SARDAR M. AJAZ KHAN, JUDICIAL MEMBER. This appeal has been filed by the taxpayer against order issued vide bar Code No.100000141007466 dated 17.01.2023 passed by CIR(A-II), Islamabad.
2. As per reported facts, the taxpayer, Mr. Muhammad Akhtar, Registration No. 3740505316867 (hereinafter referred to as "the taxpayer") an individual who derives income from business. The taxpayer, being a withholding agent, was liable to deduct tax at the time of making payments under various provisions of Income Tax Ordinance, 2001. The assessing officer observed that the taxpayer did not fully discharge his legal obligations as withholding agent while making payments to different suppliers/vendors. The taxpayer was confronted with different issues through show- cause notices asking for various details/documents which remained un complied with.
Consequently, the proceedings culminate in finalization of order under section 161(1) of the Ordinance vide order dated 10.05.2022 creating income tax demand of Rs. 36,943,295/- (inclusive of default surcharge). Against this treatment an appeal was preferred before the CIR(A-II), Islamabad who vide impugned order dated 17.01.2023 confirmed the order of the Assessing Officer.
3. Being aggrieved the taxpayer filed appeals before this forum on the following common grounds:- I. That the order of the learned Commissioner Inland Revenue (Appeals-II), Islamabad is bad in Law and against the facts of the case.
2. That the ex-parte order of learned CIR (Appeals-III) in unjust and also not on merit. The Commissioner on basis of sole notice dated 02.01.2023 reflected on IRIS confirmed the impugned order although name of AR and his cell No. are mentioned in the appeal filed before his office.
3. The order of Learned CIR(A) did not meet the criteria of fair trial for justice. Reliance may be placed on judgment of Sarfraz Saleem v. FOP and others (PLD 2014 SC 232) wherein it has been held that: "every person, for determination of his civil rights and obligations or in any criminal charge against him shall be entitled to fair trial and due process."
4. That the assessing officer has passed the impugned order only within 28 days of issuance of show-cause notice.
Subsection (1A) of 161 provides that "No recovery shall be made under subsection (1) unless the person referred to has been provided with an opportunity of being heard."
5. The officer has not attained jurisdiction under section 161, to impose tax on deduction claim under section 20 of the Ordinance 2001. The deduction under section 20 is not covered under Division II of this Part, Chapter XII or Division III of this Part 2 or as required under section 50 of the repealed Ordinance so order up to that extent without any jurisdiction and ultimately not maintainable.
6. The appellant registered as commercial importer and good imported at Rs. 2,066,756/- are part of the purchased declared in the return at Rs. 32,161,289/-, the remaining purchases were made from importers and deduction of advance tax not applicable as per section 153(3) of the Ordinance, 2001.
7. The officer deliberately applied maximum rate on all heads without anything brought on record or any reason, source and information. This illegal act of officer was entirely ignored by CIR Appeal.
8. The officer unlawfully calculated default surcharge under section 205 of ITO 2001 at Rs.3,446,915/- and same was also confirmed by CIR(a) without any justification. The default surcharge is void and illegal because no period of default calculated and not confronted to appellant before passing the order.
9. The default surcharge highly unlawful and unjustified. Reliance is placed on decision of Honorable Sindh High Court in I.T.R No. 80/2015 dated 01.12.2017.
10. The default surcharge under section 205 is also not maintainable because both forum entirely fail to determine whether default is wilful or not
11. The CIR Appeals, Islamabad had grossly erred in law and facts while ignoring that the imposition of alleged withholding Tax under section 161 on the appellant being advance Tax after the close of relevant tax year is illegal, unenforceable and without lawful authority as the advance tax provision loses their force after the close of year due to its adjustment against the tax due and short is paid with return and excess deducted is refundable to the recipient.
12. That the learned CIR Appeals had grossly erred in law and facts while ignoring that the impugned order founded upon invalid, vague, unspecific, surmises, evasive, arbitrary, baseless, hypothetical, show-cause notice and figures is illegal, void ab initio and without lawful authority and have no legal effect.
(a) That the appellant be allowed to add, amend, alter or delete any or all the above grounds.
