Mian ASGHAR ALI VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2003 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 1482 (2002)

(a) Income Tax Ordinance (XXXI of 1979)---

----Ss. 77, 74 & First Sched., Part IV, Para. B(2), Cl. ,(2)---Companies Ordinance (XLVII of 1984), S.2(28) & 2(30)---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S:9---Liability in the case of deceased person---Liability for payment of tax in the case of private companies, firm and Association of Persons---Tax liability against public companies---Recovery-from deceased Director ---Validity- Tax due from the public companies could- not be recovered from the deceased Director by resort to S.77 of the Income Tax Ordinance; 1979, which could be pressed into service for recovery of tax from a former Director, only when `tax payable by a private company could not be recovered'---Section 77 of the Income Tax Ordinance, 1979 neither even remotely authorizes recovery of tax outstanding against a public company, from its former Directors, nor does-it spell out any condition 'under which a public company could be deemed to be a private company---Steps initiated for recovery of tax liability of public companies from the assets of deceased Director were from the 'very beginning, contrary to law, arbitrary and unjust.

(b) Income Tax Ordinance (XXXI of 1979)---

----Ss. 74, 77 & First Sched., Part IV, Para. 13f2), Cl.(2) --- Companies Ordinance (XLVII of 1984), S.2(28) & 2(30)----West. Pakistan Urban Rent Restriction Ordinance (VI of 1959)---Income Tax Rules, 1982, Rr.159 & 74---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.9---Liability in the case - of deceased person---Liability for payment of tax in the case of private companies, firms and Associations of Persons---Tax liability against public companies---Legal heirs ---Assessee in default---Recovery of arrears from legal heirs without service of notice showing intention to treat them as assessee in default and also recovery of tax liability against public companies from the property of deceased Director ---Validity---Mal administration was evident by continuing recovery proceeding ignoring that on the death of an assessee who was treated as a `defaulter', the efficacy of Recovery Certificate had come to an end and recovery proceedings could not continue against legal heirs without service of notice showing intention to treat them as 'assessee' or `assessee-in default'---Recovery Certificate originally issued included the tax arrears in respect of public company completely forgetting that in absence of definition of `public company' and `private company' in the Income Tax Ordinance, 1979; 'the definition as obtaining in the Companies Ordinance, 1984 were applicable with the result that -recovery from a former Director could not be made of tax arrears outstanding against a public company---Recovery action was contrary to taw, rules and regulations thus perverse, arbitrary and unreasonable resulting in "maladministration" as per S.2(3) of the Establishment of Office of Federal Tax Ombudsman Ordinance, 2000---Federal Tax Ombudsman recommended that Recovery Certificate be withdrawn and the Official Receiver recalled that amount recovered in excess of the demand against the deceased and the two private limited companies be refunded alongwith compensation as admissible under S.171 of the Income Tax Ordinance, 2001 and enquiry be conducted to identify those who failed to take appropriate legal action as respects recovery of tax demand outstanding against the two public limited companies report of inquiry be furnished.

In re: Habib Bank Ltd. 1999 PTD 2940 and In re: Begum Nusrat Bhutto 1981 SCMR 1192 ref.

Syed Ghulam Abbas Shah's case 1985 CLC 1582. rel.

Zahid Parvez for the Complainant.

Abdur Rehman Warraich for Respondent.

DECISION/FINDINGS

The facts in brief are that for the assessment year 1960-61 to 1972-73 income tax demand aggregating Rs. 4,946,304 was found to be outstanding against 4 companies and one individual as under:--

(a)Individual

Mian Aziz-ud-DinRs.83,556

(b)Private Companies

(i) Kaiser Sertaj Industries (Pvt.) Ltd.72,740

(ii) Sertaj Industries (Pvt.) Ltd.897 468

Total of (a) and (b)1,053,764

(c)Public Companies

(i) Sertaj Engineering Corporation Ltd.675,180

(ii) Sertaj Engineering Company Ltd. 3,217 360

Total:3,892,540

Total for which Receiver Appointed: Rs.4,946,304

(Wrongly totaled in the complaint at Rs.4,936,304)

2. Since all the four Companies (two Public Limited and two Private Limited) were already under liquidation, for the recovery of above demand, the concerned Tax Recovery Officer invoked section 77 of the Income Tax Ordnance, 1979 read with Rule 159 of the Income Tax Rules, 1981 for which approval of IAC. as required under Rule 74 was obtained. The defaulter Director Mian Aziz-ud-Din died soon after in 1982. However, the recovery proceedings commenced on 5-7-1981, continued against his legal heirs. In the meantime one Receiver was substituted by another and the present Receiver; Mr. Muhammad Iqbal Chaudhry, is working in that capacity since 31-10-1985. The legal heirs objected to the legality of the proceeding but it was not considered.

