Auditors were found guilty of misconceived charges of short payment of sales tax amounting to Rs 42 million against a Karachi Large Taxpayer Unit (LTU) M/s Reckitt Benckiser, Pakistan.
The Sales Tax auditors detected the short payment early this year while scrutinising the accounts of the firm for 1998-1999. They had detected non-payment of sales tax in respect of furniture and equipment, motor vehicles and scrap sold during 1998 and 1999 and devaluation of plant and other assets.
The audit note stated: The unit have also deleted the plant assets from its book value in terms of accumulated description which really devalues the original value to the tune of Rs 280.5 million involving sales tax worth Rs 42 million.
Following the report, the Collector Adjudication, Sales Tax issued show cause notice as to why sales tax aggregating to Rs 42 million along with additional tax under section 34 and penalty u/s 33 should not be recovered from the company.
The company complained to the Federal Tax Ombudsman alleging that the show cause notice was arbitrary and contrary to law. The department in its response opposed the jurisdiction of the FTO and endorsed some of the charges of non- payment of sales tax. But it conceded that the allegation of demand of sales tax against the accumulated depreciation was based on some misconception. The department further pointed out that this case was not made by Large Taxpayer Unit.
In his order, the FTO Justice Saleem Akhtar (Retd) took note of the auditors' misconceived and contravention charge which failed.
The FTO further noted that the disposition of fixed assets by the complainant was not in furtherance of its business and therefore was not liable to sales tax. This led to the incontrovertible conclusion that the complainant did not fail to deposit the amount of tax due or any part thereof in the time or manner laid down under the Act or rules or order as envisaged u/s 33. The order also referred to a number of cases quoted by the complainant where it placed reliance on the decisions of higher courts in its support.
The order observed that the Collector of Sales Tax being an executive officer of CBR is supposed to know the decisions of judicial forums higher to him and are binding on him.
Maladministration alleged against the auditors is proved. They framed three misconceived charges of contravention of law due to lack of competence and negligence in examining the account books for verification of payment of tax due.
Their negligence, incompetence and ineptitude in discharge of duties and responsibilities are maladministration. Ignorance of the settled position of law is "incompetence" which is maladministration per se as specifically defined in clause (ii) of sub section (3) of section 2 of the FTO Ordinance.
It is evident that they acted without valid reasons. Actions unsupported by valid reasons are maladministration as specifically defined under section 2(3) (I) (a) of the FTO Ordinance, notwithstanding the fact that those actions might be bona fide. The view that mala fide is to be proved to hold a tax employee responsible for maladministration is based on the misconceived understanding that the words "unless it is bona fide and for valid reasons" appearing at the end of sub clause (a) of clause (1) of sub section (3) of section 2 of the FTO Ordinance apply to any decision, process, recommendation, act of omission or commission which is contrary to law, rules and regulations or is a departure from the established practice or producer.
Maladministration according to sub section (3) of section 2 of the FTO Ordinance, besides all else, which the word "maladministration" ordinarily means or connotes, includes whatever is enumerated in clauses (I), (ii), (iii), (iv), (v), (vi) and (vii) sub section (3) of section 2 ibid.
Before proceeding to analyse what the clauses supra literally convey, a comprehension of common dictionary meanings of the word "maladministration" is desirable. Meanings of the word given in Chambers 21st Century Dictionary, Revised Edition, at Page 829, published 1999, Reprinted 2000 are;
Maladminister, verb to manage (e.g. public affairs)
Badly, dishonestly or incompetently. Maladministration noun
Further, the meaning of the term "maladministration" as given in Black's Law Dictionary, 7th Edition at Page 967 published - 1999, 6th Reprint - 2003 are;
Maladministration. Poor management or regulation, esp. in an Official capacity. - Also termed misadministration.
