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Petitioner: I.C.I. Pakistan Ltd., Karachi VS Respondent: Federation Of Pakistan And 3 Other
Court Name: Sindh High Court Judge(s): Anwar Zaheer Jamali, Mrs. Yasmeen Abbasey Title: I.C.I. Pakistan Ltd., Karachi vs Federation Of Pakistan And 3 Other Case No.: C. P. No. D-658 of 2005 Date of Judgment:2006-01-13 Reported As: PTCL 2006 CL. 225 Result: Petition dismissed
Judgment ORDER MR. JUSTICE ANWAR ZAHEER JAMALI.-(l). Petitioner ICI Pakistan Limited, a public limited company, incorporated in Pakistan, aggrieved by the action of respondent No. 4 in the form of notice, dated 26-5-2005, have preferred this constitutional petition with the following prayers:- "(i) Declare that the notice, dated 26-5-2005 issued by the Respondent No. 4 under section 62 of the Income Tax Ordinance, 1979 (Annex "O") is and has been issued without lawful authority and is of no legal effect or consequence. (ii) Declare that as per order/judgment of this Hon'ble Court in J.M. 17/2000, dated 23-7-2001, that the PTA Business of the petitioner was de-merged, transferred to and vested in a separate company, Pakistan PTA Limited with effect from 1.10.2000 and that the same is binding on the Respondents. (iii) Declare that the issue/question of the Effective Date being 1.10.2000 is final and stands concluded by the assessm ent order, dated 29-5-2002 for the assessment year 2001-2002. (iv) Restrain and prohibit the Respondents Nos. 3 and 4 directly and indirectly and through their officers, subordinates and assigns from proceeding any further on the basis of the notice, dated 26-5-2005 issued by the Respondent No. 4 under section 62 of the Income Tax Ordinance, 1979 (Annex "O"). (v) Such other relief as may be deemed necessary in the circumstances of the case. (vi) Costs." 2. As per contents of the petition, case of the petitioner- company is that they are engaged in the manufacture of polyester staple fibre, soda ash, paints and specialty chemicals. While previously they were also engaged in the manufacture of the pure terephthalic acid (PTA). In the year, 2000,
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they decided to reorganize their business, therefore, under a scheme of arrangement, duly approved by the shareholders and creditors of the petitioner- company and sanctioned by this Court in its company jurisdiction under sections 284 and 287 of the Companies Ordinance, 1984, vide order, dated 23-7-2001, the PTA business of the petitioner was de-merged, transferred and vested in a separate company Messrs Pakistan PTA Limited w.e.f. 1-10-2000. Accordingly, all arrangements were made and implemented as per scheme of restructuring and de-merger, and a certified true copy of order, dated 23.7.2001 passed by this Court, regarding approval of demerger was filed with the Registrar of Companies on 6-8-2001, which is the completion date of the scheme of arrangement. Further case of the petitioner is that the actual de-merger of PTA business from the petitioner-company took effect from 1.10.2000, as is reflected and confirmed from the actual accounts of the petitioner and other record produced with the petitioner, therefore, Income Tax Return of the petitioner-company for the assessment year 2001-2002 (financial year ending 31-12- 2000) was filed with the Income Tax Department showing the position of the company after de- merger of PTA business from the petitioner- company. The Return of the petitioner-company so submitted, mentioning explicitly the factum of de-merger w.e.f. 1-12-2000, was scrutinized by the Assessing Officer and the assessm ent was completed accordingly. The petitioner aggrieved by such assessm ent, on a limited issue not relating to the transfer of PTA business, had filed appeal before the Commissioner of, Income (Appeals), which was allowed vide order, dated 9-3-2004 and consequently the grievance of the petitioner to that extent was also redressed. 3. On 30-12-2002, the Taxation Officer-C (Audit Division), Large Taxpayers Unit, issued notice under section 122(5 A) of the Income Tax Ordinance, 2001 to the petitioner in an attempt to alter/amend the aforesaid assessm ent of the petitioner for the year, 2001-2002. Through this notice, the respondent No. 3 sought amendment in the assessment order of the petitioner for the year, 2001- 2002 on the basis that the transfer of the PTA business of the petitioner to the PTA Company amounted to sell, transfer or disposal of its assets. This notice was duly replied by the petitioner through Messrs A.F. Ferguson and Co., Chartered Accountants vide their reply, dated 3-3-2005, whereafter no further action was taken by the respondents with regard to the said notice under section 122(5A) of the Income Tax Ordinance, 2001. The petitioner also stated that on 30-9-2002, they had filed their Income Tax Return for the assessment year 2002-2003 along with the accounts for the year ending 31.12.2001 under section 55 of the Income Tax Ordinance, 1979, but subsequent to the fifing of such Return of total income for the