MAPLE LEAF CEMENT FACTORY LTD. VS FEDERAL BOARD OF REVENUE, 2016 PTD-LAHORE-HIGH-COURT-LAHORE 2074 (2016)

Income Tax Ordinance (XLIX 2001)----

----Ss.174(3), 165 & 158---Income Tax Rules, 2002, R. 44(4)---Statements/records, production of---Requirement---Time of deduction of tax---Annual statements of tax collected or deducted---Petitioners challenged the notices issued by the Deputy Commissioner, Enforcement and Collection, whereby, the petitioners had been asked to furnish the annual statement of withholding tax as prescribed under S. 165 of Income Tax Ordinance, 2001, along with reconciliation statement as per R. 44(4) of Income Tax Rules, 2002---Question before the High Court was if a taxpayer did not maintain accounts and documents beyond a period of five years (now six years), as stipulated in S. 174(3) of the Ordinance, could the taxpayer be held liable or compelled to produce that record---Department, in the present case, had required the petitioners to produce accounts and documents for two purposes; firstly, for purposes of reconciliation with the audited accounts submitted by the petitioner and the tax deductions claimed; and , secondly, for the purposes of conduct of audit of the petitioner's accounts by the Commissioner---In terms of S. 158 of the Ordinance, a person was required to deduct tax from an amount paid by the person would deduct tax inter alia in other cases at the time the amount was actually paid---Proper construction of S. 174(3) of the Ordinance could only be put by reading the entire S. 174 holistically---Section 174 of the Ordinance obliged a taxpayer and imposed a duty upon him to maintain such accounts, documents and records as might be prescribed, which, being a mandatory and compulsory duty cast upon the taxpayer, must have been complied with, and the only exception was where the taxpayer was authorized by the Commissioner not to do that---One of the purposes of S. 174 of the Ordinance was that where the departmental authorities, who were tasked to recover an amount of tax allegedly not paid or to recover an amount of deduction wrongly claimed by the taxpayer, those proceedings must have been initiated expeditiously and with all deliberate speed and preferably within the period mentioned in S. 174(3) of the Ordinance---Rule 44 (4) of Income Tax Rules, 2002 required a person to furnish an annual statement under S. 165 (1) of the Ordinance, as also monthly statement under S. 165(2) of the Ordinance, in case that person was responsible for collecting or deducting tax under Division II or Division III of Part V of Chapter X of the Ordinance, and the said statement would be accompanied by the evidence of deposit of tax collected---Person, who was required to furnish statements under S. 165 (1) or 165 (2) of the Ordinance, would, whenever he was required by the Commissioner, furnish a reconciliation of the amounts mentioned in the annual and monthly statements with the amounts mentioned in the return of income etc.---Petitioners, however, were obliged to maintain those records for five years (now six years), and thus, it would not be lawful for the Department to ask for those records (beyond that period)---Taxpayer was neither under compulsion or obligation to maintain the record beyond a period of five years (now six years), nor S. 174(3) of the Ordinance had laid down a penalty to be imposed on a taxpayer in case the record was not maintained under the provisions of S. 174---Department although could proceed with the impugned notices, but it would be debarred from proceeding against the petitioners in any manner to enforce the compliance of the impugned notices or to require the petitioners compulsorily to produce the record---Constitutional petition was dismissed in circumstances.

Messrs Bilz (Pvt.) Ltd. v. Deputy Commissioner of Income Tax, Multan and another 2002 PTD 1 distinguished.

Habib Bank Ltd. v. Federation of Pakistan through Secretary, Revenue Division and 5 others 2013 PTD 1659 rel.

Shahbaz Butt for Petitioner.

Liaqat Ali Chaudhry for Respondents.

Date of Hearing: 12th April, 2016.

