Cir Sahiwal Zone vs M/S Iqbal Industry Pvt Ltd

Stereo. H C J D A-38.

JUDGMENT SHEET

IN THE LAHORE HIGH COURT, MULTAN BENCH,

MULTAN

JUDICIAL DEPARTMENT

ITR No.100 of 2025

Commissioner Inland Revenue, Sahiwal Zone, Regional Tax Office, Sahiwal

Versus

M/s Iqbal Industry (Pvt.) Limited

JUDGMENT

Date of hearing: 21.09.2026.

Applicant by: Mr. Muhammad Suleman Bhatti, Advocate. Respondent by: Rana Jahangir Khan, Advocate.

MUHAMMAD SAJID MEHMOOD SETHI, J.:- This consolidated judgment shall decide instant Reference Application under Section 133 of the Income Tax Ordinance, 2001 (“the Ordinance of 2001”), along with following connected cases, as common questions of law and facts are involved in these cases:-

1.ITR No.101 of 2025 titled Commissioner Inland Revenue, Sahiwal Zone, Regional Tax Office, Sahiwal v. M/s Iqbal Industry (Pvt.) Limited

2.ITR No.102 of 2025 titled Commissioner Inland Revenue, Sahiwal Zone, Regional Tax Office, Sahiwal v. M/s Iqbal Industry (Pvt.) Limited

3.ITR No.103 of 2025 titled Commissioner Inland Revenue, Sahiwal Zone, Regional Tax Office, Sahiwal v. M/s Mughal Steel Casting (Pvt.) Limited

4.ITR No.104 of 2025 titled Commissioner Inland Revenue, Sahiwal Zone, Regional Tax Office, Sahiwal v. M/s Mughal Steel Casting (Pvt.) Limited

5.ITR No.105 of 2025 titled Commissioner Inland Revenue, Sahiwal Zone, Regional Tax Office, Sahiwal v. M/s Mughal Steel Casting (Pvt.) Limited

2.The following questions of law, urged to have arisen out of the consolidated impugned order dated 20.03.2025, passed by the learned

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Appellate Tribunal Inland Revenue, Government of Pakistan, Single Bench, Multan (“Appellate Tribunal”), have been pressed and argued for our opinion:-

1.Whether in the facts and circumstances of the case, the learned ATIR Multan Bench, Multan was justified to hold that payment made to the director(s) of the company as “fee” is not chargeable to tax @ 20% in terms of Section 149(3) of the Income Tax Ordinance, 2001?

2.Whether in the facts and circumstances of the case, the learned ATIR Multan Bench, Multan was justified to hold that payment made to the director(s) of the company is salary and not fee against the express language of sub-section 3 of Section 149 of the Income Tax Ordinance, 2001 – and which has been declared as fee by the taxpayer itself in the return of income?

3.Brief facts of the case are that the respondent, M/s Iqbal Industry (Pvt.) Limited (hereinafter referred to as “the Company”), is engaged in the manufacture and sale of auto parts. For Tax Year 2015, it filed its income tax return declaring a loss of Rs.457,317/-, which was treated as a deemed assessment under Section 120 of the Income Tax Ordinance, 2001 (hereinafter referred to as “the Ordinance”). In the return, an amount of Rs.1,260,000/- was reflected under the head “Management, Administrative, Selling & Financial Expenses” against the row captioned “Director’s Fee”. The Additional Commissioner Inland Revenue, while exercising jurisdiction under Section 122(5A) of the Ordinance, treated the said amount as directorship fee attracting withholding tax at the rate prescribed under Section 149(3), and, for failure to deduct and pay the requisite tax, disallowed the expenditure under the withholding-related provision of Section 21, resulting in an additional tax demand. The learned Commissioner Inland Revenue (Appeals), Lahore, vide consolidated order dated 28.08.2020, maintained the departmental action for Tax Years 2015 to 2017, principally on the ground that the Company had failed to substantiate its claim that the amounts were salary payments or to produce satisfactory evidence of deduction and deposit of tax. The learned Appellate Tribunal Inland Revenue, Multan Bench, Multan, however, vide consolidated order dated 20.03.2025, accepted the appeals,

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holding, on the basis of the salary record, the directors’ individual income tax returns and the certificate of collection/deduction of tax, that the disputed amounts represented salary and not directorship fee; hence, the special withholding regime under Section 149(3) was not attracted. The Department has now invoked the reference jurisdiction of this Court in respect of Tax Year 2015.

