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Petitioner: KARACHI ELECTRIC SUPPLY CORPORATION LTD. through Director Taxation VS Respondent: FEDERAL BOARD OF REVENUE through Chairman and 3 others
Court Name: Sindh High Court Judge(s): Munib Akhtar Title:KARACHI ELECTRIC SUPPLY CORPORATION LTD. through Director Taxation vs
FEDERAL BOARD OF REVENUE through Chairman and 3 others Case No.: Suit No,1322 and C.M.As. Nos. 10305, 11608 and 11609 of 2012 Date of Judgment:2013-01-30 Reported As: 2013 PTD 851 Result: Order accordingly Judgment ORDER ' MUNIB AKHTAR, J.---Three applications, all filed by the plaintiff, fall for determination. The firstl(C.M.A. 10305 of 2012), which was filed along with the suit, seeks interim injunctive relief. The second application (C.M.A. 11608 of 2012) seeks amendment of the plaint on account of certain developments that took place after the filing of the suit, and the third (C.M.A. 11609 of 2012) seeks interim injunctive relief on account of the said developments. The plaintiff is Karachi's electric supply company ("KESC"), which was previously a public utility but is now' in private hands. The defendant No, 1 is the Federal Board of Revenue ("FBR") and the defendant No, 2 is the Chief Commissioner of Inland Revenue, Regional Tax Office (RTO)-II, Karachi. The defendant No, 3 is the Commissioner of Inland Revenue of Zone IV in the aforesaid RTO (herein after referred to as the "Commissioner Zone IV"), while the defendant No, 4 is a Deputy Commissioner in Unit 2, Zone IV (herein after, referred to as the "Deputy Commissioner Zone IV") (mistakenly identified as Unit 3 in the title of the plaint). The dispute arises in relation to the Income Tax Ordinance, 2001 ("2001 Ordinance"). 2. Section 235 of the 2001 Ordinance (which is to be found in Chapter XII thereof) requires a person such as the plaintiff, supplying electricity to commercial' or industrial consumers to collect advance tax along with the payment for electricity supplied. The manner in which the advance tax is collected is that in the electricity bills sent out by the plaintiff, along with the various amounts itemized therein for supply of electricity, there is also specified an amount being collected by way of tax, including or being advance tax under the 2001 Ordinance. Thus, while paying his bill, the consumer also pays the amount of advance tax. The latter amount goes into the plaintiffs account.
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Section 160 provides in material part as follows: "Any tax that has been collected ... Under Chapter XII shall be paid to the Commissioner by the person making the collection ... Within the time and in the manner as may be prescribed". 3. The grievance of the defendants is that although the plaintiff has been collecting advance tax from its consumers under section 235, it has failed to remit or has stopped remitting the same. It is stated that the amount of advance tax lying with the plaintiff is already in excess of Rs One billion. In any case, it is an amount that continues to accumulate and increase on a monthly basis, as the plaintiff collects more and more of it along with the billings to its consumers for electricity consumed. 4. The plaintiff does not deny that it is bound to collect advance tax under section 235 or that it has done so but has not remitted the same. The reason why, according to the plaintiff, it has not remitted the amount collected will be stated shortly. During the course of submissions learned counsel for the plaintiff contended that a determination had yet to be made of the amount that had to be remitted in terms of section 160, and absent such determination, no recovery proceedings could be taken against it. However, on a query from the Court, learned counsel fairly (and quite correctly) conceded that since the amount being collected from each consumer by way of tax is specifically itemized in the bill, the plaintiff is aware of the amount that has been collected under section 235. Thus, the quantum of the amount is a fact peculiarly within the plaintiff's knowledge and it is not something that (other than as a formality) requires any specific determination by the income tax authorities. This then is not, and cannot be, the reason why the plaintiff has not remitted the amount collected as required of it under section 160. 5. Learned counsel for the plaintiff submitted that on 27-9-2012, the plaintiff received a letter (of the same date) from the Deputy Commissioner Zone IV. This letter referred to the advance tax collected by the plaintiff under section 235 but not paid over in terms of section 160. The plaintiff was called upon to "immediately discharge" its legal obligation and remits the tax collected for the months of July and August, 2012. The letter concluded in the following terms:-- "Please note that in case of non-remission of the said tax by 28th September, 2012, the same will be recovered through the recovery measures (including attachment of bank account) provided in the [2001] Ordinance along with default surcharge and consequential penal action." ' This letter was clearly in the nature of a demand notice, which required payment by the next day. It prompted the timing of the present suit on 28-9-2012. C.M.A. 10305 of 2012 was filed along with suit, and an ad interim order made thereon on the same day whereby the operation of the demand notice was suspended and the defendants were restrained from initiating any coercive and/or punitive action against the plaintiff. 