Case Summary & Legal Holding

This judicial decision was delivered by the INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN. The matter involves proceedings between RAJA M. RAHEEL and The COMMISSIONER INLAND REVENUE, REGIONAL TAX OFFICE, SIALKOTHonorable Justice Shahid Masood ManzarTahir Razzaque Khan,Tariq Iqbal, officially reported as 2020 PTD 403. The court reviewed applicable Pakistani statutes, procedural requirements, and governing case-law authorities. The full text below contains the complete facts, arguments, and legal reasoning rendered by the honorable bench.

Full Judgment Text & Judicial Ruling

2020 P T D (Trib.) 403 [Inland Revenue Appellate Tribunal] Before Shahid Masood Manzar, Chairman and Dr. Muhammad Naeem, Accountant Member RAJA M. RAHEEL Versus The COMMISSIONER INLAND REVENUE, REGIONAL TAX OFFICE, SIALKOT I.T.A. No.488/IB of 2018, decided on 8th May, 2019. Income Tax Ordinance (XLIX of 2001)--- ----Ss. 82, 111, 121, 122, 122-C, 129, 140 & 218--- Convention for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income, between Government of Islamic Republic of Pakistan and Government of French Republic, Arts. 4(2) & 25--- Notification SRO No. 729 (I) / 96, dated 2-9-1996---Double taxation--- Non-resident--- Foreign national--- Appellant was foreign national filing his tax returns in France and he was aggrieved of attachment of Bank accounts by authorities in lieu of tax default on property purchased in Pakistan--- Validity--- Appellant was liable to be assessed in accordance with Art.4 of the Convention between Government of Islamic Republic of Pakistan and Government of French Republic for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income, vide SRO No. 729 (I) / 96 dated 02-09-1996--- Once it was established that center of vital interest was not Pakistan, S. 111 of Income Tax Ordinance, 2001 read with S.82 of the Ordinance, were thus superseded by and thus quashed by Art. 4 of Convention between Government of Islamic Republic of Pakistan and Government of French Republic for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income--- Provisions of Income Tax Ordinance, 2001 could not be invoked because Convention between Government of Islamic Republic of Pakistan and Government of French Republic for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income had an overriding effect on Income Tax Ordinance, 2001--- Appellant was filing his tax returns in France, in light of tax treaty between Pakistan and France, no action could be perpetuated in Pakistan by Pakistan tax authorities--- Appellant had center of vital interest in France by virtue of his personal and economic interests abroad--- Appellant who had his habitual abode abroad and his income was assessed in France, was absolved from Pakistan taxation and no provision of Income Tax Ordinance, 2001 was attracted as he did not have any plausible source of income that was deemed to have accrued to him--- Provisions of S.111 of Income Tax Ordinance, 2001 was applicable to residents of Pakistan only and could not be extended to appellant who was resident abroad and did not have taxable income in Pakistan--- Appellate Tribunal Inland Revenue deleted levy of tax under S.111 of Income Tax Ordinance, 2001 made by department--- Appellate Tribunal Inland Revenue directed authorities to return the amount to appellant which was extorted from his Bank accounts--- Appeal was allowed accordingly. I.T.A. No. 57/IB/2015 dated 16.02.2015; I.T.A. No.1066/LB/2013 dated 15.08.2013; Phillip Baker Double Taxation Conventions 3rd Edition; Black v. R 16 ITLR 573; Yates v. Revenue and Customs Commissioners 15 ITLR 205; Garcia v. Canada 10 ITLR 179; Abdul Razzak A Meman v. CIT (International Taxation) 9 ITLR 139; Alchin v. R 7 ITLR 851; Podd v. Commissioner (1999) 1 I.T.L.R. 485; Indian Double Taxation Agreements and Tax Laws with OECD Commentaries on Articles of Model Tax Convention by D. P. Mittal (Sixth Edition), Paras 10.13 at page 1.406 and Landmark Book Double Taxation Treat by Philip Baker ref. Tahir Razzaque Khan, FCA and Shaheer Bin Tahir for Appellant. Tariq Iqbal, DR. for Respondent. Date of hearing: 4th April, 2019. ORDER SHAHID MASOOD MANZAR (CHAIRMAN).----This appeal has been filed against the impugned order bearing No.CIR(A)/SKT-I.Tax/433 dated 05.12.2017 passed by the learned Commissioner Inland Revenue (Appeals), Sialkot on the following grounds: - 1. That the appellate order under section 129 of the Income Tax Ordinance, 2001, passed by the learned Commissioner Inland Revenue, (Appeals), Sialkot is bad in law and against the facts and circumstances of the case. 2. That the learned CIR (A) was not justified in remanding back the case for de novo consideration. 3. That the learned CIR (A) was not justified that the assessment came to knowledge of the appellant when the bankers had informed that tax department has looted the account by way of attachment under section 141 of the Income Tax Ordinance, 2001. 