Interpretation of word 'default'

A Collection of tax where it is not due is as detestable as its non-payment when it is due-Nasim Sikander, J in CIT Companies, Lahore v State Cement of Corporation (Pvt) Ltd, Lahore 2002 PTD 1603 This deprivation results in unjustly enriching and benefiting the department-Syed Mansoor Ali Shah, J in Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc in W.P 14832/2014.
The word "default" as it appears in various sections of tax statutes needs to be interpreted judicially. For example, section 161 of the Income Tax ordinance, 2001 can only be invoked where a person has wilfully failed to collect tax or after deduction of tax has not deposited it into government treasury. This section can only be invoked once a default is established and failure to deduct, collect and pay the tax becomes crystallised-Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc in W.P 14832/2014. The officials of the Federal Board of Revenue (FBR) through issuance of notices under this section indulge in fishing enquiries without confronting any instance of non/short deduction of tax. They have been using this section indiscriminately to raise tax demands without establishing default or failure. This unlawful exercise of the powers has recently been disapproved by the Lahore High Court is an elaborate judgement in the case of Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc in W.P 14832/2014.
In some cases notices were issued even after lapse of six years or more in utter violation of section 174(3) of the Income Tax ordinance, 2001 which says that accounts and documents cannot be called after six years from the end of the tax year to which they relate. The officials had been wrongly relying on the judgement of Supreme Court in Civil Appeals No 1091-1092 and 1111-1127/2008 and 1435-1488/2008 and 229/2011 dated 17.05.2011 re: Pakistan Mobile Communication (Pvt) Ltd. For issuing notice beyond the period of six years without realising that it did not apply as the same was based on interpreting section 52 of the repealed Income Tax Ordinance, 1979 wherein no provision analogous to section 174 of the Income Tax Ordinance, 2001 was in force. The issue was later decided against the FBR by Sindh High Court in Habib Bank Ltd v. Federation of Pakistan & others reported as (2013) 108 TAX 294 (H.C. Kar) holding that Supreme Court judgement cited above was not relevant for the purpose of section 161 of the Income Tax Ordinance, 2001.
I. RELEVANT PROVISIONS The relevant provisions of the repealed Income Tax Ordinance, 1979 ["the repealed Ordinance'] and the Income Tax Ordinance 2001 ["the Ordinance"] that deal with the subject of treating withholding agents as 'defaulters' and imposition of additional tax are:
52. Liability of persons failing to deduct or pay tax. -Where any person fails to deduct or collect, or having deducted or collected, as the case may be, fails to pay the tax as required by, or under, section 50, he shall, without prejudice to any other liability which he may incur under this Ordinance, be deemed to be an assessee in default in respect of such tax.
EXPLANATION: For the purposes of this section, the Deputy Commissioner having jurisdiction under section 5 over the case of the assessee in default may initiate action.
52A. Recovery from the person from whom tax was not deducted or collected. Where any sum deductible or collectable by any person has not been deducted or collected as required by, or under section 50, the Deputy Commissioner having jurisdiction over the case of the person from whom tax was deductible or collectable, without prejudice to any liability which the person responsible for deduction or collection of tax under section 50 may incur under this Ordinance, may recover the sum not deducted or collected from the person from whom tax was to be deducted or collected and all provisions of this Ordinance relating to recovery of tax shall apply.
86. Charge of additional tax for failure to deduct and pay tax. -Where any person fails to deduct, or having deducted, fails to pay any tax, as required by section 50, such person shall, without prejudice to any other liability which he may incur, be liable to pay additional tax at the rate of twenty-four percent per annum on the amount not paid for the period commencing from the date on which he was required to pay such tax to the date of the payment thereof.
161. FAILURE TO PAY TAX COLLECTED OR DEDUCTED. - (1) WHERE A PERSON
(a) fails to collect tax as required under Division II of this Part or deduct tax from a payment as required under Division III of this Part or Chapter XII or as required under section 50 of the repealed Ordinance; or
(b) having collected tax under Division II of this Part or deducted tax under Division III of this Part or Chapter XII] fails to pay the tax to the Commissioner as required under section 160, or having collected tax under section 50 of the repealed Ordinance pay to the credit of the Federal Government as required under sub-section (8) of section 50 of the repealed Ordinance, the person shall be personally liable to pay the amount of tax to the Commissioner who may proceed to recover the same.
