Shahid Jamil Khan, J. This judgment deals with the vires of Commissioner's jurisdiction under Sections 161 and 162 of the Income Tax Ordinance, 2001 ("Ordinance of 2001"), on the touchstone of law laid down by August Supreme Court in Commissioner Inland Revenue Zone-I, LTU v. MCB Bank Limited (2021 SCMR 1325) and Division Bench of this Court in Commissioner Inland Revenue v. M/s PEPCO Pakistan (2015 PTD 863).
The petitioner has challenged order dated 30.11.2021 passed under Section 161 of the Ordinance of 2001.
The impugned order is assailed in second round of litigation. Earlier, Writ Petition No. 21602 of 2021, was partly allowed, against notices under Section 161 of the Ordinance of 2001, observing that petitioner enjoyed protection, under Section 174(3), from producing record beyond last six years. It was, however, observed that proceeding under Section 161 may continue. Relevant part is reproduced: "11. Therefore to the extent of the repeated demands for production of documents in the impugned notices, the same are without any legal basis and against the mandate of the law. However, the proceedings under Section 161 of the Ordinance are independent proceedings which may continue but it is for the department to make the most of the information provided to it and to pass speaking orders on the basis of which it will determine whether there is a failure to pay the tax collected or deducted without placing any burden on the taxpayer and its inability to produce the relevant documents.
12. Under the circumstances, the instant petition is accepted in the above terms and the requirements for documentary evidence under the impugned notices dated 7.1.2021, 25.1.2021, 2.3.2021, 10.3.2021 and 25.3.2021 issued by the Respondents are set aside. It is clarified that the proceedings under Section 161 of the Ordinance may continue."
[emphasis supplied] Admittedly, the judgment ibid, reported as Pepsi Cola International (Private) Limited through Authorized Representative v. Federation of Pakistan through Secretary Revenue Division, Islamabad and another (2022 PTD 51) being not assailed, attained finality.
2. While assailing the impugned order, learned counsel for the petitioner has attributed mala fide for conducting proceedings in haste, as fresh Notice was issued on 25.11.2021 and final order is passed on 30.11.2021. Violation of the earlier judgment was asserted for calling again the record of period, protected under the Section 174(3). To support this contention, contents of Show Cause Notice and the impugned order were read.
Reliance is placed on Northern Power Generation Company Limited v. Federation of Pakistan and others (2015 PTD 2052) and Nagina Silk Mill, Lyallpur v. The Income-Tax Officer, A-Ward, Lyallpur and another (PLD 1963 SC 322), to argue that writ petition is maintainable in presence of an appealable impugned order, against which appeal has already been filed.
3. Learned counsel for the respondents raised preliminary objection on maintainability of this petition, against which statutory remedy of appeal has already been availed.
Further submitted that there is no limitation for an action under Section 161 of the Ordinance of 2001 and relied on August Supreme Court's judgment in M/s Pakistan Mobile Communication (Pvt.)
Ltd. v. The Commissioner of Income Tax, Companies Zone, Islamabad, (Civil Appeal Nos. 1091- 1092/2009 etc.), followed by Hon'ble Sindh High Court in Habib Bank Ltd. v. Federation of Pakistan through Secretary, Revenue Division and 5 others (2013 PTD 1659).
Responding to alleged mala fide, learned counsel submitted that earlier notices were merely referred without conducting any proceedings under the notices already set aside.
4. Heard. Record perused.
5. It is noticed, besides arguments by the parties, that the Show Cause Notices and consequent impugned order is in oblivion of law already settled through judgments of this Court, by Division Bench in Commissioner Inland Revenue v. M/s PEPCO Pakistan (2015 PTD 863), and by Single Bench in Sui Northern Gas Pipelines v. Deputy Commissioner Inland Revenue and others (2014 PTD 1939) and Messrs Riaz Bottlers Pvt. Ltd. through Tax Manager v. Lahore Electric Supply Company (LESCO) through Chief Executive and 3 others (2010 PTD 1295). Relevant excerpt from the judgment in PEPCO Case is reproduced: - "6. Before discussing the provisions of Section 162, it would be advantageous to have a glance on scheme of the statute from where it stems. This Section is placed in Division IV of Part V to Chapter X. Part V of Chapter X (PROCEDURE) deals with "ADVANCE TAX AND DEDUCTION OF TAX AT SOURCE".