assessment year 2002-2003, the officers of respondent No. 1 had issued notices, dated 28-1-2003, 10-12-2003, 19-2-2004 and 14-3-2004, which were separately replied by the petitioner. Despite all this, after lapse of more than one year to the last notice issued by the officers of respondent No. 1. The petitioner have now received the impugned notice, dated 26-5-2005, under section 62 of the Income Tax Ordinance, 1979 to the effect that respondent No. 4 has proposed assessment of the petitioner's income for the assessm ent year, 2002-2003 on the basis, as detailed in the said notice. It is the notice, dated 26.5.2005 issued by respondent No. 4, which has given cause of grievance to the petitioner for filing of instant petition. The petitioner have narrated in detail various grounds on the basis of which, according to petitioner, the whole proposed action visualized in the notice, dated 26-5-2005 is illegal, without jurisdiction, mala fide, and consequently, have sought reliefs through this petition, as reproduced above. 4. In their reply/comments to this petition, jointly submitted by respondents Nos. 2, 3 and 4, they have not disputed the assertions of the petitioner-company as regards the process of demerger undertaken by the petitioner-company, approval of such scheme of de-merger by this Court in its company jurisdiction, vide order, dated 23-7-2001, and submission of certified true copy of such order with the Registrar of Companies on 6-8-2001. However, they have strongly disputed the assertion of the petitioner that the effective date of de-merger is 1-10-2000. The respondents have
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further asserted that looking to the facts and circumstances of the case, the record produced by the petitioner themselves, and the relevant provisions of the Companies Ordinance and Income Tax Ordinance, the completion date i.e. 6.8.2001, is the effective date of de-merger for the purpose of income tax assessm ent of the petitioner company, and consequently the issuance of impugned notice, dated 26-5-2005 is legal and justified on the basis of details disclosed therein. The respondents have also challenged invoking of writ jurisdiction by the petitioner at this stage and strongly denied the allegations of the petitioner that the proposed action through impugned notice is either without jurisdiction or mala fide. They, however, did not dispute the assertions of the petitioner as regards issuance of earlier notice, dated 30th December, 2004, under section 122(5A) of the Income Tax Ordinance, 2001, its reply submitted by the petitioner through Messrs A. F. Ferguson and Co., Chartered Accountants, on 3-3-2005, as well as judgment of this Court in C. P. No. D-643/2004, wherein it has been held that the provisions of section 122(5A) of the Income Tax Ordinance, 2001, are not retrospective in nature, therefore, the assessments which were concluded before the date of its enforcement, viz. 1-7-2003 could not be re-opened, revised or amended by invoking action under this provision of law. 5. On 1-7-2005, petitioners have submitted their reply to the comments filed by respondents Nos. 2, 3 and 4 wherein they have reiterated the facts and the grounds stated in the petition in more detail and stated that for all purposes the effective date of demerger is 1-10-2000 and not 6-8-2001, as urged by the respondents. They have further stated that the rule of constructive res judicata is applicable to the facts and circumstances of the case, therefore, the issue of effective date of de- merger decided in the assessm ent case of the petitioner for the assessment year 2000- 2001, which has already been finalized, is past and closed transaction and it cannot be re-opened on the grounds urged in the impugned notice under section 62 of the Income Tax Ordinance, 1979. To be more precise in legal phraseology, case of the petitioner is that the proposed action of respondents in the form of impugned notice is mala fide, illegal, tainted with malice, and coram non judice, thus, it has been rightly challenged in the writ jurisdiction of this Court, and the bar, due to availability of alternate remedy is not attracted to this case. 6. Mr. Abdul Hafiz Pirzada, learned Senior Counsel, representing petitioner in this petition, in his arguments, narrated in detail all the facts stated in the petition with reference to the bunch, of documents produced with the petition, which include the record of Extraordinary General Meeting of petitioner-company for the year, 2001 regarding re-structuring of ICI Limited, spreading over 170 pages, order of learned Company Judge of this Court in J.M. 17/2001, dated 23-7-2001, Annual Report of the petitioner- company for the year, 2000 in the form of a booklet, spreading over 125 pages. Assessm ent Return of the petitioner-company for the year, 2001-2002, order of Commissioner of Income Tax (Appeals), dated 9-3-2004, copy of notice under section 122(5A) of the Income Tax Ordinance, 2001, dated 30-12-2004 along with its reply and other correspondences made by