SHAMS MEHMOOD MIRZA, J.- This reference application under section 196 of the Customs Act, 1969 (the Act) seeks opinion of this Court on the following questions of law arising out of order dated 31.03.2022 passed by the Customs Appellate Tribunal (Tribunal):
1. Whether the learned Tribunal has erred in failing to appreciate that before the Finance Act, 1999, and during the period in question, there were no provisions in the Customs Act, 1969, which made the directors of a company liable for the company's obligation to pay Customs Duties, and the show cause notice in the instant case set out no legal or factual basis for holding directors to be so liable?
2. Whether in the facts and circumstances of the case, the learned Tribunal has wrongly imposed liability on the Applicant as a legal heir of Begum Birjees Zaheer Abbas by holding that the latter was a defaulter presumably by virtue of being a director of the Company during the relevant period?
2. Brief facts of the case are that respondent No.5 (the company) was issued a show cause notice on 27.10.1999 alleging violations of SRO 69(I)/1970 dated 17.04.1970. It was stated that the raw material imported by the company under the terms of the aforementioned notification was meant for export of manufacturing goods whereas the company sold its products manufactured from the raw material in the local market under SRO 671(I)/94 dated 03.07.1994. The show cause notice furthermore alleged that the company was not entitled to the benefit of SRO 671(I)/94 dated 03.07.1994 and as such it is obliged to make payment of duties and taxes amounting to Rs.94,763,813/-. The company filed the reply to the show cause notice denying the allegations contained therein. Notwithstanding the stance taken by the company, order-in-original was passed on 20.09.2000 holding it liable for payment of Rs.94,763,813/- together with penalty in the sum of Rs.25,000,000/-. The company filed an appeal before the Tribunal as recovery proceedings had been initiated by the respondents. A proclamation of attachment was drawn up on 18.03.2011 in respect of House No.Y-85, Phase-III, Defence Housing Authority, Lahore (property in dispute) which was under the ownership of the applicant, who was a former director of the company having resigned on 08.02.1992. Begum Birjees Zaheer Abbas, the mother of the applicant, who was also a director of the company, made a gift of the property in dispute in favour of the applicant on 22.12.2001. The proclamation was issued to the applicant in her capacity as director of the company. On that basis, the proclamation of attachment was brought under challenge before this Court by the applicant by filing writ petition No.4847 of 2016 which was dismissed on 16.02.2016 by directing the applicant to file objection before the recovery officer. The applicant accordingly filed objections before the Deputy Collector Customs who in response issued letter dated 01.08.2016 holding the applicant liable for tax liability to the extent of the property in dispute by stating that said property could not be transferred in terms of section 202 of the Act. The applicant again filed applications before the Collector of Customs objecting to the stance taken by the respondent department. The Collector of Customs through letter dated 17.08.2016 also placed reliance on section 202(2) and (3) of the Act to state that the applicant was liable for the tax liability. On negation of her stance, the applicant filed application Order 1 Rule 10 of the Code of Civil Procedure, 1908 (CPC) for becoming a party to the appeal filed by the company before the Tribunal, which application was allowed on 01.10.2020. The Tribunal decided on the appeal on 31.03.2022 by dismissing the same and ordered recovery of the tax liability from the applicant to the extent of the property in dispute.
3. Learned counsel submits that show cause notice was served on the company and only a copy thereof was addressed to the applicant and that too on her wrong address. The order-in-original also reflected the company as the only respondent. Learned counsel asserts that there was no provision in the Act at the relevant time fixing liability on the applicant or Begum Birjees Zaheer Abbas for the tax liability and that the applicant was not even the director of the company.
According to the learned counsel, section 2(y) of the Act providing the definition of 'defaulter' was introduced through Finance Act, 1999. Similarly, the proviso to section 202(1) was introduced through Finance Act, 2007. The said proviso, according to the learned counsel, is not attracted to the property in dispute or to the transaction of gift by the mother of the applicant.
4. The learned counsel for the respondent states that the applicant was liable for the tax liability being transferee of property from her mother, Begum Birjees Zaheer Abbas in view of the bar contained in the proviso to section 202(1) of the Act. It was also alleged that the applicant could not file the present reference application as she did not challenge the order-in-original.