4. That no notice, order or correspondence was received by appellant through registered post, courier service or personally under section 218(5) read with section 218(1) of the Income Tax Ordinance, 2001. 5. That the learned CIR (A) was not justified that the order passed by learned ACIR is patently illegal on the point of jurisdiction. BTB was not allowed to make assessments until 01-08-2013 where Board has allowed Commissioner Inland Revenue (BTB, IP and FTD and HRM) to make assessment under sections 122 and 122C only. Assessment under section 121 was not authorised to the BTB officials. 6. That appellant is non-resident Pakistani, engaged in Restaurant business in France where he is earning his livelihood. Since he does not have any Pakistani Source Income, therefore, section 111 cannot be invoked. Even otherwise he had enough agricultural income to purchase this property. 7. That the learned CIR (A) was not justified that the ACIR has failed to declare nobody as representative of the taxpayer under section 172 of Income Tax Ordinance, 2001, therefore, the entire exercise is illegal and without jurisdiction. 8. That the appellant had brought in money through legal sources and channels. Which are not subject to invoking of section 111 of the Income Tax Ordinance, 2001. 9. That section 111 is not applicable on the non-residents therefore, the learned ACIR has illegally invoked the provision which is void ab initio and illegal. 10. That the appellant has not visited Pakistan in the aforesaid period and invoking ex parte assessment under section 121 of the Income Tax Ordinance, 2001 is patently illegal and injustice. 11. That the appellant craves leave to add, alter, withdraw and substitute all or any grounds of appeal on or before the date of hearing. 2. Brief facts of the case are that the appellant is a French National and is not a resident of Pakistan. He is engaged in the business of restaurant and is owner of one in Paris, France and holds that his source of income is outside Pakistan. The proceedings in the case were started by ACIR on the basis of information where it was alleged that the taxpayer purchased properties for the consideration of Rs.34,32,000/-. Notice under sections 114(4) and 116(1) of the Income Tax Ordinance, 2001 was issued but on the day of the hearing neither anyone appeared, nor filed any reply. Later on, notice under section 111(1)(b) of the Income Tax Ordinance, 2001, were issued, but to no avail. Consequently, the ACIR completed assessment under section 121(1) of the Income Tax Ordinance, 2001 vide order dated 28-04-2012 received on 02-06-2016, creating a tax demand of Rs.8,58,000/- and subsequently attached the bank accounts and recovered the impugned tax so assessed under section 140 of Income Tax Ordinance, 2001. Aggrieved of the treatment, the taxpayer filed the first appeal before the Commissioner Inland Revenue (Appeals), Sialkot who vide his impugned order No.CIR(A)/SKT-I.Tax/433 dated 05.12.2017 remanded back the assessment passed by the ACIR for de novo consideration. Again being aggrieved, the taxpayer filed instant appeal before this forum. 3. The taxpayer is represented by Mr. Tahir Razzaque Khan, FCA, and Mr. Shaheer Bin Tahir, Advocate, both representing the taxpayer in the capacity of Authorised Representatives. The Departmental Representative in this case was Mr. Tariq Javaid Burki, learned Additional Commissioner Inland Revenue. 4. The following submissions were made by the learned AR of the appellant in this case:- (i) It was contended that learned CIR(A) was not justified in passing the order and remanding the matter for de novo consideration because of the fact that the appellant is not a resident of Pakistan and is a French citizen. In order for a tax liability to be attracted, it first needs to be proved by the department that the taxpayer was in Pakistan, subject to section 82 of the ITO, 2001, which lays down the circumstances under which one can be held to be a resident of a state, for the tax year i.e. the 183 (one hundred and eighty three) days rule. It was contended that the appellant is an owner of a Restaurant, in Paris, France, and holds that as his source of income. (ii) Furthermore, learned CIR(A) has erred in assessing him as a resident whereas the appellant is in fact a resident of France. The department has simply assumed that by virtue of having property in Pakistan renders the appellant as a resident of the country, without concerning the relevant authorities (i.e. the French embassy) or having done any conclusive study into the double tax agreement between the two countries, which provides the taxpayer with relief under Article 4(2)(b) of the Convention between the Government of the French Republic and The Government of the Islamic Republic of Pakistan For the Avoidance of