Stay of recovery in tax matters - I

In tax disputes the principles relating to stay of recovery in appropriate cases with or without condition, whether provided statutorily or as a matter of inherent jurisdiction, are well-established. The highest court of the country, the Supreme Court of Pakistan and High Courts throughout the country grant stay of recovery in eligible cases even where the vires of any law are challenged on the touchstone of the supreme law of the land-Constitution of Islamic Republic of Pakistan ("the Constitution).

In view of the hierarchical character of the judicial system in Pakistan, it is of paramount importance that the law declared by courts should be certain, clear and consistent. Inconsistencies create distrust in the administration of justice. It is an established fact that most decisions of the courts are of significance, not merely because they constitute adjudication on rights of parties and resolve disputes between them, but a fortiori in doing so they embody a declaration of law, operating as a binding principle (stare decisis) in future cases. In this latter aspect lies their particular value in developing the jurisprudence of law and the same is true in the matter of granting stay of recovery in tax matters. In a large number of cases where the vires of section 80C, 80CC and 80D of the repealed Income Tax Ordinance, 1979 were challenged, recoveries were stayed, though the matter was finally decided against taxpayers by the Supreme Court in the Elahi Cotton Mills Ltd. and others v. Federation of Pakistan through Secretary Finance, Islamabad [(1997) 76 TAX 5 (S.C.Pak).

On the issue of interim stay, in the case of the Tharparkar Sugar Mills Ltd. v. Federation of Pakistan through Secretary, Revenue Division and Chairman, CBR, Islamabad and another [1996] 73 TAX 215 (H.C.Kar.), the Sindh High Court held: ".....once a petition in tax matters is admitted that ispo facto shows that the petitioner has made a prima facie case....interim stay may be granted."This principle is held in a number of cases related to various taxes and its compilation is done in 'Principles of Income Tax Laws'(fifth edition, 2018) and in many other books. The point worth noting is that principles laid down for granting stay of recovery in tax matters, decided by Supreme Court and High Courts, have binding force under Article 189 and 201 of the Constitution.

The Lahore High Court in case of E.M.E. Cooperative v. CIT (2004) 90 TAX 359 (H.C.Lah.) held that application for stay of recovery should be given due consideration, which is a binding injunction/directions for all subordinate courts/tribunals/authorities. In another case reported as the Shoaib Bilal Corp. Faisalabad v. CIT, Faisalabad & another [(1993) 67 tax 233 (H.C.Lah.)], it was held:

"It is well-settled that stay order, unlike injunctions, operates from the moment, it is passed irrespective of the time of its communication....legally speaking, the communication of the stay order granted by this court is not relevant. Even if the Income Tax Officer was not aware of the stay order granted by this court, all the proceedings taken subsequent to it are nullity in the eye of law."

The Supreme Court of Pakistan and High Courts, in a number of cases held that recovery of demand without decision by an independent authority should not be made, meaning by that in eligible cases Appellate Tribunal Inland Revenue and Customs Appellate Tribunal are under legal obligation to provide interim relief by way of stay before deciding the appeal if a prima facie case exists. The same principle will apply to provincial tax legislations. Some of the cases to this effect are:

1. Mehram Ali and Others v. Federation of Pakistan and others PLD 1998 SC 1445

2. Sunrise Bottling Co. (Pvt.) Ltd v Federation of Pakistan and 4 others (2006) 94 TAX 140 (H.C. Lah.)

3. Punjab Provincial Cooperative Bank Ltd, Lahore v DCIT 2002 PTD 2799

4. Dawood Textile Printing Industries (Pvt.) Ltd, Faisalabad v Federation of Pakistan and 4 others PTCL 2010 CL.460

In the Income Tax Ordinance, 2001 [hereinafter "the Ordinance"], the Commissioner Inland Revenue holding jurisdiction of the case may grant extension of time for payment of tax or allow the taxpayer to pay such tax in installments [section 128(1A)] though he seldom exercises these powers as meeting fixed targets/recovery is his/her main priority. Commissioner Inland Revenue (Appeals) is also empowered to grant stay in income tax, sales tax and federal excise matters where appeals are filed. Collector (Appeals) is also empowered to grant stay under the Customs Act, 1969. In the Federal Excise Act, 2005 even the facility of automatic stay of six months is available in case 15 percent tax demand is paid along with appeal [proviso to section 37(3) of the Federal Excise Act, 2005].

