IJAZ HUSSAIN BUTT Versus The SECRETARY, REVENUE DIVISION, ISLAMABAD

Complaint No.54/ISD/F.E(01)/675 of 2015, decided on 16th December, 2015.

Result: Order accordingly.

Summary

The complaint was filed by a cooperative housing society before the Federal Tax Ombudsman under Section 10(1) of the Federal Tax Ombudsman Ordinance, 2000 against an illegal demand of Federal Excise Duty raised by Regional Tax Office, Gujranwala. The core legal questions involved whether a show cause notice and order-in-original could be issued under a repealed provision of the Federal Excise Act, 2005 without framing mandatory rules, and whether levying Federal Excise Duty on development expenditure instead of allotment or possession of plots constituted maladministration. The Federal Tax Ombudsman held that issuing the order-in-original based on development expenditure rather than the prescribed criteria of allotment or possession of plots violated FBR instructions and appellate tribunal decisions, amounting to maladministration. The Federal Tax Ombudsman recommended that the Federal Board of Revenue direct the concerned Commissioner to review the impugned order-in-original under Section 45A of the Federal Excise Act, 2005 and pass a fresh order in accordance with applicable instructions.

Questions settled in this judgment

Whether raising a tax demand based on development expenditure instead of allotment or possession of plots constitutes maladministration under the Federal Tax Ombudsman Ordinance, 2000?
Can an order-in-original for Federal Excise Duty be issued under a repealed statutory provision without framing rules?
Whether the Federal Tax Ombudsman can recommend review of an order-in-original under Section 45A of the Federal Excise Act, 2005 upon finding maladministration?

Laws & provisions referred

Federal Excise Dutymaladministrationproperty developersFederal Tax Ombudsmantax demandcooperative housing society

FINDINGS/RECOMMENDATIONS

ABDUR RAUF CHAUDHRY, FEDERAL TAX OMBUDSMAN.--- The complaint has been filed by The Provincial Government Employees Cooperative Housing Society Limited (PGECHSL) in terms of Section 10(1) of the Federal Tax Ombudsman Ordinance, 2000 (the Ordinance) against RTO, Gujranwala for raising illegal demand of Federal Excise Duty (FED) by passing Order-in-Original No.5/FED/2014 dated 24.09.2014 after issuing show cause notice (SCN) dated 27.02.2014 under the provision of Federal Excise Act, 2005 (the Act) which stood repealed since June, 2011. It has also been alleged that demand was also illegal because it has been raised without framing the rules.

2.The case was referred to Secretary, Revenue Division for comments in terms of Section 10(4) of the Ordinance. In response, RTO Gujranwala filed comments through its letter No.54/ISD/F.E.D/(01)1675/2015/3859/J dated 12-06-2015 contending that demand has been ordered for the period 01.07.2008 to 30.06.2011 when relevant legal provision was in field. Further that procedure laid down in the Act was duly followed.

3.This case was heard on 29.06.2015, 14.07.2015, 03.08.2015, 19.08.2015 and 01.09.2015. During hearing, Secretary FBR (Mr. Zaheer Queshi) provided a copy of FBR's letter dated 02.03.2015 and requested that the same may be treated as comments of FBR. Following contentions have been made in this regard:--

(a)The Parliament vide Finance Act, 2008-09 levied Federal Excise Duty on property developers and promoters @ Rs. 50/- sq. ft of covered area in case of construction of residential and commercial units and @ Rs. 100/- sq. yd on development of purchased or leased land for residential or commercial plots.

(b)The levy was challenged before the Federal Tax Ombudsman. The FTO vide his findings/recommendations dated 19.07.2010 in Complaint No.115/ISD/FE(01)484/2010 had directed the FBR to resolve the issue of FED on services rendered by the land developers and promoters by expediting the matter in the light of advice of Law and Justice Division as per Rule 14 of Rules of Business, 1973.

(c)The Law and Justice Division, in its first opinion, had stated that collection of excise duty on services was not supported by any provision of the Constitution. It is primarily levied upon a manufacture or produce in respect of the commodities manufactured or produced and the concept of excisable services is not covered under entry 44 of the Federal Legislative List, Part-1 of the Fourth Schedule to the Constitution of Islamic Republic of Pakistan.

(d)The FBR did not agree with the opinion of Law and Justice Division and the matter was again referred to the Law and Justice Division on the grounds that Federal Excise Duty on development of property was levied under Section 3 of the Federal Excise Act, 2005, and under Article 70(4) of the Constitution of Islamic Republic of Pakistan read with item 44 of Part 1 of the Fourth Schedule thereto.

