sharing the cost of service lines i.e. The amount is utilized in creation of an asset which is a capital asset then the receipt, being in the nature of direct re-coupment or reimbursement of a capital expenditure, cannot be treated as a revenue/ taxable receipt. It was added that similar treatment was accorded to the appellant in all subsequent years upto and including assessment year 2002-2003 and in all the years the matter has been consistently decided in appellant's favour through judgments dated 10-6-1997, 26-2-2002, 19-6-2003 and 1-2-2005. The AR clarified that departmental reference for all the 21 years are pending before the Lahore High Court and as such the legal position stands settled so far as this forum is concerned.
18. The AR argued that it is an admitted position that the nature of both the consumer contribution and government grants is exactly the same, therefore, based on legal position already settled in the appellant's on case, not only the Additional Commissioner grossly erred in taxing the amount constituting the grants but also its confirmation by the first appellate authority is not legally sustainable.
19. It has been submitted by the AR that the fundamental reason advanced by the Additional Commissioner for not regarding the aforesaid decisions of this Tribunal as binding precedents is that in his view the earlier decisions were given in the context of the "repealed 1979 Ordinance" and as such the legal position has changed by virtue of insertion of section 18(1)(d) in the new 2001 Ordinance. Referring to this observation, the AR submitted that this argument of the Additional .
Commissioner is faulty and contrary to the correct legal position. That is so because:
(i) so far as the facts and circumstances applicable in the appellant's case, the provisions of section 22(c) of the repealed 1979 Ordinance are part materia to the provisions of section 18(1)(d) of the new 2001 Ordinance and as such it is wrong assumption of the Additional Commissioner that there is a change in law that warrants the action;
(ii) in any case provisions of section 18(1)(d) of the new Ordinance are not applicable in respect of any benefit that is received in 'cash' [which admittedly is the case for subject government grants] and in this respect, relied upon decisions from Indian jurisdiction in 205 ITR 353 and 259 ITR 520 wherein by reference to expression "....Whether convertible into money or not..." it has been ruled that amounts received in cash fall outside the scope these provisions; and (i.e) though the Additional Commissioner has stated in the order that change in law rendered the earlier decisions irrelevant but still he did not charge to tax the amounts constituting consumer contributions which shows that he himself is aware of the position that there is no material variance in the two legislations and as such Additional Commissioner arbitrarily taxed the 'government grants'.
20. The learned LA/DR, though supported the taxability of government grants primarily on its 'recurrence' but conceded to the position that there is no material change in the two legislations vis-a-vis the underlying facts and with reference to provisions invoked by the Additional Commissioner. There is nothing in the amendment order either as to how the two amounts, have any different character. On our specific query as to in what respect the department differentiates between the two amounts viz. 'government grants' and 'consumer contributions', the LA/ DR could not render any explanation and conceded that both the amounts were received and utilized in procurement of capital/ depreciable assets.
21. In the admitted circumstances that there the subject amounts were received towards sharing the cost of service lines and were meant to reduce the capital cost of depreciable assets, we consider that the decision dated 17-1-1991, given in the appellant's on case, is squarely applicable in respect of present proceedings. As has already been settled in the appellant's case that where such amounts are utilized to create capital/depreciable assets, the amounts so received, being in the nature of re-coupment or reimbursement of capital expenditure, constitute 'capital receipts' in the hands of the recipients. The issue having already been conclusively decided, we hold that the Additional Commissioner erred in deviating from the principles enunciated in this Tribunal's earlier decisions and as such the amounts were illegally charged to tax. Similarly, no exception could be taken from the principle laid down in decisions cited from Indian jurisdiction that in any case amounts received in cash are not covered by the subject provisions. The position being admitted that in the present case the amounts were received by the appellant in cash, we have no hesitation in holding that these provisions were wrongly invoked by the Additional Commissioner and as such the amendment order, and its confirmation by the first appellate authority, are liable to be struck down. These are accordingly vacated. Resultantly, the appeal on this point is also accepted and addition is annulled.
22. The appeal succeeds in the manner and to the extent described above.
Sd/- Sd/- (AMJAD IKRAM ALI) (SYED NADEEM SAQLAIN)
ACCOUNTANT MEMBER) JUDICIAL MEMBER DISSENTING NOTE AMJAD IKRAM ALI (ACCOUNTANT MEMBER).---The taxpayer has charged expenses, which in my view are reserves, as they pertain to post retirement employees benefits relating to the medical facility and free provision of gas. I have chosen to call them reserves, as they are still retained by the company and utilized by the company. No separate fund whereby the company has dis- associated itself from the fund has been created. Even, if the company had disassociated itself by creating a separate fund and not utilized its fund, even then the statutory bar to admissibility of appropriations towards unapproved gratuity fund by virtue of mischief of section 21(e) would make them inadmissible.
2. The Additional Commissioner disallowed the claim under sections 122(5A)/21(e) of the Income Tax Ordinance, 2001 and the learned C1T(A) has also upheld the same. My learned brother gave following concluding remarks:- "The upshot of the discussion is that the provision claimed by the appellant qualify to be an admissible deduction in the light of ratio settled in 1992 PTD 668 (SC), 2001 PTD 443 (LHC) and 2008 PTD 647 and as such the disallowance made by the Additional Commissioner is deleted".
3. The judgment of the august Supreme Court reported as 1992 PTD 668 (SC) relied upon by my learned brother was a matter regarding refusal to grant of appeal and the following questions were before the apex court:-- "Whether in the facts and circumstances of the case, the Appellate Tribunal was justified in upholding the disallowance of the claim of gratuity payable to the employees."
4. The Apex Court referred to Karachi High Court's decision reported as 1985 PTD 413 and decided as under:- "For the facts and reasons stated above, we are of the considered view that no exception can be taken to the judgment of the High Court impugned in this petition for the reason that it has answered the question correctly to the effect that claim of gratuity payable to the employees cannot be disallowed in the light of and for the reasons stated in the case-law mentioned above.
No interference is warranted, as such leave is refused".
5. It would be observed that the judgment which was relevant to 1922 Act did not take into account the statutory bar on such admissibility placed by section 24(g) of the repealed Ordinance as have been reiterated in section 21(e) of the new Ordinance.
