APPELLATE TRIBUNAL INLAND REVENUE, SPECIAL SINGLE BENCH, ISLAMABAD
ITA No.1739/IB/2018
(Tax
Year, 2015)
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M/s Matrix Chemical Industries (Pvt) Limited; Office
No.502, Green Trust Tower, Jinnah Avenue, Islamabad. NTN: 3606694 |
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Appellant |
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Vs |
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Commissioner Inland Revenue, Corporate Zone, CTO,
Islamabad. |
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Respondent |
Appellant By: None.
Respondent BY: None.
Date of Hearing: 06.11.2025
Date of Order: 06.11.2025
ORDER
M. M. AKRAM (Judicial Member):
The
titled appeal has been preferred by the appellant–taxpayer, challenging the
appellate Order-in-Appeal No. 44/2018 dated August 27, 2018, passed by the
learned Commissioner Inland Revenue (Appeals-II) [“CIR(A)”], Corporate
Tax Office (CTO), Islamabad, under section 129 of the Income Tax Ordinance,
2001 (“the Ordinance”), pertaining to the Tax Year 2015. The appeal has
been instituted on the grounds set forth in the memorandum of appeal.
2. The brief facts leading to the present appeal are that the
Assessing Officer observed that the appellant company had declared taxable
income exceeding Rs. 500,000, and was therefore liable to pay Workers Welfare
Fund (WWF) at the rate of 2% of its total income in accordance with section 4
of the Workers Welfare Fund Ordinance, 1971 (“the WWF Ordinance”). As the
taxpayer failed to deposit the said amount, a notice was issued requiring
payment of the WWF at the prescribed rate. After considering the reply submitted
by the taxpayer, the Assessing Officer proceeded to charge WWF as tax payable
and passed an order under section 4 of the WWF Ordinance, 1971.
3. Aggrieved by the aforesaid order, the taxpayer preferred an
appeal before the learned CIR(A), CTO Islamabad. After due consideration of the
record and the arguments advanced, the learned CIR(A) upheld the action of the
Assessing Officer, holding that the taxpayer had failed to establish that
section 65D of the Income Tax Ordinance, 2001, provided an exemption from the
levy of WWF.
4. Being dissatisfied with the decision of the learned CIR(A), the
taxpayer has now filed the present appeal before this Tribunal.
5. The case was fixed for hearing on November 6, 2025; however,
none appeared on behalf of either party despite due service of notice.
Accordingly, the matter has been taken up and decided on merits based on the
material available on record.
6. I have carefully examined the record and the submissions made
by the appellant in the grounds of appeal. The appellant taxpayer has assailed
the orders passed by the Assistant Commissioner Inland Revenue and the learned
CIR(A) on several grounds. It has been contended that the issuance of the show
cause notice and the subsequent order for recovery of WWF were without lawful
authority, mala fide, and beyond jurisdiction. The appellant has maintained
that its income was exempt under section 65D of the Income Tax Ordinance, 2001,
and therefore it was not liable to pay WWF. Reliance has been placed on the
judgment of the Hon’ble Peshawar High Court reported as (2000) TAX 61 (HC
Peshawar), wherein it was held that WWF is not leviable in cases where
income is not assessable under the law. It has further been argued that despite
being apprised of relevant judicial pronouncements confirming that WWF is not
chargeable on exempt income, the Assistant Commissioner disregarded these legal
positions and issued a second notice dated April 13, 2018, erroneously treating
the appellant’s income as taxable with a 100% tax credit rather than exempt.
The appellant has also contended that the impugned order under section 4 of the
WWF Ordinance, 1971, was passed without proper consideration of its reply dated
April 18, 2018, and without affording an opportunity of personal hearing,
thereby violating the principles of natural justice and due process of law.
7. Issue
for Adjudication
The
primary issue requiring determination in the present appeal is:
Whether the appellant, whose income qualifies
for a 100% tax credit under Section 65D of the Income Tax Ordinance, 2001, is
liable to contribute to the Workers’ Welfare Fund (WWF) under the Workers’
Welfare Fund Ordinance, 1971.
Section
4 of the WWF Ordinance, 1971, mandates that every industrial establishment
shall pay to the Fund an amount equivalent to two percent of its total income
as assessed under the Income Tax Ordinance, 2001, for the relevant year. The
expression “total income”
is defined in Section 10 of the Income Tax Ordinance, 2001, to include both taxable and exempt income. Hence, the
chargeability to WWF is determined by the income assessed under the Income Tax Ordinance,
rather than by the amount of income tax actually payable. The decisive criterion for WWF
liability is, therefore, the assessment of income, not the payment of tax.
8. Section
65D grants a 100%
tax credit to companies establishing new industrial
undertakings in Pakistan, subject to fulfillment of prescribed conditions. This
credit is equivalent to the entire amount of tax payable, including minimum
tax, for a period of five years. Accordingly, while the income of such
undertakings remains chargeable
to tax under the Ordinance, the tax liability is effectively
reduced to nil through the mechanism of tax credit. This provision does not
render the income exempt from
tax; rather, it merely neutralizes the tax payable after
assessment.
9. There is a marked distinction between Exempt Income and Income Eligible for
Tax Credit. The appellant’s contention
that its income, being subject to a 100% tax credit under Section 65D, should
be treated as exempt
and thereby excluded from the ambit of WWF, is misconceived. There exists a
well-settled and judicially recognized distinction between exempt income and income eligible for tax credit.