4.Learned counsel for the Applicant-Department contends that the Company itself had categorically declared the disputed amount under the separate and identifiable head of “Director’s Fee” and, therefore, could not subsequently characterize the same payment as salary. He argues that Section 149(3), being a non-obstante provision, expressly requires deduction at the prescribed rate where payment is made as directorship fee or fee for attending a board meeting. He further submits that the return form itself contained a separate provision for salaries/wages/perquisites, which had not been utilized. He also contends that no CPR or other independent proof of deduction and deposit of tax was produced and, therefore, the Tribunal had erred in accepting the taxpayer’s subsequent explanation. He adds that the Tribunal’s reliance upon the income level of the directors was speculative and insufficient to dislodge the Company’s own declaration in its return.

5.Conversely, learned counsel for the respondent-taxpayer supported the impugned order by submitting that the disputed payments were, in substance, salary, as evidenced by the salary record and the directors’ individual income tax returns, and that the description as “Director’s Fee” in the Company’s return could not override the actual nature of the payments.

6.We have heard learned counsel for the parties and examined the record with their assistance.

7.At the outset, it is necessary to notice the distinction between the two provisions around which the controversy revolves. Section 149(1) concerns deduction of tax from payments constituting salary, whereas Section 149(3) provides a specific withholding regime in

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respect of directorship fee, fee for attending a board meeting, or such fee by whatever name called. The two provisions operate in distinct fields. Therefore, applicability of Section 149(3) depends upon the payment answering the statutory description contained therein; the mere fact that the recipient is a director does not, by itself, determine the character of every payment made to him. A director may, depending upon the circumstances, also have a separate employment or service relationship with the company, and a payment made pursuant to such relationship may partake of the character of salary. The relevant consideration, therefore, is the capacity in which the payment was made and the nature of the obligation which it discharged, rather than merely the designation of the recipient. At the same time, the expression “by whatever name called” occurring in Section 149(3) cannot be rendered redundant; it prevents avoidance of the statutory withholding obligation merely by assigning a different nomenclature to a payment which, in substance, answers the description of directorship fee or fee for attending a board meeting. The provision, however, cannot be extended so as to treat every payment made to a director as directorship fee irrespective of its actual character. It may further be clarified that Section 149(3) prescribes a rate of withholding at source and does not itself constitute a separate charging provision. The real controversy, therefore, is one of characterization of the payment, whether the disputed amounts represented directorship fee within the contemplation of Section 149(3), or salary/remuneration falling within Section 149(1). The provision was already in force during Tax Year 2015 and, therefore, its temporal applicability is not in issue.

8.The Department has principally relied upon the fact that the Company itself described the disputed amount as “Director's Fee” in its return. Such entry is undoubtedly a relevant piece of evidence and cannot be brushed aside. It is, however, not necessarily conclusive of the legal character of the payment. The true character of a transaction or payment is to be determined from its substance and the surrounding

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circumstances rather than from nomenclature alone. The principle of determining the tax treatment of a transaction by reference to its substance and real character, rather than merely its nomenclature or outward description, is well recognized. Accordingly, the description assigned to a payment in the accounts or return, though relevant, is not by itself conclusive; its true legal character is to be determined from the nature of the payment, the relationship between the parties, and the surrounding circumstances. Applied to the present controversy, the words “by whatever name called” in Section 149(3) operate against artificial relabelling by the taxpayer; equally, the Department cannot determine the statutory character of a payment solely from a descriptive entry when the other contemporaneous material, taken as a whole, supports a different character. The return entry was, therefore, required to be examined along with the remaining documentary material. This principle operates equally against the taxpayer: had the evidence established that the amounts were, in substance, directorship fee, their description as salary elsewhere could not have taken them outside Section 149(3). The question is thus not which nomenclature is preferable, but what the payment actually represented in the circumstances of the case.

9.In the present case, the Tribunal did not rest its conclusion merely upon a subsequent explanation furnished by the taxpayer. It took into consideration the salary particulars, the individual income tax returns of the directors, wherein the receipts were reflected as salary income, and the certificate of collection/deduction of tax produced on behalf of the taxpayer. The consistency of this documentary material was a relevant circumstance which the Tribunal was entitled to consider while determining the true character of the payments. The Tribunal did, however, also observe that the directors were “low-paid” and, on that basis, considered it unlikely that they would have received the disputed amounts as directorship fee. Such observation, standing alone, cannot constitute a legal test for determining the character of a payment, as the quantum of

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remuneration does not, by itself, determine its legal nature. Nevertheless, the impugned order does not rest upon this observation alone; rather, the ultimate conclusion is supported by the documentary material referred to above. An incidental or imperfect observation in the reasoning, therefore, does not render the ultimate finding unsustainable where the same is otherwise supported by sufficient evidence on record.

