1. Dr. Sohail Ahmed Fazlani Date: 17-04-2012
Assistant Commissioner-IR
Monitoring & Audit Cell-02
Zone-II, R.T.O.
Karachi
SUB: MONITORING OF WITHHOLDING TAXES FOR THE TAX YEAR 2011-
EXPLANATION REGARDING.
Dear Sir,
Please refer to your letter No. ACIR/MAC-02/ZONE-II/RTO/2011-12/856 dated 13-04-2012, we
are submitting our replies in response to your queries raised through the above referred letter.
1) OBSERVATION OF THE OFFICER INLAND REVENUE
Salary expenses debited (Note 27) of Audited Financial Statement Rs. 122,307,734/-
(Figure differs with audited accounts)
Less: Amount subjected to withholding tax u/s. 149 of I.T.Ord.2001. Rs. 11,994,480/-
Residual amount not subjected to withholding of tax. Rs. 110,313,254/-
Please assign reasons for such default of non-deduction of withholding tax u/s.149 of the Income
Tax Ord. 2001 duly supported with cogent documentary evidence.
OUR RESPONSE TO THE OBSERVATION
A. The breakup of the areawise wages as per Note No. 27.1 of the audited accounts for the year
ended June 30, 2011 is as under:
DETAIL KARACHI LAKHRA METING HYDERABAD KHUSHAB PD KHAN TOTAL
………………………………………………………. (Rs.) …………………………………………………………………………
i. MINE INITIAL EXPENSES
Shaft Incline Exp. 3,343,509.90 89,938.10 3,433,448
Progressive 227,000 227,000
Development
TOTAL 3,343,509.90 89,938.08 227,000 3,660,448
ii. WATER CHARGES
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2. Water Charges 9,280 1,600,093 22,700 11,685 235,836.92 1,879,594.92
Water Charges 162,447.50 162,447.50
Katha
Water Charges 486,227.58 486,227.58
Kalyal
TOTAL 9,280 1,600,093 22,700 11,685 883,311.60 2,528,270
iii. MINE CONTROLLER
Mine Sardar 1,539,445 129,400 688,433 115,980 2,473,258
Chowkidar Salary 2,073,268 118,000 183,677 20,250 2,395,195
Time Keeper 455,400 326,367 781,767
Weighmen Salary 1,200 1,200
TOTAL 4,068,112.98 247,400 183,677 1,016,000 136,230 5,651,420
iv. WAGES COAL CUTTING
Wages Coal Cutter 26,636,814.18 148,842 18 7,348,746 119,275.50 34,253,695.68
Mate Commission 4,668,831.95 18,540 596,500 12,857.50 5,296,729.45
Summer Seam 925,656,87 4,238,682 5,164,338.87
TOTAL 32,231,302,92 167,382 18 12,183,928 132,133 44,714,764
v. WAGES DRIVAGE & CROSS CUTTING
Wages Drivage 9,355,696 172,520 6,876,326 142,825 16,547,367
Debris Charges 1,639,947 1,639,947
TOTAL 9,355,695.82 172,520 8,516,273 142,825 18,187,314
vi. MINE LIGHTING
Wages Safety Lamp 301,380 301,380
Over Time 75,564 457,749 51,050 64,995 387,572 1,036,930
TOTAL 75,564 457,749 51,050 64,995 688,951 1,338,310
vii. BONUS & EXGRATIA
Bouns 586,973 7,454,964 11,860 110,996 746,858 50,759 8,962,410
Gtatuity 227,125 1,410,950 4,200 231,901 29,250 1,903,426
TOTAL 814,098 8,865,913.51 11,860 115,196 978,759 80,009 10,865,836
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3. GRAND TOTAL 898,942 58,996,721.0 762,850.10 375,571 24,495,423 491,197 86,946,362
3
(i to vii)
B. The breakup of the areawise wages as per Note No. 27.2 of the audited accounts for the year
ended June 30, 2011 is as under:
DETAIL KARACHI LAKHRA METING HYDERABAD KHUSHAB PD KHAN TOTAL
………………………………………………………. (Rs.) …………………………………………………………………………
i. WAGES, SALARIES & TRANSPORTATION CHARGES
Coal Transportation 927,255 66,580 993,835
Loss Of Live Stock
Salaries For 685,432 15,642 65,356 435,670 1,202,100
Transportation
TOTAL 685,432 15,642 65,356 1,362,925 66,580 2,195,935
ii. WAGES FOR TRANSPORTATION
Wages Repair & 159,446.69 1,586,686 1,746,132.69
Maint. Vehicle
Wages Rope Way 231,121 231,121
Wages Power 350,670 350,670
House
Wages Haulage 2,245,419.70 13,100 1,251,169 3,509,688.70
Wages Repair & 305,858 11,672 839,533.61 441,109 1,598,172.61
Maint.
