DECISION /FINDINGS Mr. Allah Ditta Zahid had filed Complaint No.Q/3/2000/17 before the Wafaqi Mohtasib against the National Savings Organization, Quetta for deduction of withholding tax on profits of various Schemes of National Savings Centre from account holders of Tribal Areas of Pakistan. It has been alleged that by C.B.R.'s Letter No.SM0.1(8)/WHT/94, dated 27th February, 1995 relaxation was given to the residents of Tribal Areas and withholding tax was not charged from them. The Banks situated in Tribal Areas complied with the instructions of the C.B.R. But the National Savings Centres did not comply on the plea that the aforestated instructions of C.B.R. Were for Banks only and not for National Savings Centres. The complainant filed a complaint before the Wafaqi Mohtasib. In reply to the notice issued by Wafaqi Mohtasib the C.B.R. By Letter C. No. 4(7) Insp/2000, dated 12-2-2000 stated that unlike profit or interest derived from accounts/ deposits maintained with banks, various. National Savings Schemes fall within the meaning of "Government Security" as contained in section 2 of the Public Debt (Central Government) Act, 1944 (Act No. XVIII of 1944) and income from such a security is chargeable to income-tax, under section 17 of the Income Tax Ordinance, 1979. Some Government Securities are issued with the stipulation that the interest thereon shall not be liable to income-tax whereas some Government securities stipulate that income-tax shall be payable on interest derived therefrom. The interest payable by the Government of Pakistan constitutes income accruing or arising in Pakistan and consequently falls within the scope of total income. Such interest on income is thus chargeable to income-tax/withholding tax. It was further stated in reply that the issue has been referred to Law Division for authoritative opinion and the same shall be submitted as soon as it is received. The Wafaqi Mohtasib by his Findings dated 3-6- 2000 observed as follows:--- "7. When the Central Board of Revenue was asked to comment on the complainant's rejoinder it reported that Board's letter C. No.1(8)/WHT/94, dated 27-2-1995 referred to by Mr. Allah Ditta Zahid in his complaint, dated 13-1-2000 as well as rejoinder, dated 13-3-2000 relates to branches of Banks and that the Board has already explained the legal position as contained in the Income Tax Ordinance, 1979 and that the Law Division has also concurred with C.B.R.'s views.
8. Keeping in view the Investigation the complainant's case is not tenable and is ordered to be closed accordingly."
2. The complainant filed Reference before the President who was pleased to pass order which was communicated by letter, dated 25-4-2001 as follows:- "I am directed to refer to your representation, dated 24-6--2000, on the above subject and to state that the President has been pleased to pass the following order:--- "The Wafaqi Mohtasib closed the investigation of the complaint keeping in view the legal position explained by the C.B.R. In its Letter No.1(8)WHT/94, dated 27-2-1995 with which the Law Division is said to have concurred. The Law Division has however explained that its opinion has not been understood in its proper context. Keeping in view the Law Division's Explanation it is appropriate that the complaint is reinvestigated. Accordingly, the Wafaqi Mohtasib shall transfer the complaint to Federal Tax Mohtasib. A copy of the Law Division's clarification contained in its U. 0. No. 256/2000.
Rep (WM) Law, dated 21-3-2000 shall also be forwarded to the Wafaqi Mohtasib for transmission to the Federal Tax Mohtasib."
3. On receipt of the documents notice was issued to the Secretary, Revenue Division to furnish the following information:
(i) Whether the Income-tax Law has been extended to Tribal Areas including the Tribal Areas of Province of Balochistan. If it was extended the date and copy of the notification should be supplied.
(ii) Was after its application the Income Tax Ordinance withdrawn. If so furnish the date of such withdrawal with copy of the notification.
(iii) Whether on profits accruing from Government securities purchased from National Savings Centres withholding tax is chargeable or not. If it is not chargeable then full particulars including the notification or direction/circular be supplied.
4. In reply the C.B.R. Has reiterated its stand taken earlier and it was pleaded that the Income Tax Ordinance, 1979 was never extended to Tribal Area including the Tribal Areas of Province of Balochistan. In reply to query number 3 it was stated that in view of the provisions of sections 50(2), 17 and 12(3) and (6) of the Ordinance, withholding tax is deductible on profits accruing on all Government securities, including those purchased from National Saving Centres, if not otherwise exempted.
5. As the opinion of the Ministry of Law and its clarification, dated 17-3-2001 was referred it is necessary to consider the same as well. The C.B.R. Had sought advice on questions:-- "(a) Whether income-tax laws have been extended to the Northern Areas/Tribal Areas.
(b) Whether the interest accruing on the securities to non-residents shall be taxable."
The Division was of the opinion:
(i) The Income Tax Ordinance was extended to Northern Areas in 1981 which was prospectively withdrawn from 3-4-1999.
(ii) The Ordinance was not applicable to Tribal Areas.
(iii) The income from Securities purchased during the period 1981 to 1999 is chargeable to income- tax.
