Versus Shaukat Amin Shah , Shahid Iqbal

ORDER

1. This appeal has been filed by the taxpayer against order dated 28-10-2009 passed by CIT (Appeals-I), Islamabad.

2. The taxpayer is a public limited company. It derives income from providing telephone services across the country. The company offered its employees a scheme known as "Voluntary Separation Scheme (V.S.S.)" giving them the option to accept termination of employment in consideration of lump sum compensation. During the course of monitoring of statement of withholding taxes' filed by the company, the Taxation Officer noted that tax deduction was not properly made from the compensation given under Voluntary Separation Scheme. He confronted the company about this position along with details of 259 cases, wherein short deduction was made from the aforesaid amount. The company in its reply stated that employees mentioned in statement of withholding taxes were those, who opted for V.S.S. The tax calculation in respect of payments released to these employees was different from the normal tax calculation. It was stated that tax deduction was properly made from these payments on average tax basis. The Taxation Officer held that pension scheme of the company was not approved by F.B.R. Moreover, tax deduction was not made in accordance with relevant legal provisions. For the reasons recorded in the order under sections 161/205 dated 4-8-2009, the company was finally treated as assessee in default in respect of short deduction of withholding tax and liability of Rs.4,246,767,668 was created besides additional tax of Rs.466,329,995. The taxpayer filed appeal against this order, which was rejected by CIT(A) vide his impugned order dated 28-10-2009. The taxpayer has now filed second appeal before this forum on the following grounds:--

(1) That order dated 28th October, 2009 passed by the learned Commissioner of Income Tax (Appeals-I), Islamabad is bad in law and against the facts of the case.

2. (2), That the learned CIT(A) was not justified in partially upholding the order of the Taxation Officer through which the appellant has been held to have failed to deduct tax at the time of making payments of salaries to its employees.

(3) That the learned CIT(A) was not justified in upholding that the appellant should have informed the concerned Commissioner about the applieation and details of the average rate of tax of the employees at the time of payments made under the Voluntary Separation Scheme.

(4) That the learned CIT(A) has deleted an incorrect amount of Rs.153,889,773 on the issue of commutation of pension.

(5) That the learned CIT(A) was not justified in upholding levy of additional tax as the appellant did not fail to deduct tax at the time of payment to its employees.

3. Learned AR stated that the appellant offered its employees a scheme known as the 'Voluntary Separation Scheme' (VSS) giving them the option to accept termination of employment in consideration of a lump sum amount. Tax was duly deducted by the appellant from lump sum amounts which were paid under VSS during tax year, 2008 keeping in view the provisions of section 12 of the Income Tax Ordinance, 2001 (the Ordinance), being the charging section, and section 149, being the machinery section governing deduction of tax at source. In spite of the above compliance of legal provisions by the appellant, the taxation officer (the TO) held the appellant as taxpayer in default under section 161 of the Ordinance and also levied additional tax under section 205 of the Ordinance. The Commissioner of Income Tax (Appeals-I), Islamabad (the CIT(A) upheld TO's following assertions:--

(a) That the appellant was not empowered to apply average or rate of tax of last three years as elected by the employees under section 13(6) of the Ordinance; and

(b) That the evidence of election of the above rate by the employees is defective since it is allegedly "not received at Commissioner's office" .

(c) The CIT(A) further held that it was the responsibility of the appellant to furnish details of average rate of tax to the Commissioner of Income Tax concerned at the time of payment of VSS dues.

4. Learned AR stated that as per section 12(6) of the Ordinance all salaried persons receiving payments on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rate computed in accordance with the specified formula. Each of the 29,868 employees of the appellant receiving payments under VSS elected to be taxed in accordance with the above provision of law and furnished to the appellant a copy of his/her letter to the Commissioner of Income Tax containing intimation of the election. Accordingly, the appellant withheld tax in accordance with the above specified formula. The Departmental view is that appellant had no authority to apply average rate of tax of last three years while making deductions from payments to employees and that the appellant should have applied the full rate of tax and all 29,868 employees should have been left to claim refunds from the Department on the basis of their election to be taxed at average rate of tax.

5. Learned AR contended that firstly, the above stance of the TO is self-contradictory. During the course of the proceedings under section 161 of the Ordinance, the TO specifically demanded evidence, from the appellant, of the employees opting for the average rate of tax under section 12(6) of the Ordinance. If the TO did not consider the appellant authorized to apply the average rate of tax there was no need for calling evidence about exercise of the aforesaid option. This indicates that the TO was bent upon creating an unjust tax demand. This argument was made before the CIT(A) who has unfortunately completely ignored it. It was stated that the TO has misinterpreted the provisions of section 12(8) of the Ordinance by inferring that every employee electing to be taxed at average rate is obliged to file a return of his income. In fact, the said provision only stipulates the time by which such an employee can make the election to be taxed at average rate. The said provision of law does not make it obligatory for the employee to file a return and go through the mill of claiming refund for excess deduction by his employer. The TO also lost sight of the provisions of section 115(1) of the Ordinance as it existed at the relevant time. The provision did not require a salaried taxpayer to file his return or a certificate from his employer if his employer had furnished prescribed annual statement of deduction of income tax from salaries for the relevant year. In view of the fact that the law relies on the employer's statement as a substitute of employees' return of income, the same law cannot be interpreted to mean that the employer has no role in applying the average rate of tax. In fact, the appellant was obligated to apply the average rate of tax on VSS dues and provide relief sanctioned by the law to employees who are' receiving payments which effectively represent their life-time savings.

6. Learned AR argued that the appellant is empowered to deduct tax from salaries under section 149 of the Ordinance. The said provision of law requires the appellant to deduct tax at the employee's average rate of tax computed at the rates specified in Division-I of Part-I of the First Schedule to the Ordinance. Section 149(2) of the Ordinance lays down that the above average rate is to be computed based upon the estimated income of the employee for a year. Section 149 of the Ordinance is a machinery or procedural provision of law. It is a well established principle of interpretation of taxing statutes that strict interpretation does not apply to machinery provisions (Central Exchange Bank Limited v. CIT reported as (1951) 2 Tax 121 (H.C. Pak.), CIT v. National Taj Traders AIR 1980 SC 485, AIR 1976 SC 314, AIR 1963 SC 1062, 1982, ALJ 1140) and these provisions have to be so construed as to effectuate the charging sections (India United Mills Ltd., v. CEPT AIR 1955 SC 79 at 82 followed in AIR 1963 SC 1062). Similarly it was also held by the Supreme Court of India in a case reported as AIR 1981 SC 1887 that the machinery section must be interpreted so as to suit the intention of the charging section and effectuate it. Applying the above principles of interpretation of fiscal statutes, section 149 of the Ordinance needs to be interpreted to effectuate the provisions of section 12 of the Ordinance, being the charging provision of law. The crux of the matter is that section 12(6) of the Ordinance allows the employee to opt for a special rate based upon his last three years income. Through application of the above principles of interpretation the rate laid down in the charging section 12(6) overrides the normal rates of the First Schedule referred to in section 149(1) of the Ordinance. Accordingly, the appellant was not only authorized but also obligated to withhold tax from its retiring employees in 'accordance with the formula laid down in section 12(6) of the Ordinance.

7. Learned AR averred that the types of documentary evidence that the appellant is bound to collect from its employees as a withholding agent are exhaustively listed in section 149 of the Ordinance. The TO has disputed the authenticity of the above signed letters of the employees opting for the average rate of tax by alleging that these "have not been received at Commissioner's Office". This allegation was never confronted to the appellant during the proceedings leading to the order under sections 161/205 of the Ordinance. He stated that the documentary evidence required to be obtained by the appellant did not include notices by the employees to the Commissioner under section 12(6) of the Ordinance. Since it was not the responsibility of the appellant to obtain the above notices the TO had no jurisdiction whatsoever to hold the appellant in default by questioning the authenticity of the notices obtained. The appellant, in fact, obtained copies of the above notices from its employees as a matter of abundant caution. While exercising such care the appellant could not have possibly asked for any evidence of filing of the. above notices since section 12(8) of the Ordinance had allowed the employees time till 30-9-2008 to submit the notices while the payment were made before 30-6-2008. He stated that the interpretation adopted by the CIT(A) that the appellant was responsible to furnish details of average rate of tax is totally contrary to the provisions of sections 12 and 149 of the Ordinance. The responsibility of intimating the concerned Commissioners of Income Tax of the exercise of option squarely lied with the employees.

