Mrs. SHAMA RAUF VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2012 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 330 (2011)

Sales Tax Act (VII of 1990)---

----Ss.48 & 45B---Sales Tax Rules, 2006, R.71(2)(b)---Sales Tax General Order No.1 of 1998---Establishment of the Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), 9(2)(b)---Recovery of arrears of tax---Recovery of outstanding liability from one of the directors of the company, who ceased to hold ownership, pertaining to the period before the company was assessed---Validity---Notices issued by the Department to the Directors, including the complainant, for recovery of outstanding arrears were after the process of liquidation and auction of the company by the order of the High Court---Plea about non-service of recovery notices till complainant got information from her bank and approached the Department for certified copy of the order-in-original appeared to be well founded as the Department had failed to rebut her claim---No evidence regarding service of order-in-original was produced by the Department on the plea that old record was not traceable---Copy of Form-29 was also not certified by the Security and Exchange Commission of Pakistan on the ground that it was not available on the record maintained by them---Security and Exchange Commission of Pakistan had neither accepted nor rejected the complainant's claim, but had shown inability to certify Form-29 on the ground that it was not available in the record maintained by them---Revenue, after perusing copies of wealth tax returns and subsequent assessment orders framed by the Department conceded that the shares of Company gifted by the complainant were assessed for the assessment year 2000-2001 in the hands of her son---Change of ownership and subsequent assessment of Wealth Tax coupled with a copy of Form-29 dated 30-10-1999 stated to be submitted by the Complainant showed that during the period of order-in-original i.e. June 2000 to July 2001, the complainant was no more director of the company---Department could not recover the outstanding sales tax arrears of the company from the complainant, in circumstances---Action of Department to recover sales tax liabilities outstanding against the company from the complainant under S.58 of the Sales Tax Act, 1990 was tantamount to maladministration in terms of S.2(3) of the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000---Federal Tax Ombudsman recommended that Federal Board of Revenue to direct the Chief Commissioner to (i) withdraw notice issued to the banks for recovery of sales tax liability outstanding against the company from the accounts of the complainant (one of the directors of the company); (ii) issue refund of the amount already recovered from her bank accounts after necessary verification and (iii) provide the complainant a certified copy of the impugned order-in-original.

Manzoor Hussain Kureshi, Advisor Dealing Officer.

Khushnood A. Khan and ShirazA. Khan, Advocate Authorized Representatives.

Abdul Rehman Khilji Additional Commissioner, IR Mushtaq Ali Tunio, ACIR Departmental Representatives.

FINDINGS/RECOMMENDATIONS

DR. MUHAMMAD SHOAIB SUDDLE (FEDERAL TAX OMBUDSMAN).---The complainant, a former director of Messrs Mehran Coatings Limited (MCL), has filed complaint of maladministration against the Department, for passing unreasonable order-in-original (Order-in-Original) No.14 dated 10-8-2002, and issuing arbitrary notices for recovery of sales tax demand amountingto Rs.7,111,095.

2.The Department assessed Messrs MCL for tax period 2000-2001 vide order-in-original dated 10-8-2002 raising demand of sales tax along with default surcharge and penalty amounting to Rs.6,105,889. As Messrs MCL was wound up due to liquidation and the sales tax demand could not be recovered from it, the directors were issued notices to pay the liability outstanding against the company under section 58 of the Sales Tax Act, 1990 (the Act). Subsequently, for non-compliance/non-payment, notices were issued to effect the recovery of demand amounting to Rs.7,111,095 (including default surcharge calculated up to 30-4-2011) through accounts of the directors maintained in different banks, under section 48 of the Act read with Rule 71(2)(b) of the Sales Tax Rules, 2006 (the Rules).

3.The AR, at the very outset, disputed merits of the impugned order-in-original claiming that Messrs MCL had categorically explained vide letter dated 8-4-2002 that it was not engaged in trading but in rendering services to small shop keepers who provided the fabrics which were returned to them after processing. Thus Messrs MCL did not fall under the category of a 'trading unit'. It was asserted that the Department twisted the factual position by treating Messrs MCL as retailer, instead of a processing unit, and created huge tax liability against it. He further contended that the affairs of the company were in the hands of the complainant's husband, the Chief Executive of the company. After his death in 1997, she was unaware about the business affairs or his financial obligations and only came to know the subject tax liability when the bank informed her about the seizure of her account and she approached the Department vide letter dated 8-5-2011 and obtained photo copy of the impugned order-in-original. The AR stated that the Department had already recovered an amount of Rs.1,049,607 from the bank account of the complainant despite the fact that she had resigned from the directorship of the company with effect from 23-10-1999 as per Form-29 submitted to the Securities and Exchange Commission of Pakistan (SECP) dated 4-11-1999. He further contended that although she had requested the Department vide letter dated 8-5-2011 to provide certified copy of the order-in-original and also that till then her bank account be unsealed, the Department, till filing of the complaint before the Hon'ble FTO, had failed to respond.