the petitioner with the respondents/Income Tax Department during the intervening period. Learned counsel made specific references from various parts of these documents more particularly relating to the scheme of de-merger and proceedings before the Company Judge regarding approval of scheme of de-merger, and emphasized that the record produced by the petitioner is more than sufficient to conclude that the whole action initiated by respondent No. 4 in the form of impugned notice is not only without jurisdiction but the said officer is also acting in a mala fide manner to cause unnecessary harassment and inconvenience to the petitioner. He contended that in such circumstances availing of departmental remedy by the petitioner or submission of reply of impugned notice, was merely an illusory remedy in nature, thus, the petitioner- company is fully justified in directly invoking the constitutional jurisdiction of this Court for striking down such illegal action of the respondents. He further added that the rule of constructive res judicata is squarely applicable after finalization of assessment case of the
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petitioner for the previous assessm ent year 2000-2001. To fortify his submissions, learned counsel has placed reliance on the following cases:- (1) Ujala Cotton Mills Ltd. v. Income Tax Officer and others 1985 PTD 510; (2) Marshal Sons and Co. (India) Ltd. v. Income Tax Officer (1997) 88 Comp. Cases 528; (3) Reghubar Dayal v. The Bank of Upper India Ltd. (AIR 1919 PC 9); (4) Abdul Majid and others v. Abdul Ghafoor Khan and others (PLD 1982 Supreme Court 146); (5) Bahadur Ali and another v. Haji Amirullah Khan (PLD 1955 Lah. 140); (6) Abdul Ghani and another v. Subedar Shoedar Khan Company and others (PLD 1968 Supreme Court 131); (7) Messrs Usmania Glass Sheet Factory Limited, Chittagong v. Sales Tax Officer, Chittagong (PLD 1971 SC 205); (8) Pakistan and the Assistant Collector, Central Excise and Land Customs, Kohat v. Qazi Ziauddin (PLD 1962 SC 440); (9) Messrs Julian Hoshang Dinshaw Trust and others v. Income Tax Officer, Circle XVIH South Zone, Karachi and others (1992 PTD I); (10) Chairman C.B.R, v. Pak-Saudi Fertilizer Limited (2000 PTD 3748). 7. Giving reply to the above submissions of Mr. Pirzada, in the first instance, with the permission of the Court, Departmental Representative Dr. Tariq Masood, D.C. Income Tax, has addressed the Court. In his arguments, he also made reference to various documents filed by the petitioner along with their petition, more particularly the scheme of arrangement fonning part of annexure "B" to this petition, order of Company Judge of this Court, dated 23-7-2001 and the relevant provisions of Companies Ordinance, 1984 to add force to his submissions that for the purpose of assessment of income tax of the petitioner-company the effective date of de-merger is 6-8-2001, when as per requirement of section 287(3) of the Companies Ordinance, 1984 and in terms of paragraph 29 of the scheme of arrangements read together with the definition of words "completion date" given in the scheme itself, the certified true copy of order of Company Judge, allowing demerger to the petitioner-company with Pakistan PTA Ltd. Was filed before the Registrar of Companies. He strongly contended that the Income Tax Department has nothing to do with the internal financial arrangement and paper work of the petitioner-company and the de-merged company Pakistan PTA Ltd. Which they can manage as per their own suitability. The real test of judging the effective date of de-merger of the petitioner-company with Pakistan PTA Ltd. For income tax purposes, will be regulated by looking into the ground realities vis-a-vis the relevant provisions of the Income Tax Ordinance, 1979, which provide that the effective date of de-merger would be the date on which PTA Ltd. Actually' and physically separated from petitioner-company on filing of certified true copy of the order of Company Judge before the Registrar of Companies, i.e. 6-8-2001. Replying to the arguments of Mr. Pirzada, as regards applicability of rule of constructive res judicata the learned Departmental Representative made reference of following cases:- (1) Commissioner of Income Tax, Central Zone "D" Karachi v. Farrokh Chemical Industries (1991 SCC 805); (2) Commissioner of Income Tax v. Pakistan Industrial Engineering Agencies Ltd. (1991 SCC 878); and (3) Commissioner of Income Tax, East Pakistan. Dacca v. Wahiduzzaman (1965 SCC 212). 8. Departmental Representative also made reference to the relevant provisions of International Accounting Standard (IAS) which according to him, are internationally recognized for regulating all accounting matters. He also made reference to the definition of word "transfer" from the Black's Law Dictionary, VII-Edition, page 1503 and news clipping in daily "Dawn" Karachi, dated 7-8-2001 to. Lay emphasis to his arguments that for the purpose of Income Tax assessment the actual physical transfer of assets of one company to another and independent working of de-merged company
