Mr. Said Ghani, H.No.223 Street No.19, Sector G-10/2, Islamabad | Appellant | |
Vs | ||
The Commissioner Inland Revenue, Withholding Zone, RTO, Islamabad | Respondent | |
Appellant by | Mr. Tariq Hanif, CA | |
Respondent by | Ms. Naheed Akhtar Durrani, DR | |
Date of hearing | 20.08.2019 | |
Date of order | 20.08.2019 |
M. M.
AKRAM (Judicial Member): This appeal has been filed by the appellant/taxpayer against an
Order No.134/2017 dated 20.10.2017 passed by the learned Commissioner Inland
Revenue (Appeals-II), Islamabad for the Tax Year 2015 on the grounds as set
forth in the memo of appeal. The appellant also filed additional grounds in the
instant appeal as well.
2. Brief facts of the case are that the
appellant is a prescribed person under section 153(7)(i) of the Income Tax
Ordinance, 2001 (the Ordinance), therefore, it was obliged to deduct tax at the
time of making payments against different expenses as well as purchases as
required under the provisions of the Ordinance. Accordingly, proceedings were
initiated for the purpose of ascertaining the exact tax liability through the issuance
of notices under section 161/205 read with Rule 44(4) of the Income Tax Rules,
2002 to know the reason for non-deduction of tax against the various
transactions appeared in the return of income filed for the Tax Year 2015 in
view of relevant provisions of law and the judgment of the Hon’ble Supreme
Court of Pakistan reported as 2002 PTD 1. Hence, notice under section 161/205
of the Ordinance was issued for compliance by 21.11.2016 and served upon the
appellant through UMS and also sent through e-mail. Numbers of notices were
issued to the appellant for production of the record and to substantiate his
declared version but the appellant failed to comply with the notices. However,
in response to one notice, the appellant submitted the detail of some expenses
without any supporting documents. Therefore, there was no alternative with the
Assessing Officer to pass an order on the basis of the information available on
the record. The Assessing Officer accordingly passed an ex-parte order dated
09.03.2017 whereby tax demand was created at Rs.45,111,314/- inclusive of
default surcharge. The appellant preferred an appeal before the learned CIR(A)
who vide order dated 20.10.2017 rejected the appeal of the appellant. Being
aggrieved, the appellant has now come up before this forum and has assailed the
impugned order on a number of grounds.
3. This
case came up for hearing on 20-08-2019. The learned AR of the appellant
reiterated the contentions already submitted on the grounds of appeal. On the
other hand, learned DR opposed the appeal on the ground that learned
Commissioner (Appeals) has passed a speaking order and there is no illegality
or lacuna in his order. He, therefore, prays for the rejection of the appeal.
4. The orders of both the authorities have
been examined in detail and perused the available record as well keeping in
view the submissions advanced by the rival parties. The submissions made on
behalf of the appellant have substance. The assessing officer has not mentioned
the reasons for treating the appellant as Withholding Agent under section
153(7)(i) of the Ordinance. How the appellant comes within the ambit of section
153(7)(i), the basic order is silent about this. He should have specifically
mentioned the turnover before assuming the jurisdiction under section 161 of
the Ordinance as this is the first of the three prerequisites spelled out in a number
of cases. According to the law laid down by the Hon’ble High Court, the
following are the basic requirements for assuming the jurisdiction under
section 161 of the Ordinance: -
(i) Taxpayer is a withholding agent and comes
under the definition of prescribed person.
(ii) A particular
transaction is liable to deduction/withholding; and
(iii) That specific tax of a specific person was
to be withheld who could take credit of the tax recoverable under section 161
of the Ordinance.
Reliance may be placed
on the judgment titled CIR Vs Islam Steel Mills (2015 PTD 2335)
and M/s Nishat (Chunian) vs Federal Board of Revenue (2015 PTD 1385)
The record shows that
the case of the revenue is held to be deficient on this account.
From the perusal of the opening
paragraph of the order of the Inland Revenue Officer dated 11.05.2017, it appears
that the assessing officer had no clarity in his mind as to why did he initiate
the proceeding under section 161. An extract from the opening paragraph of his
order is reproduced as under: -
“However, during the course of
the desk audit, it appeared that there is a need to examine the withholding taxes pertaining to the year under
consideration through proceedings u/s 161/205 of the Income Tax
Ordinance, 2001 read with Rule 44(4) of the Income Tax Rules, 2002 to know the reasons of non-deduction of
tax against the various transactions appeared in the return of income
filed for the tax year 2015 in view of relevant provisions of the income tax
law and judgment issued by the Honourable Supreme Court of Pakistan No.
DTPSC0250, 2002 PTD 1 (220 PLD 353) decided in the case of M/s Bilz (Pvt) Ltd.
Vs DCIT Multan & Others.” (Emphasis supplied).