Wages 4,249,184 3,200 4,252,384
TOTAL 2,710,724.09 24,772 8,508,363.61 444,309 11,688,169
iii. STORE CONSUMED
Store Consumed 1,432,405.8 7,272,992 198,192.23 418,924 3,475,850.32 224,405 13,022,769.43
Vehicle 8
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4. Store Consumed
Rope Way
Store Consumed 98,802.05 98,802.05
Power House
Store Consumed 24,827 55,739.18 80,566.18
Work Shop
Store Consumed 2,306,910.95 80,946.92 3,291,159.06 5,679,016.93
Haulage
Store Consumed 166,292 3,581.70 298,722.71 3,996 472,592.41
Misc.
TOTAL 1,432,405.8 9,771,021.95 282,720.85 418,924 7,220,273.03 228,401 19,353,747
8
GRAND TOTAL 1,432,405.8 13,167,178.3 323,134.85 484,280 17,091,561.93 739,290 33,237,851
8 4
(i to iii)
C. The breakup of the area wise expenses of wages as per Note No. 27.3 of the audited accounts
for the year ended June 30, 2011 is as under:
DETAIL KARACHI LAKHRA METING HYDERABAD KHUSHAB PD KHAN TOTAL
………………………………………………………. (Rs.) …………………………………………………………………………
i. WAGES REPAIR & MAINTENANCE
Wages Repair & 244,026 2,573,139.10 40,564 6,378,355.17 9,236,084.27
Maint. R & M
Wages Repair & 5,113,976.13 30,720 3,778,912 248,664 9,172,272.13
Maint. Mine
Wages Repair & 111,124 288,593 41,157 440,874
Maint. Building
Wages Repair & 10,410 10,410
Maint. Roads
Wages Repair & 1,287,445.60 1,200 682,473 1,971,118.60
Maint. Misc.
TOTAL 244,026 9,096,094.83 31,920 40,564 11,128,333.17 289,821 20,830,759
ii. STORE CONSUMED
Air Compressor 29,607.76 29,607.76
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5. Air Compressor Oil
Air Compressor 11,550 11,550
Khb
Store Consumed 401,095.62 401,095.62
Lighting & Building
Store Consumed 109,355 25,683.17 54,037.45 35,467 224,542.62
Building
Store Consumed 643,750 643,750
Roads
TOTAL 109,355 55,290.93 1,110,433.07 35,467 1,310,546
GRAND TOTAL 353,381 9,151,385.7 31,920 40,564 12,238,766.24 325,288 22,141,305
6
(i to ii)
D. The breakup of the salaries, house rent allowance, provident fund, EOBI, medical allowance,
staff welfare, compensation, bonus, gratuity as per Note No. 28.1of the audited accounts for the
year ended June 30, 2011 is as under:
SALARIES AND OTHER BENEFITS
Amount (Rs.)
