ISLAMABAD  -   The Supreme Court of Pakistan has held that Section 214-D of the Income Tax Ordinance, 2001, be construed and applied strictly, and deviation or discrepancy, howsoever minor, may in favour of the taxpayer.

A three-member bench of the apex court headed by Justice Munib Akhtar and comprising Justice Shahid Waheed and Justice Musarrat Hilali ruled this while hearing an appeal of Commissioner Inland Revenue, Lahore.

According to the judgment, the appeal has arisen out of the Income Tax Ordinance, 2001, and relates to the tax year 2015.

It was the contention of the department that the taxpayer (M/s Atta Cables (Pvt) Ltd, Lahore) had not filed its return for tax year 2015 within the date required. It is a common ground that, first, the date for filing the return was 21.01.2016; second, on that date the respondent properly filed an application under Section 119 for extension of time; and third, that the Commissioner did not respond to said request. On such basis, the department claimed that Section 214D applied.

Being aggrieved by the notices served on it in this regard, the taxpayer challenged the same by filing a writ petition in the Lahore High Court. A single judge of the LHC dismissed the petition.

The respondent then filed an intra- court appeal, which was allowed by a division bench of the LHC. The department, therefore, approached the apex court.

The judgment noted that a bare perusal of Section 214D shows that it was a coercive — some might say draconian — measure to ensure, inter alia, that returns were filed within the stipulated period. A taxpayer in default automatically came within the ambit of s. 177, the principal provision in the Ordinance relating to audit. The audit requirements of s. 177 are broadly stated and certainly impose a heavy, cumbersome and onerous burden on the taxpayer.

The judgment said that selection for audit is not automatic but is a result that comes about after going through various statutory filters, including such as are set out in various circulars issued by the Federal Board of Revenue.

These provisions have generated much legal controversy and many disputes, and have been considered by the courts on different occasions.

It added, “Section 214D, inasmuch as it applied automatically (subject to certain exceptions contained in its subsections (3) and (4)) and therefore bypassed the filters otherwise built into the Ordinance before an audit could be undertaken, had therefore to be construed and applied strictly.” “More particularly, the conditions that had to exist for the section to be attracted had to apply precisely. Any deviation or discrepancy, howsoever minor, slight or even inconsequential it may otherwise appear to be would apply, and go, in favour of the taxpayer,” maintained the judgment.

The judgment said that in the present case, the section would have applied if the Commissioner had, under Section 119, extended the period for filing the return (subject to a thirty-day condition) and the return was not filed within such extended period. It noted, the fact of the matter was that the Commissioner never took any action on the application, which was otherwise properly filed, for extension.

It further noted that subsection (3) of Section 119 specifically requires the Commissioner to grant the extension in writing. Since Section 214D had to be applied exactly, this meant that for purposes of this provision the refusal of the Commissioner also had to be in writing. In other words, any inaction on the part of the Commissioner, or a failure to reject or refuse the application for extension in any manner other than in writing, would mean that for the purposes of Section 214D the application would be regarded as pending.

It added, “There could be no refusal or denial of extension by implication. That would, in effect, introduce a deeming fiction into Section 214D, i.e., the section would be deemed to apply if, after a “reasonable” period had passed, the Commissioner had still not made an order on the application under Section 119.

The judgment observed that for a provision as harsh and severe as Section 214D to apply merely by way of implication or on a deemed basis would be incorrect. Even if the section were to be considered as merely in aid of, and ancillary to, the recovery and procedural mechanisms of the Ordinance, the severity of its application was penal in nature.

It said at least as presently relevant, the section was hugely disproportionate measure for the “evil” it was seeking to remedy. The portions thereof now under consideration required a strict construction. Clearly therefore, until the application for extension was actually disposed of by an order in writing the section would not become applicable.

Furthermore, the condition of thirty days would have to apply, in the context of Section 214D, not from the due date for the filing of the return, but the date of the order made by the Commissioner granting an extension. (Of course, if the Commissioner refused the extension in writing, then the section would apply from the date of such order, subject to any remedies available to the taxpayer to challenge such refusal.) “Therefore, it was our view that in the facts and circumstances presented in this case, Section 214D never became applicable. The writ petition was thus rightly allowed by the LHC Division Bench.”