Messrs RECKITT BENCKISER PAKISTAN LTD. VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2007 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 1141 (2004)

(a) Sales Tax Act (VII of 1990)---

----Ss. 36, 33 & 34---Establishment of the Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Recovery of tax not levied or short-levied or erroneously refunded---Show-cause notice for recovery of sales tax and initiation of penal action for violation on account of sales of Furniture and equipment; Motor vehicle; Scrap and Devaluation of Plant and other assets without payment of sales tax---Validity---Fact that information about disposal of fixed assets was picked by the audit from the annual accounts of the complainant showing the complainant disposing of depreciated furniture and depreciated motor vehicles and complainant had sufficient reasons, on the authority of decisions of judicial forums, to believe that the disposition of fixed assets made by the complainant was not in furtherance of its business and was not liable to sales tax, leads to incontrovertible conclusion that the complainant did not fail to deposit the amount of tax due or any part thereof in the time or manner laid down under the Sales Tax Act, 1990 or rules or order made thereunder as envisaged under S. 33(2)(cc) of the Sales Tax Act, 1990---Even if, in order to protect the interest of revenues till the issue was finally settled, non-levy of tax on disposal of fixed assets was deemed to be "by reason of deliberate act" and as such notice under S.36(1) of the Sales Tax Act, 1990 was considered valid, the fact that all decisions in the field were in favour of complainant's view, the notices to levy penalty under S.33 and additional tax S.34 of the Sales Tax Act, 1990 were premature if not totally unwarranted; hence without valid reasons---Maladministration was proved---Three misconceived charges of contravention of law were framed due to lack of competence and negligence in examining the account books for verification of payment of tax due---Senior officers in the Department, while handling the response of tax employee against whom mal administration was alleged, endorsed the same---Tax employee should not disregard the settled principles of providing due and sufficient opportunity before recommending or taking any action against a tax payer---Federal Tax Ombudsman recommended that the adjudication proceedings by the Collector Sales Tax (Adjudication) be concluded within 30 days if not already concluded and remedial written counselling of the concerned auditors is done by their Officer-in-charge having regard to the findings.

2002 PTD (Trib.) 1455 and Collector of Customs, Central Excise and Sales Tax, Karachi (West) v. Novartis Pakistan Limited 2002 PTD 976 rel.

(b) Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)---

----S. 2(3)(ii)---Maladministration---Ignorance of settled position of law is "incompetence" which amounted to maladministration.

(c) Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)---

----S. 2(3)(i)(a)---Maladministration---Actions unsupported by valid reasons were maladministration notwithstanding the fact that those actions might be bona fide.

(d) Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)---

----S. 2(3)(1)(a)---Maladministration---View that mala fide is to be proved to hold a tax employee responsible for maladministration was based on the misconceived understanding that the words "unless it is bona fide and for valid reasons" appearing at the end of sub-clause (a) of clause (1) of subsection (3) of S.2 of the Establishment of, Office of Federal Tax Ombudsman Ordinance, 2000 apply to any decision, process, recommendation, act of omission or commission which was contrary to law, rules and regulations or was a departure from the established practice or producer.

(e) Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)---

---S. 2(3)---Maladministration---In most general terms bad or poor management or regulation of public affairs is "maladministration"---Bad or poor management/regulation of public affairs will remain bad notwithstanding that it is bona fide and for valid reason because goals of good management or regulation of public affairs cannot be achieved without eradication of such reasons/causes.

Chambers 21st Century Dictionary, Revised Edition, at page 829 published 1999, Reprinted 2000 and Black's Law Dictionary, 7th Edition at page 967 published 1999, 6th Reprinted 2003 ref.

