COMMISSIONER INLAND REVENUE VS PEPCO PAKISTAN, 2015 PTD-LAHORE-HIGH-COURT-LAHORE 863 (2014)

(a) Income Tax Ordinance (XLIX of 2001)---

----Ss. 147(7), 147(8), 161 & 162---Advance tax---Nature and concept examined.

(b) Income Tax Ordinance (XLIX of 2001)---

----Ss. 162, 169(3), 161, 148, 115, 122 & 120---Reference to High Court---Final Tax Regime---Recovery of tax from the person from whom tax was not collected or deducted---Tax collected and deducted as "final tax"---Scope and nature of Ss. 162 & 161 of the Income Tax Ordinance, 2001---"Tax due" and "advance tax recoverable"---Distinction---Change of character of "advance tax" to "tax due" by application of S. 169(3) of the Income Tax Ordinance, 2001---Question before the High Court was whether tax deducted at the import stage under S. 148 Income Tax Ordinance, 2001 could be recovered under provisions of S. 162 of the Ordinance after completion of assessment vide application of S. 169(3) of the Income Tax Ordinance, 2001 where statement filed under S. 115(4) of the Income Tax Ordinance, 2001 was to be treated as assessment under S. 120 of the Income Tax Ordinance, 2001---Held, that S. 162 of the Income Tax Ordinance, 2001 was meant to recover advance tax from the person "from whom it was to be collected or deducted", and thus S. 162 of the Income Tax Ordinance, 2001 could not be invoked after completion of assessment when tax payable for a tax year was determined and paid----"Advance tax recoverable" and "tax due recoverable" were two distinct species and were dealt separately under the Income Tax Ordinance, 2001---Recovery and collection of "tax due" was dealt under Part IV of Chapter X of the Income Tax Ordinance, 2001 which became due after determination of payable tax after assessment and provisions related to assessments were placed in Part II of Chapter X of the Ordinance---Taxpayer, in the present case, was taxed under the Final Tax Regime and tax was collected at import stage under S. 148 of the Income Tax Ordinance, 2001 which was final tax on the income arising out of import---Instead of filing return under S. 114 of the Income Tax Ordinance, 2001 taxpayer was required to file statement under S.115(4) of the Ordinance; and provisions of S. 169 of the Ordinance, captioned as "tax collected or deducted as final tax" were of pivotal significance under the Final Tax Regime---Construction of S. 169(3) of the Income Tax Ordinance 2001 and the phrase used therein, which was, "an assessment shall be treated to have been made under S. 120" revealed that amount specified under statement filed S. 115(4) of the Ordinance shall be taken as "tax due" and deemed to be taken as an assessment order under S. 120, for all purposes of the Income Tax Ordinance, 2001---High Court observed that amount collected under S. 148(1) of the Income Tax Ordinance, 2001 which was specified in statement filed under S. 115(4) of the Ordinance was to be taken as "tax due" by application of S. 169(3) of the Income Tax Ordinance, 2001---In the present case, controversy was raised under S. 162 of the Income Tax Ordinance, 2001 regarding rate of tax deducted by taxpayer under S.148(1) of the Income Tax Ordinance, 2001 while ignoring the legal position that the same had become "tax due" under the assessment order for the tax year, which could not therefore be altered without amendment of assessment order under S. 122 of the Income Tax Ordinance, 2001---Provisions of Ss. 161 & 162 of the Income Tax Ordinance, 2001 could not have been invoked for recovery of a tax, character of which changed from "advance tax" to "tax due" after assessment vide S. 169(3) of the Income Tax Ordinance, 2001---Reference was answered accordingly.

(c) Income Tax Ordinance (XLIX of 2001)---

----Ss. 161, 162 & 169(3)---Tax collected and deducted as final tax---Scope and nature of recovery of tax under Ss. 161 & 162 of the Income Tax Ordinance, 2001---Application of S. 169(3) of the Income Tax Ordinance, 2001 to tax deducted as final tax and deemed to be an assessment under S. 120 of the Income Tax Ordinance, 2001---Effect---Provisions of Ss. 161 & 162 of the Income Tax Ordinance, 2001 could not have been invoked for recovery of tax, character of which changed from "advance tax" to "tax due" after assessment vide S. 169(3) of the Income Tax Ordinance, 2001.

Ch. Muhammad Shakeel for Applicant.

Nemo for Respondent.

Date of hearing: 10th November, 2014.

JUDGMENT

SHAHID JAMIL KHAN, J.---This Reference Application under section 133(1) of Income Tax Ordinance, 2001 ("the Ordinance") is filed by Department, proposing a legal proposition emanating from order dated 14-7-2014 by Appellate Tribunal Inland Revenue, Lahore ("Appellate Tribunal").

2.The Respondent Taxpayer, being commercial importer, was subjected to withholding tax @ 1% under Section 148 of the Ordinance in Tax Year 2010. Income from imports fell in Presumptive Tax Regime ("PTR") under section 148(7) of the Ordinance, therefore, statement under Section 115(4) was filed, which attained status of an assessment order under Section 120, read with Section 169(3) of the Ordinance.