6. Learned counsel for the plaintiff took two primary objections to the demand notice. Firstly, it was contended that the Deputy Commissioner Zone IV had no jurisdiction in the matter. Learned counsel submitted that the jurisdiction of the various income tax authorities is specified by FBR in terms of section 209. Exercising its powers under that section, FBR had by means of a notification dated 7-4-2012 (which was in supersession of a previous notification on the matter) specified the powers and functions of various Commissioners. Insofar as the plaintiff was concerned, the powers and functions under the 2001 Ordinance had been assigned to the Commissioner Inland Revenue Zone III, LTU Karachi. (LTU refers to the Large Taxpayers Unit.) The Deputy Commissioner Zone IV came under a different Commissioner altogether and hence had no jurisdiction to make any demand or seek to recover any amount from the plaintiff. Secondly, learned counsel submitted that if a person had collected advance tax but failed to remit it in terms of section 160 then a specific procedure was laid down for recovery of the same. In particular, section 161(1) empowered the Commissioner to make an order to the person to pay the amount and if he still failed or refused to do so, the Commissioner could proceed to recover the same. Subsection (1A) however
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specifically required that before action could be taken under subsection (1) the person had to be given an opportunity of hearing. Learned counsel submitted that this procedure had not been followed. No show cause notice had been issued nor had any opportunity of hearing provided. In such circumstances, the demand notice of 27-9-2012 was patently illegal and could not be acted upon. 7. Learned counsel proceeded further and submitted that after the filing of the suit and the ad interim order as above, FBR issued another notification dated 25-10-2012. This purported to confer concurrent jurisdiction on the Commissioner Zone IV with specific reference to the plaintiff, and empowered him in the following terms:-- "The Commissioner Inland Revenue [Zone IV, RTO-II] shall have the powers for concurrent jurisdiction under section 161 of Income Tax Ordinance 2001 in respect of section 235 in the case of Messrs Karachi Electric Supply Corporation." ' The plaintiff thereupon received another letter, dated 30-10-2012, from the Deputy Commissioner. Zone IV. This referred again to the matter of the advance tax collected but not remitted and made reference to the filing of the present suit. It was noted that the plaintiff had contended in the suit that "this office" did not have the jurisdiction to fake action in terms of section 161. The Deputy Commissioner stated that "jurisdiction under the said section has now been assigned to this office by the competent authority i,e, [FBR]", and the notification was enclosed "for ready reference": It was also contended by the Deputy Commissioner that on account of the authority conferred the present suit had become infructuous "as the cause of action i,e, locus standi of [the plaintiff's] suit stands removed". It was stated that in view of the jurisdiction vested in him under section 161, "recovery proceedings will be taken as laid down in the Income Tax Ordinance including attachment of your bank accounts under section 140...." (Before proceeding further, I may note that it appears that on 24-10-2012, FBR had issued another order, which had (as presently relevant) conferred jurisdiction on the Commissioner Zone IV in exactly the same terms as the notification of 25-10-2012. Since reference throughout was made only to the latter, which was forwarded to the- plaintiff, and the order and the notification are the same in all material respects, no further reference shall be made to the order of 2440-2012.) 8. Learned counsel submitted that the foregoing developments forced the plaintiff to file the other two applications, C.M.As. Nos.11608 of 2012 and 11609 Hof 2012. These were presented on 31-10-2012 and another ad interim order was made on that date, suspending the second demand notice received by the plaintiff from the Deputy Commissioner Zone IV. 9. Learned counsel submitted that the second notification was invalid as no concurrent jurisdiction could be conferred in the manner as therein stated. His case was thus grounded on two points: a lack of jurisdiction of the income tax authority purporting to take action (the Deputy Commissioner Zone IV) and a complete failure to follow the prescribed procedure, i,e,, issuance of a show cause notice and opportunity of hearing. On the merits, learned counsel submitted that in fact the plaintiff was owed huge sums of money by way of sales tax refunds and these claims more than offset the amount required' to be remitted by the plaintiff on collection of advance tax. Learned counsel submitted that the plaintiff had on more than one occasion asked for the netting off of the amount collected against the various amounts to which it was entitled under law, and referred to certain correspondence placed on the record in this regard. His case was that had the plaintiff been granted an opportunity of hearing as required by section 1,61(1A) this point would have been taken before the duly authorized and empowered Commissioner (of Zone III, LTU) on which a lawful order could have been made and then the matter dealt with in accordance with law. Since all of this had patently not been done and the defendants persisted in their flouting of mandatory statutory provisions, the plaintiff was plainly entitled to interim injunctive relief.