5. The relevant portion of the order of the Tribunal pertaining to the applicant reads as under:
26. It is evident that the name of Ms. Faiza Basir Syed was in the list of persons against whom the Impugned Order was issued but she did not file an Appeal before this Tribunal. In this instant Appeal, there is just one Appellant i.e. M/s. Oyster Fiberglass (Pvt.) Limited, Kasur. This question was decided by the Honourable Lahore High Court therefore, this issue is hit by the principle of Res Judicata and thus cannot be opened by a lower forum. The only course open for Mrs. Faiza Basir, in case of being aggrieved by the Order, was to challenge it before the higher forum.
Since this was not done so she was now bound to follow the orders of the Honourable Lahore High Court whereby she could have agitated the issue before the Recovery Officer. However, on 9.4.2019, Mrs. Faiza Basir Syed, through Mian Bilal Ahmed, Advocate, filed an application under order 1, Rule 10 of the Code of Civil Procedure, 1908 and prayed to become a party in the instant Appeal.
27. Fifthly, Mrs. Faiz Basir Syed resigned as Director from M/s. Oyster Fiberglass (Pvt.) Ltd, Kasur (Appellant) and thus claimed disassociation from any recovery proceedings. However, Mrs. Birjees Zaheer Abbas is another defaulter in the case. Recovery Rules, however, places liability of the defaulter as well as on legal heirs in case of default. Rule 8(4) and 201 of the Recovery Rules, 1992 issued vide SRO 677(I)/92 dated 2.7.1992, are reproduced hereunder: "8(4). the immovable and movable property of the defaulter shall stand attached in the name of the Federal Government on the expiry of the time limit specified in the notice if the payment of the Government dues is not made within time."
"201. Continuance of proceedings.- (1) No proceedings shall cease to be in force by reason of the death of the defaulter.
(2) If, at any time before or after the issue of a demand note to the Recovery Officer, the defaulter dies, the proceedings under this chapter may, except arrest and detention, be continued against the legal heirs of the defaulter who shall be liable to pay, out of the properties left by the deceased defaulter to the extent to which the properties are capable of meeting the outstanding Government dues, and provisions of this chapter shall apply as if the legal heirs were the defaulter."
28. The recovery notices were issued, first on 28.9.2000 and second on 1.11.2000, wherein the defaulter was given 15 days to deposit the amount. The Hiba deed of the house (By Mrs. Birjees Zaheer Abbas to Mts. Faiza Basir Syed) was finalized on 20.12.2001, much after the demand raised by the respondent. Hence, in view of the Customs Recovery Rules, 1992, the movable and immovable property of Mrs. Birjees Zaheer Abbas stand attached in the name of the Federal Government and thus it also includes any movable or immovable property held in her name after issuance of recovery notices. The right of the Customs Department will not be vitiated by the act of the defaulter by transferring the property in someone else name, to avoid the attachment proceedings. The law is clear that the provisions of this Chapter (Recovery Rules) shall apply as if the legal heirs were the defaulters. Since, Mrs. Faiza Basir Syed is legal heir of Mrs. Birjees Zaheer Abbas, so the defaulted amount will be recovered from the legal heirs including Mrs. Faiza Basir Syed, including those transferred in her name, by any means. (Emphasisadded)
6. The stance taken by the respondent department at the hearing makes it clear that it accepted the fact that the applicant had resigned as director of the company much earlier to the assessm ent proceedings and that she was per se not a defaulter. The Tribunal in its order also accepted this position and held that recovery shall be made from the property transferred in the name of the applicant by her mother through gift. On these findings, it is unnecessary for this Court to adjudge whether the show cause notice was issued in the name of the applicant or whether the order-in-original was made against her although it may be stated that the stance of the applicant on this aspect of the matter is apparently correct that she was not a party to those proceedings.
7. It is evident from the record that the findings of the Tribunal against the applicant had no nexus with the actions of the respondent department which issued notices seeking recovery of tax liability from her in her capacity as director of the company and not on the basis of the property in dispute.