Salaries 14,830,092
House Rent 2,348,986
Allowance
Other Allowances 3,456,625
Provident Fund 1,489,297
E.O.B.I 2,109,074
Medical Allowance 1,410,172
Staff Welfare 3,354,624
Compensation 387,364
Gratuity
TOTAL 29,386,234
EXPLANATORY NOTES
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6. Our Company is engaged in business of extraction of coal from LAKHRA (SINDH), METING
(SINDH), KHUSHAB (PUNJAB) AND P.D.KHAN (PUNJAB). Coal mining operations are
purely based on manual work. We have 550 workers in Lakhra Mines, 290 workers in Khushab
Mines, 17 workers in Meting Mines and 20 workers at P.D Khan Mines.
To extract the coal these workers include coal cutters, katcha workers, mine repair &
maintenance workers, mine sardars, chowkidar, haulage drivers etc. Payments to these workers
are made from time to time, which remains below taxable limit in each case, as far as their
monthly and annual wages are concerned. Therefore, being below taxable limit, no withholding
tax is deducted from their payments, because section 149 combined with clause 1A of First
Schedule of Income Tax Ordinance, 2001 mentions that no withholding tax will be deducted if
the taxable income on account of salaries or wages does not exceed Rs. 300,000 per annum.
As the coal is extracted from mines with the help of manual labor, therefore, the main proportion
of the overall expenditure comprises of wages payments in the form of coal cutting wages of coal
cutters, wages katcha work, wages of repair and maintenance of mines, wages of repair and
maintenance of roads and building, salaries of staff relating to mines, wages of vehicles staff and
workshop etc. Normally 65% to 70% of the total expenses of any coal extraction area, comprises
of wages of labor, whose annual wages do not exceed taxable limit and therefore, there is no
question of any withholding tax u/s.149.
All the payments on account of wages made to the workers are supported by salary registers and
wages sheets signed by them. Complete detail of wages paid to coal cutters, daily wage rate
workers, katcha workers of Lakhra and Khushab areas are available in our coal mining areas.
CNIC No’s of workers whether monthly rated, daily rated or piece work employed are also
available in our record. The no. of workers, employees working in the coal mining areas are
around eight hundred seventy seven.
Further it may be noted that:
- Medical allowance as per clause (139) of Second Schedule of the Income Tax Ordinance,
2001 is exempt from payment of withholding tax. Therefore, no withholding tax was
deducted from payment of medical allowance to the employees.
- No withholding tax was deducted from payment of gratuity to the employees in accordance
with sub clause iv of clause 13 of Second Schedule, which states that no withholding tax to
be deducted on the payment of gratuity which is 50% of the amount receivable or
Rs.75,000 whichever is less.
- Staff welfare / Compensation expenses of workers and contribution to recognized
Provident Fund and EOBI also do not come within the deduction of withholding tax from
these payments.
- Bonus and House rent allowance was included in the salary while deducting withholding
tax from the employees.
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7. i. Directors’ remuneration amounting to Rs.5,974,838 was subjected to withholding tax duly
deducted from the payment of salaries to working directors and deposited as per income tax
challans attached herewith.
ii. The bonus amounting to Rs.8,962,410 paid to workers does not fall within the preview of
deduction of withholding tax because the payment of wages including bonus per individual
worker remained below taxable limit of Rs.300, 000.
iii. The gratuity amounting to Rs.1,903,426 was paid to workers. No withholding tax was
deducted from these payments because payment to each worker was within the exemption
limit under clause (13) sub clause (iv) of Part-I of the Second Schedule to the Income Tax
Ordinance, 2001.
iv. Accordingly, a sum of Rs.1,545,475 was deducted as withholding tax from the payments of
salaries of Rs.11,994,480 to the employees. The remaining amount of salaries was below
taxable limit i.e. Rs. 300,000/- per annum per employee and therefore, no withholding tax
u/s.149 was required to be made.
v. Salaries of all the Senior and Junior employees of all six areas are verifiable from the salary
register, salary sheets, accounts books etc and wherever withholding tax u/s.149 was
applicable, has not only been deducted but has also been deposited as per the challans /
evidences submitted and also disclosed in the annual statement filed u/s.165 / 149 of Income
Tax Ordinance, 2001.
vi. As for as salaries and other benefits under Note No. 27.1 are concerned, an amount of
Rs.1,545,475 was deducted as withholding tax from salaries payments of Rs.11,994,480.
