SECTION 122: ABSOLUTE POWER CORRUPTS ABSOLUTELY

SECTION 122: ABSOLUTE POWER <!--[if gte mso 10]> SECTION 122: ABSOLUTE POWER CORRUPTS ABSOLUTELY By Dr. Ikramul Haq, Advocate, Lahore INTRODUCTION The primary function of any tax levy by a State is to raise resources in an efficient and equitable manner. It is well‑recognised in modern times that taxation policies of a country do not aim merely at enhancing revenue collection, but serve to achieve the broader socio economic objectives of the nation and help accelerate the process of economic growth and redistribution of wealth. In Pakistan there is a general consensus that the tax administration has yet not realised the need for a changed role even after entering into the 21st century. Success of tax legislation depends not only on how it has been formulated but more importantly on how it is administered. The new income Tax Ordinance 2001 [hereinafter: "the new Ordinance"] was promulgated with the tall claim of bringing simplification but it has turned out to be a more complex document susceptible to increased litigation. Section 122 alone provides unbridled, unfettered and uncontrolled powers to the tax department which are violative of Articles 4 and 25 of the Constitution. Absolute powers conferred on tax authorities under this section are bound to corrupt them absolutely. This corruption can be financial as well as intellectual. The power to amend and further amend any order passed is a classic piece of legislation showing how a faulty tax system increases tax burden of the existing taxpayers and leaves unaffected those who are non‑filers. Section 122 is proving to be a lethal weapon in the hands of tax officials who have taken it as a licence to destroy the sanctity of past and closed transactions that constitute taxpayers' vested right under the law. They are using it in a ruthless manner by finding. fault with, every order passed by their predecessors under the repealed Income Tax Ordinance, 1979 [hereinafter: "the repealed Ordinance"] and in some cases even by themselves. This is an open mockery of due process of law enshrined in Article 4 of the Constitution of Pakistan and unashamed violation of basic norms of justice. This provision of law is being abused by the Taxation Officers under delegated powers whereas the Commissioner cannot delegate his legal obligation to apply Independent Mind to amend or further amend an assessment order. Powers and functions can be delegated but legal obligation to apply independent mind cannot be passed on to another person. Where application of a statute is left entirely to the whims and caprice of the executive authority it offends Article 25 of the Constitution. According to the interpretation of the Central Board of Revenue (CBR), section 122 applies to assessments already attained finality under the repealed Income Tax Ordinance of 1979. Article 264(a) of the Constitution says that "where a law is repealed, the reveal shall not except as otherwise provided revive anything not in force or existing at the time at which the repeal takes effect". It appears that the CBR stalwarts are not aware of the well‑recognised principles relating to repeal and saving and therefore are creating utter confusion by misinterpreting section 122. The powers given to the Commissioner in section 122 to reopen completed assessments under the repealed Ordinance (which constitute past and closed transactions) are causing heartburn to the taxpayers. This amounts to retrospective operation of law impairing existing rights and imposing new obligations in respect of past and closed transactions. The points raised above vis‑a‑vis application of section 122 are elaborated in detail in the following paragraphs: 1. RETROSPECTIVE APPLICATION: The new Ordinance cannot operate for any period prior to 1st July, 2002, the date from which it became operative, unless there is an explicit saving provision in the law itself. This has been elaborated recently vide Office Memorandum dated 11‑11‑2003 of the Law Division conveying the decision of the President of Pakistan on the representation of the Central Board of Revenue (CBR) against the recommendation of the Federal Tax Ombudsman (FTO) in Complaint No.530‑L/2002 in the following words: " ....Further the 2001 Ordinance which came into force on 1‑07‑2002 does not apply to the assessment order for the assessment year 2000‑2001". The CBR as usual has refused to accept this part of the order of President of Pakistan, while implemented the remaining part which was decided against the FTO. The CBR has no authority to interpret law or denounce the observation of the President of Pakistan. The view expressed in this Office Memorandum enunciates the correct position of law. The following points rescope of section 122 and analogous provisions of section 65 and 66A of the repealed Ordinance deserve attention: 1. There is no saving provision in section 239 of the new Ordinance for issuance of fresh notices under section 65 or 66A in respect of any order passed under the repealed Ordinance. Pending proceedings are, however, covered under section 239(4) of the new Ordinance. Hence any notice under section 122(5) or 122(5A) for any assessments already completed or other orders made that attained finality prior to 1st July 2002 under the repealed Ordinance is void ab initio. 