MUHAMMAD SAJID MEHMOOD SETHI, .J.----Through instant Reference Application under Section 133 of the Income Tax Ordinance, 2001' ("the Ordinance of 2001"), following questions of law, urged to have arisen out of impugned order dated 25.08.2007, passed by learned Income Tax Appellate Tribunal, Lahore Bench, Lahore ("Appellate Tribunal"), have been proposed for our opinion:-
1. Whether the learned Tribunal was justified to hold that the commission received by the Travel Agents and insurance Agents does not fall in the purview of the Presumptive Tax Regime for the Tax Year 2005?
2. Whether under the facts and in the circumstances of the case, the learned ITAT was justified to vacate the orders of the authorities below by ignoring subsections (3) and (4) of Section 233 and subsection (1)(b) of Section 169 as it stood amended through Finance Act, 2004 and was applicable to Tax Year 2005?
2. Brief facts of the case are that respondent-taxpayer is a private limited company deriving income as Travel Agent, engaged in sale of Air Tickets on behalf of Travel Air Lines, who filed return by declaring net loss worth Rs.503,326/-, which was deemed to be assessed under Section 120 of the Ordinance. Later on, it was found by the Additional Commissioner that the above assessment was erroneous and prejudicial to the interest of revenue as the commission earned by the Travel Agent from the principal company falls within the purview of Presumptive Tax Regime ("PTR") under the provisions of Section 169(1)(b) read with sub sections (3) and (4) of Section 233 of the Ordinance. Consequently, the assessment was amended under Section 122(1) read with Section 122 (5A) of the Ordinance vide order dated 07.09.2006. The respondent-: taxpayer filed appeal before CIT (Appeals), who, vide order dated 26.12.2006, confirmed the aforesaid order. Feeling aggrieved, respondent-taxpayer preferred second appeal before learned Appellate Tribunal, which was allowed vide order dated 25.08.2007. Hence, this Reference Application.
3. It is contended by learned Legal Advisor for applicant-department that the commission received from the Travel Agents and Insurance Agents falls within the purview of PTR for the tax year 2005 and in this regard the provisions of subsections (3) and (4) of 233 and subsection 1(b) of Section 169 of the Ordinance of 2001, as it stood amended through Finance Act, 2004, were misconstrued by the learned Appellate Tribunal while passing the impugned order. Whereas learned counsel for respondent-taxpayer defends the impugned order.
4. Heard. Available record perused.
5. The Travel and Insurance Agents were subjected to withholding taxes under subsection (3) of Section 233 through an amendment introduced by Finance Act, 2004. The tax withheld from commission paid to the Travel and Insurance Agents was brought in the PTR through subsection (4). The amendment made in subsection (b) of Section 169 also clearly provides that the tax withheld from the Travel and Insurance Agents under section 233 (3) is to be treated as final tax.
Section 115 (4) was also amended to provide that the tax withheld from Travel and Insurance Agents is the final tax and they are not required to furnish return of income for the tax year 2005.
This was also clarified vide CBR's Circular No.7 of 2004. The relevant provisions of law and aforesaid Circular are reproduced as under:- Section 233.Brokerage and Commission:-- (1) Where any payment on account of brokerage or commission is made by the Federal Government, a Provincial Government, a Local Government, a company or an association of persons constituted by, or under any law (hereinafter called the "principal") to a person (hereinafter called the "agent"), the principal shall deduct advance tax at the rate specified in Division II of Part IV of the First Schedule from such payment.
(2) If the agent retains commission or brokerage from any amount remitted by him to the principal, he shall be deemed to have been paid the commission or brokerage by the principal and the principal shall collect advance tax from the agent.
(3) Where any paym ent on account of brokerage or commission is made by the principal to a travel agent or an insurance agent, the principal shall deduct advance tax at the rate specified in Part IV of the First Schedule from such paym ent.
(4) Where any tax is required to be collected from a person under subsection (1), such tax shall be the final tax on the income of such persons."
Section 169.Tax collected or deducted as a final tax.---(1) This section shall apply where--
(a) the advance tax required to be collected or paid is a final tax under subsection (7) of sections 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 subsection (3) of section 151, subsection (1B) or subsection (1BB) of section 152, subsection (3) of section 153, subsections (I AAA) of section 152, subsection (4) of Section 154, subsection (3) of section 156, subsection (2) of section 156A or subsections (1) and (3) or section 233 on the income from which it was deductible. ...
Section 115.(4) Any person who is not obliged to furnish a return for a tax year because all the person's income is subject to final taxation under sections 5, 6, 7, 148, 151 and 152, subsection (3) of section 153, sections 154, 156 and 156A, subsection (3) of section 233 or subsection (3) of section 234A shall furnish to the Commissioner a statement showing such particulars relating to the person's income for the tax year in such form and verified in such manner as may be prescribed.
CBR's Circular No.7 of 2004Clause 2 Such deduction would be a final tax in respect of commission income of these categories for tax year 2005 and onward.
[emphasis supplied] However, while misconstruing the afore-referred provisions of law and even ignoring the above Circular clarifying the said provisions of law, learned Appellate Tribunal in the impugned order concluded that the income of Travel Agents did not fall in the ambit of final tax for the tax year 2005. The relevant findings of learned Appellate Tribunal are as under:- "5. A plain reading of the above statute indicates that there is no withholding tax on the travel agents. However tax was retained as advance tax. The travel agent was exonerated from withholding tax through an amendment made in law by the Finance Act, 2004. The amendment made in the law has been highlighted in the above quoted section which indicates that this amendment was made through Finance Act 2004 and came into force w.e.f. 01.07.2004 to 30.06.2005 i.e. for the tax year 2005.
6. It is also not out of place to mention here that section 169 of the Income Tax Act, 2005 regulates the presumptive Tax Regime. Section 169 (1)(b) of the Income Tax Ordinance, 2001 indicates that amendment in this section was made through Finance Act to include the sub-section 233 in the presumptive tax. Relevant extract of said section is reproduced as under: . . .
6. The above situation makes it abundantly clear that amendment in section 169 (b) was brought through Finance Act, 2005 and was applicable during the period from 01.07.2005 to 30.06.2006 i.e. tax year 2006. The commission of the travel agents falls into the ambit of PTR for the tax year 2006 and not in the year 2005. In this view of matter orders of both the authorities below are not sustainable in the eye of law since the case of the assessee does not fall within the ambit of PTR hence provisions of section 122 (5A) are not applicable. Orders of both the authorities below are vacated and the original order stands restored.
7. It is ordered accordingly."
6. The above findings of learned Appellate Tribunal are not in conformity with the relevant provisions of law. The tax deducted on payments on account of commission made by the principal to a Travel Agent @ 10% would be treated a final discharge of tax liability for tax year 2005 and onward. The Ordinance of 2001 uses the term advance tax for withholding tax because normally income tax is to be paid after the end of the tax year accounting period but the withholding tax is deducted / collected during the tax year, hence, is in the nature of tax paid in advance. The term advance tax is also used for withholding taxes under Sections 148(1) and 153(1).
7. In our view, our answer to the proposed questions is negative i.e. in favour of applicant- department and against respondent-taxpayer.
This Reference Application is decided in favour of applicant-department.
8. Office shall send a copy of this order under seal of the Court to the Appellate Tribunal as per Section 133 (5) of the Ordinance of 2001. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.