Stay of recovery in tax matters
Huzaima Bukhari & Dr. Ikramul Haq
In tax disputes the principles relating to stay of recovery in appropriate cases with or without condition, whether provided statutorily or as a matter of inherent jurisdiction, are well-established. The highest court of the country, the Supreme Court of Pakistan and High Courts throughout the country grant stay of recovery in eligible cases even where the vires of any law are challenged on the touchstone of the supreme law of the land—Constitution of Islamic Republic of Pakistan (“the Constitution).
In view of the hierarchical character of the judicial system in Pakistan, it is of paramount importance that the law declared by courts should be certain, clear and consistent. Inconsistencies create distrust in the administration of justice. It is an established fact that most decisions of the courts are of significance, not merely because they constitute adjudication on rights of parties and resolve disputes between them, but a fortiori in doing so they embody a declaration of law, operating as a binding principle (stare decisis) in future cases. In this latter aspect lies their particular value in developing the jurisprudence of law and the same is true in the matter of granting stay of recovery in tax matters. In a large number of cases where the vires of section 80C, 80CC and 80D of the repealed Income Tax Ordinance, 1979 were challenged, recoveries were stayed, though the matter was finally decided against taxpayers by the Supreme Court in Elahi Cotton Mills Ltd. and others v. Federation of Pakistan through Secretary Finance, Islamabad [(1997) 76 TAX 5 (S.C.Pak).
On the issue of interim stay, in the case of Tharparkar Sugar Mills Ltd. v. Federation of Pakistan through Secretary, Revenue Division and Chairman, CBR, Islamabad and another [1996] 73 TAX 215 (H.C.Kar.), the Sindh High Court held: “.....once a petition in tax matters is admitted that ispo facto shows that the petitioner has made a prima facie case….interim stay may be granted.” This principle is held in a number of cases related to various taxes and its compilation is done in ‘Principles of Income Tax Laws’ (fifth edition, 2018) and in many other books. The point worth noting is that principles laid down for granting stay of recovery in tax matters, decided by Supreme Court and High Courts, have binding force under Article 189 and 201 of the Constitution.
The Lahore High Court in case of E.M.E. Cooperative v. CIT (2004) 90 TAX 359 (H.C.Lah.) held that application for stay of recovery should be given due consideration, which is a binding injunction/directions for all subordinate courts/tribunals/authorities. In another case reported as Shoaib Bilal Corp. Faisalabad v. CIT, Faisalabad & another [(1993) 67 tax 233 (H.C.Lah.)], it was held:
“It is well-settled that stay order, unlike injunctions, operates from the moment, it is passed irrespective of the time of its communication....legally speaking, the communication of the stay order granted by this court is not relevant. Even if the Income Tax Officer was not aware of the stay order granted by this court, all the proceedings taken subsequent to it are nullity in the eye of law.”
The Supreme Court of Pakistan and High Courts, in a number of cases held that recovery of demand without decision by an independent authority should not be made, meaning by that in eligible cases Appellate Tribunal Inland Revenue and Customs Appellate Tribunal are under legal obligation to provide interim relief by way of stay before deciding the appeal if a prima facie case exists. The same principle will apply to provincial tax legislations. Some of the cases to this effect are:
1. Mehram Ali and Others v. Federation of Pakistan and others PLD 1998 SC 1445
2. Sunrise Bottling Co. (Pvt.) Ltd v Federation of Pakistan and 4 others (2006) 94 TAX 140 (H.C. Lah.)
3. Punjab Provincial Cooperative Bank Ltd, Lahore v DCIT 2002 PTD 2799
4. Dawood Textile Printing Industries (Pvt.) Ltd, Faisalabad v Federation of Pakistan and 4 others PTCL 2010 CL.460
In Income Tax Ordinance, 2001 [hereinafter “the Ordinance”], the Commissioner Inland Revenue holding jurisdiction of the case may grant extension of time for payment of tax or allow the taxpayer to pay such tax in installments [section 128(1A)] though he seldom exercises these powers as meeting fixed targets/recovery is his/her main priority. Commissioner Inland Revenue (Appeals) is also empowered to grant stay in income tax, sales tax and federal excise matters where appeals are filed. Collector (Appeals) is also empowered to grant stay under Customs Act, 1969. In Federal Excise Act, 2005 even the facility of automatic stay of six months is available in case fifteen percent tax demand is paid along with appeal [proviso to section 37(3) of Federal Excise Act, 2005].
