Cir. vs Ms. Samitow Spinning Mills Ltd.

Stereo. H C J D A-38.

JUDGMENT SHEET

IN THE LAHORE HIGH COURT, LAHORE

JUDICIAL DEPARTMENT

PTR No.429 of 2010

Commissioner of Inland Revenue, Lahore Versus

M/s Saritow Spinning Mills Limited, Lahore

JUDGMENT

Date of hearing: 14.06.2021.

Applicant by: Mr. Liaquat Ali Chaudhry, Advocate. Barrister Ameer Abbas Ali Khan, A.A.G. on Court’s call.

Respondent by: M/s Shahbaz Butt and Muhammad Ahsan Mahmood, Advocates.

MUHAMMAD SAJID MEHMOOD SETHI, J.- Through instant Reference Application under Section 133 of the Income Tax Ordinance, 2001 (“the Ordinance of 2001”), the following question of law urged to have arisen out of impugned order dated 23.01.2010, passed by learned Appellate Tribunal Inland Revenue, Lahore Bench, Lahore (“Appellate Tribunal”), has been pressed and argued for our opinion:-

“Whether transfer of raw material to sister concern attracts withholding tax provisions?”

2.Brief facts of the case are that respondent-taxpayer is a public limited company deriving income from spinning, manufacturing and sale of yarn. Proceedings under section 161 of the Ordinance of 2001 were initiated for alleged failure of respondent-taxpayer to deduct tax at source while making payment against the supply of cotton (raw material) received from sister concern, which culminated in passing of original assessment order under Sections 161/205 of the Ordinance of 2001, determining tax liability of

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Rs.5,689,747/-, however, in appeal, tax charged on raw material was deleted by CIT(Appeals) vide order dated 26.07.2005. In second appeal, Appellate Tribunal, vide order dated 12.09.2006, remanded the case to Taxation Officer for fresh assessment. In post remand proceedings, again aforesaid default was determined against respondent-taxpayer vide order dated 28.06.2008. Feeling aggrieved, respondent-taxpayer filed appeal before CIT(Appeals), which was accepted and assessment order was cancelled vide order dated 13.06.2009. Feeling dissatisfied, applicant-department filed appeal before learned Appellate Tribunal, which was dismissed vide order dated 23.01.2010. Hence, instant Reference Application.

3.Learned Legal Advisor for applicant-department submits that raw material was transferred to sister concern against a consideration, and the transaction comes within expression “sale of goods” mentioned in Section 153(1)(a), thus, respondent-taxpayer was rightly charged tax by the Taxation Officer. He adds that expression “supply of goods” appearing in Section 50(4)(a) of the Repealed Income Tax Ordinance, 1979 (“the Ordinance of 1979”) includes both cash and credit purchases of goods and Section 153(1)(a) of the Ordinance of 2001 is pari materia to Section 50(4) of the Ordinance, 1979. He further submits that under latter provision of law, every person making payment in full or part for sale of goods is required to deduct tax from the gross amount payable (including sales tax, if any) at the time of making the payment. He argues that every supply involves a sale as there is provision of goods in exchange of consideration, therefore, transfer of raw material from one unit to another, even without any cash payment and only through book adjustments, is fully covered under section 50(4). He next submits that as per Section 158(c) of the Ordinance of 2001, amount actually paid shall have the meaning as prescribed, and Rule 43B of the Income Tax Rules, 2002 deals with transaction which is settled or discharged through book adjustment, thus, respondent-taxpayer was liable to pay the tax determined by

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the Taxation Officer. He further submits that issue in hand has already been laid to rest by Hon’ble Apex Court in Commissioner of Income Tax Legal Division, Lahore and others v. Khurshid Ahmad and others (2016 PTD 1393).

4.Conversely, learned counsel for respondent-taxpayer submits that instance of making payment has not yet arrived in this case, therefore, legal provisions as well as case law, referred to by learned counsel for applicant-department, are not attracted.