The
objectives set forth by the assessing officer in taking up the proceedings through
show cause notice are:
a)
to examine
the withholding taxes pertaining to the year under consideration; and
b) to know the reasons for the non-deduction of tax against the various transactions.
The
scope of all the three provisions of law cited by the assessing officer i.e.,
section 161, section 205, and Rule 44 of the Income Tax Rules, 2002 has totally
been misconceived by the assessing officer as none of them provide the kind of mandate
he has derived. For the sake of convenience, sub-sections (1) and (1A) of
section 161 are reproduced, as under: -
“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 1 or Chapter
XII or deduct tax from a payment as required under Division III of this Part or
Chapter XII or as required under section 50of the repealed Ordinance; or
(b)
having collected tax under Division II of this Part 4 or Chapter XII 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 pass an order to that effect and 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.”
Sub
Section (1) of section 161 can only be invoked in two situations, firstly, to
recover tax under the provisions of clause (a) of sub-section (1) thereof from
a person who fails to collect the tax or deduct tax and secondly, to recover
tax under the provisions of clause (b) of sub-section (1) thereof from a person
who after having collected tax or deducted tax fails to pay to the
Commissioner. Before issuance of a show-cause notice under section 161 of the
Ordinance, there must be identified any amount of tax which falls within the mischief
of above mentioned two eventualities. In this case, the assessing officer, instead
of seeking reconciliation under Rule 44(4) has demanded the production of
records which are not permissible within the scope of section 161. He has
indulged himself into an exercise which is akin to audit proceedings and after
alleging non-compliance in the submission of records, he has been issuing
notices repeatedly to discharge his onus of providing the opportunity of
hearing. We are of the view that the assessing officer has not identified any
recoverable amount of tax at a point of time prior to resort to invoking the
machinery provision of section 161 provided in the scheme of the Ordinance for
recovery of tax in a specific circumstance. Determination of default of the
withholding agent is the condition precedent for invoking the provisions of section
161 of the Ordinance. The action of the assessing officer is, therefore, held
to be departed from the scope of the provisions of sections 161 and 205. The
CIR (Appeals) has also failed to take notice of the deficiency mentioned above
and has fallen an error of confirming the order of the assessing officer.
5. Section 205 of the Ordinance provides
powers to the Commissioner to charge default surcharge for late payment of tax
which is computed from the date on which payment of withholding tax was due
under Rule 43 of the Income Tax Rules, 2002 read with section 158 of the Income
Tax Ordinance, 2001. Unless and until findings have been given to the effect
that any amount of tax deducted or collected is paid after the time prescribed
under the law, the provisions of section 205 cannot be pressed into service.
Similarly,
Rule 44(4) of the Income Tax Rules, 2002 envisage that: -
“(4) A person required to
furnish the statement under sub-rule (1) or (2) shall, wherever required by the
Commissioner, furnish a reconciliation statement of the amounts mentioned in
the aforesaid annual and monthly statements with the amounts mentioned in the
return of income, statements, related annexes and other documents submitted
from time to time.”
Rule
44(4) provides powers to the Commissioner to seek reconciliation between the payments
mentioned in the return of income tax read with audited accounts thereto and the
withholding statements filed under section 165. Before issuance of notice under
section 161, it is incumbent upon the assessing officer to issue a notice under
Rule 44(4) to seek reconciliation thereunder. Reliance is placed on judgments of
the hon’ble Lahore High Court, Lahore titled as M/s Noon Sugar Mills Ltd Vs
FOP (2015 PTD 1653), WP No. 25020 of 2014 RE: Sahir Associates (Pvt) Ltd Vs FOP, Akhtar Saeed Medical & Dental College Vs
FOP etc2015 PTD 267 (H.C), M/s Nishat ChunianVs Federal Board of Revenue (2014
PTD 2078). In the instant case, there is no mention of issuance of
notice under Rule 44(4) or the reconciliation provided thereunder. In other
words, the assessing officer has not identified any un-reconciled amount before
issuing the show cause notice under section 161(1A). The proceedings in the
case were initiated directly by issuing notice dated 27.10.2016 under section
161/205 of the Ordinance without first adopting the procedure as contemplated
in Rule 44(4) of the Income Tax Rules, 2002 therefore, the proceedings are
contrary to the procedure prescribed in the Ordinance and the law laid down by
the Hon’ble High Court in the judgments cited supra. The assessing officer has
not mentioned the defects in the statements filed under section 165 of the
Ordinance. In case the statements under section 165 of the Ordinance were not
filed or the same were filed but were lacking in making correct disclosure, the
appropriate course was to confront the taxpayer on this account and impose a penalty
under section 182 of the Ordinance. The assessing officer has not given
findings in his order to the effect of any deficiency in the conduct of the
appellant taxpayer in the filing of the statements under section 165 ibid. It appears
that he was satisfied with the quality of disclosures required to be made in
terms of statements under section
6. On the service of notices, we have observed
that the assessing officer was largely focusing on the issuance of notices and
has been piling up the number of notices issued to absolve himself of the responsibility
of providing the opportunity of hearing. The assessing officer has not
discussed how the notices were served and what clear time was allowed for
compliance of these notices except in respect of the notice issued for 13.04.2017
where only two day’s clear time was allowed. The officer has recorded that no
compliance of notice issued for 13.04.2017 was made and he issued last notice
for 27.04.2017 in response to which adjournment was requested by the appellant
which was refused for the alleged reason of using delaying tactics and then
passed the order without providing any further opportunity. We have also observed
that the assessing officer did not fix any date for the personal hearing of the
appellant or his authorized representative. The assessing officer vides notice dated
04.04.2017 issued for 13.04.2017 has asked the appellant to provide records
which signify that his findings were not complete until the issuance of that
notice requiring the taxpayer to appear before him in person or alternative
through his authorized representative with the complete record as required. How
did he issue the show cause notice u/s 161(1A) dated 27.10.2016 when there were
no findings on record to the effect of failure to deduct tax on the part of the
appellant is a question fundamental to the case. There is a long list of
records summoned by the assessing officer. In this regard, the assessing officer
has reproduced his notice issued on 04.04.2017 for the date of compliance of
13.04.2017, as under: -
“Your reply has been examined and
observed that complete details/documents have not been provided. Therefore, you
are required to provide the following documents on or before 13-04-2017: -
1) Party-wise
detail of purchases.
