Titled appeal has been filed by the taxpayer against appellate Order No.740/2016 dated 20.06.2016 passed under section 124 of the Income Tax Ordinance, 2001 by learned Commissioner IR (Appeals-I), Islamabad. The appellant has raised grounds, reproduced below: a) .........
(b) The CIR (A) LTU Islamabad has erred in disallowing salaries under section 21(c) of the ITO 2001 for alleged non/incorrect deduction of withholding tax under section 149 aggregating to Rs.10 ,427,236/- on the basis of non- provision of information / documentation and without considering /cross checking if the respective employee/taxpayer has already paid tax allegedly not deducted by the foundation at the time of filing of return on income for the tax year 2009. c) CIR (A) has erred in not giving any directions on allocating the additions of salaries on proportionate basis on gross values of exempt income, normal income and Fixed Tax Regime (FTR) income ignoring the provisions of section 67 of the ITO 2001 read with Rule 13 of the ITO 2002. This has resulted in incorrect determination of taxable income. d) CIR (A) has erred in treating the gross salary as taxable income of each employee ignoring the following: i.Tax due under section 149 of the IT O 2001 to be determined on taxable salary income and not the gross salary , ii. Taxpayer / employee is entitled to adjustment from taxable income of Zakat paid under section 60 of the ITO 2001, iii.. Taxpayer / employee is entitled to adjustment from taxable income of donations paid to approve organizations as provided in clause 61 of Part I of the Second Schedule to the IT O 2001, iv. Taxpayer /employee is entitled to various tax credits due under sections 61 to 64 of the IT O 2001 and v. Taxpayer / employee is entitled to adjustment of various advance taxes paid under sections 231 to 236 of the ITO 2001 vi. Without prejudice to the above grounds Nos. 2 to 4, the add back of Rs.6,130,776,776/- and Rs.4,296,460/- includes the credit entries
2. Briefly stated facts leading to the instant case as transpired from impugned order are that appellant "Shaheen Foundation" a trust established under Charitable Endowments. Act, 1890, and registered with. Government of Pakistan, Ministry of Health, Welfare and Population Planning. Return for tax year under appeal was filed declaring income of Rs.175,508,908/- which was deemed assessment under section 120 of the Income Tax Ordinance, 2001 and was further amended under section 122(1) by creating demand of Rs.51,273,189/-. The taxpayer filed appeal before Commissioner IR(A) who set aside the proceedings for de novo consideration as under: a) Disallowances of salaries under section 21(c) amounting to Rs.10,427,236/- b) Disallowances of rent paid to CAA under section 21 (c) amounting to Rs.32,399,385/- c) Add back of unrealized exchange gain amounting to Rs. 20,769,728/- d) Credit of tax paid /deducted at source amounting to Rs. 1 14 , 250,42.7/-
3. Complying with the aforementioned directions by learned CIR(A) the appeal effect under section 124 of the ITO 2001 was given by the department as under: Income Rs.175,508,908/- Addition Taxable salaries paid to Shaheen Air Port Services under section 21(c) of the ITO 2001 which tax has not been deducted.6,130,776 Salaries paid to other project under section 21(c) which tax not been deducted4,296,460 Total addition 10,427,236 Total income 185,936,144 Tax @ 35% 65,077,650 Tax already paid /deducted 114,250,457 Balance tax refundable 49,172,777
4. The taxpayer again went in appeal before CIR (A). The relevant findings are reproduced below: "Perusal of the impugned order reveals that it has been framed consequent to the earlier appeal order . The CIR (A) had remanded back the issue of disallowance of salary under section 21(c), disallowance of rent paid to CAA under section 21(c) add back of unrealized exchange gain and credit of tax paid. The assessing officer in the impugned order has discussed all these heads. Under the head of disallowance of salaries under section 21(c) the -assessing officer has recorded that taxpayer failed to provide any documentary evidence in support of his contention and that taxpayer itself admitted the fact that company failed to deduct tax on alleged salaries. Resultantly addition was made under section 21(c) at Rs.10,427,23 6/-. The assessing officer accepted the view point of the taxpayer on the issue of disallowance of rent paid to CM and add back regarding unrealized exchange gain. Similarly , the assessing officer allowed the credit of an amount of Rs.114,250,427/- with the observation that the taxpayer provided complete detail for tax deducted.
4. The above referred details clearly transpire that the assessing officer accepted taxpayer's stance where it was accompanied by documentary evidence or reason. During the course of hearing the AR of the appellant could not put forth any solid reason or documentary evidence with regards to its grounds Nos. 2 to 5. Therefore the action taken by the assessing officer in the impugned order is upheld and the appeal fails being devoid of any merit."
5. Instant appeal on the grounds reproduced supra. The case was fixed for hearing and the due date Mr. Saqib Latif FCCA appeared on behalf of the taxpayer whereas Mr. Khurram DR has on the other hand represented the department. We have heard arguments of learned AR and-also the DR, perused the available record, precedents cited and examined the orders of the authorities below . It would be pertinent to reproduce sections 21(C), 161, 169 and 177 of the Income Tax Ordinance 2001, as under:
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 -- (c) any expenditure from which the person is required to deduct or collect tax under Part V of Chapter X or Chapter XII, unless the person has paid or deducted and paid the tax as required vide Division IV of Part V of Chapter X: Provided that disallowance in respect of purchase of raw materials and finished goods under this clause shall not exceed twenty per cent of purchases provided further that amount of tax recovered shall be considered as tax paid.
Inserted vide Finance Act, 2013
161. Failure to pay tax collected or deducted. --(1) Where a person -
(a) fails to collect tax as required under Division II of this Part 5 [or Chapter XII] or deduct tax from a payment as required under Division III of this Part 6[or Chapter XII] 7[or as required under section 50 of the repealed Ordinance] ; or
(b) having collected tax under Division II of this Part 8[or Chapter XII] or deducted tax under Division III of this Part 9[or Chapter XII] fails to pay the tax to the Commissioner as required under section 160, 10 [or having collected tax under section 50 of the repealed Ordinance pay to the credit of the Federal Government as required under subsection (8) of section 50 of the repealed Ordinance,] the person shall be personally liable to pay the amount of tax to the Commissioner -1 [who may [pass an order to that effect and] proceed to recover the same.] [(1A) No recovery under subsection (1) shall be made unless the person referred to in subsection (1) has been provided with an opportunity of being heard.
(1B) Where at the time of recovery of tax under subsection (1) it is established that the tax that was to be deducted from the payment made to a person or collected from a person has meanwhile been paid by that person, no recovery shall be made from the person who had failed to collect or deduct the tax but the said person shall be liable to pay [default surcharge] at the rate of [--twelve] per cent per annum from the date he failed to collect or deduct the tax to the date the tax was paid.]
(2) A person personally liable for an amount of tax under subsection (1) as a result of failing to collect or deduct the tax shall be entitled to recover the tax from the person from whom-the tax should have .been collected or deducted.
169. Tax collected or deducted as a final tax.--( 1) This section shall apply where -- (a) the [advance tax required to be collected 6 [or paid]] is a final tax under subsection (7) of section 148 [,148A] [or section 234A] on the income to which it relates; or
(b) the [tax required to be deducted] is a final tax under 11 [subsection (3) of section 151], subsection (1B) 12[or subsection (1BB)] of section 152,1 [ 2 [ ] subsection (3) of section 153], [subsection (1AAA) of section 152],] subsection (4) of section 154, [ ] subsect ion (3) of section 156, / I /subsection (2) [or] section 156A or subsection [(1) and] (3)of section 233 [1] on the income from which it [was deductible].
(2) Where this section applies --
(a) the income shall not be chargeable to tax under any head of income in computing the taxable income of the person;
(b) no deduction shall be allowable under this Ordinance for any expenditure incurred in deriving the income;
(c) the amount of the income shall not be reduced by --
(i) any deductible allowance under -Part IX of Chapter III; or
(ii) the set off of any loss;
(d) the tax deducted shall not be reduced by any tax credit allowed under this Ordinance; 12[]. (e) there shall be no refund of the tax collected or deducted [unless the tax so collected or deducted is in excess of the amount for which the taxpayer is chargeable under this Ordinance 14[; and].] [(f) tax deductible has not been deducted, or short deducted, the said non-deduction or short deduction may be recovered under section 162, and all the provisions of this Ordinance shall apply accordingly .
(3) Where all the income derived by a person in a tax year is subject to final taxati on under the provisions referred to in subsection (1) or under sections 5, 61 [and] 7 2 [ ] 3 [an assessment shall be treated to have been made under section 120 and] the person shall not be required to furnish a return of income under section 114 for the year.
