' Through these five appeals the appellant taxpayer has objected against the impugned consolidated order of the learned CIR(A) dated 12-8-2011 for the tax years 2006 to 2010 on the following common grounds:-- "(1) That appeal was filed on 25-1-2011 while appellate order of CIR (Appeals) was received by the appellant through UMS No,19396926 on 16-9-2011 after 7 months and 21 days. Even if the date of disposal is presumed as 12-8-2011 as admitted by the CIR (Appeals), it was passed after the period of 06 months and 19 days. The order was not passed within the time limitation prescribed under section 129(4) of the Income Tax Ordinance, 2001.
(2) That consequently the relief sought by appellant in the grounds of appeal before the CIR(Appeal) stand allowed as provided for in section 129(5) of the Income Tax Ordinance, 2001.
(3) That the Commissioner Inland Revenue (Appeals) was not justified to draw extraordinary inference from a pseudonymous and frivolous complaint received during the pendency of appeal carrying no relevance to the facts and legal proposition of the case.
(4) That Commissioner Inland Revenue (Appeals) was not justified to adjudicate on the contents of a complaint once it was established before him that it is anonymous and pseudonymous having no concern to the facts and finding of the department on the assessment record.
(5) That the finding of the Commissioner Inland Revenue (Appeals) are incorrect, injudicious, based on misreading and misinterpretation of the case-laws cited by the appellant.
(6) That it is incorrectly conceived by the CIR (Appeals) that appellant is a resident of Oghi, a settled area, hence, not entitled to claim refund of income tax withheld on the work done in Northern Areas, Ref: 2010 PTD (Trib.) 734.
(7) That it was also unlawfully observed by the CIR (Appeals ) that although work was done in the northern Areas but the contract payment on such work were received in Taxable Territory. Ref: 2010 PTD (Trib.) 1099.
(8) That it is in fact the territory of Northern Areas where provisions of Income Tax Ordinance, 2001 are not applicable irrespective of residential status or place of payment in the taxable territory. Ref: 2010 PTD (Trib.) 734."
2. The appellant in this case is an individual who derives income from execution of contracts with National Highway Authority (NHA) and Frontier Works Organization (FWO) for the construction of roads stated to be executed in non-taxable territory as well as taxable territory. The taxpayer has applied for refund in respect of taxes withheld at source regarding contracts carried out in non- taxable area on the ground that as Income Tax Laws have not been extended to these areas under the Constitution of Pakistan the same should be refunded to him regarding work done in Gilgit and Baltistan, which is the part of 'Northern areas where Income Tax Ordinance, 2001 has not been extended. The Taxation Officer has rejected the refund application of the appellant on the ground that since the applicant is a resident .Of Oghi which is a settled area of District Mansehra therefore he is not entitled of refund under any provisions of law, even, if the contract was executed in the non-taxable area. According to Taxation officer, the payments for the contracts were received in taxable area i,e, Jinnahabad, Abbottabad, which is the final tax liability as per provisions of section 153(3) read with section 169(1) of the Ordinance therefore no refund can be issued.
' The appellant against the above treatment of the Taxation officer filed present appeal before the learned CIR (A) who has also rejected the same. Hence these appeals filed before this Tribunal.
3. The learned counsel representing the appellant has at the very outset submitted that he is not pressing the above referred grounds Nos.1 and 2 and regarding the grounds Nos.3 and 4 he has simply contended that an anonymous and pseudonymous complaint filed before the learned CIR(A) during the pendency of appeals having no bearing on facts and findings of the department was not even worth consideration. But the learned CIR(A) has without any justification taken the cognizance of the complaint which is against the law and the facts. On merits of the case it is argued that provisions of Income Tax Ordinance, 2001 or for that matter repealed Ordinance, 1979 are not made applicable to the territories of Northern Areas presently known as Gilgit Baltistan. He is therefore of the view that the portion of the contract and work done in those areas does not come under the jurisdiction of the Ordinance, 2001 and the tax withheld on the portion of such contractual work is liable to be refunded to the appellant. He has contended that the appellant has filed statement of final taxation under section 115(4) and wealth statement under section 116(1) with the break-up of contract payments within the taxable and non-taxable areas before the ACIR Mansehra, RTO, Abbottabad claiming refund of income tax. He has also placed before us the details of tax withholding agent and other details which are reproduced hereunder:- Tax with holding AgentTax Year Contract Payment with in taxable territoryPrescribed amount of income tax deducted at sourceContract payment with in non- taxable territory (Northern Areas)Amount of income tax illegally deducted at source.