SECTION 21(e) READS AS FOLLOWS" "21. Deductions not allowed.---Except as otherwise provided - in this Ordinance, no deduction shall be allowed in computing the income of a person under the head "Income from Business".
"(e) any contribution made by the person to a fund that is not a recognized provident fund (approved pension fund), approved superannuation fund, or approved gratuity fund".
6. The interpretation of allowing gratuity as provision would make section 21(e) redundant, which finding has not been given by any forum yet.
7. In the case reported as 2006 PTD 460, Mr. Mujibbullah Siddiqui as Judge of the Hon'ble High Court addressed the question of inadmissibility of provision for gratuity in terms of section 24(g) of the repealed Ordinance, 1979, which is para metria the same as 21(e) of the new Ordinance and also taking into account admissibility under the Income Tax Act, 1922.
Following questions were put before the High Court:--
(1) Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal was justified in confirming the order of the CIT(A) that provision of gratuity is an admissible expense ?
(2) Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal correctly relied on the judgment of High Court cited as 1989 PTD 579, when the judgment was based on provision of repealed Act of 1922 and the assessment in this case on the point of 'Provision' was covered by the section 24(g) of the Income Tax Ordinance, 1979".
The High Court held as under:-- "Consequent to the above discussion, it is held that the Assessing Officer rightly disallowed the claim for provision of gratuity on account of clear bar contained in section 24(g) of the Income Tax Ordinance, 1979. It is further held that no such bar was contained in the Income Tax Act, 1922, and therefore, this Court while considering the provisions contained in the Income Tax Act, 1922, held in the case referred to above, that the provision of gratuity was admissible expenditure for the reason that it pertained to the ascertained liability. After introduction of bar contained in section 24(g) of the Income Tax Ordinance, 1979, the earlier judgments of this Court delivered on consideration of the provisions contained in the Income Tax Act, 1922, are no more applicable for the reason that no provision analogous to action 24(g) of the Income Tax Ordinance, 1979, was there in the Income Tax Act, 1922. It is therefore, held that the ITAT was not justified in confirming the order of CIT(A), whereby the provision for gratuity was held to be an inadmissible expense under the law contained in the Income Tax Ordinance, 1979."
8. In view of the High Court's judgment referred to above, the provision of gratuity is statutordy inadmissible expenditure.
9. The provisions of 1979 Ordinance as applicable to the assessment year 2002-2003 were para materia the same as those in the Income Tax Ordinance, 2001 and have been answered above.
10. It is imperative to mention here that in the latest Full Bench Judgment of this Tribunal reported as 2009 PTD (Trib) 1187, it has been held as under:-- "For assessm ent year 2002-2003, assessee as well as department both have contested the impugned order. Regarding the objection of assessee about the provision of gratuity, neither the gratuity has been got approved as per requirement of law nor actually it has been paid, therefore, the L/CTT(A) has rightly disallowed the same, hence, his finding is confirmed."
11. Therefore, in the interest of harmony, the provision for gratuity should be deleted.
12. The other judgments relied upon by my learned brother are 2001 PTD 443 (LHC) and 2008 PTD
647. The former judgment was regarding the assessment years 1977-1978 to 1986-1987, wherein statutory bar to admissibility of provision of gratuity was not discussed. Income Tax Ordinance, 1979 was promulgated from July 1979. This by itself shows that the provision of section 24(g) of the repealed Ordinance, which is para metria the same as section 21(e) of the Ordinance, 2001 was not considered. As evidence of non-consideration of statutory bar imposed by the Income Tax Ordinance, 1979 and reiterated in the Income Tax Ordinance, 2001, the precise questions of law framed before the Hon'ble Lahore High Court are reproduced hereunder:---
(i) Whether in the facts and circumstances of the case, the gratuity calculated by the assessee from year to year and provided for in its books of accounts was a deductible business expense even if actual payment of the gratuity depended on a future even and it had not actually become payable to any employee in the relevant income year ?
(ii) Whether the liability for payment of gratuity is a proper charge against the income of the assessee and as such admissible as expense against the income of relevant years on incremental value basis?
(i.e) Whether the assessee being a limited company is a person not capable of incurring expenses on its travelling, telephone and the like and disallowance as such is liable to be deleted in computing the taxable income of the assessee?".
(iv) Whether all expenses vouched by the Directors of limited company for the telephone, travelling, entertainment and the like are deemed to have been incurred and paid for the purpose of the business of the company and allowable on account of commercial expedience?.
13. It is abundantly clear that the judgment of the Hon'ble Lahore High Court is not relevant to the issile before us. This is besides the fact that it is based on apex court's judgment discussed supra, which was regarding 1992 Act and that also was an application of refusal to interfere in an un- contested order of the Hon'ble High Court, which was made without hearing the Income Tax Department.
14. The later judgment relied upon is also based on the august Supreme Court's judgment, which has been discussed as having been delivered by the apex court by application of entertaining a question of law wherein the law under consideration i.e. Section 21(e) of the Ordinance 2001 or section 24(g) of repealed Ordinance, 1979 was not discussed by the apex court.
15. Further, the Division Bench of the Tribunal vide its order dated 6-2-2010 passed in I.T.A.
No.910/LB/08 and I.T.A. No.679/LB of 2008 (Tax year 2005) has addressed the question of inadmissibility of expenses books towards unapproved gratuity fund and endorsed the view points regarding inadmissibility taken by the undersigned.
Regarding the argument at the assessment stage that no separate fund was created for free gas and medical facility and therefore; section 21 (e) is not applicable, I endorse the views of the taxation officer given hereunder:-- "So for as the first argument of the taxpayer is concerned, it appears that creation of provision and its charge on the income tantamount to creation of a separate fund. This view finds support from the judgment of the Sindh High Court reported as 2006 PTD 460 in which the honourable Court held as under: Secondly even if no fund has been created formally, the provision created to which the gratuity accrued but not actually paid is transferred and on the basis whereof claim of gratuity is preferred itself amounts to creation of gratuity fund. The reason being that the expression 'fund' in the ordinary common parlance means accumulation of money for some specific purpose. We are of the opinion that the expression fund used in section 24(g) is to be taken as an ordinary expression and. Not as a term of art. The rules relating to approved gratuity fund are contained in Part-III of Sixth Schedule to, the Income Tax Ordinance, 1979. The term of gratuity fund has not been defined in these rules. However, the term 'approved gratuity fund' has been defined in section 2(4) of the Income Tax Ordinance, 1979 to mean a gratuity fund which has been and continued to be approved by the Commissioner in accordance with the rules contained in Part-III of the Sixth Schedule. Thus the expression 'approved gratuity fund' has not been defined in the Ordinance or rules framed there under. The result is that the expression shall not be treated as term of art and is to be given ordinary meaning as is understood in common parlance".
