APPELLATE TRIBUNAL
INLAND REVENUE, DIVISION BENCH-I,
ISLAMABAD
ITA No.19/PB/2023
(Tax Year, 2017)
ITA No.20/PB/2023
(Tax Year, 2018)
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M/s
Khyber Pakhtunkhwa Highway Authority (KPKHA) Attach Department
Complex, Near Treasury Office, Khyber Road, Peshawar |
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Applicant/Appellant |
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Vs |
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Commissioner
Inland Revenue, |
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Respondent
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Appellant
By: |
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Mr.
Safeer Qaiser, Advocate
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Respondent
By: |
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Mr.
Asad Bilal Jehangir,
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Date
of Hearing: |
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16.02.2023 |
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Date
of Order: |
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09.03.2023 |
ORDER
M.
M. AKRAM (Judicial Member): The titled appeals have
been filed by the appellant against the Appeal Order Nos.1381 & 1382 both dated
25.01.2023 passed by the learned Commissioner Inland Revenue (Appeals), Peshawar
in respect of tax years 2017 & 2018 respectively. As the issues raised in these
appeals are more or less identical and rather interlinked, for the sake of
convenience and clarity, these appeals are taken up for consideration together
and disposed off in this common order.
2. Brief
facts giving rise to the instant appeals are that the appellant is a corporate
body established in 2001, and the principal activity of the appellant is to
construct road highways of KP Province. In the years under consideration, the
appellant for the first time in
partnership with FWO constructed Swat Expressway (Phase I) under the Public
Private Partnership Act, 2014 (PPP Act, 2014). In this regard, the
Appellant executed an Equity Funding and Utilization Agreement dated 07.10.2016
with FWO (Frontier Works Organization). The assessing officer while invoking
the provisions of section 161/205 of the Income Tax Ordinance, 2001 (‘the
Ordinance”) observed minor withholding default under section 153 of the
Ordinance in the tax years under consideration and had decided in the garb of
section 161 to re-characterize a transaction of investment which represents the
shares of KPKHA towards the construction of Swat Motorway Express in the Form
of Class-B Ordinary shares of Rs.100/- each deposited in a pool-fund in a
separately created company namely Sawat Expressway Planning Construction and
Operations (Pvt) Ltd (SEPCO), the company under PPP arrangement
was formed on 25.08.2016 which KPKHA & FWO constitutes
to be the joint owners under PPP Act, 2014. The assessing officer instead of probing the
source of investment, which in this case was the Government of KPK, opted to
re-characterization of the transaction already held invested in the form of
paid-up capital duly acknowledged and accepted by the Securities & Exchange
Commission of Pakistan (SECP). The assessing officer did not accept the
explanation tendered by the appellant and ultimately passed the orders under sections 161/205 of the Ordinance
for the tax years 2017 and 2018 whereby after re-characterization of the transaction
of investment, the appellant/withholding agent has been held liable in default
for alleged non/short deduction/payment of taxes as required under various
provisions of the Ordinance. In the orders, the Assessing Officer held the appellant
withholding agent liable in default at an amount of Rs.424,574,533/- and
397,556,248 for the tax years 2017 and 2018 respectively besides levy of
default surcharge under section 205 of the Ordinance.
Feeling aggrieved,
the appellant taxpayer filed
appeals
before the learned Commissioner Inland Revenue (Appeals), Peshawar who vide appeal Orders Nos.1381 & 1382 both dated 25.01.2023 confirmed the orders passed by the Deputy Commissioner
Inland Revenue. Felt aggrieved with these orders, the taxpayer has preferred
appeals
before this forum and assailed the impugned orders on a number of grounds.