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10. Learned counsel for the defendant No, 3 (Commissioner Zone IV) (who is, effectively, contesting the case for all the defendants) strongly disputed the case put forward on behalf of the plaintiff. He submitted that there was no cause of action as could maintain the present suit and it was liable to be dismissed on this ground alone. Learned counsel submitted that the defendants, and in particular the Deputy Commissioner Zone IV had sufficient authority and jurisdiction, and were fully empowered to act. In the matter. The plaintiff was unlawfully sitting on a huge sum of money collected for the State and that amount had to be remitted by it Without prejudice to the foregoing, learned counsel submitted that in any case, all of the objections taken by the plaintiff could have been raised by it before rthe Deputy Commissioner Zone IV. He submitted that had the plaintiff applied to the last mentioned authority, sufficient time would have been granted to enable the plaintiff to make out whatever case it wished to and an appropriate order would have been passed thereafter in accordance with law. Learned counsel also relied on certain case law, including in particular ICI Pakistan Ltd. v. Federation of Pakistan and others 2006 PTD 778 a decision of a learned Division Bench of this Court The cited decisions will be considered later. Learned counsel submitted that no case at all had been made out for interim relief and since the plaintiff was refusing to hand over State revenue that-it had collected under mandate of law; it was not entitled to any equitable relief from the Court. He prayed that the applications be dismissed. 11. Mr. Habibullah Khan, the Commissioner Zone IV (i,e,, the defendant No, 3) had remained present on previous dates of hearing and had earlier expressed great anxiety and requested for an expedited hearing of the applications under consideration. I gave him special permission to address the Court. The learned Commissioner submitted that there was in law a clear distinction between the plaintiff's position as a taxpayer under the various fiscal laws (including the 2001 Ordinance) and its duty as a collecting authority or agent in terms of section 235. The learned Commissioner contended that the plaintiff was erroneously conflating these two distinct and separate positions or roles. The question of whether (if at all) the plaintiff was entitled to a refund under any fiscal law was entirely separate and could not be linked with its obligations as a collecting agent. In particular, there could be no setting off of the amount collected against any refund being claimed by the plaintiff. The advance tax collected had to be remitted in its entirety by the plaintiff and there was no dispute that it had failed to do so. The learned Commissioner submitted that this was a clear breach of a legal duty and the plaintiff was liable accordingly. 12. On the issue of jurisdiction, the learned Commissioner submitted that he, as 'Commissioner Zone IV and his subordinate authority, the Deputy Commissioner Zone IV, had due and proper authority and jurisdiction to act in terms of section 161. In addition to the second notification issued by FBR referred to above (of 25-10-2012) the learned Commissioner contended that even otherwise the issue of jurisdiction did not arise. In this regard, he placed reliance on an order that had been issued by FBR on 28-12-2010, an order of the Chief Commissioner Inland Revenue, RTO-II dated 5-5- 2012 and an office order issued by him (i,e,, the learned Commissioner) dated 22-5-2012 on the basis of the order of 5-5-2012. The nature of these orders will be considered later, but the learned Commissioner contended that on this basis as well, the plaintiff had no case whatsoever. He prayed for dismissal of the applications and vacation of the interim orders since Government revenue was being stuck up on account thereof. 13. I have heard learned counsel and the Commissioner as above, examined the record with their assistance and considered the case-law relied upon. Before proceeding further, I may make one general observation. This is the interlocutory stage. The observations made below are only tentative in nature. I am only concerned with what appears prima facie to be the position. Whatever I say below should therefore be read and understood in the foregoing terms. 14. Section 207 specifies the income tax authorities for purposes of the 2001 Ordinance. At the apex is of course the FBR itself. It is followed (in descending order and as presently relevant) by the Chief