[Explanation. -- The expression, --an assessment shall be treated to have been made under section 120 means, --
(a) the Commissioner shall be taken to have made an assessment of income for that tax year, and the tax due thereon equal to those respective amount s specified in the return or statement under subsection (4) of section 115; and
(b) the return or the statement under subsection (4) of section 115 shall be taken for all purposes of this Ordinance to be an assessment order [(4) Where the tax collected or deducted is final tax under any provision of the Ordinance and separate rates for filer and non-filer have been prescribed for the said tax, the final tax shall be the tax rate for filer and the excess tax deducted or collected on account of higher rate of non-filer shall be adjustable in the return filed for the relevant tax year.]
177. Audit. -[(1) The Commissioner may call for any record or documents including books of accounts maintained under this Ordinance or any there law for the time being in force for conducting audit of the income tax affairs of the person and where such record or documents have been kept on electronic data, the person shall allow access to the Commissioner or the officer authorize d by the Commissioner for use of machine and software on which such data is kept and the Commissioner or the officer may have access to the required information and data and duly attested hard copies of such information or data for the purpose of investigation and proceedings under this Ordinance in respect of such person or any other person: Provided that--
(a) the Commissioner may, after recording reasons in writing call for record or documents including books of accounts of the taxpayer; and
(b) the reasons shall be communicated to the taxpayer while calling record or documents including books of accounts of the taxpayer: Provided further that the Commissioner shall not call for record or documents of the taxpayer after expiry of six years from the end of the tax year to which they relate.
[(2) After obtaining the record of a person under subsection (1) or where necessa ry record is not maintained, the Commissioner shall conduct an audit of the income tax affairs (including examination of accounts and records, enquiry into expenditure, assets and liabilities) of that person or any other person and may call for such other information and documents as he may deem appropriate.]
(6) After completion of the audit [ ] the Commissioner may, if considered necessary , after obtaining taxpayer 's explanation on all the issues raised in the audit, amend the assessment under subsection (1) or subsection (4) of section 122, as the case may be.
(7). The fact that a person has been audited in a year shall not preclude the person from being audited again in the next and following years where there are reasonable grounds for such audits 5[]
(14) Notwithstanding anything contained in subsections (2) and (6), where a person fails to produce before the Commissioner or a special audit panel under subsection (11) to conduct an audit, any accounts, documents and records, required to be maintained under section 174 or any other relevant document, electronically kept record, electronic machine or any other evidence that may be required by the Commissioner or the panel, the Commissioner may proceed to make best judgment assessment under section 121 and the assessment treated to have been made on the basis of return or revised return filed by the taxpayer shall be of no legal effect.
6. Hearing argument of the learned AR and the DR and after perusal of record it appears that the appellants stance that it was not given an opportunity of being heard and that sufficient opportunity was not provided and that the evidence of deduction of tax on salaries was available and produced before the assessing officer is acceptable to some extent. The financial statements of the taxpayer/appellant are based on accrual basis and there is apparently no inconsistency in the method of accounting as stipulated in section 32 of the Income Tax , Ordinance, 2001.
Grounds are concerning exemption from withholding and about non-applicability of withholding of tax on salaries of project individuals. The appellant taxpayer status is that of a trust, established under Charitable Endowments Act, 1890, and registered with Government of Pakistan, Ministry of Health, Welfare and Population Planning and in the return of income produced before us the income/receipts are claimed as attributable to Final Tax Regime
(FTR) or exempt from tax or taxable which does not exempt it from carrying out its duties as a withholding agent. The department is required to verify if payments claimed have been actually made to the withholders and the fiduciary duty cast on such taxpayers is on a higher pedestal than other class of taxpayers. As the status of the appellant is that of a trust, established under Charitable Endowments Act, 1890, and registered with Government of Pakistan, Ministry of Health, Welfare and Population Planning and being accorded such a status or deriving income under FTR or exempt status does not absolve any such taxpayer from strict compliance of withholding provisions and statutory financial reporting requirements particularly wherein it is not selected by the department for audit and income is not assessed / computed as a class. The assessment order reveals that the amounts of payment are including substantial receipts/ disbursement warranting stringent fiscal screening in addition to the' internal audit control mechanisms which are presumed to be in place. Such entity upon being accorded status of a trust, established under Charitable Endowments Act, 1890, and registered with Government of Pakistan, Ministry of Health, Welfare and Population Planning or enjoying exempt status has to a certain degree public trust reposed in them under any fiscal requirements. In a generic view in case withholdee is exempt from deduction of tax the withholding agent will have to either provide a valid exemption certificate or be covered under a specific provision of the Income Tax Ordinance, 2001 and in either condition the name of withholdee has to be specified yet not in general terms and each and single payment found to be below taxable limit has to be documented. In the instant case it has also to be determined if the withholdees are filers of returns of income and withholding is to be made on taxable income of the employers. To some extent the withholding order under section 124 is haphazard, illogical, inconsistent, leaving many areas uncovered, glossing over payment details and vague. The learned Commissioner IR(A) in the impugned appellate order has upheld the same without recording any detailed findings particularly as to how certain payments are above 'taxa ble limits attracting withholding and consequential disallowance under section 21(c) and whether proof of the same has been brought on record by the assessing authority .
