MOTIWALA SECURITIES (PVT.) LTD. VS COMMISSIONER INLAND REVENUE, 2016 PTD-KARACHI-HIGH-COURT-SINDH 2831 (2016)

Income Tax Ordinance (XLIX of 2001)---

----Ss.168, 170, 233-A(1)(c) & 133---Reference---Refund, issuance of---Applicant was a stock broker who claimed to be entitled for issuance of refund collected by Stock Exchange---Validity---Amount of tax collected and withheld relating to customer/client of applicant was the liability of such taxpayer and not the liability of applicant---Mere fact that amount of tax was collected or withheld by Stock Exchange on the entire transaction made by applicant would not in any manner change the scope of liability or chargeability of tax---Applicant was not required to make payment of such refund of tax to its customers under any agreement between the two---Income Tax Ordinance, 2001, was a special law and a separate piece of legislation which had catered to chargeability of income and collection of tax liability of a taxpayer---Any agreement or accounting procedure, if any, adopted by applicant company, could not circumvent legal course as provided under Income Tax Ordinance, 2001---High Court declined to interfere in the orders passed by authorities below as well as the order of Appellate Tribunal, which depicted correct legal position---Circular issued by Federal Board of Revenue in such regard did not suffer from any illegality, though it could have binding effect in quasi- judicial proceedings or upon High Court while deciding a legal question---High Court decided the question in negative---Reference was dismissed in circumstances.

Aminuddin Ansari for Applicant.

Amjad Javed Hashmi for Respondents.

ORDER

Through instant Income Tax Reference Application, the applicant has proposed five questions, however, dropped questions Nos. 1 and 5 and decided to press only questions Nos. 2 to 4, which have been mentioned in order dated 07.12.2012, which read as follows:--

1.Whether on the facts and circumstances of the case the applicant/tax payer company in terms of [section] 233A(1)(c) of Income Tax Ordinance, 2001, is a prescribed person/tax collecting agency under Income Tax Ordinance, 2001?

2.Whether on the facts and circumstances of the Case under section 233A(1)(c) of Income Tax Ordinance, 2001 Karachi Stock Exchange collected tax during the year from the applicant tax payer company exclusively as Stock Broker on shares traded by it?

3.Whether on the facts and circumstances of the case the applicant/tax payer company was entitled for the issuance of the refund collected by the Karachi Stock Exchange from the applicant tax payer company for Rs.12,369,248/- and was rightly issued by the Commissioner Inland Revenue under section 170 read with section 168 and section 233A(1)(c) of Income Tax Ordinance, 2001?

2.However, during the course of arguments, by consent of both the learned counsel for the parties, question No.3, being the relevant question of law arising from the impugned order, has been pressed and submissions have been advanced by the learned counsel for decision on this question only by this Court.

3.Learned counsel for the applicant has read out the order dated 18.6.2010, passed by the Additional Commissioner, Inland Revenue, Audit Division, Zone I, RTO Karachi, under section 122(5A) of the Income Tax Ordinance, 2001 for the tax year 2005, whereby, the claim of refund of amount of tax, withheld under section 233A(1)(c) of the Income Tax Ordinance, 2001 relating to customers/clients, has been disallowed on the ground that since the same does not pertain to the transactions relating to the applicant, therefore, such claim can only be filed by the customer/client and not by the applicant who is a stock broker engaged in the business of trading in shares. This order was challenged before the Commissioner, Inland Revenue (Appeals) under section 129 of the Income Tax Ordinance, 2001 by the applicant, however, the Commissioner (Appeals) has been pleased to concur with the finding of the Additional Commissioner and dismissed the appeal filed by the applicant. The applicant, still being dissatisfied with the order passed by the Commissioner (Appeals), preferred 2nd appeal i.e. I.T.A. No.733/KB/2011 before the Appellate Tribunal, Inland Revenue (Pakistan). Karachi under section 131 of the Income Tax Ordinance. 2001 who, vide impugned order dated 11.10.2012, has been pleased to dismiss such appeal while concurring with the findings of the two Authorities below. Such order has been assailed by the applicant through instant reference application for an opinion on the above question No. 3 only.

4.Learned counsel for the applicant argued that since the certificate of deduction of tax has been issued by the Stock Exchange in favour of the applicant relating to the entire transactions, including the transaction made by the applicant on behalf of his customers/clients, therefore, the applicant has rightly claimed adjustment/refund of such tax withheld by the Stock Exchange under section 233A(1)(c) of the Income Tax Ordinance, 2001. According to the learned counsel, the applicant, on receipt of such refund, would credit such amount to the accounts of its respective customers in addition to the sale consideration of the shares. Learned counsel further argued that the circular issued by the Board in this regard is neither binding on the applicant nor it reflects the correct legal position, therefore, the Additional Commissioner was not justified to amend the order under Section 122 (5A) of the Income Tax Ordinance, 2001 It has been prayed that the question proposed through instant reference application may be answered in affirmative in favour of the applicant.