3. The department in reply pleaded that out of four companies two were private companies and two public companies against which arrears of tax were due as stated in the complaint. The receiver was appointed in accordance with law during the life time of Azizuddin, Director. The Official Receiver attached the rent in favour of the Department. The Receiver collected Rs.1,520,402 upto May, 2002 arid of Rs.4,946,412 and balance of Rs.3,426,010 are till recoverable. Mr. Mohammad Iqbal Chaudhry the Receiver never informed about change of tenancy or receipt of Pugree/advance rent and the Department is making inquiry into the matter.

4. As a first instance of "maladministration", Mr. Zahid Perveaz (Advocate) of the Complainant pointed out that proceedings, were initiated for recovery of tax from a former Director, both in respect of tax due against Public Companies and Private Companies. Elaborating the scope of section 77 it was stressed that the recovery-from a former Director or from a shareholder, under the provisions of section 77, was possible only in respect of "tax payable by a private company". Therefore, the inclusion of the tax dues relating to two pubic limited companies, which was the major chunk of the arrears, was unjustified arbitrary and illegal. For this assertion reliance was placed on a decision by the Karachi High Court reported 1999 PTD 2940 in re: Habib Bank Ltd. Another Lacuna, according to the learned counsel, was that after the death of Mian Aziz-ud-Din, his legal heirs, were neither identified nor served with any notice for the payment of arrears and recovery proceedings, through the Receiver, continued unabated. In this connection reference was made to the Supreme Court verdict . in re: Begum Nusrat Bhutto 1981 SCMR 1192. He, however, later on abandoned to press this point. Attention was next drawn to a letter by the Commissioner of Income Tax Company Zone-I, Lahore, dated 10-4-2000 wherein all officers were requested "to ensure the appointment of each and every official Receiver, except those where they are appointed through fresh appointment letter, have been withdrawn". Despite this categorical direction by the Commissioner, the AR emphasized, maladministration' was caused as the official Receiver appointed in 1985 was allowed to continue though no `fresh appointment letter' was issued to him. It also was alleged that the Assessing Officer (i) did not exercise proper care and supervision on the recoveries made by the official Receiver, (ii) who was given a free hand to install new tenants, (iii) to fix rent .to be charged from the new tenants, and (iv) no accountability was exercised as respects advance/rents (or pugree) received on change of tenancy. It was explained that seized property is market consisting .of 28 shops on McLeod Road, which is the hub of auto parts dealers. The counsel for the Complainant pointed out that even now tenants are 'said to be paying rents at Rs.200 to 300 per month despite express provision in the Urban Rent Restriction Ordinance author-izing 25% increase in rent after each 3 years period. Had proper supervision been exercised, the entire demand would have been wiped out, a long time ago. Through calculation it was demonstrated that whereas the demand from two `private companies' and one "individual", 'aggregated at Rs.1,053,764 the recoveries to date, as admitted by the Department, come to Rs.1,520,402 hence it was admitted to continue recovering money in excess of the legitimate arrears. The learned counsel concluded by submitting that from the date the illegality crept in the recovery proceedings, and in the appointment of the Receiver, the amount recovered from the legal heirs of the deceased defaulter, be refunded alongwith compensation thereon.

5. Mr. Abdur Rehman Warraich, "(D-CIT) appearing for the Revenue submitted that the term `private limited company' is not defined anywhere in the Income Tax Ordinance. However, `public limited company' is defined in paragraph B(2) of Part-IV to the First ,Schedule of Income Tax Ordinance as under:--

"Public company means:--

(a)a company in which not less than fifty per cent of shares are held by the Government;

(b)a company whose shares were the subject of dealings in a registered Stock Exchange in Pakistan at any time during the income year and remained listed on the Stock Exchange till the close of that year; and

(c)a trust formed by or under any law for the time being in force.

According to the DR wherever, the above criteria were not satisfied, the company was to be .treated as Private Company and, therefore, for 'purposes of income-tax recovery; the two so-called `public limited companies' of which the deceased was a Director, fell under the definition of `private limited company'. Consequently recovery measures could be jointly and severally taken against any person who was "a Director of the company at any time during said income year". The DR further submitted that as per subsection (2) of section 74 of the repealed Ordinance proceedings taken against the deceased before his death were to be deemed to have been taken against the legal representatives and could be continued from the stage at which these stood on the date of death of the deceased. Therefore, the recovery proceedings, by way of attachment of immovable property and collection of rent, as were taken against the late Mian Aziz-ud-Din were continued even after his death because the legal heirs were liable under section 74 read with section 77 of the Ordinance.

6. The investigations show that the arguments by the representative of Revenue suffer from a fundamental flaw inasmuch as the Income Tax Ordinance, 1979 nowhere independently defines the terms `public company" or, "private company". Subsection (16) of section 2 simply says; `Company means company as defined in the Companies Act, 1913'. This Act of 1913 was superseded by Companies Ordinance, 1984 where separate definitions for `private company' and "public company" are obtaining as under:--

Section 2(28) `Private-company' means a company which by its Articles-

restricts the right to transfer its shares, if any;

(i)limits the number of its members to fifty not including persons who are in the employment of the company; and

(ii)prohibits any invitation to the public to subscribe for the shares, if any, or debentures of the company:

Provided that, where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definition be treated as a single member.