4.In response to the notice of complaint issued to the Secretary, Revenue Division,theDepartmentfiledparawisecommentson28-11-2011, contesting maintainability under section 9(2)(b) of the Establishment of the FTO Ordinance, 2000 on the ground that the matter was related to determination of tax liability in respect of which legal remedy of appeal was available under section 45B of the Act. The Department contradicted the complainant's claim that she had resigned from the directorship of Messrs MCL on 23-10-1999. It was contended that the SECP, vide letter dated 19-5-2011, had informed the RTO, Quetta, that Messrs MCL was an inactive company and did not file return since 1995. As such, filing of Form-29 dated 4-11-1999 as claimed by her was of no legal value. Even on merits, the adjudicating authority at Para 8 of impugned order-in-original had concluded that Messrs MCL was not entitled to charge sales tax on processing charges as supplies as well as purchases were made to un-registered persons and no Principals were involved in the instant case as required under Sales Tax General Order No.1 of 1998. According to the Department, Messrs MCL should have charged sales tax on actual value of goods instead of on processing charges.

5.The AR reiterated his stance that the complainant who held less than 10% shares of the company had already resigned from the directorship with effect from 23-10-1999 and was replaced by her son, Mr. Khurrum Rauf, and intimation thereof as required under Companies Ordinance was duly acknowledged by the SECP as per Form-29 dated4-11-1999. In furtherance of his contention, the AR also produced a copy of gift deed, whereby the complainant had gifted her shares in Messrs MCL along with shares of other companies to her son, M. Khurram Rauf, on 23-10-1999. He also furnished copies of Wealth Tax returns and assessment orders for tax years 2000-2001 in respect of donor and donee showing that shares of Messrs MCL were transferred from the name of the complainant and assessed in the name of Mr. Khurrum Rauf vide order under section 16(5) of the Wealth Tax Act, 1963 (Repealed). The AR vehemently argued that under these circumstances there was no justification to recover outstanding liability pertaining to the fax period 2000-2001 from the complainant, who ceased to hold ownership of shares before Messrs MCL was assessed, vide impugned order-in-original. He further argued that till filing of the complaint even service of certified copy of the order-in-original was denied to the complainant.

6.The arguments of both the parties have been considered and case record produced by the parties examined. The complaint has been filed after more than 9 years of passing of the impugned order-in-original. No plausible justification for delay has been offered either. On the other hand, the notices dated 3-6-2008 issued by the Department to the Directors, including the complainant, for recovery of outstanding arrears were after the process of liquidation and auction of Messrs MCL by the order of the High Court of Sindh. The complainant's plea about non service of above recovery notices till she got information from her bank and approached the Department for certified copy of the impugned order-in-original appears to be well founded as the Department has failed to rebut her claim. Regarding service of the impugned order-in-original also, no evidence is produced by the Department on the plea that old record was not traceable. The SECP, whom copy of Form-29 regarding resignation of the complainant from the Directorship of the Company wassentforauthentication,ontheotherhand,videletterdated23-11-2011 stated that the same could not be certified as it was not available on the record maintained by them. Thus the SECP has neither accepted nor rejected the complainant's claim, but has shown inability to certify Form-29 on the ground that it is not available in the record maintained by them.

7.The DR, after perusing the copies of Wealth Tax returns and subsequent assessment orders framed by the Department conceded that the shares of Messrs MCL gifted by the complainant were assessed for the assessment year 2000-2001 in the hands of Mr. Khurram Rauf. The change of ownership and subsequent assessment of Wealth Tax coupled with a copy of Form-29 dated 30-10-1999 stated to be submitted by the complainant show that during the period of impugned order-in-original i.e. June 2000 to July 2001, the complainant was no more director of Messrs MCL. Under the circumstances the Department cannot recover the outstanding sales tax arrears of Messrs MCL from the complainant.

Findings:

8.The action of the Department to recover sales tax liabilities outstanding against Messrs MCL from the complainant under section 58 of the Act is tantamount to maladministration in terms of section 2(3) of the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000.

Recommendations:

9.F.B.R. to direct the Chief Commissioner, RTO, Quetta, to--

(i)withdraw notice issued to the banks for recovery of sales tax liability outstanding against Messrs MCL from the accounts of the Complainant;

(ii)issue refund of the amount already recovered from her bank accounts after necessary verification;

(iii)provide the complainant a certified copy of the impugned order-in-original; and

(iv)report compliance within 30 days.

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