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Commissioner, the Commissioner and the Deputy 'Commissioner. Subsections (3) and (4) confirm the hierarchy by expressly providing that the Chief Commissioner shall be subordinate to the -FBR, the commissioner to the Chief Commissioner and the Deputy Commissioner to the Commissioner. Section 209 deals with the jurisdiction of the income tax authorities. This section will have to be examined in some detail, a consideration that is deferred to later in the decision. As presently relevant, section 209 provides as follows: "209. Jurisdiction of income tax authorities.---(1) Subject to this Ordinance, the Chief Commissioners, the Commissioners and the Commissioners (Appeals) shall perform all or such functions and exercise all or such powers under this Ordinance as may be assigned to them in respect of such persons or classes of persons or such areas as the Board may direct: ' Provided that the Board or the Chief Commissioner, as the case may be, may transfer jurisdiction in respect of cases or persons from one Commissioner to another. (2) The Board or the Chief Commissioner may, by an order, confer upon or assign to any officer of Inland Revenue all or any of the powers and functions conferred upon or assigned to the Commissioner, under this Ordinance, in respect of any person or persons or classes of persons or areas as may the specified in the order. (3) An order under subsection (2) by the Chief Commissioner shall be made only with the approval of the Board. (4) The officer of Inland Revenue referred to in subsection (2) shall, for the purposes of this Ordinance, be treated to be the Commissioner. (5) (8A) The power to confer jurisdiction under this section shall include the power to transfer jurisdiction from one income tax authority to another." Reference must also be made to section 210, which provides in material part as follows:- "210. Delegation.---(l) The Commissioner subject to subsection (IA), may, by an order in writing, delegate to any officer of Inland Revenue, subordinate to the Commissioner all or any of the powers or functions conferred upon, or assigned to the Commissioner under this Ordinance, other than the power of delegation. (2) An order under subsection (1) may be in respect of all or any of the persons, classes of persons or areas falling in the jurisdiction pf the Commissioner." 15. The obligation of a person to remit the advance tax collected by him to the State, and what is to happen if he fails to do so, is covered by sections 160 and 161. Reference must also be made to section 163 these provide in material part as follows:- "160. Payment of tax collected or deducted.---Any tax that has been collected or purported to be collected,... Under Chapter XII shall be paid to the Commissioner by the person making the collection ... Within the time and in the manner as may be prescribed. 161. Failure to pay .Tax collected or deducted.---(1) Where a person (a) fails to collect tax as required under ... Chapter XII ...; Or (b) having collected tax under ... Chapter XII ... Fails to pay the tax to the Commissioner as required under section 160 the person shall be personally liable to pay the amount of tax to the Commissioner who may pass an order to that effect and proceed to recover the same. (1A) No recovery under subsection (1) shall, be made unless the person referred to in subsection (1) has been provided with an opportunity of being heard. 163. Recovery of amounts payable under this Division.---The provisions of this Ordinance shall apply to any amount required to be paid to the Commissioner under this Division as if it were tax due under an assessm ent order." ' As already noted, section 235 is to be found in Chapter XII. In my view, the following points emerge from a consideration of sections 160, 161 and 163. Firstly, if there is a failure to pay the tax collected as required in terms of section 160, the Commissioner must make an order to this effect and then
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proceed to recover the same (section 161(1)). There has to be a specific order in this regard. Before such an order can be made, there must be an opportunity of hearing given to the person concerned: subsection (1A) categorically so, requires. Furthermore, recovery cannot be effected simultaneously with the order. The reason for this is section 163, which provides that the provisions of the 2001 Ordinance apply to the amount to be recovered as though it were tax due under an assessm ent order. Now, section 137(2) provides that where tax is payable under an assessment order or any other order of the Commissioner, he shall serve a notice on the taxpayer in the prescribed form specifying the amount payable and thereupon the said amount shall be paid within 15 days from the date of service of notice. All of these provisions are mandatory. Prima facie, failure to comply with the same renders any recovery exercise illegal as being contrary to the provisions of the 2001 Ordinance. 