IN THE HIGH COURT OF SINDH AT KARACHI

I.T.R.A. Nos.40, 41 & 42 of 2017

[ Commissioner Inland Revenue Zone-1 v. M/s. Wazir Ali Industries (Pvt) Ltd. ]

PRESENT:

Mr. Justice Arshad Hussain Khan

Mr. Justice Amjad Ali Sahito

*****

Applicant : Through M/s. Faheem Ali Memon and Mukesh

Kumar, Advocates.

Respondent : Through M/s. Atta Muhammad Qureshi and

Muhammad Ali Lakhani, Advocates.

Date of hearing : 12.10.2026

Date of order : 16.10.2026

JUDGMENT

ARSHAD HUSSAIN KHAN J; Through these Income Tax Reference Applications, filed under Section 133 of the Income Tax Ordinance, 2001 (the “Ordinance”), the Applicant has impugned the common order dated 31.08.2016 passed by the Appellate Tribunal Inland Revenue, Karachi Bench (the “Tribunal”), in ITA Nos. 252/KB, 253/KB and 254/KB of 2014, pertaining to Tax Years 2007, 2008 and 2010, respectively, whereby the appeals preferred by the Department were dismissed. ITRA No. 40 of 2017 pertains to Tax Year 2007, ITRA No. 41 of 2017 to Tax Year 2008, and ITRA No. 42 of 2017 to Tax Year 2010. Since all three Reference Applications arise out of the same order and involve identical questions of law, they are being decided through this common judgment.

2. Briefly stated, the Respondent-taxpayer is engaged in the business of manufacturing and selling vanaspati ghee and cooking oil. For the tax years under consideration, the Respondent filed its returns of income, which were treated as assessment orders under Section 120 of the Ordinance. Subsequently, the Assessing Officer, exercising powers under Section 122(5A) of the Ordinance, amended the assessments on the premise that the deemed assessment orders were erroneous insofar as prejudicial to the interest of revenue. Among other additions, the Assessing Officer disallowed expenditure recorded under the head “Sales Promotion Expenses” by invoking Section 21(c) of the Ordinance, on the ground that the Respondent had failed to deduct withholding tax under Section 156. According to the Department, the expenditure represented prizes or incentives offered to distributors for promotion of sales and was, therefore, subject to withholding tax under the said provision.

3. Aggrieved by the amended assessment orders, the Respondent preferred appeals before the Commissioner Inland Revenue (Appeals) [“CIR(A)”], who, through separate orders dated 01.01.2014, deleted the disallowances. The CIR(A) observed that the Assessing Officer had failed to establish that the disputed expenditure represented prizes or winnings within the meaning of Section 156. The Respondent's explanation was that the amounts constituted trade discounts allowed across the board to distributors, irrespective of the quantities purchased or achievement of predetermined sales targets. Copies of invoices were also produced in support of this explanation. The CIR(A), therefore, concluded that the mere classification of expenditure under the head “Sales Promotion Expenses” did not justify its treatment as prizes attracting withholding tax under Section 156.

4. The Department challenged the aforesaid orders before the Tribunal, which, through the common order impugned herein, dismissed the appeals and maintained the findings of the CIR(A). The Tribunal observed that the Department had failed to establish that any prize or incentive had been announced or awarded upon achievement of specified sales targets. It further noted that the discounts were allowed across the board to customers/distributors and that copies of invoices had been produced before the CIR(A) in support of the Respondent's explanation. The Tribunal consequently upheld the deletion of disallowances made under Section 21(c) on account of alleged non-deduction of withholding tax under Section 156. The Applicant has accordingly preferred the present References, proposing the following questions of law, which are identical in all three Applications:

(i) “Whether under the facts and circumstances of the case the learned Tribunal was justified to uphold the order of Commissioner (Appeals) deleting addition made under section 21(c) on default of section 156(2) in deviation from the principle upheld in the taxpayer's own case, reported as 2012 PTD 405?”

(ii) “Whether under the facts and circumstances of the case the learned Tribunal was justified to uphold the order of Commissioner (Appeals) deleting addition made under section 21(c) on default of section 156(2) on the basis of mere contention of the taxpayer before him that the amount represented the discount allowed to the taxpayer, without any supporting evidence being presented before him?”