Exempt income is not chargeable to tax under the Ordinance and is excluded ab initio from computation
of taxable income. Conversely, income qualifying for a tax credit remains
chargeable to tax, is duly assessed under the Ordinance, and only at a later
stage is the payable tax amount reduced or nullified through credit adjustment.
This principle has been conclusively affirmed by the Hon’ble Supreme Court of
Pakistan in H.M.
Extraction Ghee & Oil Industries (Pvt.) Ltd. v. Federal Board of Revenue (2019 SCMR 1081).
The Court elaborated, relying on Whitney
v. Inland Revenue Commissioners (1926), that the process of
taxation comprises three stages:
1.
Leviable
– declaration of liability;
2.
Payable
– assessment of the amount due; and
3.
Recoverable
– collection of tax.
An exemption operates between
the leviable and payable stages, preventing tax from ever becoming payable, whereas
a tax credit
operates between the payable and recoverable stages, after tax has been
assessed. Thus, while both mechanisms may result in zero effective tax payment,
they differ conceptually and legally: exemption affects chargeability and
assessment, while tax credit impacts payment or recovery only. The Supreme
Court therefore upheld that exemptions and tax credits are distinct in
principle and cannot be treated as interchangeable.
10. The
Hon’ble Supreme Court, in Workers’ Welfare Funds, M/o Human Resources
Development, Islamabad, through Secretary and others v. East Pakistan Chrome
Tannery (Pvt.) Ltd. through G.M. (Finance), Lahore, and others (PLD 2017 SC 28),
held that contributions made under the WWF Ordinance, 1971, do not constitute a
tax. The Court observed that Section 4(7) of the WWF Ordinance expressly treats
payments made by industrial establishments to the Fund as expenditures for purposes
of income tax assessment, implying that WWF contributions cannot be regarded as
a tax. This interpretation is reinforced by Section 60A of the Income Tax
Ordinance, 2001, which allows a deductible
allowance for WWF payments, deductible from total income rather
than from tax payable. Hence, WWF liability arises independently of the quantum
of tax payable and is based on income assessed under the Income Tax Ordinance,
2001. The levy is not contingent upon tax payment but upon the existence of
assessable income.
11. Applying these settled principles, it is
evident that the income of the appellant, though eligible for 100% tax credit
under Section 65D, remains chargeable to tax under the Income Tax Ordinance,
2001. The tax credit merely nullifies the recoverable amount of tax and does
not affect the assessability or chargeability of income. Accordingly, the
appellant’s claim of exemption from WWF liability is untenable. Reliance placed
by the appellant on the judgment of the Peshawar High Court reported as 2000 TAX 61 is
misplaced, as that decision pertains to instances where the income was not assessable under law. The
present case is distinguishable in that the income is assessable but benefits
from a post-assessment credit.
12. Without
prejudice to the foregoing, the contention that WWF should be levied solely on taxable income, excluding
exempt income, is also not tenable for the following reasons:
(i) Section 4(1) of the WWF Ordinance, 1971
This provision requires every
industrial establishment with a total income of at least five
lakh rupees to contribute two percent of its total
income to the Fund. The term “total
income” has been defined in Section 2(i) of the WWF Ordinance to
have the same meaning as assigned under the Income Tax Ordinance. Although the
definition was amended through the Finance Acts of 2006 and 2008, the Hon’ble
Supreme Court in PLD
2017 SC 28 declared those amendments ultra vires, restoring the
original definition as it existed prior to such substitution.
(ii) Definition of Total Income under the Income
Tax Ordinance, 2001
Section 10 defines total income to include:
i.
income under all heads
(salary, business, property, etc.); and
ii.
income exempt from tax under any
provision of the Ordinance.
Thus, “total income” expressly includes both taxable and exempt income.
(iii) Section 4(4) of the WWF Ordinance, 1971
This subsection authorizes
the Taxation Officer to determine WWF liability based on assessed income, which, by
reference to subsection (1), clearly denotes total
income.
(iv) Legislative Intent and Scheme
The
legislative scheme demonstrates that:
i.
The WWF Ordinance does not
exclude exempt income from the computation of total income.
ii.
The broad inclusion of all
income sources aligns with the welfare-oriented purpose of the Fund, designed
to generate contributions on a wide income base.
(v) Absence of Exclusionary Provision
There exists no provision
within the WWF Ordinance expressly excluding exempt income from total income
computation. In the absence of such exclusion, the plain and inclusive
definition of “total income” must prevail.
13. In light of the foregoing analysis, it is
held that:
i.
The appellant’s income,
though eligible for a 100% tax credit under Section 65D of the Income Tax
Ordinance, 2001, remains chargeable to tax thereunder.
ii. The
levy of WWF under Section 4 of the WWF Ordinance, 1971, is attracted on the total income as assessed under the
Income Tax Ordinance, irrespective of the quantum of tax payable.
iii. The
availability of a 100% tax credit does not confer exemption from WWF liability.
iv.
For purposes of WWF
computation, total income
encompasses all income, including income exempt from tax under the Income Tax
Ordinance.
Accordingly,
the appellant is legally liable to contribute to the Workers’ Welfare Fund in
accordance with the law. Resultantly, the appeal filed by the appellant stands
dismissed.
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-SD- (M. M.
AKRAM) JUDICIAL
MEMBER |
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