2. A new law cannot be applied to any period prior to the date of its coming into force unless a specific saving provision is provided in the repealing law [(1984) 49 Tax 34 (Trib.)], which is conspicuous by its absence in the new Ordinance. 3. The CBR has wrongly interpreted the law that assessment completed under the repealed law can be reopened/unsettled under section 122(5) or (5A) as a result of amendments made in section 122 vide Finance Ordinance 2002 and 2003. This cannot be done without first saving the retroactive application of section 65 and 66A in the saving clause itself. The interpretation resorted to by the CBR in Circular Letter No. F.4(75)/ITP/2002 dated 28‑06‑2003 is violative of law as the forthcoming paragraphs will show. 4. Section 122(5A) [pari materia to section 66A of the repealed Ordinance] inserted vide Finance Act, 2003 has not been extended to orders passed under the repealed Ordinance as is the case under section 122(1) read with 122(5). Section 122(5) of the Ordinance as amended up to the Finance Act 2003 reads as follows:‑ " 122 Amendment of assessments.‑‑‑(1) Subject to this section, the Commissioner may amend an assessment order treated as issued under section 120 or issued under section 121 ,or issued under sections 59, 59A, 62, 63 or 65 of the repealed Ordinance, by making such alterations or additions as the Commissioner considers necessary. (2) An assessment order shall only be amended under subsection (1) within five years after the Commissioner has issued or is treated as having issued the assessment order on the taxpayer. (3) Where a taxpayer furnishes a revised return under subsection (6) of section 114‑‑‑ (a) the Commissioner shall be treated as having made an amended assessment of the taxable income and tax payable thereon as set out in the revised return; and (b) the taxpayer's revised return shall be taken for all purposes of this Ordinance to be an amended assessment order issued to the taxpayer by the Commissioner on the day on which the revised return was furnished. (4) Where an assessment order (hereinafter referred to as the "original assessment") has been amended under subsection (1) or (3), the Commissioner may further amend, as many times as may be necessary, the original assessment within the later of (a) five years after the Commissioner has issued or is treated as having issued the original assessment order to the taxpayer; or (b) one year after the Commissioner has issued or is treated as having issued the amended assessment order to the taxpayer. (4A) In respect of an assessment made under the repealed Ordinance, nothing contained in sub‑section (2) or, as the case may be, subsection (4) shall be so construed as to have extended or curtailed the time limit specified in section 65 of the aforesaid Ordinance in respect of an assessment order passed under that section and the time‑limit specified in that section shall apply accordingly. (5) An assessment order in respect of a tax year, or an assessment year, shall only, be amended under subsection (1) and an amended assessment for that year shall only be further amended under subsection (4) where, on the basis of definite information acquired from an audit or otherwise, the Commissioner is satisfied that ‑ (i) any income chargeable to tax has escaped assessment; or (ii) total income has been under‑assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or . (iii) any amount under a head of income has been mis‑classified. (5A) Subject to subsection (9), the Commissioner may amend, or further amend, an assessment order, if he considers that the assessment ,order is erroneous insofar as it is prejudicial to the interest of Revenue. (5B) Any amended assessment order under subsection (5A) may be passed within the time‑limit specified in subsection (2) or sub section (4), as the case may be. (6) As soon as possible after making an amended assessment under subsection (1), sub‑section (4) or sub‑section (5A), the Commissioner shall issue an amended assessment order to the taxpayer stating ‑ . (a) the, amended taxable income of the taxpayer; (b) the amended amount of tax due; (c) the amount of tax paid, if any; and (d) the time, .place, and manner of appealing the amended assessment. (7) An amended assessment order shall he treated in all respects as an assessment order for the purposes of this Ordinance, other than for the purposes of subsection (1). (8) For the purposes of this section, "definite information" includes information on sales or purchases of any goods