2) Documentary
proof in respect of expenses claimed under different heads.
3) Copy
of rent agreements.
4) Proof
of payments made under the different heads.
5) Proof
of mark up paid
6) Copy
of depreciation chart.
7) Bank
statement for verification of transactions made during the period under
consideration.
8) Salary
register, copies of CNICs of the employees, proof of payment, and mode of
payments made during the period under consideration.
9) Copies
of contracts executed during the period under consideration.”
The
language of the above notice reveals that the appellant provided some
information but the assessing officer was not satisfied with that. The opening
paragraph of page 3 of the order of the assessing officer depicts that notice
of final opportunity was issued on
18-04-2017 for compliance by 27-04-2017. Again,
the intended compliance is the production of records and not the opportunity of
hearing as is required under sub-section (1A) of section 161. We have observed
the following infirmities from the notices issued by the assessing officer: -
(i) The appellant taxpayer submitted a reply and some details which the assessing officer considered as incomplete. The assessing officer required the appellant to submit hefty records which in our view cannot be summoned through a notice under section 161. Such records can be summoned during the course of audit proceedings only. The scope of enforcing submission of records in proceedings under section 161 is quite limited; the withholding agent can only be burdened to provide evidence in support of his contentions that tax was not required to be deducted and the choice of submission of any particular evidence in explanation of the reasons of non-deduction of tax must remain with the claimant withholding agent and the officer must not insist upon submission of records in bulk and in general for conducting audit except the reconciliation statement under Rule 44(4) of the Income Tax Rules, 2002. Before issuance of notice under section 161, the law empowers the Commissioner to issue a notice under Rule 44(4). The Hon’ble Lahore High Court in the judgment titled as M/s Noon Sugar Mills Ltd Vs FOP (2015 PTD 1653) has held that: -
“Rule 44(4) of the Rules empowers the Commissioner to call for a reconciliation statement of the amounts mentioned in the monthly statements filed by the Petitioners. Since the monthly statement is specifically with respect to the withholding tax deducted and collected by the Petitioners, it is not an audit of the income tax affairs of the Petitioners. Audit under Section 214C read with Section 177 of the Ordinance is of a wider scope involving the tax affairs of the Petitioners whereas Rule 44(4) of the Rules is specifically with respect to the withholding tax. It is a verification of the amounts mentioned in the statements to ensure that the Petitioners have deducted or collected tax in accordance with law. The Petitioners are agents of the Government and the amounts collected and deducted by them are amounts which belong to the Government and have to be deposited into the Government treasury. Therefore reconciliation of the statements filed by the Petitioners under Rule 44(4) of the Rules cannot be equated with an audit of the income tax affairs of the Petitioners.”
ii) Notice issued for compliance “on or before 13.04.2017” was the second last notice of the series. There was no hearing fixed on 13.04.2017 through this notice but the officer directed the appellant taxpayer to submit certain records “on or before 13-04-2017”. It cannot be equated with a notice providing the opportunity of hearing. Even if the appellant had provided records, determination of the failure to deduct tax would have remained contingent upon the scrutiny of the records whereas, before the ascertainment of the failure to deduct tax, notice under section 161(1A) cannot be issued. There is a huge difference between a notice calling for records and the notice providing an opportunity of hearing under section 161(1A) of the Ordinance. The learned CIR (Appeals) has erred in not observing the said difference.
iii)
The last notice issued by the assessing
officer for submission of records “by 27-04-2017”
too cannot be termed as a notice of final opportunity of hearing. This is the
last notice issued by the officer and it purports to seek compliance with the
previous notice in terms of submission of records. There was no hearing fixed
on 27.4.2017. Notice for compliance “by
27-04-2017” is held to be a follow-up notice of the previous notice
mentioned at serial (ii) above. The officer directed the taxpayer to submit
certain records “by 27-04-2017”. We
hold that this was not a notice to provide the opportunity for a personal
hearing. The learned CIR (Appeals) has erred in not observing this deficiency.
iv) There was no opportunity of
personal hearing provided through the last two notices mentioned at serials (ii)
and (iii) which is against the principle of equity and audi alteram partem.
