Abusing withholding provisions - I

Provisions of Sections 161 & 162 of the Income Tax Ordinance, 2001 could not have been invoked for recovery of tax, character of which changed from "advance tax" to "tax due" after assessment vide Section 169(3) of the Income Tax Ordinance, 2001-Commissioner of Inland Revenue v Pepco 2015 PTD 863 Another aspect of assessment under section 161 is the obligation of the department to establish that the deductible amount has not been paid in the meanwhile under section 161(1B)-Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc (2014) 110 TAX 221 (H.C. LAH.)
A Collection of tax where it is not due is as detestable as its non-payment when it is due-CIT Companies, Lahore v State Cement of Corporation (Pvt) Ltd, Lahore 2002 PTD 1603
The words "default" and "failure" appearing in various sections of tax statutes needs to be interpreted judicially. The tax officials working under the Federal Board of Revenue (FBR) through issuance of notices under section 161/205 of the Income Tax Ordinance, 2001 indulge in fishing enquiries without confronting any instance of non/short deduction or payment of tax. They have been abusing these sections with impunity to raise unlawful tax demands and then collect the same through coercive measures without establishing default and/or failure. This unlawful exercise of the powers has been disapproved by the higher courts in a number of cases-especially in an elaborate judgement reported as Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc (2014) 110 TAX 221 (H.C. LAH.). Though it is clearly held by the Lahore Court that section 161 of the Income Tax Ordinance, 2001 can only be invoked where a person has failed to collect tax or after deduction of tax has not deposited it into government treasury, yet Department is violating the law in contravention of Article 201 of the Constitution of Pakistan.
In some cases notices under section 161 are 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 notices beyond the period of six years without realising that the judgement did not apply to the new Ordinance-it was in fact 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 available. 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"] dealing with failure to withhold tax or its deposit, recovery and imposition of penal interest/penalty are:
Provisions of the repealed Ordinance
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.
Provisions of 2001 Ordinance
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 18 percent 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 percent 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 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.
Lahore High Court in Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc (2014) 110 TAX 221 (H.C. LAH.) has specifically dealt this issue and held the proceedings unconstitutional in such circumstances as under:
"Another aspect of assessment under section 161 is the obligation of the department to establish that the deductible amount has not been paid in the meanwhile under section 161(1B). In order to establish this, an opportunity of hearing is required to be provided to the taxpayer (payee) ie, E&P in this case. This complies with the requirement of Articles 4 and 10A of the Constitution and the jurisprudence settled by the superior courts (reliance for convenience is placed on Mst. Zahida Sattar and others v. Federation of Pakistan and others (PLD 2002 SC 408). The assessment order presented in Court during the proceedings, inter alia, fails to comply with this constitutional requirement."
The above judgement clearly provides that to establish default the department must show that the non-compliance continues or 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).
Sindh High Court in Messrs Continental Chemical Co (Pvt) Ltd v. Pakistan and others (2001 PTD 570) and Karachi Port Trust, Karachi v. Commissioner Inland Revenue, Karachi (2011 PTD 1996) also opined as under: "To declare a deductor, who failed to deduct the tax at source, as an assessee in default, the condition precedent is that the payee has also failed to pay tax directly. The Allahabad High Court, on a harmonious construction of the provisions of ss 190, 191 and 201, held that the fact that the payee had failed to pay tax directly is a foundational and jurisdictional fact. It is only after finding that the payee had failed to pay tax directly, can the deductor be deemed to be an assessee in default in respect of such tax...In a reverse situation, where no tax is deducted or there is shortfall in deduction by the deductor-assessee but the payee has paid tax on the income earned, no tax shall be once again recovered from the deductor-assessee. However, the deductor-assessee will be liable to pay interest under s 201 (1A) for the period during which tax remained unpaid".
Lahore High Court in Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc (2014) 110 TAX 221 (H.C. LAH.) has further observed that: "Deduction of Tax at Source under Division III, Part V of Chapter X of the Ordinance is a species of advance tax, withheld at source by the person making the payment (deductor) to the taxpayer (payee or deductee)."
"In the wake of section 147(7) of the Ordinance, the department is to consider the amount of advance tax due as tax due under an assessment order but has no locus or authority to doubt, suspect or dispute the quantum and the veracity or sanctity of the payment of advance tax paid in a particular quarter for the purposes of section 161(1B). In this background, once the taxpayer (payee/deductee) has paid advance tax for the quarter and categorically stated that no tax credit has been availed for the deduction of tax at source ie, component D in the abovementioned formula, it will be assumed that the amount of tax to be deducted by SNGPL has been duly paid by the taxpayer and will qualify to be the payment paid in the meanwhile under section 161(1B) of the Ordinance.
11. As discussed above, once the payment has been made by the payee, the amount of tax that SNGPL failed to deduct cannot be recovered from SNGPL, except the imposition of default surcharge penalising the failure to deduct."
"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.
Lahore High Court, Lahore in Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc (2014) 110 TAX 221 (H.C. LAH.) has categorically disapproved invoking of section 161 on the touchstone of "unjust enrichment" as well holding that:
"The principle of unjust enrichment presupposes three things. First, the defendant must have been enriched by the receipt of a benefit. Secondly, that benefit must have been gained at the plaintiff's expense. Thirdly, it would be unjust to allow the defendant to retain that benefit... Unjust enrichment occurs when a person retains money or benefits which is justice, equity and good conscience, belong to someone else...The doctrine of unjust enrichment, therefore, is that no person can be allowed to enrich inequitably at the expense of another. A right of recovery under the doctrine of "unjust enrichment" arises where retention of a benefit is considered contrary to justice or against equity. Reliance with advantage is also placed on Messrs Pfizer Laboratories limited v. Federation of Pakistan and other (PLD 1998 SC 64). Unjust enrichment is, inter alia, anchored in our fundamental preambular constitutional value of economic justice. Our constitution abhors any form of economic exploitation. In this case, the prime tax regulator is trying to recover an amount of tax which has already been paid (and this is no reason to suspect the same). In any case if there is shortfall at the end of the year, it can be recovered with a heavy default surcharge from the payee/deductee. FBR has given no plausible or legal justification for suspecting that the amount of advance tax, paid by the payee, is in any way short or insufficient because the enhancement or reduction of advance tax at the end of the tax year has no co-relation with the amount of advance tax paid in a quarter. The impugned notice for recovery promotes unjust enrichment and offends the constitutional principle of economic justice. For reference, reliance is placed on Ikram Bari and 524 others v. National Bank of Pakistan through President and another (2005 SCMR 100) and Pakistan Tobacco Company Ltd and another v. Federation of Pakistan through Secretary, Ministry of Commerce, Islamabad and 3 others (1999 SCMR 382).
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 willful 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.
(To be continued) (The writers, lawyers and partners in HUZAIMA, IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences)