KARACHI: A number of Income Tax Reference Applications and constitutional petitions filed by Dr. Zafar Sajjad against Commissioner Inland Revenue Zone-I Regional Tax Office-III Karachi impunging show cause notices issued to them.
The controversy pertains to the definition of term “salary” and that whether other emoluments including clinical supplements and incentives received by the Applicant from their employer are “salary” as defined in Section 12 of the Income Tax Ordinance 2001 and whether the tax payer is entitled to any rebate.
The ITRA was been filed in terms of section 133 of the Income Tax Ordinance, 2001, (“Ordinance”) against a common order dated 05.11.2018 passed by the Appellate Tribunal Inland Revenue, Karachi, whereby, various Appeals of the tax-payers as well as the department have been decided for tax years 2010 and 2011.
The Counsel for the Applicants submitted that the Applicants are permanent employees of Agha Khan University Hospital (“AKUH”) pursuant to independent employment contracts and work as a Faculty Members in various departments; that the remuneration of the Applicants is outlined in the salary package which includes salary, clinical supplement and clinical incentive; that the Applicants are not permitted to undertake any non-institutional private practice; that they being full time employees are not permitted to be engaged in any employment, business or services with another organizations or to have any financial/business interest with any other organization or entity even on a part-time or temporary basis; that they perform their assignment as teachers and professors at the AKUH and are also required to attend and work for the Consultation Clinics
It was further contended that they are paid fixed salary along with clinical incentive and supplement which is though variable; but is paid on a monthly basis as agreed upon and at the end of the year, is either adjusted or paid in excess depending upon the total receipts earned thereof, but at all times such remuneration remains salary within the contemplation of section 12 of the Income Tax Ordinance 2001; that clause (1) sub clause (2) of Part III of the 2nd Schedule to the Ordinance, provides rebate or reduction of tax on the amount of salary so earned
The counsel stated that the respondents issued Show Cause Notices and amended the assessments orders by treating the clinical supplement and incentive as not being salary but other income and disallowed the rebate; that though in one tax year the Commissioner Appeals had decided the issue of clinical incentive partly in favour of the Applicants, but the Tribunal through the impugned, has overturned the same;
The counsel argued that the Tribunal has erred in law and has not appreciated the provisions of the Ordinance as reliance has been placed on dictionary meaning of employee, whereas, it has been defined in Section 2 (20) of the Ordinance and that the Tribunal has completely ignored the provision of section 121 ibid which provides an exhaustive definition of salary; 1 12. Salary.—(1) Any salary received by an employee in a tax year, other than salary that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Salary”. (2) Salary means any amount received by an employee from any employment, whether of a revenue or capital nature, including — (a) any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave, overtime payment, bonus, commission, fees, gratuity or work condition supplements (such as for unpleasant or dangerous working conditions) (b) any perquisite, whether convertible to money or not; (c) the amount of any allowance provided by an employer to an employee including a cost of living, subsistence, rent, utilities, education, entertainment or travel allowance, but shall not include any allowance solely expended in the performance of the employee’s duties of employment; (d) the amount of any expenditure incurred by an employee that is paid or reimbursed by the employer, other than expenditure incurred on behalf of the employer in the performance of the employee’s duties of employment; (e) the amount of any profits in lieu of, or in addition to, salary or wages, including any amount received — (i) as consideration for a person’s agreement to enter into an employment relationship; (ii) as consideration for an employee’s agreement to any conditions of employment or any changes to the employee’s conditions of employment; (iii) on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments; (iv) from a provident or other fund, to the extent to which the amount is not a repayment of contributions made by the employee to the fund in respect of which the employee was not entitled to a deduction; and (v) as consideration for an employee’s agreement to a restrictive covenant in respect of any past, present or prospective employment; (f) any pension or annuity, or any supplement to a pension or annuity; and (g) any amount chargeable to tax as “Salary”under section 14. (3) Where an employer agrees to pay the tax chargeable on an employee’s salary, the amount of the employee’s income chargeable under the head “Salary” shall be grossed up by the amount of tax payable by the employer. (4) No deduction shall be allowed for any expenditure incurred by an employee in deriving amounts chargeable to tax under the head “Salary”. (5) For the purposes of this Ordinance, an amount or perquisite shall be treated as received by an employee from any employment regardless of whether the amount or perquisite is paid or provided — (a) by the employee’s employer, an associate of the employer, or by a third party under an arrangement with the employer or an associate of the employer; (b) by a past employer or a prospective employer; or (c) to the employee or to an associate of the employee or to a third party under an agreement with the employee or an associate of the employee (6) ………… (7)………. (8)………. ITRA 276 of 2018 and other connected matters