JUDGMENT

SHAHID KARIM, J.---This petition under Article 199 of the Constitution of Islamic Republic of Pakistan, 1973, lays a challenge to the notice dated 06.12.2008 issued by the Deputy Commissioner, Enforcement and Collection Division-02, Large Taxpayer Unit, Lahore. By the impugned notice, a request has been made to furnish the annual statement of withholding taxes as prescribed under section 165 of the Income Tax Ordinance, 2001 (Ordinance, 2001) in respect of tax year 2003 along with reconciliation statement as per rule 44(4) of the Income Tax Rules, 2002 (Rules, 2002).

2.According to the contents of the impugned notice, it has been mentioned that the record of the tax department shows that annual statement of withholding taxes for the tax year 2003 has not been filed. It was further intimated through the impugned notice that the results declared in the return of income/audited accounts statements furnished along with return of income for the tax year 2003 show that certain amount of tax had not been deducted by the petitioner during the tax period 2003. Thus, by the impugned notice the petitioner was required to furnish the statement of withholding taxes for the tax year 2003 along with reconciliation statement as per the provisions of rule 44(4) of the Rules, 2002. Further that the evidence of payment of the claimed deduction should also be made over to the officer issuing the impugned notice. It is clear from the impugned notice, therefore, that the department is seeking a reconciliation of the amounts claimed as tax deductions by eliciting evidence of the payment of the tax deductions claimed by the petitioner.

3.This judgment shall also decide W.P. No.13957 of 2010 which also seeks to restrain the respondents from requiring the petitioner to produce the record which was not required to be maintained beyond a period of five years under section 174(3) of the Ordinance, 2001. In this petition too, the return of total income in respect of tax year 2004 was filed under section 114 of the Ordinance, 2002. Subsequently, the petitioner was selected for audit by the Commissioner in exercise of the powers under section 177(4) of the Ordinance, 2002. This was followed by two notices for initiation of audit proceedings issued by the respondent No.2, both dated 15.5.2009. The selection for audit was challenged before this Court vide W.P. No.12475 of 2009 which was disposed of on 22.10.2009. During the course of the audit proceedings, the petitioners raised objections to the demand by the respondent-department for the petitioners to produce certain record vide letter dated 20.05.2010 on the plea that the period for maintaining the record and accounts for the tax year 2004 had lapsed on 30.06.2009 in terms of section 174(3) of the Ordinance, 2001. This plea of the petitioners was rejected vide letter dated 27.5.2010. The respondent No.3 in the instant petition did not consider the objections raised by the petitioner as sustainable and issued a notice dated 4.6.2010 by which it was threatened that ex -parte assessment shall be completed under section 120 of the Ordinance, 2001. The notice dated 4.6.2010 has been impugned in this petition (impugned notice-2).

4.A common question of law which arises for determination in these two petitions is the precise import and sweep of section 174(3) of the Ordinance, 2001. The learned counsel for the petitioners takes cavil to the demand raised by the department for requiring the petitioners to produce the record which the petitioner were not obliged to maintain beyond a period of five years in terms of section 174(3). The learned counsel took pains to clarify that the challenge is not to the proceedings initiated under section 165 or 161 of the Ordinance, 2001 but is merely restricted to the production of record which is being demanded of the petitioners.

5.The learned counsel for the petitioners has referred to the scheme of Ordinance, 2001 which prescribes the method of accounting and the accrual-basis accounting envisaged by sections 32 and 34 of the Ordinance, 2001. The learned counsel for the petitioners does not dispute the fact that in terms of section 158, a person is required to deduct tax from an amount paid by the person at the time the amount is actually paid.

6.The learned counsel for the respondents has referred to the provisions of section 165 of the Ordinance, 2001 in order to submit that a liability to file annual statement of an assessee who deducts tax from a payment is immutable and any such person is required to file an annual statement in this regard.The learned counsel for the department further relies upon rule 44(4) of the Rules, 2002 under which the notice to the petitioner in W.P. No.18703 of 2008 has been issued.

7.The provision around which the entire controversy revolves is section 174(3) of the Ordinance, 2001. For facility, it is reproduced as under:

"174. Records.---(1) Unless otherwise authorised by the Commissioner, every taxpayer shall maintain in Pakistan such accounts, documents and records as may be prescribed.

