SHAHID JAMIL KHAN, J. This judgment deals with mode of recovering Workers Welfare Fund ("WWF"), allowed to be adjusted against refund of income tax.
Petitioners, in this and connected petitions, being industrial undertakings, were liable to pay WWF, under Workers Welfare Fund Ordinance, 1971 ("WWF Ordinance, 1971"). Federal Board of Revenue ("FBR") was obliged, under this Ordinance to collect WWF 2%, to be worked out as consequence of income determined under the Income Tax Ordinance, 2001 ("Ordinance of 2001"), if total annual income was not less than five lacs.
2. Legal issue and grievance is same in all petitions, but for the purpose of judgment, facts of this petition are discussed.
Notices under Section 138(1) of the Ordinance of 2001 were issued for recovery of WWF allowed to be adjusted in relevant tax years, which was challenged before the Court through Writ Petition No.40070 of 2021. The constitutional petition was converted into representation and respondent Commissioner was directed to decide through speaking order. The representation is decided against the petitioner vide impugned order dated 24.09.2021, relevant part of which is reproduced.
"7. Taxpayers has agitated following issues in its representation and through written/verbal arguments during hearing dated 15.09.2021 which are decided in the following manner:- a.... d. That department is bound to amend the deemed assessment prior to recovering WWF.
The unlawful non-payment and subsequent adjustment of WWF vis--vis income tax refundable amount in the return filed under section 120(1) of the ITO Ordinance, 2001 does not require amendment of assessm ent in terms of section 122 Ordinance ibid because such self-admitted but not paid amounts of WWF unavoidable lead to recovery measures as provided in section 4(9) of WWF Ordinance, 1971 which is a separate law that governs the payment of WWF. Moreover, in these cases, there is no need for an audit or finding a definite information to enforce the recovery. e. That the officer issuing recovery notices did not have jurisdiction to do so.
The questions raised over jurisdiction and delegation of powers of recovery- are not valid because the section 4(2) of WWF Ordinance, 1971 itself empowers the officer to collect the amount of WWF from the industrial establishment which falls under jurisdiction assigned to him under the ITO, 2001.
"Every industrial establishment which is liable under subsection (1) shall pay the amount due from it to the [Taxation Officer] having jurisdiction over the industrial establishment for purposes of the [Ordinance]. f. That recovery notices for the tax years is barred by time.
The recovery measures for an unpaid liability are not subject to any time limitation under the law, therefore recovery notices issued for any of the previous years are lawful and valid. g. That WWF should be adjusted out of refund.
The taxpayer's persistence that its WWF liability should be adjusted against income tax refunds under ITO, 2001, is misplaced as discussed above. The matter has already been sufficiently explained above in the light of judgment of Honorable Supreme Court of Pakistan. However, in case the taxpayer pays the WWF liability it is entitled to revise its return of income to offset the impact of earlier unlawfully adjusted WWF contribution against income tax refunds, resulting into enhancement of income tax refund claim by the same amount of WWF paid in cash."
[emphasis supplied]
3. The notices for recovery of WWF were issued, undeniably, after the judgment by August Supreme Court of Pakistan in Workers' Welfare Funds, Ministry of Human Resources Development, Islamabad v, East Pakistan Chrome Tannery (Pvt.) Ltd. (PLD 2017 SC 28); wherein the amendments in WWF Ordinance, through Finance Bill were held ultra vires, by declaring that WWF is not a tax, but a Fund for worker's welfare, therefore, the legislation should have been through ordinary law making procedure under the Constitution. On the basis of the enunciation that the Fund cannot be equated with tax, following circular dated 25.05.2021 was issued; "Subject Adjustment of the Liabilities of WWF and WPPF against Refunds of Income Tax.
I am directed to refer to the subject and to say that as per subsection (3) of Section 170 of the Income Tax Ordinance, 2001, refund can only be adjusted against any other liability of tax. WWF and WPPF are not classifiable as "tax" and hence cannot be adjusted against a tax liability or credit.
2. Income tax returns are filed voluntarily, however, reportedly, some taxpayers probably adjusted WWF and WPPF against available tax credits. As the Income Tax Ordinance does not allow for adjustment of Workers Welfare Fund/Workers Profit (Participation) Fund against tax credits, such adjustments are detected during audit and be taken as part of audit exercise and detection and efforts to get correct declaration i.e. enforcement related activities.
3. In order to speed up improvements in tax declarations, field formations are advised to ensure that payment of WWF and WPPF is not skipped through adjustment against income tax refunds. In case of any lapse, further action may be initiated under the law. A report in this regard may be furnished to the. Board by 07.06.2021."
