Transaction against a taxpayer: Authorities fail to establish re-characterization

LAHORE: Tax authorities fail to establish re-characterization of a transaction against a taxpayer in the absence of no action for the companies against which default surcharge was applied.

Re-characterization is used in tax law to refer to treatment for tax purposes of a transaction, agreement, event, etc., differently than for other purposes.

According to details, the taxpayer was a corporate body established in 2001 engaged with the construction of road highways. The assessing officer observed that a minor withholding default had been made, and decided to re-characterize a transaction of investment.

The controversial transaction represented taxpayer’s shares in a company separately incorporated under the PPP arrangement. The assessing officer passed orders that the withholding agent was liable in default for the alleged non/short deduction/payment of taxes.

The taxpayer company was of the view the tax department had erred in confirming the treatment accorded by the assessing officer for re-characterization of transaction of investment, as the assessing officer had ignored the exemption certificates claimed by recipients for payments made to the company incorporated separately. Also, the recipients were in fact NTN holders and had been filing their income tax returns, which means that the primary liability to pay tax deducted was on the person from whom it was being deducted.

The department, on the other hand, maintained that the taxpayer was informed of tax avoidance during the release of funds to the company in controversy. However, the tribunal held that the departmental orders were void and illegal. The assessing officer was empowered to collect the appropriate amount from the recipient or payee of income, not from the payer. If the payer did not deduct tax or fails to pay to the government treasury, then he would be deemed to be a taxpayer in default and provisions of penalty.

It also held that companies against which the taxpayer allegedly failed to deduct or withhold tax were not questioned and that their returns submitted had been accepted, which meant that the department only took action from one party and not from the other.

Copyright Business Recorder, 2024