5.Conversely, learned counsel for the respondents submits that admittedly separate account has been prepared by the applicant in respect of each customer/clime, showing its own transactions of sale and purchase of shares, as well as the transactions made on behalf of its customers/clients as per scheme of the Income Tax law so that the liability of the applicant company, may be separated from the liability of its customers/clients who are eventually chargeable to tax on such transactions i.e. trading of shares. According to the learned counsel for the respondent, though a certificate was issued by the Stock Exchange in terms of section 233A(1)(c) of the Income Tax Ordinance, 2001, showing the deductions of tax made on the entire transactions, however, as per scheme of the lain, with particular reference to chargeability of tax, such amount of tax has to be adjusted/credited/refunded against the liability of the tux payer which, in the instant case, per learned counsel, is the customer/client on whose behalf such transaction has been made by the applicant and not the applicant itself. Learned counsel for the respondent has also referred to the provisions of section 170 of the Income Tax Ordinance, 2001 relating to claim of refund and submits that only such tax payer, who is chargeable under the said provision, can apply to the Commissioner for refund of the excess amount of tax deducted or withheld Whereas, in the instant case, admittedly, the applicant is not chargeable to such portion of transaction which pertains to his customer/client, therefore, it has been argued that question proposed may be answered in negative against the applicant and in favour of the respondents.

6.We have sought assistance of Mr. Abid H. Shaban, advocate, who was present in Court regarding the nature of the transactions and the accounts maintained by the stock broker, who has candidly suited that irrespective of the fact that the tax has been deducted/withheld by the Stock Exchange for the entire transactions made by the applicant, however, any adjustment or the claim of refund can only be made by the customer/client who is chargeable to tax and not by the applicant, which is chargeable to tax to the extent of trading of shares made by the company itself.

7.We have heard the arguments of the learned counsel for the parties as well as the submission made by Mr. Abid H. Shaban, advocate, perused the relevant provisions of law, including sections 168, 170, and 233A(1)(c) of the Income Tax Ordinance, 2001, and have also examined Circular No.2 dated 26.3.2009, which is reproduced for the sake of brevity:--

"Circular No.2/2009:

The reference has been made to the Board to clarify that who will take the credit of the tax withheld under clause (c) of subsection (1) of section 233A of the Income Tax Ordinance, 2001. Whether the Member of the Stock Exchange or the seller of shares who did the trading of shares through the said Member?

The matter has been considered. Though the tax in respect of trading of shares is deducted from the member by the stock exchange yet the tax so withheld under clause (c) of sub-section (1) of section 233A of the Income Tax Ordinance, 2001, does not pertain to him exclusively. He is only an intermediary and the tax withheld under the aforesaid provisions of law, belongs to the seller of shares who traded through him. Legally speaking, the seller is entitled to take the credit of the tax so withheld as well as the member in respect of the shares owned by him. The member of the stock exchange is the custodian of the record, as the transactions of shares are made through him on the stock exchange.

It is, therefore, clarified that the Member would clarify the quantum of tax withheld from each person traded through him and shall furnish statement to the concerned Director General, RTO, for the verification of claim of the taxpayer who traded the shares through him."

8.It will also be relevant to reproduce the provisions of sections 168, 170 and 233(A)(1)(a), (b) and (c), which read as under:--

Section 168. Credit for tax collected or deducted.---(1) For the purposes of this Ordinance -

(a)The amount of any tax deducted from a payment under Division III of this Part or Chapter XII shall be treated as income derived by the person to whom the payment was made; and

(b)The amount of any tax collected under Division II of this Part or Chapter XII or deducted under Division II of this Part or Chapter XII shall be treated as tax paid by the person from whom the tax was collected or deducted.

(2)Subject to subsections (3) and (4), where an amount of tax has been collected from a person under Division II of this Part or Chapter XII or deducted from a payment made to a person under Division III of this Part or Chapter XII, the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted.

(3)No tax credit shall be allowed for any tax collected or deducted that is a final tax under--

(a)subsection (7) of section 148;

(b)subsection (3) of section 151;

(c)subsection (IB) and (IBB) of section 152;

(d)subsection (3) of section 153;

(e)subsection (4) of section 154;

(f)subsection (3) of section 156;

(g)subsection (2) of section 156A;

(h)subsection (3) of section 233; and

(i)----

(j)subsection (3) of section 234A.

(4)A tax credit allowed under this section shall be applied in accordance with subsection (3) of section 4.