The words “opportunity of being heard” used in subsection (1A) of section 161
have significant and purposely been used therein. The
expression "opportunity of being heard" also appears in various
sections of Income Tax Ordinance, 2001. Some of these are:-
Section 74(6)
& (7)
(6) An
order under sub-section (3) or (4) shall be made after providing to the
applicant an opportunity of being
heard and where his application is rejected the Commissioner shall
record in the order the reasons for rejection.
(7) The Commissioner may, after providing to the
person concerned an opportunity of
being heard, by order, withdraw the permission granted under
sub-section (3) or (4).
Section 122(9)
(9) No
assessment shall be amended, or further amended, under this section unless the
taxpayer has been provided with an opportunity
of being heard.
Section 122B(2)
(2)
Where, after making such inquiry as is necessary, Regional Commissioner
considers that the order requires revision, the Regional Commissioner may,
after providing reasonable opportunity
of being heard to the taxpayer, make such order as he may deem fit in
the circumstances of the case.]
Section 132(2)
(2) The
Appellate Tribunal shall afford an opportunity
of being heard to the parties to the appeal and, in case of default by
any of the parties on the date of hearing, the Tribunal may proceed ex parte to
decide the appeal on the basis of the available record.
Section
161(1A)
(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.
Section 170(4)
(4) The
Commissioner shall, within sixty days of receipt of a refund application under
sub-section (1), serve on the person applying for the refund an order in
writing of the decision after providing the taxpayer an opportunity of being heard.
Section 172(5)
(5) No
person shall be declared as the representative of a non-resident person unless
the person has been given an opportunity
by the Commissioner of being heard.
Section 182(2)
(2) The
penalties specified under sub-section (1) shall be applied in a consistent
manner and no penalty shall be payable unless an order in writing is passed by
the Commissioner, Commissioner (Appeals), or the Appellate Tribunal after
providing an opportunity of being
heard to the person concerned.
Section 214B(1), Proviso
Provided
that no order imposing or enhancing any tax or penalty than the originally
levied shall be passed unless the person affected by such order has been given an opportunity of showing cause and of
being heard.
Section 221(2)
(2) No
order under sub-section (1) which has the effect of increasing an assessment,
reducing a refund, or otherwise applying adversely to the taxpayer shall be
made unless the taxpayer has been given a reasonable opportunity of being heard.
Rule 1(5), Part I, Sixth Schedule
(5) The
Commissioner shall neither refuse nor withdraw recognition of any provident
fund unless he has given to the trustees of the fund a reasonable opportunity of being heard.
Rule 1(3), Part II of Sixth Schedule
(3) The
Commissioner shall neither refuse nor withdraw approval to any superannuation
fund or any part of a superannuation fund unless he has given the trustees of
that fund a reasonable opportunity of
being heard.
Rule 1(3), Part III of Sixth Schedule
(3) The
Commissioner shall neither refuse nor withdraw approval to any gratuity fund
unless he has given the trustees of that fund a reasonable opportunity of being heard.
The judgment of the Hon’ble
Sindh High Court in the case titled Siemens Pakistan Engineering Co Ltd v. Federation
of Pakistan & Others (1999 PTD 1358) will apply squarely and
with full force without any exception. The Hon’ble Sindh High Court has made
elaborate observations in respect of the real scope of the expression "opportunity of being heard"
as under: -
"It will be observed that in all the aforesaid
three sections, the law requires that no order affecting the rights of a person
shall be passed without providing him an opportunity of being heard. The word,
"hear" according to The Chambers Dictionary (1994 Edition) means
"to perceive by the ear, to have or exercise the sense of hearing, to
listen, or be spoken of". The past participle "heard" means
"actin of perceiving sound" and the noun "hearing" means
"power or act of perceiving sound; an opportunity to be heard; judicial
investigation and listening to evidence and arguments". The Standard
International Dictionary (1973 Edition), Part I, defines "hear" to
mean "to listen, to perceive by means of the ear, to listen to officially,
judicially". The phrase "opportunity of being heard" would,
therefore, mean that the party concerned should be allowed to present his point
of view, explanation, clarification, and arguments by spoken words which should
be heard by the officer passing the order. An explanation given in writing is
perceived by the sense seated in the eye has generally not been considered
sufficient. Experience has shown that many doubts, complaints, and
misunderstandings between parties are cleared, resolved, and removed when they
meet face to face and communicate by word of mouth. Appearance in person and
explanation by word of mouth, therefore, is placed on a higher footing both in
daily life and in judicial and administrative proceedings where the rights of
parties are involved. Therefore, it is not the written explanation or the
answer submitted to the show-cause notice but the expression of spoken words of
the person concerned which have been emphasised by the Legislature in the
relevant provisions relating to Appeals in the Sales Tax Act. Consequently, an
officer before passing an order which would adversely affect the rights of a
party should hear that person's explanation, clarification, and argument in his
defence submitted by him personally or through his counsel or his duly authorised
agent. If such a hearing is not given to the person concerned, the order would
be in violation of not only the principles of natural justice but also of the
statutory requirements and consequently would be invalid.”
