2. The appellant, a resident deriving its income from preparation and sale of visual and audio- cassettes, claimed legal expenses at Rs.1,74,325 including the expenses of Rs. 28.283 which were paid to a non-resident attorney based in New York with permission of State Bank of Pakistan as professional fee for suing M/s Asghar International at New York Courts. The I.T.O. Disallowed this amount for the reason that the appellant had failed to deduct tax under section 50(3) of the Income-tax Ordinance while making payment of Rs.28,283 to a non-resident hence was not entitled to this deduction and on appeal his order has been confirmed. From perusal of the assessm ent order, it appears that the I.T.O. Disallowed aforesaid deduction with the following remarks: "I do not agree with the contention of the assessee because although the payment was made outside Pakistan but it was paid in connection with the services to the company operating in Pakistan and income therefore accrued in connection with the business activities in Pakistan therefore, notwithstanding the fact that payment was made outside Pakistan it had its connection with business in Pakistan and thus was charged to tax in Pakistan making it incumbent on the assessee to deduct tax u/s 50(3). Since this has not been done the deduction on account of those expenses is disallowed."
3. From perusal of the impugned order, it appears that the learned C.I.T. (A) has concurred with the finding of the I.T.O. Because she was of the view that the recoveries of the debts had arisen due to the business in Pakistan. Consequently she repelled the arguments of the learned counsel for the appellant with the following remarks: "With all due respects to the arguments that have been advanced and the case-law relied upon I would like to state that the appellant had to make the recoveries of the debts that had arisen dud to the business in Pakistan, and as such payment of any amount for the purpose of such recoveries irrespective of the place of payment as service in my humble opinion accrued and arose in Pakistan. Therefore, the I.T.O. Was justified in disallowing the legal expenses because no tax had been deducted before making the payment. This disallowance is confirmed."
4. Mr. Shabbir Hamza Khandwala, the learned authorised representative of the appellant has seriously disputed the finding of both the officers below and in this connection he has placed his reliance on a decision of Nagpur High Court reported as (1951)-20-I.T.R.-331. Jetha Bhai Javeri Bhai v. The Commissioner of Income-tax. He has also cited in support of his arguments, a circular of the C.B.R. Bearing No.14-I.T.P. Of 1950 dated 1st September, 1950.
5. Mr. KA. Nomani, the learned D.R. However has supported both the officers below for the reasons given by them.
6. I have heard both learned counsel for the appellant as well as learned D.R. And have also gone through the relevant law and the assessment and impugned orders. Since the I.T.O. Has disallowed the legal expenses incurred in New York by invoking section 50(3) of the Income-tax Ordinance, it would be in fitness of things that 1 start my discussion with it and before I do so, let me reproduce it for the sake of easy reference. It reads: "S.50. Deduction of tax at source:
(3) Any person responsible for paying to a non-resident any sum chargeable under the provisions of this Ordinance (other than income to which subsection (1) or subsection (2) shall, unless such person is himself liable to pay tax thereon as an agent, deduct, at the time of payment, tax at the rates specified in the First Schedule: Provided that where the Income-tax Officer gives a certificate in writing (which certificate he shall give in every proper case on the application of the assessee that to the best of his knowledge and belief, the assessee shall not be liable to pay any tax under this ordinance or shall be liable to pay tax at the rate which is less than the rate specified in the First Schedule, the person responsible for paying any income referred to in this subsection to such recipient shall, until such certificate is cancelled by the Income-tax Officer, pay the amount involved without deduction or deduct the tax at such less rate, as the case may be."
