JUDICIAL INTERPRETATION OF `DEFAULT'

JUDICIAL INTERPRETATION OF `DEFAULT' <!--[if gte mso 10]> JUDICIAL INTERPRETATION OF `DEFAULT' By Dr. Ikramul Haq, Advocate, Lahore A Collection of tax where it is not due is as detestable as its non-payment when it is due Nasim Sikander, J. in CIT Companies, Lahore v. State Cement of Corporation (Pvt.) Ltd., Lahore 2002 PTD 1603. I. DEFAULT' IN LEGAL PARLANCE The expression `default' connotes an element of willful and deliberate failure to fulfil an obligation and negligence in the performance of duty. Every failure without .any ulterior design and mala fide intention on the part of a person would not equate with the expression `default' as used in its strict legal sense. In the words of the apex Court (Ghulam Muhammad Lundkhor v. Safder Ali PLD 1967 SC 530), the word `default' in legal terminology necessarily imports an element of negligence or fault and means something more than mere non-compliance. To establish default one must show that the non-compliance has been due to some avoidable cause, for a person who ought not to be made liable for a failure due to some reason for which he is, in no way, responsible or which was beyond his control. It should not be presumed that the law intends to cause injustice or .hardship. On the basis of this principle, the expression `default' should mean an act done deliberately and willfully in breach of a duty or in .disregard of an order or direction with mala fide intention. This view is followed in cases reported as Muhammad Hassan Khan v. Mirza Abdul Hamid (1981 SCMR 799), Irshad Hussain v. Abdul Rehman Kazi (1983 SCMR 471), M. Imamuddin v. Surriya Khanum (PLD 1991 SC 317) and NDFC v. Naseemuddin (PLD 1997 SC 564). "Before a person is declared to be in default, it is absolutely necessary that there should have been a demand to make payment of a determined sum which should have remained un-responded and unattended for a period beyond the period prescribed by law" Irfan Gul Magsi v. Haji Abdul Khaliq Soomro and others 1999 PTD 1302. It is abundantly clear from the above-referred authentic case law that "default" in legal terminology necessarily imports an element of willful and deliberate negligence or fault and means something more than mere non-compliance. It is incumbent upon the Tax Department before alleging default to prove beyond doubt that the non-compliance was due to some willful and deliberate act. The word "default" wherever appears in the Income Tax Law should mean an act done in breach of legal obligation, a duty or in disregard of an order or direction with mala fide intention and ulterior motive. Resort to section 52 of the repealed Income Tax Ordinance now section 162] as a charging provision and a "new source of revenue" has been disapproved strongly by the Income Tax Appellate Tribunal in a number of cases, the latest one is reported as (2003) 87 Tax 23 (Trib.) (Also see 2001 PTD (Trib.) 2605). II. "WILLFUL" AND/OR "DELIBERATE" - SCOPE & IMPORT In tax jurisprudence, the words "willful" (sometimes spelled as "wilful") and "deliberate have special significance. The apex Court has held in a number of cases that no penal 'action is to be taken against a taxpayer unless the Revenue discharges its onus of proving through some incontrovertible evidence that 'default' was committed willfully and deliberately. According to Black's Law Dictionary, these two expressions entail the following meanings: `Deliberate': "Intentional; predetermined and fully considered". `Willful': "Voluntary and intentional, but not necessarily malicious". "The word `wilful' or `wilfully' when used in the definition of a crime means only intentionally or purposely as distinguished from accidentally or negligently and does not require any actual impropriety; while on the other hand it has been stated with equal repetition and insistence that the requirement added, by such a word is not satisfied unless there is a bad purpose or evil intent." Rollin M. Perkins & Ronald N. Boyce, Criminal Law 875-76 (3rd ed. 1982). "Almost all of the cases under (Bankruptcy Code 523(a)(6)) deal with the definition of the two words `willful' and `malicious'. Initially one might think that willful and malicious mean the same thing. If they did, Congress should have used one word and not both. Most Courts feel compelled to find some different meaning for each of them." David G. Epstein et al., Bankruptcy 7-30, at 531 (1993). Talbot J., in the case reported as (1933) 2 KBD 669, stated that though the word "willful" and "intentional" are synonymous, "willful" is more commonly used .in modern speech of bad conduct or actions than of ,good, though it does not necessarily connote blame---PLD 1966 Lah. 822." III. SECTIONS 52, 52A, 86 OF THE INCOME TAX ORDINANCE, 1979 & 161, 162 & 205 OF THE INCOME TAX ORDINANCE, 2001 The relevant provisions of the repealed Income Tax Ordinance, 1979 and the Income Tax Ordinance 2001 that deal with the subject of treating withholding agents as `defaulters' and imposition of additional tax are: 52. Liability of persons failing to deduct or pay tax.