Whereas withholding tax was not deducted from the remaining payments of salaries due to
being below able taxable limit of Rs.300,000. Withholding Tax was deducted from all those
senior and junior employees who came in the ambit of deduction of withholding tax on
account of payment of salaries and other benefits.
It may be noted that company has already filed with you all the relevant annual statements of
withholding tax, inter-alia including salary; commission; rent; supplies; contracts; services, etc.
alongwith evidences of tax deduction and deposit into Government account. Further, as desired,
even audited financial statements for year ended 30.06.2011 corresponding to Tax Year 2011
have been filed with you.
From audited financial statements, you have picked up figures of various heads of expenses
under profit and loss account, on which 100% en-block withholding tax is required by you.
You have not considered whether withholding tax provisions are attracted or not in certain cases
and/or exemption of recipients and/or payments within the threshold of exemption limit of
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8. withholding tax on payments to individual parties, salaries / wages, other expenses etc., and has
thrown full burden of reconciliation of same on the company.
It may be noted that such burden on the company for reconciling each and every head of profit
and loss account to prove, on which amount withholding tax was deductible and accordingly,
deducted and the balance amount was not attracting provisions of withholding tax, is
extraordinary burden which otherwise can be verifiable from books of accounts / ledgers and
vouchers produced.
The learned Appellate Tribunal has in number of cases held that the collection of tax is basically
function of the Revenue Officer and not that of deducting authorities who have been made
responsible to deduct tax as Government agents under the law and therefore, revenue officer
must proceed very judicially before penalizing the assessee.
In yet another case, ITAT has observed that the provisions of S.50 read with S.52 and other
related sections such as S.139, S.140 and S.142 of Income Tax Ordinance, 1979 are harsh and
extraordinary burden on taxpayers, who are providing services without a charge. As such
invoking S.52 by treating assessee-in-default seems more an effort of making immediate
recovery than to create a legal and just charge is not justified as a routine order.
2) OBSERVATION OF THE OFFICER INLAND REVENUE
Following “Administrative Expenses” enumerated in Note 28 of the financial statements, were
liable to deduction of withholding tax. A tentative picture of rate applicable and deductible
amount for each head of expenditure is depicted as under:
Sr. Description of Expenses Amount Claimed Tentative Rate Tentative Amount
No. Applicable of Tax Deductible
1 Travelling & Conveyance 2,018,391 6% 121,103
2 Repair & Maintenance 22,439,869 6% 1,346,392
(Figure differs with audited accounts)
3 Stationery/ Office Supplies 526,264 3.5% 18,419
4 Advertisement 63,900 6% 3,834
5 Professional Charges 1,110,400 6% 66,624
6 Others. 5,030,892 6% 301,853
(Figure differs with audited accounts)
7 Rent/Rates/Taxes 1,180,300 As per Sch. 80,030
8 Mark-up Interest. 898,760 6% 53,926
9 Profit On Debts. 537,486 6% 32,249
10 Other Expenses 33,249,236 6% 1,994,954
8

9. (Figure differs with audited accounts)
Total 4,019,384
Sr. Description Initial Allowances and Addition Rate Taxable Amount
No. Amortization (Purchases Assets)
1 Building (all types) 1,719,621 3.5% 60,187
2 Motor Vehicle 235,000 3.5% 8,225
3 Machinery and plant ( not otherwise 246,257 3.5% 8,619
specified)
4 Computer hardware including printer 163,300 3.5% 5,715
and allied items.
Total 82,746
You are advised to justify for short deduction of tax together with complete details of payments
and amount of tax deduction under each head of expenditure separately duly substantiated with
copy of paid challans/ CPR in original.