(5)A tax credit or part of a tax credit allowed under this section for a tax year that is not able to be credited under subsection (3) of section 4 for the year shall be refunded to the taxpayer in accordance with section 170.

(6)Notwithstanding anything contained in any other law or any rules for the time being in force, no amount shall be deducted on account of service charges from the tax withheld or collected by any person under the provisions of this Ordinance.

(7)In case any amount is deducted on account of service charge, by the person, the said person will be liable to pay the said amount to the Federal Government and all the provisions of this Ordinance shall apply in so far as they apply to the recovery of tax.

Section 170. Refunds.---(1) A tax payer who has paid tax in excess of the amount which the taxpayer is properly chargeable under this Ordinance may apply to the Commissioner for a refund of the excess.

(1A) Where any advance or loan, to which sub-clause (e) of clause (19) of section 2 applies, is repaid by a taxpayer, he shall be entitled to a refund of the tax, paid by him as a result of such advance or loan having been treated as dividend under the aforesaid provision.

(2)An application or a refund under subsection (1) shall be--

(a) made in the prescribed form;

(b) verified in the prescribed manner; and

(c) made within two years of the later of

(i) the date on which the Commissioner has issued the assessment order to the taxpayer for the tax year to which the refund application relates; or

(ii) the date on which the tax was paid.

(3) Where the Commissioner is satisfied that tax has been overpaid, the Commissioner shall --

(a) apply the excess in reduction of any other tax due from the tax payer under this Ordinance;

(b) apply the balance of the excess, if any, in reduction of any outstanding liability of the taxpayer to pay other taxes: and

(c) refund the remainder, if any, to the taxpayer.

(4)The Commissioner shall, within sixty days of the receipt of a refund application under subsection (1), serve on the person applying for the refund an order in writing of the decision providing the taxpayer an opportunity of being heard.

(5)A person aggrieved by -

(a) an order passed under subsection (4); or

(b) the failure of the Commissioner to pass an order under subsection (4) within the time specified in that subsection.

May prefer an appeal under Part III of this Chapter.

Section 233A. Collection of tax by a stock exchange registered in Pakistan.---(1) A stock exchange registered in Pakistan shall collect advance tax, --

(a) At the rates specified in Division IIA of Part IV of First Schedule from its Members on purchase of shares in lieu of tax on the commission earned by such Members, and

(b) At the rates specified in Division IIA Part IV of First Schedule from its Members on sale of shares in lieu of tax on the commission earned by such Members.

(e) From its Members in respect of trading shares by the Members at the rates specified in Division IIA of Part IV of first Schedule.

9.From perusal of hereinabove provisions of the Income Tax Ordinance, 2001 it is clear that the amount of any tax collected or deducted is to be treated as tax paid by the person from whom or on whose behalf such tax was collected or deducted and the person, who is chargeable to tax in respect of such income can be allowed a tax credit or adjustment for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted. Similarly, from perusal of provisions of section 170 of the Income Tax Ordinance, 2001 it is clear that a tax payer who has paid tax in excess of the amount which the tax payer is properly chargeable under this Ordinance may apply to the Commissioner for the refund of excess.

10.In the instant case, admittedly, the amount of tax collected/ withheld relating to the customer/client of the applicant is the liability of such taxpayer and not the liability of the applicant, whereas, the mere fact that the amount of tax has been collected or withheld by the Stock Exchange on the entire transaction made by the applicant company will not in any manner change the scope of liability or chargeability of tax. The concern or the learned counsel for the applicant that as per some purported agreement between applicant and its customers, the applicant is required to make payment of such refund of tax to its customer/client, is not convincing for the reason that the Income Tax Ordinance, 2001 being special law and a separate piece of legislation, caters to the chargeability of income and collection of tax liability of a taxpayer, therefore, any such agreement or accounting procedure, if any, adopted by the applicant company, cannot circumvent the legal course as provided under the Income Tax Ordinance, 2001. Moreover, nothing has been brought on record to support such assertion by the learned counsel for the applicant in this regard.

11.In view of hereinabove facts and circumstances of the case, we do not find any error in the impugned order passed by the Authorities below as well as the order of the Appellate Tribunal which depicts the correct legal position, whereas, the circular issued by the Board in this regard also does not stiffer from any illegality, though it may not have binding effect in quasi-judicial proceedings or upon this Court while deciding a legal question.

12.Accordingly, the question proposed hereinabove is answered in negative, against the applicant and in favour of the respondents.

13.Before parting with this order, we may place our appreciation on record for the assistance readily provided by Mr. Abid H. Shaban, Advocate on the subject controversy.

MH/M-135/Sindh Reference dismissed.