National Highway Authority2006 1,7,236,083 1,034,900 Frontier works Organization2006 85,064,466 2,103,868 National Highway Authority2007 22,148,000 1,331,882 -- Frontier works Organization2008 ---- 28,573,465 1,714,408 National Highway Authority2008 61,260,878 3,677,154 ---- - Frontier works Organization2009 94,325,896 5,659,554 National Highway Authority2009 2,585,995 155,160 ---- --- Frontier works Organization2010 ---- ---- 2,110,042 National Highway Authority2010 22,405,677 1,344,341 ---- --- Frontier works Organization2010 46,609,985 2,796,599 Total amount of income tax withheld on the contract work done with in non-taxable territory (Northern Areas)14,384,471 ' Learned counsel has submitted that with the exception of tax year 2006 where statement were filed manually, all other tax years i,e, from 2007 to 2010 the statements as well as refund applications were filed electronically as required under the rules. Regarding the anonymous complaint received by the learned CIR(A), it is stated that detailed enquiry was conducted and finally it was observed as under in the impugned order:- "In so far as the complaint is concerned the main focus of the same is that illegal refund is being claimed on the ground that the appellant is posing a " Resident" of non-taxable area and claiming refund on the ground that Income Tax Law have not been extended to the non-taxable area, whereas in reality he is resident of settled area i,e, Oghi District Mansehra. After investigation and receipt of explanation by the appellant it is revealed that this allegation is incorrect because the appellant has not claimed that he is resident of non-taxable area. In fact it has been stated by him that he is resident of taxable area. Therefore, on this ground the allegation of the complaint is incorrect."
' The claim of refund in spite of above referred observations was refused by the learned CIR(A) with the observations that case-law cited by the appellant are not relevant and in the light of the FBR's Circular No,1(3)WHT/IT 2007 dated 23-11-2010 providing clarification on clause (126 F) part-I and clause (10A) part-IV of Second Schedule to the Ordinance, 2001 the appellant was held liable to be taxed under the final tax regime under clause 6 of section 153 of the Ordinance, 2001 as per circular referred to above.
4. In order to distinguish Northern Areas from Federally Administered Tribal Areas (FATA) and Provincial Administered Tribal Areas (PATA) the relevant provisions of the Constitution of Pakistan are reproduced hereunder:-- "Article.1
(1) The Republic and its territories.---(1) Pakistan shall be a Federal Republic to be known as the Islamic Republic of Pakistan.
(2) The territories of Pakistan shall comprise:-
(a) the provinces of (Balochistan ), the (Khyber Pakhtunkhwa), the Punjab and (Sindh)
(b) the Islamabad Capital Territory, hereinafter referred to as the Federal Capital:
(c) the Federally Administered Tribal Areas; and
(d) such States and territories as are or may be included in Pakistan, whether by accession or otherwise.
(3) [Majlis-e-Shoora (Parliament)] may by law admit into the Federation new States or areas on such terms and conditions as it thinks fit] "
' The Tribal areas are defined in Article 246 of the Constitution of Pakistan which is reproduced hereunder:- "Article: 246. Tribal Areas. In the Constitution:-
(a) "Tribal Areas" means the areas in Pakistan which, immediately before the commencing day, were Tribal Areas, and includes?
(i) the Tribal Area of [Balochistan and the [Khyber Pakhtunkhwa];
(ii) the former States of Amb, Chitral, Dir and Swat;
(b) "Provincially Administered Tribal Areas" means?
