SULTAN MUHAMMAD KHAN VS DEPUTY COMMISSIONER INLAND REVENUE, 2015 PTD-LAHORE-HIGH-COURT-LAHORE 458 (2014)

Income Tax Ordinance (XLIX of 2001)---

----Ss.139 & 140---Constitution of Pakistan, Art.199---Constitutional petition---Notice of recovery of tax---Persons holding money on behalf of taxpayer---Petitioner assailed notice of recovery of tax issued by income tax authorities on the ground that taxpayer company was still in existence---Validity---Tax had to be "any tax due by a taxpayer" and notice should have disclosed how the tax was due---If the tax was being recovered from another person i.e. who was held "liable for payment of the tax" then notice should also disclose how the other person was made liable for payment of the tax---No proceedings were undertaken to show that tax was not recoverable from the company and to hold petitioner as liable to pay tax under S. 139 of Income Tax Ordinance, 2001, after confronting and providing opportunity of being heard---Petitioner's right of "due process" and "fair trial" was found to have been violated---High Court declared notice under S. 140 of Income Tax Ordinance, 2001, issued by authorities as void---Petition was allowed in circumstances.

Sarfraz Saleem v. Federation of Pakistan and others PLD 2014 SC 232 and Babar Hussain Shah and another v. Mujeed Ahmed Khan and another 2012 SCMR 1235 ref.

Hafiz Muhammad Idrees for Petitioner.

Manzoor Hussain for Respondents Nos.1 to 3.

ORDER

SHAHID JAMIL KHAN, J.---Petitioner has assailed notice dated 20-8-2013 under section 140 of Income Tax Ordinance, 2001 ("Ordinance"). Regional Manager, Utility Stores Corporation of Pakistan (Pvt.) Ltd., Talagang Road, Chakwal ("Tenant Corporation") was directed, through the impugned notice, to remit rent to respondent No.1, against default of tax payable by Al-Abbas Fabrics (Pvt.) Limited ("Taxpayer Company"). Petitioner, being owner of the rented premises and one of the Directors of Taxpayer Company, has filed this petition.

2.Necessary facts are; impugned notice was served, upon Tenant Corporation for providing information and remittance of the rent. As argued and discernable from record; the tax was outstanding against Taxpayer Company, relating to assessment years 1990-1991 and 2000-2001. The rented building was an old office of the Taxpayer Company. It appears that respondent No.1, merely on information that it was an old office of Taxpayer Company, issued the impugned notice.

3.It is submitted, by learned counsel for the petitioner, that the provisions of section 140 of the Ordinance could be invoked, only after the Commissioner was satisfied that the tax was not recoverable from the Taxpayer Company. It is asserted that the Taxpayer Company is still in existence.

4.Learned counsel for the respondents has opposed the arguments; He submits that the tax is not recoverable from the Taxpayer Company, hence the notice in question was rightly issued. However, he was unable to show that any proceedings for holding the petitioner as liable to pay the tax of Taxpayer Company was undertaken. He could not deny that Taxpayer Company is in existence.

5.Heard, record perused.

6.Assertions and denials, in this petition, need interpretation of sections 140 and 139 of the Ordinance, to determine judicially, whether impugned notice could be issued in the manner under challenge. For examination of provisions of both the sections, relevant portions are reproduced hereunder:--

"140. Recovery of tax from persons holding money on behalf of a taxpayer.---(1) For the purpose of recovering any tax due by a taxpayer, the Commissioner may, by notice, in writing, require any person -

(a)owing or who may owe money to the taxpayer; or

(b)holding or who may hold money for, or on account of the taxpayer;

(c)holding or who may hold money on account of some other person for payment to the taxpayer; or

(d)having authority of some other person to pay money to the taxpayer,

to pay to the Commissioner so much of the money as set out in the notice by the date set out in the notice."

[emphasis supplied]

The underlined parts of the reproduced section depicts that the tax has to be, "any tax due by a taxpayer" " The notice, therefore, should disclose; how the tax is due. If the tax is being recovered from another person i.e., who is held, 'liable for payment of the tax' then notice should also disclose how the other person is made liable for payment of the tax.

7.Section 139 allows to hold a director or shareholder of private company, to be liable on behalf of the company; its relevant provisions are reproduced:--

"139. Collection of tax in the case of private companies and associations of persons.---(1) Notwithstanding anything in the Companies Ordinance, 1984 (XLVII of 1984), where any tax payable by a private company (including a private company that has been wound up or gone into liquidation) in respect of any tax year cannot be recovered from the company, every person who was, at any time in that tax year--

(a)a director of the company, other than an employed director; or

(b)a shareholder in the company owning not less than ten per cent of the paid-up capital of the company,

shall be jointly and severally liable for payment of the tax due by the company."

[emphasis supplied]

8.The words, 'cannot be recovered from the company' make it obligatory for the Taxation Officer/Commissioner to show, after employing due process, that tax was not recoverable from the company. A director or shareholder cannot be proceeded against for the recovery without exhausting all modes of recovery against the company. The director/shareholder is required to be confronted, under this section, that tax is not recoverable from the company, therefore, he is being held liable, otherwise he would be taken by surprise on notice under section 140. Though, this section is a 'non obstante' provision, excluding Companies Ordinance, 1984, yet the basic principle that 'company is a distinct personality, independent of its shareholders/ directors' could not be ignored.

9.After insertion of Article 10A in the Constitution of Pakistan, 1973, 'fair trial' and 'due process' are fundamental rights of every citizen for 'determination of his civil rights and obligations'. Before shifting the obligation of the tax from company to its director under section 139 of the Ordinance, the director should be confronted and be given an opportunity to defend himself. The Apex Court in a recent judgment Sarfraz Saleem v. Federation of Pakistan and others (PLD 2014 SC 232) has held:--

"4. ...every person, for determination of his civil rights and obligations or in any criminal charge against him shall be entitled to fair trial and due process"....

In another case Babar Hussain Shah and another v. Mujeeb Ahmed Khan and another (2012 SCMR 1235), the Hon'ble Court has highlighted the import of Article 10A in the words:--

"11. ....concept of fair trial and due process has always been the golden principles of administration of justice but after incorporation of Article 10-A in the Constitution of the Islamic Republic of Pakistan, 1973 vide 18th Amendment, it has become more important that due process should be adopted for conducting a fair trial and order passed in violation of due process might be considered to be void...."

In a Suo Motu Case No.4 of 2010, reported as (PLD 2012 SC 553), Hon'ble Supreme Court of Pakistan has held that right to free trial and due process is to be read as part of every statute; relevant excerpts are reproduced hereunder:--

"27. ...law, or custom or usage having the force of law, which is inconsistent with the right to a 'fair trial' would be void by virtue of Article 8 of the Constitution...."

"...Right to a fair trial has been associated with the fundamental right of access to justice, which should be read in every statute even if not expressly provided for unless specifically excluded..."

10.No proceedings were undertaken to show; first that tax was not recoverable from the company, secondly to hold the petitioner as liable to pay tax under section 139, after confronting and providing opportunity of being heard. Petitioner's right of "due process" and "fair trial" is found to have been violated. Therefore, the impugned notice under section 140 of the Ordinance is held as void.

11.The petition is allowed.

MH/S-126/LPetition allowed.