The Court further observed: `Such provision of gratuity has all the attributes of a gratuity fund but admittedly this gratuity fund is not approved and therefore, by virtue of Specific bar contained in section 24(g) of the Income Tax Ordinance, 1979, the claim was not admissible'.
"A perusal of above provisions shows that a well designed mechanism has been devised under the law in respect of approved gratuity fund. If any assessee claims a deduction on account of gratuity without establish an approved gratuity fund, he defies the law and consequently cannot be allowed the benefit".
16. In view of above said, I am of the considered opinion that such provisions for Gas and Medical Facility are in the nature of provision for gratuity and thus inadmissible under section 21(e) of the Income Tax Ordinance, 2001.
17. The question that arises is:--
(1) Whether future medical and gas charges booked as an expense are admissible deduction in terms of section 21(e) of the Income Tax Ordinance, 2001 ?
(2) Whether the judgment of the august Supreme Court refusing to interfere in the mater of provision for gratuity in the context of repealed Income Tax Act, 1922 remains relevant to application of section 24(g) of the repealed Income Tax Ordinance, 1979 and section 21(e) of the Income Ordinance, 2001 ?
18. I also disagree with the view point of my learned brother on the issue of disallowance under section 21(c) for the reasons discussed hereunder: DISALLOWANCE U/S 21 (C) Banks/financial institutions received payments as 'collecting agent' on behalf of the taxpayer. The banks retained service charges and remit the balance to the respondent company. No tax under section 153(1)(b) was deposited. The Additional Commissioner added the amount under sections 153/21(c) and 122(5A). My learned brother has endorsed earlier decision of the Tribunal in this case that deduction of tax was not due. No payment was actually made by the taxpayer to the 'banks. The banks remitted the collection to the taxpayer. Since, no payment was made by the taxpayer, therefore, section 153(1)(b) was not attracted and consequently, addition under section 21(c) was not warranted. This view of the Tribunal is altogether different from my view. My view is that it was due to be deducted because firstly settlement of account is also form of payment, secondly that the collecting agent appointed under a contract was authorized by virtue of operation of section 187 of Contract Act to do every thing inferred as required from the circumstances. Thirdly, section 153(1) read with sections 153(5)(bb) and 153(5)(ba) shows that the arrangement of payment by recipients or in "KIND" does not absolve the payer. However, before dilating the reason in detail, I think it is imperative to state that the construction of payment limited to physical payment will topsy turvy the entire withholding regime.
The machinery section has to be so construed as to make the law executable, rather than place the 'STATE' in limbo. The provisions effected by the interpretation relied upon by my learned brother as shown from references below would bring entire machinery to halt:---
(a) Payments of salary wherein the salary payment is adjusted against the some rent or other payment due from the employee to the employer. (Section 149).
(b) Dividends settled by the inter-corporate settlement, more so, in multitude of sister concern.
(Section 150)
(c) Profits on debts. (Section 151).
(d) Payment to non-resident. (Section 152). Adjustment against other transactions.
(e) Payment for sale of goods adjusted against other transactions. (Section 153(1)(a)).
(f) Payment on execution of contracts. (153 (1 c)). Adjustment against other transactions.
(g) The payment for securitization. (Section 153 (5b)). Adjustment against other transactions and payment under section 153(8).
(h) Payment to non-resident media person ((153(a)). Adjustment against other transactions.
(i) Settlement between an exporter using the export proceeds by opening of new L/C. (Section 154).
(j) Income from property. (Section 155). Adjustment against other transactions.
19. All these sections would apply in very situation of adjustments. Some of such settlements were dealt with in I.T.A. No.208/LB/09 (Tax Year 2007) dated 21-11-2009 (copy enclosed). In this case, many provisions of withholding regime were avoided by recourse to such construction of law as has been made by the learned AR and endorsed in the order being dissented. The ITAT in its said order rejected the taxpayer's stance and held that adjustment is liable to deduction.
20. Payment for purchase of furniture was made by the distributor out of sums payable to the principal company. Messrs Noon Pakistan Ltd. No deduction was made as the payment was not made by Messrs Noon Pakistan Limited directly. Payment was in fact a result of tri pi rite arrangement between the vender of furniture, the distributor and the principal company. The Tribunal held that that the distributor acted as an agent of the principal company and although the distributor was not prescribed person under section 153(1a). The deduction of tax under section 153(1a) was necessary. The taxation officer's action under sections 161/205 against the principal company was upheld.
21. Similarly, mineral water purchased by the distributor for principal company and which had not been subjected to deduction under section 153(la) was considered as justifying action under sections 161/ 205 for the reasons recorded above.
22. Freight and forwarding expenditure reimbursable to the distributor by principal and adjusted against the company's sales was not subjected to deduction under section 153(1)(b) because no actual payment was passed from the principal company to the distributor. Action under sections 161/205 was upheld by this Tribunal.
23. Rent payable by the principal company to the distributor was adjusted against the sales made to distributor. Again, the Tribunal upheld the action under sections 161/205 against the principal company. On the issue of rent, the observations of the learned CIT(A) and the Tribunal are given hereunder:-- "Sales were made by Messrs Noon and payment thereof was to be made by the distributor. Rent payment was to be made by the taxpayer to the distributor. These are two independent transactions. The taxpayer cannot be allowed to avoid liability under section 155 by stating that the amount has been paid by adjustment. The matter has been considered. The factum that two streams are between same persons does not mean that liability to deduct tax is set of. It is for the parties to deduct tax at the time of mutual adjustments. That is to say when payments are adjusted by mutual consent the parties become principal and agents of one and other. The agent is then the responsible to deduct tax from the sums being adjusted. This is the same situation as when travel agents deduct there on commission and tax thereon while adjusting the accounts of airlines. The rent was paid by the taxpayer by giving consent of adjustment to the distributor. The distributor became an agent by consent explicit or tacit. At the time of adjustment the agent was liable to deduct his on tax on behalf of principal. The taxpayer has defaulted the treatment of T.O.