4. During the course of hearing Learned AR stated that the impugned orders under section 161/205 are arbitrary, against the facts as well as law. AR reiterated the points raised in ground of appeal and argued that action of the Assessing Officer is based on estimation. AR submitted that the learned CIR (A) was not justified to decide the appeals in a summary manner without passing a speaking orders. It was also contended that the withholding tax wherever required was duly deducted and deposited into government treasury. He argued that the assessing officer simply moved to tax the whole amount treated as head expenses on the basis of third party information and on estimation basis under the withholding provisions of Income Tax Ordinance, 2001 for which there was no legal ground available with the assessing officer. In several reported cases, the Superior Courts have disallowed such bald estimation. He further contended that failure to file party wise details does not ipso facto means that default could be made out on an estimate basis and without identifying the name of the recipient, breakup of payment the charge of tax under section 161 is illegal and not maintainable in the eye of law and if an amount of tax that has escaped withholding tax is required to be determined with precise accuracy to invoke sections 161/205 of the Ordinance which is missing in the impugned order and the huge demand was created along with default surcharge without seeking reconciliation in the prescribed manner which is illegal and against the facts of the matter. AR also objected that the CIR(A) was not justified to confirm the alleged default purely on the basis of estimation as there is no room for estimation in the withholding tax regime.
5. Learned AR argued that the authorities below adjudicated the matter by ignoring that the Honorable Court vide its latest judgment in the case of CIR v. MCB Ltd. reported as 2021 SCMR 1325 has explained the judgment in "Bile case and categorically held that burden of proof of non- withholding of tax cannot be passed on to the withholding agent simply by pointing out the heads appearing in the return/financial statements in a generic manner moreover, assumption of jurisdiction under section 161 of the Income Tax Ordinance, 2001 necessarily requires possession of information in sufficient detail. It was also contended that the authorities below failed to appreciate that the apex Court in its above referred judgment in the MCB case held the notices as illegal as these featured 'deliberate vagueness and breath-taking generality' by 'simply identifying one or more payments, or a class or category of payments' and thereby shifting the burden of proof on to the withholding agent. He further stated that the Honorable Lahore High Court in its reported judgment in 2023 PTD 541 dated 01.4.2022 in the case of M/s. Pepsi Cola International v. FOP and others settled the ratio in view of the judgment of apex Court in MCB case and held that the initial burden is on the department to identify payments and also ensure that the tax is already paid or not and if already paid only default surcharge can be levied. The assumption of jurisdiction under sections 161/205 of the Ordinance by the DCIR on the basis of assumptions, probabilities is unlawful.
Learned CIR(A) was also not justified to take it judicially. He stated that the learned CIR(A) simply endorsed the order of DCIR without application of independent judicial mind is violation of section 24A of General Clauses Act, 1897 and due process of law embodied in Article 4, of the Constitution of Islamic Republic of Pakistan, 1973 and binding precedents. AR submitted that the imposition of straight forward tax of Rs. 2,259,148/- on the self-assuming default of salaries/wages as reported in Income Tax Return for whole of tax year 2021 on the basis of surmises assumption/presumption whereas proper evidence of the same was provided to the authority entailing that most of them were below the taxable limit prescribed for withholding tax to be triggered. He submitted that the figures were reconciled but not taken into account. It was also argued that the imposition of tax of Rs.2,894,516/- under the head of net purchases is also unwarranted and that the assessing officer by way of ignoring payments made to commercial importers which is exempt from withholding or advance taxes while the tax has already been paid by the land lord thus the act of learned DCIR is a violation of section 161(1)(b) of the Ordinance, 2001. He contended that the payments in respect of salaries were below taxable limited and apply flat rate of 19.38% under the head is unjustified. He stated that similarly, the learned DCIR imposed tax of Rs. 516,286/- at the self-assumed rate of 20% taking refuge to estimation which is outside the realm of withholding regime. He also objected the imposition of tax under the heads of Other Indirect Expenses amounting to Rs. 27,817,524/- calculated at 20% rate under the head repair/maintenance and 3% i.e. Rs.8,906/- under the head traveling/conveyance estimation basis. He added that the learned officer even applied flat rate of 20% in respect of the indirect expenses and imposed tax under section 161 at Rs.27,817,524/- quite arbitrarily which was unwarranted and sheer example of estimation while learned CIR(A) also confirmed the impugned demand of Rs.36,943,295/- created by of the Assessing Officer in a mechanical manner without a judicious application of independent mind.