8. Learned AR added that it was the responsibility of the employees to deposit the above-referred notices. It follows that if a procedural default was committed by the said employees in not depositing the same within time the respective Commissioners of Regional Tax Offices all over Pakistan where the appellant's employees worked were to proceed against the said employees. Accordingly, the Large Taxpayers Unit, Islamabad had no jurisdiction to pass the order under sections 161/205 of the Ordinance, which was incorrectly upheld by the CIT(A). Learned AR stated that section 161 can only be invoked if the taxpayer "fails" to collect tax as required under the Ordinance. The superior courts of our country have held in many judgments that the word "fail" entitles an element of negligence or fault or it arises out of refusal to act. In support of his contention reliance was placed upon a judgment of the honourable Lahore High Court in the case of Commissioner of Income Tax, North Zone, Lahore v. Warris Silk Weaving and Knitting Mills, Gujranwala reported as (1972) 28 Tax 181 (Lah.). Relevant part of the above judgment reads as under:--

3. "We have a decision of our own Supreme Court in Ghulam Muhammad Khan Lundkhor v. Safdar Ali (PLD 1967 SC 530] where it has been held that--

4. 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 ought not to be made liable for a failure due to some cause for which he is, in no way, responsible or which was beyond his control. It is not lightly to be presumed that the law intends to cause injustice or hardship, thus unless the legislature has made its intention clear that construction must be preferred which will prevent manifest injustice and obviate hardship. On this principle too the word 'default' should mean an act done in breach of a duty or in disregard of an order or direction."

5. It consequently follows that if a person is required by law to do something which becomes impossible for him to do not on account of his own negligence or fault, but on account of something which was unavoidable and in any case not subject to this control, he cannot be said to have failed to perform that which the law or an order passed under the law required him to do. Failure being an essential condition for proceeding under section 23, subsection (4) and the same being absent in this case, it was not open to the ITO to have proceeded to frame the assessment under section 23(4) of the Income Tax Act. The Income Tax Officer should have proceeded under section 23(3) of the Act which enjoins upon the Income-tax Officer to assess the total income of the assessee "after hearing such evidence as such person may produce and such other evidence as the Income Tax Officer may require, on specified points".

9. Learned AR pressingly contended that conduct of the appellant can by no stretch of imagination be termed as falling in the category of `failure' which only could justify invocation of the provisions of section 161 of the Ordinance. Difference of opinion by the Department with a bona fide interpretation of law by the withholding agent, followed by exercise of reasonable care, in obtaining copies of letters from employees opting for average rate, can in no way be categorized as a 'failure' on the part of the later who has been unjustifiably and severely punished by the said invocation of the provisions of section 161 of the Ordinance. He further stated that additional tax under section 205 of the Ordinance can only be levied if a person 'fails' to collect tax as required under the relevant provisions of the Ordinance. In the light of the judicial pronouncements referred to above, the conduct of the appellant does not fall under the category of 'failure'. Accordingly, the action of the TO in levying additional tax is entirely against the law and tax so imposed merits deletion. Learned A.R. stated that it was held by the Tribunal in a judgment reported as 2003 PTD 689 (Trib.) that where there is a short deduction of tax, proceedings under section 62 of the repealed Income Tax Ordinance, 1979 (now section 161 of the Income Tax Ordinance, 2001), cannot be started. He contended that same ratio was settled by Hon'ble Supreme Court of Pakistan in their judgment reported as 2000 PTD 2872. He further stated that out of 29868 employees, 25943 have filed their option with the concerned Commissioner for taxation of their income on average rate. Their details are as under:--

6. Sr. No.

7. Name of DDO

8. No of Cases

9. Remarks

10. 1.

11. SM (Central Payments), Islamabad

12. 857

13. Submitted to relevant CIT on 4-12-2009

14. 2.

15. SM (Finance, GTR), Gujranwala

16. 1,032

17. Submitted to relevant CIT on 5-12-2009

18. 3.

19. SM (Finance, WZ), Quetta

20. 1,356

21. Submitted to relevant CIT on 5 and 9-12-2009

22. 4.

23. SM (Finance), Hyderabad

24. 1,639

25. Submitted to relevant CIT on 7-12-2009

26. 5.

27. SM (Finance) AN Operations Lahore

28. 2,550

29. Submitted to relevant CIT on 5-12-2009

30. 6.

31. SM (Finance, ITR AN Ops IBD)

32. 1,465

33. Submitted to relevant CIT on 4-12-2009

34. 7.