And CIT(A) is upheld."
23. The dictionary meaning of payment has been examined from Blacks' Law Dictionary ".................... A discharge in money or its equivalent of an obligation or debt owing by one person to another and is made by debtors delivery to creditors of money or some other valuable things for the purpose,of extinguishing debit".
24. The undersigned also supports the DR's contentions according to dictionary meanings "payment would be said to have been made when a liability to settle consideration is discharged regardless, of any specific or complicated modus operandi".
X. The learned DR cited the case-law reported as (195) SCC. 1 (Federal Court) titled Messrs Ramkola Sugar Mills Co., Ltd. v. Commissioner of Income Tax, Punjab etc., wherein the dividend was paid by the company-A. To company-B. As soon as payment of dividend was shown as due on account of dividend, another liability of the recipients of dividend was adjusted. No deduction of tax was made on the ground that no actual payment passed on from the payer. The apex court held that such settlement constituted payment for the purpose of withholding provisions. Some extracts of the said judgment are reproduced hereunder:-- "The appellant, Ramkola Sugar Mills Ltd., a joint stock company, situated at present at Hamira, in Kapurthala State, had its registered office at Nawanshahar in the Hazara district of the North-West Frontier Province during the assessment year 1943-1944. This company held certain shares in another joint-stock company Mahalaxmi Sugar Mills Ltd., which had its registered office at Hamira in the Kapurthala State. The latter company on the 31st October, 1942, declared its dividend on the shares aforesaid and a sum Rs.75,000 became payable to the appellant company on that account. On the same date, however, that is the 31st October, 1942, an adjustment was made in the books of account of the Mahalaxmi Sugar Mills Company Limited, by crediting the sum of Rs.75,000 aforesaid towards a sum of Rs.78,000 said to have become due to it, by the appellant company and by debiting that sum by a corresponding entry in the books of account of the appellant company at Nawanshahr. Admittedly, the three directors of the two companies were the same persons, who managed the business of the said companies. It appears that in connection with the assessm ent of income tax for the year 1943-1944, a contention was raised on behalf of the appellant company to the effect that as the sum of Rs.75,000 had accrued at Hamira in an Indian State, and was not received by the appellant company at Nawanshahr in British India, section 4(1)
(a) of the Income Tax Act (XI of 1922) was inapplicable while section 4(1)(b)(ii) was to be read with section 14(2)(c) thereof with the consequence that the said sum of Rs.75,000 was not liable to income tax under either of the clause (a) or (b) (ii) of section 4(1). This contention was, however, overruled by the Income Tax Authorities and by the Income Tax Appellate Tribunal and their view was upheld by the court of the Judicial Commissioner, North-West Frontier Province on reference under section 66(1) of the Income Tax Act, 1922. The reference made was in the following terms:- "Whether in the circumstances of the case the dividend income of Rs.75,000 can be said to have been received by the assessee company in British India within the meaning of section 4(1) read with section 14(2)(c) of the Act".
Certain general observations in the case of Trinidad Lake Asphalt Operating Company Ltd. (supra) cited by the respondent, appear to me be of assistance in the present case, although the decision in the case mentioned above was with regard to the true meaning of the words "transmission" of "revenue" in section 30 of the Income Tax Ordinance, 1940, applicable in Trinidad. Lord Wright in the course of his judgment observed as follows:-- "No actual money passed. If the dividend had been transmitted by a banker's draft sent by the appellant to Barber it could not have been questioned that the dividend had been transmitted, but the two companies might do their on banking transactions between themselves and dispense with the intervention of banking facilities. The transaction involved the sending to Barber by the appellant, and receipt by Barber from appellant, of the dividend. This was effected by the agreement that payment should be made by cancellation of the debt for good} supplied. This method had been mutually agreed before the dividend was declared. The agreement was carried out by each party making corresponding entries in its books. These were not merely book-keeping entries. They represented the actual receipt of the dividend by barber and the actual payment of it by the appellant to barber and concurrently, the actual receipt by the appellant from barber of payment of his debt for goods supplied. The composite and joint transaction in principle satisfies the description of a payment by Mellish L.J in In re Haremoney and Mongtague Tin and Copper Mining Co., Spargo's Case ((1873) LR 8 Ch. 407. 414). 'Nothing is clear', he said, 'then that if parties account with each other, and sums are stated to be due on the one side and sums to an equal amount due on the other side of that account, and those accounts are settled by both parties, it is exactly the same thing as if the sums due on both sides had been paid. Indeed, it is a general rule of law, that in every case where a transaction resolves itself into paying' money by A. To B., and then handing it back again by B. To A., if the parties" must meet together and agree to set one demand against the other, they need not go through the form and ceremony of handing the money backward and forwards. This statement gives a description of what is often called a settlement in account or a set of, the word not being there used in the technical sense of the statutes of set of. There is actual, not merely national or constructive payment of the indebtedness on either side. There is thus a 'transmission' of funds whether the transmission is only across the table or is across the ocean. Transmission involves, indeed, an intermediate space, but does not depend on the extent of the space. Each party receives payment from the other. Each party having received payments in this way makes in his turn the corresponding payment to the other. The transaction is necessarily bilateral".
27. The apex court, therefore, upheld that the payment of dividend though not physically was a payment. (Copy of judgment is enclosed).
28. This view has been supported by the judgment referred above. Reading of sections 153(1) with 153(5)(b)(a) and 153(5)(bb) is as under: Section 153 - Payment for goods and services.---(1) Every prescribed person making a payment in full or part including a payment by way of advance to a resident person or permanent establishment in Pakistan of a non-resident person.
(a) for the sale of goods;
(b) for the rendering of or providing of services;
(c) on the execution of a contract, other than a contract for the sale of goods or the rendering of or proiding of services, shall, at the time of making the payment, deduct tax from the gross amount payable at the rate specified in Division III of Part HI of the First Schedule.
(ba) A payment made by the Federal Government, a Provincial Government or a Local Government to a contractor for construction material supplied to the contractor by the said government or the authority.
(bb)A cotton ginner who deposits in the Government Treasury, an amount equal to the amount of tax deductible on the payment being made to him, and. Evidence to this effect is provided to the 'prescribed person'.