made by the taxpayer, receipts of the taxpayer from services rendered or any other receipts that may be chargeable to tax under this Ordinance, and on the acquisition, possession or disposal of any money, asset, valuable article or investment made or expenditure incurred by the taxpayer. (9) No assessment shall be amended, or further amended, under this section unless the taxpayer has been provided with an opportunity of being heard". Section 122(1) as amended by Finance Act, 2002 says that the Commissioner may amend an assessment order treated as issued under section 120 or issued under section 121 or issued under sections 59, 59A 62 63 or 65 of the repealed Ordinance, by making such alterations or additions as the Commissioner considers necessary. This insertion should be read in conjunction with section 239(2) of the Ordinance which empowers the Taxation Officers to make any assessment in respect of an income year ending on or before 30th June 2002 in accordance with procedure specified in section 59 or 59A or 61 or 62 or 63. Once an assessment is made for any income year under the repealed Ordinance after 1st July, 2002, provisions of section 122(1) can be invoked by the Commissioner subject to limitation provided in section 122(4A) that is: "In respect of an assessment made under the repealed Ordinance, nothing contained in subsection (2) or, as the case may be, subsection (4) shall be so construed as to have extended or curtailed the time limit specified in section 65 of the aforesaid Ordinance in respect of an assessment order passed under that section and the time‑limit specified in that section shall apply accordingly". As evident from above, section 122(5) can only be invoked in respect of orders passed after 1st July 2002 in respect of tax year 2003 onwards or for any income year ending on or before 30th June 2002 in the light of section 239(1) and (2) under the new Ordinance. It has no application whatsoever for assessment orders made prior to 1st July 2002, the date on which the new Ordinance was made effective vide S.R.O. 381(I)/2002 dated 15 June 2002, issued by the Federal Government in exercise of powers entrusted by subsection (3) of section 1 of the new Ordinance. As regards section 122(5A), it can be invoked in respect of orders passed after 1st July, 2003 as it was inserted vide Finance Act, 2003 prospectively. Secondly it does not cover the orders passed under the repealed Ordinance. Article 264(a) of Constitution and section 6 of the General Clauses Act, 1897 clearly provide that a repealing statute cannot revive any provision of the repealed law "unless a different intention appears". In the absence of any explicit intention in the saving provision i.e. section 239 of the new Ordinance to retain sections 65 and 66A any action under section 122(5) or (5A) for assessments completed under the repealed Ordinance prior to 1st July 2002 is unlawful. In section 239 there is no mention that the Legislature wants to revive section 65 or 66A for assessments/orders passed under the repealed Ordinance, hence subsequent amendments in section 122 to this effect by the Finance Ordinance, 2002 are to be read and interpreted accordingly. In the light of above, it can be concluded that proceedings initiated under section 122(5) or (5A) by the Taxation Officers for earlier orders passed before 1st July 2002 and 1st July 2003 respectively are unlawful, coram non‑judice and violative of Article 4 of the Constitution of Pakistan. II. PAST AND CLOSED TRANSACTIONS & THEIR SANCTITY It is an established law that past and closed transactions cannot be disturbed/unsettled unless allowed under the law. The honourable apex Court in ITO, Central Circle II, Karachi & Another v. Cement Agencies Ltd. (1969) 20 Tax 1 (S.C. Pak) strongly disapproved the act of disturbing past and closed transactions in the following terms:' " I do not see how on the basis of the judgment of this in Octavious Steel & Company Ltd.'s case past and closed transactions could be reopened ...Mr. Nusrat has not been able to refer to any authority which lends support to the course adopted by the Income‑tax Officer. A decision given by a High Court in another case cannot be ground for reopening an issue which stood finally determined by a decision of a subordinate Court or authority". This judgment of the honourable Supreme Court is unequivocal on the issue that after an order is passed and has attained finality, the same cannot be disturbed even if a contrary order of the highest Court in the country later on pronounced in another case. If tax officials are issuing notices under section 122(5) or (5A) on the basis of some latter cases, they should reconsider their action, which in such circumstances would be totally unlawful, unwarranted and uncalled for. The language of section 122(5) and (5A) casts a heavy burden on the Commissioner to prove that there was: 1. On the basis of definite information1 