(i) the districts of Chitral, Dir and Swat (which includes Kalam), [the Tribal Area in Kohistan District, ] Malakand Protected Area, the Tribal Area adjoining [Mansehraj district and the former State of Amb; and
(ii) Zhob district, Loralai district (excluding Duki Tehsil), dalbandin Tehsil of Chagai district and Marri and Bugti Tribal territories of Sibi district; and
(c) "Federally Administered Tribal Areas" includes?
(i) Tribal Areas adjoining Peshawar district;
(ii) Tribal Areas adjoin Kohat district
(iii) Tribal Areas adjoin Bannu district;
(iv) Tribal Areas adjoining Lakki Marwat district; ' Tribal Areas adjoining Dera Ismail Khan district; (iva) Tribal Areas adjoin Tank' District;
(iv) Bajaur Agency; (va) Orakzai Agency
(v) Mohmand Agency;
(vi) Khyber Agency;
(vii) Kurram Agency;
(viii) North Wazirstan Agency; and '
(ix) South Waziristan Agency."
In Article 247 of the Constitution it is provided that no act of Parliament shall apply to FATA unless the President so directs and no Act of Provincial Assembly shall apply to PATA unless the Governor of the Province concerned with the approval of President of Pakistan so directs. Regarding the Northern Areas (Gilgit Baltistan) it is stated that these areas have been intentionally kept outside the Constitutional domain of Government of Pakistan because of the fact that a plebiscite under the auspices of the United Nations is to be held. In order to understand that status of Northern Areas, its historical background has also been referred. The Northern Areas are presently known as Gilgit and Baltistan is the territory under the charge of Ministry of Kashmir and Northern Areas Affairs, Pakistan. It borders along with the Azad Kashmir to the south and province of Khyber Pakhtunkhwa to the west, Together with Azad Kashmir it forms part of the disputed Kashmir region which has been the subject of conflict between India and Pakistan since partition in 1947. The part of Gilgit and. Baltistan (Northern Areas) is an autonomous self-governing region that was established as single administrative unit in 1970. Historically the territory was part of the Dehli Sultanate in the early half of the 16th Century. In 1757 sovereignty of region was obtained from Mughals by Ahmad Shah Durrani and became part of Afghanistan and was known as Durrani Empire. Raja Ranjeet Singh invaded the area and took control from the Afghans in 1819. It became a princely State with the name Jammu and Kashmir around 1847. After the partition of Sub-Continent in 1947, the local inhabitants with the help of Pakistan Government obtain the control of the area and this area was established as a North and West of ceasefire line in 1948. The territory of present Gilgit and Baltistan became a separate administrative unit 1970 under the name Northern Areas formed by the amalgamation of Gilgit Agency, the Baltistan district of Ladakh Wazart, the State of Hunza and Nagar. Presently this area consists of seven districts namely Skardu, Ghanche, Gilgit, Ghizar, Diamer, Astore and Hunza-Nagar with population of one million sharing border with China, Afghanistan and India. The area is ruled by the Pakistan since 1947 but has not been formally integrated into Pakistan and does not participate, in the Constitutional affairs until 2009. On 29th August, 2009 the Gilgit and Baltistan Empowerment and Self Governance Order, 2009 was promulgated by the Government of Pakistan. By virtue of this order Gilgit and Baltistan Legislative Assembly has been created which is an elected body and this area has gained de facto province status without constitutionally being a province. However further integration has not been made for the reason that it would prejudice its international obligations over the Kashmir dispute in accordance with the UN Resolution.
5. The learned counsel after referring the above discussed legal position of the territory has contended that provisions of the Income Tax Ordinance, 2001 are not made applicable to FATA, PATA and Northern Areas so far. He has contended that it is in fact not a statutory exemption but the business activities carried out in these areas do net come under the ambit of the Income Tax Law irrespective of residential status or place of payment. He has in this regard referred to a case- law reported as (2009) .100 Tax 378 (Trib.) wherein it has been decided that income, accrued from the Northern Areas is not taxable. In another case of a taxpayer who executed contracts within the limits of Northern Areas decided in I.T.A. No, 185/PB/2010 dated 5-4-2011 it was held that learned CIR(A) has rightly held that even if the AOP was a resident AOP, the portion of its business which is situated in tribal area would not come under the Income Tax Ordinance, 2001, and if the income generating activity commences and ends in the tribal area (nontaxable territory) then that activity is not liable to taxation. It is contended that the controversy was raised by the Taxation officer and upheld by the learned CIR(A) regarding resident and non-resident in the Income Tax Law is not meant for different territories within Pakistan wherein Income Tax Laws are applicable or not but it has been used keeping in view international scenario. Learned counsel in this regard has referred the circular letter C.No,4(4)ITP/2009.PT-I-142122-R dated 6-10-2011 has stated that the clarification on the principle to allow exemption under. Clause 126F to the terrorism affected areas has clarified that the taxpayer is located outside the specified areas but his business carried on within the specified areas would be exempt and that the taxpayer is located outside the specified area, but his business is partly carried on outside the specified area would be exempt to the extent of the income attributable to the business operations carried on inside the specified area. The learned counsel in this regard has also placed reliance on the judgment of the honorable Supreme Court .Of Pakistan while reviewing of its own judgment in the case of Messrs Gul Cooking Oil and Vegetable Ghee (Pvt.) Ltd. And 6 others reported as 2008 PTD 169. The relevant para of the judgment which is reproduced hereunder:-- "16. There is no cavil to the legal position that exemption 'under the law from payment of income tax is available to a person or company carrying its business in tribal areas and income tax cannot be collected from such person or company by the tax collecting authorities of the Government unless the law relating to the collection of Income Tax is extended to the tribal areas by, virtue of Article 247 of the Constitution. However, the question whether a company or a person derives income form business being carried out in taxable or non-taxable area is a pure question of fact which cannot be decided without holding proper inquiry for determination of controversial facts regarding the tax liability. The business of a person or Company may or may not be confined to a particular place or area rather it may be expanded beyond the local limits of the area in which Income Tax Ordinance is not applicable and thus if the income is derived from the sale of products which are manufactured in the factory situated in non-taxable area both from taxable and nontaxable areas, the question relating to the tax liability of such a' business concern cannot be determined only on the basis of location of factory or its registered office rather the requirement of law in such case is to hold a proper inquiry and ascertain the correct factual position for determination of tax liability. The exemption from payment of tax is certainly available on the business being carried in tribal area in which income tax law is not applicable but the real question for determination in the present case would be that a company with its manufacturing unit and registered office in non-taxable area, if is also carrying business in taxable area is exempted from payment of income tax on its income as a whole or only on the income being derived from non-taxable area."
' Learned counsel has contended that the facts in the present case have not been disputed by the authorities below to the extent of contract work done by the appellant in the Northern Areas. He has therefore requested that on the basis of ratio decidente in the above referred judgment .Of the honourable Supreme Court of Pakistan, the portion of contract work done in the territories of Northern Areas (Gilgit-Baltistan) by the appellant is not liable to tax under the Income Tax Law and income tax withheld on such payments is refundable.