Double Taxation And the Prevention of Fiscal Evasion with Respect to Taxes on Income (henceforth "The Convention") (iii) It was vehemently submitted by the learned AR that the application of section 111 of the ITO, 2001, is only applicable to individuals who are residents of Pakistan for the Tax-Year as illustrated in section 82 of the ITO, 2001. Attention was drawn to the matters of international tax case law and the residence test, as imposed under the national legislation under section 82(a) of the ITO, 2001. The test laid out in the provision provides that the person to be in Pakistan for a total of 183 days, to attract the tax liability under the provisions. The taxpayer in this regard, has not been a resident of Pakistan for said number of days; as is evident from his passport issued by the French Government. This hereby excludes him from the definition of a "resident" under section 82(a) of the ITO, 2001. (iv) It was contended by learned AR that the person is not a resident of Pakistan for the tax year, as he had not been in Pakistan for a total of one hundred and eighty-three days for the tax-year 2008. (v) Learned AR also submitted that another issue that needs the careful consideration, is that of the application of section 1(2) of the Income Tax Ordinance, 2001. The section states that the authority of the letter of the law laid out in the Income Tax Ordinance, 2001, extends to the whole of Pakistan. The issue that arises here is one of jurisdiction. Due to the fact, that the person does not live in Pakistan, the application of unexplained income does not arise under section 111 of the Income Tax Ordinance, 2001. Furthermore, as the individual in question is not a "resident" of Pakistan, the issue of unexplained income under section 111 is also ill-founded. (vi) Stemming from the above-mentioned argument, it is thus elucidated that Section 111 of the Income Tax Ordinance, 2001 would attract tax liability only if the individual in question is a "resident". Reliance was placed on the decision of the ATIR in ITA No. 57/IB/2015 dated 16.02.2015 in identical circumstances and ITA No. 1066/LB/2013 dated 15.08.2013 where the Tribunal held that:- 5. "we would like to clarify that a citizen can be made liable to pay tax only on the basis of unambiguous and explicit law. In fiscal statute there is no room for any presumption or intendment and no provision of law can, by any process of argumentation or interpretation be loaded with meaning or intentions which plain language of the provision does not convey. In this case, we are of the considered view that the department is trying to screw the taxpayer and extorting tax without observing the cardinal principal of tax laws discussed above. The department functionaries are also acting under sheer ignorance and not following procedure laid down in statute and circulars and clarifications issued by the FBR which are binding on all functionaries working under FBR under the law. 6. We are of the view that once it has come on record and has been established that the appellant is a French National Pakistani having sufficient sources of income through running Restaurant in France and having transferred foreign currency through proper Banking channels or otherwise by legal means, there was no justification to harass the appellant which is discouraging him to invest in Pakistan. He has no means/business in Pakistan and all sources of income are in France and has only made investment in Pakistan by purchasing landed property through foreign exchange brought from France. It is further observed that tax is not a forced liability but in fact it is a responsibility to owe to the state a proportionate share given by the taxpayer for utilizing and consuming the services provided by the state. Its determination must be made with a view to keep the above principle intact and to maintain confidence and to boost the encouragement in the taxpaying society so that the tax should not be taken by the concerned public to be a harsh imposition but a duty. The Honourable High Courts and this Tribunal has held in many cases that it is high time to develop tax culture in the working classes which will help the enforcement of self-assessment at large and the tendency of concealment of taxes shall be gradually discouraged and public would rather prefer to be the taxpayer instead of tax swallowers. Similar is the position regarding Foreign National making investment, they should be encouraged rather forced to make investment in other countries". (vii) The learned AR of the appellant as a matter of procedural accuracy has drawn our attention to the issue of the service of documents, due to which reliance is placed on Sections 172(5) and 218 of the ITO, 2001. The relevant provisions read as under:- "172. Representatives.