First appellate authorities i.e. Commissioner Inland Revenue (Appeals) or Collector (Appeals) are not considered as independent judicial forums as they are under administrative control of the Federal Board of Revenue (FBR) and can be transferred any time back to become part of field formation assigned the revenue collection targets. In the light of above case law it is, therefore, imperative for the Appellate Tribunal Inland Revenue and Customs Appellate Tribunal to not only decide the appeals when filed before them but also adjudicate stay applications expeditiously on the basis of settled principles.
The rejection/refusal or stay with harsh conditions by first tax appellate authority also gives rise to application for stay before the Appellate Tribunal Inland Revenue and Customs Appellate Tribunal. In such cases, Tribunal may allow stay, waive harsh condition imposed by first appellate authority though appeals remain pending at first appeal level, or reject the same if no case is made out.
Where appeals and stay applications are filed simultaneously or stay applications afterwards when recovery is started, the Appellate Tribunal Inland Revenue and Customs Appellate Tribunal are under statutory duty to dispose of stay application before or with appeals expeditiously. The adjudication of application for stay independent of appeal is imperative, inter alia, for the following:
· Legislature has provided statutory safeguard in section 131(5) of the Income Tax Ordinance, 2001 [it equally applies to Sales Tax Act 1990 by virtue of its section 46(2)] and section 194B of the Customs Act, 1969 so that the citizens/taxpayers are not put into undue jeopardy/difficulties till the final adjudication.
· Tax Departments should not use coercive measures for recovery before appeal is decided by an independent forum that is Appellate Tribunal Inland Revenue and Customs Appellate Tribunal as it is the command of higher courts. In case the Departments adopt such measures, the Tribunals have to grant stay strictly in accordance with law/rules and principles settled by higher courts.
· In cases where the impugned orders are prima facie unlawful, arbitrary, excessive, and/or unfair, Appellate Tribunal Inland Revenue and Customs Appellate Tribunal are empowered, rather duty-bound, to grant relief after the aggrieved person makes out a case for unconditional and/or conditional stay after affording an opportunity to the Department.
The above parameters are not exhaustive. They are only recommendatory in nature. The ‘trinity’ of prima facie case, financial stringency and balance of convenience is the basic tenet which is indispensable in consideration of a stay application independent of a pending appeal or even it is not filed e.g. in cases where first appellate authority declines the stay or allows it with unreasonable conditions.
Since Tax Tribunals are first independent judicial forums, it is necessary to discuss stay proceedings at this level in detail. In this respect, it is imperative to reproduce section 131(5) of the Ordinance to accentuate this point [almost the same position exists in Second Proviso to section 194B of the Customs Act, 1969]. It reads as under:
(5) Notwithstanding that an appeal has been filed under this section, tax shall, unless recovery thereof has been stayed by the Appellate Tribunal, be payable in accordance with the assessment made in the case.
Provided that if on filing of application in a particular case, the Appellate Tribunal is of the opinion that the recovery of tax levied under this Ordinance and upheld by the Commissioner (Appeals), shall cause undue hardship to the taxpayer, the Tribunal, after affording opportunity of being heard to the Commissioner, may stay the recovery of such tax for a period not exceeding one hundred and eighty days in aggregate:
Provided further that where recovery of tax has been stayed under this section, such stay order shall cease to have effect on expiration of the said period of one hundred and eighty days following the date on which the stay order was made and the Commissioner shall proceed to recover the said tax:
Provided further that in computing the aforesaid period of one hundred and eighty days, the period, if any, for which the recovery of tax was stayed by a High Court, shall be excluded.
[Underlined by us for emphasis]
It is abundantly clear from plain language of section 131(5) of the Ordinance that appeal and stay application are two distinguishable acts. Notwithstanding that an appeal under section 131 of the Ordinance has been filed, Department can resort to recovery of disputed tax unless stay is granted by Appellate Tribunal Inland Revenue. Conjunct reading of section 130, 131(5) and Proviso(s) added to it by Finance Act, 2009 and subsequently substituted by Finance Act, 2012 enunciate as under:
1. On filing of application for stay in any case, where appeal is pending in Appellate Tribunal Inland Revenue, order for granting stay or refusing it has to be passed independent of decision in appeal.
