1. Taxpayers, in the tax years 2010, 2011 & 2012, derived income from execution of construction contracts and other civil engineering projects. Head offices of taxpayers were at Lahore, however, the civil construction work was executed in affected areas of Khyber Pakhtunkhwa, FATA and PATA. The controversy, leading to the legal proposition under consideration, hinges upon interpretation of Clause (126F), which was introduced in Part I of Second Schedule of the Income Tax Ordinance, 2001 (“the Ordinance”) through Finance Act, 2010. It provided exemption for three years (from tax year 2010) to those taxpayers who were located in the affected areas of Khyber Pakhtunkhwa, FATA and PATA.
2. Taxpayers revised their returns/statements to get benefit of exemption provided under this Clause, however learned counsels for the taxpayers have not denied that they were covered by the provisions of Section 153(1)(c) of the Ordinance, therefore, fell under Final Tax Regime (“FTR”).
3. Notices under Section 122 of the Ordinance were issued, inter alia, for reason that the taxpayers were not entitled to concession under this Clause for being taxed under FTR. In Taxation Officer’s opinion, provisions of the Clause contained the words “profits and gains”, therefore, the concession was meant only for Normal Tax Regime (“NTR”).
4. In PTR Nos. 69, 70 & 71 of 2014 seven questions are framed, out of which following questions, which directly relate to the controversy, are pressed for our opinion:
“iii. Whether the explanatory letter of FBR vide C.No.4(4)ITP/2010 dated 07.06.2013 can be applied retrospectively.
v. Whether the learned Tribunal justified to declare that no refund is admissible on contract receipts when the appellant was not chargeable to tax in respect of those receipts being covered under Clause (126F).
vii. Whether, in view of exemption certificate issued by Commissioner, the Additional Commissioner was empowered to undo the effect of exemption certificate issued to the appellant.”
In PTR Nos. 364, 365 & 366 of 2013, out of seven questions framed, following questions, which directly related to the controversy, are pressed for our opinion:
“1. Whether under the facts and circumstances of the case the learned ATIR was justified to delete minimum tax liability u/s 113 on the ground that charging of minimum tax liability was not confronted to the taxpayer, whereas, payment/s of tax u/s 113 was the statutory obligation of taxpayer? Furthermore findings on Section 113 are duly dilated upon?
2. Whether, the learned ATIR was justified to endorsed the order of CIR (Appeals) that the provisions of clause (126F) of Part 1 of Second Schedule also grant exemption from tax on contractual receipts under Section 153 (1) (c) of the Income Tax Ordinance, 2001 which otherwise fall under final tax regime and were not exempted by the statute in expressed manner?
In ITR Nos. 477 to 482 of 2015, following question is relevant to the proposition under consideration:
“(i) Whether the contractual receipts of a contractor would fall under clause 126F who according to law is liable to be assessed under FTR/PTR and its receipts are taxable under clause (C) of subsection (1) of section 153 of the Income Tax Ordinance, 2001 subject to tax 6% as full and final tax?
5. Mr. Muhammad Yasir Pirzada, Additional Commissioner Inland Revenue, Lahore, assisted by learned counsel for the department, has argued the cases, with permission of the Court. He has read Section 18(1)(a) of the Ordinance, to submit that “profits and gains” of any business are taxable as business income under normal law; whereas under Section 169(2)(a), the income falling under FTR shall not chargeable to tax under any head of income in computing the taxable income of the person. Further submits that Appellate Tribunal, while holding that taxpayer was entitled to exemption under Clause (126F), has not given reasons. Also submits that even minimum tax under Section 113 is not paid, if at all, it is accepted without considering that applicant was entitled to the exemption.
6. Mr. Muhammad Iqbal Hashmi, Advocate appearing for respondents taxpayers has raised preliminary objection that six appeals were decided through impugned order dated 27.08.2013, whereas department has filed only three applications. He explains that cross appeals were filed against order of Commissioner Appeals; taxpayer had challenged levy of minimum tax on the ground that it was not levied in the order under Section 122(5A), therefore, Commissioner Appeals could not have levied it. The department in PTR No. 364, 365 & 366 of 2013 has challenged Commissioner Appeals’ Order for allowing exemption under Clause (126F). Mr. Ibrar Ahmad, Advocate for the applicants department confronted with the situation, submits that though the impugned order as a whole is challenged, yet the emphasis is on the findings of Appellate Tribunal regarding exemption under Clause (126F). Since, learned counsel for the applicants department in PTR Nos. 364, 365 & 366 of 2013 has failed to establish that findings of Appellate Tribunal on levy of minimum tax under Section 113 is challenged, therefore, we decline to exercise our jurisdiction to the extent of Question No. (1) regarding levy of minimum tax in PTR Nos. 364, 365 & 366 of 2013.
7. Replying to the arguments on remaining questions of law, Mr. Muhammad Iqbal Hashmi, Advocate submits that under proviso to Clause (126F), manufacturers and suppliers of Cement, Sugar, Beverages and Cigarettes are excluded specifically from purview of the Clause. He explains that some of the sectors mentioned in the proviso are covered under FTR. He concludes that such exclusion is made regarding the income covered under FTR. Placing reliance on Dr. Muhammad Anwar Kurd and 2 others v. The State through Regional Accountability Bureau, Quetta (2011 SCMR 1560) he submits; though business sector of the taxpayers, in this case, mentioned in the proviso, however, it encompasses their case on the analogy of being under FTR. He also submits that “profits and gains” are covered under FTR and has placed reliance on a judgment by Division Bench of this Court in Messrs Rashid & Co. v. Commissioner of Income Tax, Zone-A, Lahore (2005 PTD 1790), Dr. Muhammad Anwar Kurd and 2 others v. The State through Regional Accountability Bureau, Quetta (2011 SCMR 1560). Explains that income under Presumptive Tax Regime (“PTR”) is also “profit and gains”. For this, he has placed reliance on Messrs Rashid & Co., v. Commissioner of Income Tax, Zone-A, Lahore and others (2005 PTD 1790).
Further information regarding Presumptive Tax Regime and entitlement of exemption under Section 126F of Income Tax Ordinance can be solicited from AUJ LAWYERS. Feel free to contact us in case you need any clarification and/or require legal assistance regarding similar matters.