Following things merged:--
(i) The deduction is from gross amount payable
(ii) The prescribed person under subsections (bb)/(ba) was otherwise required to deduct tax on the gross amount. In order to provide for non-deduction on the cost of material supplied specific provision for deduction of net amount was made. Thereby saying that without its provision, tax was deductible on the gross amount including cost of raw-material..
(i.e) Section (bb) shows that payer was required to deduct tax from cotton ginners. However, facilitation measure/machinery has been given so that the recipient can deposit its on tax.
Similarly. Facilitation measure has been provided in section 233. These measures/machinery do not shift the responsibility.
29. Section 153 has procedural part and substantive part. In substance it treats sales made and services rendered liable to final tax liability. While the machinery provided is for execution of this intent of substance, the prescribed person is required to make deduction of tax. Section 153(5)(bb) states that the cotton ginners who deposit their on tax would not be liable to further deduction by the payer of ginned cotton. This clearly indicates that this section, is dealing with machinery and substance both. While in substance, the payer of ginned cotton remained responsible to deduct tax the vendor has been made eligible to exemption from deduction if he deposit his on tax and shows evidence thereof to the prescribed person. Similarly, section 233 gives similar facility to recipient of commission without in any way circumventing the responsibility of the prescribed person. I am of the opinion that the responsibility of the prescribed, person is not compromised by absence of similar to section 153(5)(bb) provision regarding receipts of services. The proper procedure was that entire amount of bill proceeds should have been received by the prescribed person who would then pay the service charges after deducting tax or the agent could have made the deduction himself.
30. The substance of section 153 is to tax the sale, services provided by the prescribed person, therefore, the transactions were the substance of law. S.R.O. No.386(I)/94 dated 7-3-1994; which gives exemption to the companies having capital below 1.5 millions exporting from liability to deduct. S.R.O. No.586(I)/91 identified exempt recipients such as Provincial Governments, Local Authorities, Tribal Areas. Obvious inference is that all other transactions encompassed by this section cannot be exempted by accounting somersault. The interpretation of AR would create two classes of recipients and treatments - one being paid by the adjustment as not liable to deduction under section 153(1)(b) and thus out of PTR Regime and the other recipient being paid in cash as liable to deduction under section 153(1)(b) and. Thus liable to PTR Regime. This construction would create anomaly in law and its implementation.
31. The arguments of the learned AR that since no machinery as provided under section 233 has not been provided in respect of services rendered under section 153(1)(b), as such the substance of law would change is not correct. The term payable included the entire sums payable to the agent.
The payer remained responsible for deduction just as payer remained responsible for deduction under sections 153(5)(bb)/153(5)(ba) and section 233. Similarly, the responsibility of the prescribed person will not shift just because. Of absence of a machinery provision, which is otherwise available from the Contract Act and squarely applicable to the collecting agent appointed by the respondent company.
32. Section 187 of the Contract Act also gives authority to the agent to do every thing that can be inferred from circumstances of the assignment. Section 187 of the Contract Act reads as under:-- Section 187 - Definitions of express and implied authority.-- An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to he inlerred from the circumstances of the case, and things spoken or written, or the ordinary course of dealing, may be accounted, circumstances of the case".
33. This clearly allows the agent to do to deduct its on tax for the reason that at the time of appropriating service charges the agent has two capacities. In the capacity of rendering of services, it has to be paid, while in the capacity of agent of payer, he is a payer as well. He is also authorized to deduct its on tax by virtue of above referred provisions. However, the responsibility would remain that all the prescribed person, as has been amplified by section 153(5)(bb) in the case of cotton ginners.
34. Here the circumstances that the respondent company has appointed agent governed by the Contract Act. The agent has to do all that the principal is required to do and the payment to agent is equal to payment to principal. Since to borrow the words of. Learned AR, the respondent company had appointed collecting agent, who was to remit the balance of collection after deduction of service charges to the respondent company. The situation here is analogous to the employee of the company who deducts tax from salary and then takes away his salary as recipient and deposit tax in the capacity of employee/agent of the company. The bank has to do just the same. However, well intended failure was on account of mutual benefits. The respondent company was facilitated by not having first received the bills and then depositing tax. While on the other hand, banks were facilitated by instant collection of service charges which otherwise would have first that to send bills to the respondent company and the respondent company was to remit the bills and deposit the tax. The banks would in this way earn the interest on the turn around the period.
35. It is also imperative to bear in mind that section 21(c) comes into operation to enforce the law of withholding tax. The law does not conceive any payment being made to the withholding agent who was assigned to do the function by operation of law. Since, no compensation for withholding agent was conceived, therefore, enforceability was built upon by providing inadmissibility of expenditure not subjected to deduction. Other .Side of the story that enforcement is done by virtue of recovery of tax not withheld from the payer is riot the whole truth. This provision i.e. 161(1) at the end of the day in ideal circumstances is zero sum game as amount recovered under section 161(1) becomes recoverable from the payee under section 161(2). Therefore, the sanction of law for enforcement of deduction is section 21.
36. In my view, the respondent company failed in its duty to deduct tax under section 161 and deduction under section. 20(1)(c) was justified.
37. In consequence of the above discussion, the questions arise as follows:--
(i) Whether the machinery part of section 153 is subject subservient to substantial part?.
(ii) Whether the adjustments in the nature of innumerable conceived circumstances would not defeat the substance of transaction with the prescribed person?
(i.e) Whether the payment by adjustment, which has been interpreted as payment equivalent to physical payment by apex court can be changed by this Tribunal ?
(iv) Whether section 21(c) is not the only sanction/bite for execution of duty assigned under section 153 ?
(v) Whether the facilitation provided in sections 153(5)(bb), 153(5)(ba) and 233 tantamount to shifting of responsibility or the responsibility of the payer does not shift because of a facilitation measure provided in these sections ?
(vi) Whether sections 153(1)(a) and (b) do not express the intent of legislature that deduction on adjustment cost was built in the payment and has been excluded by sections 153(5)(ba), (a)/(b) and 233, correspondingly, the payment to recipient was liable to deduction ?