----(1) For the purposes of this Ordinance and subject to subsections (2) and (3), "representative" in respect of a person for a tax year, means -- (a) where the person is an individual under a legal disability, the guardian or manager who receives or is entitled to receive income on behalf, or for the benefit of the individual; (b) where the person is a company (other than a trust, a Provincial Government, or [Local Government] in Pakistan), the principal officer of the company; (c) where the person is a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including any Wakf deed which is valid under the Mussalman Wakf Validation Act, 1913 (VI of 1913)), any trustee of the trust; (d) where the person is a Provincial Government, or [Local Government] in Pakistan, any individual responsible for accounting for the receipt and payment of moneys or funds on behalf of the Provincial Government or [Local Government]; (e) where the person is an association of persons, the principal officer of the association or, in the case of a firm, any partner in the firm; (f) where the person is the Federal Government, any individual responsible for accounting for the receipt and payment of moneys or funds on behalf of the Federal Government; or (g) where the person is a public international organisation, or a foreign government or political sub-Division of a foreign government, any individual responsible for accounting for the receipt and payment of moneys or funds in Pakistan on behalf of the organisation, government, or political sub-Division of the government. (2) Where the Court of Wards, the Administrator General, the Official Trustee, or any receiver or manager appointed by, or under, any order of a Court receives or is entitled to receive income on behalf, or for the benefit of any person, such Court of Wards, Administrator General, Official Trustee, receiver, or manager shall be the representative of the person for a tax year for the purposes of this Ordinance. (3) Subject to subsections (4) and (5), where a person is a non-resident person, the representative of the person for the purposes of this Ordinance for a tax year shall be any person in Pakistan - (a) who is employed by, or on behalf of, the non-resident person; (b) who has any business connection with the non-resident person [:] [Explanation.---In this clause the expression "business connection" includes transfer of an asset or business in Pakistan by a non-resident;] (c) from or through whom the non-resident person is in receipt of any income, whether directly or indirectly; (d) who holds, or controls the receipt or disposal of any money belonging to the non-resident person; (e) who is the trustee of the non-resident person; or (f) who is declared by the Commissioner by [an order] in writing to be the representative of the non-resident person. (4) A bona fide independent broker in Pakistan who, in respect of any transactions, does not deal directly with, or on behalf of, a non-resident principal but deals with, or through a non-resident broker, shall not be treated as a representative of the non-resident principal in respect of such transactions, if-- (a) the transactions are carried on in the ordinary course of business through the first-mentioned broker; and (b) the non-resident broker is carrying on such transactions in the ordinary course of its business and not as a principal. (5) No person shall be declared as the representative of a non-resident person unless the person has been given an opportunity by the Commissioner of being heard. 218. Service of notices and other documents.---(1) Subject to this Ordinance, any notice, order, or requisition required to be served on a resident individual (other than in a representative capacity) for the purposes of this Ordinance shall be treated as properly served on the individual if - a) personally served on the individual or, in the case of an individual under a legal disability or a non-resident individual, the representative of the individual. It was rudimentary for Commissioner Inland Revenue to make someone representative under section 218(1)(a) by exercising the power under section 172(5). In this case no one was made representative under section 218(1)(a) read with section 172(5) on whom the notice could be served. In light of the above provision, it was submitted that the service of documents made was not done so in a proper fashion, if at all. The show-cause notice was not served on the person/taxpayer, who was not in Pakistan when it was issued. Only this fault render the entire proceedings void ab inito. Furthermore, it was submitted that the service should have been made to his representative under section 172. As this was not the case, the issue at hand is liable to be dismissed on the bases of procedural misconduct, as continuation with this case would only lead to the apparent misapplication of the law and the procedure laid down for the service. (viii) He submitted that the Department