ZAHID SIKANDAR (MEMBER).---The titled appeal pertaining to tax year 2017 has been filed by the department against order No.01 dated 04.03.2019 passed by Commissioner Inland Revenue (Appeals-II), Lahore whereby the learned CIR(A) deleted the tax liability of Rs.1,973,470/-created under section 161 by the OIR.

1. Brief facts are that the taxpayer, a private limited company engaged in the business of Tanning and Processing of Leather, is a withholding agent and is liable to deduct and deposit withholding tax under the withholding provisions of Income Tax Ordinance, 2001 and submit statements of tax deduction under section 165. In order to verify compliance level, notice under rule 44(4) was issued to the taxpayer for reconciliation of the payments. Being dissatisfied with the details, the OIR issued show-cause notice under section 161(1A) dated 23.06.2018 to the taxpayer which eventually culminated into order-in-original dated i.e. 30.11.2018. Nondeduction under various heads were confronted but after examining reply/evidence the OIR created tax liability to the extent of following heads in the following manner:

1. Being aggrieved, the taxpayer filed appeal before the CIR(A). The learned commissioner (Appeals) vide order 04.03.2019 deleted the impugned tax demand in toto. Hence, the department has filed this second appeal before the tribunal assailing the deletion of charge of tax.
2. Arguments of the learned representatives of rival parties are heard and orders perused.
3. The relevant excerpt of the Commissioner Appeals order is as follows:

"I have gone through the argument of the Learned AR as reproduced above and have carefully considered the case law and the guidance of FBR produced for ready reference and convenience. The company has filed its return under section 115(4) of Income Tax Ordinance, 2001 being an exporter and keeping in view Circular No. 20 of 1992 dated 01.07.1992 and Circular No. 05 of 2000 dated 06.03.2000. The export sales consist of direct exports and indirect exports made to local parties as input which further processes them and are to be considered exports. No deduction of tax is required on such direct and indirect exports, as per legal provisions.
Firstly, I am fully convinced with the interpretation of learned AR that as per the guidance issued by FBR the person receiving supply should be registered on or before June 30, 2011, which is the case of appellant company. Hence I have no hesitation in any mind to confirm that rate of 1% for tax deduction was applicable to the company, in case even a deduction was required to be made under the Ordinance. Therefore, charging of higher rate on the part of assessing officer is uncalled for and is legally not maintainable.
Secondly, the chart as reproduced before me shows that the company has made complete tax deduction on the local sales and there is no default in deduction of tax. The details as reproduced to me during course of hearing fully confirm that complete deduction wherever applicable was made by the company, hence the total demand of Rs. 1,973,470, as raised, being illegal is ordered to be deleted.
Thirdly, section 161(1B) or the Ordinance is very clear on the subject, if the person from whom purchases has been made is a registered NTN holder, no principle liability can be recovered from the said person for non-deduction of tax, only surcharge can be recovered in view of section 161(IB) of the Ordinance, which is very clear on this subject matter.
Lastly, it was mandatory on the part of assessing officer to identify specific default on the part of specific tax payer which the assessing officer failed to identify/prove and unjustly taxed various heads of expenses, based on her own assumptions and presumptions which are not allowable under law. The demand of Rs.1,973,470/-, therefore, merits decision on this point as well."
Firstly, the CIR(A) held that as per clause 45A of Part IV of Second Schedule of Income Tax Ordinance, 2001, 1% of tax deduction was applicable to the company under all heads even a deduction was required to be made. We do not subscribe to such interpretation as the said clause relates to sales/supply but payments under various heads had no nexus with the sales and supplies of the taxpayer. For ready reference, the said clause is reproduced as under:
Clause 45A of Part IV of Second Schedule.
[(45A) The rate of deduction of withholding tax under clauses (a) and (b) of subsection (1) of section 153 shall be one per cent on local sales, supplies and services provided or rendered to the taxpayers falling in the following categories namely:‑

1. textile and articles thereof;
2. carpets;
3. leather and articles thereof including artificial leather footwear;
4. surgical goods; and
5. sports goods;

Explanation.---For removal of doubt, it is clarified that the relief of reduced rate for withholding tax under clauses (a) and (b) of subsection (1) of section 153 is available only to the local sales, supplies and services made by the taxpayers of categories specified at serial Nos. (i) to (v) of this clause]
[Provided that the rate of deduction of withholding tax under clauses (a) and (b) of subsection (1) of section 153 shall be 0.5% on local sales, supplies and services made by traders of yarn to the above mentioned categories of taxpayers.