Thus in most general terms, bad or poor management or regulation of public affairs is maladministration. Bad or poor management/regulation of public affairs is maladministration. Bad or poor management/regulation of public affairs will remain bad notwithstanding that it is bona fide and for valid reasons because goals of good management or regulation of public affairs can not be achieved without eradication of such reasons/causes. This is the pronounced objective in the Preamble of the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000 reproduced hereunder:
"WHEREAS it is expedient to provide for the appointment of the Federal Tax Ombudsman to diagnose, investigate, redress and rectify any injustice done to a person through maladministration by functionaries administering tax laws;""(Emphasis provided)
Coming to the traits specifically included in the definition of "maladministration' provided in the FTO Ordinance, sub clause (a) of clause (I) of sub section (3) of section 2 ibid. includes in the definition of maladministration a decision, process, recommendation, act of omission or commission, which,
i. is contrary to law, rules or regulations
or
ii. is a departure from established practice or procedure, unless it is bona fide and for valid reasons. (Emphasis provided).
In order to comprehend the rider, "unless it is bona fide and for valid reasons", supra literally, a reference to the dictionary meanings of the term bona fide may be beneficial. Chamber 21st Century Dictionary - Revised Edition at page 155 offers the meanings of the word as under:
Bona fide > adj. Genuine or sincere; done or carried out in good Faith a bona fide offer. > adverb genuinely or sincerely; in good Faith. 16c ad adverb: Latin.
Meanings of the word in Black's Law Dictionary, 7th Edition, at Page 168, Published 1999, 6th Reprint are as under:
Bona fide- adj. [Latin "in good faith"] 1. Made in good faith;
Without fraud or deceit. 2. Sincere; genuine. See GOOD FAITH. - bona fide, adv.
The foregoing meanings of the term "bona fide" show that a decision, process, recommendation, act of omission or commission which is contrary to law, rules or regulations or a departure from established practice or procedure may be claimed to be done in good faith (bona fide), the concept of malice in law notwithstanding.
However, attributing any "valid reason" to a decision, process, recommendation, and act of omission or commission, which is "contrary to law" (the law as settled by the binding decisions of judicial forums) is inconceivable. Departure from established practice or procedure is the only act for which valid reasons may be offered. Thus the rider supra governs only the second part of sub clause (a) of clause (I) of sub section (3) of section 2 ibid ie the phrase, "act of omission and commission which is a departure from established practice or procedure" because it may be both bona fide as well as for valid reasons".
Further, the use of conjunction "and" in the rider supra requires the tax employee to prove that an act of omission or commission, which is a departure from, established practice or procedure on his part was both bona fide as well as for valid reasons. Failure to discharge the onus on any one of the two counts or both shall not absolve him of maladministration because the use of the word "unless" with the rider suggests that it is for the respondent to prove bona fide and valid reasons.
It is also significant that the rider "unless it is bona fide and for valid reasons" governing the second part of sub clause (a) of clause (I) supra, is an exception to the common dictionary meanings of the word "maladministration'. The exception seems to have been made to suggest that the Federal Tax Ombudsman does not recommend any adverse action against a tax employee who is able to prove that departure from established practice or procedure on his part was bona fide and for valid reason.
Accordingly, the preliminary objection taken to the jurisdiction of this forum over the matters alleged in the complaint is over ruled.
It has been noted with concern that senior officers in the Department, while handling the response of tax employee against whom maladministration is alleged, endorsed the same. While recording appreciation for the approach of Director General Large Taxpayers Unit (LTU) in offering to withdraw the charge of contravention on account of unverified allegation of non payment of tax on sale of two lots of scrap and not to press the misconceived allegation of non payment of tax on amount of accumulated depreciation, it would have been desirable if he had not owned the respondent's explanation that:
"Audit observations are issued when any clarifications are required from the taxpayer, which was not required in this case. Moreover, there was no statutory requirement of issuing audit observations before the issuance of show-cause notice at the time when audit in question was conducted. The opportunity of hearing is required to be given as stipulated in section 36 of Sales tax Act, 1990, which has been afforded through the issuance of show-cause notice".
Because it is for him to impress upon the officers in the line of supervision below him that tax employee should not disregard the settled principle of providing due and sufficient opportunity before recommending or taking any action against a tax payer.
It is recommended:
(a) That the adjudication proceedings by the Collector Sales Tax (Adjudication) are concluded within 30 days if not already concluded.
(b) That remedial written counselling of the concerned auditors is done by their Officer-in-charge having regard to the findings supra.
(c) That compliance is reported within 60 days.