2. Stay is to be granted after affording opportunity of being heard to the Commissioner Inland Revenue.
3. Statutory period of stay is prescribed by Legislature and on expiry it stands vacated.
In a recent decision of Division Bench of Appellate Tribunal Inland Revenue in MA (Stay) No.611/PB/2019 in ITA No.413/PB/2019 (Tax year 2017) dated 15.11.2019 followed in MA (Stay) STA No.1153/IB/2019 dated 19.11.2019, it is held as under:
“…it is our humble view that the entrustment of the main appeal prior to fixation of the stay application to the Bench is necessary for the reason that if the Bench does not hear the main appeal then how it can hear and decide only the stay application which is ancillary to the proceedings. Interim relief is the part of main appeal and it is immutable principle of law which cannot be lightly brushed aside that where a Court is competent to allow final relief, it has also got the jurisdiction to allow interim relief. Reliance may be placed on the judgment report as Additional Collector-II Sales Tax, Lahore Vs M/s Abdullah Sugar Mills Ltd (2003 SCMR 1026). By following this principle it is essential to entrust the appeal and application simultaneously to the Bench and after that the said Bench shall hear and decide the matter. If this principle is not followed and the appeal is entrusted to one Bench and stay application to another Bench then the aforesaid principle of law would be violated which is not permissible in any cannon of interpretation. Further this kind of procedure may create difference of opinion amongst the Benches. For instance the Bench has granted the stay to the taxpayer and subsequently the application for extension in stay is filed by the same taxpayer on the same issue but fixed to another Bench, it may create difference of opinion between the Benches. Therefore, to avoid such anomaly it would be appropriate to fix all the applications to the concerned Bench having been already entrusted the main appeal by the competent authority.”
The Full Bench of Appellate Tribunal Inland Revenue has overruled the above judgement [in MA (Stay) STA No.1153/IB/2019 in STA No.328/IB/2019] and paragraph 10 of its order dated January 8, 2020 reads as follows:
The Sub-section (5) of Section 131 and its proviso are of paramount importance to resolve this controversy, which was inserted by Finance Act, 2003 dated June 17, 2003 while the proviso 3 was substituted by Finance Act, 2012. A bare reading of sub-section (5) reveals that preferring of appeal and filing of stay application are two independent and separate proceedings. Sub-section (5) of Section 131 starts with clause which means that sub-section precludes whether appeals has been filed by the taxpayer is recovery proceedings can be stayed by the Appellate Tribunal otherwise tax shall be payable in accordance with the assessment made in the case. First proviso to this sub-section also supports this point of view which clearly provides that on filing of application in a number of cases, the Appellate Tribunal is of the opinion that the recovery of tax levied under this Ordinance which has been upheld by the Commissioner (Appeals) causes undue hardship to the taxpayer. The Tribunal after affording proper opportunity of being heard to the parties may stay the recovery of such tax for a period not exceeding 180 days in aggregate. From this proviso it can safely be inferred that application for recovery of tax is to be heard separately and independently provided the conditions as laid in the first proviso of sub-section (5) of this Section are fulfilled. Firstly, application for stay of recovery is filed secondly Commissioner (Appeals) has refused to grant stay of recovery, thirdly the appellate tribunal is of the opinion that the tax levied shall cause undue hardship to the taxpayer and fourthly opportunity of being heard shall be provided to both parties. Thus, if sub-section (5) of Section 131 of the Ordinance is read with all its three provisos, the conclusion is very obvious that the Appellate Tribunal may grant or refused to grant the stay of recovery of tax irrespective of the fact that the appeal has been filed by the taxpayer.
The arguments advanced by the Division Bench of Appellate Tribunal Inland Revenue in MA (Stay) No.611/PB/2019 in ITA No.413/PB/2019 (Tax year 2017) dated 15.11.2019 [followed in MA (Stay) STA No.1153/IB/2019 dated 19.11.2019] now overruled and para 10 reproduced above of Full Bench of Appellate Tribunal Inland Revenue elicited arguments amongst legal fraternity in favour and against the decisions. This issue, therefore, needs further elaboration for debate and discourse.
