NISHAT CHUNIAN LTD. VS FEDERAL BOARD OF REVENUE, 2014 PTD-LAHORE-HIGH-COURT-LAHORE 2078 (1921)

Income Tax Ordinance (XLIX of 2001)---

----Ss. 161, 165 & 205(3)---Income Tax Rules, 2002, R. 44(4)---Constitution of Pakistan, Art. 199---Constitutional petition---Withholding tax---Deduction of withholding tax by taxpayer-company---Notices sent to company under Ss. 161 read with S. 205(3) of Income Tax Ordinance, 2001---Purpose---Collection of relevant information for reconciling the accounts of the company with its statements filed under the Income Tax Ordinance, 2001---Plea of company was that impugned notice under Ss. 161 & 205(3) of Income Tax Ordinance, 2001 demanded information which had been already provided to tax authorities in monthly, quarterly and annual statements filed by the company under S. 165 of the Income Tax Ordinance,2001; that tax authorities were threatening the company with a declaration of being made an "assessee in default" unless further information was provided to explain that withholding tax had been deducted in entirety upon payment made by the company to the suppliers---Plea of tax authorities that impugned notice was only intended to collect information for reconciling the accounts of the company in order to establish that the expenses incurred by the company had been simultaneously subjected to deduction of corresponding withholding tax at the applicable rate---Validity---Tax authorities had pre-emptorily issued notice under S. 205 of the Income Tax Ordinance, 2001 to the company in respect of the present matter, which in essence concerned reconciliation of the amounts contained in the statutory statements filed by the company under the Income Tax Ordinance, 2001 with the amounts given in their audited accounts---Requirement for such reconciliation could not be presumed to be a default in deduction of withholding tax by the company---Penalty in default of deduction of withholding tax had wrongly been threatened by the tax authorities in the impugned notice whereas in fact no material to sustain such threat was available with the tax authorities---Equally the company, instead of providing the requisite information for reconciliation of the amounts regarding deduction of withholding tax in its statements with its accounts, prematurely approached the High Court on an apprehension, which was without any concrete evidence of penalization---High Court observed that appropriate course of action was to restrain the tax authorities from taking any action against the company under S. 205 of the Income Tax Ordinance, 2001 without first issuing notices for reconciliation of records in respect of deposit of withholding tax by the company; that such notice must contain the precise query/material in respect of which reconciliation of amounts was required; that if such reconciliation was avoided by the company or was negated by its records, only then must the tax authorities proceed to take further action against the company based on a finding of fact to the effect that the company had defaulted in deduction of withholding tax---Constitutional petition was disposed of accordingly.

Shahbaz Butt, Senior Advocate and Tariq Rasheed for Petitioner.

Syed Naveed Amjad Andrabi, Muhammad Ajmal Khan, Asghar Ahmad Kharl, Mudassar Shuja Ud Din, Jan Muhammad Ch., Syed Nadeem Saqlain, Rana Munir Hussain, Ch. Muhammad Anwar Khan Mayo, Muhammad Shabbir Hussain, Malik Abdullah Raza, Ch. Muhammad Mohsin Virk, Muhammad Younas Khalid, Advocates in connected petitions.

Syed Sajjad Haider Rizvi for Respondents.

Muhammad Ilyas Khan, Muhammad Yahya Johar, Afzal Hussain, Sarfraz Ahmad Cheema, Ibrar Ahmed, Raja Sikandar Khan, Muhammad Asif Hashmi and Khadim Husain Zahid, Advocates in connected petitions.

JUDGMENT

UMAR ATA BANDIAL C.J.---This judgment shall dispose of connected writ petitions bearing Writ Petitions Nos. 4449, 6997, 11129, 11601, 13760, 13411, 15136 of 2011, 2528, 3962, 167, 30932, 31132, 19227, 19373, 14732, 13755, 13754, 14334, 13676, 7597, 28853, 9172, 12217, 2445, 12217, 17121, 16421, 17119, 18993 of 2102, 2829, 5566, 3707, 5247, 5249, 4226, 5248, 6647, 9505, 8665, 8232, 8493, 8361, 8666, 9963, 10006. 10141, 10467, 10138, 10140, 10142, 10777, 10786, 11825, 11427, 10877, 11636, 11781, 11782, 11783, 11784, 12306, 12889, 9817, 13052, 13067, 12551, 13151, 13573, 13425, 13429, 13139, 13424, 13631, 13469, 13798,13942, 13940, 14406, 14401, 14683, 14473, 14425, 14532, 14533, 9816. 15335, 15334, 15789, 15947, 16823, 16824, 16825, 17147, 17146, 16871, 19096, 19461, 19896, 20058, 20561, 20321, 20518, 24871, 24896, 24808, 25974. 28781, 29056, 33060, 33485, 32400, 33090, 31826 of 2013 and 324, 61, 1757, 2589, 4189, 5364, 5254, 9446, 10242, 8218, 11053 of 2014 involving common questions of law and fact.