First, appellate authorities, i.e., Commissioner Inland Revenue (Appeals) or Collector (Appeals) are not considered as independent judicial forums as they are under administrative control of the Federal Board of Revenue(FBR) and can be transferred any time back to become part of field formation assigned the revenue collection targets. In the light of above case law, it is, therefore, imperative for the Appellate Tribunal Inland Revenue and Customs Appellate Tribunal to not only decide the appeals when filed before them but also adjudicate stay applications expeditiously on the basis of settled principles.

The rejection/refusal or stay with harsh conditions by first tax appellate authority also gives rise to application for stay before the Appellate Tribunal Inland Revenue and Customs Appellate Tribunal. In such cases, Tribunal may allow stay, waive harsh condition imposed by first appellate authority though appeals remain pending at first appeal level, or reject the same if no case is made out.

Where appeals and stay applications are filed simultaneously or stay applications afterwards when recovery is started, the Appellate Tribunal Inland Revenue and Customs Appellate Tribunal are under statutory duty to dispose of stay application before or with appeals expeditiously. The adjudication of application for stay independent of appeal is imperative, inter alia, for the following:

* Legislature has provided statutory safeguard in section 131(5) of the Income Tax Ordinance, 2001 [it equally applies to the Sales Tax Act 1990 by virtue of its section 46(2)] and section 194B of the Customs Act, 1969 so that the citizens/taxpayers are not put into undue jeopardy/difficulties till the final adjudication.

* Tax departments should not use coercive measures for recovery before appeal is decided by an independent forum that is Appellate Tribunal Inland Revenue and Customs Appellate Tribunal as it is the command of higher courts. In case the departments adopt such measures, the tribunals have to grant stay strictly in accordance with law/rules and principles settled by higher courts.

* In cases where the impugned orders are prima facie unlawful, arbitrary, excessive, and/or unfair, Appellate Tribunal Inland Revenue and Customs Appellate Tribunal are empowered, rather duty-bound, to grant relief after the aggrieved person makes out a case for unconditional and/or conditional stay after affording an opportunity to the department.

The above parameters are not exhaustive. They are only recommendatory in nature. The 'trinity' of prima facie case, financial stringency and balance of convenience is the basic tenet which is indispensable in consideration of a stay application independent of a pending appeal or even it is not filed, e.g., in cases where first appellate authority declines the stay or allows it with unreasonable conditions.

Since tax tribunals are first independent judicial forums, it is necessary to discuss stay proceedings at this level in detail. In this respect, it is imperative to reproduce section 131(5) of the Ordinance to accentuate this point [almost the same position exists in Second Proviso to section 194B of the Customs Act, 1969]. It reads as under:

(5) Notwithstanding that an appeal has been filed under this section, tax shall, unless recovery thereof has been stayed by the Appellate Tribunal, be payable in accordance with the assessment made in the case.

Provided that if on filing of application in a particular case, the Appellate Tribunal is of the opinion that the recovery of tax levied under this Ordinance and upheld by the Commissioner (Appeals), shall cause undue hardship to the taxpayer, the Tribunal, after affording opportunity of being heard to the Commissioner, may stay the recovery of such tax for a period not exceeding one hundred and eighty days in aggregate:

Provided further that where recovery of tax has been stayed under this section, such stay order shall cease to have effect on expiration of the said period of 180 days following the date on which the stay order was made and the Commissioner shall proceed to recover the said tax:

Provided further that in computing the aforesaid period of one hundred and eighty days, the period, if any, for which the recovery of tax was stayed by a High Court, shall be excluded.

It is abundantly clear from plain language of section 131(5) of the Ordinance that appeal and stay application are two distinguishable acts. Notwithstanding that an appeal under section 131 of the Ordinance has been filed, Department can resort to recovery of disputed tax unless stay is granted by Appellate Tribunal Inland Revenue. A conjunct reading of section 130, 131(5) and Proviso(s) added to it by the Finance Act, 2009 and subsequently substituted by the Finance Act, 2012 enunciate as under:

1. On filing of application for stay in any case, where appeal is pending in Appellate Tribunal Inland Revenue, order for granting stay or refusing it has to be passed independent of decision in appeal.