(e)The Law and Justice Division opined that such duty in pith and substance would be tax on land which is provincial subject. However, even if it is treated as tax on services rendered by the developers, it also falls within the legislative competence of the provinces. The Law and Justice Division further argued that the original idea was to tax the income of builders and developers of residential and commercial units and plots but the same was changed into FED converting it from a direct tax into an indirect tax. They maintained that this FED would be a tax on plots for buildings instead of the income of property developers and the property is subject enumerated in Article 142(c) which is not permissible under the Constitution.

4.It was also contended during hearing that the chargeability of FED was contested before the Appellate Tribunal Inland Revenue (ATIR) Islamabad Bench in Appeal FEA No.09/IB/2012 and the Honourable ATIR has upheld the levy of FED on development of plots. Furthermore that the Federal Tax Ombudsman vide his judgment dated 19.07.2010 recommended to FBR to resolve the issue of FED on services rendered by the land developers and promoters by expediting the matter with the Law and Justice Division as per Rule 14 of Rules of Business, 1973. The said levy was enacted by the Parliament through Finance Act, 2008 and later on withdrawn through Finance Act, 2011. However, the Law and Justice Division did not support this levy considering it as a provincial subject and declined to vet the draft Rules framed by FBR on this levy. The provisions of Finance Act entail sanctity of the Act of Parliament and any subsequent clarification or opinion of Law and Justice Division cannot nullify or challenge precincts of an enactment. Under these circumstances when the issue is also contested before different appellate fora, it would be more appropriate/ advisable if the vires is settled by the apex court.

5.The Complainant in his rejoinder raised following issues:-

(i)A repeal of incomplete and unenforceable law does not extend or revive the law (after its repeal). Intention to continue law after repeal not manifest. There is no saving clause. Examples of savings clauses in Income Tax Ordinance, 1979 and the Income Tax Ordinance, 2001 were quoted.

(ii)Provisions of law requiring framing of rules have not been done in this case. Law required framing of rules a sine qua non for enforceability never fulfilled. Supreme Court judgment makes such action mandatory 2015 SCMR 630

(iii)Allotment of plots was completed before the promulgation of law in July, 2008.

(iv)Even time barred demand for 2008 has been included in SCN.

6.Contentions of both parties and relevant case record have been perused. In view of special circumstance of the case in the interest of justice, delay in filing the complaint is condoned in terms of Section 10(3) of the Ordinance. It is evident that SCN dated 27.02.2014 in this case was issued much after repeal of relevant provision in the Act on 30.06.2011. It is also evident that impugned O-in-O was issued without framing rules under the Act as Law and Justice Division had opined that the matter fell within the domain of provincial government. Perusal of impugned O-in-O in this case shows that FED has been ordered on the basis of development expenditure incurred by PGECHSL during 1st July 2008 to June, 2011 although FBR in its letter No. 1(2)FED/2008/156301-R dated 10.09.2008 had clarified that FED is leviable on allotment of plots. In the impugned O-in-O, FED has been ordered on the basis of development expenditure instead of allotment/possession of plots. The impugned O-in-O also violates the ATIR decision dated 09.12.2012 in which it was held that crucial date of levy of FED was date of taking over possession of plots. Even leaving aside the issues of passing impugned O-in-O under a repealed provision of law and without framing rules as required under it (repealed provision) on the basis of interpretation of law/rules being outside FTO's domain, mere ordering payment of FED on the basis of development expenditure instead of allotment/possession of plots/residential and commercial units is violative of FBR's directions issued vide letter No.1(2)FED/2008/156301-R dated 10.09.2008 and ATIR's decision dated 09.12.2012. The impugned O-in-O also appears discriminatory as this is the only case wherein FED has been ordered to be paid on the basis of development expenditure incurred instead of criteria of allotment/possession of plots/residential and commercial units applied in some other cases.

Findings:

7.Passing impugned O-in-O for payment of FED on the basis of development expenditure instead of allotment/possession of plots/ residential and commercial units tantamount to maladministration in terms of Section 2(3)(i)(a)&(ii) of the Ordinance.

Recommendations:

8.FBR to:-

(i)direct concerned Commissioner to review the impugned O-in-O under Section 45A of the Act and pass orders afresh (if needed) on the basis of FBR's instructions applied to other cases; and

(ii)report compliance within 45 days.

KMZ/105/FTO Order accordingly.

Judges on this bench

Abdur Rauf Chaudhary78 judgments
Federal Tax Ombudsman30 judgments