(f) Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)-

----S. 2(3)(i)(a)---Maladministration---Term "bona fide" shows that a decision, process, recommendation, act of omission or commission which is contrary to law, rules or regulations or a departure from established practice or procedure may be claimed to be done in good faith (bona fide), the concept of malice in law notwithstanding---Attributing any "valid reason" to a decision, process, recommendation, act of omission or commission which is "contrary to law" (the law as settled by the binding decisions of judicial forums) was inconceivable---Departure from established practice or procedure is the only act for which valid reasons may be offered---Rider "Departure from established practice or procedure" governs only second part of sub-clause (a) of clause (i) of subsection (3) of S.2 of the Establishment of Office of Federal Tax Ombudsman Ordinance, 2000 i.e. the phrase, "act of omission and commission which is a departure from established practice or procedure" because it may be both bona fide as well as for valid reasons.

(g) Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)---

----S. 2(3)(i)(a)---Maladministration---Use of conjunction "and" in the rider "act of omission and commission which is a departure from established practice or procedure" requires the tax employee to prove that an act of omission or commission which is a departure from established practice or procedure on his part was both bona fide as well as for valid reasons---Failure to discharge the onus on any one of the two counts or both, shall not absolve tax employee of maladministration because the use of the word "unless" with the rider suggests that it is for the department to prove bona fide and valid reasons.

(h) Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)---

----S. 2(3)(i)(a)---Maladministration---Rider "unless it is bona fide and for valid reasons" governing the second part of sub-clause (a) of clause (i) of subsection (3) of S.2 of the Establishment of Office of Federal Tax Ombudsman Ordinance, 2000 is an exception to the common dictionary meanings of the word "maladministration"---Exceptions seems to have been made to suggest that the Federal Tax Ombudsman did not recommend any adverse action against a tax employee who is able to prove that departure from established practice or procedure on his part was bona fide and for valid reason.

Ms. Danish Zuberi and Ms. Umera Ali Barristers for the Complainant.

Abdul Hameed Memon for Respondent.

FINDINGS/DECISION

Maladministration is alleged in the instant Complaint on account of incompetence and inaptitude in discharge of duties and responsibilities on the part of auditors as well as the Collector of Sales Tax (Adjudication), Karachi-III.

2. A notice has been received from Collector Adjudication, Salts Tax, Karachi-III, dated 2-4-2004 requiring the complainant to show cause why Sales Tax aggregating Rs.42,598,420 should not be recovered from them under section 36 along with additional tax under section 34 and why penal action under section 33 of Sales Tax Act, 1990 (hereinafter referred to as the Act) may not be initiated for violations on account of following sales without payment of Sales Tax:-

(The Notice says, "the unit have also deleted the plant assets from its book value in terms of Accumulated Description which really devalues the original book value to the tune of Rs.280,500,000 involving sales tax worth Rs.42,075,000").

3. It is alleged that the process initiated by the aforementioned tax employees through show-cause notice, dated April 2, 2004, is contrary to law, perverse, arbitrary and unreasonable, based on irrelevant grounds and involves exercise of powers for administrative excess insofar as:--

(a) The show-cause notice fails to specify as to how the complainant allegedly falls within subsection (1) of section 36 of the Sales Tax Act, 1990 because neither any allegation of collusion or deliberate act or evasion has been made against the complainant in the show-cause notice nor any such allegations were made nor any audit objections were raised by the respondent during the course of audit for the financial years 1998 and 1999.

(b) The allegations levelled in the show-cause notice are based on figures taken from the Annual Accounts of the complainant and tax liability calculated on the basis of these figures. The "reason of some collusion or deliberate act" has thus been imputed without any application of mind whatsoever. As such show-cause notice is time-barred under section 36 of the Sales Tax Act, 1990.

(c) The allegation that the complainant has "sold furniture of Rs.323,000 and motor vehicle of Rs.12,000 which were transferred into a new PCT heading of scrap that is liable to sales tax" is vague and ambiguous because neither the period nor the tax allegedly payable has been specified in the show-cause notice.

(d) The allegation that "the unit have also sold scrap worth Rs. 1,472,000 during 1999 and 1,497,000 during 1998 involving sales tax worth Rs.264,960.00 and Rs.269,460.00 respectively" without payment of Sales Tax, which is based on an incorrect audit observation contrary to facts available on record.