3. This case came up for hearing on 16.02.2023.
The learned AR for the appellant in addition to the written submissions
contended that the learned CIR(A) grossly erred in confirming the treatment
accorded by the assessing officer for re-characterizing of transaction of
investment in the garb of section 161 of the Ordinance as the entire
proceedings were out of the mandate of section 161 ibid. It has been stated
that even no specific notice under section 109 of the Ordinance was served upon
the appellant which is a sine qua non for the initiation of proceedings. He
explains that omission of issuance of show cause notice cannot be called a
procedural irregularity and therefore, it is not a curable defect. Reliance is
placed on 2019 PTD 1828 and 2020 PTD 799. He argued that no independent order
was framed for the re-characterizing transaction of investment under section
109 ibid rather by simply giving the background of the issue or reproducing
proceedings of minutes of the meeting of the provincial “PPP” Committee held
under the Chairmanship of Chief Minister, KP. As regards, the other alleged
default with respect to payments made to PESCO, PTCL, and others under section
153 of the Ordinance, the AR for the appellant contended that the assessing
officer has ignored their exemption certificate as claimed by the recipients.
Notwithstanding the aforesaid, the learned AR for the appellant contended that
all the recipients are NTN holders and have been filing their income tax
returns, therefore, in terms of section 161(1B) of the Ordinance, the default
surcharge could have only been recovered from the appellant. He elaborated that
the primary liability to pay the tax deducted was that of the person from whom
it was being deducted (here, the PESCO). The final determination of the
latter's liability was governed by various provisions of the Ordinance, all of
which imposed separate mechanisms and time limits. Thus, if the recipient/payee
filed a tax return, it would be deemed an assessment order under section
120(1)(b) and could, as a general rule, be amended under section 122 only
within a period of five years as therein provided. The liability of the person
liable to deduct tax (i.e., the appellant) was only secondary and vicarious. It
would be highly anomalous if the liability of the actual or primary taxpayer
was accepted or had no objection on the subject transaction of investment but
that of the deducting authority under section 161 was without any such limit.
Learned counsel submitted further, relying on section 24-A of the General
Clauses Act, 1897 that all statutory power had to be exercised reasonably,
fairly, justly, and for the advancement of the purposes of the enactment. Thus,
the power to take action under section 161 could not be open-ended and without
limit.
4. On the contrary, the
learned DR submits that proceedings under section 161 of the Ordinance were
initiated wherein the appellant was intimated of the issue of tax avoidance at
the time of the release of funds to SEPCO. The appellant was also apprised that
as per section 3, the Income Tax Ordinance, 2001 had an overriding effect on
KPK PPP Act, 2014 and the transaction could be recharacterized under section
109 of the Ordinance. In support, he placed reliance on the minutes of the
meeting chaired by the Chief Minister, KPK, and the others member including the
Chief Secretary KPK and secretary Finance, who specifically pointed to the fact
that the transaction of equity financing could be re-characterized by the
revenue department and eventually the tax would be required to be paid. The
learned DR further argued that as far as the provision of section 161(1B) is
concerned, the prime liability to withhold the tax was on the part of the
appellant which it failed to do so. Notwithstanding the aforesaid, the
recipient SEPCO has not exhausted its minimum tax liability, therefore, the appellant
cannot claim the benefit of section 161(1B) of the Ordinance. It has also been
stated that the tax incidence was avoided,
in the garb of the PPP model under the PPP Act 2014, the main purpose of which
was to circumvent the tax required to be deducted under section 153(1)(c) of the Ordinance.
Therefore, sections 1091(a) & (c)
were applied and the transaction was recharacterized.
The recharacterization of the transaction finds force in the documents
furnished by the appellant relating to the
Planning and Development Department wherein the PKHA consultant M/s KMR
proposed the transaction in the first place and then cautioned the Department,
the Chief Minister, the Chief Secretary, and the Secretary Finance that the
Income Tax Department would recharacterize the transaction and the Chief
Minister cautioned that in such an eventuality the tax liability will be paid.
Viewed in the above context, the
recharacterization of the transaction was done in accordance with the law.
5. We have heard the parties and perused the record. After
considering the grounds of appeal and the arguments advanced by the parties,
the following pivotal question is involved for our consideration:-
Whether under the facts and in the circumstances of
the case, the recharacterization of the transaction of investment and
determining the tax liability thereon could have been made in the hand of the
withholding agent (i.e, the appellant) by invoking the provision of section 161
of the Ordinance?