It's Section 147 (7) and (8) discloses the nature of advance tax, same is reproduced:- "(7) The provisions of this Ordinance shall apply to any advance tax due under this section as if the amount due were tax due under an assessment order.
(8) A taxpayer who has paid advance tax under this section for a tax year shall be allowed a tax credit for that tax in computing the tax due by the taxpayer on the taxable income of the taxpayer for that year."
[emphasis supplied] Underlined part of Sub-Section (7) says that 'advance tax' shall be taken as 'tax due' under an assessm ent order, whereas the underlined portion of Sub-Section (8) discloses its nature that the person who has paid 'advance tax' shall be allowed 'tax credit' while computing 'tax due' on his taxable income for that year.
Essence of advance tax is that it is collected before determination of income (passing of assessm ent order) and its credit is allowed against the taxable income so determined. The concept of advance tax is known since inception of income tax; purpose of which is collection of tax in advance and its adjustment at later stage but not charging or levy of tax.
The Part V, ibid, deals with mechanism of fixing liability to pay advance tax and its collection. For collection of advance tax, certain persons are obliged, by the Statute, to collect and deposit the same in treasury. The person obliged, under the statute, to withhold or deduct tax of another person is in fact an agent of the State. If he fails to comply with the statutory obligation, such tax can be recovered from him under Section 161 of the Ordinance, which is also placed, along with Section 162, in Division IV of Part V. Section 162 is for recovery from the person whose advance tax was not withheld or collected.
Sub-Section (1B) of Section 161 further clarifies the concept of advance tax, which says that 'no recovery shall be made if 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'. However, under Sub-Section (2) of Section 162, a person who failed to deduct tax shall not be absolved from other legal action, like imposition and recovery of default surcharge or disallowance of deduction of expenses etc."
[emphasis supplied]
6. Admitted position is that impugned order, under section 161 of the Ordinance, relates to tax year 2014, whereas proceedings were initiated through Show Cause Notice dated 15.06.2020, on failure to submit reconciliation in response to Notice dated 04.06.2020 under Rule 44(4) of Income Tax Rules 2002 ("the Rules"). However, while concluding proceeding through impugned order, subsection (1B) of the Section 161 is totally ignored, which is reproduced: - "161. _ (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 per cent per annum from the date he failed to collect or deduct the tax to the date the tax was paid."
[emphasis supplied] The subsection, ibid, casts an obligation upon the Commissioner or Taxation Officer to satisfy itself that the tax due of the person, from who's payment advance tax was to be deducted or collected, has been paid.
The rational in the subsection (1B) is very simple that a tax liable to be adjusted against tax due, cannot be recovered when the tax due is already paid. Recovery of any amount, thereafter, not adjustable against tax due for the relevant period, shall have to be refunded and the whole exercise for recovery would be futile, as tax collected would not become part of National Exchequer rather would burden it with an expense which could have been expended for recovery of tax due.
The pursuit of creating such demands by tax administrators, to meet budgetary targets, not only wastes resource and revenue but burdens the judicial hierarchy up till Supreme Court.
If any proceeding is concluded without fulfilling this obligation, the final order so passed, even if appealable, is susceptible to judicial review in constitutional jurisdiction, in particular, when the High Court has already declared this obligation as mandatory. Judgment in Northern Power Generation Company Limited v. Federation of Pakistan and others (2015 PTD 2052) identifies the circumstances where action, need to be nipped in the bud, can be judicially reviewed, despite availability of appeal.
7. August Supreme Court of Pakistan has dealt, recently, with similar exercise of power under the Section 161, through judgment in MCB's Case, ibid, where notices for tax years 2003-2006 were given on 18.06.2012 and the amounts confronted in the notices were culled from the tax returns by merely referring to different heads, asserting that statements under the Rule 44 were not submitted. Judgment in Messrs BILZ (Pvt.) Ltd. v. Deputy Commissioner of Income Tax and another (2002 PTD 1) was relied upon for seeking reconciliation under its sub rule (4) and to pass the order for recovery under Section 161.
