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For business information, annual reports, laws, ordinances, regulations and articles. |
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ARTICLE 26
EXCHANGE OF INFORMATION
(1) The competent authorities of the Contracting States shall
exchange such information as is necessary for carrying out the provisions of this
Convention or of the domestic laws of the Contracting States concerning taxes covered by
the Convention, in so far as the taxation thereunder is not contrary to the Convention, in
Particular for the prevention of fraud or evasion of such taxes. The exchange of
information is not restricted by Article 1. Any information received by a Contracting
State shall be treated as secret in the same manner as information obtained under the
domestic laws of that State. However if the information is originally regarded as secret
in the transmitting State it shall be disclosed only to persons or authorities including
courts and administrative bodies) involved in the assessment or collection of, the
enforcement or prosecution in respect of, or the determination of appeals in relation to,
the taxes which are the subject of the Convention. Such persons or authorities shall use
the information only for such purposes but may disclose the information in public court
proceedings or in judicial decisions. The competent authorities consultations, develop
appropriate conditions, methods shall, through and techniques concerning the matters in
respect of which such exchanges of information. shall be made, including, where
appropriate, exchanges of information regarding tax avoidance.
2. In no case shall the provisions of paragraph .(1) be construed so as to impose on a
Contracting State the obligation:
(a) To carry out administrative measures at variance with the laws and administrative
practice of that or of the other Contracting State.
(b) To supply information which is not obtainable under the laws or in the normal course
of the administration of that or of the other Contracting State.
(c) To supply information which would disclose any trade, business, industrial, commercial
or professional secret or trade process or information, the disclosure of which would be
contrary to public policy (order public).
126. Scope
The agreement lays down general principles for the avoidance of double taxation and
prevention of fiscal evasion. When the question of application of the agreement arises in
individual cases, administrative assistance for the ascertainment of facts assumes
importance; which are-so vastly and sometimes deliberately dispersed that possibility of
their ascertainment becomes remote by the taxing authority of a State in their attempt at
prevention of evasion. Most tax agreements have as their objectives, besides avoidance of
double taxation, combating the danger of tax evasion. Since the tax jurisdiction of a
State is confined within its bounds, and the economic transactions nowadays do not and
cannot be cabined, the possibility of tax evasion (or avoidance) has increased. Hence, the
provisions in the bilateral agreements for the prevention of tax evasion and for the
exchange of fiscal information are most helpful to the efforts of developing countries to
combat such evasion. Bilateral tax agreements authorise the Contracting States to exchange
information as necessary to carry out the provisions of the agreements and to curb tax
evasion. The exchange usually contemplated is on a routine basis or on the request of the
Contracting State with reference to a specific transaction or a taxpayer. The Article,
therefore, embodies the rules under which information may be exchanged with a view to
laying the basis for the implementation of the domestic laws of the Contracting States
concerning taxes covered by the agreement, which are not in conflict with the provisions
of the convention, and for the prevention of fraud or evasion of such taxes. The exchange
of information may include particulars about non-residents, as such an exchange is not
restricted by Article 1. Information is also required to be exchanged to develop
appropriate conditions, methods and techniques concerning the matters by which such
exchange shall be made.
The rules about the exchange of information are contained in paragraph which relate to the
subject-matter of information, its purpose, scope and extent. The information should be
such as is necessary for (1) carrying out the provisions of the convention, or (2)
carrying out the domestic laws of the Contracting Status concerning taxes covered by the
agreement.
The information should help, assist the Contracting States combating evasion of taxes. The
emphasis of this Article is more on the prevention of evasion of tax.
127. Prevention of fiscal evasion
Anti-tax avoidance measures have been receiving the full support of the courts; and
the Governments are devising those measures with reckless speed. One such measure is in
the field of transfer pricing. The doctrine of tearing the corporate veil comes nearer to
Sub-Part F of the United States Internal Revenue Code, that income of foreign corporations
and trusts controlled by Pakistani resident taxpayers can be attributed to those
taxpayers, if the device of the corporation is planned to avoid payment of taxes by the
promoters in their hands. The world economy is heading towards deregulation, but as yet
not so deregulated as to encourage blossoming of international tax avoidance. Exchange of
information for the prevention of such avoidance on international scale is, therefore,
necessary, and Article 26 permits it between the Contracting States.
The dividing line between evasion and avoidance is tenuous, and even this line has almost
become indistinct because of the recent decisions of the courts. Nowadays, what is avoided
is regarded under certain circumstances, as evaded. There has been a change in the
judicial attitude to tax avoidance devices. The 'tax avoidance' is no longer condoned or
looked upon with sympathy.
127.1. Meaning of expressions 'avoidance' and 'evasion' - The
shortest definition of tax avoidance is 'the art of dodging tax without breaking the law'.
Much legal sophistry and judicial exposition have gone into the attempt to differentiate
the concepts of tax evasion and tax avoidance and to discover the invisible line supposed
to exist which distinguishes one from the other. Tax avoidance, it seems, is legal; tax
evasion is illegal. ‘Avoidance' is a word of
wider import than ‘evasion’. Ordinarily, there should be nothing objectionable
in a transaction lawful in itself, which has the effect of avoiding liability. No
liability to tax can arise by reason merely of abridging or abandoning one's business. But
if by reason of transaction the business is reduced so as to divert the profits which the
person would otherwise have received, and if such a transaction is affected with the
dominant object of avoiding or reducing the liability, it would be competent for the
department to go behind the transaction and assess the profit which might have been
received by the person but for the transaction. Avoidance
of tax is not tax evasion and tax avoided does not mean tax evaded. But the line between
avoidance and evasion is so thin that the distinction between the two is sometimes
difficult to make.
The Gujarat High Court in CIT v. Sakarlal Balabhai
which decision was later affirmed by the Indian Supreme Court in CIT v.
Vadilal Lallubhai, observed as follows:
"... Tax avoidance postulates that the assessee is in receipt of amount which is
really and in truth his income liable to tax but on which he avoids payment of tax by some
artifice or device. Such artifice or device may apparently show the income as accruing to
another person, at the same time making it available for use and enjoyment to the assessee
as in a case falling within section 44D or mask the true character of the income by
disguising it as a capital receipt as in a case falling within section 44E or assume
diverse other forms But there must be some artifice or device enabling the assessee to
avoid payment of tax on what is really and in truth his income ...."(Pp. 200, 201)
Thus, the aim of both 'avoidance' and ' ‘evasion’ is the same, not to pay tax on
income which really and in truth is the assessee's income. For the former, an artifice or
device has to be designed which accords with an interpretation of some provisions of the
Act, the mainstay of which is some lacuna in them irrespective of the intention of the
Legislature being otherwise. Of late, the courts are coming round to the view that there
is no distinction between 'avoidance' and ‘evasion’, as any attempt towards
payment of less taxes than what is due from an assessee is pernicious to the economy of a
welfare State. Any design or attempt which results in depriving the State of its
legitimate share cannot be encouraged, whatever nomenclature is ascribed to it.
127.2. Avoidance not regarded as evasion till recently - The
courts, till recently, have been adopting approach of approving an assessee's right to
transact his business or to enter into a series of transactions in such a manner as to
save taxes. Lord Atkin in IRC v. Duke Westminster
said that though it is not denied, at any rate it is incontrovertible, that the deeds were
brought into existence as a device by which the taxpayer might avoid some of the burden of
tax. The word ‘device’ is not used in any sinister sense, for it has to be
recognised that the subject, whether poor and humble or wealthy and noble has the legal
right so to dispose of his capital and income as to attract upon himself the least amount
of tax. Though the courts favoured the doctrine that in taxation cases the subject was to
be taxed in accordance with the substance of the transaction, as also the doctrine that
the transaction be read to conform the spirit of the statute, they had been holding that
the subject is not taxable by inference or by analogy to the facts and circumstances of
his case. The Judges have been sounding, from time to time, cautionary notes more
reflective of their personal dislike of tax avoidance scheme than the legal
ineffectiveness of the techniques. Viscount Simon in Latilla v. IRC said that there is, of course, no doubt that they were within their legal
rights, but that is no reason why their efforts, or those of the professional gentlemen
who assist them in the matters should be regarded as a commendable exercise of ingenuity
or as a discharge of the duties of good citizenship.
However, in 1978, the obstinacy of the English Judges in upholding an assessee's right to
arrange his affairs as to pay least taxes or his right to claim expenses on the basis of
the doctrine of 'business purposes text', yielded to interpretation of transactions as not
to encourage tax avoidance. In Floor v. Davis,
Eveleigh, J., held, in a dissenting judgment, that where a series of transactions were
carried out for the. purpose of avoiding what would otherwise have been the tax applicable
to a single transaction, the fact that each step was genuine in the series of the
transactions did not prevent the Court from regarding the series to be a single
transaction and to impose tax on that basis. This approach was a departure from the
traditional approach of English courts. The majority of the Judges in that case did not
favour the view of Eveleigh, J., but were subsequently overruled in Ramsay
v. CIR and Furniss v: Dawson.
