This is a complaint by a limited company against the allegedly illegal actions of the officers of the Wealth Tax Department, Companies-II, Lahore in recovering a total amount of Rs.4.1 million under section 92 of the Income Tax Ordinance (read with section 32 of the Wealth Tax Act) through attachment of the complainant's bank accounts as well as its income-tax refund. The main points in the complaint are as under:
(i) The complainant is a private limited company fully owned by the Government of Pakistan.
(ii) The complainant had no tax liability as on 28-6-2001 and in fact a refund of Rs.1,337,132 had been determined in its case in Circle-17, Companies Zone-II, Lahore which had not yet been paid.
(iii) On 28-6-2001 the Assistant Commissioner of Income Tax/Wealth Tax issued a notice under section 92 of the Income Tax Ordinance (read with section 32 of the Wealth Tax Act) to various banks in which the complainant was maintaining its accounts and got Rs.2.8 million transferred from these bank accounts illegally and without any jurisdiction. The tax officers verbally informed the complainant that the recovery was on account of the wealth tax liability of another company viz. Messrs Corporation House (Pvt.) Ltd. In which the complainant held 25% shares.
(iv) In the meantime the Income Tax Appellate Tribunal (vide order, dated 29-6-2001) had allowed a stay of demand till 16-7-2001) in the case of Messrs Corporation House and immediately on grant of his stay, the complainant asked its main bankers not to clear the proceeds of the pay order collected illegally by the department on 28-6-2001) but to not avail.
(v) Subsequently NESPAK received a letter from the Tax Department, dated 28-6-2001 that the income-tax refund of Rs.1,337,132 had also been recovered from Circle 17, Companies Zone II, Lahore by the Assistant Commissioner, Circle-02, Companies Zone-H, Lahore under section 31E of the Wealth Tax Act.
(vi) NESPAK is a shareholder in Corporation House to the extent of 25% of its shareholding by investing Rs.2 million jointly with State Cement Corporation. NFC and PARCO ' and as per provisions of the Companies Ordinance, 1984 the liability of the shareholders was limited to the extent of any unpaid capital.
(vii) It has statedly been held by the Courts that the recovery of outstanding liability of tax may be made from shareholders only when the tax cannot be recovered from the assessee-Company.
Messrs Corporation House (Pvt.) Ltd. Owned sufficient assets for the discharge of its tax liability and there was thus no justification for the recovery of the tax from the complainant company.
(viii)The tax Officials of Companies Zone-II, Lahore have acted in an illegal manner in order to meet their revenue targets and this is tantamount to maladministration as defined in the Establishment of Office of the Federal Tax Ombudsman Ordinance, 2000.
In the light of the above contentions it has been prayed by the complainant that the Commissioner of Income Tax, Companies Zone-II, Lahore may be directed to issue a refund of Rs.4.1 million recovered through coercive measures which was also contrary to the stay order passed by the Income Tax Appellate Tribunal on 29-6-2001 in the case of Corporation House (Pvt.) Ltd.
2. The respondent's reply has been received and the representatives of the complainant and the respondent have been heard. The main points in the respondent's reply are as follows:
(i) Vide later, dated 20-6-2000 (served on the complainant on 21-6-2000), the complainant company was required under section 31-A of the Wealth Tax Act to deposit the wealth tax of Rs.14,502,518 outstanding against Messrs Corporation House (Pvt.) Ltd. In which the complainant was a major shareholder.
(ii) It is not correct that the amount of Rs.2.8 million was recovered illegally from the complainant's bank accounts because the complainant had already been conveyed as far back as on 20-6- 2000 that in case of non-payment, recovery measures would be adopted against the complainant.
(iii) Stay of recovery had been allowed to Messrs Corporation House (Pvt.) Ltd. By the ITAT from time to time but there was no stay when the recovery was made.
(iv) As already noted, notice under section 31A of the Wealth Tax Act (read with section 77(2) of the Income Tax Ordinance) had already been served in June, 2000 but the complainant-company had neither challenged the notice nor had made any compliance.
(v) According to the provisions of section 31A of the Wealth Tax Act, the complainant was liable to pay the outstanding tax demand of Messrs Corporation House and the mode of recovery adopted by the Department was duly authorised by section 32 of the Wealth Tax Act. There was thus no maladministration on the part of the tax authorities.