(2)The Commissioner may disallow or reduce a taxpayer's claim for a deduction if the taxpayer is unable, without reasonable cause, to provide a receipt, or other record or evidence of the transaction or circumstances giving rise to the claim for the deduction.

(3)The accounts and documents required to be maintained under this section shall be maintained for five years after the end of the tax year to which they relate.

Provided that where any proceeding is pending before any authority or court the taxpayer shall maintain the record till final decision of the proceedings.

[Explanation.---Pending proceedings include proceedings for assessment or amendment of assessment, appeal, revision, reference, petition or prosecution and any proceedings before an Alternative Dispute Resolution Committee.]

(4)For the purpose of this section, the expression -deduction means any amount debited to trading account, manufacturing account, receipts and expenses account or profit and loss account.

(5)The Commissioner may require any person to install and use an Electronic Tax Register of such type and description as may be prescribed for the purpose of storing and accessing information regarding any transaction that has a bearing on the tax liability of such person."

8.It can be seen from a reading of subsection (3) of section 174 that the provision requires the maintaining of the accounts and documents for a period of five years after the end of tax year to which they relate. Thus, there is an obligation cast upon the taxpayer to maintain the accounts and documents for five years. This begs the question: Whether if a taxpayer does not maintain accounts and documents beyond a period of five years as stipulated in subsection (3) of section 174, can the taxpayer be held liable or compelled to produce that record as is the case in the two petitions that are being decided through this judgment. In both the petitions, the petitioners have been required to produce accounts and documents for two different purposes. In the case of Maple Leaf Cement, it is being required for the purposes of reconciliation between audited accounts submitted by the petitioner and the tax deductions claimed. In the second petition (W.P. No.13957 of 2010) the record is being required to be made over for the purposes of conduct of audit of the petitioner's accounts by the Commissioner.

9.It will be useful to refer to the amendment brought about in subsection (3) by the Finance Act, 2010 by which the word 'five' was substituted by the word 'six'. Simultaneously, a proviso was added to subsection (3) by which it was provided that where any proceedings are pending before any authority or court the taxpayer shall maintain record till final decision of the proceedings.

10.The learned counsel for the petitioners with regard to W.P. No.18703 of 2008 submits that the provisions of subsection (3) of section 174 will be rendered redundant and without any purpose if the petitioner was to be compelled to produce the accounts and documents required by the impugned notice. In this regard, the learned counsel makes a reference to section 32 which lays bare the different methods of accounting and by subsection (1) it is provided that a person's income chargeable to tax shall be computed in accordance with the method of accounting regularly employed by such person. The method of accounting, according to the learned counsel for the petitioners, in Maple Leaf Cement case was the accrual-basis accounting employed by Maple Leaf Cement by which method a person accounting for income chargeable to tax under the head "income from business" on an accrual-basis shall derive income when it is due to the person and shall incur expenditure when it is payable by the person. By this method, according to the learned counsel, an amount shall be due to a person when the person becomes entitled to receive it even if the time for discharge of the entitlement is postponed or the amount is payable by the installments. The learned counsel states that the Maple Leaf Cement receives the amounts mostly in cash and the necessary documentation is completed and compiled at the time when the payment is received. That record is now sought to be produced by the impugned notice and which Maple Leaf Cement was merely obliged to keep for five years and no more. Section 34 has to be read with section 158 of the Ordinance, 2001, which is as follows:

"S. 158. Time of deduction of tax.---A person required to deduct tax from an amount paid by the person shall deduct tax-

a)in the case of deduction under section 151, at the time the amount is paid or credited to the account of recipient, whichever is earlier; and

b)in other cases, at the time the amount is actually paid; and

c)amount actually paid shall have the meaning as may be prescribed."

11.It can be seen that by the terms of section 158, a person required to deduct tax from an amount paid by the person shall deduct tax inter alia, in other case, at the time the amount is actually paid.