understands the necessity of and causality between proper service of documents and the application of the law, as both go hand in hand, and a procedural impropriety smears the case with uncertainty, which in this scenario goes against the spirit and the judiciousness on part of the tax department. (ix) That the learned AR has contended that, in order to establish the appellant, as a tax resident of Pakistan, the tax authorities need to apply the residence test, as laid out under Article 4(2) of The Convention between Pakistan and France. The Convention implores that the term "resident of a Contracting State" means a person who "under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature". The Convention lays tests for the tax authorities to overcome in over to decide whether the individual is a resident or not, in the failure of which, would trigger the application of a Mutual Agreement Procedure laid out in Article 25 of The Convention (which reproduces the words of the OECD Model Tax Convention) under which the tax authorities would take up the issue with the French Tax Authorities. His submission with reference to taxpayer of non-residents read as follows:- (x) For the sake of understanding and case the relevant provisions of The Convention, vis- -vis the OECD Model Tax Convention (MTC) are reproduced below: 1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. But this does not include any person who is liable to tax in that State in respect only of income from sources in that State. 2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows; a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (center of vital interests); b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode; c) if he has a habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national; c) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. (xi) The paras (a) to (d) above are tie breaker tests which usually found in every treaty by the virtue of the treaty. In regard to the provisions laid out above, it should be noted that the taxpayer would have to fall under the definition of a resident under Article 4 of The Convention. In order to do so, Article 4 of The Convention lays out four tests that need to be satisfied, i.e. Permanent Home and Centre of Vital Interests, Habitual Abode, Nationality and Mutual Agreement. To illustrate the tests, reliance is placed on Klaus Vogel on Double Taxation Conventions, Fourth Edition which is reproduced as under:- 83 If an individual has his permanent home in one of the Contracting States, he is deemed to be a resident of that State for convention purposes because his attachment to this state is reflected thereby. Where the taxpayer has a permanent home in both Contracting States, a closer look must be taken in order to determine to which Contracting State the taxpayer's attachment is closer, which is decided by his centre of vital interests. The systematic position of permanent home and centre of vital interests in a single sub-paragraph, as well as the wording "centre" (of vital interests), suggest that the taxpayer will have some vital interests at his permanent home. Thus, if the taxpayer is connected to both Contracting States via vital interests, their "centre" is decisive for the taxpayer's residence. (xii) The commentary then goes on to illustrate how the first of the two-limb tie-breaker test would play out. This is reproduced as under: a. Permanent Home. Under the first tie-breaker test a dual-resident individual is a resident in the state where he has a permanent home available to him. A permanent home is something more than just a place to sleep and keep some belonging on a temporary basis. Rather, the permanent home must be of such quality that it is of vital interest to the individual. The criterion "permanent home" solves the conflict where dual residence arises as a consequence of a permanent home in one Contracting State and a stay of some length in the other. (b) If an individual is found to have a permanent home in both Contracting States, his residence for DTC purposes is decided by the second portion of the Article 4(2)(a) OECD and UN MC test: i.e. which permanent home is the taxpayers "centre of vital interests". An individual has his vital interests in the State in which his personal and economic relations are closer, between the two Contracting States. (xiii) This is further defined to show the variety of factors that may be taken into account when considering which Contracting State is to be considered the State where the individual has "closer" ties. This would be decided taking into account the personal and economic relations. It should also be stated that an individual cannot have "closer" ties to both the Contracting States. (xiv) (1) ...many factors from the taxpayers private and economic sphere are relevant to…

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