Section 2(30) `Public company' means a company, which is not a private Company.

On the other hand, the definition in Cl. (2) of Para. B(2) of Part IV of the First Schedule, on which reliance was placed by the DR, is relevant only for purposes of tax-rate as the First Schedule itself proclaims to be a supplement to section 9 (Charge of Tax), section 10 (Charge of Super Tax and Surcharge) and section 50 (Payment of Tax at Source). Therefore, for all other purposes, including recourse to Recovery of Tax, the definition in the Companies Ordinance (ibid) is to be followed. Judged on this basis, tax amounting to over Rs.3.8 (M) due from the two public companies (ibid) could not be recovered from the deceased Director by resort to section 77, which can be pressed into service for recovery of tax, from (among others) a former Director, only when "tax payable by a private company ...cannot be recovered'. Section 77 not even remotely, authorises recovery of tax outstanding against a public company, from its former. Directors, nor does it spell out any 'condition under which a public company can be deemed to be a private company. Therefore, the steps initiated for recovery of tax liability of the two public companies from the assets of the deceased Director, were, from the very beginning, contrary to law, arbitrary and unjust.

7. Moreover, a scrutiny of legal provision as also the case-law relied upon by the learned counsel, particularly the decision of the Azad Jammu & Kashmir High Court in re: Syed Ghulam Abbas Shah = (1985) 51 Tax 157, leads to the conclusion:---

(i)The definition of Public company as per para. B(2) of Para. IV of First Schedule to the Income Tax Ordinance, 1979 is relevant only in respect of rates of tax applicable to different. types of companies, because para B(2) begins with the word `as used in the Schedule' and the Schedule relates to, is only in pursuance to sections 9, 10 and 50. Quite obviously it does not extend to recovery measures stipulated in Chapter VIII relating to Tax Liability in Special Cases.

(ii)As per subsection (3) of section 74, the legal representative of the deceased is; "to be deemed to be an assessee". This without doubt implies that he would be served with a notice by the Assessing Officer showing intention to treat him as an assessee. It is an elementary principle of law that no person can be subjected to an obligation without affording him an opportunity of show-cause as has been held in 1970 SCMR 226 in re: Aswab Ali and others. Admittedly no Demand Notice was served upon any legal representative of the deceased.

(iii)It also is an admitted position that the two private limited companies in which the late Mian Aziz-ud-Din was a Director, had gone into liquidation. There is nothing on record .to show that liquidator contacted the D-CIT as required by subsection (1) of the section 76 or the DCIT intimated the amount of tax arrears demand outstanding against the private companies under liquidation.

(iv)The Department had no material to contradict the allegation by the Complainant's counsel, that provision of Rule 160 of the Income Tax Rules in respect of powers of receiver were not adhered to as respects the 'management, protection, preservation hand improvement of the property' and now the R-CIT in para wise comments admits 'no knowledge of receipt of Pugree/ advanced' and promises to take. appropriate action, if allegations are found to be true, after a Departmental inquiry.

8. To sum up, maladministration is evident by continuing the 'recovery proceeding ignoring that on the death of an assessee, who was treated as. a `defaulter', the efficacy of the Recovery Certificate had come to an end and recovery proceedings could not continue against the legal heirs (who are said to be 8 in number) without service of notice) showing intention to treat them an `assessee' or assessee-in-default. Moreover, the Recovery Certificate originally issued included the taxi arrears in respect of public company completely forgetting that in the absence of definition of `public company' and `private company' in the Income Tax Ordinance, the definitions as obtaining in the Companies Ordinance were applicable with the result that recovery from a former Director could not be made of tax arrears outstanding against a public company.

9. Judged on the above criteria the recovery action was contrary to law, rules and regulation thus perverse, arbitrary and unreasonable resulting in "maladministration" as per subsection (31 of section 2 of the Establishment of the Office of Federal Tax Ombudsman Ordinance. It is, therefore, Recommended that:--

(a)That Recovery Certificate be withdrawn, and the Official Receiver recalled,

(b)The amount recovered in excess of the demand against the (i) deceased Mian Aziz-ud-Din, and (ii) the two private limited companies (aggregating Rs.1,043,372) be refunded alongwith compensation as admissible under section 171 of the Income Tax Ordinance, 2001.

(c)An enquiry be conducted to identify those who failed to take appropriate legal action as respects recovery of tax demand aggregating Rs.3,892,54 outstanding against the two public limited companies.

(d)The report of inquiry against Mr. Mohammad Iqbal Choudhry be furnished.

10. Compliance report be submitted within the 30 days of the receipt of this order.

C.M.A./678/FTO Order accordingly.