Sd/- (AMJAD IKRAM ALI) Accountant Member
38. It is pertinent to mention here that I have already given dissenting note on the issue of provision for gratuity order passed by Mr. Javed Masood Tahir Bhatti, Judicial Member in the case titled as CIT, Legal Division, LTU v. Messrs Resham Textile Indis., Lahore (I.T.As. Nos.1143 and 1221/LB/08 - Tax Year 2003 dated 27-10-2009), therefore, the Hon'ble Chairman is requested to please refer the aforementioned questions to any other learned Member except to him for appropriate adjudication of the matter.
Sd/- Sd/- (SYED NADEEM SAQLAIN) (AMJAD IKRAM ALI)
Judicial Member Accountant Member Sd/- (SYED NADEEM SAQLAIN) JUDICIAL MEMBER JAVID IQBAL (JUDICIAL MEMBER).---This matter has referred to me by the worthy Chairperson to resolve the difference of opinion between the Judicial Member and the Accountant Member on account of following expenses:--
(a) Post retirement employee benefits relating to medical facility and free provision of gas - Rs.331.754 million. '
(b) Gas bills collection charges - Rs.212.329 million.
2. The precise facts relating to two issues are that appellant is public limited company listed on the stock exchanges in Pakistan. The principal business of the compahy is purchase, transaction, distribution gild supply of natural gas. For subject year under appeal return of income was filed within due date which could be termed to be deemed assessment order under the term of section 120(1)(b) of Income Tax Ordinance, 2001 (hereinafter called the Ordinance). Being erroneous and prejudicial to the interest of revenue order was amended under section 122(5A) of the Ordinance by the Additional Commissioner of Income Tax, Large Taxpayer Unit, Lahore. The aforementioned order was assailed before the CIT(A) (now designated as Commissioner CIR(A) whereby appeal was decided vide order dated 13-6-2009. This order was further assailed before the Tribunal, which was heard by the Division Bench comprising of Judicial and Accountant Members. On the aforementioned two issues of post retirement employee benefits relating to medical facility and free provision of gas, and on account of addition under section 21(c) of the Ordinance for not withholding tax from the bank relating to service charges. The difference has been crept up between the two Members of the Bench. I have heard arguments of both the sides and have perused the relevant orders, the cases law and other material made available at the time of hearing. On the issue of post retirement employee benefits relating to medical facility and free provision of gas - Rs.331.754 million, following two questions have been framed by the Hon'ble Members in their split decisions:
(1) Whether future medical and gas charges booked as an expense are admissible deduction in terms of section 21(e) of the Income Tax Ordinance, 2001?
(2) Whether judgment of the august Supreme Court refusing to interfere in the matter of provision for gratuity in the context of Income Tax Ordinance, 1979 (In my view the intended reference was made to Income Tax Act, 1922) remain relevant to application of section 24(g) of the repealed Income Tax Ordinance, 1979 and section 21(e) of the Income Tax Ordinance, 2001.
4. It was pleaded on behalf of the appellant by it's A.R. That in accordance with human resources policies appellant provides free natural gas and medical facility to its employees in the post employment period. The limits of post employment benefits are determined in accordance with the rank and seniority of the respective employees. The appellant accounts for the ensuing expense by making provision in the financial statements to reflect the company's expense in respect of the above benefits under accrual basis of accounting. The actual payments on the accounts are made against the subject provisions that are recognized on year and year basis. In this way the learned A.R. Explained that these provisions are made in pursuant to the accounting principles, that the employee cost should be recognized as an expense in the period in which the employee, rendered the service not in the period in which such benefits are actually paid. The Additional Commissioner of Income Tax on the basis of Sindh High Court cited as 2006 PTD 460 has observed that the provision made in the appellant's financial statements is a separate fund and being not approved by the Commissioner of Income Tax, these are hit by mischief of section 21(e) of the Ordinance, thus are not an admissible expense. Therefore, it was disallowed as such. To rebut the above observation of the Taxation Officer, it was pleaded by learned A.R. That section 21(e) of the Ordinance, trade contribution is an admissible deductions which are made to fund that is not recognized provident fund, approved pension fund, approved superannuation fund, or approved gratuity fund. The Additional Commissioner has failed to mention in the order that which of these categories is applicable in the case of the appellant. While it was also contended by the learned A.R. That the judgment relied upon by the Taxation Officer pertained to case in which the relevant taxpayer claimed deduction on account of provision of gratuity which was disallowed by the Taxation Officer With reference to section 24(g) of the repealed Ordinance, 1979 (hereinafter called the repealed Ordinance). In that case the Taxation Officer's observation was confirmed by the Sindh High Court by holding that creating provision on account of gratuity was claimed to formation of a fund and the same being not an approved gratuity fund the claim of deduction was not allowable in view of provision of section 24(g) of the repealed Ordinance. In the present case the Additional Commissioner of Income Tax has treated the subject provision on account of certain post retirement benefits at par with that under consideration before the Sindh High Court and invoked the provision of section 21(e) of the Ordinance, provision pari materia to section 24(g) of the repealed Ordinance to disallow the deduction claimed by the appellant. The learned A.R. Pleaded that the Hon'ble Supreme Court has settled the issue, which has been followed by the Hon'ble Lahore and Sindh High Courts and the ratio of the same is applicable to the instant matter, while it was further pleaded before me that Since the amount in question represent the expense and not the contribution, contention of ACIT is completely misplaced and disallowance has been made on fetch assumptions and imaginary ground. This is not a case of formation of fund rather a case for claiming a deduction on account of ascertained liability, which as per law, is allowable deduction in the year of accrual.
Without prejudice to above, it was also contended by the L/AR of the appellant that even if these are considered to be contributions these were not made to any fund as there existed no separate fund, therefore; the provisions of section 21(e) of the Ordinance are not applicable ab initio. In his support the learned A.R. Of the taxpayer relied upon the judgment of Supreme Court cited as 1992 PTD 668 and the judgments of the Hon'ble Lahore. High Court cited as 2001 PTD 443 and the judgment of Hon'ble Sindh High Court cited as 2006 PTD 460 97 2008 PTD 647.