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will determine the effective date of de-merger and not its de-merger only on paper. Relevant news clipping, referred above, not disputed by the petitioner's counsel, is reproduced as under: "ICI. PTA de-merger gets under way Karachi, Aug 6. The Scheme of Arrangement for the Reconstruction of ICI Pakistan Limited would go into effect from August 6, following the sanction by the Sindh High Court vide its order of July 23. ICI Pakistan said in a notice to the Stock Exchanges on Monday adding: 'As a consequence, the PTA business formerly carried on by ICI Pakistan Limited will now be carried on by Pakistan PTA Limited.' ICI said that the Board of Directors of ICI Pakistan had fixed August 30 as the Record Date, the date with reference to which the entitlement of the shareholder of ICI Pakistan to shares of Pakistan PTA and to shares in the reduced capital of ICI Pakistan and subsequently to new shares of ICI Pakistan would be determined. Share Transfer Books of ICI Pakistan would be closed for a period of seven days from August 24 to August 30. In accordance with the scheme, share certificates relating to the existing shares in ICI Pakistan would stand cancelled with effect from August 30. The company stated that it was agreed with the KSE that trading in shares of ICI Pakistan would remain suspended from August 24 to September 26. Trading would start in tire shares in the reduced capital of ICI Pakistan and in shares of Pakistan PTA from September 27. As regards the new shares of ICI Pakistan to be issued in lieu of the 25 per cent shareholding in Pakistan PTA to be allotted to ICI Pakistan, the determination of the number of new shares to be issued, and the entitlements of the shareholders to such new shares would be determined m accordance with the Scheme and in the manner provided therein. Such determination and allotment of shares would be made as soon as possible after November 4, 2001. ICI said, and that notices relating to the allotment of the new shares and the delivery of share certificates in respect of such new shares would be published in newspapers in due course. Daily The Dawn, Karachi 7 August 2001". 9. In the end, Dr. Tariq Masood also challenged the maintainability of this petition on the grounds that even if the question of jurisdiction is involved in a complexed manner, rule of propriety demands that this Court before straightaway exercising its constitutional jurisdiction, in the first instance, shall allow an opportunity to the concerned department/authority to examine such aspect of the matter and give its own findings. Further the practice followed by the petitioner by not filing the reply of impugned notice before the respondent No. 4 even after seeking several adjournments for this purpose, should be discouraged to repose confidence on the Government functionaries instead of doubting their actions readily with the presumption of mala fide. Further elaborating his arguments as regards availability of alternate remedy, he also made reference to the provisions of Federal Tax Ombudsman Ordinance and contended that if the grievance of the petitioner is regarding mere mal-administration or mala fide on the part of respondent No. 4 then remedy before the Federal Tax Ombudsman was also adequate, efficacious and appropriate. In this regard he made reference to the judgment reported as Hafiz Muhammad Arif Dar v. I.T.O. (60 Tax 52). He also made reference to following other cases:-- (a) Nagina Dal Factory v. ITO (18 Tax 1); (b) Roche Pakistan Limited v. DCIT and others (2001 PTD 3090); (c) Sitara Chemicals Industries Limited v. DCIT (2003 PTD I285);and (d) H.M. Abdullah v. Income Tax Officer, Circle-]', Karachi (68 Tax 29) = (1993 SCMR 1195).' 10. Mr. A.R. Akhtar, learned counsel for respondents Nos. 2 and 4 endorsed and adopted the arguments of Dr. Tariq Masood with the addition that the provisions of Company Law and Income Tax Law have their independent fields of operation with no overlapping, therefore, the de-merger of the petitioner-company with Pakistan PTA Ltd. Is strictly regulated by the relevant provisions of the Company Law, while the assessm ent case of the petitioner-company for various years, is to be
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regulated by the provisions of Income Tax Ordinance, 1979. The authorities under the hierarchy of Income Tax Ordinance have, therefore, to follow strictly the provisions of Income Tax Ordinance and their actions are not to be regulated by the provisions of Company Law. 11. Mr. Abdul Hafiz Pirzada in his reply arguments, firstly, made reference to the order of Company Judge, dated 23-7-2001 and contended that it is the sanctity of this order, passed by the highest Court of the Province, which is to be maintained and honoured by the respondents, as it is Judge made law, which is binding on all subordinate Courts and Government functionaries. To add force, in the same context, learned counsel made reference of Article 4 of the Constitution, which