---Where any person fails to deduct or collect, or having deducted or collected, as the case may be, fails to pay the tax as required by, or under, section 50, he shall, without prejudice to any other liability which he may incur under this Ordinance, be deemed to be an assessee in default in respect of such tax. Explanation.---For the purposes of this section, the Deputy Commissioner having jurisdiction under section 5 over the case of the assessee in default may initiate action. 52A. Recovery from the person from. whom tax was not deducted or collected.---Where any sum deductible or collectable by any person has not been deducted or collected as required by, or under section 50, the Deputy Commissioner having jurisdiction over the case of the person from whom tax was deductible or collectable, without prejudice to any liability which the person responsible for deduction or collection of tax under section 50 may incur under this Ordinance, may recover the sum not deducted or collected from the person from whom tax was to be deducted or collected and all provisions of this Ordinance relating to recovery of tax shall apply. 86. Charge of additional tax for failure to deduct and pay tax. Where any person fails to deduct; or having deducted, fails to pay any tax, as required by section 50, such person shall, without prejudice to any other liability which he may incur, be liable to pay additional tax at the rate of twenty-four per cent. per annum on the amount not paid for the period commencing from the date on which he was required to pay such tax to the date of the payment thereof. 161. Failure to pay tax collected or deducted.---(1) Where a person-‑ (a) fails to collect tax as required under Division II of this Part or deduct tax from a payment as required under Division III of this Part or Chapter XII or as required under section 50 of the repealed Ordinance; or (b) having collected tax under Division II of this Part or deducted tax under Division III of this Part or Chapter XII] fails to pay the tax to the Commissioner as required under section 160, or having collected tax under section 50 of the repealed Ordinance pay to the credit of the Federal Government as required under subsection (8) of section 50 of the repealed Ordinance, the person shall be personally liable to pay the amount of tax to the Commissioner who may proceed to recover the same. (1A) No recovery under subsection (1) shall be made unless the person referred to in subsection (1) has been provided with an opportunity of being heard. (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 additional tax at the rate of eighteen per cent per annum from the date he failed to collect or deduct the tax to the date the tax was paid. (2) A person personally liable for an amount of tax under sub-section (1) as a result of failing to collect or deduct the tax shall, be entitled to recover the tax from the person from whom the tax should have been collected or deducted. 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 deduct tax from a payment as required under Division III of this Part or Chapter XII, the Commissioner may 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. (2) The recovery of -tax under subsection (1) does not absolve the person who failed to deduct tax as required under Division III of this Part or Chapter XII from any other legal action in relation to the failure, or from a charge of additional tax or the disallowance of a deduction for the expense to which the failure relates, as provided for under this Ordinance. 205. Additional tax.