35. SM (Finance, ITR Development IBD)

36. 241

37. Submitted to relevant CIT on 3-12-2009

38. 8.

39. SM (Finance, Business Zone LHR

40. 2,410

41. Submitted to relevant CIT on 542-2009

42. 9.

43. SM (Finance M & L)

44. 284

45. Submitted to relevant CIT on 4-12-2009

46. 10.

47. SM (Finance, NTR-1 Peshawar

48. 163

49. Submitted to relevant CIT on 3-12-2009

50. 11.

51. SM (Finance, Devep Peshawar

52. 604

53. Submitted to relevant CIT on 3-12-2009

54. 12.

55. SM (Finance, Trans South) Karachi

56. 6,936

57. Submitted to relevant CIT on 8-12-2009

58. 13.

59. SM (Finance MMBB, 'DRS) IBD

60. 278

61. Submitted to relevant CIT on 9-12-2009

62. 14.

63. SM (Finance & Mgt) Faisalabad

64. 1,781

65. Submitted to relevant CIT on 7-12-2009

66. 15.

67. SM (CTR) Lahore

68. 851

69. Submitted to relevant CIT on 5-12-2009

70. 16.

71. SM (Finance & Billing IBD

72. 1,777

73. Submitted to relevant CIT on 9-12-2009

74. 17.

75. SM (HR Coord Comm. A/Sc) Lahore

76. 338

77. Submitted to relevant CIT on 4-12-2009

78. 18.

79. SM (Finance, OFNS) Lahore

80. 74

81. Submitted to relevant CIT on 4-12-2009

82. 19.

83. SM (Finance, MTR) Multan

84. 1,296

85. Submitted to relevant CIT on 10-12-2009

86. 20.

87. SM (Finance, WLL Network) IBD

88. 11

89. Submitted to relevant CIT on 10-12-2009

90. 25,943

10. Learned A. R. further contended that when tax is not deducted under section 161, the Department has powers to enforce recovery under section 162 from the person from whom the tax was deductible. He emphatically stated that in this case, all the former employees of PTCL are very much contactable. Their complete addresses are available. Therefore, instead of making recovery from PTCL, the tax can be collected from these persons, who received payments in question. Learned AR added that in a judgment reported as 2006 PTD (Trib.) 288, it as 'held that in case of default or failure by the deducing agent, the tax should be collected from the person, who received payments. He contended that Assessing Officer did not appreciate this legal position and he was not justified to treat the appellant as assessee in default. Learned CIT(A) also did not give a judicious consideration to the legal aspects of the issue in hand. Learned A.R. stated that Tribunal in its judgment reported as 2003 PTD 2689 has held that provisions of section 161 can be invoked only, where there is `total failure' in deduction of withholding tax. No action under section 161 could, however, be taken where tax was deducted, but it was less than the prescribed rate/amount.

11. Learned D.R. stated that this is a very simple case of non-deduction of withholding tax. The company was required to make deduction of tax from payments released to its employees. It did not have any powers to make deduction of tax on reduced rate. The employees had an option to be filed with the Commissioner for assessment of their income at reduced rate. This option had to be filed in September, whereas tax deduction was to be made 30th of June. How could the appellant presume in June in the month of September that the employees will be assessable to tax at reduced rate? No law authorizes the withholding agent to make deduction of tax at the rate of its own choice. In this case, the default in question is established. In fact, a collusive arrangement was made by the company with its employees through which, their option was procured for taxation of their income at reduced rates. The tax deduction was accordingly made on reduced rate through this collusive arrangement, which had no value in the eyes of law. The company was required to make deduction of tax at prescribed rates. Then, it was between the taxpayer and the Tax Department that how their tax liability would be determined and how the excess deduction, if any, would be refundable? The appellant company could not sit as a judge and decide the issue on its own sweet will. This is a case of flagrant violation of law, which cannot be excused. Learned D.R. stated that this is also a case of contributory negligence on the part of withholding agent, who has taken the role of a judge to decide, as to what amount of tax should be deducted from the payments of retiring employees. He stated that section 12(6) does not apply to section 149. These are two different provisions independent of each other.

91. Conceptional scope and fundamental parameters of these two provisions are different. The taxpayer did not have any valid reason to explain, as to why the deduction of withholding tax was not strictly made in accordance with relevant provisions of law. Therefore, it was rightly treated as assessee in default.