7. Now, if we peruse subsection (3) of section 50 it appears that it casts a responsibility on the shoulders of a person who makes payment to a non-resident any sum chargeable under the provisions of this Ordinance other than income to which subsection (1) or subsection (2) applies to deduct at the time of payment that amount of tax which is specified in first schedule. It further appears from perusal of its proviso that in case where the Income-tax Officer certifies at the instance of the person responsible for paying to non-resident that such non-resident would not be liable to pay any tax or would be liable to pay lesser tax than the prescribed rate under the Ordinance, he shall pay the amount involved without deduction of tax at lesser or full rate till the order recorded by the I.T.O. Is cancelled. Let me, therefore, firstly find out as to what the expression "any sum chargeable under the provisions of this Ordinance" means and implies and for that purpose, I would have to refer to sections 11 and 12 of the Income-tax Ordinance which read as under:- "S.1. Scope of total income:
(a) Subject to the provisions of this Ordinance the total income in relation to any assessment year or a person,
(b) who is a non-resident, includes all income from whatever source derived, which-
(1) is received, or is deemed to be received, in Pakistan in the income year by, or on behalf of, such person, or
(2) accrues or arises, or is deemed to accrue or arise, to him in Pakistan during such year;"
"S.12. Income deemed to accrue or arise in Pakistan:
(1) Income which would be chargeable under the head "Salary" shall be deemed to accrue or arise in Pakistan, wherever paid, if it is earned in Pakistan, or if it is paid by, or on behalf of, the Government or a local authority in Pakistan to a person in the service of such Government or authority, as the case may be.
(2) Any income accruing or arising, whether directly or indirectly, through or from--
(a) any business connection in Pakistan;
(b) any asset, property or source of income in Pakistan; or
(c) transfer of a capital asset situated in Pakistan shall be deemed to accrue or arise iii Pakistan.
Provided that, in the case of a business all the operations of which are not carried out in Pakistan, the income of the business deemed under this subsection to accrue or arise in Pakistan shall be only such part of the income as is reasonably attributable to the operations carried out in Pakistan."
8. From perusal of section 11 it appears that it lays down the scope of total income for the purposes of determining the tax liability of both a resident and a non-resident. Since we are dealing with the case of a non-resident, clause (b) of subsection (1) of section 11 is relevant for us and it lays down that the income of a non-resident which is either received or deemed to be received, or accrues or arises or is deemed to accrue or arise in Pakistan in any income year shall be included in his total income. On the other hand, section 12 lays down as to which income shall be deemed to accrue or arise in Pakistan whether it is paid in Pakistan or not. Subsection (1) of section 12 lays down that an income which is chargeable under the head "Salary" shall be deemed to accrue or arise in Pakistan if it is earned in Pakistan or if it is paid by or on behalf of the Government or a local authority in Pakistan to a person in the service of such government or local authority, irrespective of its place of payment. Similarly, section 12 lays down that any income accruing or arising, whether directly or indirectly, through or from any business connection in Pakistan or any asset, property or source of income in Pakistan or transfer of a capital asset situated in Pakistan shall be deemed to accrue or arise in Pakistan. However, its proviso has restricted it to that income which is reasonably attributable to the operations carried out in Pakistan if the business operations have not been fully carried out in Pakistan and since from perusal of their orders it is clear that both the officers below have put their reliance on the business connections in Pakistan, let me, therefore, examine this issue in some details.
9. If we peruse the repealed Income-tax Act, we Find that the expression "business connection" found place in section 42 and from time to time its interpretation has been coming up for consideration of Courts. The leading case on this point has been reported as (1965)-56-I.T.R.-20 C.I.T. v. Agarwal & Company in which their Lordships of Indian Supreme Court have laid emphasis on such type of business connections which yield profits or gains out of some activity in India which contributes directly or indirectly to the earning of such profits and gains as against the stray or isolated transactions. The following observation of Justice Shah, who spoke for the Supreme Court in this case, is quite pertinent and can quite fruitfully be reproduced. His Lordship has observed as under: "The business connection------------involves a relation between a business carried on by a non- resident which yields profits or gains and some activity in "INDIA" which contributes directly or indirectly to the earning of these profits or gains. It predicates an element of continuity between business of the non-resident and the activity in "INDIA"------.; a stray or isolated transaction is normally not to be recorded as a business connection. The expression "business connection" postulates a real relation between trading activity carried on outside "India" and trading activity within "India". The relation between the two contributing to the earning of the income of the non- resident in his trading activity."