[emphasis supplied] Admittedly, the Circular, ibid, was issued in presence of the. circular dated 17.02.2000, whereby, refund of Income Tax was allowed to be adjusted against demand of WWF. The letter/circular dated 17.02.2000 is also reproduced:- "No.4(33)-Rev.Bud./99 GOVERNMENT OF PAKISTAN REVENUE DIVISION CENTRAL BOARD OF REVENUE Islamabad, the February, 17, 2000 All Regional Commissioner of Income Tax.
Subject: ADJUSTMENT OF INCOME TAX REFUND AGAINST THE LIABILITY OF WORKERS WELFARE FUND.
I am directed to refer to the above subject and to state that representations have been made to the Board that the Department is not allowing adjustment of Income Tax refunds against the liability of Workers Welfare Fund (WWF)
2. It has, therefore, been decided that since collection of WWF arrear demand is also the responsibility of the Department, the refund of Income Tax should be adjusted against demand of WWF."
[emphasis supplied] This Circular was, however, withdrawn, after initiation of impugned recovery proceedings vide Circular dated 28.03.2022, reproduced below:- "No.1(10)ST-L&PE/2020 Islamabad the March 28th, 2022 Chief Commissioners Inland Revenue
(i) LTOs
(ii) MTO
(iii) CTOs
(iv) RTOs Subject: Adjustment of the Liabilities of Workers Welfare Fund (WWf) Against Refunds of Income Tax I am directed to refer to the subject and to say that FBR's letter C.No.4(33)Rev.Bud/99 dated 17.02.2000 is hereby rescinded."
[emphasis supplied]
4. Barrister Shehryar Kasuri, Advocate submitted with emphasis that the impugned action/notices for recovery in this and connected petitions are issued before withdrawal of the Circular dated 17.02.2000. Also submitted that adjustment of payment of WWF against refund was a consistent practice and that adjustment of WWF in the e-portal while filing Return is still available.
Mr. Shahbaz Butt, Advocate has informed that adjustment of WWF against payable tax is being made by the department in orders under Sections 122(5) and 122(5A) and while giving appeal effect.
It is further argued, by the petitioner's side, that adjustment of tax in returns for relevant Tax Years had attained the status of an assessment order under Section 120 of the Ordinance of 2001, therefore, the impugned order for recovery of WWF could not be passed without an amendment order under Section 122(1) for respective tax years.
5. Mr. Ahmad Pervaiz, Advocate assisted by Chief Policy could not deny the factual position argued by petitioners' side. He, however, argued that after judgment in East- Pakistan Chrome Tannery case by apex Court payable WWF cannot allowed to be adjusted against tax refund.
6. Responding to the argument, further submitted that provisions of Section 122 of the Ordinance of 2001 cannot be invoked for recovery of WWF. Explained that under subsection (5) of the Section 122, a definite information is required whereas under subsection (5A) two conditions should simultaneously exist i.e. erroneous as well as prejudicial to the interest of revenue. He contended that wrong adjustment is prejudicial to the WWF and not the revenue. Also submitted that return, having attained the status of order under Section 120, does not require amendment, per se, because liability, determined therein, is not in question. The payability part of the return can be enforced through administrative action of recovery without resorting to the provisions of Section 122.
During proceeding on 02.11.2021, learned Assistant Attorney General for Pakistan has conveyed a proposal from Federal Board of Revenue ("FBR") that on deposit of WWF by the petitioner, their return shall be rectified accordingly under Section 221 of the Income Tax Ordinance, 2001.
7. Heard. Record perused.
8. Suffice it to observe that legal position, if settled by the Apex Court, cannot be disturbed by this Court through any interpretation. Necessary corollary of the judgment in East Pakistan Chrome Tannery case is that WWF, being not a tax, cannot be adjusted against an accrued income tax refund. However, the question arises, whether the adjustment allowed through Circular dated 17.02.2000 and withdrawn through Circular/letter dated 28.02.2022, would allow the Commissioner to invoke recovery provisions of Ordinance of 2001, on a direction by FBR in Circular/letter dated 25.05.2021. If the legal position after the judgment in East Pakistan Chrome Tannery case is applied retrospectively, whether any amendment in Order under Section 120 is required.
Learned Sindh High Court in judgment OBS Pakistan (Pvt.) Ltd. through Manager Legal v.
Federation of Pakistan through Secretary Revenue Ex-Officio Chairman Federal Board of Revenue and 2 others (2022 PTD 290) has already held that provisions of Section 221 for rectification cannot be invoked and Circular dated 25.05.2021 has prospective effect. The operative part of the judgment is reproduced:- "36. We, therefore, concluded as under:- A) Subject of impugned notices issued under section 221 of Income Tax Ordinance, 2001 claiming WWF prior to the effect of impugned Circular dated 25.05.2021 are illegal and unlawful for the purposes of Section 221 of Ordinance, 2001; B) Impugned Circular dated 25.05.2021 issued by Federal Board of Revenue under Income Tax Ordinance, 2001 is lawful, however, has its prospective effect:"
This Court agrees with conclusion by the Hon'ble Division Bench of Sindh High Court.