---(1) A person who fails to pay-‑ (a) any tax, including any advance payment of tax under section 147; (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 additional tax at a rate equal to eighteen per cent 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. (2) Any additional tax 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 be payable. (3) A person who 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 additional tax at a rate equal to eighteen per cent 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. (4) Additional tax imposed under subsection (3) shall be borne personally by the person obliged to collect or deduct the tax, and no part shall be recoverable from the taxpayer. (5) The Commissioner shall make an assessment of any additional tax imposed under this Part in accordance with the provisions of Part II of this Chapter as if the additional tax were tax. (6) The provisions of Parts III and IV apply to an assessment of additional tax as if it were an assessment of tax. [Underlined for emphasis] Judicial analysis of these provisions in the light of various cases decided by Courts is summarised below: - * The appellate Courts have been very liberal in interpreting the law relating to withholding tax and it has been consistently held-that if a person fails to deduct tax under any subsection of section 50 on payments made by him but the tax is paid by the recipient of such payment then no action can be taken against the payer under section 52 or any other provision of the income Tax Ordinance in respect of the said payments (2003) 87 Tax 23 (Trib.). * These are not charging sections aimed at creating tax demands independently in the hands of withholding agents 2001 PTD (Trib.) 2605. * Proceedings under section 52 can be initiated at any time during the financial year. If the assessing officer fails to take cognizance of any default during the financial year he can proceed after gathering information from assessee's books of account by issuing notice under section 61, which can only be issued three year prior to the income year (2003) 87 Tax 89 (Trib.). * No recovery from the payer if the payee has filed return of total income 2000 PTD (Trib.) 2664. * Assessee-in-default" means a withholding agent who has failed to deduct and/or deposit tax on another person's behalf in the State treasury as per law. But if the person on whose behalf tax was to be deducted had already paid the tax, the same could not be recovered again from the withholding agent, although he may be subjected to additional tax if default was willful and deliberate (2003) 87 Tax 23 (Trib.). * If a case falls in the ambit of presumptive tax regime action under section 52 cannot be taken; appropriate remedy is resort to section 52A (2002) 82 Tax 1 (Trib.). * Provisions contained in section 52A are retrospective in nature - 2000 PTD (Trib.) 2193. * If tax has been recovered from the payee the same cannot be recovered from the payer C.B.R.'s Circular No. 8 of 1999 IV. WORD `DUE' Proceedings in respect of recovery of tax from a withholding agent cannot be initiated if the same has already been recovered from the payee as word `due' does not imply continuity of the liability from past. In Taimur Shah v. Commissioner of Income Tax (1976) 34 Tax 151 (H.C. Kar.) = PLD 1976 Kar. 1030, it is held: "The learned counsel for the Revenue also attempted to argue that the words `fails to pay the tax due from him' included tax due for the past years and, therefore, in a sense section 45A [parallel to section 89 and 205 of the Income tax Ordinance 1979 and 2001 respectively] is retrospective in its operation. In support of his contention that though a provision has not expressly been made retrospective but the words used therein may clearly indicate that it has retrospective operation, he relied upon the case of Income. Tax Officer v. Sullaiman Bhai Jiva (PLD 1970 SC 82) wherein it was held that the words, such as `shall' or `hereinafter', should be taken to indicate the legislative intent that the statute is to be construed as prospective only but on the other hand the use of the words denoting past time, such as `has been' or `hereto before' construed an expressive declaration that the Act is to be construed retrospectively. We find ourselves unable to agree with the broad proposition of Mr. Nusrat that the word `due' has an implication of a liability which is continuing from the past. V. IS ADDITIONAL TAX MANDATORY? The Revenue has always conceived and interpreted provisions relating to additional tax as mandatory in nature. The taxpayers and their advisers also share this conviction of the Department that assessing officers enjoy no discretion whatsoever in imposition of penal interest [which in substance is additional tax] even in cases where default was not willful or deliberate. This interpretation arises from the use of word `shall' in section(s) relating to imposition of additional tax. This myth needs to be exploded as it has been ignored both by the Department and the professionals that the mere use of the word "shall" in any