acquired from an audit or otherwise: 1 The expression "definite information" is defined in sub‑section (8) of section 122 to "includes information on sales or purchases of any goods made by the taxpayer, receipts of the taxpayer from services rendered or any other receipts that may be chargeable to tax under this Ordinance, and on the acquisition, possession or disposal of any money, asset, valuable article or investment made or expenditure incurred by the taxpayer". This is an inclusive definition and literal meaning of the expression is to be relied upon in addition to what has specifically been included. The leading cases elaborating the scope and import of this expression are: (1) IAC and another v. Pakistan Herald Limited 1997 PTD 1485= (1997) 76 Tax 131 (SC Pak). (2) EFU General Insurance Ltd and others v. Federation of Pakistan and others 1997 PTD 1693= (1997) 76 Tax 213 (SC Pak). (3) Central Insurance Co. and others v. CBR Islamabad (1993) 68 Tax 86 (SC Pak). (4) Saitex Spinning Mills Ltd. v. CIT, Zone 3, Lahore 2003 PTD 808 (HC Lah.). (a) any income chargeable to tax has escaped assessment; or (b) total income has been under‑assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or (c) any amount under a head of income has been misclassified. 2. The assessment order is erroneous insofar as it is prejudicial to the interest of Revenue The divergence of views that the Assessing Officer who passed the earlier order should have completed the assessment in a different way cannot be construed as a basis to invoke section 122(5) as it will be a mere change of opinion. As regards section 122(5A) past and closed transactions cannot be disturbed by merely alleging that assessment order is erroneous insofar it is prejudicial to the interest of Revenue. First of all the Commissioner will have to prove beyond any shadow of doubt that while making the assessments in question the provisions of the repealed Ordinance were incorrectly applied and it also caused loss of Revenue. In a recent case reported as 2003 PTD 808, the Honourable Lahore High Court once again highlighted the sanctity of finalized assessments which cannot be disturbed on mere views, gossips, conjectures or surmises and in a light manner as is being attempted by the Taxation Officers these days through issuing notices under section 122 indiscriminately, erratically and irresponsibly. It is worthwhile to mention that the honourable Supreme Court in Income Tax Officer v. Cement Agencies Ltd. (1969) 20 Tax 1 (SC Pak) held that: "...even a legislative measure like an Ordinance expressly given retroactive effect could not operate so as to annul a valid and existing judgment as between parties whose rights had been determined and according to law which existed before the new Ordinance was passed." In another case Central Insurance Company and others v. CBR 1993 SCMR 1232 = (1993) 68 Tax 86 (SC Pak), it is categorically held by the honourable apex Court that in para. 27 that any subsequent decision after the disposal of the case by the Assessing Officer cannot be said to be the discovery of a new important matter or of a mistake or an error on the face of record and that mere conflict and divergence of opinion cannot give rise to review of the judgment'. These judgments of the honourable apex Court confirm that even the new Ordinance cannot apply retrospectively to annul a valid and existing judgment as between parties whose rights had been determined and according to law which existed before the new Ordinance was passed [see my article Confusion about repeal and saving on this subject in Tax Review (October‑December 2002) published by Lahore Law Publications or access the same at http://www/paktax.com.pkl. III. RETROSPECTIVE APPLICATION IS NOT PERMISSIBLE Section 122(5A), which is pari materia to section 66A [excluding subsection (1A)] of the repealed Ordinance, was inserted by the Finance Act 2003 which was made effective from 1st July 2003. Thus this provision cannot be applied for any assessment order passed prior to 1st July 2003. It is an established law that any provision, which is not procedural in nature, cannot be applied retrospectively unless the Legislature itself explicitly so provides. Insertion of subsection (5A) in section 122 of the Ordinance is without any such explicit or implied intention. It is an established law that any provision, which is not procedural in nature, cannot be applied retrospectively unless inserted by explicit words to apply so by the Legislature itself. In similar circumstances, when section 66A was added in the repealed Income Tax Ordinance, 1979, the honourable Lahore High Court in the case of Messrs Monnoo Industries Ltd. v. The Commissioner of Income Tax, Central Zone, Lahore 2001 PTD 1525 held as under: "Section 66A of the Income Tax Ordinance, 1979 is not procedural in nature, and therefore, it could not have retrospective effect to touch the completed assessments