The above
directions/observations of the Sindh High Court are an eye-opener for the Tax Authorities.
They do not bother to consider the written arguments/replies of the taxpayers
what to talk of giving them "personal hearing" and recording of their
spoken arguments. Applying the principle laid down by the Sindh High Court one
would find that hardly a few orders by the tax authorities, both adjudicating
and appellate, would stand the test of natural justice. It is tragic that the
tax machinery (responsibility squarely lies with the FBR) in its statutory
functions is blatantly violating the principle of natural justice. The higher
courts, including the Tax Appellate Tribunal, have time and again even passed
strictures against the tax authorities for such lapses, but the concerned
authorities in the FBR never bother to initiate any departmental proceedings
against these officers. This shows how much respect they have for the higher
courts (their claims in press releases and interviews are mere lip-service).
The Supreme Court of
Pakistan, in the case of Anisa Rehman v. PIAC, 1994 SCMR 2232,
set aside the order of reversion of the employee on the ground that she had not
been heard before the impugned order reverting her to a lower grade was passed
with the observation that it would be open to the employer to take fresh action
after hearing the appellant in accordance with law.
The important questions
relating to statutory requirements of "hearing" in person have been
answered by the Sindh High Court in Siemens Pakistan Engineering Co Ltd v.
Federation of Pakistan & Others (1999 PTD 1358) as under: -
"The next question which arises for consideration
is whether the requirement of personal hearing would be fulfilled if the
hearing is given by one officer and the order is passed later on by another
officer who has not heard the explanation, clarification, and the arguments of
the party concerned.
The answer is simple. If the Legislature did not want
to provide an opportunity to the person concerned to present his case by spoken
words before the Sales Tax Authority it would not have included the phrase
"giving an opportunity of being heard" in sections 44, 45, and 46 of
the Sales Tax Act. The wordings of section 44(c) of the Act are very
significant in this respect because it clearly requires that the person
concerned should be given a reasonable opportunity of being heard in person.
If the officer has not heard the person
concerned he would not have knowledge of the explanation given and the
arguments advanced by the latter and consequently would not be qualified to
pass an order because the hearing by a predecessor does not mean or amount to a
hearing by the officer passing the order.
Such an officer would be ignorant of the
explanation, clarification, and arguments advanced by the party concerned and
would pass the order on the basis of his own perception and understanding of
the issues in question. In this respect, it would be advantageous to reproduce
here a short paragraph from the "Judicial
Review of Administrative Action" by S.A. de Smith, (1973 Edition), page
193, which reads as follows:-
"Must he who decides also hear? In general, the
answer is in the affirmative. It is a breach of natural justice for a member of
a judicial tribunal or an arbitrator to participate in a decision if he has not
heard all the oral evidence and the submissions. The same principle has been
applied to members of the administrative bodies who have taken part in
decisions affecting individual rights made after oral hearings before those bodies
at which they have not been present; for bias and ignorance alike precludes
fair judgment upon the merits of a case."
A similar view was expressed more than 75 years ago, in
the case of Mahmood Khan and others
v. Ghazanfar Ali and others, AIR 1920 Lahore 247, by Abdul Raoof, J. of
the Lahore High Court, who accepted the contention of the appellant that the
fact that the arguments had been heard by another officer made it absolutely
necessary for the learned Munsif who was going to deliver the judgment to have
allowed the parties to put their case before him and consequently remanded the
case to the trial Court for disposal according to law.
In the present case also, it is an admitted
position that the Additional Collector-I (respondent No 4) who passed the
impugned order, dated 12-6-1998 was not the officer who had heard the
petitioner's counsel on various dates and especially on the last date of
hearing on 25-10-1997. The said officer (respondent No 4) thus passed the
impugned order without giving a personal hearing to the petitioner, which is
not only a violation of the principles of natural justice but also of the
statutory requirement of section 44 of the Sales Tax Act."