(iv) There is no prohibition that non-residents cannot invest in the Securities and, therefore, the income from securities shall be liable to tax."
It was clarified that "the said advice does not mean that a nonresident" investing in the securities issued by the National Saving Centres at a place where the income-tax law is not in force, shall be compelled to pay income-tax merely on the ground that the interest on securities is paid by the Government of Pakistan. Income-tax can never be charged on the source of payment but it is charged on the income of the person liable to income-tax".
6. The question for consideration is whether the withholding tax can be deducted from the profits accruing on certificates issued by the National Savings Centres in Tribal Areas to its residents. The first point, which is very clear, is that Income Tax Ordinance was never extended to Tribal Areas including Tribal Areas of Balochistan. The complainant had referred to C.B.R.'s Letter No.SMO 1(8)WHT/94, dated 27-2-1995 referred above. It clearly stated that the provisions of section 50 of the Income Tax Ordinance are not applicable to the Branches of Pakistan Banks located in the Tribal Areas.
7. The C.B.R. Has referred to subsections (3) and (6) of section 12 of the Income Tax Ordinance in support of its contention that the profits accruing on the certificates of National Savings Scheme purchased in Tribal Areas withholding tax is chargeable.
Section 12, subsection (3) reads as follows:--"(3) Any income by way of interest payable by---
(a) a person who is a resident except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside Pakistan or for the purposes of making or earning any income from any source outside Pakistan;
(b) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in Pakistan or for the purposes of making or earning any income from any source in Pakistan, shall be deemed to accrue or arise in Pakistan." Subsection (6) reads as follows:- "(6) As used in subsections (3), (4) and (5), the expression 'a person who is resident' includes Government."
8. The effect of subsection (3-a) is that any income accruing by way of interest payable by a person who is a resident shall be deemed to accrue or arise in Pakistan. Under subsection (6) the expression "a person who is resident" includes the Government. Therefore, the income by way of interest payable by the Government shall be deemed to accrue or arise in Pakistan. Section 12 by fiction of law considers income by way of interest payable by the Government to be an income arising in Pakistan. Any income, which arises in Pakistan to any person, is subject to income-tax.
The main emphasis is on the accrual of income from a resident and not the residence of the person to whom the income accrues.
9. Under section 9 of the Income Tax Ordinance, income-tax is chargeable in respect of the total income of the income year. Scope of the term "total income" has been defined under section 11 according to which the total income of a person who is a resident in any assessment year includes all income from whatever source derived which:---
(i) is received or is deemed to be received, or
(ii) accrues or arises or is deemed to accrue or arise in Pakistan, or
(iii) accrues or arises outside Pakistan.
The total income of a non-resident includes all income from whatever source derived which--
(i) is received or deemed to be received in Pakistan, or
(ii) accrues or arises or is deemed to arise to him in Pakistan.
Thus in respect of a resident irrespective of the source of income, any income which is received or deemed to be received, accrues, arises or is deemed to arise in Pakistan or accrues or arises outside Pakistan is included in the total income. The treatment to non-resident is the same except that income which accrues or arises to him outside Pakistan is not included in his total income.
10. The term "income deemed to accrue or arise in Pakistan" has been defined in section 12 of the Ordinance. According to subsection (2) of section 12 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, shall be deemed to accrue in Pakistan. Subsection (3) of section 12 further provides that any income by way of interest except those specified therein payable by "a person who is a resident" shall be deemed to accrue or arise in Pakistan. In the present case as the Government has paid the interest, can it be treated as a person resident in Pakistan? This aspect has been taken care of by subsection (6) of section 12 which expressly states that this term includes, Government. The cumulative effect of the above provisions is that the interest paid by the Government on certificates issued by or under the National Savings Scheme shall be deemed to accrue or arise to a resident in Pakistan whether interest is paid in the Tribal Areas or outside Pakistan. The same treatment will be given to a non-resident as he is a recipient of income accruing or arising from an asset or source of income in Pakistan. The fact that Income Tax Ordinance is not applicable in Tribal Areas does not affect the chargeability as by fiction of law such income is deemed to accrue in Pakistan which would mean an area where Income Tax Ordinance is applicable. The total income of every person, including payment of interest by the Government on the Savings Certificates or on Schemes issued by the National Saving Centre is chargeable to income-tax.
11. It is pertinent to point out that so far Regular Income Certificates are concerned under Rule 9 of Regular Income Certificate Rules, 1993 the profits earned under the Rules is subject to withholding tax at the rate of 10% at source.
12. Where on Savings Certificates or similar securities, merest is paid by the Government to a person residing in Tribal Area suci income shall be deemed to accrue to him in Pakistan. Once it is established that income arising from such payment of interest is deemed to accrue or received in Pakistan, tax will be chargeable. Because the basis of chargeability of tax in such cases is the place of accrual of income and not the residence of the assessee.
The complaint has no merit and is closed. .