5.Arguments heard. Available record perused.

6.Perusal of record shows that respondent-taxpayer has two other associate companies and cotton (raw material) is purchased in bulk by any of the units, and payment in respect thereof is made by such unit. Undeniably, unit purchasing the cotton deducts tax from payments made to seller(s) at the time of making payment within the contemplation of section 50(4) of the Ordinance of 1979. The unit, purchasing the cotton, also holds stock and transfers the same to other associate companies at cost, as the need arises, without any cash involvement by making necessary book entries in relevant ledgers of the units and respective accounts are debited and credited accordingly. These transactions between associate companies are reflected through book entries and book adjustments and at the time of closing of the year, the same are netted off and balance is reflected in the record maintained by the associate companies.

7.In view of above factual position, learned CIT (Appeals) as well as learned Appellate Tribunal have unanimously observed that as instance of making payment had yet not arrived in the instant case, therefore, tax under section 80C of the Ordinance of 1979 was not chargeable and provisions of section 50(4) of the Ordinance of 1979 were not attracted. The relevant portion of order of learned Appellate Tribunal is reproduced hereunder:-

“5. The learned CIT(A) cancelled the assessment order relying on the observations of the ITAT quoted on page 4 and 5 of the impugned order. We have observed that while

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cancelling the assessment order, the CIT(A) stated that the instructions of the ITAT regarding detailed ascertainment of facts for the ledger account of the sister companies have not been complied. The learned AR also drew our attention to the fact that purchase of cotton was centralized and it was transferred to sister concerns without any cash payments and only book adjustments were made and as such tax u/s 80-C of repealed Income Tax Ordinance, 1979 was not chargeable. ITAT in its order dated 12.12.2007 has held as follows:- “We are also of the considered opinion that since no payments were made against transactions of raw material from one unit to other unit (sister concern), therefore, such like transactions do not come under the ambit of 80C, against which expenses allocated in respect of exempt supplies as sale of raw material is quite unjustified. Thereby deleted....”

8.Undeniably, as per Section 50(4) of the Ordinance of 1979, the event of tax deduction shall come into play only at the time of making payment. The language of provisions of Section 50(4) of the Ordinance of 1979 and 153(1) of the Ordinance of 2001 clearly state that deduction of tax has direct nexus with “the time of making payment” and unless payment is actually made, aforesaid provisions would not attract. In this case, no payment was made and only book entries were made in respective ledgers of the companies, therefore, question of deduction of tax did not arise at all. In these circumstances, proceedings under section 161 of the Ordinance of 2001 could not have been initiated. Likewise, provisions of Section 158 of the Ordinance of 2001 are also not attracted.

9.So far as the argument that issue in hand has been settled in the case of Khurshid Ahmad supra, is concerned, suffice it to say that as no payment has been made in instant case, therefore, afore-referred case, being distinguishable, is not attracted to the facts and circumstances of this case.

10.In the light of discussion in preceding paragraphs, the objection of respondent-taxpayer that, even otherwise, proceedings could not have been initiated under section 161 of the Ordinance of 2001, as matter pertained to assessment year 2001-2002, therefore, Section 52

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of the Ordinance of 1979 could have been invoked, has become redundant. Hence, we restrict ourselves to the question pressed and argued before us and aforesaid argument / question would be addressed in some other appropriate proceedings.

11.In view of the above, since instance of making payment has not yet arrived, withholding tax provisions are not attracted in the given circumstances. Therefore, our answer to the proposed question is in negative i.e. against applicant-department and in favour of respondent-taxpayer.

This Reference Application is decided against applicant- department.

12.Office shall send a copy of this judgment under seal of the Court to learned Appellate Tribunal as per Section 133 (5) of the Ordinance of 2001.

(Abid Hussain Chattha) (Muhammad Sajid Mehmood Sethi) Judge Judge

APPROVED FOR REPORTING

Judge Judge *Sultan*