The Counsel for the department submitting arguments read out the impugned Order as well as Show Cause Notice and submits that the entire income of the Applicants does not fall under salary; but is income from professional services/business; hence not entitled for rebate or reduction in terms of Clause (1) sub clause (2) of Part III of the 2nd Schedule to the Ordinance as claimed; that section 18 (b) of the Ordinance defines this Income and is to be taxed separately and independently; that section 11 of the Ordinance provides different heads of Income and the component of Income in question has to be dealt with separately and not under salary as a whole; that the proviso inserted in 2019 would not apply retrospectively; hence question be answered against the Applicants.
The court observe that the learned Tribunal instead of dilating upon and giving its own interpretation to section 12 of the Ordinance in respect of the question framed by it, engaged itself into unnecessary and irrelevant observations which are not germane to the core issue in these matters.
“ After having agreed on the facts of the case it was only left to decide that whether clinical supplement income and clinical incentive income would fall in “Salary” as defined in s.12 ibid or not. And for that it was only required to see that the Applicants were engaged in any other employment; or had any other source of income; or were engaged in any private practice. All these have already been addressed and answered in favor of the Applicants. The only issue then is that whether the income earned by the Applicants by way of performing their job in respect of consultation and other related matters, exclusively with AKUH could be termed as salary or and income on their own from rendering professional services. Once it has come on record that the Applicants are neither permitted nor are engaged in any other private practice, then the answer to this question was not that difficult. Nonetheless, on perusal of the record and without any specific finding to the contrary, according to us, the consultation which they are required to conduct within AKUH is not their independent practice as wrongly assessed by the forums below. It is within the control and administration of their employer; as neither the Applicants incur any expenditure; nor anybody is taken into employment by them for providing such services; nor do they pay any rent to AKUH for using any of the facilities required for performing this job. It is also not the case of the department that the fee charged to the patients is received by them directly in their names and is then shared with AKUH. In fact it is vice versa. And this sharing is not earned by them as independent professional service providers as they have surrendered and placed their professional expertise at the disposal of AKUH. They may have their own credibility which every professional including a doctor has; but at the same time for the present purposes, merely for the fact that this income is not certain and is paid in a manner which is not quantified until the entire year has passed, cannot be said to be an income which is other ITRA 276 of 2018 and other connected matters Page 9 of 22 than salary as defined in s.12 of the Ordinance. It has come on record that the entire operations of the Hospital is managed by AKUH, whereas, the amount of charges and fees is also fixed by them. The Applicants are only entitled for a portion of it which forms part of their salary, and is paid to them as an incentive for extending their professional expertise. It is nothing but salary; may be in un-quantified manner on a monthly basis. But for that the law is clear, it includes various types of such payments, like commission, fee and bonus payments to the employees under the head of salary. It appears that since rebate is admissible to the Applicants in respect of taxation to this kind of salary, the department has gone to this extent, whereby it has acted against the very definition of salary provided under the Ordinance. Merely for the reason that these two heads of income are variable and not fixed; it could not be treated as income from professional services. No doubt the Applicants are professionals; but for the present purpose, they are under exclusive employment and it is not in dispute, that whatever they earn is from their employment and is paid to them as a