(iii) “Whether under the facts and circumstances of the case the learned Tribunal was justified to uphold the order of Commissioner (Appeals) deleting addition made under section 21(c) on default of section 156(2) when the taxpayer had changed its stance before the Commissioner (Appeals) on the issue and was therefore not approaching the Court with clean hands?”

5. Learned counsel for the Applicant submitted that the controversy stands concluded against the Respondent by the judgment of this Court in the Respondent's own case, Messrs Wazir Ali Industries Ltd. v. Appellate Tribunal Inland Revenue, Karachi (2012 PTD 405), as well as by the recent order dated 24.09.2026 passed by this Court in M/s. Shell Pakistan Limited v. Commissioner Inland Revenue (ITRA Nos. 71 to 76 of 2015), wherein, according to learned counsel, the principle laid down in the former judgment was applied to rebates or trade discounts. He contended that the expression “prize” under Section 156 is not confined to winnings dependent upon chance but also encompasses incentives offered to distributors for promotion of sales. According to learned counsel, the CIR(A) and the Tribunal, being bound by the aforesaid judgment, erred in holding that the disputed amounts did not constitute prizes within the meaning of Section 156. He further argued that the Tribunal accepted the Respondent's characterization of the expenditure as trade discounts merely on the basis of its assertions, without requiring satisfactory supporting evidence or examining the true nature of the transactions. Learned counsel also pointed out that the Respondent had taken inconsistent positions regarding the nature of the expenditure, having initially described the amounts as sales incentives and subsequently claimed that they represented trade discounts reflected in the invoices. He, therefore, maintained that the impugned order was legally unsustainable and liable to be set aside.

6. Conversely, learned counsel for the Respondent supported the impugned order and submitted that it rests upon concurrent findings of fact recorded by the CIR(A) and the Tribunal, to the effect that the disputed amounts represented trade discounts allowed uniformly to customers/distributors, irrespective of achievement of any specified sales targets. He contended that the Department had failed to establish that any prize or reward had been offered or awarded within the meaning of Section 156, and that the burden of establishing a default under the said provision rested upon the Department. He maintained that, in the absence of misreading or non-reading of material evidence or perversity in the concurrent findings, no question of law arose warranting interference under Section 133 of the Ordinance. He further argued that a trade discount merely represents a reduction in the agreed sale price and does not constitute an actual payment by the seller to the purchaser so as to attract withholding tax. He also contended that Section 21(c) could not be extended to payments or expenditures not specifically enumerated therein. Distinguishing Wazir Ali Industries (2012 PTD 405), learned counsel submitted that the said case concerned free units awarded to distributors upon achievement of predetermined sales targets, whereas no such arrangement existed in the present cases. In support of his submissions, he relied upon Commissioner Inland Revenue, Lahore v. M/s. Coca Cola Pakistan Ltd. [(2026) 133 Tax 477], and prayed that the References be dismissed.

7. We have heard learned counsel for the parties and examined the impugned order, the relevant statutory provisions and the judicial precedents relied upon. The three questions proposed by the Applicant essentially concern the same controversy, namely, whether the Tribunal was legally justified in treating the disputed expenditure as trade discounts rather than promotional prizes and, on that basis, upholding the deletion of disallowances under Section 21(c). We, therefore, consider it appropriate to consolidate and reformulate the questions of law in the following terms:

Whether, on the facts and in the circumstances of the case, the learned Appellate Tribunal Inland Revenue was justified in holding that the expenditure claimed by the Respondent-taxpayer as trade discounts allowed to its distributors did not constitute prizes offered for promotion of sales within the meaning of Section 156 of the Income Tax Ordinance, 2001, and consequently in upholding the deletion of disallowances made under Section 21(c) of the Ordinance, particularly in view of the judgment of this Court reported as 2012 PTD 405?