(e) The allegation that the unit have also deleted the plant assets from its book-value in terms of accumulated Depreciation which really devalues the original book value to the tune of Rs.280,500,000 involving sales tax amounting to Rs.42,075,000 is contrary to law.

(f) The notice to show cause why action should not be taken under sections 33 and 34 of the Sales Tax Act, 1990 is consequential to the forgoing; hence allegedly infructuous.

4. The respondent, in response to notice under section 10(4) of the Ordinance XXXV of 2000 (hereinafter referred to as FTO Ordinance), has offered comments that are being recorded hereunder for proper investigation:--

(a) He has raised a preliminary objection that the matter relates to a legal issue/dispute, which is already under adjudication before Collector Sales Tax, Karachi-III and the complainant will also have subsequent remedies of appeal under relevant sections of the Sales Tax Act, 1990, if the order passed by the Adjudicating Authority aggrieves them. The matter involved, therefore, is barred from the jurisdiction of the Federal Tax Ombudsman as laid down in clauses (a) and (b), section 9(2) of the FTO Ordinance.

(b) Regarding the allegation in para. 3(a) and (b) supra it is submitted that "the show-cause notice falls within the purview of section 36(1)" of the Act because "the alleged evasion of tax is "deliberate". However, the respondent has stated that "collusion" is not alleged because no "collusion" is involved.

(c) Regarding allegation in para. 3(c) supra, it is submitted that the complainant calls the show-cause notice vague merely on the ground that the period relating to non-payment of tax has not been specified. It is submitted that show-cause notice clearly mentions that non-payment relates to years 1998 and 1999; hence the allegation is unfounded.

(d) The respondent averred in respect of allegation in para. 3(d) supra that audit observations are issued when any clarifications are required from the taxpayer, which was not required in this case. Moreover, there was no statutory requirement of issuing audit observations before the issuance of show-cause notice at the time when audit in question was conducted. The opportunity of hearing is required to be given as stipulated in section 36 of Sales Tax Act, 1990, which has been afforded through the issuance of show-cause notice. However, it is submitted that Department is ready to withdraw the demand relating to scrap if, the complainant provides the proof of payment of tax on scrap during the course of adjudication.

(e) The comment offered by the respondent on allegation in para. 3(e) supra is as under:---

"It is submitted that prima facie departmental view is that demand of sales tax cannot be raised against the accumulated depreciation. The demand on this account seems to be based on some misconception. It is also pointed out that this case was not made by Large Taxpayers Unit. However, LTU will not press for demand on this issue during the adjudication process."

(f) Regarding allegation in para. 3(0 supra the respondent has submitted that additional tax is mandatory requirement of section 34 in all cases where the tax is not paid in due time. Only the Federal Government and the Central Board of Revenue have powers to grant exemption from payment of additional tax.

5. The respondent has conceded in the parawise comments that the contravention Report submitted by the Audit for Adjudication is by and large misconceived and based on observations that called for an opportunity to be given during the course of audit to the complainant to clarify and substantiate with evidence. It has been conceded that the alleged contravention of non-payment of Rs.42,075,000 is based on misconception that cost reduction of depreciable capital assets by Rs.280,500,000 on account of accumulated depreciation amounts to supply/sale liable to sale tax. Further the respondent has offered to withdraw the charge of contravention of alleged non-payment of Sales Tax amounting to Rs.269,460 and Rs.264,960 on Sale of Scrap for Rs.1,497,000 in 1998 and for Rs.1, and 472,000 in 1999 respectively if the complainant provides the proof of payment of tax on scrap sale during the course of adjudication. This leaves the charge of contra vention of non-payment of Sales Tax of Rs.50,250 on sale of used furniture and motor car aggregating Rs.335,000. Although in another matter the High Court has decided the issue against the Department which has challenged it in the Supreme Court.