provision does not make it mandatory as held in 2000 PTD 2872 re: Allied Bank v. ITAT, AJK etc. and Messrs Maple Leaf Cement Factory Ltd v. The Collector of Central Excise & Sales Tax (Appeals) etc. 1993 MLD 1645 = PTCL 1993 CL 656. There are authoritative judgements of the higher courts that additional tax is in the nature of penalty. If it is in the nature of penalty then the rule of willful and deliberate default shall apply. The following case law supports this view: (a) Additional tax is in the nature of "penalty" - Taimur Shah v. CIT [1976] 34 TAX 151 (H.C. Kar.) = PLD 1976 Kar. 1030. (b) Additional tax is not mandatory, imposition only where willful default exists - Messrs Murree Brewery's'. Naseem PLJ 1994 Lah. 508. (c) If a person does' not act with mala fide intention, the imposition of penalty or the additional charge is not justified Messrs Lone China (Pvt.) Ltd. v. Additional Secretary to the Government of Pakistan PTCL 1995 CL 415. (d) Assessing officer is obliged under the law to apply his mind to the imposition of penal interest - Schazoo Laboratories Ltd. v. CIT, Lahore [1977] 35 TAX 15 (H.C. Lah.) = 1976 PTD 361. CONCLUSIONS The proceedings for recovery of tax from withholding agents as assessee -in-default and imposition of additional tax on the tax not deducted/collected or deposited are to be taken construing the relevant, sections on the touchstone of rules relating to interpretation of penal provisions. In other words such proceedings are justified only if the default was willful and deliberate. Tax withheld or collected at source, as explained by the apex Court in CIT v. Asbestos Cement Industries Limited (1993) 67 Tax 174 (SC Pak), is to be utilised and adjusted towards the ultimate tax liability of a person [on whose behalf tax is deducted or collected at source] after it has been determined. There is consensus of all the Courts in Pakistan that sections 52, 52A and 86 [now sections 162, 163 and 205] are only a mode of ensuring collection of taxes before the assessment, which later on are to be adjusted against liability of the persons on whose behalf it is deducted/collected. These, therefore, cannot be used as a substitute of normal assessment or as a new source of revenue by the Tax Department. The indiscriminate recourse to penal provisions irrespective of the fact whether or not default is committed willfully or deliberately is against the letter and spirit of law as discussed above. LETTER FROM MUHAMMAD SHARIF & COMPANY, SAHIWAL TO THE MEMBER DIRECT TAXES, CENTRAL BOARD OF REVENUE Re: Properly filing of Wealth Tax 2nd Appeals [21st December, 2002] Vakil Ahmad Khan Esqr. Honourable Member Direct Taxes, Central Board of Revenue, Constitution Avenue, Islamabad. SUBJECT: PROPERLY FILING OF WEALTH TAX 2ND APPEALS. Respected Sir, Most humbly and respectfully it is submitted that known all men by section 131 of the Income Tax Ordinance, 2001 that, if powers are not delegated under section 210 (which to my information the board has advised not to delegate the powers of section 131), powers and functions of filing of second Income Tax appeals has been entrusted, by virtue of section 131, to the Commissioner of Income-tax and all the honourable Commissioners are preferring appeals to the Tribunal under section 131 under their own signatures. But, your honour, no one knows whether the said procedure for second Wealth Tax appeals has been harmonized with aforesaid procedure if so under what authority or the field officers are allowed to continue for filing frivolous appeals with vague grounds such as W.T.A. No.548/LB of 1999 hearing title SOIT, Circle 05, Sahiwal v. Mirza Muhammad Yaqoob and W.T.A. No. 550/LB of 1999 hearing title SOIT, Circle 05, Shaiwal v. Gholam Jillani wherein the following ground was taken:--‑ "The learned AAC was not justified to reduce the rates, as the rates have been applied in the light of rates fixed by the District Collector of this locality". And in I.T.A. No.797 of 1959-60 (1962 PTD (Trib.) 125) that Income Tax Officer not specifically raised in Memorandum of Appeal:--‑ "Appeal Memorandum of appeal---Vague ground urged that order is against law and contrary to facts-Whether entitles assessee to assail finding of Income-tax Officer not specifically raised in Memorandum of Appeal Held No.". . It is, therefore, craved that considering the aforesaid, the method, if any, be kindly changed in the interest of the department and the manner of filing of second Wealth Tax appeals be harmonized with section 131 of the Income Tax Ordinance, 2001. Tanking you in anticipation.