6. On the other hand, learned DR is supporting the impugned orders of the officers below. He has contended that in the case of Messrs Gul Cooking Oil and Vegetable Ghee (Pvt.) Ltd., decided by the honourable Supreme Court of Pakistan in Civil Review Petition No,63 of 2003 the controversy of taxable in the settled taxable area or otherwise income derived from not taxable territories has been settled and it has been laid down that income from non-taxable area would be exempt if the business etc. Was conducted within the nontaxable area by persons who are residents of that area and sale proceeds etc. Are made in the nontaxable area. In case 100% sale activities are not made in nontaxable territory, say 30% sales activities are made in taxable area then this amount would be brought to tax, whereas 70% would be exempt, as these sale activities took place in nontaxable area.' Learned DR has contended that the main point and standard laid down in this judgment is that business activities should take place in non-taxable area and the persons or owners be resident of nontaxable area. According to learned DR contrary to this touch stone, the appellant's case reveals that the appellant is not a resident of nontaxable area and contract payments were also received in settled area therefore the same have to be subjected to tax despite the fact that some portion of contract activities took place in nontaxable area. Learned DR in this regard has also confronted the case of Messrs Shoukat Ali Khan and Co on the ground that said Shoukat Ali Khan was permanent resident of Village Maira Besham Tehsil Alpuri District Shangla (former Swat State) which is nontaxable territory while the appellant in the present case is permanent resident of taxable area and therefore the business activities have become taxable. Regarding the case of Messrs NATCO which has been decided by the Tribunal, learned DR has contended that the Messrs NATCO is a business venture and falls under the provisions of section 18 of the Income Tax Ordinance, 2001 dealing with 'Business income' which places no limitation or restrictions regarding taxable area or nontaxable area but in the impugned issue this not the case, because contractor are treated separately and brought to tax under section 153(1) of the Income Tax Ordinance, 2001 and their tax withheld at 6% becomes this final tax liability. Learned DR in this regard has also referred the Circular No,1(13)WHT/IT/2007 dated November 23, 2010 issued by the Secretary (Withholding Tax) FBR Islamabad which is reproduced hereunder:-- "To remove any contusion, it is clarified that subject to provisions of clause (1261) of Part-I and clause (10A) of Part-IV of second schedule to the Income Tax. Ordinance, 2001, withholding taxes is deductible in the following circumstance;
(i) Contractors who are resident in PATA/FATA, and are executing contracts in tribal areas, but are receiving payments from Federal or Provinces Governments in settled territories, are not exempt from withholding tax deductible under section 153 of the Income Tax Ordinance, 2001. This being a final tax liability of such a contractor is not adjustable against his normal tax liability.
(ii) Owners/operators of petrol pumps who are resident in PATA/ FATA and making payments to petroleum companies (mostly situated in Karachi) are not exempt from withholding tax deductible under section 156A of the Ordinance.
(iii) Employers of Federal or Provincial Governments, who are posted in PATA/FATA, are not exempt from deduction of withholding tax under section 149 of the Ordinance.
(iv) Persons, who are resident of PATA/FATA and are making payments on account of imports in settled territories are not exempt from advance tax deductible under section 148 of the Ordinance.
(v) PATA/FATA residents receiving payments from settled areas are not exempt and
(vi) The earlier conflicting clarifications, if any, on this issue may be treated as suppressed."
' Learned DR has contended that the FBR in the above referred circular has very clearly laid down that such activities as carried out by the present appellant are taxable and income of such contractors fall under the final taxable liability even more so because the contractor in the present case is resident of settled area and received payments in settled area and executed contracts in nontaxable area, therefore, he, is liable to be taxed under Final Tax Regime under clause (6) of section 153 of the Income Tax Ordinance, 2001 as per para-(i) of the above referred circular of the FBR. The learned DR has therefore requested to uphold the impugned order of the learned CIR(A).
7. We have heard the learned representatives from both the sides and have also perused the impugned order of the learned CIR(A), case-law referred and other relevant record of the case.