OUR RESPONSE TO THE OBSERVATION
A. TIMBER & GENERAL STORES
Areawise timber consumed in the coal mines during the year ended June 30, 2011 is as under:
Amount (Rs.)
Lakhra 8,995,054
Meting 210,117
Khushab 4,225,785
P D Khan 64,349
TOTAL 13,495,305
Timber is purchased from forest department and growers of the timber whose income is basically
exempt from income tax because timber is a agricultural produce and its income is exempt from
income tax. Therefore, no withholding tax was deducted from payments to the timber growers.
We refer SRO 586 (1) 91 dated 30/06/1991 (Serial No. V). According to this circular, no
withholding tax should be deduced while making payments to those who produce timber.
B. GENERAL STORE CONSUMED
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10. The areawise consumption of the stores consumed, parts consumed and machinery accessories
and tools consumed etc. in our mines of various areas are as under.
Amount (Rs.)
Lakhra 4,867,493
Meting 84,186
Khushab 1,702,576
TOTAL 6,654,255
Taxpayer Company is engaged in operation of coal extraction in Lakhra, Meting, Khushab and
Pind Dadan Khan. Where stores are consumed in abundance in the mines, haulage engines
installed at the mouth of the mines, rail lines, roads, buildings, vehicles, wire ropes, diesel
generators, mining lamps, mining machinery etc. As the coal mines are located in the far off hilly
area, therefore, wear and tear, oil and lubrication, breakage, depreciation of mining machinery
and coal transportation is on very high side as regards expenses.
It may be noted that the above stores consumed includes 60% to 70% diesel / oil purchased for
vehicles and for generators, because in coal mining business of extraction of coals, in absence of
electricity connection, full time generators are used where diesel is an essential requirement.
Similarly, for transportation of coal, diesel is used in vehicles and no tax deduction is to be made
from payments of petroleum products, including diesel and oil, as they are exempt from
withholding tax.
Further, withholding tax was duly deducted and deposited from those suppliers who supplied
goods of value above Rs. 25,000/- per annum. No withholding tax was deducted from those
parties who supplied goods below Rs. 25,000/- per annum, as per SRO 586(1)/91 dated 30-06-
1991 and SRO 826(1) / 91 dated 24-08-1991 (clause xii).
The imported goods supplied in same condition by M/s Cummins Sales and Services Pakistan
and M/s Cables and Conductors did not come under withholding tax because they imported the
items on which tax has already been paid by them at source u/s.148 and therefore, they are
exempt from second time withholding tax u/s.153.
Withholding tax of Rs.549,473/- was deducted from payment aggregating to Rs. 8,036,013/- on
account of purchases of goods under this head, the remaining amount did not attract withholding
tax because each party as it remained below taxable limit. The amount on which withholding tax
was not deducted belongs to those suppliers/shopkeepers from whom items of store are
purchased on day to day basis in cash in very small amounts. The number of these suppliers
/shopkeepers is in hundreds, supported by their bills, cash memos, invoices etc.
C. FREIGHT & CARRIAGE
The areawise payments of the freight & carriage are as under:
Amount (Rs.)
Karachi 5,420
10

11. Lakhra 877,866
Meting 112,023
Hyderabad 492
Khushab 440,008
P D Khan 16,440
TOTAL 1,452,249
Section 153(1) (b) mentions that withholding tax @ 2% (transportation services) will be
deducted from each party. However, if total services per annum of each individual party is below
Rs. 10,000/- per annum, then no deduction is required. Further, it may be noted that Freight and
carriage expenses of all areas comprises of very small amount say Rs.2,000/-, Rs.5,000 and Rs.
6,000 etc.
However, withholding tax was duly deducted from all those payments following in the taxable
limit for purpose of withholding tax. We are enclosing challans of withholding tax during the
year ended June 30, 2011.