The provision of section 161 is
reproduced below for ease of reverence:-
“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 Chapter XII 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 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.
(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 twelve percent 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.
(3) The Commissioner may, after making, or
causing to be made, such enquiries as he deems necessary, amend or further
amend an order of recovery under sub-section (1), if he considers that the
order is erroneous in so far it is prejudicial to the interest of revenue:
Provided
that the order recovery shall not be amended unless the person referred to in
sub-section (1) has been provided an opportunity of being heard.” (Emphasis
supplied)
SCOPE OF SECTION
161
This section provides for the consequences of
failure to collect or deduct tax at source under Division-II (i.e section 148) or Chapter XII (i.e Transitional Advance Tax Provisions), Division-III (i.e
sections 149 to 158), and section 50 of the repealed Ordinance. Similarly, it
also provides that where a person collects or deducts tax at source under the aforesaid provisions of law but fails to pay to
the Commissioner as required under section 160 of the Ordinance or subsection
(8) of section 50 of the repealed Ordinance. This section is penal in nature
and prescribes the procedure for recovery. The section as presently available in the statute caters to the
eventuality only to the extent of non-deduction of tax alone as a default while short
deduction of tax is not expressly considered as a failure on the part of the payer/withholding agent. Where there is a short
deduction of tax, the recourse available to the assessing officer would be to
collect the appropriate tax from the recipient/payee of income and not to hold
the payer as a taxpayer in default. If the payer does not deduct the tax, or after
deducting fails to pay it to the Government treasury, he would be deemed to be a taxpayer in default in respect of the tax, would be liable to pay default surcharge thereon [subsection (1B) of section 161] and would also be liable to a penalty under Serial No. (15) of section 182 of the Ordinance, in cases of failure to
deduct and pay the tax without good and sufficient reasons. If a person is deemed to be a taxpayer in default, he has to suffer the consequences expressly provided for in
the Ordinance, as mentioned above.
However, if tax is not deducted
or short deducted, it remains payable by the recipient/payee directly, as provided by section
162 of the Ordinance. Further, where the assessment of the recipient has been
made and the tax fully paid by him, the assessing officer has no jurisdiction
to demand further tax from the payer under this section. Reliance is placed on
the judgment of the Hon’ble High Court titled M/s
Riaz Bottlers (Pvt.) Ltd Vs LESCO and others, (2010 PTD 1295)
wherein it observed that the department is entitled only to charge default
surcharge under section 161(1B) of the Ordinance. Further reliance may be
placed on the judgment titled Sui Northern Gas Pipelines Vs Deputy
Commissioner Inland Revenue and others, (2014 PTD 1939) wherein it has been
held that:
“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 SNGPL (deductor-assessee) who failed to deduct
the tax. The deductor shall, however, be liable to pay default surcharge at the
rate of 18% per annum from the date he failed to collect or deduct the tax to
the date the tax was paid.”
To declare a
deductor, who failed to deduct the tax at source, as a taxpayer in default, the
condition precedent is that the payee has also failed to pay the tax directly.
Reliance may be placed on the judgment titled CIT Vs Sahara India
Commercial Corporation Ltd, (395 ITR 734). The Allahabad High Court
in the case titled Jagran Prakashan Ltd Vs DCIT, (345 ITR
288) on a harmonious construction of the provisions of sections 190, 191, and
201 of the Income Tax Act, 1961, held that the payee had failed to pay the tax
directly is a foundational and jurisdictional fact. It is only after finding
that the payee had failed to pay the tax directly, can the deductor/payer be
deemed to be an assessee in default in respect of such tax. The same view has
been taken by the Hon’ble Lahore High Court, in the case titled Sui
Northern Gas Pipelines Vs Deputy Commissioner Inland Revenue and others.
Where the payer who has deducted the
tax at source has not paid the tax to the Commissioner IR, only such payer can
be considered as a “taxpayer in default” in respect of the amount so deducted
and the revenue department cannot recover the amount from the payee. In a
reverse situation, where no tax is deducted but the payee has paid tax on the
income earned, no tax shall be once again recovered from the deductor-taxpayer.