12.What is required in the instant cases is the proper construction of section 174(3) of the Ordinance, 2001. However, a proper construction of subsection (3) can only be put by reading the entire section 174 holistically. Section 174 obliges a taxpayer and imposes a duty upon him to maintain such accounts, documents and records as may be prescribed. The only exception is where a taxpayer has been authorized by the Commissioner not to do so. This is a mandatory and compulsory duty cast upon a taxpayer and must be complied with. Thus, there is no cavil that the records contemplated by section 174 have to be maintained by every taxpayer. By subsection (3), the duty of the taxpayer to maintain accounts and records has been further reinforced by the mandatory requirements that the record contemplated by subsection (1) shall be maintain for five years (six years by the amendment of Finance Act, 2010). There is no compulsion on the taxpayer to maintain the record beyond a period of five years prescribed by subsection (3). Section 174 does not lay down a penalty to be imposed on a taxpayer in case the record is not maintained under the provisions of section 174. Thus, a combined reading of subsections (1) and (3) of section 174 will ineluctably follow that while a taxpayer is obliged to maintain accounts and records for a period of five years, there is no obligation on the taxpayer to maintain such accounts beyond the period prescribed under subsection (3) of section 174. Had the intention of the legislature been that the records be maintained for all times to come or in eternity, there was no purpose to enacting subsection (3) of section 174. One of the purposes that comes to amend is that the departmental authorities who are tasked to recover any amount of tax which is allegedly not paid or to recover an amount of deduction wrongly claimed by the taxpayer, those proceedings must be initiated expeditiously and with all deliberate speed and preferably within the period mentioned in subsection (3) of section 174. The petitioners in both the petitions have been served with notices which do not prescribe a period of limitation within which the notices can be issued by the authorities who have issued the notices. It is also not the case of the petitioners that those notices could not have been issued and they be held statute barred. We are concerned in these petitions with the precise relation of subsection (3) of section 174 with the provisions under which the impugned notices have been issued.

13.The learned counsel for the department has laid emphasis on the fact that the proceedings are for the recovery of the tax and not for the assessment of the petitioners as taxpayers. The learned counsel invoked to his aid the provisions of rule 44(4) of the Rules, 2002, which is to the following effect:

"44. Annual statement of tax collected or deducted.---(1) An annual statement required to be furnished under subsection (1) of section 165 for a financial year shall be in the form as set out in Part VIII and Part IX of the Second Schedule to these rules.

(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 a monthly statement within twenty days of the end of each month as set out in Part X of the Second Schedule to these rules.

(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 statements under sub-rule (1) or (2) shall, wherever required by the Commissioner, furnish a reconciliation of the amounts mentioned in the aforesaid annual and monthly statements with the amounts mentioned in the return of income, statements, related annexes and other documents submitted from time to time."

14.The above rule has been invoked in the context of the case of Maple Leaf Cement. At first blush, it is evident from a perusal of sub-rule (4) of rule 44 of the Rules, 2002 that a person is required to furnish an annual statement under subsection (1) of section 165 of the Ordinance, 2001 as also monthly statement under subsection (2) of section 165 in case that person is responsible for collecting or deducting tax under Division II or Division III of Part V of Chapter X of the Ordinance, 2001. That statement shall be accompanied by the evidence of deposit of tax collected. Thus, by the terms of sub-rule (4) of rule 44, a person who is required to furnish statements under sub-rule (1) or (2) shall wherever required by the Commissioner furnish a reconciliation of the amounts mentioned in the annual and monthly statements with the amounts mentioned in the return of income etc. Thus, what is required to be furnished by the impugned notice in Maple Leaf Cement case is a reconciliation of the amounts mentioned in the return of income. All of these documents and records are required to be maintained under section 174 of the Ordinance, 2001 and this is not denied by the learned counsel for the respondents. Thus, these records, according to the learned counsel for the petitioners, cannot be produced in response to the impugned notice since that record is not available with the petitioners. The simply and straightway explanation for this is that the petitioners were obliged to maintain those records for five years (now six years) and thus it will not be lawful for the department to ask for these records. It may, once again, be made clear that the stance taken by the petitioners does not impinge upon the power of the departmental authorities to proceed with the impugned notices which have been issued. The only effect will be that the records demanded of the petitioners will not be produced on the simple plea that the record is not available with the petitioners. In case, that plea is taken by the petitioners in response to the show cause notice, the necessary corollary would be that the department or the authority issuing the impugned notices will be debarred from proceedings against the petitioners in any manner to enforce the compliance of the impugned notices or to require compulsorily the petitioners to produce the record. In other words, in case the petitioners do not produce the record which they were required to maintain in terms of section 174, no penal consequences will follow.