D. REPAIR & MAINTENANCE
The areawise expenditures of repair & maintenance of office equipments and furniture are as
under:
Amount (Rs.)
Lahore 61,020
Lakhra 9,400
Hyderabad 2,850
Khushab 22,922
TOTAL 96,192
These expenses were incurred on the repair & maintenance of office equipments and office
furniture. Those expenditures are incurred on day to day basis in small amounts. No withholding
tax was deducted from the payments of bills of repair & maintenance which individually and
separately do not cross the taxable limit of Rs.10,000 per annum.
E. LEGAL & PROFESSIONAL AND AUDIT FEE
i. A sum of Rs.65,000 was paid to auditors of the company M/S Daudally Lalani & Co. for
conducting the audit of our company for the year ended June 30, 2011. Withholding tax of
6% on payment made to them was deducted and deposited into the Govt. treasury. Photocopy
of the payment receipt is enclosed herewith.
11

12. ii. An amount of Rs.933,000 was paid to the legal consul of the company viz ABS & Company
Advocates, Akram Associates and Qazi Mohammad Aslam Advocate, Khushab for
contesting the legal cases of the company. We deducted withholding tax of 6% on payment
made to them was deducted and deposited into the Govt. treasury. The payments receipts of
withholding tax are being enclosed with this letter.
An amount of Rs.33,900 was paid on account of purchasing legal documents and court
expenses in small amounts. So, withholding tax was not deducted on these amounts due to
being small amounts.
iii. A sum of Rs.52,000 was paid to legal consultant of the Company Chaudhary Umar Hayat,
Advocate for contesting he legal cases of the company. We duly deducted withholding tax at
the rate of 6% on payments which was deposited into Govt. treasury.
iv. We paid a sum of Rs.21,500 as professional fee in the account of the Excise & Taxation
Office, Govt. of Sindh. This amount was Govt. levy. No withholding tax was deducted on
this amount because payment of Govt. dues does not attract provisions of withholding tax.
v. We paid an amount of Rs.45,000 to M/S Akber G Merchant & Co. Chartered Accountants as
income tax consultancy fee. Withholding tax of 6% on payment made to them was deducted
and deposited into the Govt. A/c.
vi. Our company deducted withholding tax from all payments of legal and professional charges
which were above taxable limit of Rs.10,000 per individual per annum. So withholding tax
was duly deducted in the light of SRO 586 (1) 91 dated 30/06/1991 and SRO 826 (1) 91
dated 24/08/1991 (clause XII).
We are producing herewith extract of books of accounts comprising of all the cash books,
ledgers, salary registers, original vouchers / evidences and wages sheets / register, etc. for your
verification in support of our all above contentions and then return to us.
We hope that above explanation will suffice your purpose of monitoring of withholding tax and
in case, you desire any further document / evidence / explanation, please let us know.
NOTE:
Our company has paid Rs.39,950,434 (Rs.35,352,530: 30/06/2010) to Govt. Exchequer in the
form of Sales Tax and Central Excise Duty. This payment can be verified from the audited
accounts for the year ended June 30, 2011 and FBR Web Portal.
Thanking you.
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13. Yours faithfully
MOHAMMAD AZAM
CHIEF ACCOUTANT
MOHAMAD AMIN BROS. (PVT) LTD.
ATTACHMENTS
1. Annual Statement of Deduction of Income Tax from Salary under Rule 44(1).
2. Annual Statement of Collection or Deduction of Income Tax under Section 165 (2).
3. Copies of exemption certificates issued during the year ended 30/06/2011.
4. Photocopies of withholding tax challans deducted from those deriving salaries / wages
above the taxable limit for the year ended 30/06/2011.
13

14. 5. Photocopies of tax challans deducted from supplies, services, commission, rent paid for
the year ended 30/06/2011 are enclosed.
6. Wages / salaries payment sheets of our main coal extraction areas viz Lakhra and
Khushab for the months of December 2010 and June 2011 are enclosed to support our
above mentioned replies.
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