provides that rights of individuals are to be dealt with in accordance with law as every citizen enjoys the protection of law. 12. Replying to the other submissions of departmental representative, regarding non-applicability of principle of constructive res judicata in income-tax cases, learned counsel also made reference to the case of Farrukh Chemicals Industries (1983 PTD 67). He read before us some paragraphs from this judgment to demonstrate that the rule laid down by the Supreme Court in this case supports the case of the petitioner. Making reference to other material available on record, he further contended that up to December, 2004 constantly the stand of the respondents/Income- tax Department was that the effective date of de-merger is 1.10.2000, and it is only subsequent to it that the respondents are now trying to change their stand and circumvent the things to the prejudice of petitioner, even contrary to their own admission made in para-6 of their reply/comments to this petition. To fortify his submission as regards the effective date of de- merger learned counsel again made reference to the case of Ujjala Textile Mills Ltd. 1985 PTD 510 and the other case of Marshall Sons and Co. (India) Ltd. (1997) 88 Law Cases 528 and contended that the view taken by the Indian Supreme Court in this judgment is fully attracted and applicable to the facts and circumstances of instant case to the extent of effective date of de-merger, as provisions of law referred therein from the Indian Companies Act are pari materia to sections 284 to 287 of the Companies Ordinance, 1984. Learned counsel emphasized that it is not within the statutory powers of DCIT or any other officer in the hierarchy of Income-tax Law to adjudicate the effective date of de-merger, which is the exclusive jurisdiction of Company Judge and in the instant case as per the order of the Company Judge, dated 23-7-2001 the effective date of de- merger is 1-10-2000, therefore, the whole action envisaged in the impugned notice, based on the premises contrary to it is without jurisdiction. 13. We have carefully considered the arguments advanced before us on behalf of the parties to this petition, perused the material placed on record and also the case-law cited in the preceding part of this judgment. 14. The first crucial point for determination arising out of this petition seems to be as under:- "Whether in the facts and circumstances of the case filing of Constitutional petition against impugned notice, dated 26-5-2005 is premature, and no other adequate, efficacious, alternate remedy is available to the petitioner, which should have been exhausted in the first instance?" 15. In the context of examining the point of maintainability of this petition and in order to understand more explicitly the view point of the respondents for issuance of impugned notice, dated 26.5.2005 under section 62 of the Income Tax Ordinance, 1979, it will be advantageous to reproduce the same in verbatim, which reads thus:-- "The Principal Officer M s. ICI Pakistan Limited ICI. Mouse 5 West Wharf P.O. Box # 4731 Karachi 740000 SUB: PROCEEDINGS FOR ASSESSMENT YEAR 2002-2003- NOTICE UNDER SECTION 62 OF THE INCOME
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TAX ORDINANCE. 1979. Dear Sir, On examination of the return of the total income for assessment year, 2002-2003 and the details filed by your good self this office has deduced some findings. One of the findings in this regard is that the effective date of the de-merger is the Completion date of the scheme of arrangement as envisaged in the definitions given in the same scheme. The said definition is reproduced below for the facility:- Completion Date: Means the day on which this Scheme becomes effective pursuant to paragraph 29 hereof. Paragraph 29: This Scheme shall become effective as soon as a certified copy of an order or orders of the Court under section 284 of the Companies Ordinance, 1984 sanctioning this scheme is filed with the Registrar of Companies, Karachi. Unless this Scheme shall have become effective as aforesaid on or before December 31, 2001 or such later date (if any) as the Court may allow, this Scheme shall not become effective. The date of the order of Honourable Sindh High Court is 23rd July, 2001 and the same order was filed with the Registrar of the Companies, Karachi on the subsequent date. This makes it abundantly clear that effective date is the completion date falls in assessment year, 2002-2003. In view of the same all remaining findings rest on the very basis that the event of de-merger took place on the completion date which falls in the assessment year under consideration. In view of those findings this office intends to make following additions in your declared version of total income:- 1. Capital gain on transfer of undertaking In the year under consideration your company has transferred your PTA plant to another company which is incorporated with title of Pakistan PTA Ltd. This transfer of the plant is not…
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