The proclamation issued on 12.03.2011 also attached the property in question on account of the applicant being a director of the company. Even in the proclamation of sale published in the newspapers, the property in question was shown to be under the ownership of the director of the company. At no point in time, the action of the respondents suggested that the applicant is liable to the extent of the property in dispute. In pursuance of the direction given by this Court to the applicant in writ petition No.4847 of 2016, she made an application to the Collector of Customs whereupon letter dated 01.08.2016 was issued when the applicant was informed for the first time about the nature of the liability being imposed on her. The applicant was, however, never issued mandatory show cause notice by the respondents regarding the property in dispute. There is thus substance in the contention of the applicant that the respondent department shifted its stance after issuance of the recovery notice and proclamation of attachment when it was brought to their notice that the applicant had already resigned as a director of the company.
8. We may now turn our attention towards the statutory provisions which were pressed into service by the respondents before this Court. The definition of "defaulter" as mentioned in section 2(y) of the Act reads as follows (y) "defaulter" means the person and in the case of a company or firm every director or partner of the company or, as the case may be of the firm and of which he is a director or a partner of proprietor, and includes the guarantor who fails to pay outstanding arrears.
Similarly, section 202 in so far as it is relevant together with its proviso reads as under:
202. Recovery of Government dues.- (1) When, under this Act or under any other law for the time being in force, which provides for any tax, duty or other levy being collected in the same manner as customs-duties are collected, a penalty is adjudged against, or notice or demand is served upon, any person calling for the payment of any amount unpaid which may be payable by way of penalty or by way of duty, tax or other levy or under any bond guarantee or other instrument executed under this Act or such other law or the rules made there under, the appropriate officer-
(a) may deduct or require any other officer of Customs, or Inland Revenue to deduct such amount from any money owing to such person which may be under the control of the Customs, or Inland Revenue authorities; or
(b) if it cannot be so recovered, may recover, or may require any other officer of Customs, or Inland Revenue to recover, such amount by detaining and selling any goods belonging to such person which are under the control of the Customs, or Inland Revenue authorities Provided that notwithstanding anything contained in any other law for the time being in force, if a defaulter sells or transfers ownership of his assets, the defaulted amount of duty and taxes shall be the first charge on the business so transferred.
(2) If the amount cannot be recovered from such person in the manner provided in sub-section (1), the appropriate officer may serve upon the defaulter a notice in the prescribed form requiring him to pay the amount specified in the notice within such time as may be so specified.
(3) If the amount referred to in the notice under sub-section (2) is not paid within the time specified therein or within the further time, if any, allowed by the appropriate officer, the appropriate officer may proceed to recover from the defaulter the said amount by one or more the following modes, namely:-
(a) attachment and sale of any movable or immovable property of the defaulter; (Emphasis added)
9. Suffice it to state that the definition of "defaulter" and the proviso to sub-section (1) of section 202 were introduced in the Act through Finance Act, 1999 and Finance Act, 2007 respectively. These provisions being substantive in nature must be construed to operate prospectively and cannot bring in their fold transactions concluded in the past.
10. Lord Dunedin in his speech in Whitney v. Inland Revenue Commissioners [1926] A.C. 37 (mentioned with approval by the Supreme Court in the case of H. M. Extraction Ghee & Oil Industries (Pvt.) Limited v. Federal Board of Revenue (2019 SCMR 1081) stated about the three stages in the imposition of a tax .........there is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessm ent. That, ex hypothesi, has already been fixed. But assessment particularises the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay.
The above passage makes it clear that show cause notice may be a prelude to the assessment proceedings, but these proceedings are not constitutive either of the jurisdiction of the assessing officer or the liability of the assessee. The only purpose the assessment proceedings serve is to quantify the tax the assessee is liable to pay. In the present case, the applicant was not the director of the company at the relevant time and thus did not come within the purview of the definition "defaulter" as contained in section 2(y) of the Act. The transfer of property in dispute also took place much earlier to the introduction of the proviso to section 202(1) of the Act and as such the transaction of gift did not come within the mischief of the said proviso. Although it was argued that on the language of the proviso the amount of duties and taxes are first charge only on the "business" that is transferred by a defaulter and not on the property in dispute, we are not inclined to pass any order on this aspect of the matter in the present case.