(1A) No recovery under sub-section (1) shall be made unless the person referred to in sub-section (1) has been provided with an opportunity of being heard.
(1B) Where at the time of recovery of tax under sub-section (1) it is established that the tax that was to be deducted from the payment made to a person or collected from a person has meanwhile been paid by that person, no recovery shall be made from the person who had failed to collect or deduct the tax but the said person shall be liable to pay default surcharge at the rate of eighteen per cent per annum from the date he failed to collect or deduct the tax to the date the tax was paid.
(2) A person personally liable for an amount of tax under sub-section (1) as a result of failing to collect or deduct the tax shall be entitled to recover the tax from the person from whom the tax should have been collected or deducted.
162. Recovery of tax from the person from whom tax was not collected or deducted. - (1) Where a person fails to collect tax as required under Division II of this Part or Chapter XII or deduct tax from a payment as required under Division III of this Part or Chapter XII, the Commissioner may pass an order to that effect and recover the amount not collected or deducted from the person from whom the tax should have been collected or to whom the payment was made.
(2) The recovery of tax under sub-section (1) does not absolve the person who failed to deduct tax as required under Division III of this Part or Chapter XII from any other legal action in relation to the failure, or from a charge of default surcharge or the disallowance of a deduction for the expense to which the failure relates, as provided for under this Ordinance.
205. ADDITIONAL TAX. - (1) A PERSON WHO FAILS TO PAY
(a) any tax, excluding the advance tax under section 147 and default surcharge under this section;
(b) any penalty; or (c) any amount referred to in section 140 or 141, on or before the due date for payment shall be liable for additional tax at a rate equal to eighteen per cent per annum on the tax, penalty or other amount unpaid computed for the period commencing on the date on which the tax, penalty or other amount was due and ending on the date on which it was paid. on or before the due date for payment shall be liable for default surcharge at a rate equal to 18 per cent per annum] on the tax, penalty or other amount unpaid computed for the period commencing on the date on which the tax, penalty or other amount was due and ending on the date on which it was paid:
Provided that if the person opts to pay the tax due on the basis of an order under section 129 on or before the due date given in the notice under sub-section (2) of section 137 issued in consequence of the said order, and does not file an appeal under section 131, he shall not be liable to pay default surcharge for the period beginning from the due date of payment in consequence of an order appealed against to the date of payment in consequence of notice under sub-section (2) of section 137.
(1A) a person who fails to pay advance tax under section 147 shall be liable for default surcharge at a rate equal to 18 per cent per annum on the amount of tax unpaid computed for the period commencing on the date on which it was due and ending on the date on which it was paid or date on which the return of income for the relevant tax year was due, whichever is earlier.
(1B) Where, in respect of any tax year, any taxpayer fails to pay tax under sub-section (4A) or (6) of section 147 or the tax so paid is less than ninety percent of the tax chargeable for the relevant tax year, he shall be liable to pay default surcharge at the rate of 18 per cent per annum] on the amount of tax so chargeable or the amount by which the tax paid by him falls short of the ninety percent, as the case may be; and such default surcharge shall be calculated from the first day of April in that year to the date on which assessment is made or the thirtieth day of June of the financial year next following, whichever is the earlier.
(2) Any default surcharge paid by a person under sub-section (1) shall be refunded to the extent that the tax, penalty or other amount to which it relates is held not to be payable.
(3) A person who fails to collect tax, as required under Division II of Part V of this Chapter or Chapter XII or deduct tax as required under Division III of Part V of this Chapter or Chapter XII or fails to pay an amount of tax collected or deducted as required under section 160 on or before the due date for payment shall be liable for default surcharge at a rate equal to 18 per cent per annum] on the amount unpaid computed for the period commencing on the date the amount was required to be collected or deducted and ending on the date on which it was paid to the Commissioner:
Provided that if the person opts to pay the tax due on the basis of an order under section 129 on or before the due date given in the notice under sub-section (2) of section 137 issued in consequence of the said order and does not file an appeal under section 131, he shall not be liable to pay default surcharge for the period beginning from the date of order under section 161 to the date of payment.