before its introduction on the statute book. The interpretation made by the CBR through the Circular No.1 (48)/1T‑1‑1979 dated 17‑2‑1981 appears to be more in consonance with law. Particularly in view of the fact that revisional provisions were not saved by section 166 of the Income Tax Ordinance providing for repeal and saving of the late Income Tax Act, 1922". As section 122(5A) is pari materia to section 66A of the repealed Ordinance, the above‑referred CBR's instructions, endorsed by the Lahore High Court, still hold good in terms of section 239(10) of the Ordinance leaving out any iota of doubt that section 122(5A) cannot be applied for any assessment order made prior to 1st July 2003. The honourable apex Court in Zakaria H.A. Sattar Bilwani and another v. Inspecting Additional Commissioner of Wealth Tax, Range‑I1, Karachi 2003 PTD 52 (SC Pak), while examining application of the similar provision of the erstwhile Wealth Tax Act, 1963 (section 17B) held as under: "The learned High Court may have examined the question of the application of section 17‑B Wealth Tax Act, 1963 concerning its effect retrospectively or prospectively by applying the principle of interpretation of statutes namely where any statute effects substantive right it would operate prospectively unless by, express enactment or necessary intendment retrospective operation has been given. This Court elaborately examined identical question in respect of section 2 as amended by Banking Companies (Recovery of Loans) (Amendment) Act (XVIII of 1992) in the case of Malik Gul Hassan & Co. and 5 others vs. Allied Bank of Pakistan (1996 SCMR 237). Relevant para. Therefrom is reproduced hereinbelow for convenience: ‑ "7. It is well‑settled principle of interpretation of statute that where a statute effects a substantive right, it operates prospectively unless by express enactment or necessary intendment' retrospective operation has been given‑‑Muhammad Ishaq vs. State PLD 1956 SC (Pak.) 256 and State vs. Muhammad Jalil, PLD 1965 SC 681. This principle was affirmed in Abdul Rehman vs. Settlement Commissioner (PLD 1966 SC 362). However, statute, which is procedural in nature, operates retrospectively unless it affects an existing right on the date of promulgation or causes injustice or prejudice to a substantive right ...." The assessments concluded under the repealed Ordinance of 1979 and other proceedings finalized cannot be disturbed/unsettled through section 122(5A) which is not a procedural section. Earlier the honourable Lahore High Court held in Commissioner of Income Tax v. M. Fahad Amin (2002) 86 TAX 165 (HC Lah.) = 2002 PTD 248 that: "In the present case admittedly section 17‑B empowering an IAC was inserted by Finance Act, 1992 and was to take effect from 1st July, 1992. Therefore, the power vested in IAC through amended provisions was available for the assessment year 1992 93 onwards only. The IAC's action in touching the assessment order prior to the aforesaid assessment years when power that vested only in the Commissioner of Wealth Tax certainly not in accordance with law." It is an irrefutable principle that an amendment in law or a repealing enactment cannot destroy the vested right, yet the taxation officers are issuing notices under section 122(5A) for earlier years violating the explicit law and precedents of the higher Courts which are binding on them under Articles 189 and 201 of the Constitution of Pakistan. IV. UNLAWFUL DELEGATION OF POWERS The concept of reopening/revising an assessment order is not new. There can be occasions when an existing order whether accepted under self‑assessment scheme or passed after applying conscious mind by a departmental official is subject 4o escapement of income, under assessment, lower rate of tax or excessive relief or is erroneous insofar as it is prejudicial to the Revenue ‑‑ needs to be amended or further amended. Section 122 is a mixture of sections 65 and 66A of the repealed Ordinance (see sections 122(5) and 122(5A) respectively) as it envisages amendment or further amendment of an assessment order where the Commissioner considers that as a result of "definite information" or examination of record: any income chargeable to tax has escaped assessment; or total income has been under‑assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or any amount under a head of income has been mis‑classified. Any assessment order is erroneous insofar as it is prejudicial to the interest of Revenue In all the above cases the Commissioner can go ahead with amending the assessment orders so as to arrive at the correct income and tax liability of the taxpayer. However, there are certain limitations for proceeding with amended assessments. They are: (a) Amended assessment orders can only be made within five years after the Commissioner has issued or is treated to have issued the assessment order. (b) For further re‑amending of assessment orders, the time limit