Before parting further, for best understanding of the issue the relevant section as contained in 1922 Income Tax Act, 1979 and 2001 Ordinances are reproduced as under: Income Tax Act, 1922 "Section 10(4)(c) (4) Nothing in clause (xvi) of subsection (2) shall be deemed to authorize---
(c) any allowance in respect of a payment to a provident or other fund established for the benefit of employees, unless the employer has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are taxable under the head "Salaries"; or Income Tax Ordinance, 1979 Section 24. Deductions not admissible.---Nothing contained in section 23 shall be so construed as to authorize the allowance or deduction of--
(g) any sum paid to any provident fund, superannuation fund or gratuity fund, not being a recognized provident fund, an approved superannuation fund or an approved gratuity fund; Income Tax Ordinance, 2001 Section 21. Deductions not allowed.--Except as otherwise provided in this Ordinance, no deduction shall be allowed in computing the income of a person under the head "Income from Business" for---
(e) any contribution made by the person to a fund that is not a recognized provident fund 2(approved pension fund), approved superannuation fund, or approved gratuity fund.
5. From the above reproduction, and law on the subject it is very much and crystal clear that in the provision of law contained 10(4)(c), the concept of approval of the fund does not find place in the law. In the case decided by Hon'ble Lahore High Court cited as 2001 PTD 443 the issue was not contested by the department by his representative, while the aforementioned case-law is silent as to whether the 'fund was approved or not, same is the matter with the judgment of Sindh High Court cited as 2008 PTD 647 as referred and relied upon by the appellant. The judgment of Sindh High Court reported as 2006 PTD 460 authored by Hon'ble Justice Mujeebullah Siddiqui has comprehensively discussed all the aspect of the issue, which for the sake of convenience is reproduced, as under:-- As per this judgment, after analyzing the arguments of the parties, the "Hon'ble Justice Mr. Mujeebullah Siddiqui" agreed with the arguments of representative/legal advisor of the department as under:-- "10. We find substance in the contention canvassed by Mr. Jawaid Farooqui. In the first instance, if the law requires that an approved gratuity fund is to be created and any sum paid to such approved gratuity fund is to be allowed and if no such approved gratuity fund exists then the person' claiming the benefit is required to act in accordance with the law and cannot be allowed to take premium for circumvention of or non-compliance with the requirements of law. Secondly, even if no fund has been created formally, the provision created to which the gratuity accrued but not actually paid' is transferred and on the basis whereof claim for gratuity is preferred itself amounts to creation of gratuity fund. The reason being that the expression "fund" in the ordinary common parlance means accumulation of money for some specific purpose. We are of the opinion that the expression "fund" used in section 24(g) is to be taken as an ordinary expression and not as a term of art. The rules relating to approved gratuity fund are contained in Part-III of Sixth Schedule to the Income Tax Ordinance, 1979. The term gratuity fund has not been defined in these rules. However, the term "approved gratuity fund" has been defined in section 2(4) of the Income Tax Ordinance, 1979, to mean a gratuity fund, which has been and continues to be, approved by the Commissioner in accordance with the rules contained in Part-III of the Sixth Schedule. Thus, the expression "approved gratuity fund" has been defined in the Income Tax Ordinance, 1979, but the expression 'gratuity fund' has not been defined in the Ordinance or rules framed thereunder. The result is that the expression shall not be treated as term of art and -is to he given ordinary, meaning as is understood in common parlance. A similar point has been considered by the Calcutta High Court in the case of Duncan Brothers and Co. Ltd. v. CIT (1.978) 111 ITR 885 and has been followed by the said High Court again in the case of Duncan Brothers and Co. Ltd. v. CIT (1981) 128 ITR .302. It has been held in the above judgments of the Calcutta High Court, that etymologically fund means a sum of money available for the payment or discharge of liabilities and if the term fund is not defined in a particular statute, it is to be given to its ordinary meaning as understood in the common parlance. The Calcutta High Court accepted the contention that an amount already earmarked for a. Particular liability such a provision for tax amounts to fund."
Para-12 of this judgment is anothe'r answer to the arguments of the L/AR before me at the time of hearing:-
(12) A perusal of the above definitions, leaves no room for any doubt that the provision for gratuity created by an assessee amounts to gratuity fund. The method adopted by the respondent shows that the liability on account of gratuity accruing on mercantile basis is earmarked to the provisions for the purpose of payment to the employees and discharge of such liability in future. Such provision for gratuity has all the attributes of a gratuity fund that admittedly this gratuity fund is not approved and therefore, by virtae of specific bar contained in section 24(g) of the Income Tax Ordinance, 1979, the claim was not admissible. At this stage we feel it appropriate to reproduce few provisions contained in Part-III of Sixth Schedule to the Income Tax Ordinance, 1979:
(2) Conditions for approval.---In order that a gratuity fund may receive and retain approval; it shall satisfy the conditions hereinafter specified and any other conditions, which the Central Board of Revenue may, by rules prescribe---
(a) the fund shall be a fund established under a irrevocable trust in connections; with trade or undertaking carried on in Pakistan, and not less than ninety percent of the employees shall be employed in Pakistan;
(b) the fund shall have for its sole purpose to provision of a gratuity to employees in the trade or undertaking on their retirement at or after a specified age or on their becoming incapacitated prior to such retirement, or on termination of their employment after a minimum period of service specified in the regulations of the fund or to the widows, children or dependents of such employees on their death;
(c) the employer in the trade or undertaking shall be a contributor to the fund; and
(d) all benefit granted by the fund shall be payable only in Pakistan."
(3) (4) (5) ........................ (6) Liability of trustees on cessation of approval.----Whereby any contributions by an employer (including the interest thereon, of any,) are repaid to the employer, the amount so repaid shall be deemed for the purposes of tax to he the income of the employer of the income year in which they are so repaid.
(7) Particulars to be furnished in respect of gratuity funds. ---The trustees of an approved gratuity fund and any employer who contributes to an approved by gratuity fund shall, when required by notice from the Deputy Commissioner of Income Tax, furnish; within such period not being less than twenty-one days from the date of the notice as may be specified in the notice, such return, statement, particulars or information, as the Income Tax Officer may require.
(8) Provisions of the Part to prevail against regulations of the fund.---Where there is a repugnance between any rule of an approved gratuity fund and any provision of this Part or the rules made thereunder the said rule shall, to the extent of repugnance, be of no effect and the Commissioner may, at any time, require that such repugnance shall be removed from the rules of the fund."