It needs to be mentioned that the principle contained in Additional Collector-II Sales Tax, Lahore Vs M/s Abdullah Sugar Mills Ltd (2003 SCMR 1026) relied by Division Bench was misplaced, due to wrong inference drawn and after changes in law that are discussed above and are further elaborated hereunder inter alia on the following:
· A case is an authority for what it decides—Shahtaj Sugar Mills Ltd. through Chief Executive v. G.A. Jahangir and 2 others 2004 PTD 1621 (H.C. Lah.). The case [(2003 SCMR 1026)] relied upon by the Division Bench was on an altogether different premise wherein in the absence of power to grant stay, the Supreme Court held that:
“It is an established principle of law that whatever is not prohibited, it is permitted unless it specifically violates any law or rules…….The tribunal has got power to pass an interim order. In this background it would not be apt to hold that Legislature has authorized the Tribunal to grant interim relief, but the same is not available with the High Court which is an appellate forum. There is another established principle of law which cannot be lightly brushed aside where a court is competent to allow final relief, it has also got the jurisdiction to allow interim relief.”
From the plain reading of above, the law enunciated by the Supreme Court is clear that a forum having jurisdiction to decide a matter also enjoys inherent power to grant interim relief. This will apply wherever no power of stay is explicitly granted to any appellate tax authority. As regards the matter pertaining to income tax, this principle was given statutory form under section 131(5) of the Ordinance and in cases related to customs under section 194B of the Customs Act, 1969. In no way this judgement could support the contention that unless a Bench has jurisdiction of the main appeal it is not competent to adjudicate stay application. The power under the relevant provisions mentioned above is available to Appellate Tribunal Inland Revenue and Customs Appellate Tribunal and not restricted to a particular Bench that is assigned the appeal as well. There can be occasions where even appeal is not filed and only stay application is rejected by a lower forum and that order is assailed.
It is pertinent to mention that the Appellate Tribunal Inland Revenue in (2003) 88 Tax 127 (Trib.) even granted stay when the order of second round was not impugned before it. The operating part is as under:
“We have heard both the learned representatives appearing at the bar and find the prayer of the learned AR to be quite legitimate. Though, the appeal against the reassessment order made under section 62/65/132 of the Income Tax Ordinance, 1979 is pending for adjudication before the first appellate authority yet the facts remain that if the Tribunal ultimately declared reopening of the assessment under section 62/65 of the I.T. Ordinance, 1979 to be made without lawful jurisdiction in the appeal pending before it the entire structure built on the reassessment order made under section 62/65/132 of the Income Tax Ordinance, 1979 would dash to the ground. This would also result into striking down the illegal tax demand created against the assesse. It is also pertinent to mention that the reassessment proceedings initiated by the assessing officer u/ss 62/65 of the Income Tax Ordinance, 1979 are ancillary or incidental to the main appeal pending for adjudication before the Tribunal under section 62/65 of the Income Tax Ordinance, 1979, therefore, the Tribunal is competent to grant stay of outstanding tax demand created as a result of reassessment order made under section 62/65/132 of the Income Tax Ordinance, 1979 provided the main appeal is pending for adjudication before it.”
The above case escaped the attention of the Division Bench and is also not mentioned in the order of the Full Bench. It is pertinent to mention that an application for stay is independent of main appeal as per section 131(5) read with Rule 32 of Appellate Tribunal Inland Revenue Rules, 2010 [hereinafter “the Rules”].
Section 131 of the Ordinance uses two different terms, appeal and application. It reads as under:
131. Appeal to the Appellate Tribunal.– (1) Where the taxpayer or Commissioner objects to an order passed by the Commissioner (Appeals), the taxpayer or Commissioner may appeal to the Appellate Tribunal against such order.
(2) An appeal under sub-section (1) shall be–
(a) in the prescribed form;
(b) verified in the prescribed manner;
(c) accompanied, except in case of an appeal preferred by the Commissioner by the prescribed fee specified in sub-section (3); and
(d) preferred to the Appellate Tribunal within sixty days of the date of service of order of the Commissioner (Appeals) on the taxpayer or the Commissioner, as the case may be.
(3) The prescribed fee shall be ‘two’ thousand rupees.