15.The learned counsel for the respondents has relied upon Messrs Bilz (Pvt.) Ltd. v. Deputy Commissioner of Income Tax, Multan and another (2002 PTD 1). The said judgment of the Supreme Court of Pakistan was based on section 40(4A) of the Income Tax Ordinance, 1979 and the issue was the failure to identify the names of the parties in the show cause notice to whom the supplies were made. That judgment is not applicable to the facts and circumstances of the instant case. The learned counsel next relied upon the judgment of the Supreme Court of Pakistan rendered in Civil Appeals Nos.1091 and 1092 of 2009 which too is an authority for its own facts. In that judgment, the controversy was regarding the question of limitation in order to substantiate actions initiated by the income tax authorities under section 52 of the Income Tax Ordinance, 1979 and whether the provisions of section 156 could be made applicable in such cases. The answer to these questions were returned in the negative by the Supreme Court and it was held that no period of limitation was prescribed in section 52 of the Ordinance, 1979 and none could be imported in the said provision by reference to section 156 of the Ordinance, 1979. It was in this context that observations were made that this was a deliberate omission by the legislature so that there can be no possibility of evasion or failure to arise the requisite tax. These observations were sought to be used in support by the learned counsel for the department but as stated above the facts of the precedent of the Supreme Court of Pakistan and the issue of law involved were materially different.

16.The only judgment which directly deals with the issue in hand is a reported judgment of the Sindh High Court viz. Habib Bank Ltd. v. Federation of Pakistan through Secretary, Revenue Division and 5 others (2013 PTD 1659) and the following observations are relevant:

"...The statements of tax deducted were duly filed, again many years before the action was begun. Thus, there is no doubt that if the Department had been so minded, it could have taken the impugned action much earlier and well before the period stipulated in section 174 had elapsed. It did not however, do so. No proper justification has been provided for the belated action. In our view, the onus that lies on the Department has not been discharged. Thus, although it cannot of course be said that the impugned actions are barred by limitation, the Department has nonetheless failed to cross the threshold of the time related limiting factor identified in the paras hereinabove. The actions are not sustainable and the exercise of the statutory power conferred by section 161 is, in the facts and circumstances of the present cases, unlawful."

17.Although, in the judgment of the Sindh High Court, the exercise of statutory powers and the action taken under section 161 were declared unlawful, I will not go to the extent of declaring those actions as unlawful as, in my opinion, the provisions of section 161 and the soliciting of information under sections 165 and 177 of the Ordinance, 2001 may proceed on its own and the only power which can be placed is on the department to compel the petitioners to furnish records beyond a period of five years. However as can be seen, the Sindh High Court did not conclusively render a holding on whether a taxpayer was or was not obliged to provide the documents beyond a period of five years. By relying upon a concept of "time related limiting factor" and by reading section 174 with section 161, it was held that "justification had to be provided for the belated action". What if the justification was in fact forthcoming? In my opinion, as adumbrated, the taxpayer is relieved of his obligation to maintain the record beyond a period of five years and to produce it upon notice to do so.

18.In view of the above, these petitions are accepted. It is held that the impugned notices may be proceeded with. However, the departmental authorities shall not compel the petitioners to produce record which the petitioners were not required to maintain beyond a period of five years.

SL/M-132/LPetition dismissed.