The judgment of Justice Eveleigh was approved.
127.3. Doctrines of business purposes test and substance of
transaction -The traditional approach of maintaining an assessee's right to
arrange his fiscal affairs in a .manner as to enable him to reduce tax burden as also his
entitlement to claim expenditure as deduction for the computation of his income, on the
basis of the doctrine of 'business purpose test' has been eroded considerably during
recent years. The application of the doctrines of the form of the transaction and the
'business purpose test may border on tax evasion and may justify imposition of penalty,
and in' egregious cases, criminal prosecution. The 'business purpose test' is so important
as it could be described a technique of statutory interpretation difficult to apply but
essential to Indian tax system as it now operates.
127.3-1 Business purpose test - The paramountcy of business
expediency and of the expenditure being incidental to assessee's business/trade should
prevail over all considerations, is a concept no longer acceptable to the courts.
Expenditure incurred against public policy is not allowed deduction irrespective of how
much such spending could be justified on the doctrine of 'business purpose test'. The
Supreme Court of Pakistan has categorically pronounced in CIT v. Haji Maula Bux
Corporation Ltd. (PTCL 1990 CL. 1111) that overstatement before banking authorities for
"business purposes" cannot be condoned treating the entire stock as income under
section 13. A contention was raised before the Andhra Pradesh High Court in CIT v. Kodandarama & Co. that where
an assessee incurs an expenditure in order to promote and advance the interest of the
business and sharas his prosperity with the society, the court should give up doctrinaire
approach and take liberal attitude in diverting deduction. The learned Judges rejected the
contention by observing that if 'doctrinaire approach' means adherence to law, we are
happy to be doctrinaire; and if the expression 'liberal attitude' means ignoring the law
and public interest, we would rather shun such a misguided 'liberal
approach’.
127.3-2-Doctrine of 'substance' of transaction - The courts
had been taking legalistic view in deciding cases relating to tax avoidance. The substance
or the real motives which led to the culmination of the transaction was altogether ignored
and rather its legal basis was preferred irrespective of its social, normal and economic
consequences. Wherever the doctrine of substance was preferred, it was done so as to
assist the tax-dodgers to avoid payment of taxes, rather than checking tax avoidance. The
view of the courts had been that in revenue cases regard must be had to the substance of
the transaction rather than its mere form.
There is limit up to which the 'doctrine of substance' could go. It is not clear where its
peripheral limits may be. It is elusive and may sometimes encompass situations where tax
planning within the framework of law could be defined. There is a constitutional limit on
the extent to which the doctrine of substance over the form may be applied. Article 77 of
the Constitution declares that no taxes can be levied and collected except by authority of
law. Application of the doctrine of substance indiscriminately, without limit, may be
violative of the Constitution. The taxpayer may take advantage of the provision of-law,
the formulations of which is obscure or incomplete or very complex, so that a person can
reduce the liability while remaining within the limits of law. When law permits payment of
tax at a lower amount than the amount calculated according to revenue's interpretation of
the law, asking the assessee to pay the higher amount on the basis of the doctrine of
substance, would be unconstitutional. Although there have been conflicting decisions of
the courts, the majority takes the view that the principle that the taxation can only be
imposed by statute places severe limitations on the use of judicial doctrines or
techniques to override the forms of a transaction and impose taxation. Article 26
impliedly requires that acts undertaken to avoid taxation may not be ignored in the
absence of a statutory provision authorising this to be done. On this view of law, it is
possible that the doctrine of substance over form may be accepted as an interpretative
principle which falls within the constitutional limitations but the complete denial of
efficacy to a transaction, for whatsoever reason exceeds constitutional limits. Trend of
recent decisions reflects a unique situation of limiting a taxpayer's right to arrange and
manage his affairs. The Courts have been upholding the revenue's right to disregard the
consequences of transactions even in respect of those which' are genuinely undertaken if
their purpose is to avoid tax that would otherwise be payable, by applying the
anti-avoidance tools, whether they are legislatively provided or judicially developed.