is the later of five years after the Commissioner has issued or is treated as having issued the original assessment order to the taxpayer; or one year after the Commissioner has issued or is treated as having issued the amended assessment order to the taxpayer. (c) In respect of an assessment made under the repealed Ordinance time limitation will be as specified in section 65 of the repealed Ordinance. (d) Where a taxpayer furnishes a revised return under subsection (6) of section 114‑‑‑ the Commissioner shall be treated as having made an amended assessment of the taxable income and tax payable thereon as set out in the revised return; and the taxpayer's revised return shall be taken for all purposes of this Ordinance to be an amended assessment order issued to the taxpayer by the Commissioner on the day on which the revised return was furnished. (e) Before any amendment is made, the taxpayer has to be provided with an opportunity of being heard. The expression Commissioner as appearing in this section when read in conjunction with section 211 clearly provides that although powers and functions can be delegated by the Commissioner, but his legal obligation imposed by the statute itself of applying independent mind cannot be delegated to Taxation Officers. Section 212 reads: "where by virtue of an order under section 210, a Taxation Officer exercises a power or performs a function of the Commissioner, such power or function shall be treated as having been exercised or performed by the Commissioner". The Commissioner cannot consider for amendment any completed assessments through the spectacles of Taxation Officers, who had earlier passed orders as Assessing Officers. The Commissioner's statutory power to invoke sections 122(5) and 122 (5A) after considering the orders by applying his independent mind is not a function that can be delegated under sections 210. How can the Commissioner delegate to a Taxation Officer his own statutory obligations? There is no question of delegation of statutory obligations imposed on the Commissioner under section 122, which is distinct from functions or powers as envisaged in section 210 of the Ordinance. If a Taxation Officer applies mind on behalf of the Commissioner under section 122(5) or (5A), he will perform coram non judice functions lacking legal validity. V. VIOLATION OF `DUE PROCESS OF LAW` There are certain basic norms of justice that have to be adhered to in all the judicial and quasi‑judicial proceedings. One of the cardinal principles of such basic norms is that one cannot be a judge of his own cause. Section 122 as it stands now makes the Commissioner of Income Tax a judge in his own cause as first of all he delegates all his powers to a Taxation Officer and once an order is made by him, he may declare that the delegated officer applied the law incorrectly. What a mockery of `due process of law' that in fact he is posing as judge in his own cause. How can he declare his own orders (though passed by somebody else on his behalf as envisaged in section 211) as incorrect? This would certainly be a wanton breach of the basic norm of the justice that no one can be a judge in his own cause. This breach will in fact be violative of `the right of access to justice' which is an inviolable fundamental right enshrined in Article 4 of the Constitution. This right is equally founded in the doctrine of `due process of law'‑New Jubilee Insurance, Company Limited, Karachi v National Bank of Pakistan, Karachi PLD 1999 SC 1126. The `right of access to justice' includes the right to be, treated according to law, the right to have a fair trial and proper opportunity of being heard and the right to have a just and impartial Court/Tribunal/ Authority. The term due process of law, as elaborated by the honourable apex Court in the case of New Jubilee Insurance Company Ltd. (supra) can be summarised as under: 1. a person shall have notice of the proceedings which affect his rights; 2. he shall be given reasonable opportunity to defend; 3. that the Tribunal, Court or Authority before which his rights are adjudicates is so appointed/constituted as to give reasonable assurance of its honesty and impartiality; and 4. that it is a Court/Authority of competent jurisdiction. These are the basic requirements of the doctrine of `due process of law' that are embodied inter alia in Article 4 of the Constitution. It is intrinsically linked with the right to have access to justice which is a fundamental right. This right, inter alia, includes the right to have protection against abuse of powers. The Commissioner of Income Tax under, section 122 has assumed the role of a judge in his own cause and, therefore, any action under this provision of the new Ordinance amounts to a manifest and blatant violation of the due process of law. Needless to say that this provision as it stands now is unconstitutional in view of Articles 4 and 25 of the 1973 Constitution.