(5) The Commissioner shall make an assessment of any default surcharge imposed under this Part in accordance with the provisions of Part II of this Chapter as if the default surcharge were tax.
(6) The provisions of Parts III and IV apply to an assessment of default surcharge as if it were an assessment of tax.
II. FUNDAMENTAL PREREQUISITES The following are some fundamental prerequisites for invoking section 161 of the Ordinance, which can be summarised as under:
1. that there is a transaction requiring withholding of tax under the Ordinance;
2. that there is incontrovertible evidence that in respect of a particular transaction tax has not been deducted/collected and/or paid; and
3. that the person from whom such tax was required to be withheld has not discharged the liability as mentioned in section 161(B) as there cannot be double recovery.
III. 'DEFAULT' IN LEGAL PARLANCE The expression 'default' connotes an element of wilful and deliberate failure to fulfil an obligation and negligence in the performance of duty. Every failure without any ulterior design and mala fide intention on the part of a person would not equate with the expression 'default' as used in its strict legal sense. In the words of the apex court [Ghulam Muhammad Lundkhor v. Safder Ali [PLD 1967 SC 530], the word 'default' in legal terminology necessarily imports an element of negligence or fault and means something more than mere non-compliance.
To establish default one must show that the non-compliance has been due to some avoidable cause, for a person who ought not to be made liable for a failure due to some reason for which he is, in no way, responsible or which was beyond his control. It should not be presumed that the law intends to cause injustice or hardship. On the basis of this principle, the expression 'default' should mean an act done deliberately and wilfully in breach of a duty or in disregard of an order or direction with mala fide intention. This view is followed in cases reported as Muhammad Hassan Khan v. Mirza Abdul Hamid (1981 SCMR 799), Irshad Hussain v. Abdul Rehman Kazi (1983 SCMR 471), M. Imamuddin v. Surriya Khanum (PLD 1991 SC 317) and NDFC v. Naseemuddin (PLD 1997 SC 564).
"Before a person is declared to be in default, it is absolutely necessary that there should have been a demand to make payment of a determined sum which should have remained unresponded and unattended for a period beyond the period prescribed by law"- Irfan Gul Magsi v. Haji Abdul Khaliq Soomro and others 1999 PTD 1302.
The Appellate Tribunal Inland Revenue (ATIR) in 2012 PTD (Trib.) 122 held as under:
"I agree with this observation that without identifying names and addresses of the parties or persons from whom and how much tax was to be deducted; provisions of section 161 could not be invoked. It appears that taxation officer was in old frame of mind and could not appreciate that the tax referred to be deducted under section 161 has to be of some identified taxpayer / person and a taxpayer can be declared personally liable only after establishing that he was a withholding agent, who failed to withhold the tax from a transaction, liable to such tax. In this case details and documentary evidence about the transaction in question was disbelieved and discarded by the taxation officer for his own reasons. He misunderstood the spirit of section 161 of the Income Tax Ordinance, 2001 as he himself has observed, in his order under section 161, that proceedings were initiated to ascertain the compliance level. He could only see whether withholdings, as per return and statutory statements, was made or not and that any transaction, liable to withholding, had not escaped taxation. It is reiterated that no transaction can be held to have escaped deduction under section 161, unless it is established that: (i) taxpayer is a withholding agent, (ii) a particular transaction is liable to deduction / withholding and (iii) that a specified tax of a specific person was to be withheld, who could take credit of the tax recoverable under section 161. These findings are fortified by subsections (1B) and (2) of section 161. Under the subsection (1B) if the amount of tax, required to be deducted, is paid meanwhile by the person, who's tax was to be deducted, then the taxpayer proceeded under section 161 shall pay only default surcharge of the period, he failed to deduct tax till it was paid by that person. Subsection (2) declares that a person held personally liable under section 161(1) shall be entitled to recover the tax from the person, from whom the tax should have been collected or deducted. These provisions shall become redundant, if a person is held personally liable without identifying the person who's tax was not collected personally liable without identifying the person who's tax was not collected or deducted and without identifying the amount of such tax."