The Indian Supreme Court in CITv. B.M. Kharwar
stated that the observations in Kikabhai’s case (supra) to the effect that in revenue
cases regard must be held to the substance of the transaction rather than to its mere form
cannot be read as throwing any doubt on the principle that the true legal relation arising
from a transaction alone determines the taxability of a receipt arising from a
transaction. The observation in question was considered casual and the same was not
necessary for the' purpose of the case. The Indian Supreme Court while disapproving the
decisions in the case of Sir Homi Mehta's Executors (supra), Roger & Co. (supra) and
Mugneeram Bangur & Co. (supra), held that it is now well settled that the taxing
authorities are not entitled in determining whether a receipts liable to be taxed, to
ignore the legal character of the transaction which. is the source of the receipt and to
proceed on what they regard as 'substance of the matter'. The taxing authority is entitled
and is indeed bound to determine the true legal relation resulting from a transaction. If
the parties have chosen to conceal by a device the legal relation, it is open to the
taxing authority to unravel the device and to determine the true character of the
relationship. But the legal effect of a transaction cannot be displaced by probing into
the 'substance of the transaction'. This principle was held to apply alike to cases in
which the legal relation is recorded in a formal document and to cases where it has to be
gathered from evidence--oral or documentary and conduct of the parties to the transaction.
The principle was followed by the Indian Supreme Court in CIT v.
Gillanders Arbuthnot & Co. The Indian Supreme Court exercised
the right of unraveling a colourable device for tax evasion in the case of Juggilal Kamlapat v. CIT.
The courts have upheld the revenue's right to disregard transaction and look upon its
substance, if it is undertaken as an anti-avoidance tool. It is, therefore, the duty of a
court while administering any tax law to give importance both to the form and substance of
a transaction. It is quite possible that when a transaction is entered into in one form
known to law the amount received under that transaction may attract liability under the
Ordinance and if it is entered into in another form, which is equally lawful, it may not
attract such liability. But when the assessee has adopted the latter one, it would not be
open to the court to hold him liable for tax on the ground that in substance the
transaction is one which resulted in gain subject to tax. In matters of this kind the
court cannot ignore the form altogether as also the legal effect of the proceedings in Court.
The Indian Supreme Court in. Life Insurance Corpn. of India v. Escorts
Ltd. observed that merely the form cannot control the Act, the Rules
or the directions. As one learned Judge of the Madras High Court was fond of saying 'it is
the dog that wags the tail and not the tail that wags the dog'. It may be added what the
Indian Supreme Court had occasion to say in Vasudev Ramchandra Shelat
v. Pranlal Jayanand Thakar that the subservience of substance of a
transaction to some rigidly prescribed form require to be meticulously observed, savours
of archaic and outmoded jurisprudence. The authorities must give importance to both form
and substance (depending on the facts of each and individual case) while administering tax
laws. One cannot place over.-reliance on the form which the parties have given to their
agreement or On the label which they attach to the payment due from one to another. One
must have regard to the substance of the matter and, if necessary, tear the veil in order
to see whether the true character of a payment is something other than what by a clear
device of-drafting it is made to appear. But if
the doctrine of substance means that one can brush aside and disregard the legal rights
and liabilities arising under 'the contract between the parties and decide the question of
taxability or otherwise on the facts that the rights and liabilities of the parties being
different from what in law they are, then the courts must dissent from such a doctrine.
When one moves from a single transaction to a series of interdependent transactions
designed to produce a given result, it is perfectly legitimate to draw a distinction
between the substance and the form of the composite transaction without in any way
suggesting that any of the single transactions which make up the whole is other than
genuine. The distinction between form and substance is one which can usefully be drawn in
determining the tax consequences of composite transactions. The tax consequences of the
interlocking, inter-dependent and predetermined transactions are to be judged by reference
to the substance and not the form of the composite transactions. A preordained series of
transactions (whether or not they include the achievement of a legitimate commercial end)
into which there are inserted steps that have no commercial purpose apart from the
avoidance of a liability to tax which in the absence of those particular steps would have
been payable, seems to be the language expressing with perfect precision the concepts of
steps which are formal rather than substantial.20
Once a basic doctrine of form and substance is accepted, the drawing of precise boundaries
will need to be worked out on a case to case basis.
The boundaries appear to have been laid by the Indian Supreme Court in CWT
v. Arvind Narottam when R.S. Pathak, CJ. observed that the decision
of McDowell & Co. Ltd. v. CTO cannot advance
the case of the revenue because of the language of the deeds of settlement is plain and
admits of no ambiguity, and when Sabyasachi Mukharji, J. said that where the true effect
on the construction of the deeds is clear, the appeal to discourage tax avoidance is not a
relevant consideration. The transaction is, therefore, not to be looked at from its tax
effectiveness, but from the angle whether it conforms to the intent of the enactment. Tax
motivation or saving is an irrelevant consideration. This has been substantially clarified
in Canada by a unanimous Supreme Court decision in the case of Stubart Investments Ltd. v.