Show-Cause Notice under Section 162 read with Section 205 of the Ordinance was issued, confronting that tax was withheld at lesser rate, therefore, differential amount of tax was recoverable from respondent taxpayer along with default surcharge under Section 205. As per contents of the Notice; exemption, at a reduced rate of 1%, was availed under Clause (9) Part II of 2nd Schedule, whereas goods imported were required to be taxed at normal rate of 4% under S.R.O. 575(I)/2006 dated 5-6-2006. Being unconvinced from reply, Taxation Officer passed order under Section 162 on 23-1-2012, for recovery of proposed amount. This order was upheld by First Appellate Authority. On second appeal, orders of both the Authorities below were annulled by Appellate Tribunal, in following words:--

"12. However, there is great deal of substance in the contention of the learned counsel for the taxpayer regarding assumption of jurisdiction and conclusion of proceedings, vis- -vis the facts of the present case, under section 162 of the Ordinance. We are in full agreement with the learned counsel for the taxpayer that filing of statement under section 115(4) of the Income Tax Ordinance, 2001 with regard to subject imports constituted assessment order under section 120 of the Income Tax Ordinance, 2001. This assessment order could have only be lawfully and legally amended under section 122 of the Income Tax Ordinance, 2001 for which a comprehensive procedure is specified in the statute.

13. The amendment could not lawfully be carried out in the shelter of provisions contained in section 162 of the Ordinance. If we were to approve this recourse adopted by the Revenue in this case that would mean that while assessment order on the basis of declared income would be operative, still the taxpayer would be required to deposit further amount of tax. This is clearly unlawful because in such like case further amount of tax could not be levied or imposed without first amending the income regarding which the tax liability is sought to be determined. Not only the learned taxation officer erred in law by passing the order under section 162 of the Ordinance without amending the income but the learned first appellate authority also fell in grave error by upholding the illegal order.

14. Accordingly, we have no hesitation in annulling the orders of the authorities below being without jurisdiction. The orders of both the authorities are, therefore, vacated and it is held that no enhancement of income, be that in the nature of deemed income, could be made without following the recourse provided for in the statute for amendment of income. No amendment of income could be done under section 162 of the Income Tax Ordinance, 2001. Ordered accordingly."

3.The proposition is couched and placed for our opinion through following question of law:--

"Whether on the facts and in the circumstances of the case, the learned ATIR was justified in annulling the order under section 162 holding that assessment order could have only be lawfully and legally amended under section 122 of the Income Tax Ordinance, 2001 whereas the order under section 162 was not to amend the already completed assessment under section 162 envisages that the Commissioner may pass an order to that effect and recover the amount not collected or deducted from the person from whom the tax should have been collected or to whom the payment was made?"

4.Learned counsel for the applicant department submits that language of section 162 of the Ordinance allows the Commissioner to recover the tax not collected or deducted from the person who was liable to pay such tax.

5.Heard learned counsel for the applicant, record perused.

6.Before discussing the provisions of section 162, it would be advantageous to have a glance on scheme of the statute from where it stems. This Section is placed in Division-IV of Part-V to Chapter-X. Part-V of Chapter-X (PROCEDURE) deals with "ADVANCE TAX AND DEDUCTION OF TAX AT SOURCE". It's Section 147 (7) and (8) discloses the nature of advance tax, same is reproduced:-

"(7) The provisions of this Ordinance shall apply to any advance tax due under this section as if the amount due were tax due under an assessment order.

(8) A taxpayer who has paid advance tax under this section for a tax year shall be allowed a tax credit for that tax in computing the tax due by the taxpayer on the taxable income of the taxpayer for that year."

(emphasis supplied)

Underlined part of subsection (7) says that 'advance tax' shall be taken as 'tax due' under an assessment order, whereas the underlined portion of subsection (8) discloses its nature that the person who has paid 'advance tax' shall be allowed 'tax credit' while computing 'tax due' on his taxable income for that year.

Essence of advance tax is that it is collected before determination of income (passing of assessment order) and its credit is allowed against the taxable income so determined. The concept of advance tax is known since inception of income tax; purpose of which is collection of tax in advance and its adjustment at later stage but not charging or levy of tax.

The Part V, ibid, deals with mechanism of fixing liability to pay advance tax and its collection. For collection of advance tax, certain persons are obliged, by the Statute, to collect and deposit the same in treasury. The person obliged, under the statute, to withhold or deduct tax of another person is in fact an agent of the State. If he fails to comply with the statutory obligation, such tax can be recovered from him under Section 161 of the Ordinance, which is also placed, along with Section 162, in Division IV of Part V. Section 162 is for recovery from the person whose advance tax was not withheld or collected.

Subsection (1B) of section 161 further clarifies the concept of advance tax, which says that 'no recovery shall be made if it is established that the tax that was to be deducted from the payment made to a person or collected from a person has meanwhile been paid by that person'. However, under subsection (2) of section 162, a person who failed to deduct tax shall not be absolved from other legal action, like imposition and recovery of default surcharge or disallowance of deduction of expenses etc.