1. The above clause clearly provides that benefit of rate of 1% of deduction of withholding tax shall be on local sales, supplies and services provided to the sectors mentioned therein. Whereas the CIR(A) brought all payments of the taxpayer under the umbrella of this clause. Not to forget this is an exemption provision and is to be construed strictly in favour of the department. Had there been intention of legislature to give benefit of such reduced rate in all payments, the words 'local sales', 'supplies', and 'services' would not have been specifically mentioned in the said clause. Even otherwise, if two interpretations are possible, one going in favour of the department is to be adopted.
2. The interpretation of an exemption clause has been the subject of matter of various decision given by the apex courts. In fiscal statutes it is by now a settled preposition that exemption clause is to be strictly construed. The Hon ble Supreme Court of Pakistan in a case titled as Collector of Customs v. M/s. Fitter Pakistan (Pvt.) Ltd. reported in 2020 SCMR 1157 elaborated the construction of exemption clause and observed that the assesse/taxpayer must bring his case within the terms of the exemption, which were to be strictly construed because the exemption operated as an exception from the general rule regarding the burden of taxes. Exemptions were an exception to the general liability imposed by a tax, therefore when an exemption provision was susceptible to two interpretations, the one going against the taxpayer was preferred.
3. The full bench of this tribunal in a case reported in 2012 PTD 713 has also elucidated the principles of interpretation of exemption clause and has held that the provisions granting exemption or privileges had to be construed strictly against the person claiming the exemption or the privilege. The relevant extract of the judgment is given below:

"Provisions granting exemptions or privileges have to be construed strictly (1993 PTD 306) against the person claiming the exemption or the privilege. It is for him to show that he is entitled to the exemption. If the rules do not refer to an item of capital there can be no exemption with regard to it. (PLD 1966 SC 828). Where an exemption from taxation is claimed the words of exemption clause must be strictly construed in favour of the state. It is based on the theory that the obligation to pay tax is co-extensive with the protection received by the subject and in obtaining an exemption from taxation the particular subject is seeking relief from the obligation at the cost of other assesses but when the words of the notification in its plain reading entitles to the exemption specified therein, the court cannot go beyond the wordings of the clause to withhold that relief on the theory of equal obligation for equal protection (PLD 1966 Dacca 523) grants of tax exemption have to be narrowly construed against tax payer. (1998 PTD 3835) Law as prevailing in the assessment year would apply. If the language is doubtful, same should be resolved in favour of the taxpayer. All exemptions from taxation increase the burden of the other members of the community, they should be deprecated except to the extent permissible by the express language of the statute, provisions granting exemption or privileges have to be construed strictly and the onus in this connection lies on the assesse claiming exemption to establish his plea."

1. Further reliance in this regard is placed upon decisions given by the apex courts reported in 1992 SCMR 1652, PLD 1988 SC 370. Hence, ruling of CIR(A) giving blanket exemption of reduced rate of 1% on deduction of withholding tax against payments under all heads even beyond sales, supplies or services is not justified.
2. Secondly, some chart was statedly produced before the CIR(A) which made him satisfied with the complete tax deduction on the local sales and non-default on the part of the taxpayer. It is observed with utter surprise that not only a single detail of any sales, tax deduction/deposit etc is mentioned in the impugned order. Only by stating the fact that a chart has been produced the CIR(A) got satisfied. We are afraid that such kind of decision making is against the parameters set by the superior courts. The officer working in judicial or quasi-judicial capacity is required to decide the cases through speaking order by mentioning/analyzing all details of the evidence produced and then decide the matter to his satisfaction. In the instant case, apparently a self-made chart was produced by the taxpayer and the relief was awarded. No proof of tax deductions/deposit or figures of payments or anything is mentioned in the impugned order. Such vague and generalized decision cannot be endorsed.
3. Next reasoning given by the CIR(A) to delete the tax liability is that section 161(1B) of the ITO is very clear that if the person from whom purchases have been made is a registered NTN holder, no principle liability can be recovered from the said person for non-deduction of tax and only surcharge can be recovered under section 161(1B). We wonder how even provision of section 161(13) has any nexus with the present preposition. This section provides that where at the time of recovery of tax under subsection (1) of Section 161 it is established that the tax was to be deducted from the payment made to the person or collected from a person has meanwhile been paid by that person, no recovery shall be made from the person who failed to collect or deduct the tax but the said person shall be liable to pay default surcharge from the date he failed to collect or deduct the tax. Neither the taxpayer ever claimed that tax was paid by the person from whom it was liable to be deducted nor any proof of payment has been placed on record. When confronted, the learned AR submitted that if the taxpayer did not collect or deduct tax then the department should have collected from the person it was liable to be deducted. Submission is highly misconceived and absurd. It is the duty of the taxpayer being withholding agent to deduct and deposit withholding tax and section 161(1B) is only applicable if the withholding agent does not deduct/deposit tax but subsequently the person from whom tax was to be deducted paid and deposited the same in the government exchequer. Certainly, this is not the case in hand. The observation given by the CIR(A) in this regard has absolutely no relevance here.
4. Lastly, it was held that the OIR should identify the specific default on the part of the taxpayer. After carefully examining the original order we find that nondeduction against payments under the heads of 'Purchases', 'Addition in Fixed Assets', 'Salaries/Wages', 'Salaries-Cost of Sales', 'Salaries-Administrative', 'Director's remuneration', 'Cost of sale', 'Administrative expenses', 'Forwarding and Commission', 'Packing expenses', 'Travelling Staff', 'Travelling Director', 'Vehicle running expenses', 'Stationary/Printing/Photocopies', 'Legal and Professional Charges', 'Auditors Remuneration', 'Other expenses', 'Default surcharge' was confronted. After examining the explanation/evidence, the OIR vacated the charge under many heads which shows that the explanation/evidence was properly thrashed out and where the non-deduction was established on the part of the taxpayer tax was charged.