7. It is a misnomer that expenses/salary payments of a trust, established under Charitable Endowments Act, 1890, and registered with Government of Pakis tan, Ministry of Health, Welfare and Population Planning to even its projects are exempt from applicability of withholding provisions and consequential applicability of section 21(c). The only exemption from taxation and/or withholding of tax by a withholding agent can be derived from an explicit provision in a statute which in this case is available in the relevant Schedules of the Income Tax Ordinance, 2001. We are not going into the exemption status except we will observe that exemption from taxation on any class of income is allowable when there is no discrimination amongst the beneficiaries of the taxpayer/trust and any deviation from equitable distribution of the benefits irrespective of status of the beneficiaries of the taxpayer trust, of any sort or in an manner whatsoever whether capital or recurring , would disentitle the taxpayer/ a trust, established under Charitable Endowments. Act, 1890, and registered with Government of Pakistan, Ministry of Health, W elfare and Population Planning from exempt status.
8. We are cognizant of the rulings of the Hon' superior courts reported at 2016 PTD 2074 in the case of Maple Leaf Factory of the Hon' Lahore High Court and also of the Hon' Supreme Court of Pakistan rendered in Civil Appeals Nos. 1.091 and 1092 of 2009 as well as Ms. Bilz (Pvt.) Multan (2002 PTD 1). However , the ratio of those judgments is not applicable in the instant case being distinguishable in point of fact. There is a duty cast upon FBR and its field formations, being the premier fiscal/audit and revenue agencies of the Federal Government to ensure compliance to taxation/financial laws, statutes and regulations even if the status granted to the taxpayer is that of a NPO/trust, established under Charitable Endowments Act, 1890, and registered with Government of Pakistan, Ministry of Health, W elfare and Population Planning.
9. We have also observed that learned Commissioner (A) did not discuss the matter elaborately therefore both the orders below are found not to be speaki ng orders. In light of foregoing discussion it would be appropriate in the interest of justice to vacate orders of both the authorities below and remand the case to Assessing Officer with the direction to re - examine the case and to pass speaking order after providing adequate opportunity of hearing to taxpayer . We further direct that each salary payment and its corresponding deduction of tax or otherwise be incorporated in the body of the assessment order so as to leave no doubt that compliance of applicable/relevant withholding provision has been made by the taxpayer/appellant. The taxpayer is also directed to cooperate in submission of relevant record during proceedings. In view of the significance of such public exchequer matters, we direct AR (Roster) of this Tribunal to send a copy of this order to Chairman FBR to consider to initiate a meaningful audit of such trusts established under Charitable Endowments Act, 1890, and registered with Government of Pakistan, Ministry of Health,. Welfare and Population Plann ing/exempt / FTR cases having significant turnover/payments and to prescribe uniform parameters for meaningful audit and not to adopt a pi& and choose attitude in view of the sensitivities involved and the contribution of such class of taxpayers towards national integrity , cohesion and stability . It is further directed that in order to avoid the possibility of mere replication of the earlier the final order would be made, preferably within 60 days, and with the written responsibility of the Commissioner IR concerned having jurisdiction over the case as provided for in Chapter XI (Administration) of the Income Tax Ordinance, 2001.
10. While concluding this order we are fortified by a judgment reported at 2009 PTD 2219 , 2009 SLD Equiv .
Citation: 2010 PTD (Trib.) 2219 , ITA No. 7174/LB of 2005 , decided on 8th August, 2009 operating para of which is reproduced below : "11. The learned DR has contended that as the respondent has failed to enter appearance and he has been proceeded ex parte, therefore appeal may be accepted. But we are not persuaded to agree with, the view canvassed by the DR, inter alia, for the reasons that proceeding ex parte does not mean to punish a party for his non-appearance. Its purpose is decision of the case on merits without unnecessary delay . On out part it is in fact, an effort to translate the National Judicial Policy into action and reality and to help achieving the goals set in the National Judicial Policy , Furthermore Courts and Tribunals are respected not on account of their power to legalize injustice on technical grounds but because they are capable of removing injustice and are expected to do so. "
11. We order accordingly . The appeal is disposed of f in the manner as indicated in para 9 above.