10. It is important to note that in "Agarwal's case (Supra)" the sales promotion operations by a commission agent who had no authority to accept orders or enter into contracts on behalf of non- resident were held not to constitute such a real intimate relation so as to lx tantamount to a business connection. However, in the case of Jetha Bhai (Supra) a non-resident of British India purchased Tobacco in the Baroda State for a resident of British India and the resident paid commission to the non-resident. The question which ultimately came before their Lordships of Nagpur High Court was as to whether amount paid to the non-resident accrued or arose to him through or from a business connection in India within the meaning of section 42 of the Income-tax Act and their Lordships were pleased to answer it in the negative. Let me mention at this juncture that both the cases cited above pertain to interpretation of section 42 of the repealed Income-tax Act which can be said to be equivalent to section 12 of our Income-tax Ordinance. Thus, they appear to be direct authority on the issue involved in this appeal.
Now, reverting to the expression "any sum chargeable under the provisions of this Ordinance", which finds place in subsection (3) of section 50, let me mention that it is equivalent to section 18(3)(c) of the repealed Income-tax Act which however did not include that sum which amounted to trading receipts in the hands of a non-resident. Thus, for instance when the price of goods supplied is paid to a non-resident seller, no deduction has to be made under this section although upon making up final accounts at the end of the year, it may be found that element of profit was contained in the receipt of the sale price. This legal position emerges out of two cases coming from no less an authority than the House of Lords reported as 34 T.C. 293. I.R. v. London Corporation and 45 T.C. 427, Campbell v. I.R. However, a contrary view has been expressed by Calcutta High Court in two cases reported as 30 I.T.R. 525, Angld-India Jute Mills Co. Ltd. Dutt and 36 I.T.R. 365. Ray & Company (India) Ltd. v. Mokarji. The learned Editors of "The Law & Practice of Income-tax Ordinance" by "Kanga and Palkhiwala" (1976 edition), have questioned the legality of aforesaid decisions of Calcutta High Court at page 1043 in the following words: "It is submitted that the Calcutta High Court's view is incorrect. Section 195(2) does not contemplate trading receipts, a portion whereof may be profit; it refers to a sum which is "pure income profit" but a portion of which may not be taxable under the Act e.g. On the ground that portion accrued and was received outside India, the recipient being ex hypothesi a non-resident.
Further, the decision of the Supreme Court in the case of AGGARWAL CHAMBER OF COMMERCE does not justify the Calcutta High Court's view. The Supreme Court was only concerned with section 162(2) (the second Proviso to section 42(1) of the 1922 Act) the wording of which is different from that of this section. More-over, in that case the entire amount in question represented "pure income profit" and the Supreme Court held that the retention or withholding of tax could not be challenged on the ground that the non-resident, in view of his other losses, would ultimately turn out to be not assessable at all. Therefore, even applying the principle laid down by the Supreme Court in the case of AGGARWAL CHAMBER OF COMMERCE to this section, the position that emerges is that when making payment of "pure income profit" to a non-resident, deduction of tax has to be made at the prescribed rate (unless a certificate is obtained from the I.T.O. Under subsection (3) of this section or under section 197), irrespective of the fact that the non-resident may turn out to be not assessable when the assessm ent is ultimately made upon him. Again the fact that the non- resident may be entitled to a certain deduction from the "pure income profit" would not be enough to negative the application of this section. But gross trading receipts stand on a different footing since they are different in nature from "pure income profit"; and the words "any other sum chargeable under this Act "are not appropriate to cover such receipts:"
12. In my humble opinion, the reasoning adopted by the learned editors is very much compatible with aforesaid two decisions of House of Lords in which their Lordships have considered this issue almost under similar circumstances and I respectfully follow them. Let me point out here that both the decisions of -Calcutta High Court as well as of House of Lords are not binding on me being decisions of foreign Courts and as such I am at liberty to accept any one of them for the reasons advanced therein.