2. Stay is to be granted after affording opportunity of being heard to the Commissioner Inland Revenue.

3. Statutory period of stay is prescribed by Legislature and on expiry it stands vacated.

In a recent decision of the Division Bench of Appellate Tribunal Inland Revenue in MA (Stay) No. 611/PB/2019 in ITA No. 413/PB/2019 (Tax year 2017) dated 15.11.2019 followed in MA (Stay) STA No. 1153/IB/2019 dated 19.11.2019, it is held asunder:

"...it is our humble view that the entrustment of the main appeal prior to fixation of the stay application to the Bench is necessary for the reason that if the Bench does not hear the main appeal then how it can hear and decide only the stay application which is ancillary to the proceedings. Interim relief is the part of main appeal and it is immutable principle of law which cannot be lightly brushed aside that where a Court is competent to allow final relief, it has also got the jurisdiction to allow interim relief. Reliance may be placed on the judgment report as Additional Collector-II Sales Tax, Lahore Vs M/s Abdullah Sugar Mills Ltd (2003 SCMR 1026). By following this principle it is essential to entrust the appeal and application simultaneously to the Bench and after that the said Bench shall hear and decide the matter. If this principle is not followed and the appeal is entrusted to one Bench and stay application to another Bench then the aforesaid principle of law would be violated which is not permissible in any cannon of interpretation. Further this kind of procedure may create difference of opinion amongst the Benches. For instance the Bench has granted the stay to the taxpayer and subsequently the application for extension in stay is filed by the same taxpayer on the same issue but fixed to another Bench, it may create difference of opinion between the Benches. Therefore, to avoid such anomaly it would be appropriate to fix all the applications to the concerned Bench having been already entrusted the main appeal by the competent authority."

The Full Bench of Appellate Tribunal Inland Revenue has overruled the above judgement [in MA (Stay) STA No.1153/IB/2019 in STA No.328/IB/2019] and paragraph 10 of its order dated January 8, 2020 reads as follows:

The Sub-section (5) of Section 131 and its proviso are of paramount importance to resolve this controversy, which was inserted by Finance Act, 2003 dated June 17, 2003 while the proviso 3 was substituted by Finance Act, 2012. A bare reading of sub-section (5) reveals that preferring of appeal and filing of stay application are two independent and separate proceedings. Sub-section (5) of Section 131 starts with clause which means that sub-section precludes whether appeals has been filed by the taxpayer is recovery proceedings can be stayed by the Appellate Tribunal otherwise tax shall be payable in accordance with the assessment made in the case. First proviso to this sub-section also supports this point of view which clearly provides that on filing of application in a number of cases, the Appellate Tribunal is of the opinion that the recovery of tax levied under this Ordinance which has been upheld by the Commissioner (Appeals) causes undue hardship to the taxpayer. The Tribunal after affording proper opportunity of being heard to the parties may stay the recovery of such tax for a period not exceeding 180 days in aggregate. From this proviso it can safely be inferred that application for recovery of tax is to be heard separately and independently provided the conditions as laid in the first proviso of sub-section (5) of this Section are fulfilled. Firstly, application for stay of recovery is filed, secondly, Commissioner (Appeals) has refused to grant stay of recovery, thirdly, the appellate tribunal is of the opinion that the tax levied shall cause undue hardship to the taxpayer and fourthly opportunity of being heard shall be provided to both parties. Thus, if sub-section (5) of Section 131 of the Ordinance is read with all its three provisos, the conclusion is very obvious that the Appellate Tribunal may grant or refused to grant the stay of recovery of tax irrespective of the fact that the appeal has been filed by the taxpayer.

The arguments advanced by the Division Bench of Appellate Tribunal Inland Revenue in MA (Stay) No.611/PB/2019 in ITA No.413/PB/2019 (Tax year 2017) dated 15.11.2019 [followed in MA (Stay) STA No.1153/IB/2019 dated 19.11.2019] now overruled and para 10 reproduced above of Full Bench of Appellate Tribunal Inland Revenue elicited arguments amongst legal fraternity in favour and against the decisions. This issue, therefore, needs further elaboration for debate and discourse.

(To be continued)

(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are member Adjunct Faculty of Lahore University of Management Sciences)