The Queen (7th June, 1984). The case dealt with the transfer of the profitable business of
one company to a related company for the admitted purpose of utilising the latter's
accumulated loss carry forwards. The court refused to follow the lead taken by the English
Courts in W. T. Ramsay Ltd. v. IRC, IRC v. Burmah Oil Co. Ltd. and most recently Furness v. Dawson, by rejecting an-across-the-board
'business purpose test' as a judicial tool for combatting tax .avoidance; in Canada, a
transaction will be assessed firstly on the basis of its legal substance, i.e., whether it
constitutes a sham within the classic legal definition set out in Shook
v. London and West Riding Investments Ltd.
If this test is successfully met, the transaction will be subjected to the relevant
statutory anti-avoidance provisions and, finally, the provisions relied on by the taxpayer
will be construed in light of the scope and intent of the Ordinance in order to determine
whether the transaction falls within them. Provided it does however, the transaction will
stand, regardless of whether it was solely or principally tax motivated. Although the
judicial guidelines laid down by the Indian Supreme Court leaves some chinks in the armour
of the Duke of Westminster doctrine, they clearly place Canada on a different track from
the UK and are widely thought to restore a level of certainty to transactions founded on
technically sound tax planning. This
view conforms with the views expressed by the Indian Supreme Court in ClT v. B.M Kharwar
(supra).
127.4. Circumstances where evasion could be said to have
taken place - In determining whether a transaction is genuine, the courts will have to
consider all surrounding circumstances, including the economic purpose of the transaction
and the question whether or not there is a tax avoidance motive behind it. The acts which
dissimulate the true nature of a contract or of an agreement under the appearance of
provision giving rise to or disguising either a realisation of a transfer of profits or
income or permitting the avoidance, either wholly or partly of payment of taxes, are not
valid against the tax authorities. In order to set aside the acts of an assessee as being
ineffective, such acts should have a fictitious character, or, if not, that these have no
other motive than to avoid or alleviate the tax burden which the assessee, if he had not
carried out these acts, would normally have had to discharge having regard to his actual
situation and activity. The concept of economic approach to the fact is a rule of
interpretation available to be used by the taxing authorities as a means to counteract tax
avoidance. The circumstances which could lead inference of tax avoidance in a transaction
are:
* There is no economic or other significant reasons which could justify the transaction.
* The existence of the intent to avoid taxes can be clearly established.
* The transaction or the acts leading to its occurrence are unusual or artificial and give
rise to a situation where the letter of the tax regulation does not apply but differs so
little from a situation provided for under the regulations that the purpose and the spirit
of the regulations would be frustrated if it were to be declared inapplicable.
* Grounds exist for holding that the choice has been improperly made with the sole object
of saving taxes which would have been done had the legal relation been arranged in an
appropriate manner; and the procedure chosen would effectively result in significant
saving of tax insofar as it was allowed by the revenue authorities.
The proposition cannot be accepted in its entirety that a transaction may be disregarded
for tax purposes solely on the basis that it is entered into without any .bona fide
business purposes. A strict business purpose test in certain circumstances would run
counter to the apparent legislative intent which in the modern taxing statutes, may have a
dual aspect. Income-tax legislation is no longer a simple device to raise revenue to meet
the cost of governing the community. It is also employed to attain selective economic
policy objectives. The statute is mix of fiscal and economic policy. The economic policy
element of the fiscal statute sometimes takes the form of an inducement to a taxpayer to
undertake or redirect a specific activity Without the inducement offered by the statute,
the activity may not be undertaken by the taxpayer for whom the induced action would
otherwise have no bona fide business purpose. Thus, by imposing a positive requirement
that there be such a bona fide business purpose, the taxpayer might be barred from
undertaking the very activity Legislature wishes to encourage. At minimum, a business
purpose requirement might inhibit the taxpayer from undertaking a specified activity which
the Parliament has invited in order to attain economic and perhaps social policy goals.
Indeed, the Parliament is successful where a taxpayer is induced to act in a certain
manner by virtue of incentives prescribed by the legislation. It is at least arguable that
the taxpayer is attracted to those incentives for the valid business purpose of reducing
his cash outlay for taxes to conserve his resources for other business activities.