13. Before proceeding further, I think it proper to refer to the proviso appended to subsection (3) of section 50 of the Income-tax Ordinance. It may be argued on its basis that if a person responsible for paying to a non-resident "any sum chargeable to tax under the provisions of this Ordinance" thinks that any such sum was not chargeable under the Ordinance he should obtain a certificate from the I.T.O. For that purpose. However, with due respect, I am not inclined to accept this argument. This proviso does not make it obligatory for such person to obtain a certificate of the I.T.O. On the other hand, it has been made the duty of the I.T.O to issue such certificate if such an application has been moved. Thus, if such person without obtaining a certificate from the I.T.O.
Does not deduct any tax from the amount which he pays to a non-resident thinking that it was not chargeable under the provisions of this Ordinance he cannot be punished if ultimately it is held that such payment was not chargeable under the provisions of this Ordinance. In my humble opinion, subsection (3) of section 50 impliedly vests person responsible for paying to a non- resident to decide, of course, at his own peril, as to whether he should deduct any amount of tax before making payment to a non-resident. It casts the duty of deduction on him if such payment is chargeable to tax under the provisions of an Income-tax Ordinance and it is for him to decide as to whether such sum is chargeable under the provisions of the Income-tax Ordinance or not. If he is capable of taking decision himself he could do so and face the consequences if his judgment is ultimately found to be erroneous. However, if he wants to take the advantage of the expert "opinion" of an Income-tax Officer. He should take resort to the proviso appended to subsection (3) of section 50 of the Income-tax Ordinance by moving an application to him to issue a certificate to that effect and in such case it has been made mandatory for an I.T.O. To issue or decline the issuance of such certificate to the best of his knowledge and belief which surely is subject to the scrutiny of the higher forums of the tax hierarchy. I have come to this conclusion on the analogy of the provisions of section 55 where an assessee has been given the option of not filing a return if he thinks that his income was not chargeable to tax subject, of course, to all the consequences which he may face if his judgment is ultimately found to be erroneous.
14. With this discussion in mind, let me now turn to the facts of this case. The I.T.O. And for that matter, the learned C.I.T.(A) have not disputed the payment. The purpose of the payment also appears to be admitted to both the officers below. The emphasis appears to be on business connection but with due respect to both of them, I do not think that in view of discussion made above, their conclusion is correct. The attorney in New York is helping the appellant not in its business. He is also not doing anything connected with the business. He has been retained for the purpose of suing the defaulting customer of the appellant failing which the appellant could not have recovered any amount from the defaulting customer. Had the party paid this amount to appellant, the attorney would not have been engaged and he therefore, has been retained for this specific purpose. Thus, using the words of Justice Shah, this is not even "a stray or isolated transaction". The attorney has nothing to do with the preparation of audio or visual records or cassettes. He is not a selling agent either. He has not been retained to promote or safeguard the business interest of the appellant. In short he is not connected even remotely with the business of the appellant in its widest sense. Thus, if the conclusions of both the officers below are upheld then every non-resident who renders any service to appellant would fall within the mischief of subsection (3) of section 50. Thus if it is stretched to its logical extremity an American Airlines, a Hotel in New York or a taxi cab man in U.S.A. All would be deemed having business connections with the appellant. But it appears to be absurd because, as pointed out by Justice Shah in Aggarwal's case (supra), the expression "business connection" postulates real and intimate relation with trading activity carried on by the appellant. Moreover, the fees which has been received by the attorney in States is his trading receipt coming to him by way of his professional charges and thus in view of aforesaid two cases of House of Lords mentioned above, it is not chargeable under the provisions of Income-tax Ordinance like the receipts of American Airlines, New York Hotel or a American taxi cab man. I, therefore, conclude that the payment made to the America Attorney cannot be deemed to be an income accruing or arising whether directly or indirectly, through or from any business connection in Pakistan. However before parting with this issue, let me make it clear that the income of the American attorney cannot be deemed to be income accruing or arising m Pakistan even under subsection (1) of section 12 of the Income-tax Ordinance for the simple reason that the payment to attorney cannot be taken to be his salary. In (1944) 12 I.T.R. 193, Re: Bhagwati Shanker the nature of payment to a lawyer came under scrutiny of Lahore High Court.