6. The fact that the information about disposal of the aforesaid fixed assets is picked by the audit from the annual accounts of the complainant for the year ended 31st December, 1999, showing that the complainant had disposed of depreciated furniture for Rs.323,000 and depreciated motor vehicles for Rs.12,000 in the year, 1999 and that the complainant had sufficient reason, on the authority of decisions of judicial forums, to believe that the deposition of fixed assets made by the complainant was not in furtherance of its business and, therefore, was not liable to Sales Tax leads to incontrovertible conclusion that the complainant did not fail to deposit the amount of tax due or any part thereof in the time or manner laid down under the Act or rules or order made thereunder as envisaged under section 33(2)(cc) of the Act. It further leads to the conclusion that even if, in order to protect the interest of Revenue till the issue is finally settled, non-levy of tax on disposal of fixed assets is deemed to be "by reason of deliberate act" and as such notice under section 36(1) is considered valid, the fact that all decisions in the field are in favour of complainant's view, the notices to levy penalty under section 33 and additional tax under section 34 are premature if not totally unwarranted; hence without valid reasons. Besides the decisions of Sindh High Court ibid impugned by the Respondent in the Supreme Court of Pakistan, the complainant have placed reliance on the following decisions in support of their view:

(1) 2002 PTD (Trib.) 1455

(2) Collector of Customs, Central Excise and Sales Tax, Karachi (West) v. Novartis Pakistan Limited 2002 PTD 976.

Besides, the Collector of Sales Tax (Adjudication) being an executive/ administrative officer under the control of C.B.R. assigned the duty to adjudicate disputes is supposed to know that the decisions of judicial forums higher to him on any issue raised before him, are binding on him.

7. Maladministration alleged against the auditors is proved. They framed three misconceived charges of contravention of law due to lack of competence and negligence in examining the account books for verification of payment of tax due. Their negligence, incompetence and ineptitude in discharge of duties and responsibilities, are maladministration. Ignorance of the settled position of law is "incompetence" which is maladministration per se as specifically defined in clause (ii) of subsection (3) of section 2 of the FTO Ordinance. It is evident that they acted without valid reasons. Actions unsupported by valid reasons are maladministration as specifically defined under section 2(3)(i)(a) of the FTO Ordinance, notwithstanding the fact that those actions might be bona fide. The view that mala fide is to be proved to hold a tax employee responsible for maladministration is based on the misconceived understanding that the words "unless it is bona fide for valid reasons" appearing at the end of sub clause (a) of clause (1) of subsection (3) of section 2 of the FTO Ordinance apply to any decision, process, recommendation, act of omission or commission which is contrary to law, rules and regulations or is a departure from the established practice or procedure. Maladministration according to subsection (3) of section 2 of the FTO Ordinance, besides all else, which the word "maladministration" ordinarily means or connotes, includes whatever is enumerated in clauses (i), (ii), (iii), (v), (vi) and (vii) subsection (3) of section 2 ibid.

8. Before proceeding to analyse what the clauses supra literally convey, a comprehension of common dictionary meanings of the word "maladministration" is desirable. Meanings of the word given in Chambers 21st Century Dictionary, Revised Edition, at Page 829 published 1999, Reprinted 2000 are:

maladminister > verb to manage (e.g. public affairs) badly, dishonestly or incompetently. Maladministration noun

Further, the meaning of the term "maladministration" as given in, Black's Law Dictionary, 7th Edition at Page 967 published - 1999, 6th Reprinted 2003 are

Maladministration. Poor management or regulation, esp. in an official capacity. - Also termed misadministration.

Thus in most general terms bad or poor management or regulation of public affairs is maladministration. Bad or poor management/regulation of public affairs will remain bad notwithstanding that it is bona tide and for valid reason because goals of good management or regulation of public affairs cannot be achieved without eradication of such reasons/causes. This is the pronounced objective in the Preamble of the Establishment of Office of Federal Tax Ombudsman Ordinance, 2000 reproduced hereunder:--

"Whereas it is expedient to provide for the appointment of the Federal Tax Ombudsman to diagnose, investigate, redress and rectify any injustice done to a person through maladministration by functionaries administering tax laws;" (Emphasis provided).