(13)A perusal of above provisions shows that a well-designed mechanism has been devised under law in respect of approved gratuity fund. If any assessee claims a deduction on account of gratuity without establishing an approved gratuity fund, he defies the law and consequently, cannot be allowed the benefit.
While in Para-14 the conclusion is as under:- (14)Consequent to the above discussion, it is held that the Assessing Officer rightly disallowed the claim for provision of gratuity on account of clear bar contained in section 24(g) of the Income Tax Ordinance, 1979. It is further held that no such bar was contained in the Income Tax Act, 1922, and therefore, this Court while considering the provisions contained in the Income Tax Act, 1922, held in the cases referred to above, that the provision of gratuity was admissible expenditure for the reason that it pertained to the ascertained liability. After introduction of bar contained in section 24(g) of the Income Tax Ordinance, 1979, the earlier judgments of this Court delivered on consideration of the provisions contained in the Income Tax Act, 1922, are no more applicable for the reason that no provision analogous to section 24(g) of the Income Tax Ordinance, 1979, was there in the Income Tax Act, 1922. It is therefore, held that the ITAT was not justified in confirming the order of CIT(A), whereby the provision for gratuity was held to be an inadmissible expense under the law contained in the Income Tax Ordinance, 1979.
While as per Para-15, the following questions have been answered in negative:- "(1) Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal was justified in confirming the order of the CIT (A) that provision for gratuity is an adniissible expense?
(2) Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal correctly relied on the judgment of High Court cited as 1989 PTD 579, when the judgment was based on provision of repealed Act of 1922 and the assessment in this case on the point of "Provision" was covered by the section 24(g) of the Income Tax Ordinance, .1979?
1992 PTD 668 is not applicable for the provision under section 21(e) of the Income Tax Ordinance, 2001, as the same case-law was relating to expense allowable under Income Tax Act, 1922. The law has undergone change, under the Income Tax Ordinance, 1979 as well as Income Tax Ordinance, 2001, the contribution made to unapproved fund has been declared as an inadmissible expense. In this way in the light of above recorded observations I find myself in agreement with learned brother the Accountant Member by holding that the future medical and gas charges booked and expenses are not admissible deduction under the term of 21(c) of Income Tax Ordinance, 2001, while regarding the. 2nd question as recorded supra that the judgment of Hon'ble Supreme Court relevant to Income Tax Act, 1922 is not applicable to the Ordinance, 1979 and 2001 as the law has undergone changes as discussed supra.
(B) Gas bills collection charges - Rs.212,329 million
(i) Whether the machinery part of section 153 of the Income Tax Ordinance (Ordinance) is subject subservient to substantial part (it appears that the expression intended to be used was `substantive part')? (ii) Whether the adjustments in the nature of innumerable conceived circumstances would not defeat the substance of transaction with the prescribed person?
(i.e) Whether the payment by adjustment, which has been interpreted as payment equivalent to physical payment by apex court can be changed by this tribunal?
(iv) Whether section 21(c) of the Ordinance is not the only sanction/bite for execution of duty assigned under section 153 of the Ordinance?
(v) Whether the facilitation provided in sections 153(5)(bb), 153(5)(ba) and 233 of the Ordinance tantamount to shifting of responsibility or the responsibility of the payer does not shift because of a facilitation measure provided in these sections? And
(vi) Whether section 153(1)(a) and (b) do not express the intent of legislature that deduction on adjustment cost was built in the payment and has been excluded by section 153(5)(ba), (a)/(b)
(from the question (v) above, it appears that question (vi) is a continuation thereof and the intended reference was (bb)) and 233 correspondingly, the payment to recipient was liable to deduction?
The appellant collects its revenue through various commercial banks. Who charge certain fixed amount (classified in the financial statements as Gas Bills Collection Charges) for collecting proceeds against every invoice. The sales revenue so collected by the commercial banks is transferred into the appellant's bank accounts after the banks retain their charges.
It is the contention of the ACIT that such retention of service free by the banks tantamount to 'payment' by the appellant and withholding tax having not been deducted by the appellant on such service fee, the claim is liable to be disallowed in terms of provisions oontained in section 21(c) of the Ordinance.
It is the appellant's contention that deemed payment of such charges is outside the scope of withholding provisions of section 153 of Ordinance as these provisions are applicable only (a) in situations where payment is directly/physical made to another person; and/or (b) where payment is made on behalf of or under instructions of the-person actually required to make the payment.
The latter situation, the AR submitted, falls within the ambit, of withholding as it is actually a payment by the person though it is routed through someone else and hence, in substance, it is a case of direct/physical payment thus attracting the withholding provisions.
It is also the contention of the appellant that transactions which are tripartite in nature, the withholding is only required if specifically prescribed in Taw like is the case under section 233 of the Ordinance. In the appellant's case, it was submitted, the transaction, by default, involves consumer, bank and the appellant (tri-partite arrangements), hence the withholding would have been required only if the legislature had incorporated, in section 153, provisions similar to section 233(2) of the Ordinance and that not being the case the withholding was not required . In his support L/AR relied upon the decision of this tribunal dated 16-10-2009 in I.T.As. Nos.871-874/LB/2008, issued in the appellant's on case for four preceding years, and argued that all the issues raised by the DR as well as the learned/Brother the Accountant Member have already been addressed in the said decision, therefore, the earlier decision, constitutes and decisive precedent and hence may be followed in letter and spirit.
(a) the decision of apex court (1955 SCC 1) dealing with the interpretation of expression 'payment' in a specific context;
(b) certain examples which, in his view, are likely to render the withholding provisions inapplicable if the contention of the taxpayer is accepted.
PLD 1963 SC 296, PLJ 1995 SC 423, (sic)178 ITR 548, 2006 PTD 2329, 2007 PTD 1533, 2004 PTD 62, PLD 2004 Peshawar High Court 47, 2003 PTD 2321, 2008 PLC (C.S.) 768 has been held that in case of bench of equal strength on the same point is binding on the other bench. In the present case, since the adverse inference drawn by the ACIT was based on treatment accorded in the preceding years and since that earlier treatment has been disapproved by this tribunal, there could not be any logic or rational for approving the action of the ACIT. The issues framed by my learned brother Accountant Member have already been well answered in the, earlier decision. I would, therefore, agree with the order proposed by my learned brother Judicial Member. .