2.The petitioner is in receipt of notice dated 4-4-2011 in respect of tax years 2007, 2008 and 2009 issued by the respondent No.3 under section 161 read with section 205(3) of the Income Tax Ordinance, 2001 ("Ordinance"), Learned counsel for the petitioner contends that the notice demands information which has already been provided by the petitioner in monthly, quarterly and annual statements filed by the petitioner under section 165 of the Ordinance. The respondent No.3 has failed to apply his mind to the effect that the deduction of withholding tax under section 158 of the Ordinance is recorded on the date of payment made to a supplier whereas the account statements of the petitioner are prepared on accrual basis in terms of section 32(2) of the Ordinance. Consequently, whereas the accounts of the petitioner may reflect payment to the supplier on the accrual basis, the deduction of withholding tax is recorded on the date when such payment is made. Consequently, the accounts of the petitioner have to be read in conjunction with the statements filed under section 165 of the Ordinance where the actual payments made and corresponding withholding tax deducted is recorded. Such comparison of records is allegedly avoided by the respondents and consequently, resort is made to the provisions of section 161 read with section 205(3) of the Ordinance threatening the petitioner with a declaration of being made as an assessee in default unless further information is provided to explain that withholding tax has been deducted in entirety upon payment made by the petitioner to the suppliers.

3.In this respect the impugned notice fails to fulfill the essential statutory allegation of non-deduction and or non-payment of withholding tax. The provisions of section 205 of the Ordinance are reproduced below for purpose of facility of reference:--

"205. Default surcharge.---(I) A person who fails to pay--

(a)any tax, excluding the advance tax under section 147 and default surcharge under this section;

(b)any penalty; or

(c)any amount referred to in section 140 or 141,

on or before the due date for payment shall be liable for default surcharge at a rate equal to 18 percent per annum on the tax, penalty or other amount unpaid computed for the period commencing on the date on which the tax, penalty or other amount was due and ending on the date on which it was paid:

Provided that if the person opts to pay the tax due on the basis of an order under section 129 on or before the due date given in the notice under subsection (2) of section 137 issued in consequence of the said order, and dues not file an appeal under section 131, he shall not be liable to pay default surcharge for the period beginning from the due date of payment in consequence of an order appealed against to the date of payment in consequence of notice under subsection (2) of section 137.

(IA) a person who fails to pay advance tax under section 147 shall be liable for default surcharge at a rate equal to 18 percent per annum on the amount of tax unpaid computed for the period commencing on the date on which it was due and ending on the date on which it was paid or date on which the return of income for the relevant tax year was due, whichever is earlier.

(1B) Where, in respect of any tax year, any taxpayer fails to pay tax under subsection (4A) or (6) of section 147 or the tax so paid is less than ninety percent of the tax chargeable for the relevant tax year, he shall be liable to pay default surcharge at the rate of 18 percent per annum on the amount of tax so chargeable or the amount by which the tax paid by him falls short of the ninety percent as the case may be; and such default surcharge shall be calculated from the first day of April in that year to the date on which assessment is made or the thirtieth day of June of the financial year next following, whichever is the earlier.

(2)Any default surcharge paid by a person under subsection (1) shall be refunded to the extent that the tax, penalty or other amount to which it relates is held not to he payable.

(3)A person who fails to collect tax, as required under Division-II of Part-V of this Chapter or Chapter-XII or deduct tax as required under Division-III of Part-V of this Chapter or Chapter-XII or fails to pay an amount of tax collected or deducted as required under section 160 on or before the due date for payment shall be liable for default surcharge at a rate equal to 18 percent per annum on the amount unpaid computed for the period commencing on the date the amount was required to be collected or deducted and ending on the date on which it was paid to the Commissioner:

Provided that if the person opts to pay the tax due on the basis of an order under section 129 on or before the due date given in the notice under subsection (2) of section 137 issued in consequence of the said order and does not file an appeal under section 131, he shall not be liable to pay default surcharge for the period beginning from the date of order under section 161 to the date of payment.

[. ]

(5)The Commissioner shall make an assessment of any default surcharge imposed under this Part in accordance with the provisions of Part. II of this Chapter as if the default surcharge were tax.

(6)The provisions of Parts III and IV apply to an assessment of default surcharge as if it were an assessment of tax."

4.Section 205(3) ibid. imposes upon a person, who has failed, inter alia, to pay an amount of tax collected or deducted as required by the Ordinance, a default surcharge at a rate equal to 18 percent per annum on the amount unpaid computed for the period commencing on the date the amount was required to be collected or deducted and ending on the date when it is paid to the Commissioner. Submits that a notice by a statutory authority threatening adverse action is assailable in the constitutional jurisdiction if it fails to satisfy the statutory requirement contained in the enabling provisions. Relies on Messrs Julian Hoshang Dinshaw Trust and others v. Income Tax Officer, Circle XVIII South Zone, Karachi and others (1992 PTD 1).