The above
remarks/observations of the Sindh High Court make it abundantly clear that the
scope of the word “opportunity of being heard" requires adequate and
personal hearing and not the mere formality of issuing notice or discussing
some aspects of reply of the party in a casual manner. This principle is
applicable in all kinds of tax proceedings where the statute specifically
requires a personal hearing or even if there is no such command in law but the
order/action of the authority can increase the tax burden of the taxpayer or
where past and closed transactions are to be reopened. It is customary these
days that the tax authorities just shrug away the written replies or verbal
arguments of the taxpayers dubbing the same as "irrelevant" without
refuting the same with plausible arguments. This practice is against the
established principles of natural justice.
In conclusion, it can be said that any order
which resulted in civil consequences is a quasi-judicial order and in all such
orders principles of natural justice must be followed. The tax authorities must
observe principles of natural justice in passing orders against any taxpayer.
The principles of natural justice must always be kept in view and fulfilled
while taking action, initiating proceedings, and passing orders under fiscal
laws. Any order which violates the principles of natural justice is a void
order as held by Supreme Court in 1959 PLD 45 (SC) and (1964) 70 Tax 49
(S.C. Pak).
7. On
page 3 of the original order, the assessing officer has drawn his findings;
serial (iv) and (v) of the findings state that the assessing officer has made the
best judgment order. This is quite surprising. The concept of “best judgment” is peculiar to
assessment and is not applicable in the proceedings under section 161 of the
Ordinance for the reasons that section 161 applies to the recovery of tax in
default. We reiterate our findings made supra regarding the scope of section
161 that section 161 can be invoked only in two situations, firstly, to recover
tax under the provisions of clause (a) of sub-section (1) thereof from a person
who fails to collect tax or deduct tax and secondly, to recover tax under the
provisions of clause (b) of sub-section (1) thereof from a person who after
having collected tax or deducted tax fails to pay to the Commissioner. Section
161 does not provide for determining default as a withholding agent on the
basis of an estimate. Section 161 is a tool of recovery and not an assessment
of tax liability using guesswork. In our view, the assessing officer has erred
in law in applying the concept of best judgment assessment.
8. Now we come to the merits of the case. The
appellant claimed an expense of Rs.10,386,700/- under the head “Daily Labour”.
The assessing officer has held that the appellant did not provide any
documentary evidence regarding payments made and has taxed 50% of the claim @
10% to raise tax demand of Rs.519,335/-. The nature of the expense is
classifiable under the head salary. Given that the basic threshold of salary
income is Rs. 400,000 (which works out to Rs.33,333/- per month), there could
hardly be any daily-wager earning a taxable salary. Tax on salary income is to
be computed on case to case basis; application of a hypothetical rate of 10% is
considered patently illegal and confirmation of the treatment meted out in the first
appeal is not tenable in the eyes of law. Further, it is observed that the
requirements of sub-section (1A) of section 161 have not been fulfilled. The charge
of tax under the head “Daily labour” without specifically confronting the
appellant taxpayer is, therefore, deleted in view of the reasons assigned above.
The appellant claimed an expense of
Rs.1,617,254 under the head “Repair & Maintenance”. The appellant taxpayer
raised the contention that individual payments were below the taxable limit and
no tax was required to be deducted. The assessing officer has held that the
appellant did not provide any documentary evidence regarding payments made and
has taxed the entire amount @ 10% to raise the tax demand of Rs.161,725. Application
of a hypothetical rate of 10% is considered patently illegal and confirmation
of the treatment meted out in the first appeal is considered not in order. Further,
it is observed that the requirements of sub-section (1A) of section 161 have
not been fulfilled. The charge of tax under the head “Repair & Maintenance”
without specifically confronting the appellant taxpayer is, therefore, deleted
in view of the reasons assigned above.
The appellant claimed an expense of
Rs.5,965,200 under the head “Depreciation of vehicles”. The officer has held
that the appellant did not provide a depreciation schedule and proof of
acquisition of assets on which depreciation has been claimed and has taxed the
entire claim @ 4.5% to raise tax demand of Rs.268,434. It is quite surprising
and we are afraid that the assessing officer totally lacks the understanding
that depreciation is a non-cash notional expense admissible under the Third
Schedule to the Ordinance and there is involved no payment and withholding of tax
is not attracted. Why did the assessing officer require a schedule of
depreciation and proof of acquisition of the depreciable assets is quite strange.
In case depreciation is incorrectly claimed, an amendment of deemed assessment could
be made which is beyond the jurisdiction of the assessing officer in these
proceedings. Further, it is observed that the requirements of sub-section (1A)
of section 161 have not been fulfilled. Confirmation of the treatment meted out
in the first appeal is considered and prima facie shows that the learned CIR(A)
has passed the order without application of mind. The charge of tax under the
head “depreciation” is, therefore, deleted in view of the aforesaid reasons.