6. Learned AR further stated that Division Bench of honorable ATIR in its judgment dated 28.11.2019 in ITA No. 1892/IB/2016, 20.08.2019 in ITA No. 81/IB/2018, MA (AG) No. 81/IB/2019 and MA (AG) No. 84/IB/2019 (Tax Year 2015) and another un-reported judgment dated 11.09.2019 in ITA No. 1008/IB/2018 (Tax year 2014) held that in the case CIR v. Islam Steel Mills (2015 PTD 2335) and M/s Nishat (Chunian) v. Federal Board of Revenue (2015 PTD 1385) honorable Lahore Court laid down following basic requirements for assuming jurisdiction under section 161:-
(i) Taxpayer is a withholding agent and comes under the definition of a prescribed person.
(ii) A particular transaction is liable to deduction/withholding; and
(iii) That specific tax of a specific person was to be withheld who could take credit of the tax recoverable under section 161 of the Ordinance.
7. Learned AR also stated that in above referred three un-reported judgments the honorable ATIR also laid following principles in relation to action under section 161/205:- "The objectives set forth by the assessing officer in taking up the proceedings through show- cause notice are: a) to examine the withholding taxes pertaining to the year under consideration; and b) to know the reasons of non-deduction of tax against the various transactions.
The scope of all the three provisions of law cited by the assessing officer i.e., section 161, section 205 and Rule 44 of the Income Tax Rules, 2002 has totally been misconceived by the assessing officer as none of them provide the kind of mandate he has derived. For the sake of convenience, subsections (1) and (1A) of section 161 are reproduced, as under: - "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 1 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 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."
(IA) No recovery under subsection (1) shall be made unless the person referred to in subsection (1) has been provided with an opportunity of being heard."
Subsection (1) of section 161 can only be invoked in two situations, firstly, to recover tax under the pro visions of clause (a) of subsection (1) thereof from a person who fails to collect tax or deduct tax and secondly, to recover tax under the provisions of clause (b) of subsection (1) thereof from a person who after having collected tax or deducted tax fails to pay to the Commissioner. Before issuance of a show-cause notice under section 161 of the Ordinance, there must be identified any amount of tax which falls within the mischief of above mentioned two eventualities. In this case, the assessing officer, instead of seeking reconciliation under Rule 44(4) has demanded production of records which are not permissible within the scope of section 161. He has indulged himself into an exercise which is akin to audit proceedings and after alleging non-compliance in submission of records, he has been issuing notices repeatedly to discharge his onus of providing opportunity of hearing. We are of the view that the assessing officer has not identified any recoverable amount of tax at a point of time prior to resort to invoking the machinery provision of section 161 provided in the scheme of the Ordinance for recovery of tax in specific circumstance.
Determination of default of the withholding agent is the condition precedent for invoking the provisions of section 161 of the Ordinance. The action of the assessing officer is therefore, held to be departed from the scope of the provisions of sections 161 and 205. The CIR (Appeals) has also faded to take notice of the deficiency mentioned above and has fell an error of confirming the order of the assessing officer.
5. Section 205 of the - Ordinance provides powers to the Commissioner to charge default surcharge for late payment of tax which is computed from the date on which payment of withholding tax was due under Rule 93 of the Income Tax Rules, 2002 read with section 158 of the Income Tax Ordinance, 2001. Unless and until findings have been given to the effect that any amount of tax deducted or collected is paid after the time prescribed under the law, the provisions of section 205 cannot be pressed into service. Similarly the Rule 44(4) of the Income Tax Rules, 2002 envisage that: - "(4) A person required to furnish the statement under sub-rule (1) or (2) shall, wherever required by the Commissioner, furnish a reconciliation statement of the amounts mentioned in the aforesaid annual and monthly statements with the amounts mentioned in the return of income, statements, related annexes and other documents submitted from time to time."
Rule 44(4) provides powers to the Commissioner to seek reconciliation between the payments mentioned in the return of income tax read with audited accounts thereto and the withholding statements filed under section 165. Before issuance of notice under section 161, it is incumbent upon the assessing officer to issue notice under Rule 44(4) to seek reconciliation there under.
Reliance is placed on judgments of the Honble Lahore High Court, Lahore titled as M/s. Noon Sugar Mills Ltd v. FOP (2015 PTD 1653), W.P. No. 25020 of 2014 RE: Sahir Associates (Pvt.) Ltd. v.