11. The Tribunal mindful of the fact that section 2(y) and the proviso to section 202(1) of the Act were inserted much later to the adjudication of liability through order-in-original or the transfer of the property in dispute through gift rightly made no mention of them in its order. The Tribunal instead placed reliance on Customs Recovery Rules, 1992 (the Customs Rules). Another important aspect of the matter relates to the findings of the Tribunal through which it imposed liability on the applicant being the legal heir of Begum Birjees Zaheer Abbas for recovery of defaulted tax amount through property in dispute. It may relevantly be pointed out that these Rules preceded the amendments made in the Act through Finance Act, 1999 and Finance Act, 2007 and were in existence at the relevant time. It, therefore, becomes imperative to closely look at the provision invoked by the Tribunal to ascertain whether the same were attracted to the case of the applicant qua the transfer of the property in dispute. The Customs Rules gave the definition of "defaulter" which reads as follows "defaulter" means a person mentioned in the demand note, who has failed to discharge his liabilities in payment of Government dues The term "demand note" has been defined in the Customs Rules to mean a note received by the Recovery Officer from the referring authority specifying the details regarding the defaulter and the Government dues. Now the definition of "defaulter" in Customs Rules by its terms does not apply to the legal heirs of a person against whom assessm ent order has been made. It only pertains to a person against whom liability has been adjudged and who on account of non-payment thereof is declared as a defaulter. This provision had no applicability to the case of the applicant or Begum Birjees Zaheer Abbas for the simple reason that the record is completely silent as to whether any demand note was ever issued to Begum Birjees Zaheer Abbas. In the absence of issuance of such a notice, Begum Birjees Zaheer Abbas cannot be termed as a defaulter.
12. Rule 8 simply stipulates that if the Government dues are not recoverable in the manner specified in Rule 7, the Recovery Officer shall serve upon the defaulter a notice in Annex-IV requiring him to pay the dues under sub-section (2) of section 202 of the Act and intimating that in case of default steps would be taken to realize the amount under these rules and that the immovable and movable properties of the defaulter shall stand attached in the name of the Federal Government on the expiry of time limit specified in the notice if the payment of government dues is not made within time. As noted above, the Act contained no provision at the relevant time making the directors of the company liable for payment of tax liability. As noted above, the definition of defaulter in the Customs Rules only applied to the person against whom assessment was made and did not cover the directors of a company or the legal heirs of a deceased director. There is nothing on the record to demonstrate that even the procedure provided for in the Rules was followed by issuing the demand note to Begum Birjees Zaheer Abbas. The foregoing analysis is sufficient for a conclusion that, properly construed, the Act at the relevant time and the Customs Rules, do not contain any provision intended to impose liability on the directors for payment of taxes and duties owed by the company or to bring into the net the transaction for transfer of the property in dispute or to declare the applicant and her mother as defaulter.
13. Rule 201 mentioned in the order of the Tribunal does not come to the aid of the respondents as it simply stipulates that no proceedings shall abate on the death of the defaulter which is not the case in the present reference application.
14. The Tribunal also alluded to the fact that the applicant was bound by the decision of this Court rendered on 16.02.2016 in writ petition No.4847 of 2016 filed by her and that order operates as res judicata precluding her from laying a challenge to the attachment and consequent sale of the property in dispute. In the first instance, writ petition No.4847 of 2016 made a challenge only to the proclamation of attachment and not to the order-in-original. Secondly, this Court observed that the applicant shall have the remedy of agitating all the grounds against the proclamation of attachment before the Collector of Customs. Thirdly, it appears that the writ petition was dismissed in limine. Cumulatively, these factors do not make the order of this Court to operate as res judicata denying the applicant to agitate her claim before the Tribunal even in her capacity as a respondent. The Tribunal furthermore completely ignored the fact that neither the applicant was issued any show cause notice nor she was shown as a respondent in the assessment order and thus she could not have filed appeal against the order-in-original. The applicant on being confronted with the proclamation of attachment of her property rightly filed the application for becoming a party to the appeal of the company in order to support its case against the order-in- original. The Tribunal having allowed the application was required to adjudicate upon the claim of the applicant which it in fact did through its order by rejecting the same on merits. In the circumstances, the applicant rightly filed the present reference application.
15. For what has been discussed above, we answer both the questions in affirmative and in favour of the applicant.
16. Office shall send a copy of this order under the seal of this Court to the Customs Appellate Tribunal as per section 196 (5) of the Customs Act, 1969.