package in the form of salary. It seems that this incentive being variable has not been treated as salary by the authorities below, including the Tribunal, merely for this reason. This in our considered view was an incorrect approach and the authorities below including the Tribunal have seriously erred as the definition of salary does not require that it shall always be fixed in nature. It covers a host of different payments made to the employees including bonus, fees, commission etc etc. and mostly are not necessarily fixed; rather are variable. It also has nexus with the performance of the employee as it is paid either at the end of a particular period; or mostly at the end of the year. Merely for this reason that since this is variable in nature, it could not ipso-facto be treated as an income other than salary. The law does not support this stance of the department; howsoever, attractive it may be to increase burden of tax on the assessee. 11. Insofar as the judgment of learned Division Bench of this Court in the case of Dr. A. Razzak Kazi (Supra) is concerned, the same was premised on an entirely different set of facts. In fact, as we read it, it is in favour of the Applicants. In that case the exemption was available to income other than salary and the department was insisting that it was a salary. It was an agreement between the doctor and the company to the effect that fee would be paid to him for his services; that he will render service for treating the employees of the company free of charge; that he will employ people to assist on his own which may include doctors, assistants, technicians etc; that he will be responsible for their salaries; that no relationship of employee and ITRA 276 of 2018 and other connected matters Page 10 of 22 employer would exist between the doctor and the Company. These are very crucial facts which are lacking in the present case; hence, the ratio of this judgment has to be understood and applied keeping in mind these basic divergent facts. Despite this, as noted earlier, this judgment in fact supports this opinion of ours and the case of the Applicants. It has been held as under; The question whether remuneration paid to person engaged to perform work is a salary or income from profession, vocation or business depends upon the facts of the case and the terms of employment. There is a thin line of distinction which can be visibly drawn by scanning the contract. Such difficulty arises in cases of professionals like lawyers, chartered accountants, doctors, engineers, artists, directors of a company and other categories of persons who lend their intellect, specialised knowledge and expertise. Where assessee’s employment is temporary and incidental to or dependent on profession without any intention to he engaged permanently and further that he is free to lend his services to others as well the income so accrued will not fail under the head salary. When a person joins service and surrenders his profession or `exchanges it for service’ thereby permitting the employer to control the manner in which he must work, the remuneration paid to him will be classified as salary. But where there is some doubt in determining such control then if the work performed by the assessee is an integral part of the business or vocation of the employer the relationship of master and servant will be created. 12. Application of the aforesaid ratio decides the issue in hand in favor of the Applicants. In the present case, it has not been disputed; rather admitted that the employment of the Applicants is under the control of the employer; whereas, in our considered view the Tribunal has seriously erred in holding that the element of control and supervision is missing between the University and the Applicants while conducting professional clinical services in hospital. This has come from nowhere; nor is supported by the record. The Tribunal has perhaps come to this conclusion pursuant to the variable nature of the said income of the Applicants which we are of the view is not only misconceived; but is based on a wrong presumption of law. We do not understand as to how the Tribunal has come to the conclusion that employer and employee relationship is absent when it has come on record that the Applicants are employees for a specific purpose pursuant to a contract and cannot engage in any other practice/business or service; nor hold consultation outside AKUH. 13. In somewhat identical facts in the Indian jurisdiction in the case of Dr. Mrs. Usha Verma (Supra) the learned Punjab and Haryana High Court has been pleased to hold that fee in the like manner is to be treated as salary within the mischief of section 17(1) (iv) of the Income Tax Act, 1962 which is almost similar to our section 12 of the Ordinance. The short question was does the share of fees from paying clinic paid to the assessees fall within the mischief of Section 17(1)(iv) of the Act? It has been held as under; ITRA 276 of 2018 and other connected matters Page 11 of 22 Admittedly, the assessees were serving in the Government Medical College. By virtue of their employment with the Government, they were permitted to work in the