FOP, Akhtar Saeed Medical and Dental College v. FOP and others 2015 PTD 267 (H.C), M/s Nishat Chunian v. Federal Board of Revenue (2014 PTD 2078). In the instant case, there is no mention of issuance of notice under Rule 44(4) or the reconciliation provided there under. In other words, the assessing officer has not identified any un-reconciled amount before issuing the show-cause notice under section 161(1A), The proceedings in the case were initiated directly by issuing notice dated 27.10.2016 under sections 161/205 of the Ordinance without first adopting the procedure as contemplated in Rule 44(4) of the Income Tax Rules, 2002 therefore, the proceedings are contrary to the procedure prescribed in the Ordinance and the law laid down by the Hon'ble High Court in the judgments cited supra. The assessing officer has not mentioned the defects in the statements filed under section 165 of the Ordinance. In case the statements under section 165 of the Ordinance were not filed or the same were filed but were lacking in making correct disclosure, the appropriate course was to confront the taxpayer on this account and impose penalty under section 182 of the Ordinance. The assessing officer has not given findings in his order to the effect of any deficiency in the conduct of the taxpayer in filing of the statements under section 165 ibid. It appears that he was satisfied with the quality of disclosures required to be made in terms of statements under section 165. In such circumstances, the entire edifice of the proceedings under section 161 is held to be seriously defective. In our considered view, it is mandatory to first dislodge the statements filed under section 165 and then go for recovery proceedings contemplated under section 161 of the Ordinance. If the assessing officer is satisfied with the quality of disclosures made in the statements under section 165, he has no case to proceed under section 161. The assessing officer has unclearly cited the judgment of the Hon'ble apex Court titled as M/s Bilz Pakistan (Pvt.) Ltd. reported as 2002 PTD 1 but he has not inferred anything or have made a nexus with the defects in the quality of disclosures in terms of statements under section 165 before importing support from the said judgment of the Hon'ble Supreme Court. In non-doing so, we hold that the requirements of section 161 of the Ordinance have not been complied with and assumption of jurisdiction to proceed under section 161 is in violation of the procedure given in the Ordinance and the law laid down by the Honble High Court in the series of judgments cited above.
The learned CIR (Appeals) has also failed to take notice of the deficiencies mentioned above and has fell grave error in the confirming the order of the assessing officer."
8. Learned AR emphasized that the facts regarding estimation in the instant case are similar to those involved in the aforementioned three unreported judgments of honorable ATIR. He contended that the assessing officer failed to identify the persons from whom tax was deductible.
The machinery provisions of section 161 were put into operation without identifying and quantifying the alleged defaulted amount. Learned AR submitted that the assessing officer failed to comply with the fundamental principles of law for initiating the impugned action under section 161.
Therefore, the order under appeal is illegal and contrary to law. Learned AR argued that bifurcation of purchases along with reconciliation of payment in respect expenses incurred including BTL/Exempt payments was not considered by the authorities below. Learned AR further stated that the section 165(1B) is quite clear that the tax 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 and the assessing officer could take action under section 161(1B) only because creation of any further demand would be tantamount to double taxation. They pleaded to annul the impugned orders and delete the demands so created.
9. Conversely, learned DR supported orders of both the authorities below and stated despite proper opportunity of hearing having been provided, the taxpayer did not properly comply with the requirements of law. That is why the order under sections 161/205 was passed which was also duly upheld lawfully by the CIR (A).
10. We have heard the arguments of both sides and considered the facts of this case in the light of principles of law laid down in sections 161/205 and elaborated by the Division Bench of ATIR. We have also observed that the Assessing officer committed serious mistakes of law while conducting and completing the impugned proceedings under sections 161/205. He failed to quantify the recoverable amount before starting section under section 161. He failed to fulfill the requirements of law which provide that before initiating action under section 161, he should determine that (i) taxpayer was a withholding agent and came under the definition of prescribed person (ii) the transactions were liable to deduction/withholding; and (iii) specific tax of a specific person was to be withheld who could take credit of the tax recoverable under section 161 of the Ordinance. On top of it, this case is otherwise covered by the provisions of section 161(1B) which provide that where at the time of recovery of tax under subsection (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. In the instant case the learned AR reconciled the figures, placed on record. The assessing officer has not mentioned specific defects in the statements filed under section 165 of the Ordinance. In case the statements under section 165 of the Ordinance were not filed or the same were filed but were lacking in making correct disclosure, the appropriate course was to confront the taxpayer on this account and impose penalty under section 182 of the Ordinance. It appears that he was satisfied with the quality of disclosures required to be made in terms of statements under section 165 as the assessing officer has not given findings in his order to the effect of any deficiency in the statements filed under section 165. Moreover, there is no scope and mandate of section 161 to make the inquiries from the taxpayer. In such circumstances, the entire edifice of the proceedings under section 161 is held to be seriously defective and flawed.