9. Coming to the traits specifically included in the definition of "maladministration" provided in the FTO Ordinance, sub-clause (a) of clause (i) of subsection (3) of section 2 ibid includes in the definition of maladministration a decision , process, recommendation, act of omission or commission, which.

(i) is contrary to law, rules or regulations

or

(ii) is a departure from established practice or procedure, unless it is bona fide and for valid reasons.

10. In order to comprehend the rider, "unless it is bona fide and for valid reasons," supra literally, reference to the dictionary meanings of the term bona fide may be beneficial. Chamber 21st Century Dictionary-Revised Edition at page 155 offers the meanings of the word as under:

bona fide > adj. genuine or sincere; done or carried out in good faith a bona fide offer. > adverb genuinely or sincerely; in good faith. 16c ad adverb: Latin.

Meanings of the word in Black's Law Dictionary, 7th Edition, at page 168, Published 1999, 6th Reprint are as under:

bona fide-adj. [Latin "in good faith"] 1. Made in good faith; without fraud or deceit. 2, Sincere; genuine. See GOOD FAITH. bona fide, adv.

11. The foregoing meanings of the term "bona fide" show that a decision, process, recommendation, act of omission or commission which is contrary to law, rules or regulations or a departure from established practice or procedure may be claimed to be done in good faith (bona tide), the concept of malice in law notwithstanding. However, attributing any "valid reason" to a decision, process, recommendations, act of omission or commission which is "contrary to law" (the law as settled by the binding decisions of judicial forums) is inconceivable. Departure from established practice or procedure is the only act for which valid reasons may be offered. Thus the rider supra governs only the second part of sub-clause (a) of clause (i) of sub-section (3) of section 2 ibid i.e. the phrase, "act of omission and commission which is a departure from established practice or procedure" because it may be both bona fide as well as for valid reasons.

12. Further, the use of conjunction "and" in the rider supra requires the tax employee to prove that an act of omission or commission which is a departure from established practice or procedure on his part was both bona fide as well as for valid reasons. Failure to discharge the onus on anyone of the two counts or both shall not absolve him of maladministration because the use of the word "unless" with the rider suggests that it is for the respondent to prove bona fide and valid reasons.

13. It is also significant that the rider "unless it is bona fide and for valid reasons" governing the second part of sub-clause (a) clause (i) supra, is an exception to the common dictionary meanings of the word "maladministration". The exception seems to have been made to suggest that the Federal Tax Ombudsman does not recommend any adverse action against a tax employee who is able to prove that departure from established practice or procedure on his part was bona fide and for valid reason.

14. Accordingly, the preliminary objection taken to the jurisdiction of this forum over the matters alleged in the complaint is overruled.

15. It has been noted with concern that senior officers in the Department, while handling the response' of tax employee against whom maladministration is alleged, endorsed the. same. While recording appreciation for the approach of Director-General Large Taxpayers Unit (LTU) in offering to withdraw the charge of contravention on account of unverified allegation of non-payment of tax on sale of two lots of scrap mentioned in para. 2 supra and not to press the misconceived allegation of non-payment of tax on amount of accumulated depreciation, it would have been desirable if he had not owned the respondent's explanation that: -

"Audit observations are issued when any clarifications are required from the taxpayer, which was not required in this case. Moreover, there was no statutory requirement of issuing audit observations before the issuance of show-cause notice at the time when audit in question was conducted. The opportunity of hearing is required to be given as stipulated in section 36 of Sales Tax Act, 1990, which has been afforded through the issuance of show-cause notice"

because it is for him to impress upon the officers in the line of supervision below him that tax employee should not disregard the settled principle of providing due and sufficient opportunity before recommend ing or taking any action against a taxpayer.

16. It is recommended:--

(a) That the adjudication proceedings by the. Collector Sales Tax (Adjudication) are concluded within 30 days if not already concluded.

(b) That remedial written counselling of the concerned auditors is done by their Officer-in-charge having regard to the findings supra.

(c) That compliance is reported within 60 days.

C.M.A./291/FTOOrder accordingly.