Now we deal with the charge of tax issue wise as follows:
Purchases:

1. This head comprised of three sub-heads i.e Raw hides, Tanning material and Stores and Spares showing following state of affairs as declared by the taxpayer:

1. The reply of the taxpayer regarding tanning material and stores and spares was found partially correct as the tax was withheld at import stage and was exempt under SRO 97(I)/2000 dated 12.02.2000. Whereas tax non-deduction against payments on purchases of Rs.97,458,043/- under the head raw material was established hence the OIR charged tax @1% on the basis of clause 45A of Part IV of Second Schedule at Rs.974,580/-. It is the claim of the taxpayer that Raw Hides are purchased from open market on the basis of available suppliers and these BTL payments can be verified at client premises. We agree to some extent that BTL payments are part and parcel of any business and raw hides may be purchased either from open market or in bulk from some commercial entity. Rate was rightly charged under this head @1% under clause 45A of Part IV of Second Schedule. However, given the facts, without any record/proof, acceptance of claim of 100% BTL payments or purchases of raw hides from open markets is not justified. Hence, we uphold charge of tax on 50% of the purchases of Raw Hides @1% which would be Rs.487,290/-. Impugned first appellate order is set aside and the department's appeal on this issue is partially allowed.

Addition in Fixed Assets:

1. Addition in Fixed assets was made at Rs.4,954,137/-. Out of which an amount of Rs.2,801,607/- on account of purchase of motor vehicle paid to M/s. Atlas Honda was found exempt. However, remaining amount of Rs.2,152,530/- was contended to be payments below than Rs.25,000/- to each party. The claim of the taxpayer regarding exempt payment to M/s Atlas Honda was accepted but remaining amount was taxed @6.5%. The claim of the taxpayer regarding all remaining payments below than Rs.25,000/- to parties is without any substance and supportive documents. The OIR also rightly rejected the plea of the taxpayer regarding rate of tax @1% as payments under this head were made against capital expenditure and had no nexus with the sale/supply of the taxpayer. The CIR(A) without considering the facts and law deleted the tax which is not justified. Weak reasoning given by the CIR(A) to delete tax altogether has already been discussed in the preceding paras. First appellate order is set aside and the original order framed by the OIR under this head stands restored.

Salaries-Administrative:

1. During the adjudication at the original stage, after examining the details along with CPRs regarding deduction/deposit of tax, charge was vacated partially. However, where no tax deduction was made against payment of salaries, tax was charged @10% i.e Rs.512,989/. The CIR(A) deleted the amount altogether in the absence of any plausible reason and by giving vague opinion. However, considering the BTL salaries as part parcel of any business, we uphold 50% of the tax charged by the OIR i.e Rs.256,495/-. Impugned first appellate order is set aside and the original order framed by the OIR is modified.

Cost of Sale

1. As per taxpayer's claim, payments of Rs.1,186,142/- out of total payments under this head i.e Rs.6,245,486/- comprised of expenses related to local sales and are BTL in nature. Again, we uphold 50% of the tax charged considering the BTL expenses as part of business which would be Rs. 88,960/-. Order of CIR(A) is set aside and the original order is modified as stated above.

Packing Expenses:

1. Out of total expenses i.e Rs.2,851,572/- the taxpayer claimed payments of Rs.2,615,615/- as exempt and remaining amount of Rs.231,638/- as of BTL nature. In the absence of explanation or evidence with regards to exemption of the claim, the OIR charged tax on 19% of the total expenses related to local sales of Rs.541,799 @15% i.e Rs.81,270/-. We uphold 50% charge of tax on expenses of Rs. 541,799/- related to local sales which would be Rs.270,900/-. Impugned order is set aside and the original order is modified.

Vehicle Running Expenses:

1. Expenses of Rs.1,671,005/- claimed under this head were stated to be of BTL nature. The OIR, in the absence of any sort of evithrice, taxed on 19% of the claimed expenses of Rs.317,491/- related to local sales i.e Rs.47,624/-. No evidence is available at all in respect to expenses claimed. Impugned deletion by the CIR(A) is not justified and is hereby set aside. We uphold tax charged to the extent of 50% considering BTL expenses which would be Rs.23,812/-. The original order is modified.

Other Expenses:

1. An amount of Rs.3,171,848/- was stated to be incurred against other expenses and BTL payments. Nothing was offered in support hence the OIR charged tax on 19% of the expenses of Rs.602,651/- claimed related to local sales i.e Rs. 39,172/-. Deletion by CIR(A) without an / cogent reason was not justified. We uphold 50% of the tax charged under this head considering BTL payments as part of business which would be Rs.19,586/-.
2. With the above stated reasons and observations, this department's appeal is partly allowed in the above terms and manner. The first appellate order dated 04.03.2019 is set aside and original order dated 30.11.2018 stands modified.
3. We order accordingly.

(Trib) Appeal allowed.