Nevertheless, recovery of the WWF, wrongly adjusted against accrued refund of income tax, remains a question to be answered by this Court, if WWF, recoverable under Section 4(9) of WWF Ordinance, 1971 for respective tax years is not paid off by FBR as required under the WWF Ordinance, 1971. FBR is a collecting agency for WWF, therefore, under an obligation to deposit/pay off as required under the law, even if it was allowed to be adjusted against accrued refund of income tax for respective tax years. The fact of the payment can only be verified by FBR. In any eventuality, the issue of the payment by FBR (as collecting agent) to Federal Government shall not have a direct bearing upon the impugned recovery. The question, however, remains, whether the judgment can be applied retrospectively and allowed adjustment of WWF can be recovered?
The provisions of the Ordinance of 2001, dealing with adjustment of refund against an outstanding liability are Section 170(3) read with Section 168(2)&(5), which are reproduced:- "168. Credit for tax collected or deducted. (1)....
(2) Subject to subsections (2A), (2B), (3) and (4), where an amount of tax has been collected from a person under Division II of this Part or Chapter XII or deducted from a payment made to a person under Division III of this Part or Chapter XII, the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted."
(5) A tax credit or part of a tax credit allowed under this section for a tax year- that is not able to be credited under subsection (3) of section 4 for the year shall be refunded to The taxpayer in accordance with section 170."
"170. Refunds.-- (1) ...
Where the Commissioner is satisfied that tax has been overpaid, the Commissioner shall --
(a) apply the excess in reduction of any other tax due from the taxpayer under this Ordinance;
(b) apply the balance of the excess, if any, in reduction of any outstanding liability of the taxpayer to pay other taxes; and
(c) refund the remainder, if any, to the taxpayer."
[emphasis supplied] Under Section 168(2) credit of tax collected or deducted is primarily available against tax due for the tax year in which the tax was collected or deducted. If a tax credit is not able to be credited, as envisaged under Section 168(5), it shall be refunded under Section 170.
While determining the refund, the Commissioner is empowered, under the Section 170, to adjust available refund against any tax liability under the Ordinance of 2001 or any other tax under any Federal Taxing Statute. Section 170(3)(a) allows reduction of a tax liability under the Ordinance of 2001, whereas Section 170(3)(b) envisages reduction of outstanding tax liability under any other law.
To see whether payable WWF can be termed as tax liability under the Ordinance [Section 170(3)
(a)] or outstanding other tax liability [Section 170(3)(b)]. Section 4 of the WWF Ordinance, 1971 is required to be examined.
"4. Mode of paym ent by, and recovery from, industrial establishments.---(1) Every industrial establishment, the total income of which in any year of account commencing on or after the date specified by the [Federal Government] in the Official. Gazette in this behalf is not less than five lakh of rupees shall pay to the Fund in respect of that year a sum equal to two percent of its total income.
(2) Every industrial establishment which is liable under subsection (1) shall pay the amount due from it to the Taxation Officer having jurisdiction over the industrial establishment for purposes of the Ordinance.
(3) The industrial establishment shall on or before the date prescribed for filing of returns of income or a statement under relevant provision of the Ordinance, pay the amount due from it under subsection (1) and furnish the proof of payment to the Taxation Officer or the Commissioner as the case may be.
(4) Taxation Officer shall, by order in writing, determine the amount due from industrial establishment under subsection (1), if any, after taking into account the amount paid by the industrial establishment under subsection (3) in respect of the year and the industrial establishment shall pay the amount so determined on or before the date specified in the order.
(5) Any charge by way, of enhancement or reduction in the [total] income shall be given effect to by adjustment of the amount due under subsection (1).
(6) Any amount paid by an industrial establishment under subsection (3) which is found, on the basis of an order in appeal or revision under the Ordinance, to have been paid in excess shall be refunded to it by the Taxation Officer.
(7) The payment made by an industrial establishment to the Fund under subsection (1) shall be treated as expenditure for purposes of assessment income-tax.
(8) Where any industrial establishment fails to pay the amount due from it as required under this section, it shall without prejudice to any other liability to which it may be subject under this Ordinance or any other law, be liable to pay an additional amount [as per provisions of the Ordinance, relating to the mode and time of recovery of the income tax.
(9) The provisions of the Ordinance, relating to the mode and time of recovery of the income-tax leviable under the Ordinance shall, so far as may be,' apply to the recovery of the amount due under subsection (1).
(10) Industrial establishment may file an appeal against any order passed by Taxation Officer or the Commissioner as the case may be under the Ordinance before the Commissioner (Appeal) appointed under the Ordinance."
