MCB BANK LTD. VS DEPUTY COMMISSIONER INLAND REVENUE, 2015 PTD-LAHORE-HIGH-COURT-LAHORE 911 (2015)

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

----Ss. 170 & 171---Constitution of Pakistan, Arts. 4, 23, 24 & 199---Constitutional petition---Interpretation, scope and object of Ss. 170 & 171 of the Income Tax Ordinance, 2001---Refund---Additional payment/ compensation for delayed refunds---Adjustment of compensation amount for delayed payment against advance tax liability of taxpayer---Principles---Petitioner taxpayer impugned adjustment memo. of Federal Board of Revenue, whereby Department sought to adjust the advance tax liability of the taxpayer against the principal amount of refund due to taxpayer under S. 170 of the Income Tax Ordinance, 2001 instead of adjusting the same first against the amount of compensation accrued as payable to the taxpayer for delayed payment of said refund---Held, that instead of making adjustment of compensation due to the petitioner, the Department proceeded to adjust liability against the principal amount and attempted to deprive the petitioner of the right to claim any further compensation for delay in payment of refund which meant that petitioner was no longer entitled to claim any further compensation for delay in payment of compensation amount already due for the said tax year---Sole purpose of S. 171 of the Income Tax Ordinance, 2001 was to induce the Department to pay/adjust the amount of refund expeditiously and promptly by making adjustments against the principal amount as refund, and the Department had made an effort in the present case to avoid its duty to promptly repay/adjust the amount of refund and at the same time indefinitely delayed payment of compensa-tion on which no further compensation was payable---Such modus operandi ex-facie was an attempt to play a fraud on the statute and to deprive the petitioner of an amount which was due to it---Section 171 of Income Tax Ordinance, 2001 provided for payment of compensation to the taxpayer and also cast a duty on the Department to either adjust the refund to reduce tax liability of the taxpayer or pay the refund quickly---Intention of Legislature behind S. 171 of the Income Tax Ordinance, 2001 was that the State could not be allowed to withhold indefinitely what it admitted to as due to the taxpayer by way of a refund---Impugned actions of the Department therefore constituted violation of Constitutional guarantees and amounted to taking away property without due process of the law---Sections 170 & 171 of the Income Tax Ordinance, 2001 had to be read in tandem as they provided a mechanism to ensure that taxpayers are protected against losses that they incur on account of excessive payment of tax and delays in refund of the same---Actions of the Department, in the present case, if allowed, would result in unjust enrichment of the department, since by applying principal amount of refund to reduce advance tax liability of the taxpayer / petitioner, the Department had attempted to absolve itself of its obligation towards making any further compensation for delayed payment of principal amount of refund---Delayed compensation payment already due, by use of such methodology, could be deferred indefinitely by the Department without having to pay any further amount of account of non-payment of delayed payment / adjustment of amount of compensation that had already accrued---Contention of the Department that nothing in S. 170 or 171 of Income Tax Ordinance, 2001 existed to suggest that the department was under an obligation to utilize the amount of compensation first and then adjust the balance against the amount of refund, had no force in view of the clear and obvious intent behind Ss. 170 & 171 of the Income Tax Ordinance, and there was no need to spell out the same by way of specific provisions in the Income Tax Ordinance, 2001---Both amounts were payable by the State to the taxpayer and one attracted obligation to pay compensation with interest, for the period of delay and the other did not; and thus if the State intentionally decided to adjust a taxpayers' liability against an amount for non-payment for which it was required to pay compensation, and did not make such adjustment against an amount for delayed payment on which it did not have to pay any compensation, it could delay payment/adjustment of such compensation indefinitely without any penal consequence, and intention behind such action could not be termed bona fide fair or just---High Court directed the Department to adjust the advance tax liability of the petitioner taxpayer first against the amount of delayed payment of compensation, and make the resultant adjustment in the total amount of refund as well as in the delayed payment compensation payable to the petitioner taxpayer, and further directed the Department to reduce the tax liability by applying the compensation amount till such time it was fully adjusted before utilizing the principal refund amount for adjustment or repayment of the same to the petitioner taxpayer---Constitutional petition was allowed, accordingly.

Sui Northern Gas Pipelines Limited v. Deputy Commissioner Inland Revenue and others 2014 PTD 1939; Messrs Pfizer Laboratories Limited v. Federation of Pakistan and others PLD 1998 SC 64; Ikram Bari and 524 others v. National Bank of Pakistan through President and another 2005 SCMR 100 and Pakistan Tobacco Company Ltd., and another v. Federation of Pakistan through Secretary, Ministry of Commerce, Islamabad and 3 others 1999 SCMR 382 rel.

(b) Public Functionary---

----Duties of---State functionaries were required to act justly, fairly and transparently.

(c) Interpretation of statutes---

----Taxation statute---Where two interpretations of a taxation provision were possible, the one most beneficial to the taxpayer must be adopted.

(d) Constitution of Pakistan

----Arts. 4, 23 & 24----Economic justice---Unjust enrichment----Unjust enrichment offended the principle of economic justice embodied in the Constitution.

Sui Northern Gas Pipelines Limited v. Deputy Commissioner Inland Revenue and others 2014 PTD 1939; Messrs Pfizer Laboratories Limited v. Federation of Pakistan and others PLD 1998 SC 64; Ikram Bari and 524 others v. National Bank of Pakistan through President and another 2005 SCMR 100 and Pakistan Tobacco Company Ltd., and another v. Federation of Pakistan through Secretary, Ministry of Commerce, Islamabad and 3 others 1999 SCMR 382 rel.

Mansoor Usman Awan for Petitioner.

Sarfraz Ahmed Cheema for Respondents.

ORDER

IJAZ UL AHSAN, J.---The petitioner, which is a commercial bank and a taxpayer, challenges an adjustment memo dated 15-10-2014 issued by respondent No.1 in terms of Section 170(3) of the Income Tax Ordinance 2001 ("Ordinance").

2.The brief facts of the case are that the petitioner is required to pay advance income tax for each year in terms of Section 147 of the Ordinance in 12 equal instalments payable by the 15th day of each month. Section 170 of the Ordinance provides that where a taxpayer has paid tax in excess of the amount which the taxpayer is properly chargeable under the Ordinance, he may apply to the Commissioner for refund of the excess. If, the Commissioner is satisfied that the tax has been over paid, he can apply the excess in reduction of any other tax due from the taxpayer and refund the remainder, if any, to the taxpayer. Section 170(4) of the Ordinance provides that the Commissioner shall, within 60 days of a refund application, serve on the person applying for refund, an order in writing of the decision on his refund application after providing him an opportunity of being heard. In terms of Section 171 of the Ordinance, where a refund due to a taxpayer is not paid within 3 months of the date on which it has become due, the Commissioner shall pay to the taxpayer, a further amount by way of compensation at the rate of 15% per annum of the amount of refund computed for the period commencing at the end of the 03 month period and ending on the date on which it was paid. It is an admitted position that the following amounts of refund were granted to the petitioner:--

(i)Tax year 2008Rs.50,885,800

(ii)Tax year 2009Rs.2,811,588,770

(iii)Tax year 2010Rs.2,061,988,876

3.The afore-noted refund amounts were not paid/adjusted by the department, which resulted in accrual of compensation at the rate of 15% per annum after expiry of the statutory period of 03 months. The compensation amount in terms of Section 170 as worked out by the respondents duly reflected in order / notice for the afore noted tax years are as follows:--

4.In view of the fact that the principal amount of refund as well as compensation in substantial amounts remained outstanding, the petitioner requested the respondents to apply part of the delayed payment compensation worked out for the year, 2008 towards advance tax liability for the period commencing from July 14th through October, 2014. It appears that instead of applying the compensation amount determined for the delayed payment of tax year, 2008, the respondents have appropriated the principal amount of refund for the tax years 2008 and 2009 towards advance tax liability of the petitioner for the period of July, 2014 to October, 2014. Consequently the petitioner will no longer be entitled to claim any further compensation for delay in payment of compensation amount already due for the tax year 2008-2009. Section 171 of the Ordinance does not provide for any compensation for delay in payment of compensation already allowed by the department. The delayed payment compensation is computed on the basis of principal amount of refund determined under Section 170 of the Ordinance.

5.The petitioner is, therefore, aggrieved of the action on the part of the department whereby it has adjusted the advance tax liability of the petitioner from July to October, 2014 through adjustment of the outstanding refund amount for the tax year 2008 instead of undertaking such adjustment against delayed payment compensation admittedly due and payable to the petitioner. Hence this petition.

6.The learned counsel for the petitioner submits that the acts of the respondents constitute a fraud on the statute. The act of the petitioner deprives the petitioner of the benefit of any future delayed payment compensation that it is entitled to receive, till full and final payment / adjustment of the whole of the refund amount as well as compensation due to the petitioner. He maintains that that the object of requiring payment of compensation is to compensate the taxpayer for excessive tax collected by the department and also to provide an incentive to the respondent department to adjust the refund amount to reduce the taxpayer's liability or to make the refund payment promptly. He submits that the respondents have deprived the petitioner of its propriety rights in the refund and compensation thereon by making wrong adjustments which offends the rights guaranteed to the petitioner under Articles 4, 23 and 24 of the Constitution of Islamic Republic of Pakistan, 1973. He finally argues that the respondents being state functionaries are under an obligation to act fairly, justly and transparently. However, the impugned actions and the adjustment memo. dated 15-10-2014 are not only arbitrary but aimed at depriving the petitioner of what is lawfully due to it. He has finally pointed out that during pendency of this constitutional petition, on an application moved by the petitioner, the respondents have realized their mistake and for the period commencing from November to January, they have adjusted the advance tax liability of the petitioner against the amount of compensation payable to the petitioner.

7.Reply and parawise comments were sought from the respondents who have filed the same and have been perused. The learned counsel for the respondent submits that the taxpayer has himself admitted that as per subsection (3) of Section 170 of the Ordinance, the Commissioner is empowered to apply the refund due in reduction of tax liability of the taxpayer and refund the remaining amount. The commissioner has, therefore, exercised his power to recover the tax liability of the petitioner through adjustment of funds which were available at the material time. He submits that there is no provision in the Income Tax Ordinance which requires the department to adjust the outstanding liability of the taxpayer first on the amount of compensation and then to adjust the remaining amount, if any, from the amount of refund due to the taxpayer. He, therefore, submits that the impugned adjustment memo. dated 15-10-2014 has correctly been issued and fully meets the requirements of the law.

8.I have heard the learned counsel for the parties and gone through the record.

9.The facts and figures in this case are not disputed. The only question requiring determination by this Court is whether a taxpayer is entitled to claim adjustment of his tax liability against the amount of compensation due and payable to him first, and thereafter if any amount remains outstanding, adjustment of the same against the amount of refund due to him. On hearing the learned counsel for the parties and analysis of the provisions of sections 170 and 171 of the Ordinance, my answer to the question is in the affirmative for the following reasons:--

(i)Section 170(3) of the Income Tax Ordinance provides as follows:--

170. Refunds.---(1)

1(A) .

(2) .

(3)Where the Commissioner is satisfied that tax has been overpaid, the Commissioner shall--

(a)apply the excess in reduction of any other tax due from the taxpayer under this Ordinance;

(b)apply the balance of the excess, if any, in reduction of any outstanding liability of the taxpayer to pay other taxes; and

(c)refund the remainder, if any, to the taxpayer.

(4)

(5)

(ii)The petitioner filed an application with the request to apply part of the delayed compensation worked out for the tax year 2008 refund towards its advance tax liability for the period commencing from July, 2014 to October, 2014. It is clear and obvious from the record that there were sufficient amounts of delayed payment compensation available with the department to adjust the petitioner's tax liability for the period commencing from the July to October, 2014. However, instead of making adjustment of the compensation due to the petitioner, the department proceeded to adjust the liability against the principal amount of refund for the tax years 2008 and 2009. Through this device, the department attempted to deprive the petitioner of its right to claim any further compensation for delay in payment of refund amount already due for the tax years 2008 and 2009. This is on account of the fact that section 171 of the Ordinance does not provide for any compensation for delay in payment of the compensation. This in essence means that the department can indefinitely delay payment of compensation to the petitioner of which substantial amounts are payable to him and thereby defeat the very purpose of enacting section 171. The sole purpose of section 171 ibid is to induce the department to pay/adjust the amount of refund expeditiously and promptly by making adjustments against the principal amount of refund. The department has made an effort to avoid its duty to promptly repay/adjust the amount of refund and at the same time indefinitely delay payment of compensation on which no further compensation is payable. This modus operandi ex-facie is an attempt to play fraud on the statute, defeat the purpose of law and deprive the petitioner of an amount which is due to it by the department by way of a refund having been paid in excess of its tax liability.

(iii)The whole purpose of requiring payment of compensation on account of delayed payment of refund is to compensate the taxpayer for the excessive tax collected by the department. Section 171 of the Ordinance on the one hand provides for payment of compensation to the taxpayer and on the other casts a duty on the department either to adjust the refund to reduce the tax liability of the taxpayer or pay the refund quickly. The intention of the lawmaker behind incorporating this provision is not hard to fathom i.e. the state cannot be allowed to withhold indefinitely what it admits is due to the taxpayer by way of refund. The impugned actions of the respondents amounts to subverting and avoiding the duty cast upon the department by the lawmaker which cannot be allowed at the expense of a taxpayer who had paid by way of advance tax more than what he was required to pay. Such actions constitute violation of constitutional guarantees and amounts to taking away of property without due process of law.

(iv)Sections 170 and 171 have to be read in tandem. These provide a mechanism to ensure that taxpayers are protected against losses that they incur on account of excessive payment of tax and delays in refund of the same. If the mode of action adopted by the respondent department is allowed, it would result in unjust enrichment of the respondent because by applying the principal amount of refund to reduce the advance tax liability of the petitioner, the respondents have attempted to absolve themselves of making any further delayed payment compensation. The delayed payment compensation already due can, by using this methodology, be deferred indefinitely by respondent department without having to pay any further amounts on account of non-payment or delayed payment/adjustment of the amount of compensation that had already accrued. Unjust enrichment offend against the principal of economic justice embodied in the Constitution. Reliance in this regard may be placed on Sui Northern Gas Pipelines Limited v. Deputy Commissioner Inland Revenue and others (2014 PTD 1939), Messrs Pfizer Laboratories Limited v. Federation of Pakistan and others (PLD 1998 SC 64), Ikram Bari and 524 others v. National Bank of Pakistan through President and another (2005 SCMR 100) and Pakistan Tobacco Company Ltd. and another v. Federation of Pakistan through Secretary, Ministry of Commerce, Islamabad and 3 others (1999 SCMR 382). State functionaries are required to act justly, fairly and transparently. Further it is settled law that where two interpretations of a taxation provision are possible, the one most beneficial to the taxpayer must be adopted. In the first place, in the afore-noted background, two interpretations of sections 170 and 171 are not logically possible and even if they were possible, the one beneficial to the petitioner should have been adopted. In the second place, I have not found any substance in the argument made by the department that there is nothing in sections 170 and 171 of the Ordinance to suggest that the department is under an obligation to utilize the amount of compensation first and adjust the balance against the amount of refund. In view of the clear and obvious intent of lawmaker in drafting sections 170 and 171, in my opinion, there was no need to spell out the same by way of a specific provision in the Ordinance. The fact of the matter is that both amounts are admittedly payable by the state to its citizen. One attracts the obligation to pay compensation at the rate of 15% per annum for the period of delay while the other does not. If the state intentionally decides to adjust a taxpayer's liability against an amount for non-payment of which it is required to pay compensation and does not make such adjustment against an amount for delayed payment on which it does not have to pay any compensation, it can delay payment / adjustment of such compensation indefinitely without any penal consequence. The intention of such action cannot by any stretch of the language be termed as bona fide, fair or just.

9.For the afore-noted reasons, the impugned adjustment memo dated 15-10-2014 is declared to be illegal without lawful authority and contrary to the provision of the Ordinance. The department is directed to adjust the advance tax liability of the petitioner for the period commencing from July 2014 through October, 2014 first against the amount of delayed payment compensation worked out for the tax year 2008 and make the resultant adjustment in the total amount of refund as well as delayed payment compensation payable to the petitioner. The respondents are directed to reduce the petitioner's tax liability by applying the compensation amount till such time it is fully adjusted before utilizing the available refund amount for adjustment or repayment of the same to the petitioner. The petition is accepted in the afore-noted terms.

KMZ/M-60/LPetition accepted.