12. We have considered arguments of both the sides. We are of the opinion that this case has very unique features. Deduction of withholding tax had to be made by 30th June of the relevant year. This deduction has to be made by withholding agent, who is PTCL. The option for assessment at average/concessional rates had to be filed by 30th September of the relevant year. These options had to be filed by the taxpayer, who were the retiring employees of PTCL. Duties and functions of PTCL (withholding agent) and the retiring employees are totally different. PTCL was required to make deduction of tax according to law. It did not do so. It made deduction of tax according to the liability of retiring employees after working it out on the basis of their options for assessment at average/concessional rates. It is, therefore, clear that withholding tax was not deducted according to the prescribed rates. It was rather deducted on (educed rates after taking into account the reduced liability of each employee on the basis of their options for assessment of their income on such rate.

13. The facts and circumstances of the case reveal that PTCL was quite well aware of its obligation as withholding tax agent. It was fully cognizant of the consequences as well. It knew the _relevant law. The question of negligence does not arise in the situation under consideration. It made a well-thought-out, well-calculated, conscious and deliberate decision that instead of making deduction of withholding tax on prescribed rates, it should be made on average/concessional rates.

14. It has been claimed by PTCL that options of 25943 employees were filed with different functional units of Income Tax Department. This claim is, however, not supported with any evidence, because no proof was brought on record in its support. The Tribunal has not come across such situation for the first time. In so many cases, it has happened that tax was not deducted at source by the withholding agent, but it was subsequently paid by the concerned recipient. In such situation, it was held by the Tribunal that Government has received its share of tax and no further tax could be collected from the withholding agent. However, additional tax could be charged on the defaulted amount for the period during which, it remained unpaid, because government money was utilized in an unauthorized manner and the, cost of such utilization had to be paid in the shape of additional tax under section 205. In fact, withholding tax regime is based on pay-as you-earn principles. It provides for efficient machinery for payment of tax, which is also convenient for the concerned stakeholders. Therefore, the basic object of this regime is that tax should be paid on time in an efficient and convenient manner. In this case, the tax deduction was made on concessional/average rates and not according to prescribed rates. The default is established on record that tax was not deducted on prescribed rates. The table on page-8 shows that options collected by the PTCL were sent in bulk to the Commissioner of various regions i.e. Islamabad, Gujranwala, Quetta, Hyderabad, Lahore, Peshawer, Karachi, Faisalabad, Multan in the month of December, 2009. There is no proof of their receipt in the respective regions. Even postal or courier receipts have also not been annexed showing that these elections were sent through courier or postal services. However sub-clauses of section 12 are very much relevant which are hereby reproduced.

92. 12(2)(e)(iii) "on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments:--

93. 12(6) "An employee who has received an amount referred to in sub-clause (iii) of clause (e) of subsection (2) in a tax year may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rate computed in accordance with the following formula, namely:-

94. A/B %

95. Where

96. A is the total tax paid or payable by the employee on the employee's total taxable income for the three proceeding tax years; and

97. B is the employee's total taxable income for the three preceding tax years.

98. 12(8) "An election under subsection (6) or (7) shall be made by the due date for furnishing the employee's return of 'income or employer certificate, as the case may be, for the tax year in which the amount was received or by such later date as the Commissioner may allow ."

15. The last line of sub-clause (8) of section 12 of the Income Tax Ordinance, 2001 clearly empowers the concerned Commissioner to allow such elections even submitted late to him after the specified date. In this case learned AR has provided the information/details of these elections tabulated on page-8 of this order. So verification of receipt and passing of the order to accept these elections or reject vested with the concerned Commissioner. The fate of this case hinges upon passing of order of the concerned Commissioner in positive or negative. We are not inclined to by-pass the powers of Commissioner contemplated in provisions of clause (8) of section 12 of the Income Tax Ordinance, 2001.

16. With these observations, matter in hand is remanded to the Taxation Officer with the directions that/ it should be verified that how many employees and when they actually filed their options with the concerned Commissioners in the light of provisions of section 12(8) of the Ordinance, 2001 for assessment of tax on their income at average rates. Tax liability can only be re-determined after passing of the order by the concerned Commissioner under section 12(8) of the Ordinance. In respect of remaining employees, action as provided under the law should be taken after providing a reasonable opportunity of hearing to PTCL.

17. The appeal of the assessee is decided in the manner as indicated above.

99. C.M.A./132/Tax (Trib.) Case remanded.