The broad guidelines, gathered from various pronouncements of the courts, to determine
whether the transaction could be taken attempt at evasion of tax are:
- Where facts reveal no bona fide purpose for the transaction
- The transaction is legally ineffective or incomplete
- The transaction is benami or sham
- Any attempt made retroactivity to revise or alter the characterisation of income or
other rights and obligations after they have already been created
- Blatant transactions designed to create the appearance of offsetting the advantages and
benefits conferred under the Ordinance. The 'object and spirit' of the allowance or
benefit provision is defeated by procedures blatantly adopted to synthesise a loss, a
delay or other tax saving devices, though such actions may not attain the height of
artificiality
- The form of law chosen by the parties appears unusual, inappropriate or strange, and in
any case unadopted to the economic circumstances
- Grounds exist for holding that this choice has been improperly made with the sole object
of saving taxes which would have been due had the legal relations being arranged in any
appropriate manner
- The procedure chosen would effectively result in notable saving of tax insofar as it is
allowed by the taxation authorities
The tax authorities may presume that tax avoidance is intended if the taxpayer chooses to
carry out a transaction which may be regarded as unusual. Legitimate avoidance occurs when
the taxpayer takes advantages of a provision of the law, the formulation of which is
obscure or incomplete or very complex, so that he can reduce or avoid his liability while
remaining within the limits of the law. If, however, the taxpayer is acting against the
will of the Legislature, even if he remains within the literal interpretation of the law,
he could be said evading the tax.
127.5. Fiscal nullity and tax evasion - The literal approach
of interpretation of tax statute saw its heyday in IRC v. Duke of
Westminster. Rejecting the substance approach it was held that every
taxpayer is entitled to arrange his affairs so that tax attaching under the statute is
less than it otherwise would be. The blow to this doctrine was struck by Ramsay's case and Furness v.
Dawson where another principal known as 'fiscal nullity' was
pronounced. The principle allows the revenue authorities to look at the substance of the
taxpayer's situation in determining the liability to tax. In a series of transactions with
legitimate commercial objective if another transaction is introduced with the sole
objective of tax avoidance, the inserted steps are disregarded for purposes of taxing on
the basis of the end result. This is what is known as 'fiscal nullity'. This 'fiscal
nullity' doctrine can be invoked in addition to general anti-avoidance provisions. The
upshot of this is that, if a transaction is not a sham for masking general arguments of
attack on the taxpayer's rights to rearrange his affairs in a way that he pays the least
amount of tax, the revenue can invoke the doctrine of 'fiscal nullity'.
128. Secrecy of Information exchange
Information exchanged by virtue of Article 26 has to be treated secret and will not be
disclosed to any persons or authorities other than those concerned with the assessment or
collection of taxes which are subject to the agreement. It is, therefore, manifest that
disclosure of information by a comprehensive provision in Article 26 has been prohibited,
excepting to those persons or authorities who are responsible for assessment or collection
of these taxes which are covered under the agreement. The authorities are directed to keep
the information as secret. Even the courts may not compel their production or require the
authorities/persons in whose possession such information is available to give particulars
of evidence. Even otherwise also, the assessment
proceedings under the Income Tax Ordinance, 1979 are personal to the assessee and these
are not documents available for public scrutiny in the ordinary course of the income-tax
proceedings. Income-tax proceedings postulate a sense of confidence being reposed in the
authorities and a disclosure of confidential matters connected with the income and assets
of the assessee in the sure belief that the information so supplied will not be disclosed
to other persons. The confidentiality of the
proceedings before the income-tax authorities exists even without Article 26 of the
agreement before the agreement declares the information to be confidential. Even the
person who is affected by such information cannot have access to it, and is not entitled
to certified copies of such documents.
Section 150 deals with the disclosure of information respecting assessee to any officer,
authority or body performing any functions under the law, where such disclosure is in the
public interest. A question may arise whether the Central Board of Revene or any other
income-tax authority can disclose information respecting to an assessee which has been
collected from the competent authority of another State by virtue of Article 26, if in its
opinion such disclosure is in the public interest or whether the court in Pakistan can
compel the income-tax authority for the production of such documents.
The Pakistani tax law as regards confidentiality of information or documents respecting an
asseessee has been enshrined in section 150. Section 150 mainly consists of three parts.
First, where it is necessary to enable an officer, authority or body to perform his or its
functions under the Ordinance, the Federal Government or any authorised authority may
furnish:
(a) to any officer or authority or body performing any functions under any law relating to
the imposition of any tax, duty or case dealing in foreign exchange; or
(b) to any officer, authority or body functioning under any other law as may be specified
by the Federal Government in public interest by an appropriate notification.
