MR. JUSTICE MUHAMMAD SAJID MEHMOOD SETHI.--(1). This consolidated judgment shall decide instant Reference Application under Section 133 of the Income Tax Ordinance, 2001 ("the Ordinance of 2001"), along with Connected cases detailed in Schedule "A", appended herewith, as common questions of law and facts are involved in these cases.
2. The following questions of law, common in all the connected Tax References also, are resettled as under:--
1. Whether under the facts and circumstances of the case, the learned Appellate Tribunal Inland Revenue was justified to ignore that Commissioner had not verified payment of tax liability under Section 161(113) of the Income Tax Ordinance, 2001, which is mandatory?
2. Whether under the facts and circumstances of the case, the Appellate Tribunal Inland Revenue ensured that the guidelines and direction given by the August Supreme Court of Pakistan in Commissioner Inland Revenue Zone-I, LTU v. MCB Bank Limited (PTCL 2021 CL 714) are complied with?
3. Whether under the facts and circumstances of the case, the Commissioner could issue reconciliation notice under Rule 44(4) of the Income Tax Rules, 2002, without ensuring biannual or annual statements as envisaged under the Rules?
3. Brief facts of the case in hand are that respondent-taxpayer is a private limited company deriving income from running Ambassador Hotel, Lahore. Assessment for the tax year 2010 was finalized under Section 161/205 of the Ordinance of 2001 vide order dated 30.10.2012 by determining tax liability at Rs. 5,733,189/-. Feeling aggrieved, respondent-taxpayer filed appeal before Commissioner (Appeals), but same was rejected vide order dated 07.05.2013 and additions made by the Taxation Officer were upheld. Being dissatisfied, respondent-taxpayer preferred second appeal before learned Appellate Tribunal, which was allowed vide order dated 25.06.2013. Hence, instant Reference Application.
4. Learned Legal Advisors for applicant-department submit that the assessment order was passed by following the provisions of Section 161 of the Ordinance of 2001, as well as, the rules laid down by Hon'ble Superior Courts. They add that the liability was calculated under Section 205 read with Section 161(1B) of the Ordinance. They contend that the Appellate Tribunal was not vested with the power to delete the default surcharge on late payment of tax due. They add that Appellate Tribunal has ignored the binding precedent of the Hon'ble Supreme Court reported as Bilz (Pvt) Ltd v Deputy Commissioner of Income Tax and another (2002 PTD 1 = PLD 2002 S.C. 353), wherein it has been clearly pronounced that the assessing officer was not obliged to identify the names of the parties to whom supplies were made because the record was maintained by the supplier/withholding agent. In support, they have relied upon Messrs Attock Refinery Limited and others v. The Collector of Sales Tax and others (2021 PTD 1680).
5. Conversely, learned counsel for respondent-taxpayers defend the impugned orders.
6. Arguments heard. Available record perused.
7. The very purpose of advance tax is collection of tax in advance and its adjustment at later stage but not charging or levy of tax. 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.
For facility of reference, Section 161 of the Ordinance of 2001 is reproduced hereunder:-- "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 4 or Chapter XII or deducted tax under Division III of this Part 5 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 subsection (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" per cent 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 subsection (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."
8. Subsection 161(1B) casts an obligation upon the Commissioner or Taxation Officer to satisfy itself that the tax due of the person, from whose payment advance tax was to be deducted or collected, has been paid. The rationale 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 to the level of Hon'ble Supreme Court.
9. The Hon'ble Apex Court in case reported as Commissioner Inland Revenue Zone-I, LTU v. MCB Bank Limited (PTCL 2021 CL. 714), has deprecated such misreading of the judgment in Bilz case by the tax authorities thereby issuing general and vague show cause notices under Section 161 of the Ordinance ibid and termed suchlike notices as a fishing expedition and roving inquiry. Tax authorities had taken certain observations made in Bilz' case out of context, and misused them as a tool and instrument to harass taxpayers. It must be clearly understood that Bilz' case was not, and could not be used as a platform or tool by the tax authorities to launch expeditious probes. It cannot 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.
While highlighting the most important aspect relating to Section 161 in MCB case, the Hon'ble Supreme Court has observed as under:-- "12 ..........
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."
10. Needless to say that provisions of Section 162(2) of the Ordinance of 2001 regarding imposition and recovery of default surcharge etc. are only attracted where failure to deduct tax is established under Section 161. Since we are observing that taxation authorities have failed to exercise jurisdiction under Section 161, therefore, question of default surcharge does not arise at this stage.