3. The contentions of the two sides have been considered and it seems that as far as stay of demand allowed by the ITAT is concerned, the stay was not operative in the case of Corporation House when tax was recovered under section 32 of the Wealth Tax Act, read with section 92 of the Income Tax Ordinance from the complainant. There is also no doubt that if the provisions of section 31A of the Wealth Tax Act, were operative in the case, recovery could have been made under that section since the complainant's share in Corporation House was more than the specified 10%. The question, however, is whether the said section 31A was applicable in the instant case. For the purpose of determining this question section 31A of the Wealth Tax Act is reproduced asunder:--- "31A. Recovery of tax in the case of firms, association of persons, bodies of individuals, whether incorporated or not, and companies.---(1) Notwithstanding anything contained in other statutes, where any tax payable by a firm, an association of persons, body of individuals, whether incorporated or not, or a company (including a firm, an association of persons, a body of individuals, whether incorporated or not, or a company which are wound up or are in the process of winding-up) in respect of any year cannot be recovered, every person who is, or was at any time during the year ending on the valuation date relevant to that year, a partner, a member, a director or a major shareholder, as the case may be, of such bodies shall be jointly and severally liable for the payment of such tax: Provided that a major shareholder is one who owns not less than 10 per cent. Of paid-up capital at any time during year: Provided further that any person who makes the payment under this section shall be entitled to recover the amount so paid by him from the body on whose behalf it is paid or from the other partners, members, directors, shareholders, as.The case may be, of that body.
(2) No proceedings under subsection (1) shall be commenced except with the prior approval in writing of the Commissioner."
The important words in this section for the present purposes are the words "where any tax payable by the Company... In respect of any year cannot be recovered.... A Director or a major shareholder....
Shall be jointly and severally responsible for the payment of such taxes".
The authorized representative of the complainant has in this context referred to two decisions of the Indian jurisdiction viz, the Andhra Pradesh High Court decision in. K.V. Reddy v. ACIT (2000 PTD 943) and the Gujarat High Court decision in Bhagwandas J. Patel v. DCIT (2000 PTD 3577). In the former case it has been held that before any action is taken against any Director under section 179 of the Income Tax Act, the Assessing Officer must give a finding that tax due cannot be recovered from the company and in the absence of such a finding the Assessing Officer does not have the jurisdiction to invoke section 179. Similarly, in the second mentioned case it has been held that the tax liability is primarily that of the Company and its Director can be proceeded against only, if Revenue establishes that tax cannot be recovered from the Company. It is, however, evident that even without the case-law, the provisions of section 31A of the Wealth Tax Act are quite clear and unambiguous. It is obvious from a plain reading of the section that recovery can be made from a major shareholder only when the tax "cannot be recovered" from the Company.
4. Now, it is an admitted fact that Messrs Corporation House (Pvt.) Ltd. Own a very valuable piece of land measuring about 14 Kanals on Egerton Road, Lahore which in the last wealth tax assessment of the Company had been valued at Rs.155 million. Obviously the value of land is much more than the outstanding wealth tax demand and it would, therefore, be quite incorrect to say that the tax cannot be recovered from the Company. It is a different matter that the recovery of the demand through auction of the land may be hampered by the fact that the demand is sub judice and may remain the subject of litigation even after the decision of the ITAT. This is, however, no reason for making a recovery from the complainant when the Company had sufficient assets to meet the demand. It is added that while seeking permission of the Commissioner pf Income Tax/Wealth Tax for action under section 77(2) of the Income Tax Ordinance (section 31A of the Wealth Tax Act) the Deputy Commissioner reported that the Bank balance of Messrs Corporation House was only Rs.1,26,000, "Which does not meet with the requirement of this office" and there was no other liquid asset from which recovery could be made.
Permission of the Commissioner was, therefore, sought for the recovery of the wealth tax demand from the four shareholders of the Company. This permission was granted but it is obvious that there is nothing in section 31A of the Wealth Tax Act (or in the provisions of section 77(2) of the Income Tax Ordinance) that the words "tax cannot be recovered" can in any way be construed to mean that tax cannot be recovered out of liquid assets.
S. In the light of the above, it is evident that the basic requirement precedent to action under section 31A of the Wealth Tax Act was not fulfilled in the case and it was neither held anywhere nor is it a fact that recovery cannot be made from Messrs Corporation House (Pvt.) Ltd. Under the circumstances the recovery of Rs.4.1 million from the complainant was quite illegal. The representative of the respondent, however, pointed out in the context of the complainant's plea for refund of this amount that the tax had actually been collected against the wealth tax arrears of Messrs Corporation House and no refund can be paid to the complainant without creating a refund in the case of Corporation House. It was further added that no such refund can be created in the case of Corporation House because the tax due was still outstanding against that corporation. This, however, is not found to be an insurmountable problem because the original tax demand outstanding against Corporation House can now again be restored and the amount recovered from the complainant can be treated as a tax recovery without actual demand viz. As a refundable amount. During discussion it was, however, indicated by the representative of the complainant that the Company might be willing not to press for the actual refund of the entire amount, part of which may be retained by the Department to be adjusted against the complainant's own future tax liability. This, however, is a matter between the complainant and the respondent.
6. In the light of the above it is recommended that the respondent treat the recovered amount of Rs.4.1 million as refundable to the complainant but if the complainant agrees to the "retention of a certain portion of the amount against anticipated tax liability, only the balance amount may, for the present, be refunded to the complainant. Compliance report indicating the actual action taken be furnished within 30 days. .