16. When the facts of the present case are examined in light of the foregoing, the first demand notice of 27-9-2012 was prima facie clearly illegal. Firstly, no opportunity of hearing was given to the plaintiff as required in terms of section 161(1A). Secondly, no order was made in terms of section 161(1) declaring that the plaintiff had failed to remit the amount of advance tax collected by it as required under section 160. Without such a specific order no recovery can be affected. Thirdly, the amount that the plaintiff had failed to remit was not specified. This was necessary on account of the combined effect of sections 163 and 137(2). The former makes the latter applicable, and the latter requires that the notice to be given in terms thereof must specify the amount payable. To this extent and in this context therefore, even though in the circumstances of the present case the requirement may be a mere formality (see para 4 above), learned counsel for the plaintiff is correct is stating that the amount to'be paid over by the plaintiff has not been "determined". Of course, since the relevant data is especially within the knowledge of the plaintiff, it would 'be duty bound to 'provide in full the necessary particulars to the income tax authorities and not be allowed to shelter behind its own failure or refusal to do so. Fourthly, payment was demanded within one day (i,e,, by 28-9-2012) whereas section 137(2) specifically requires that at least 15 days' time must be granted. I note that section 138(1) seems to provide in apparently general terms that for the purpose of recovering any tax due from a taxpayer, the Commissioner "may serve upon the taxpayer a notice in the prescribed form requiring him to pay the said amount within such time as may be specified in the notice". On an sensible interpretation, the time to be given even in terms of a notice under section 138(1) must be reasonable in the facts and circumstances of the case, and clearly, demanding that a sum of around Rs, One billion be paid within 24 hours hardly meets this requirement. Furthermore, even a notice under section 138(1) is required to be in the prescribed form, and the demand notice of 27-9-2012 did not meet this requirement. Even more importantly, this provision obviously cannot be applied in a manner so as to render section 137(2) nugatory. In my view, section 138(1) can be resorted to only after the notice required in terms of section 137(2) has been issued and served and not otherwise. (I note that other considerations may apply in respect of a case to which section 137(1) applies, but that is not the situation at hand.) 17. Fifthly, it was threatened in the demand notice that if the amount was not paid by the next day, then, inter alia, the plaintiff's bank account would be attached. Subsection (2) of section 138 allows the Commissioner to attach and sell any moveable property of the taxpayer, but such action can only be taken if the amount is not paid within the period specified in subsection (1) (or such further time as the Commissioner may allow). Obviously, any attachment absent a notice under subsection (1), which itself has to be preceded by a notice under section 137(2) would be illegal. Section 140(1) appears too generally. Allow the Commissioner to, inter alia, require any person by notice in writing to pay to the Commissioner any amount owed to the taxpayer or held on or to the taxpayer's account. This section does not refer to any prior notice to the taxpayer or even specify any time. However, in my view, it would be incorrect to interpret and apply this section as though it
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were a standalone provision, which empowers the Commissioner to invoke it any time that he concludes that tax is due from the taxpayer. Section 140 is part of the recovery mechanism of the 2001 Ordinance, and can only be resorted to once the procedure laid down has been correctly followed. I also note section 146A, subsection (1) of which provides that "any proceedings for the recovery of tax under this Part may be initiated at any time", and subsection (4) of which states that "the several modes of recovery provided in this Part shall be deemed to be neither mutually exclusive nor affect in any way any other law for the time being in force relating to the recovery of debts due to the Government and the Commissioner may have recourse to any such mode of recovery notwithstanding that the tax due is being recovered from a taxpayer by any other…
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