11. The practice of calling reconciliation, in absence of any statement, is against the spirit of Rule 44 of the Income Tax Rules, 2002. Rule 44 envisages, unequivocally, that reconciliation has to be of the biannual or annual statements with other material and declaration 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 in question, would never have arisen as the amount, to be collected or deducted would have been deposited in Exchequer much earlier.
12. It has time and again been observed by the Superior Courts that the controversy, addressed in Bilz' case and MCB case, alongwith innumerable cases by different Judicial forums, is only due to absence of performing the statutory duty by the Commissioner at the earliest, causing undue burden on the Courts due to unproductive litigation. The Attorney General for Pakistan is directed to place the concern of this Court before Federal Cabinet, for an appropriate decision and consequent rule making or legislation in this regard.
13. For the reasons discussed above, our answer to the proposed questions is in negative.
One of us (Shahid Jamil Khan, J.) in constitutional jurisdiction under Article 199 of the Constitution of the Islamic Republic of Pakistan, 1973, under similar facts and circumstances, had allowed the writ petition, vide judgment in Pepsi Cola International (Pvt.) Limited v. Federation of Pakistan etc. (2022 LHC 6508)[1] (Lahore High Court Website), and remanded the case back to Commissioner.
We hereby concur with reasons and conclusions, therefore, the directions given in the judgment, ibid, shall be read in this judgment as well, which are reproduced.
"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."
14. The impugned orders by Appellate Tribunal and Commissioner (Appeals) arc vacated in this and connected Tax References. The matter, in this and connected cases, shall be deemed pending before the concerned Commissioners, after issuance of the already issued Show Cause Notices.
The Commissioners shall follow the directions, supra, before proceeding further under, the already issued, Show Cause Notices.
15. In some of the cases, objection of limitation on issuance of notice under section 161 has been raised. Paragraph No. 14 of the judgment in MCB Case shows that the question of limitation is left and decided to be considered in another case. The counsel for the taxpayer's submission is that the issue has already been addressed in Commissioner Inland Revenue, Zone-IV, Lahore v.
Messrs Panther Sports and Rubber Industries (Pvt.) Ltd. and others (2022 SCMR 1135) after discussing judgment dated 17.05.2011 in M/s Pakistan Mobile Communication (Pvt.) Ltd. v. The Commissioner of Income Tax, Companies Zone, Islamabad (Civil Appeal Nos.1091-1092 of 2009, 1111 to 1127, 1435 to 1488 of 2008 and 229 of 2011).
Be that as it may, suffice it to observe that objection of limitation even if taken after remand of the case before the Commissioner shall be entertained and addressed while passing the order.
15. Office shall send a copy of this judgment under seal of the Court to the Appellate Tribunal as per Section 133(5) of the Income Tax Ordinance, 2001.
SCHEDULE "A"
DETAIL OF CONNECTED CASES MENTIONED IN JUDGMENT DATED 28.09.2022 PASSED IN PTR NO. 280 OF 2013 Sr. No.Case Numbers
1. ITR No. 35 of 2013
2. ITR No. 74 of 2015
3. ITR No. 106 of 2015
4. ITR No. 67 of 2016
5. ITR No. 40960 of 2017
6. ITR No. 111411 of 2017
7. ITR No. 111431 of 2017
8. ITR No. 111452 of 2017
9. ITR No. 111481 of 2017
10. ITR No. 111490 of 2017
11. ITR No. 111496 of 2017
12. ITR No. 124244 of 2017
13. ITR No. 247599 of 2018
14. ITR No. 247603 of 2018
15. ITR No. 244701 of 2018
16. ITR No. 244703 of 2018
17. ITR No. 244704 of 2018
18. ITR No. 244705 of 2018
19. ITR No. 244707 of 2018 20.ITR No. 17735 of 2019
21. ITR No. 19974 of 2019
22. ITR No. 19978 of 2019
23. ITR No. 40453 of 2019 24.ITR No. 75167 of 2019 25.ITR No. 42090 of 2019 26.ITR No. 42093 of 2019
27. ITR No. 6554 of 2019 28.ITR No. 33956 of 2019 29.ITR No. 41737 of 2019 30.ITR No. 38138 of 2019
31. ITR No. 38145 of 2019
1. Reported as PTCL 2023 CL 71