Section 150 of Income Tax Ordinance, 1979 reads as under :-
Disclosure of information by a public servant. (1) All particulars contained in -
(a) any statement made, return furnished or accounts or documents produced under the
provisions of this Ordinance; or
(b) any evidence given, or affidavit or deposition made, in the course of any proceedings
under this Ordinance other than proceedings under Chapter XII; or
(c) any record of any assessment proceedings or any proceeding relating to the recovery of
a demand, shall be treated as confidential, and no public servant shall, save as provided
in this Ordinance, shall disclose any such particulars.
(2) Notwithstanding anything contained in the Evidence Act, 1872 (I of 1872), or any other
law for the time being in force, no court or other authority shall, save as provided in
this Ordinances be entitled to require any public servant to produce before it any return,
accounts or documents contained in, or forming a part of, the records relating to any
proceeding under this Ordinance, or any records of the Income Tax Department generally, or
any part thereof, or to give evidence before it in respect thereof.
(3) Nothing contained in sub-section (1) shall apply to the disclosure-
(a) of any such particulars to any person acting in the execution of this Ordinance, where
it is necessary to disclose the same to him for the purposes of this Ordinance; or
(aa) of any such particulars to any person authorised by the Central Board of Revenue in
this behalf, where it is necessary to disclose the same to him for the purposes of
processing of data and preparation of computer print-outs relating to returns of income or
calculation of tax; or
(b) of any such particulars, where the disclosure is occasioned by the lawful employment
under this Ordinance of any process for the service of any notice or the recovery of any
demand; or
(c) of any such particulars to the Auditor General of Pakistan for the purpose of enabling
him to discharge his functions under the Constitution; or
(d) of any such particulars to any officer appointed by the Auditor General of Pakistan or
the Central Board of Revenue to audit income tax receipts or refunds; or
(e) of such facts to an officer of a Provincial Government or the Federal Government
authorised by such Government in this behalf as may be necessary for the purpose of
enabling that Government to levy or realise any tax imposed by it; or
(f) of such facts to any authority exercising powers under the Central Excises and Salt
Act, 1944 (I of 1944), 1[] the Sales Tax Act, 1951 (III of 1951), the Gift Tax Act, 196,3,
(XIV of 1963), the Wealth Tax Act, 196,3 (XV of 1963), or the Customs Act, 1969 (IV of
1969), as may be necessary for the purpose of enabling it duly to exercise such powers; or
(g) of any such particulars occasioned by the lawful exercise by a public servant of his
powers under the Stamp Act, 1899 (II of 1899), to impound an insufficiently stamped
document; or
(h) of such particulars to the State Bank of Pakistan as are required by the said Bank to
enable it to compile financial statistics of international investment and balance of
payments; or
(i) of any such particulars as may be required by any order made under sub-section (2) of
section 19 of the Foreign Exchange Regulation Act, 1947 (VII of 1947), or for the purposes
of any prosecution for an offence under section 23 of that Act; or
(j) of any such particulars as may be required by the Corporate Law Authority or the
Monopolies Control Authority for the purposes of the Securities and Exchange Ordinance,
1969 (XVII of 1969), or the Monopolies and Restrictive Trade Practices (Control and
Prevention) Ordinance, 1970 (V of 1970), as the case may be; or
(k) of any such particulars relevant to any inquiry into a charge of misconduct in
connection with income tax proceedings against a legal practitioner or an accountant to
the authority referred to in sub-section (4) of section 157, when exercising the functions
referred to in that section; or
(l) of any such particulars to a Civil Court in any suit or proceeding to which the
Government or any income tax authority is a party, which relates to any matter arising out
of any proceeding under this Ordinance; or
(m) of any such particulars for the purposes of a prosecution for any offence under the
Pakistan Penal Code (Act XLV of 1860) in respect of any such statement, returns accounts,
documents, evidence, affidavit or deposition, or for the purposes of a prosecution for any
offence under this Ordinance; or
(n) of any such particulars, relevant to any inquiry into the conduct of an official of
the Income Tax Department to any person or officer appointed to hold such inquiry, or to a
Public Service Commission, established under the Constitution, when exercising its
functions in relation to any matter arising out of such inquiry; or
(o) of such information as may be required by any officer or department of the Federal
Government or of a Provincial Government for the purpose of investigation into the conduct
and affairs of any public servant, or to a court in connection with any prosecution of the
public servant arising out of any such investigation; or
(p) of such facts to an authorised officer of the Government of any country outside
Pakistan with which the Federal Government has entered into an agreement under section 163
for the avoidance of double taxation and the prevention of fiscal evasion as may be
required to be disclosed in pursuance of that agreement.