5.Learned counsel for the petitioner has been supported in his arguments by Syed Naveed A. Andrabi, Advocate, learned counsel for petitioner in connected petition (Messrs Tandlianwala Sugar Mills). The arguments on behalf of the petitioner have been rebutted by a number of learned counsel for the respondents including: Messrs Muhammad Ilyas Khan, Syed Sajjad Haider Rizvi, Muhammad Yahya Johar, Raja Sikandar Khan and Muhammad Asif Hashmi and Ibrat Ahmed, Advocates. Their submissions are dealt with below.

6.It is explained that the impugned notice is neither meant to threaten nor to penalize the recipient taxpayer companies. In essence the impugned notice is intended to collect information for reconciling the accounts of taxpayer company in order to establish that the expenses incurred by such companies have been simultaneously subjected to deduction of corresponding withholding tax at the applicable rate. It is acknowledged that the action under section 205(3) of the Ordinance is based on a factual finding that there has been a default in deduction of the withholding tax by a taxpayer company. It is acknowledged that there is no such finding recorded in the present case and at best the collection of the relevant information is for reconciling the accounts of the petitioner company with its statements filed under the provisions of the Ordinance including under section 165 thereof. Such an exercise of reconciliation of amounts is permissible as well as contemplated under Rule 44(4) of Income Tax Rules, 2002 ("Rules") Rule 44 of the Rules is reproduced below:--

"44. Annual statement of tax collected or deducted.---(1) An annual statement required to be furnished under subsection (I) of section 165 for a financial year shall be in the form as set out in Part VIII and Part IX of the Second Schedule to these rules.

(2)Pursuant to subsection (2) of section 165, a person responsible for collecting or deducting tax under Division II or Division III of Part V of Chapter X of the Ordinance or under Chapter XII of the Ordinance shall furnish a monthly statement within twenty dews of the end of each month as set out in Part X of the Second Schedule to these rules.

(3)The statement referred to in sub-rule (2) shall be accompanied by the evidence of deposit of tax collected or deducted to the credit of the Federal Government.

(4)A person required to furnish the statements under sub-rule (1) or (2) shall, wherever required by the Commissioner, furnish a reconciliation 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."

7.The petitioner company is avoiding to provide necessary information although expenses incurred by it are subject to deduction of withholding tax under specific-statutory provision. The respondents are willing to disregard those transactions that ate exempt from withholding tax and other transactions which are below the specified limit to incur liability to deduction of withholding tax. Other than the said two categories, the remaining transactions which arc subject to deduction of withholding tax are liable to scrutiny by the respondent authorities. In this behalf it is not necessary for the petitioner to send an accountant to compare entries in the statement filed under section 165 of the Ordinance with particulars provided in audited accounts of the taxpayer company. All that is required is the payments made by the petitioner to the supplier/vendor that are neither exempt nor below the specified limit to be cross related with the amounts of withholding tax deposited by the taxpayer company with the exchequer.

8.The Court has considered the positions taken by the two parties. It is first of all noticeable that the respondents have pre-emptorily issued notice under section 205 of the Ordinance to the petitioner in respect of the matter which, in essence, concerns reconciliation of the amounts contained in the statutory statements filed by the tax payer company under the Ordinance with the amounts given in their audited accounts. The requirement for such reconciliation cannot be presumed to be a default in the deduction of withholding tax by taxpayer company. On the other hand, in so far as entitlement for reconciliation of accounts is concerned, this is a right belonging to the respondent authorities which is duly conferred under Rule 44(4) of the Rules, 2002.

9.Accordingly, to the mind of this Court the grievance of the petitioner is justified to the extent that penalty in default of deduction of withholding tax has wrongly been threatened by the respondents in the impugned notice whereas in fact no material to sustain such threat is available with the respondents. Moreover, equally the petitioner has, instead of providing the requisite information for reconciliation of the amounts regarding deduction of withholding tax in its statements with its accounts, also prematurely approached this Court on an apprehension but without any concrete evidence of penalization.

10.Accordingly, the appropriate course of action in this case is to restrain the respondents from taking any action against the petitioner under section 205 of the Ordinance without first issuing notice for reconciliation of records in respect of deposit of withholding tax by the petitioner. Such notice must contain the precise query/material in respect of which reconciliation of amounts is required. If such reconciliation is avoided by the taxpayer company or is negated by its records, only then may the respondent authorities proceed to take further action based on a finding to the effect that the petitioner has defaulted in the deduction of withholding tax.

11.Petition disposed of in the above terms.

MWA/N-43/LOrder accordingly.