August Court explained the judgment in Bilz Case (supra) and its misuse by the Department is deprecated with observation that it 'cannot be used as a platform by tax authorities to launch fishing expedition and roving inquires'. It is held that the provisions of Section 161, 'becomes operative only if there is a failure to collect or deduct'. Relevant excerpts are reproduced:- "11. Bilz is sometimes taken (and the department certainly so acts) as an authority for a broad and general proposition, namely, that since the taxpayer especially has knowledge of the persons to whom payments are being made, all that the tax authorities have to do for purposes of section 161 is to identify the payments, whether singly or in lump sum (i.e., as part of a broader class or category of such payments). It is then for the taxpayer entirely to show whether the required deductions were made and if he fails to do so then section 161 comes into operation. This is how, e.g., Bilz was understood by the Lahore High Court in Islam Steel Mills (see para 13 thereof). This, in our view, is a complete misunderstanding of the law, and misreading of Bilz. It must be kept in mind that both the Bilz litigation and the appeals presently before us arose out of tax appeals/references. As is well established the final forum for determining questions of fact is the Tribunal. Thereafter, only questions of law can be taken. Now, as noted above, in Bilz (HC) it was specifically observed that the Tribunal had found, as a fact, that the assessee had deliberately withheld the particulars of the parties to whom payments had been made. Furthermore, both in the High Court and in this Court it was specifically observed that no questions of law arose for consideration. These aspects are crucial for a proper appreciation of the Bilz litigation. It moved within a specific, and narrowly drawn, factual locus, i.e., the deliberate withholding of information regarding the payees by the assessee. In any case, and further, it raised no questions of law as could ground the matter in the reference jurisdiction of the High Court. When so understood it at once becomes clear that Bilz does not (and, in our respectful view, cannot) lay down any broad or general proposition of the sort noted above. Its applicability is limited, and must be strictly confined to factual circumstances of the sort in which the litigation was grounded. To the extent that no questions of law arose therein it is, with respect, doubtful whether the leave refusing order of this Court can in any case be regarded as containing any observations that have binding precedential effect. It is therefore most unfortunate that the tax authorities have seized certain observations made in Bilz and, taking them out of context, been misusing a leave refusing order of this Court as a tool and instrument to harass taxpayers. This so-called "understanding" and application of the decision must be strongly deprecated. It must be clearly understood that Bilz is not, and cannot be used as, a platform by the tax authorities to launch fishing expeditions and roving inquiries. It cannot, and does not, support or allow the issuance of show cause notices of deliberate vagueness and breathtaking generality. And it certainly does not shift the burden under section 161, from the very inception, wholly and solely on the taxpayer by the expedient of simply identifying one or more payments, or a class or category of payments. It also follows that, with respect, the High Court misunderstood Bilz in the Islam Steel Mills case. The observations made in that case which are inconsistent with what is said in this judgment are therefore overruled.
12. ......
It will be seen that the section becomes applicable not simply because a payment is made (or a transaction or event happens) but rather on a failure to either collect tax or deduct it. It is the failure that is the triggering event. In each case, the consequence is the same: the person becomes personally liable to pay the amount of the tax. We may note in passing that the Division II referred to in the subsection comprises of only one section, 148, which imposes a duty on the Collector of Customs to collect tax on imports. One wonders how many Collectors have been issued notices and held personally liable in terms of section 161. Be that as it may, the most important point regarding the section has already been stated: it becomes operative only if there is a failure to collect or deduct. It is in our view a gross misreading of it to conclude that for the section to apply all that the Commissioner has to be do is point to a payment, and that is sufficient to cast the burden wholly and solely on the taxpayer to show that there was no failure.
There must, at least initially, be some reason or information available with the Commissioner for him to conclude that there was, or could have been, a failure to deduct. That reason or information must satisfy the test of objectiveness, i.e., must be such as would satisfy a reasonable person looking at the relevant facts and information in an objective manner. The threshold is not so stringent as to require "definite information" (using this term in the sense well known to income tax law) but it is also not so low as to be bound merely to the subjective satisfaction of the Commissioner. And it is certainly not what the tax authorities currently take it to be, based on an incorrect understanding of Bilz. It is only if this threshold is successfully crossed that the Notice can be issued, and it is only then that the burden may shift on the person allegedly in default to show that section 161 does not, or ought not to, apply."
