THE APPELLATE TRIBUNAL INLAND REVENUE, KARACHI,
SPECIAL DIVISION BENCH, QUETTA
Present: MR. M
M AKRAM, JUDICIAL MEMBER
MR. M ABDULLAH KHAN KAKAR,
MEMBER
ITA NO.1144/KB-2018
Tax Year:
2015
U/S
122(1)
The
CIR (WHZ), RTO,
Quetta.
……………..…Appellant
V E R S U S
Reg
No.0709836
Baluchistan
Glass Limited
28-B3,
Gulberg III. ………………..Respondent
Appellant By :
Mr. Niaz Ahmed, DR
:
Mr. Usama Zaheer, Advocate/LA
Respondent By : Mr. Amjad Ali Siddiqui, (ITP)
:
Mr. Musawer Sajjad, Advocate
:
Mr. Junaid Saleem, Advocate
Date of Hearing : 12.08.2026
Date of Order : 12.08.2026
O R D E R
M. M. AKRAM (Judicial Member): The instant appeal has
been instituted by the appellant-Department against the impugned Order No.
IT/235/2017-18 dated 10.05.2018, passed by the learned
Commissioner Inland Revenue (Appeals), Quetta [hereinafter referred to as the “CIR(A)”],
under section 129(1) of the Income Tax Ordinance, 2001 (the “Ordinance”),
for the Tax Year 2015, on the grounds set forth in the memorandum of appeal.
2. Briefly
stated, the facts of the case are that an order under section 161(1) of the
Ordinance was passed by the learned Deputy Commissioner Inland Revenue, WHT,
Unit-I, Zone-I, RTO Quetta, vide DC No. 10/02 dated 05.05.2017,
whereby tax recoverable under section 161 was determined at Rs.12,400,977/-.
In the same order, penalties aggregating to Rs.33,570,000/- were
also imposed on account of alleged defaults relating to late filing of
withholding statements under sections 165 and 149 of the Ordinance.
3. Feeling
aggrieved by the said order, the respondent-taxpayer preferred an appeal before
the learned CIR(A), who, vide the impugned order dated 10.05.2018,
deleted the penalties. The learned CIR(A), after examining the record and
considering the written as well as oral submissions of both sides, observed
that the quantum of penalty imposed was excessive and oppressive, particularly
when viewed in comparison with the underlying tax demand. It was also noted
that the taxpayer had claimed substantial refunds amounting to Rs.108,296,715/-
to be outstanding with the Department, which, according to the taxpayer, could
be adjusted against the outstanding demand. The learned CIR(A) further took
into consideration the taxpayer’s explanation that the delay in filing the
statements had occurred due to closure of certain business units, severe
financial difficulties and business losses, and that there was no deliberate or
mala fide intention to evade the statutory requirements. Relying upon the
principle that penalties are essentially deterrent in nature and cannot be
treated as a source of revenue, as well as the judicial precedents cited by the
taxpayer and an earlier order passed by the CIR(A), Quetta, in the taxpayer’s
own case whereby penalty had been deleted in view of substantial pending refunds,
the learned CIR(A) concluded that the imposition of penalty, to the extent of
being excessive, was not justified. Accordingly, the learned CIR(A) modified
the impugned order by deleting the penalty of Rs.33,570,000/-, while
maintaining the remaining portion of the order.
4. Being
aggrieved by the aforesaid order of the learned CIR(A), the
appellant-Department has preferred the instant appeal before this Tribunal.
5.
The appeal came up for hearing on 12.08.2026. The learned Departmental
Representative (“DR”)
reiterated the grounds and contentions set forth in the memorandum of appeal
and supported the action of the assessing officer. Conversely, the learned
Authorized Representative (“AR”)
supported the impugned order and vehemently contended that, even otherwise, the
penalties in question were imposed without invoking the provisions of section 182 of the
Ordinance. He submitted that no show-cause notice under section
182 was ever issued to the respondent-taxpayer before imposition of the
penalties. He further contended that the law provides a separate statutory
mechanism and an independent right of appeal against an order passed under
section 182; therefore, the penalties could not validly have been imposed in
the proceedings under section 161 without independently invoking and complying
with the provisions of section 182. On this basis, the learned AR argued that the
impugned penalties were, even otherwise, legally unsustainable.
6. We
have heard the learned representatives of both sides and have carefully
examined the impugned order, the assessment record and the submissions made
before us. The controversy before us is confined to the deletion of penalties
amounting to Rs.33,570,000/-,
imposed by the learned Deputy Commissioner Inland Revenue along with the order
passed under section 161(1) of the Ordinance. From the record, it is evident
that the learned officer, while passing the order under section 161(1) of the
Ordinance, determined tax recoverable from the respondent-taxpayer at Rs.12,400,977/-
and, in the same proceedings, also imposed penalties aggregating to Rs.33,570,000/-
on account of alleged defaults relating to filing of withholding statements
under section 165 and withholding obligations under section 149 of the
Ordinance.
7. The
learned CIR(A), while adjudicating the taxpayer’s appeal, deleted the impugned
penalties, inter alia, on the ground that the quantum of penalty was excessive
and oppressive when compared with the amount of tax recoverable. The learned
first appellate authority also took into consideration the taxpayer’s plea
regarding substantial refunds of Rs.108,296,715/- allegedly outstanding with
the Department, as well as the explanation that the delay in compliance
occurred due to closure of certain business units, financial difficulties and
business losses. The learned CIR(A) further relied upon the principle that penalty
is essentially deterrent in character and cannot be employed merely as a source
of revenue.