10.There is another aspect relating to the disallowance under Section 21. Such disallowance is consequential upon the existence of an underlying statutory obligation to deduct tax at source; it does not independently determine the character of the payment. The applicability of Section 149(3) must, therefore, first be established by determining whether the disputed amount was in fact directorship fee or fee for attending a board meeting. If the payment is found, on the evidence, to be salary, the special withholding regime under Section 149(3) cannot be invoked merely because the recipients happen to be directors. Conversely, if the payment is established to be directorship fee, its characterization as salary through nomenclature alone would not defeat Section 149(3). The antecedent question of characterization must thus necessarily precede the consequential question of disallowance under Section 21. It is also noticed that the relevant clause of Section 21 concerning expenditure from which tax was required to be deducted but was not deducted and paid is clause (c), rather than clause (b). The latter relates to a different category of withholding. The reference by the authorities below to Section 21(b), therefore, appears to be an incorrect statutory reference. While such incorrect citation does not, by itself, determine the substantive controversy, precision in identifying the statutory provision forming the basis of a demand or disallowance is necessary.

11.Viewed in this perspective, both questions framed by the department proceed substantially on the assumption that the Company's description of the disputed amount as “Director's Fee” in its return conclusively determined its legal character. That assumption

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cannot be accepted. The return entry was relevant, but the Tribunal was required to examine it in conjunction with the other material bearing upon the nature of the payment. The Tribunal did so and, after considering the salary particulars, the directors' individual returns and the certificate of collection/deduction of tax, concluded that the payments represented salary rather than directorship fee. The approach of determining the character of a payment from its substance and the real relationship between the parties, rather than treating the accounting description as conclusive, is applicable to the present controversy. The conclusion reached by the Tribunal does not dispense with Section 149(3), nor does it hold that payments made to directors are invariably outside its scope. It merely determines that, on the evidence relating to the particular payments under consideration, the statutory conditions attracting Section 149(3) were not established. The Department has not demonstrated that this conclusion was founded on no evidence, resulted from misreading or non-reading of material evidence, or involved an erroneous interpretation of Section

12.This leads to the scope of jurisdiction under Section 133(1) of the Ordinance of 2001. The Appellate Tribunal is the final fact- finding forum in the statutory hierarchy. Where the Tribunal has recorded a finding upon appreciation of evidence, this Court does not ordinarily undertake a fresh appraisal merely because another view may be possible. Interference may, however, be warranted where the finding is based on no evidence, is perverse, has resulted from misreading or non-reading of material evidence, or where the Tribunal has applied an erroneous legal principle or misconstrued the governing statutory provision. The Hon'ble Supreme Court reiterated this limitation upon reference jurisdiction in Commissioner of Inland Revenue, Lahore v. Messrs Sargodha Spinning Mills (Pvt.) Ltd., Faisalabad and others (2022 SCMR 1082). Likewise, a distinction must be maintained between a pure question of law and a question whose determination essentially depends upon appreciation of

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evidence. A finding of fact may be disturbed only where it is shown to be based on no evidence, perverse, the result of misreading or non- reading of material evidence, or otherwise legally unsustainable. Tested on this standard, the Department's objection regarding non- production of a particular CPR or challan, as well as its reliance upon the description “Director's Fee” in the return, essentially seeks a reassessment of the evidentiary weight assigned by the Tribunal to the competing material. No misreading or non-reading of material evidence, nor any erroneous interpretation of Section 149, has been demonstrated. Consequently, no ground has been made out for interference with the impugned order in the exercise of reference jurisdiction.

13.In view of the above, the proposed questions are answered in the affirmative, i.e. against the applicant-department and in favour of the respondent-taxpayer.

This Reference Application, along with the connected Reference Applications, is decided against the Applicant-Department.

14.Office shall send a copy of this judgment under seal of the Court to learned Appellate Tribunal as per Section 133 (8) of the Ordinance of 2001.

(Sultan Tanvir Ahmad) (Muhammad Sajid Mehmood Sethi) Judge Judge

APPROVED FOR REPORTING

Judge Judge

*A.H.S.*