11. The apex Court has clearly held that burden of proof of non-withholding of tax cannot be passed on to the withholding agent simply by pointing out the heads appearing in the return/financial statements in a generic manner. Assumption of jurisdiction under section 161 of the Income Tax Ordinance, 2001 necessarily requires possession of information in sufficient detail as was the case in the notice for tax year 2011 in the case before the apex Court. In the same case notices under section 161 for 2003-2006 were before the Court which described their contents in the following manner:- "5. We first take up the notices for the tax years 2003-2006. The amounts given in the notices had, as stated therein, been culled from the tax returns filed by the respondent, and alleged that on the various payments made by it in respect of "administrative, selling and financial expenses"; the respondent had failed to deduct tax as required under the relevant provisions of the Ordinance.
The sub-heads (listed in table form) in respect of which such default was alleged were the following: "salaries, wages and benefits"; "rent, rate and taxes", "travelling/conveyance", "repair and maintenance", "stationary/office supplies", "professional charges", "advertisement, publicity and sales promotion", "other charges"; "restructuring expenses", "profit on debt" and "others". Against each sub-head only one consolidated figure was given, i.e., for the whole of the tax year."
12. Notices for the tax years 2003-2006 were held illegal by the apex Court as these featured 'deliberate vagueness and breathtaking generality' by 'simply identifying one or more payments, or a class or category of payments' and thereby shifting the burden of proof on to the withholding agent. We are afraid that the notices under sections 161/205 of the Income Tax Ordinance, 2001 before us bears striking similarity to the notices held illegal by the apex Court above. Both sets of notices merely extract information from the tax returns under line items, 'simply assume that withholding tax against each amount was deductible and passes on the burden of proof to the withholding agent. Possession of such generic information was not sufficient to assume jurisdiction under section 161 of the Income Tax Ordinance, 2001.
13. The Honorable Lahore Court in its recent reported judgment dated 28.9.2022 in 2023 PTD 732 in the case of Commissioner Inland Revenue, Zone-I, LTU, Lahore v. M/s Marwat Enterprises (Pvt.)
Limited, Lahore decided the reference against the applicant department wherein following question was raised by the department:-- "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(1B) of the Income Tax Ordinance, 2001, which is mandatory?"
14. While deciding the reference referred supra the Honorable Court making reference to the "MCB" judgment of referred supra also observed as under:- "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 penally, 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, along with 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"
15. The Honorable Lahore High Court in its judgment supra also summarized the directions given by the Supreme Court in its judgment in the case of CIR v. MCB supra as under:- "13.........................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 (le) 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."
16. In the light of the binding principles of law enunciated in the above judgments of the honorable High Court and the judgment of the august Supreme Court of Pakistan in the case reported as CIR v. MCB Ltd. (2021 SCMR 1325), we have no hesitation in holding that notices under section 161 of the Income Tax Ordinance, 2001 were illegal being without jurisdiction. Since, the very foundation of the orders before us was illegal the superstructure of the assessment order under section 161/205 and the order of the CIR (A) also must fall to the ground and be declared void. As the very foundation of the orders before us are illegal we are afraid there are even further fatal legal infirmities in the Order under sections 161/205 of the Income Tax Ordinance, 2001. It has been noted that the assessing officer resorted to use of estimates in determining the amount payments. The use of such guess work actually supports contention of the learned AR that the assessing officer has no information whatsoever regarding the payments on which alleged non-deduction occurred. This is in direct violation of the criteria for section 161 cases determined by the apex Court discussed supra as also the general principles of application of fiscal statutes in which estimates and surmises have no place [2013 PTD 884 (MC. Lah); 2016 PTD 189 (Trib.)].
17. In the sagacity of foregoing, we do not feel any hesitation to vacate both the orders of authorities below. Consequently, the appeal under consideration stands accepted and the demand created under section 161(1) vide the impugned orders stands deleted as well as the consequential proceedings.
18. The instant appeal is decided in the manner as indicated above. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.