(4) Nothing in this section shall apply to the production by a public servant before a
court of any document, declaration or affidavit fried, or the record of' any statement or
deposition made in a proceeding under section 68 or section 75 or the giving of evidence
by a public servant in respect thereof.
(5) Nothing contained in sub-section (1) shall prevent the Central Board of Revenue from
publishing, with the prior approval of the Federal Government, any such particulars as are
referred to in that sub-section.
(6) Any person to whom any information is communicated under this section, and any person
or employee under his control, shall, in respect of that information, be subject to the
same rights, privileges, obligations and liabilities as if he were a public servant and
all the provisions of this Ordinance shall, so far as may be, apply accordingly.
(7) No prosecution shall be instituted under this section except with the previous
sanction of the Central Board of Revenue."
But in respect of a person, information has been received from the other Contracting State
which is necessary for preventing fraud or fiscal evasion or for carrying out the purpose
of the agreement, the income tax authorities have to maintain absolute secrecy about such
information or documents even if he may be satisfied about its disclosure to any person
being in the public interest. Such secrecy is absolute and has mandatorily to be
maintained. Notwithstanding the provisions of section 150 of the Income Tax Ordinance,
179, Article 26 of the Model Convention does not invest the CBR (or any other authority)
to transgress secrecy clause. The CBR has power under the Ordinance and has no such power
under the Model Convention to permit disclosure of information in the public interest.
Since the double taxation agreement is a special law, it has prevalence over the general
powers of the Commissioner under section 150. Article 26 enforces maintenance of strict
secrecy. The intention of section 150 is not to afford strict secret.
The other question is whether the domestic courts in Pakistan could compel production of
such information/documents. The civil courts in Pakistan have jurisdiction to summon the
income-tax authorities to produce information/documents in respect of an assessee. The powers of the civil courts regarding
issue of summons, etc., are governed by the Code of Civil Procedure and, therefore, do not
normally admit of limitation. But when the Article states 'Any information so exchanged
shall be treated as secret and shall not be disclosed to any persons or authority other
than those concerned with the assessment or collection of taxes which are the subject of
this convention', it inferentially implies limitation on the courts' aforesaid powers.
This is because the civil court is neither a person nor the authority which is concerned
with the assessment or collection of taxes which are the subject of the convention, to
which information could be disclosed.
129. Exceptions
Paragraph (2) is a sort of proviso to paragraph (1), in providing exceptions.
Contracting State is not bound to go beyond its domestic laws and administrative practice
in putting information at the disposal of the other Contracting State, or to supply
information which would disclose any trade, business, industrial, commercial or
professional secret or trade process, or information the disclosure of which would be
contrary to the public policy.
As regards Pakistani domestic laws for disclosure of information and about maintenance of
secrecy, the matter has been discussed in para 128. There is no strictness about the
confidentiality of information or documents and the authorised income tax authorities may
furnish any information in respect of any assessment on an application made by any person
if he is so satisfied that it is in the public interest to do so. Thus on a request of a Contracting State, the 'information could be
supplied if such information is to be used for the purpose of the agreement and for
preventing tax evasion. The requested State does not need to go so far as to carry out
administrative measures that are not permitted under the laws or practice of the
requesting State or to supply information that are not obtainable under the laws or in the
normal course of administration of the requesting State. The requesting State cannot take
advantage of the information system of the other Contracting State if it is wider than its
own system.
The information could also not to be disclosed if such a disclosure is contrary to the
public policy. Public policy is the principle of law which holds that no subject can
lawfully do that which has a tendency to be injurious to the public, or against the public
good. The term 'public policy' cannot be defined with any degree of precision. Certain
classes Of acts are said to lie against the public policy on the ground that they have a
mischievous tendency so as to be injurious to the interests of the State or the public. It
does not admit of any definition. It is equivalent to the 'policy of the law'. Whatever
tends to injustice of operation, restraint of liberty, commerce, natural or legal rights,
whatever tends to the obstruction of justice or to the violation of a statute or whatever
against the good morals -- when made the object of a contract -- is against a public policy. The doctrine of public policy is extended
not only to harmful cases but also to harmful tendencies.38