In that case, a lawyer though an employee, had claimed his receipts as professional earnings but High Court rejected his claim for the reason that the fact that a lawyer is engaged in service does not allow his salary to be converted into professional earnings. It is, therefore, clear that the receipts of the American attorney are his professional earnings for the simple reason that he is not an employee and thus section 12(l) of the Income-tax Ordinance also does not apply in this case.
15. Now, to conclude, I hold that both the officers below fell in error in disallowing Rs.28,283 which the appellant admittedly paid to the American attorney. I, therefore, for the reasons given above, direct the I.T.O. To allow this amount also to the appellant.
16. It further appears that the appellant had claimed Rs. 4,64,756 as Orchestra charges but the I.T.O.
Disallowed 20% of the claim for the reason that the full addresses of all the artists were not given to him, and on appeal her order has been confirmed. Mr. Khandwala has produced before me the details of the artist which were given to the LT.O. I have gone through them and find that full particulars of all the artists have been given. However, if the I.T.O. Thought that, full address of any artist was not given, it was her duty not only to call upon the appellant to furnish her with better particulars but it was also her duty to cite such examples in her order. It is unfortunate that learned C.I.T.(A) has also failed to cite any instance of any unverifiable item. Hence the addback does not appear to be sustainable in law. The appeal is, there fore, allowed on this point also anal the add- back made out orchestra charges is hereby ordered to be deleted.
17. Mr. Khandwala, the learned counsel for the appellant, has further submitted that the appellant had claimed Rs.3,96,505 as general expenses but the I.T.O. Disallowed 1/3 of the claim holding it to be unverifiable which on appeal has been reduced to 20%. According to him, full details of general expenses were supplied to the I.T.O. And she was not justified to make any add-back.
18. I have gone through the details. It appears that the claim of the appellant regarding general expenses consists of travelling and entertainment expenses also which has been at Rs.21,543.60 and Rs.41,296.95 respectively. When I go through the details of entertainment expenses, I find that they have been placed under three categories shown by a particular number for each category The items of expenses include cigarette, biscuits, sandwitches, coffee, tea, lunch box, soft drinks, and even carrom-board striker, carrom-board pieces and table tennis rackets and balls, etc. The third category shows expenditure on "SECY AC". There is no explanation regarding this expenditure.
Moreover, Rs.2,500 have been shown in category -2 as payment to Miss Sujata. This payment as entertainment expenses appears to be wrongly included. Similarly, the non-business use appears to be very much probable regarding other items. I, therefore, order that 20% out of the entertainment expenses should be disallowed.
19. As far as the travelling expenses are concerned, both the officers below have not found out that any non-business use was involved. If any item was unverifiable, then both the officers below should have cited such example which they have not. Hence, the travelling expenses of Rs.41,295 are allowed in full.
20. Mr. Khandwala has also given to me the details of repairs expenses which' are also shown in three categories and amounted to Rs.1,79,098 in all. I have gone through the details thereof and do not think that any item is unverifiable. Since both the officers below appear to have made the add- back by using stock phrase of un-verifiability, I order the I.T.O. To allow them in full.
21. Thus out of the claim of the appellant regarding general expenses, the I.T.O. Is directed to allow the entire claim of general expenses consisting of travelling and repairs but the addback out of claims of the appellant regarding entertainment expenses amounting to Rs. 21,52.1.60 the I.T.O, is directed to disallow 1/5 of the claim.
22. Mr. Khandwaia has also cited before me two cases reported as 1989 P.T.D. 177 (H.C.) and 1989 P.T.D. 39 (Trib.) but I do not think that they need to be dilated upon as the principle laid down in them has been followed while disposing of the issue regarding addbacks.
23. In view of discussion made above, the appeal stands disposed of to the extent and in the manner as indicated above.