paying clinics run in the college. Those who chose to work were given a share in the fees. The permission to work in the paying clinic, the rate of fees, the share therein was given by the Government. This share as paid by the Government to its employees would fall within the expression “fees paid in addition to the salary”. The doctors got this share by virtue of their being employed in the hospital. They used the facility and infrastructure provided by the employer. Their share of fees was determined by the employer. Thus, it is in addition to their salary for the services permitted to be rendered by the employer. It would fall within the mischief of Section 17(1)(iv) of the Act.20. Mr. Amrit Paul contended that the payment is not made by the employer but by the patients. Thus, it should be treated as income from profession and not as a part of the salary. The contention is wholly misconceived. In one sense everyone draws salary out of the money paid by the citizen either in the form of tax or in some other form. However, in the present case, the share of fees is given to the doctors in accordance with the terms laid down by the employer. In the circumstances of the case, it cannot be treated as income from profession. ………These paying clinics were run by the employer. The doctors were paid their share of the fees in accordance with the conditions laid down by the employer. These fees form a part of the salary as contemplated under Section 15 of the Act. 14. A learned division Bench of this Court in the case of Commissioner of Income Tax9 has dilated upon section 12 of the Ordinance and has been pleased to observe that it provides and extended and widest possible meaning. The Honorable Supreme Court in the case of Malik Muhammad Inam10 has held that even an amount received in lieu of termination would cover under s.16 of the repealed Income Tax Ordinance, 1979. 15. Lastly as to maintainability of connected petitions we are satisfied that the petitions are maintainable in the circumstances of the present case. As correctly contended by learned Counsel for the petitioners, the impugned show cause notices for tax years 2010, 2011, 2013 & 2014 are based squarely on the same issue which is now before us by way of ITRA against the Tribunal’s order and the Department obviously would be bound to follow this order in respect of that petitioner’s other tax years, and in the case of other petitioners similarly placed. Resort to statutory remedies below the Tribunal level would therefore be a mere formality. Furthermore, the Tribunal’s order is itself before this Court in Income Tax References. In these circumstances, the petitions cannot, and ought not, to be dismissed as not maintainable11 . 16. Finally, it appears that pending these proceedings before us, and after passing of the impugned order by the Tribunal, through Finance Act, 2019, a proviso has been inserted in sub-clause (2) of clause (1) of Part-III of the Second Schedule to the Ordinance which now provides that this clause shall not apply to teachers of medical profession who derive income from private medical practice or who receive share of consideration received from patients. On a 9 Commissioner of Income Tax v I.B.M SEMEA (2011 PTD 2275) 10 Malik Muhammad Inam v Federation of Pakistan (2006 SCMR 1670) 11 Engro Vopak Terminal Ltd vs. Pakistan (2012 PTD 130) ITRA 276 of 2018 and other connected matters Page 12 of 22 plain reading, it clearly shows that now the intention of the legislature is that from 2019 onwards such income of the Applicants has been excluded from the purview of admissible rebate; and further shows that the earlier it was not excluded. If it had not been admissible earlier, there would have been no need for inserting this proviso for exclusion of this particular income. The legislative intent by not giving retrospective effect to this proviso shows that what was not excluded earlier has now been excluded; however, with effect from Finance Act, 2019. A legislature is deemed to be aware of the previous state of the law and if knowing this it makes a change when repealing it and re-enacting some of its provisions the intention is clearly to effect a change”, the court said in its detailed judgment.
Parting with the judgment, the appellate bench held that “ The proviso therefore, (though not under consideration for the present purposes), clearly shows by the intent of the legislature itself that even otherwise, the benefit / rebate was admissible at least prior to Finance Act, 2019”.
In view of hereinabove facts and circumstances of the case, it appears that the authorities below have failed to appreciate the correct proposition of law and the Ordinance to conclude that the two heads of income as above do not fall within the definition of salary in terms of Section 12 of the Ordinance. Accordingly, the question is answered in the affirmative; in favour of the Applicants and against the respondents. All these Reference Applications are allowed, and as consequence thereof, the Petitions are also allowed to such extent. The notices impugned or pertinent constituents thereof are hereby quashed / set-aside, the order said.