The appellant claimed an expense of
Rs.11,491,110/- under the head “Stores & Spares”. The appellant taxpayer
raised the contention that individual payments were below the taxable limit and
no tax was required to be deducted. The assessing officer has held that the
appellant did not provide any documentary evidence regarding payments made and
has taxed the entire amount @ 4.5% to raise the tax demand of Rs.517,099/-. The
assessing officer has not confronted the appellant before imposing tax and
without conducting any hearing. Further, it is observed that the requirements
of sub-section (1A) of section 161 have not been fulfilled. Charge of tax under
the head “Stores & Spares” is, therefore, deleted in view of the aforesaid reasons.
The appellant claimed an expense of
Rs.492,308/- under the head “Labour Welfare”. The officer has held that the
appellant did not provide any documentary evidence regarding payments made and
has taxed the entire amount @ 4.5% to raise the tax demand of Rs.22,154/-. The assessing
officer has not classified this expense and has charged a hypothetical rate of
4.5%. The officer has not confronted the appellant before imposing tax and
without conducting any hearing. Further, it is observed that the requirements
of sub-section (1A) of section 161 have not been fulfilled. The charge of tax
under the head “Labour Welfare” is, therefore, deleted in view of the aforesaid
reasons.
The appellant claimed an expense of
Rs.39,975/- under the head “Photostat”. The officer has held that the appellant
did not provide any documentary evidence regarding payments made and has taxed
the entire amount @ 4.5% to raise tax demand of Rs.1,799/-. The appellant
taxpayer raised the contention that individual payments were below the taxable
limit and no tax was required to be deducted. The claim is quite nominal and
patty in nature. The officer has not confronted the appellant before imposing
tax and without conducting any hearing. Further, it is observed that the
requirements of sub-section (1A) of section 161 have not been fulfilled. Charge
of tax under the head “Photo state” is, therefore, deleted in view of the aforesaid
reasons.
The appellant claimed an expense of
Rs.717,294 under the head “Wood/coal”. The officer has held that the appellant
did not provide any documentary evidence regarding payments made and has taxed
the entire amount @ 4.5% to raise tax demand of Rs.32,278/-. The appellant
taxpayer raised the contention that individual payments were below the taxable
limit and no tax was required to be deducted. The claim is quite nominal and
patty in nature. The officer has not confronted the appellant before imposing
tax and without conducting any hearing. Further, it is observed that the
requirements of sub-section (1A) of section 161 have not been fulfilled. Charge
of tax under the head “Wood/coal” without specifically confronting the
appellant taxpayer is, therefore, deleted in view of the aforesaid reasons.
The appellant claimed an expense of Rs.128,500/-
under the head “Travelling”. The officer has held that the appellant did not
provide any documentary evidence regarding payments made and has taxed the
entire amount @ 2% to raise the tax demand of Rs.2,570. The claim is quite
nominal and patty in nature. The application of 2% tax rate is also
hypothetical as the expense is different from freight. The officer has not
confronted the appellant before imposing tax and without conducting any
hearing. Further, it is observed that the requirements of sub-section (1A) of
section 161 have not been fulfilled. The charge of tax under the head “Travelling”
is, therefore, deleted in view of the reasons assigned above.
The appellant claimed an expense of
Rs.3,229,432/- under the head “Petrol & Diesel”. The officer has held that
the appellant did not provide any documentary evidence regarding payments made
and has taxed the entire amount @ 4.5% to raise the tax demand of Rs.145,324/-.
The appellant taxpayer raised the contention that individual payments were exempt
from being petroleum items and no tax was required to be deducted. The claim is
quite nominal and patty in nature. The officer has not confronted the appellant
before imposing tax and without conducting any hearing. Further, it is observed
that the requirements of sub-section (1A) of section 161 have not been
fulfilled. The charge of tax under the head “Petrol & Diesel” is,
therefore, deleted in view of the reasons assigned above.
The appellant claimed an expense of
Rs.764,500/- under the head “Security Guard”. The officer has held that the
appellant did not provide any documentary evidence regarding payments made and
has taxed 50% of the claim @ 10% to raise tax demand of Rs.76,450/-. The nature
of the expense is classifiable under the head salary. Given that the basic
threshold of salary income is Rs. 400,000 (which works out to Rs. 33,333/- per
month), there could hardly be any daily-wager earning a taxable salary. Tax on
salary income is to be computed on case to case basis; application of a
hypothetical rate of 10% is considered patently illegal and confirmation of the
treatment meted out in the first appeal is not tenable in the eyes of law. Further,
it is observed that the requirements of sub-section (1A) of section 161 have
not been fulfilled. The charge of tax under the head “Security Guard” without
specifically confronting the appellant taxpayer is, therefore, deleted in view
of the reasons assigned above.
Expenses under the head Printing &
Stationary (Rs.136,528/-), Newspaper (Rs.33,465/-), Legal & Professional
(Rs.45,000/-), and Medical (Rs.153,173/-) have also been taxed at hypothetical
rates and without confronting the taxpayer. These expenses are also nominal. Further,
it is observed that the requirements of sub-section (1A) of section 161 have
not been fulfilled. Charge of tax under these heads without specifically
confronting the appellant taxpayer is, therefore, deleted in view of the reasons
assigned above.