It is abundantly clear from the above-referred case law that "default" in legal terminology necessarily imports an element of wilful and deliberate negligence or fault and means something more than mere non-compliance. It is, thus, incumbent upon the Tax Department before alleging default to prove beyond doubt that the non-compliance was due to some wilful and deliberate act. The word "default" wherever appears in the Income Tax Law should mean an act done in breach of legal obligation, a duty or in disregard of an order or direction with mala fide intention and ulterior motive.
Resort to section 52 of the repealed Income tax Ordinance [now section 161] as a charging provision and a "new source of revenue" has been disapproved strongly by the ATIR in a number of cases, eg (2003) 87 TAX 23 (Trib.) and 2001 PTD (Trib.) 2605.
IV. "WILLFUL" AND/OR "DELIBERATE" - SCOPE & IMPORT In tax jurisprudence, the words "wilful" and "deliberate" have special significance. The apex court has held in a number of cases that no penal action is to be taken against a taxpayer unless the Revenue discharges its onus of proving through some incontrovertible evidence that 'default' was committed wilfully and deliberately.
According to Black's Law Dictionary, these two expressions entail the following meanings:
'Deliberate': "Intentional; predetermined and fully considered".
'Wilful': "Voluntary and intentional, but not necessarily malicious".
"The word 'wilful' or 'wilfully' when used in the definition of a crime means only intentionally or purposely as distinguished from accidentally or negligently and does not require any actual impropriety; while on the other hand it has been stated with equal repetition and insistence that the requirement added by such a word is not satisfied unless there is a bad purpose or evil intent." Rollin M. Perkins & Ronald N. Boyce, Criminal Law 875-76 (3rd ed. 1982).
"Almost all of the cases under (Bankruptcy Code § 523(a)(6)] deal with the definition of the two words 'wilful' and 'malicious'. Initially one might think that wilful and malicious mean the same thing. If they did, Congress should have used one word and not both. Most courts feel compelled to find some different meaning for each of them." David G. Epstein et al., Bankruptcy § 7-30, at 531 (1993).
Talbot J., in the case reported as (1933) 2 KBD 669, stated that though the word "wilful" and "intentional" are synonymous, "wilful" is more commonly used in modern speech of bad conduct or actions than of good, though it does not necessarily connote blame- PLD 1966 Lah. 822."
V. WORD 'DUE' Proceedings in respect of recovery of tax from a withholding agent cannot be initiated if the same has already been recovered from the payee as word 'due' does not imply continuity of the liability from past-Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc in W.P 14832/2014.
In Taimur Shah v. Commissioner of Income Tax [1976] 34 TAX 151 (H.C. Kar.) = PLD 1976 Kar. 1030, it is held:
"The learned counsel for the Revenue also attempted to argue that the words 'fails to pay the tax due from him' included tax due for the past years and, therefore, in a sense section 45A [parallel to section 89 and 205 of the Income tax Ordinance 1979 and 2001 respectively] is retrospective in its operation. In support of his contention that though a provision has not expressly been made retrospective but the words used therein may clearly indicate that it has retrospective operation, he relied upon the case of Income Tax Officer v. Sullaiman Bhai Jiva (PLD 1970 SC 82) wherein it was held that the words, such as 'shall' or 'hereinafter', should be taken to indicate the legislative intent that the statute is to be construed as prospective only but on the other hand the use of the words denoting past time, such as 'has been' or 'hereto before' construed an expressive declaration that the Act is to be construed retrospectively. We find ourselves unable to agree with the broad proposition of Mr Nusrat that the word 'due' has an implication of a liability which is continuing from the past.
VI. IS DEFAULT SURCHARGE MANDATORY? The Revenue has always conceived and interpreted provisions relating to default surcharge [additional tax] as mandatory in nature. The taxpayers and their advisers also share this conviction of the Department that taxation officers enjoy no discretion whatsoever in imposition of default surcharge [which in substance is penal tax] even in cases where default was not wilful or deliberate. This interpretation arises from the use of word 'shall' in section 205 of the Ordinance relating to imposition of default surcharge. This position needs to be reconsidered as it has been ignored both by the Department and the professionals that the mere use of the word "shall" in any provision does not make it mandatory as held in 2000 PTD 2872 re Allied Bank v. ITAT, AJK etc and M/s Maple Leaf Cement Factory Ltd v The Collector of Central Excise & Sales Tax (Appeals) etc 1993 MLD 1645= PTCL 1993 CL 656.