8. The controversy primarily concerns the scope of Section 156 of the Ordinance, which deals with prizes and winnings, including prizes offered by companies for promotion of sales. The provision also contemplates prizes awarded otherwise than in cash and prescribes the manner in which tax is to be collected in such circumstances. It is significant that the statutory expression is “prize offered by companies for promotion of sales” and not “expenditure incurred for promotion of sales”. The distinction is material. While the latter expression may encompass a wide range of commercial expenditures intended to increase sales, the former requires the existence of a benefit possessing the legal character of a prize or reward. Consequently, the mere fact that an expenditure is incurred for promoting sales, or is recorded under that head in the taxpayer's accounts, does not, by itself, establish that it falls within Section 156. Equally, the description of a benefit as a trade discount cannot be conclusive where its actual nature and the circumstances in which it is granted disclose that it constitutes a promotional prize.

9. In this context, reference may be made to the judgment of a Division Bench of this Court in Messrs Wazir Ali Industries Ltd. v. Appellate Tribunal Inland Revenue, Karachi (2012 PTD 405), wherein the scope of Section 156 was examined in relation to free units supplied by the taxpayer to its distributors. In that case, the taxpayer had provided free units to distributors upon achievement of specified sales targets and contended that such benefits constituted trade discounts rather than prizes. This Court held that the expression “prize” was not necessarily confined to a reward obtained by chance but could also encompass a reward offered for achievement or performance. The Court particularly noted that the free units were not supplied as part of the original sale but were awarded upon achievement of predetermined sales targets. Such benefits were, therefore, held to constitute prizes offered for promotion of sales within the meaning of Section 156.

10. The principle emerging from Wazir Ali Industries (supra) is that the true nature of the benefit, rather than its nomenclature, determines whether it falls within Section 156. A reward granted to a distributor upon achievement of specified sales targets may constitute a promotional prize notwithstanding that it is described as a trade discount or is provided in the form of free goods rather than cash. The judgment does not, however, establish that every trade discount or commercial concession intended to encourage sales necessarily constitutes a prize. The material distinction lies between a reduction in the price payable under an ordinary sale transaction and a separate benefit awarded as a reward for performance or achievement. The existence of predetermined sales targets is a significant consideration in making that distinction, although the statutory concept of a prize is not necessarily confined to rewards dependent upon such targets.

11. In the present case, the Tribunal has recorded a materially different factual position. The Respondent maintained that the disputed amounts represented trade discounts allowed across the board to distributors, irrespective of quantities purchased or achievement of specified sales targets. The Tribunal noted that copies of invoices had been produced before the CIR(A) in support of this explanation and that the Department had failed to establish that any prize or incentive had been announced or awarded upon achievement of sales targets. It was upon consideration of these circumstances that the Tribunal affirmed the CIR(A)'s findings. The distinction from Wazir Ali Industries (supra), therefore, does not arise merely from the description of the expenditure as trade discounts, but from the finding that the benefits were not shown to constitute separate rewards or prizes of the kind considered in the earlier judgment.

12. We may now examine the Applicant's contention that the Tribunal accepted the Respondent's explanation without sufficient supporting evidence and overlooked the alleged change in its position. The impugned order does not support the assertion that the claim of trade discounts was accepted solely upon an unsupported statement of the Respondent. The Tribunal specifically recorded that copies of invoices had been produced before the CIR(A), who accepted the explanation that the amounts represented discounts allowed to distributors. It is true that the Tribunal did not undertake an elaborate examination of each invoice or reproduce the particulars of the transactions. Nevertheless, the mere absence of such detailed discussion would not, by itself, establish that its findings were based on no evidence. The relevant consideration is whether material existed to support the conclusion reached and whether the Department demonstrated that such material had been misread, ignored or incorrectly appreciated in a manner giving rise to a question of law. The production of some invoices, standing alone, may not conclusively establish the character of every disputed transaction; however, the Applicant has not identified any material demonstrating that the Tribunal's acceptance of the Respondent's explanation was contrary to the record or that the invoices relied upon were inconsistent with the findings recorded.