(4) The Appellate Tribunal may, upon application in writing, admit an appeal after the expiration of the period specified in clause (d) of sub-section (2) if it is satisfied that the person appealing was prevented by sufficient cause from filing the appeal within that period.
(5) Notwithstanding that an appeal has been filed under this section, tax shall, unless recovery thereof has been stayed by the Appellate Tribunal, be payable in accordance with the assessment made in the case.
Provided that if on filing of application in a particular case, the Appellate Tribunal is of the opinion that the recovery of tax levied under this Ordinance and upheld by the Commissioner (Appeals), shall cause undue hardship to the taxpayer, the Tribunal, after affording opportunity of being heard to the Commissioner, may stay the recovery of such tax for a period not exceeding one hundred and eighty days in aggregate:
Provided further that where recovery of tax has been stayed under this section, such stay order shall cease to have effect on expiration of the said period of one hundred and eighty days following the date on which the stay order was made and the Commissioner shall proceed to recover the said tax:
Provided further that in computing the aforesaid period of one hundred and eighty days, the period, if any, for which the recovery of tax was stayed by a High Court, shall be excluded.
[underlined by us for emphasis]
Separate Rule 32 exists under the Tribunal Inland Revenue Rules, 2010 for stay application that reads as under:
32. Procedure for filing and disposal of stay application.– (1) Every application for stay against recovery of demand of tax or ancillary proceedings shall be presented in the same manner as provided in rules 7, 8, 9, 11, 21 and 22 relating to appeals.
(2) On receipt of stay application the Registrar or any other officer authorized to act on his behalf shall fix the application for hearing as early as possible.
[underlined by us for emphasis]
Rule 11(1) of Appellate Tribunal Inland Revenue Rules, 2010 reads as under:
11. Documents to accompany memorandum of appeal.– (1) Every memorandum of appeal shall be in triplicate and shall be accompanied by three clear and legible copies (one of which shall be a certified copy),–
(a) the order appealed against;
(b) order of Commissioner Inland Revenue, or as the case may be officer of Inland Revenue;
(c) copy of the grounds of first appeal;
(d) proof of payment of appeal fee; and
(e) a certificate provided in rule 12.
It is clear that if stay application is filed in the Tribunal after decision of appeal by the first appellate authority, all the documents required under Rule 11 of the Income Tax Appellate Tribunal Rules 2010 for appeal are to be provided with stay application as well. The Bench assigned hearing/disposal of stay application has to decide the matter independent of appeal and cannot insist for having jurisdiction of the appeal matter as well. This principle is enunciated in para 6 to 8 of an order of High Court of Judicature at Bombay in Writ Petition No.5704 of 2014 dated 13.11.2017 [the position of law is same in India and Pakistan]:
“6. We have given careful consideration to the submissions. The first paragraph of the impugned judgment and order shows that what was heard by the Appellate Tribunal was an application for stay made by the petitioner in the pending appeal. While deciding the application for stay, the Appellate Tribunal always could have gone into the question whether prima facie there is any merit in the appeal. However, from the impugned order, we fund that the Appellate Tribunal has recorded a final finding on merits of the appeal by holding that the appeal was devoid of any merit. In fact, the Appellate Tribunal proceeded to dismiss the appeal and, consequently, the stay application was dismissed.
7. The approach of the Appellate Tribunal is completely erroneous. What was heard before the Appellate Tribunal was the application for stay. There was no occasion for the Appellate Tribunal to go into the merits and decide the appeal itself by holding that it was devoid of any merits.
8. Therefore, the impugned order cannot be sustained and by setting aside the same, the appeal and the stay application will have to be restored to the file of the Tribunal.”
It is the sole prerogative of the Chairperson to assign the jurisdiction of main appeal independent of stay application. As regards the plea taken by the Division Bench that “there may be a different/divergent order by the bench hearing appeal”, it needs to be highlighted that disposal of appeal after grant/refusal of stay is an independent action. Even otherwise, if difference of opinion emerges, the case can be sent to Chairperson for constituting a Larger Bench.