[emphasis supplied] It is settled now that WWF is not a tax, but its mode of payment, recovery and refund is same, under the Ordinance of 2001, as it was for tax. Subsection (9) of Section 4 clearly says that the provisions of the Ordinance of 2001, relating to mode and time for recovery of income tax, shall apply for recovery of WWF. Under subsection (6), WWF paid in excess, shall be refunded by the Taxation Officer, therefore, the mode and manner, for refund, has to be under the provisions of the Ordinance of 2001, meaning thereby, provisions of Section 170 of the Ordinance of 2001 are applicable for refund of excess WWF. Now the question arises whether subsection (3) of Section 170 would be applicable to reduce the liability of WWF by adjusting payable refund. Since both clauses
(a) and (b) have used the word "tax" for reduction of liability, therefore, after the judgment in East Pakistan Chrome Tannery Case it cannot be adjusted. Though this judgment has decided upon the power and mode of legislation under the Constitution but it would, unescapably, effect adjustment of WWF against tax.
Nevertheless, the judgment by Apex Court would not be applicable, retrospectively, for reversing the agreed adjustment of WWF against tax. The FBR as well as taxpayer bonafidely treated the Fund as tax, because Section 4 of WWF Ordinance, 1971 made the provisions of the Ordinance of 2001 applicable for charging, recovery and refund of the Fund. Circular dated 17.02.2000, allowing adjustment was issued under this understanding. In this Court's opinion, it derived statutory authority under Section 170(3), at relevant time, therefore, is not declared illegal or in conflict with the judgment in East Pakistan Chrome Tannery Case, which was not available and enforced by FBR till 25.05.2021.
9. To see, whether adjustment of WWF is part of deemed assessment; provisions of Section 120 of the Ordinance of 2001 are examined.
On furnishing of complete return the Commissioner is taken to have made an assessment order of "taxable income" and "tax due thereon". The order under. Section 120 is taken to be assessment order for all purposes of the Ordinance of 2001. Subsection (2A) was inserted in Section 120 and after the date it is notified, the return of income is processed through automated system. Certain adjustments, inter alia, of incorrect claim are allowed to be made by Commissioner, before the return attains status of an assessm ent order by operation of law. On identifying the incorrect claim, a system generated notice is issued, before making adjustment. Importantly, if no adjustment is made within six months of filing the return, the amounts specified in the return shall be deemed to be rightly adjusted amounts, therefore, would be part of assessment order under Section 120, relevant provisions of which, showing this legal position, are reproduced:- "[120. Assessments.--(1) Where a taxpayer has furnished a complete return of income (other than a revised return under subsection (6) of section 114) for a tax year ending on or after the 1st day of July, 2002,--
(a) the Commissioner shall be taken to have made an assessm ent of taxable income for that tax year, and the tax due thereon; and
(b) the return shall be taken for all purposes of this Ordinance to be an assessm ent order issued to the taxpayer by the Commissioner on the day the [return was furnished] Provided that until the date specified under the fourth proviso to subsection (2A) is notified, this subsection shall be in force as if subsection (2A) is not in operation: .................... ....................
(2A) A return of income furnished under subsection (2) of section 114 shall be processed through automated system to arrive at correct amounts of total income, taxable income and tax payable by making adjustments for -
(i) any arithmetical error in the return;
(ii) any incorrect claim, if such incorrect claim is apparent from any information in the return;
(iii) disallowance of any loss, deductible allowance or tax credit under Parts VIII, IX and X respectively of Chapter III; and
(iv) disallowance of carry forward of any loss under clause (b) of subsection (1) of section 182A: Provided that no such adjustments shall be made unless a system generated notice is given to the taxpayer specifying the adjustments intended to be made: Provided further that the response received from the taxpayer, if any, shall be considered before making any adjustment, and in a case where no response received within thirty days of the issue of such notice, adjustments shall be made.
Provided also that where no such adjustments have been made within six month of filing of return, the amounts specified in the return as declared by the taxpayer shall be deemed to have been taken as adjusted amounts on the day the return was filed and the taxpayer shall be intimated automatically through Iris. ....."
[emphasis supplied] Admittedly, no system generated notice under subsection (2A) was issued, therefore, the WWF adjusted or allowed to be adjusted is part of order under Section 120, under third proviso to Section 120(2A).
10. For the reasons in this judgment, this and connected Writ Petitions (ANNEX-A) are allowed in terms and to the extent, noted herein.
Annexure-A Sr. No.Case No.
1. W.P. 64781 of 2021
2. W.P. 68437 of 2021
3. W.P. 69385 of 2021
4. W.P. 69600 of 2021
5. W.P. 70735 of 2021
6. W.P. 71137 of 2021
7. W.P. 71804 of 2021
8. W.P. 72781 of 2021
9. W.P. 76836 of 2021
10. W.P. 76879 of 2021