However, the deductor-taxpayer will be liable to pay the default surcharge
under section 161(1B) read with section 205 of the Ordinance for the period
during which tax remained unpaid.
6. ANSWER TO THE PROPOSED QUESTION
As far as the proposed question is concerned,
the admitted facts are that the payee/recipient i.e M/s SEPCO had filed its
returns of income for the tax years 2017 and 2018 and the returns so filed by
the taxpayer were treated to be assessment orders under section 120(1)(b) of
the Ordinance. The department admittedly has not taken any action against the
payee so far and therefore, the transactions made with the payee by the appellant
have been accepted. It is settled law that the liability of the person liable to
deduct tax (i.e., the appellant) is only secondary and vicarious. It would be
highly anomalous if the liability of the actual or primary taxpayer/payee was
accepted or had no objection on the subject transaction of investment but on
the other hand, the same department cannot be
permitted to adopt a different view in the hand of the payer and recharacterize
the transaction in the garb of section 161 of the Ordinance. The event of
recharacterization of the transaction is incurred only while assessing/computing
the normal income of the taxpayer and determining the tax liability
thereon.
7. If we look at the scheme of the law, the scope of proceedings as
explained above under section 161 of the Ordinance is limited. It cannot be
used to bypass the scheme of the law, particularly with respect to the re-characterization
of transactions that come within the ambit of Chapter VIII (ANTI-AVOIDANCE)
of the Ordinance. For this,
a separate provision is found available in the shape of section 109 of the
Ordinance. Even otherwise, it is pertinent to mention that Chapter VIII of the
Ordinance does not even come within the ambit of section 161 of the Ordinance,
and as such, the appellant cannot be treated as a taxpayer in default. Thus,
the entire proceedings instituted through the show cause are built on a weak
superstructure. In the case titled Habib Bank Limited v.
Federation of Pakistan, (2013 PTD 1659) the hon’ble Sindh High Court observed that the nature
of the transaction cannot
be ascertained in the proceedings under
section 161 of the Ordinance for the reason that
provisions of section 161 are recovery in nature and exercised to
recover the tax only arises when there is an
obligation to deduct and collect tax. The act of failure would not be attracted
when there is a difference of opinion on the interpretation of certain statutory provisions and the nature of the transaction.
The nature of the transaction has to be ascertained and determined in the
assessment of the income of
the taxpayer. At this stage reference can be made to the decision of this Tribunal
reported as 2003 PTD 1167 where it has been held that the provision
of Section 161 is not a charging provision. This has nothing to do with the income or profit
of the person, which is subject to a charge under the Ordinance. Moreover, the withholding
agent is neither a beneficiary in any form in the said exercise nor has been
allowed an incentive for the performance of such duty on behalf of the tax
functionaries. Reference is also made to the judgment of the Hon'ble High Court of
Sindh in the case of Al-Haj Industries v. Collector of Customs, where it has been held that collection of tax and
assessment of income are not one and the same. Reference may also be given to the full bench of
this tribunal judgment titled CIR, Zone-1, RTO, Hyderabad Vs Medimakers Pharmaceutical (AOP), Hyderabad, (2018 PTD 1533). In view of the foregoing, the answer to the
question is in negative against the department.
8. The
assessing officer also subjected some other payments made to PESCO, PTCL, and
others under section 153(1)(a)/(c), ignoring their respective exemption status
as claimed by the recipients. Hence, on this account, the alleged default of
the appellant is also deleted.
9. For what has been discussed above, the impugned orders passed
by the lower authorities are void ab-initio, illegal, and without jurisdiction,
the same are hereby annulled. As a result, the appeals filed by the appellant
are accepted. We, accordingly exercise our power under section 132(6) of the
Ordinance and direct the revenue authorities to refund a sum of
Rs.1,246,905,844/- recovered from the Banks to the appellant taxpayer within a
period of fifteen days from the date of service of this order failing which the
law shall take its course.
10. This order consists of (11) pages and each page bears my
signature.
Sd/-
(M. M. AKRAM)
JUDICIAL MEMBER
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