8. Before
us, however, the learned AR has raised an additional and, in our view,
fundamental legal objection. It has been specifically contended that the
impugned penalties were not imposed in accordance with the procedure prescribed
under section
182 of the Ordinance; no separate show-cause notice under the
said provision was issued to the taxpayer; and the taxpayer was consequently
deprived of a lawful opportunity to explain why the proposed penalties should
not be imposed. It has further been argued that the statutory scheme
contemplates an independent proceeding for imposition of penalties and that an
order determining tax recoverable under section 161 cannot, by itself,
substitute the proceedings required under section 182.
9. We
find considerable force in the above contention. It is a settled principle of
tax jurisprudence that the liability to pay a penalty must arise strictly in
accordance with the statutory provision creating such liability and that the
authority imposing a penalty is required to comply with the procedure
prescribed by law. A penalty is distinct from the principal tax liability.
While an order under section 161 concerns the liability of a person to pay tax
which was required to be deducted or collected and was not deducted or
collected, the imposition of penalty constitutes a separate consequence arising
from the alleged statutory default and must, therefore, satisfy the specific
requirements governing such imposition.
10. Section
182 of the Ordinance provides the statutory framework for imposition of
penalties for various defaults. The provision requires the competent authority
to proceed in accordance with the prescribed statutory procedure and, where
required by the provision, to afford the person concerned an opportunity of
being heard before imposition of penalty. Thus, the mere existence of a
default, or even the determination of an amount recoverable under section 161,
does not dispense with the statutory requirements governing the imposition of
penalty.
11. In
the instant case, there is nothing on the record brought before us to establish
that an independent show-cause notice under section 182 was issued to the
respondent-taxpayer specifying the defaults for which penalties were proposed,
the applicable provisions of section 182, and the amounts of penalties proposed
to be imposed. Equally, there is no material demonstrating that the taxpayer
was afforded the statutory opportunity of showing cause against the proposed
penalties in proceedings undertaken specifically for that purpose.
12. This
omission is not a mere procedural irregularity. The right to be heard before
imposition of a penalty is a substantive safeguard against arbitrary exercise
of penal jurisdiction. The taxpayer must know the precise default alleged
against him, the statutory provision invoked, the basis on which the penalty is
proposed and the amount sought to be imposed, so that an effective opportunity
of defence may be availed. Where the prescribed penal proceedings themselves
have not been initiated in accordance with law, the resulting penalty cannot be
sustained merely because the underlying withholding order under section 161 is
otherwise valid.
13. We
are also mindful of the distinction between the determination of tax liability
and the imposition of penalty. The two operate in different fields. The
determination under section 161 may establish the amount of tax recoverable
from a withholding agent; nevertheless, such determination does not
automatically validate every penal consequence sought to be attached thereto.
The authority exercising penal jurisdiction must independently satisfy the
requirements of section 182 and record a lawful basis for imposition of the
particular penalty.
14. In
the present case, the learned officer appears to have imposed the penalties in
the very order passed under section 161(1), without demonstrating compliance
with the mandatory requirements of section 182. No separate penal proceedings
or show-cause notice have been brought on record. Consequently, the penalties
suffer from a foundational legal defect and cannot be sustained.
15. In
view of the above finding, it is not necessary for us to enter into the other
considerations relied upon by the learned CIR(A), including the alleged
disproportionality of the penalty vis-à-vis the tax recoverable, the taxpayer’s
financial difficulties, closure of business units, the alleged absence of mala
fide intention, or the availability of substantial refunds. Those
considerations may have relevance where a penalty is otherwise lawfully imposed,
and its quantum or exercise of discretion is under challenge. In the present
case, however, the very assumption of penal jurisdiction has not been shown to
have been exercised in accordance with the statutory procedure.
16. We
may also clarify that our finding regarding the penalties does not disturb the
determination of tax recoverable under section 161(1) amounting to Rs.12,400,977/-,
which was not the subject matter of the relief granted by the learned CIR(A) in
the impugned order and is not required to be adjudicated afresh in the present
appeal.
17. For
the foregoing reasons, although the learned CIR(A) deleted the penalties
primarily on the ground that their imposition was excessive and oppressive, we
uphold the ultimate conclusion for the more fundamental reason that the
penalties amounting to Rs.33,570,000/- were imposed without
establishing compliance with the mandatory statutory procedure under section
182 of the Ordinance. An order imposing penalty without lawful initiation and
completion of the prescribed penal proceedings cannot be sustained.
18. Consequently,
the impugned order of the learned CIR(A), to the extent whereby the penalties
of Rs.33,570,000/-
were deleted, is upheld, though for the reasons recorded
herein. The appeal filed by the Department is accordingly dismissed.
19.
Resultantly, the tax liability determined under section 161(1) shall remain
unaffected, whereas the penalties of Rs.33,570,000/- deleted by the learned
CIR(A) shall stand deleted. Order accordingly.
-SD-
(M M AKRAM)
JUDICIAL MEMBER
-SD-
(M ABDULLAH
KHAN KAKAR)
MEMBER
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