Resort to section 52 of the repealed Income tax Ordinance [now section 161] as a charging provision and a "new source of revenue" has been disapproved strongly by the ATIR in (2003) 87 TAX 23 (Trib.) and 2001 PTD (Trib.) 2605. In a number of cases, eg, 2013 PTD (Trib.) 459, 2012 PTD (Trib.) 188, 2010 PTD (Trib.) 150, the indiscriminate use of section 52/52A/86 of the repealed Ordinance and section 161/162/205 is deprecated.
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."
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.
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.
Lahore High Court in Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc (2014) 110 TAX 221 (H.C. LAH.) observed:
"Under section 161 of the Ordinance, if a deductor fails to collect tax under section 152 or collects it and fails to deposit it with the Commissioner under section 160, such a person becomes personally liable to pay the amount of tax to the Commissioner, who may pass an order to that effect and proceed to recover the same after granting an opportunity of hearing to the person. Section 161(1B), however, provides a concession. If it is established that the tax that was to be deducted from the payment to the payee/deductee and was in the meanwhile paid by that person (payee/deductee), no recovery shall be made from--(deductor-assesee) who failed to collect the tax. The deductor shall, however, be liable to pay default surcharge......."
The Lahore High Court in Asia Feeds (Pvt) Ltd v Federal Board of Revenge etc (2015) 112 TAX 504 (H.C. Lah.) held that:
The objection of the learned counsel for the respondents that the writ petition against impugned show cause notices was not maintainable is not of much substance. Superior courts of the country have already held that if the liability in the show cause notice is palpably unlawful or show cause notice is ultra vires, without jurisdiction or with mala fide intent, such action is to be nipped in the bud. Reference, in this regard, can be made to Mughal-E-Azam Banquet Complex v. Federation of Pakistan and others (2011 PTD 2260), Northern Power Generation Company Ltd v. Federation of Pakistan etc (2015 LHC 3623). Even otherwise, if the dispute arises between the parties in respect fiscal right based upon a statutory instrument the same can be easily determined in writ jurisdiction, as held by the Hon'ble Supreme Court of Pakistan in Messrs Usmania Glass Sheet Factory Ltd Chittagong vs. Sales Tax Officer, Chittagong (PLD 1971 SC 205). I, therefore, overrule the objection of maintainability of petition raised by learned counsel for the respondents and hold the constitutional petition to be maintainable.
The Lahore High Court in Asia Feeds (Pvt) Ltd v Federal Board of Revenge etc (2015) 112 TAX 504 (H.C. Lah.) held that:
Perusal of record shows that earlier proceedings under section 161 read with section 205 of the Ordinance, initiated against the petitioner were finalised vide orders dated 30-06-2012 of the respondent No 3, and orders dated 12-04-2013 and 17-02-2014 passed by respondent No 4 for the Tax Years 2012 and 2013 respectively, and completion of earlier proceedings resulted into creation of demands against the petitioner as mentioned above. Perusal of detailed orders passed by respondent No 3 and 4 in earlier proceedings under section 161 read with section 205 of the Ordinance, reveals that earlier orders were passed after consideration and examining of relevant record for the relevant period, therefore, there is no justification for initiation of fresh proceedings. In this case reference can be made to the judgement dated 19th February, 2015 passed by a Division Bench of the Lahore High Court in PTR No 325 of 2010.
-- 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 (2014) 110 TAX 221 (H.C. LAH.) 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 (2014) 110 TAX 221 (H.C. LAH.) 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 (2014) 110 TAX 221 (H.C. LAH.). In other words such proceedings are justified only if the default was wilful and deliberate.
-- How can the federal government force the people living in various provinces to act as tax withholding agents on its behalf? This is encroachment on their right under the provincial autonomy. The federal government has authority under the constitution to levy tax on income other than agricultural income, but does it have the authority to make people of provinces act as withholding agents? This constitutional question has yet not been raised by the provinces.
-- 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 (2014) 110 TAX 221 (H.C. LAH.) 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 irresponsible and 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 in the case of Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue, etc (2014) 110 TAX 221 (H.C. LAH.). This case comprehensively deals with the issue and is binding on all tax authorities in Pakistan under Article 201 as no contrary judgement of any other High Court or Supreme Court is in the field.
(Concluded) (The writers, lawyers and partners in HUZAIMA, IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences)