Reference Citations: 2023 PTD 541

JUDGMENT/ORDER/FINDINGS/RECOMMENDATIONS
JUDGMENT

LAHORE HIGH COURT

Writ Petition No.81107 of 2021, decided on 1st April, 2022.

PEPSI COLA INTERNATIONAL (PVT.) LIMITED

Vs.

FEDERATION OF PAKISTAN and others

Shahid Jamil Khan, Jusge

Salman Akram Raja for Petitioner. Mirza Nasar Ahmad, Additional Attorney General for Pakistan.

INCOME TAX ORDINANCE 2001

161, 162, 174(3), 161(1B), 173(4), 149(6)

SHAHID JAMIL KHAN, Judge.----This judgment deals with the vires of

Commissioner's jurisdiction under Sections 161 and 162 of the Income Tax
Ordinance, 2001 ("Ordinance of 2001"), on the touchstone of law laid down by
August Supreme Court in Commissioner Inland Revenue Zone-I, LTU v. MCB
Bank Limited (2021 SCMR 1325) and Division Bench of this Court in
Commissioner Inland Revenue v. M/s PEPCO Pakistan (2015 PTD 863).
The petitioner has challenged order dated 30.11.2021 passed under Section
161 of the Ordinance of 2001.
The impugned order is assailed in second round of litigation. Earlier, Writ
Petition No. 21602 of 2021, was partly allowed, against notices under Section
161 of the Ordinance of 2001, observing that petitioner enjoyed protection, under
Section 174(3), from producing record beyond last six years. It was, however,
observed that proceeding under Section 161 may continue. Relevant part is
reproduced:
"11. Therefore to the extent of the repeated demands for production of
documents in the impugned notices, the same are without any legal basis
and against the mandate of the law. However, the proceedings under
Section 161 of the Ordinance are independent proceedings which may
continue but it is for the department to make the most of the information
provided to it and to pass speaking orders on the basis of which it will
determine whether there is a failure to pay the tax collected or deducted
without placing any burden on the taxpayer and its inability to produce the
relevant documents.
12. Under the circumstances, the instant petition is accepted in the above
terms and the requirements for documentary evidence under the impugned
notices dated 7.1.2021, 25.1.2021, 2.3.2021, 10.3.2021 and 25.3.2021
issued by the Respondents are set aside. It is clarified that the proceedings
under Section 161 of the Ordinance may continue."
[emphasis supplied]
Admittedly, the judgment ibid, reported as Pepsi Cola International (Private)
Limited through Authorized Representative v. Federation of Pakistan through
Secretary Revenue Division, Islamabad and another (2022 PTD 51) being not
assailed attained finality.
2. While assailing the impugned order, learned counsel for the petitioner has
attributed mala fide for conducting proceedings in haste, as fresh Notice was
issued on 25.11.2021 and final order is passed on 30.11.2021. Violation of the
earlier judgment was asserted for calling again the record of period, protected
under the Section 174(3). To support this contention, contents of Show Cause
Notice and the impugned order were read.
Reliance is placed on Northern Power Generation Company Limited v.
Federation of Pakistan and others (2015 PTD 2052) and Nagina Silk Mill,
Lyallpur v. The Income-Tax Officer, A-Ward, Lyallpur and another (PLD 1963 SC
322), to argue that writ petition is maintainable in presence of an appealable
impugned order, against which appeal has already been filed.
3. Learned counsel for the respondents raised preliminary objection on
maintainability of this petition, against which statutory remedy of appeal has
already been availed.
Further submitted that there is no limitation for an action under Section 161
of the Ordinance of 2001 and relied on August Supreme Court's judgment in M/s
Pakistan Mobile Communication (Pvt.) Ltd. v. The Commissioner of Income Tax,
Companies Zone, Islamabad, (Civil Appeal Nos. 1091-1092/2009 etc.), followed
by Hon'ble Sindh High Court in Habib Bank Ltd. v. Federation of Pakistan through
Secretary, Revenue Division and 5 others (2013 PTD 1659).
Responding to alleged mala fide, learned counsel submitted that earlier
notices were merely referred without conducting any proceedings under the
notices already set aside.
4. Heard. Record perused.
5. It is noticed, besides arguments by the parties, that the Show Cause
Notices and consequent impugned order is in oblivion of law already settled
through judgments of this Court, by Division Bench in Commissioner Inland
Revenue v. M/s PEPCO Pakistan (2015 PTD 863), and by Single Bench in Sui
Northern Gas Pipelines v. Deputy Commissioner Inland Revenue and others
(2014 PTD 1939) and Messrs Riaz Bottlers (Pvt.) Ltd. through Tax Manager v.
Lahore Electric Supply Company (LESCO) through Chief Executive and 3 others
(2010 PTD 1295). Relevant excerpt from the judgment in PEPCO Case is
reproduced:-
"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."
[emphasis supplied]
6. Admitted position is that impugned order, under section 161 of the
Ordinance, relates to tax year 2014, whereas proceedings were initiated through
Show-Cause Notice dated 15.06.2020, on failure to submit reconciliation in
response to Notice dated 04.06.2020 under Rule 44(4) of Income Tax Rules,
2002 ("the Rules"). However, while concluding proceeding through impugned
order, subsection (1B) of the Section 161 is totally ignored, which is reproduced: -
"161. _
(1B) Where at the time of recovery of tax under subsection (1) 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, no recovery shall be made from the person who had failed to collect
or deduct the tax but the said person shall be liable to pay default surcharge
at the rate of twelve per cent per annum from the date he failed to collect or
deduct the tax to the date the tax was paid."
[emphasis supplied]
The subsection, ibid, casts an obligation upon the Commissioner or Taxation
Officer to satisfy itself that the tax due of the person, from who's payment
advance tax was to be deducted or collected, has been paid.
The rational in the subsection (1B) is very simple that a tax liable to be
adjusted against tax due, cannot be recovered when the tax due is already paid.
Recovery of any amount, thereafter, not adjustable against tax due for the
relevant period, shall have to be refunded and the whole exercise for recovery
would be futile, as tax collected would not become part of National Exchequer
rather would burden it with an expense which could have been expended for
recovery of tax due. The pursuit of creating such demands by tax administrators,
to meet budgetary targets, not only wastes resource and revenue but burdens
the judicial hierarchy up till Supreme Court.
If any proceeding is concluded without fulfilling this obligation, the final order
so passed, even if appealable, is susceptible to judicial review in constitutional
jurisdiction, in particular, when the High Court has already declared this
obligation as mandatory. Judgment in Northern Power Generation Company
Limited v. Federation of Pakistan and others (2015 PTD 2052) identifies the
circumstances where action, need to be nipped in the bud, can be judicially
reviewed, despite availability of appeal.
7. August Supreme Court of Pakistan has dealt, recently, with similar exercise
of power under the Section 161, through judgment in MCB's Case, ibid, where
notices for tax years 2003-2006 were given on 18.06.2012 and the amounts
confronted in the notices were culled from the tax returns by merely referring to
different heads, asserting that statements under the Rule 44 were not submitted.
Judgment in Messrs BILZ (Pvt.) Ltd. v. Deputy Commissioner of Income Tax and
another (2002 PTD 1) was relied upon for seeking reconciliation under its sub-
rule (4) and to pass the order for recovery under Section 161.
August Court explained the judgment in Bilz Case (supra) and its misuse by
the Department is deprecated with observation that it 'cannot be used as a
platform by tax authorities to launch fishing expedition and roving inquires'. It is
held that the provisions of Section 161, 'becomes operative only if there is a
failure to collect or deduct'. Relevant excerpts are reproduced:-
"11. Bilz is sometimes taken (and the department certainly so acts) as an
authority for a broad and general proposition, namely, that since the
taxpayer especially has knowledge of the persons to whom payments are
being made, all that the tax authorities have to do for purposes of section
161 is to identify the payments, whether singly or in lump sum (i.e., as part
of a broader class or category of such payments). It is then for the taxpayer
entirely to show whether the required deductions were made and if he fails
to do so then section 161 comes into operation. This is how, e.g., Bilz was
understood by the Lahore High Court in Islam Steel Mills (see para 13
thereof). This, in our view, is a complete misunderstanding of the law, and
misreading of Bilz. It must be kept in mind that both the Bilz litigation and
the appeals presently before us arose out of tax appeals/references. As is
well established the final forum for determining questions of fact is the
Tribunal. Thereafter, only questions of law can be taken. Now, as noted
above, in Bilz (HC) it was specifically observed that the Tribunal had found,
as a fact, that the assessee had deliberately withheld the particulars of the
parties to whom payments had been made. Furthermore, both in the High
Court and in this Court it was specifically observed that no questions of law
arose for consideration. These aspects are crucial for a proper appreciation
of the Bilz litigation. It moved within a specific, and narrowly drawn, factual
locus, i.e., the deliberate withholding of information regarding the payees by
the assessee. In any case, and further, it raised no questions of law as could
ground the matter in the reference jurisdiction of the High Court. When so
understood it at once becomes clear that Bilz does not (and, in our
respectful view, cannot) lay down any broad or general proposition of the
sort noted above. Its applicability is limited, and must be strictly confined to
factual circumstances of the sort in which the litigation was grounded. To the
extent that no questions of law arose therein it is, with respect, doubtful
whether the leave refusing order of this Court can in any case be regarded
as containing any observations that have binding precedential effect. It is
therefore most unfortunate that the tax authorities have seized certain
observations made in Bilz and, taking them out of context, been misusing a
leave refusing order of this Court as a tool and instrument to harass
taxpayers. This so-called "understanding" and application of the decision
must be strongly deprecated. It must be clearly understood that Bilz is not,
and cannot be used as, a platform by the tax authorities to launch fishing
expeditions and roving inquiries. It cannot, and does not, support or allow
the issuance of show cause notices of deliberate vagueness and
breathtaking generality. And it certainly does not shift the burden under
section 161, from the very inception, wholly and solely on the taxpayer by
the expedient of simply identifying one or more payments, or a class or
category of payments. It also follows that, with respect, the High Court
misunderstood Bilz in the Islam Steel Mills case. The observations made in
 that case which are inconsistent with what is said in this judgment are
therefore overruled.
12.
It will be seen that the section becomes applicable not simply because a
payment is made (or a transaction or event happens) but rather on a failure
to either collect tax or deduct it. It is the failure that is the triggering event. In
each case, the consequence is the same: the person becomes personally
liable to pay the amount of the tax. We may note in passing that the Division
II referred to in the subsection comprises of only one section, 148, which
imposes a duty on the Collector of Customs to collect tax on imports. One
wonders how many Collectors have been issued notices and held personally
liable in terms of section 161. Be that as it may, the most important point
regarding the section has already been stated: it becomes operative only if
there is a failure to collect or deduct. It is in our view a gross misreading of it
to conclude that for the section to apply all that the Commissioner has to be
do is point to a payment, and that is sufficient to cast the burden wholly and
solely on the taxpayer to show that there was no failure. There must, at least
initially, be some reason or information available with the Commissioner for
him to conclude that there was, or could have been, a failure to deduct. That
reason or information must satisfy the test of objectiveness, i.e., must be
such as would satisfy a reasonable person looking at the relevant facts and
information in an objective manner. The threshold is not so stringent as to
require "definite information" (using this term in the sense well known to
income tax law) but it is also not so low as to be bound merely to the
subjective satisfaction of the Commissioner. And it is certainly not what the
tax authorities currently take it to be, based on an incorrect understanding of
Bilz. It is only if this threshold is successfully crossed that the Notice can be
issued, and it is only then that the burden may shift on the person allegedly
in default to show that section 161 does not, or ought not to, apply."
[emphasis supplied]
8. MCB judgment endorsed the settled legal position that facts can only be
found by the Appellate Tribunal. In Bilz Case the facts so found did not raise any
question of law, either before the High Court or Supreme Court, however, for not
providing details of the transactions an adverse inference was drawn. In this case
also, the impugned order is based on not providing the details of transactions,
which were called through reconciliation under sub-rule (4) of the Rule 44. The
Rule is reproduced to see how reconciliation can be called:-
"44. Statement of tax collected or deducted.---(1) Omitted by
SRO/1218(I)/2015 dated 08.12.2015)
(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 or e-file a biannual statement as set out in Part X of the Second
Schedule to these rules as per the following timelines, namely:--
(a) in respect of the half-year ending on the 30th June, on or before the 31st
day of July; and
(b) in respect of the half-year ending on the 31st December, on or before
the 31st January.
(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 Statement under sub-rule (2) shall,
wherever required by the Commissioner, furnish a reconciliation of the
amounts mentioned in the aforesaid biannual Statement with the amounts
 mentioned in the return or income, statements, related annexes and other
documents submitted from time to time.
(5) Pursuant to subsection (6), a person responsible for deducting tax under
section 149 shall furnish or e-file annual statement by the 31st day of the
month of July after the end of a financial year in the form set out in Part IX of
the Second Schedule to these rules."
[emphasis supplied]
9. The practices of calling reconciliation, in absence of any statement, is
against the spirit of this Rule. The emphasized portions of the Rule 44 envisages,
unequivocally, that reconciliation has to be of the biannual or annual statements
with other material and declarations submitted in or with the return. If there is no
statement filed by the taxpayer, as is recorded in the impugned order, no
occasion of reconciliation arises. It is duty of the Commissioner, as tax
administrator to ensure that biannual or annual statements are filed within the
time stipulated by the Statute. Commissioner is equipped with power of imposing
penalty, if statutory obligation is not fulfilled by any taxpayer. Had Commissioner
fulfilled the duty of ensuring compliance for filing statements, at the earliest, the
occasion of issuing Notice under Section 161 for tax years beyond six years, as
stipulated under Section 173(4), would never have arisen. And the amount, to be
collected or deducted would have been deposited in Exchequer much earlier.
The controversy, addressed in Bilz and MCB Cases, along with innumerable
cases by different Judicial forums is only due to absence of performing the
statutory duty by the Commissioner at the earliest. Ironically, there is no system
of holding accountable, an officer or official in FBR who does not perform his duty
diligently and causes loss to National Exchequer and burdens the Courts with
unproductive litigation. The Attorney General for Pakistan is directed, hereby, to
place the concern of this Court before Federal Cabinet, for an appropriate
decision and consequent rule making or legislation.
10. Collective reading of MCB and PEPCO judgments would unravel the
riddle of exercising powers under the Sections 161 and 162.
For issuing Notice under these provisions:-
(i) There must, at least initially, be some reason or information available with
the Commissioner for him to conclude that there was, or could have been, a
failure to deduct.
(ii) All the tax authorities have to do for the purpose of Section 161 is to identify
the payments, whether singly or in lump sum (i.e.) as part of a broader class
or category of such payments.
(iii) The triggering event for issuance of Notice is a failure to either collect
tax or deduct it.
(iv) The Commissioner has to point out a payment to cast burden wholly or
solely on the taxpayer.
(v) After issuance of Notice, the first thing need to be verified is, whether tax,
required to be deducted or collected, of a person has been paid or not. If tax
liability for the relevant tax year is found paid/discharged, the Commissioner
can proceed only to impose default surcharge and penalty.
(vi) Reconciliation, under the Rule 44(4), cannot be called without first
ensuring filing of statements under this Rule.
11. Since the impugned order dated 30.11.2021 is found to have been
passed, ignoring the judgments in MCB and PEPCO Cases, therefore, is set-
aside. The other grounds of mala fide and proceedings in haste are not required
to be addressed as fate of the case has been determined on legal issues.
Respondents may proceed under Notice dated 25.11.2021, by adhering to
the law discussed and following the law and guideline laid down through this
judgment.

Petition Allowed