It also needs to be emphasised that fixation of main appeal with stay application will defeat the very purpose of giving a taxpayer the right of stay of demand in appropriate cases and be in violation of Article 189 of Constitution as the judgment of Supreme Court in Mehram Ali and Others v. Federation of Pakistan and others PLD 1998 SC 1445 is binding and explicitly provides:
The right of "access to justice to all" is a fundamental right, which right cannot be exercised in the absence of an independent judiciary providing impartial, fair and just adjudicatory framework i.e. judicial hierarchy. The Courts/Tribunals which are manned and run by executive authorities without being under the control and supervision of the High Court in terms of Article 203 of the Constitution, can hardly meet the mandatory requirement of the Constitution.
Even the order of Full Bench overruling the judgement of Division Bench [both cited above] did not take into account all the arguments/points/caselaw that decision on stay application should be based on prima facie merits of the case and well-established principles that may vary from a case to case depending on its facts and circumstances, and not going into merit or de-merits of main appeal. The right to stay of demand in appropriate cases is a fundamental right as guaranteed in Article 4 of the Constitution.
As highlighted above, in section 131 of the Income Tax Ordinance, 2001, the legislature has intentionally and purposely used two different words, “appeal” and “application”, and therefore, adjudication of stay application cannot be made conditional to giving jurisdiction of main appeal to the same Bench (invariably in all the cases) to expeditiously deciding stay application (usually fixed on the very next day of filing the application). More so, there can be many instances/situations where even appeals are still pending at lower forums and order of refusal of stay applications are only impugned before the Appellate Tribunal Inland Revenue or Customs Appellate Tribunal. In a case where stay application is filed after appeal when the Department starts recovery process and the Bench that was marked the said appeal is not present, any other available Bench can hear and decide the matter of stay in the light of well-established principles.
So far as powers of High Courts are concerned for staying tax recovery in income tax references, provisions of sub-section (7) of section 133 of Income Tax Ordinance, 2001[almost similar provisions exist in sub-section (7) of section 196 of the Customs Act, 1969, sub-section (8) of section 47 of Sales Tax Act, 1990 and sub-section (7) of section 34A of Federal Excise Act, 2005] say: “Where recovery of tax has been stayed by the High Court by an order, such order shall cease to have effect on the expiration of a period of six months following the day on which it was made unless the reference is decided or such order is withdrawn by the High Court earlier”. It is clear from these provisions that High Courts are also empowered to grant stay in tax references.
Apart from statutory jurisdiction of the High Courts under Income Tax Ordinance, 2001, Sales Tax Act, 1990, Customs Act, 1969 and Federal Excise Act, 2005, they are empowered to grant stay under Article 199 of Constitution where alternate remedy is not available or illusionary or action is patently against the law. The cases relating to entertaining writs in tax matters are numerous that are compiled in ‘Law & Practice of Income Tax’ (in three volumes, updated till December 31, 2019) and ‘Principle of Tax Laws’ [fifth edition, 2018]. As regards, expiry of such an order under Article 199(4A) as substituted by Constitution (Eighteenth Amendment) Act, 2010 [“the 18th Amendment], the position is as under:
“An interim order made by a High Court on an application made to it to question the validity or legal effect of any order made, proceeding taken or act done by any authority or person, which has been made, taken or done or purports to have been made, taken or done under any law which is specified in Part I of the First Schedule or relates to, or is connected with, State property or assessment or collection of public revenues shall cease to have effect on the expiration of a period of six months following the day on which it is made:
Provided that the matter shall be finally decided by the High Court within six months from the date on which the interim order is made.”
When read in conjunction with the main provision the proviso clearly says that order of stay shall cease to have effect on the expiration of a period of six months following the day on which it was made unless the matter is finally decided within six months. Before the 18th Amendment, the position was different as language was unambiguous that the stay in any case will end after the expiry of six months. The Proviso has made this conditional to disposal of the matter within the stipulated period otherwise the stay can go beyond six months. Cases to the contrary decided prior to the 18th Amendment are no longer relevant.
The appeal against the order of any High Court in tax matters lies with Supreme Court of Pakistan, governed by Article 185(3) of the Constitution. The Supreme Court of Pakistan may grant or refuse Leave to Appeal, and being the final adjudicator and final court of law along with granting the Leave in appropriate cases, if prayed, can suspend the order, stay the demand or pass any other appropriate interim injunction as it deems fit.
The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are member Adjunct Faculty of Lahore University of Management Sciences (LUMS).