7.Now; relevant provision of Section 162 of Ordinance is reproduced for examination:--

"162. Recovery of tax from the person from whom tax was not collected or deducted.---(1) Where a person fails to collect tax as required under Division II of this Part [or Chapter XII] or deduct tax from a payment as required under Division III of this Part [or Chapter XII], the Commissioner may [pass an order to that effect and] recover the amount not collected or deducted from the person from whom the tax should have been collected or to whom the payment was made."

Section 162 is meant to recover advance tax from the person 'from whom it was to be collected or deducted', this section cannot be invoked after completion of assessment, when tax payable for a Tax Year is determined and paid. It will not be out of context to mention here that 'advance tax recoverable' and 'tax due recoverable' are two distinct species and are dealt separately under the Ordinance. Recovery and collection of 'tax due' is dealt with under Part IV of Chapter X, which becomes due after determination of payable tax after assessment.

8.Provisions relating to "Assessments" are placed in Part II of the Chapter X. Section 120 under this part is reproduced for ease of reference:--

"120. Assessments.---(1) Where a taxpayer has furnished a complete return of income (other than a revised return under subsection (6) of section 114) for a tax year ending on or after the 1st day of July, 2002,-

(a)the Commissioner shall be taken to have made an assessment of taxable income for that tax year, and the tax due thereon, equal to those respective amounts specified in the return; and

(b)the return shall be taken for all purposes of this Ordinance to be an assessment order issued to the taxpayer by the Commissioner on the day the return was furnished."

Complete return furnished, under Section 144, is taken to be an assessment order under Section 120 and respective amounts specified in the return as 'tax due' become payable or recoverable tax, for having been determined by operation of law. The advance tax payable, collected/deducted or recovered shall be adjustable against the 'tax due' under such assessment. Necessary corollary is that advance tax is not recoverable under section 161 or 162 after the assessment is completed and payable tax is determined. It may be clarified that the scheme of the Ordinance discussed, hereinabove, deals with 'Taxation of Income under Normal Law'. Final Tax Regime ("FTR") is a departure from conventional method of determining taxable income, where 'fiction of law' comes into play.

9.The respondent taxpayer in this case was taxed under FTR. Being importer, tax collected, at import stage, under section 148(1) was final tax, of the respondent taxpayer, on the income arising from import under subsection (7) of section 148. Instead of filing return under section 114 (Normal Law), he was required to file a statement under section 115(4) of the Ordinance. Provisions of Section 169, captioned as "Tax collected or deducted as final tax" can be said to have pivotal significance for taxation under FTR. Construction of its subsection (3) is necessary to answer the proposition under consideration, which is reproduced hereunder:--

"(3) Where all the income derived by a person in a tax year is subject to final taxation under the provisions referred to in subsection (1) or under sections 5, 6 and 7" and assessment shall be treated to have been made under section 120 and the person shall not be required to furnish a return of income under section 114 for the year.

Explanation.---The expression, "an assessment shall be treated to have been made under section 120" means,

(a)the Commissioner shall be taken to have made an assessment of income for that tax year, and the tax due thereon equal to those respective amounts specified in the return or statement under subsection (4) of section 115; and

(b)the return or the statement under subsection (4) of section 115 shall be taken for all purposes of this Ordinance to be an assessment order.

(emphasis supplied)

The expression "an assessment shall be treated to have been made under section 120" as explained, tells that amount specified in the statement under Section 115(4) is taken as "tax due" and deemed assessment under this section is taken to be an assessment order 'for all purposes of this Ordinance'. For final taxation of an importer under Section 148(7), the amount collected under Section 148(1) is specified in the statement under Section 115(4), which is taken as 'tax due'.

10.The controversy raised through Show-Cause Notice under section 162 was regarding rate of tax collected under section 148(1), ignoring the legal position that it had become or taken as 'tax due' under the assessment order for Tax Year 2010, which could not be altered without amendment, of the assessment order, under section 122 of the Ordinance. It is reiterated that provisions of section 161 or 162 could not have been invoked for recovery of a tax, character of which had been changed from 'advance tax' to 'tax due' after assessment under section 169(3) of the Ordinance.

We find ourselves in agreement with the decision by learned Appellate Tribunal, as reproduce supra, particularly when department has not controverted the capacity of respondent/taxpayer to file statement under Section 115(4) for being taxed under FTR.

Even otherwise; the proposed change in the tax rate was based on interpretation of the S.R.O., which is quasi judicial in nature, hence, could not have been done while exercising jurisdiction under a provision (Section 162); meant for recovery only and not determination through interpretation.

11.For what has been discussed, our answer to the proposed question of law is in Affirmative. Reference Application is decided against the applicant department.

12.Office shall send a copy of this order under seal of the Court to the Appellate Tribunal Inland Revenue as per section 133(5) of the Income Tax Ordinance, 2001.

KMZ/C-5/LOrder accordingly.