The assessing officer has given very
novel treatment in para 2 of page 7 of his order in respect of the cost of
contract receipts. It has been alleged that the appellant has suppressed
expenses relating to the cost of contracts and the assessing officer has
estimated the expenditure for the purpose of charging of tax on a totally
fictitious and hypothetical basis and determined tax liability as per the
following computation: -
Cost of contracts after excluding
profit Rs. 606,918,875/-
Less the expenses declared Rs. 44,846,648/-
Balance suppressed cost Rs. 562,072,227/-
Less 20% BTL payments Rs. 449,657,782/-
Balance taxable payments Rs. 449,657,782/-
Estimated purchases out of above @ 50% Rs. 224,828,891/-
Estimated services out of above @ 50% Rs. 224,828,891/-
Tax on goods @ 4.5% Rs.
10,117,300/-
Tax on services Rs. 22,482,889/-
Total tax u/s 161 Rs. 32,600,189/-
There
is no explanatory note given in the order to provide reasons, rationale, and
basis for resort to charging tax on a presumptive basis. Such kind of
discretion exercised cannot be sustained under any standard of law and equity. In
case the appellant failed to make proper disclosures, he should have been
confronted in respect of the lacking disclosures. Any failure on the part of
the taxpayers and non-compliance with the notices entails penal proceedings and
prosecution proceedings. Unfortunately, the assessing officer has not proceeded
in accordance with the relevant law and has charged tax on the basis of
presumption, estimate, and without knowing the actual amount paid without tax
deduction and the nature of actual expenses. The contention of the appellant
taxpayer that the contract receipts also include mobilization advance received
and refund of retention money has not been considered at all. However, we
disagree with the learned AR in respect of ground No.10 wherein, it has been
asserted that once tax under section 234 is paid in respect of carriage
vehicles, it constitutes final discharge of tax liability as an order under
section 161 has not been passed against the owners of trucks and the plea taken
is considered totally irrelevant. Creating charge of tax on the alleged
suppressed cost of sales by fictitious computation, fictitious bifurcation of
expenses, and fictitious classification of expenses, to the tune of
Rs.32,600,189/- is considered patently illegal. The assessing officer has
failed to identify that a particular transaction is liable to
deduction/withholding and that specific tax of a specific person was to be
withheld who could take credit of the tax recoverable under section 161 of the
Ordinance. Reliance may be placed on the judgment of the Hon’ble High Court reported
as 2015 PTD 2335.
The Hon’ble Lahore High Court in a
number of judgments has held that no recovery of non-deducted/non-collected tax
from taxpayer except for default surcharge could be made penalizing the failure
to deduct if the recipient of payment had discharged his tax liability while
filing his own return of income tax. Reliance is placed on the judgments
reported as Margalla Textile Mills Ltd., Lahore (2008 PTD 1982), Pak-Saudi
Fertilizer Ltd. (2000 PTD 3748), Messrs Riaz Bottlers (Pvt.) Ltd. through Tax
Manager v. Lahore Electric Supply Company (LESCO) through Chief Executive and 3
others (2010 PTD 1295). The Hon’ble Lahore High Court in similar
circumstances has held that 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). This complies with the requirement of Articles 4 and 10A of the
Constitution and the jurisprudence settled by the superior courts. Reliance can
be placed on Mst. Zahida Sattar and others v. Federation of Pakistan and others
(PLD 2002 SC 408).
Creating a tax demand which is in
excess of the right of the tax collector and recovery thereof is tantamount to
Unjust Enrichment. The doctrine of unjust enrichment i.e., retention of a
benefit by a person that was unjust or inequitable squarely applies in this
case. Reliance is placed on the judgment of the Hon'ble Supreme Court of
Pakistan reported as (2005 SCMR 100), (1999 SCMR 382). Further,
it is observed that the requirements of sub-section (1A) of section 161 have
not been fulfilled. The proceedings conducted by the assessing officer are
quasi-judicial proceedings, giving a hearing of opportunity to the taxpayer is
the mandatory requirement and it is also the mandate of sub-section (1A) of
section 161. Just calling of record from the taxpayer is not equated with the
opportunity of being heard by the taxpayer.
9. For the foregoing reasons, the appeal of
the appellant is accepted and the orders passed by both the authorities are
vacated.
10. This order consists of (20) pages and each
page bears my signature.
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Sd/- (M.M.
AKRAM) JUDICIAL
MEMBER |
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Sd/- (NADIR
MUMTAZ WARRAICH) ACCOUNTANT
MEMBER |
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Sir, Thank you so much for uploading this and detailed discussion regarding 161/205 very much helpful for the new Qamar's as well as to the seniors to understand the gist of law.
ReplyDeleteThank you
Regards:
Muhmmad Waqas
Cost & Management/Advocate