13. As regards the alleged change in the Respondent's position, it may be observed that the description of expenditure as “sales promotion” or “sales incentives” is not necessarily inconsistent with its subsequent explanation as trade discounts. A trade discount may itself be employed as a commercial means of promoting sales. What is material is whether the expenditure actually represented a reduction in the sale price or a separate reward possessing the characteristics of a promotional prize. The accounting description may be relevant evidence, but it cannot independently determine the legal character of the transaction. In the present case, the Tribunal accepted the Respondent's explanation regarding the nature of the discounts and found that the Department had failed to establish the existence of prizes attracting Section 156. The Applicant's objection concerning the alleged change in terminology, without demonstrating that the underlying transactions were materially different from those accepted by the Tribunal, does not furnish sufficient ground for interference.

14. Learned counsel for the Applicant has also placed reliance upon the order dated 24.09.2026 passed by this Court in M/s. Shell Pakistan Limited v. Commissioner Inland Revenue (ITRA Nos. 71 to 76 of 2015). A perusal of the relevant portion of the said order reveals that the Court found the controversy arising therein, both on facts and in law, to be squarely covered by the earlier judgment in Messrs Wazir Ali Industries Ltd. (2012 PTD 405). It was further observed that learned counsel for the Applicant-taxpayer in those proceedings had not disputed the applicability of the said judgment. Consequently, the Reference Applications filed by the taxpayer were dismissed, and the questions of law proposed therein were answered against the taxpayer and in favour of the Department. The order in Shell Pakistan Limited, therefore, proceeded upon the admitted applicability of the earlier precedent to the facts of that case. It did not independently lay down that every rebate or trade discount, irrespective of its nature and the circumstances in which it is granted, necessarily constitutes a prize within the meaning of Section 156 of the Ordinance. In the present cases, however, the Tribunal has recorded that the disputed amounts represented trade discounts allowed across the board to distributors, without reference to achievement of specified sales targets, and that the Department had failed to establish the existence of any promotional prize. These factual distinctions are material and have not been shown to suffer from any legal infirmity. Accordingly, the order in Shell Pakistan Limited, notwithstanding that it was decided in favour of the Department, does not, by itself, furnish sufficient ground for disturbing the impugned order.

15. Further guidance regarding the interpretation of withholding tax provisions is available from the judgment of the Supreme Court in Commissioner Inland Revenue, Lahore v. M/s. Coca Cola Pakistan Ltd. [(2026) 133 Tax 477]. In that case, the taxpayer had granted a rebate to its customer, McDonald's, in consideration of the exclusive sale of its products at the latter's outlets. The Department treated the rebate as consideration for advertising services and sought to invoke Section 153(1)(b), followed by disallowance under Section 21(c) on account of non-deduction of withholding tax. The Supreme Court rejected the Department's contention, holding that the rebate merely represented a reduction in the price payable by the customer and did not constitute an actual payment by the taxpayer to the customer for rendering services.

16. The Supreme Court further observed that statutory provisions requiring deduction or collection of advance tax, although not strictly charging provisions, are analogous to charging provisions when viewed from the perspective of the person obliged to deduct or collect tax, having regard to the serious consequences of non-compliance. Such provisions must, therefore, receive a strict and narrow construction. The Court emphasized that the expression “making a payment” in Section 153(1)(b) contemplated an actual payment moving from the person obliged to deduct tax to the recipient and that a notional payment could not be brought within the provision merely by recharacterizing a commercial discount or rebate. The Supreme Court accordingly refused leave to appeal.

17. It is, however, necessary to distinguish the statutory provision considered in Coca Cola Pakistan Limited (supra) from the provision involved in the present References. The Supreme Court was concerned with Section 153(1)(b), which contemplated payment for rendering services, whereas Section 156 expressly extends to prizes awarded otherwise than in cash. Consequently, the requirement of an actual payment under Section 153(1)(b) cannot be mechanically imported into Section 156 to exclude prizes awarded in kind. Nevertheless, the broader principle emerging from the Supreme Court's judgment, namely that withholding tax obligations must be determined by reference to the precise statutory language and the true nature of the transaction, remains relevant. A notional payment or an ordinary adjustment of the selling price cannot be brought within a withholding tax provision merely by assigning it a different description, unless the transaction satisfies the statutory conditions for its application.