[emphasis supplied]
8. MCB judgment endorsed the settled legal position that facts can only be found by the Appellate Tribunal. In Bilz Case the facts so found did not raise any question of law, either before the High Court or Supreme Court, however, for not providing details of the transactions an adverse inference was drawn. In this case also, the impugned order is based on not providing the details of transactions, which were called through reconciliation under sub rule (4) of the Rule 44. The Rule is reproduced to see how reconciliation can be called:- "44. Statement of tax collected or deducted.-- (1) Omitted by SRO1218(I)/2015 dated 08.12.2015)
(2) Pursuant to sub-section (2) of section 165, a person responsible for collecting or deducting tax under Division II or Division III of Part V of Chapter X of the Ordinance or under Chapter XII of the Ordinance shall furnish or e-file a biannual statement as set out in part X of the Second Schedule to these rules as per the following timelines, namely:--
(a) in respect of the half-year ending on the 30th June, on or before the 31st day of July; and
(b) in respect of the half-year ending on the 31st December, on or before the 31st January.
(3) The statement referred to in sub-rule (2) shall be accompanied by the evidence of deposit of tax collected or deducted to the credit of the Federal Government.
(4) A person required to furnish the Statement under sub-rule (2) shall, wherever required by the Commissioner, furnish a reconciliation of the amounts mentioned in the aforesaid biannual Statement with the amounts mentioned in the return or income, statements, related annexes and other documents submitted from time to time.
(5) Pursuant to sub-section (6), a person responsible for deducting tax under section 149 shall furnish or e-file annual statement by the 31st day of the month of July after the end of a financial year in the form set out in Part IX of the Second Schedule to these rules."
[emphasis supplied]
9. The practices of calling reconciliation, in absence of any statement, is against the spirit of this Rule. The emphasized portions of the Rule 44 envisages, unequivocally, that reconciliation has to be of the biannual or annual statements with other material and declarations submitted in or with the return. If there is no statement filed by the taxpayer, as is recorded in the impugned order, no occasion of reconciliation arises. It is duty of the Commissioner, as tax administrator to ensure that biannual or annual statements are filed within the time stipulated by the Statute. Commissioner is equipped with power of imposing penalty, if statutory obligation is not fulfilled by any taxpayer. Had Commissioner fulfilled the duty of ensuring compliance for filing statements, at the earliest, the occasion of issuing Notice under Section 161 for tax years beyond six years, as stipulated under Section 173(4), would never have arisen. And the amount, to be collected or deducted would have been deposited in Exchequer much earlier.
The controversy, addressed in Bilz and MCB Cases, alongwith innumerable cases by different Judicial forums is only due to absence of performing the statutory duty by the Commissioner at the earliest. Ironically, there is no system of holding accountable, an officer or official in FBR who does not perform his duty diligently and causes loss to National Exchequer and burdens the Courts with unproductive litigation. The Attorney General for Pakistan is directed, hereby, to place the concern of this Court before Federal Cabinet, for an appropriate decision and consequent rule making or legislation.
10. Collective reading of MCB and PEPCO judgments would unravel the riddle of exercising powers under the Sections 161 and 162.
For issuing Notice under these provisions:-
(i) There must, at least initially, be some reason or information available with the Commissioner for him to conclude that there was, or could have been, a failure to deduct.
(ii) All the tax authorities have to do for the purpose of Section 161 is to identify the payments, whether singly or in lump sum (i.e.) as part of a broader class or category of such payments.
(iii) The triggering event for issuance of Notice is a failure to either collect tax or deduct it.
(iv) The Commissioner has to point out a payment to cast burden wholly or solely on the taxpayer.
(v) After issuance of Notice, the first thing need to be verified is, whether tax, required to be deducted or collected, of a person has been paid or not. If tax liability for the relevant tax year is found paid/discharged, the Commissioner can proceed only to impose default surcharge and penalty.
(vi) Reconciliation, under the Rule 44(4), cannot be called without first ensuring filing of statements under this Rule.
11. Since the impugned order dated 30.11.2021 is found to have been passed, ignoring the judgments in MCB and PEPCO Cases, therefore, is set-aside. The other grounds of malafide and proceedings in haste are not required to be addressed as fate of the case has been determined on legal issues.
Respondents may proceed under Notice dated 25.11.2021, by adhering to the law discussed and following the law and guideline laid down through this judgment.
The petition is allowed in above terms.