There are authoritative judgements of the higher courts that surcharge/penal/additional tax is in the nature of penalty. Since it is in the nature of penalty, the rule of wilful and deliberate default shall apply. The following case law supports this view:
(a) Additional tax is in the nature of "penalty" - Taimur Shah v. CIT [1976] 34 TAX 151 (H.C. Kar.) = PLD 1976 Kar. 1030.
(b) Additional tax is not mandatory, imposition only where wilful default exists - M/s Murree Brewery v. Naseem PLJ 1994 Lah. 508.
(c) If a person does not act with mala fide intention, the imposition of penalty or the additional charge is not justified - M/s Lone China (Pvt) Ltd v. Additional Secretary to the Government of Pakistan PTCL 1995 CL 415.
(d) Assessing officer is obliged under the law to apply his mind to the imposition of penal interest - Schazoo Laboratories Ltd v. CIT, Lahore [1977] 35 TAX 15 (H.C. Lah.) = 1976 PTD 361.
VII. CONCLUSIONS Judicial analysis of provisions relating to default in the light of various cases decided by courts is summarised below: -
-- The appellate courts have been very liberal in interpreting the law relating to withholding tax and it has been consistently held that if a person fails to deduct tax but the tax is paid by the recipient of such payment then no action can be taken against the payer-Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc in W.P 14832/2014 and (2003) 87 TAX 23 (Trib.).
-- These are not charging sections aimed at creating tax demands independently in the hands of withholding agents-2001 PTD (Trib.) 2605.
-- Proceedings u/s 161 cannot be initiated beyond the period mentioned in section 174(3)- Habib Bank Ltd v. Federation of Pakistan & others reported as (2013) 108 TAX 294 (H.C. Kar).
-- No recovery from the payer if the payee has filed return of total income-(2000) 81 TAX 289 (Trib.).
-- "Assessee-in-default" means a withholding agent who has failed to deduct and/or deposit tax on another person's behalf in the State treasury as per law. But if the person on whose behalf tax was to be deducted had already paid the tax, the same could not be recovered again from the withholding agent, although he may be subjected to additional tax if default was wilful and deliberate-Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc in W.P 14832/2014 and (2003) 87 TAX 23 (Trib.).
-- If a case falls in the ambit of presumptive tax regime action u/s 52 [now section161] cannot be taken; appropriate remedy is resort to section 52A [now section162]-(2002) 82 TAX 1 (Trib.).
-- If tax has been recovered from the payee the same cannot be recovered from the payer-Board's Circular No 8 of 1999
The proceedings for recovery of tax from withholding agents as assessee-in-default and imposition of default surcharge and/or penalty in respect of tax not deducted/collected or deposited, are to be taken construing the relevant sections on the touchstone of rules relating to interpretation of penal provisions-Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc in W.P 14832/2014. In other words such proceedings are justified only if the default was wilful and deliberate.
Tax withheld or collected at source, as explained by the apex court in CIT vs. Asbestos Cement Industries Limited [1993] 67 Tax 174 (S.C.Pak) and Lahore High Court in Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc in W.P 14832/2014 is to be utilised and adjusted towards the ultimate tax liability of a person [on whose behalf tax is deducted or collected at source] after it has been determined. There is consensus of all the courts in Pakistan that sections 52, 52A and 86 [now sections 161, 162, and 205] are only a mode of ensuring collection of taxes before the assessment, which later on are to be adjusted against liability of the persons on whose behalf it is deducted/collected. These, therefore, cannot be used as a substitute of normal assessment or as a new source of revenue by the Tax Department.
The indiscriminate recourse to section 161 and 205 of the Ordinance irrespective of the fact whether or not default is committed wilfully or deliberately or tax involved has already been recovered from the payee/deductee is against the letter and spirit of law as discussed above in the light of various court verdicts, especially the latest one in the case of Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc in W.P 14832/2014 that comprehensively deals with the issue and is binding under Article 201, subject to Article 189 of the Constitution.
(The writers, tax lawyers and partners in law firm, HUZAIMA & IKRAM (members Taxand: www.taxand.com), are members of Adjunct Faculty of Lahore University of Management Sciences (LUMS). They can be contacted at [email protected])