18. When the principles emerging from the aforesaid judgments are considered together, it becomes apparent that Wazir Ali Industries (supra) and Coca Cola Pakistan Limited (supra) are not inconsistent. The former concerns rewards awarded in kind upon achievement of specified sales targets, whereas the latter concerns a commercial rebate representing a reduction in the price payable by the customer. Although the judgments interpret different withholding tax provisions, both emphasize the importance of determining the true legal character of the transaction. The decisive question in the present References is, therefore, not whether the disputed discounts were intended to promote sales, but whether they constituted prizes offered for promotion of sales within the meaning of Section 156.

19. Applying the foregoing principles, we find that the Tribunal did not proceed upon an erroneous interpretation of Section 156. Rather, it considered the nature of the disputed expenditure and affirmed the CIR(A)'s findings that the amounts represented trade discounts allowed across the board to distributors, without reference to achievement of specified sales targets. The Tribunal also recorded that the Department had failed to establish that any prize or incentive had been offered or awarded in circumstances attracting Section 156. The mere classification of expenditure under the head “Sales Promotion Expenses” could not, without further material establishing the existence of a prize, justify the invocation of that provision. The Assessing Officer was required to identify the transaction attracting withholding tax and establish the statutory basis for alleging non-compliance. The Tribunal found that this essential foundation was lacking.

20. We are also mindful that the Tribunal is the final fact-finding forum under the statutory scheme of the Ordinance. In proceedings under Section 133, this Court is concerned with questions of law arising from the Tribunal's order and does not ordinarily undertake a fresh appraisal of evidence merely because another factual conclusion may also be possible. Findings of fact may undoubtedly give rise to a question of law where they are based on no evidence, suffer from material misreading or non-reading of evidence, or are otherwise perverse. However, the Applicant has not demonstrated that the Tribunal's findings concerning the nature of the discounts and the absence of any established promotional prize suffer from such infirmity. The mere possibility of a different characterization of the expenditure does not warrant interference in reference jurisdiction.

21. Insofar as the disallowances under Section 21(c) are concerned, the same were founded upon the alleged failure of the Respondent to comply with the withholding tax obligation under Section 156. Once the Tribunal found that the disputed transactions did not constitute prizes or winnings within the meaning of Section 156, the foundation for alleging such default ceased to exist. Consequently, the disallowances made under Section 21(c), insofar as they were based upon the alleged non-compliance with Section 156, could not be sustained. It is, therefore, unnecessary for the purposes of the present controversy to determine the broader contention that Section 21(c) does not extend to payments or expenditures not specifically enumerated therein.

22. For the foregoing reasons, we are of the considered view that the Tribunal correctly appreciated the distinction between an ordinary trade discount and a promotional prize contemplated under Section 156 of the Ordinance. The judgment of this Court in Messrs Wazir Ali Industries Ltd. (2012 PTD 405), as subsequently applied in M/s. Shell Pakistan Limited (ITRA Nos. 71 to 76 of 2015), does not warrant a different conclusion in the present cases, having regard to the material factual distinctions recorded by the Tribunal. The principle enunciated in the former judgment remains applicable to benefits possessing the character of promotional prizes, including rewards awarded upon achievement of specified sales targets; however, it cannot be extended indiscriminately to every reduction in the selling price merely because such reduction may serve the commercial objective of promoting sales. The approach adopted by the Tribunal is also consistent, to the extent indicated above, with the principles of statutory interpretation laid down by the Supreme Court in Commissioner Inland Revenue, Lahore v. M/s. Coca Cola Pakistan Ltd. [(2026) 133 Tax 477]. We, therefore, find no legal infirmity in the impugned order warranting interference in reference jurisdiction.

23. Consequently, the consolidated question of law, as reformulated in paragraph 7 above, is answered in the affirmative, against the Applicant-Department and in favour of the Respondent-taxpayer. The findings recorded by the learned Appellate Tribunal Inland Revenue in its common order dated 31.08.2016, insofar as they relate to the deletion of disallowances made under Section 21(c) on account of alleged non-deduction of withholding tax under Section 156 of the Ordinance, are maintained.

24. Accordingly, ITRA Nos. 40, 41 and 42 of 2017 are disposed of in the above terms. A copy of this judgment shall be transmitted to the learned Appellate Tribunal Inland Revenue, Karachi Bench, in terms of Section 133(8) of the Ordinance.

JUDGE

Naveed PA