Subsection (2) of section 1 provides that Income Tax Ordinance, 2001 extends to the whole of Pakistan. This expression needs to be read in conjunction with Article 1 of the Constitution of Pakistan defining the territories of the Pakistan which does not include the Northern Areas for the reason a plebiscite is to be held under the auspices of UN. We, thus, feel no hesitation to hold that Income Tax Ordinance, 2001 is not so for extended to the Northern Areas and this is an admitted and undisputed position on part of the department. It is clearly provide in Article 77 of the Constitution of Pakistan that "no tax shall be levied for the purpose of Federation except by or under the authority of Act of Parliament". As regards inquiry conducted by the CIR(A) that appellant is posing himself as resident of non-taxable territory it is ridiculous in presence of the case record and the basic dispute where appellant was refused refund for the reason that he is resident of Oghi a taxable territory, hence, what was the Justification to hold inquiry from 13-6-2011 to 16-9-2011 for this purpose. Such action on the part of CIR (A) is deprecated. On the place of appellant's residence in taxable area it was held by the CIR (A) that in case of Messrs Gul Cooking Oil and Ghee Mills (Pvt.) Ltd., Ref: 2008 PTD 169 (SC) it was laid down that Income from non-taxable area would be exempt if business was conducted within the nontaxable area by persons who are resident of that area and payment is also received in that area. The Judgment in review of honorable Supreme Court of Pakistan has been carefully perused it was nowhere mentioned that Income from non-taxable area would be exempt if business was conducted within the non-taxable area by persons who are resident of that area and payment is received in that area. The judgment was, thus, grossly misinterpreted by CIR(A). On the other hand it is clearly decided by the honorable Supreme Court of Pakistan that Income derived by a person or Company in non-taxable area would be exempt from Income Tax while business activities in taxable area are liable to tax. No distinction of residential status or place of payment was made in this judgment of the Supreme Court. The ratio decidendi is, therefore, squarely applicable to the instant case. Similarly in the case of Messrs Shoukat Khan and Co. Decided by this Tribunal in I.T.A. No,185/PB/2010 dated 5-4-2011 refund of the contract work done in Northern Area was refused on the ground that one of the member of AOP Mr. Shoukat Ali Khan is resident of House No, 322 Kakul Road Abbottabad with same address on CNIC receiving contract payment from WAPDA Lahore and it was held that even if the AOP was a resident AOP the portion of its business in nontaxable area would not come under the Income Tax Ordinance, 2001. In the case-law reported as (2010) 101 Tax 33 referred to by the AR, no distinction pertaining to the nature of business was made by the Tribunal. The FBR's Circular No 1(13) WHT/IT/2007 dated 23rd November, 2010 as referred by the CIR(A) in the impugned order was superseded by the FBR vide Circular No 14,of 2011 (Income Tax ) dated 6-10-2011 on the subject and in its paras (11) and (iv) it was clarified that if taxpayer is resident of taxable area but his business is carried on within the exempt area he would be exempted to the extent of Income attributable to the business operation carried on in exempt territory, thus, the circular referred to by the CIR(A) was not relevant Even otherwise the issue of taxability of contractors in Northern Areas stand clarified by the C.B.R, in its circular letter No, 1(6) WHT/96-Pt-V dated 01-02-2000 as follows:--
(i) The, Income Tax Ordinance, 1979 and the Wealth Tax Act, 1969 extended to Northern Areas stand withdrawn.
(ii) The contract payments received by the contractors of nontaxable territory for contracts executed in taxable territory would attract withholding tax under section 50(4) of the Income Tax Ordinance, 1979.
(iii) The provisions of section 80C (PTR) would apply where tax is deductible under section 50(4) and these would not apply where withholding tax under section 50(4) was not deductible.
' Based on the foregoing clarification of CBR, following exemption certificates were statedly issued by the Commissioner (E & C) RTO Abbottabad to the contractors of district Kohistan execution contracts with in the territory of Northern Areas and receiving payments from taxable territory i,e, NHA Abbottabad:-
(a) Exemption Certificate No 1388 dated 27-9-2008 issued to Mr. Sajjadullah Rustam district Kohistan for construction of Jalkhad Chillas Road in Northern Areas.
(b) Exemption Certificate No, 1389 dated 27-9-2008 issued to Mr. Zardad Khan District Kohistan for construction of Jalkhad Chillas Road in Northern Areas In view of the judgment in review passed by the honorable Supreme Court of Pakistan, reported case-law of the Tribunal and clarification made in circulars of the FBR we are inclined to agree with the submissions of the appellants AR that portion of contract work done in the Northern Areas would not come under the provision of Income Tax Ordinance, 2001 irrespective of place of residence or place of payment. Any person whether belonging to taxable or non-taxable territory if derives income from non-taxable territory would be exempt from the application of Income Tax Ordinance, 2001 and liable to tax for income derived from taxable territory. Keeping in view the factual as well as legal position the orders passed by the authorities below are vacated. The amount of Income Tax withheld on the contract work done in Northern Areas is directed to the refunded to the appellant along with compensation.
8. All the five appeals succeed accordingly.