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Petitioner: Shell Pakistan Limited VS Respondent: Federation of Pakistan & Others
Court Name: Sindh High Court Judge(s): Muhammad Junaid Ghaffar, Agha Faisal Title: Shell Pakistan Limited vs Federation of Pakistan & Others Case No.: CPD 5842 of 2022 Date of Judgment:2022-12-22 Reported As: PTCL 2023 CL. 162, 2023 PCTLR 128, 2023 SHC 22 Result: Petitions allowed
JUDGMENT
JUDGMENT MR. JUSTICE AGHA FAISAL. (1). The Petitioners had challenged the constitutionality of Section 4C of the Income Tax Ordinance, 2001 ("4C"), and the appurtenant 1st proviso to Division IIB of Part I of the First Schedule to the Income Tax Ordinance, 2001 ("Proviso"), introduced vide Finance Act, 2022, inter alia, upon grounds that the same unlawfully vitiates vested rights accrued in past and closed transactions; is discriminatory; confiscatory; demonstrably devoid of any intelligible differentia having rational nexus with the object of classification; and amounts to impermissible double taxation. The present petitions were advocated with respect to the vires[1] and were allowed to the extent of our short order, announced in Court at the conclusion of the final hearing, on 22.12.2022. These are the reasons for our short order. Factual context 2. In contemporary times, super tax was imposed vide section 4B[2] of the Income Tax Ordinance, 2001 ("Ordinance"), having been inserted in the Ordinance through Finance Act, 2015, and the levy was upheld by the respective High Courts[3]. The edicts of the High Courts are pending appeal before the honorable Supreme Court. 3. Super tax was imposed once again, vide insertion of section 4C[4] in the Ordinance vide Finance Act, 2022. While the charge was expressed to befall upon the income of every person on the rates specified in Division IIB of Part I of the First Schedule to the Ordinance, the Proviso[5] thereof raised the incidence of tax exponentially upon entities partly or wholly engaged in certain businesses cited therein. This vires of this levy/proviso is presently in challenge before us. Respective arguments.
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4. It was the petitioners' case[6] that section 4C ought to be struck down, inter alia, as a charging section could not be retrospective; rights crystallized in the past could not be unhinged; no fairness was apparent from the verbiage of 4C; and it amounted to manifest arbitrariness, hence, dissonant with fundamental rights. It was espoused in the alternative that section 4C be read to become effective from tax year 2023, inter alia, as the legislative field was already occupied, in so far as tax year 2022 was concerned, vested rights created vide section 4B of the Ordinance had not been varied and irreconcilable conflict existed between Divisions IIA and IIB of Part I of the First Schedule to the Ordinance[7]. It was articulated that in any event the differentiation sought to be undertaken vide the Proviso must be quashed; on account of being discriminatory and devoid of any intelligible differentia having rational nexus with the object of classification[8]. 5. It was the Federal Board of Revenue's case[9] that since the challenge to section 4B of the Ordinance has failed, hence, the same fate ought to befall the challenge to section 4C, being pari materia thereto. In was submitted that no crystallization has taken place with respect to any right of the petitioners and that in any event there was no bar upon double and/or retrospective taxation, notwithstanding the absence of any express intendment. The learned counsel vociferously denounced the claim of discrimination and argued that perceived hardship could not be any grounds to strike down fiscal legislation. It was concluded that national interest ought to be the paramount consideration in determining these petitions and that the overlap between sections 4B and 4C of the Ordinance is being remedied in any event, with effect from the next tax year, as section 4B of the Ordinance shall be withdrawn/repealed[10]. Scope of determination 6. Heard and perused. The challenge to section 4B of the Ordinance could not be sustained by an earlier Division Bench of this Court[11] and the exposition of law expressed is binding upon us in view of the Multiline[12] principles. The said issue is presently pending in appeal before the Supreme Court. Therefore, this determination is rested upon the premise that section 4B of the Ordinance is valid law and due care is endeavored to determine the present lis in a manner that the findings with respect to section 4B of the Ordinance are not disturbed, either expressly or even by implication[13]. 7. It is settled law that courts ought to abstain from deciding larger questions, if a case could be decided on narrower grounds and that it was preferred for the courts to confine determinations to questions pivotal for the determination of a case[14]. It is our considered view that a determination herein could be clinched by answering two fundamental questions framed herein below: i. Whether section 4C of the Ordinance unlawfully vitiates vested rights accrued in past and closed transactions. ii. Whether the 1st proviso to Division IIB of Part I of the First Schedule to the Ordinance is discriminatory and demonstrably devoid of any intelligible differentia having rational nexus with the object of classification. Therefore, we proceed to consider these questions and deem it prudent to eschew deliberation upon the other arguments; which we leave for future consideration in an appropriate cases[15]. Whether section 4C of the Ordinance unlawfully vitiates vested rights accrued in past and closed transactions. Juxtaposition of sections 4B and 4C of the Ordinance 8. The learned counsel from both sides of the spectrum were unified in pie respect that section 4C is the same specie of tax as that levied vide section 4B of the Ordinance. While the petitioners' counsel argued that such equivalence was fatal for section 4C in the present facts and circumstances, the respondents' counsel insisted to the contrary and averred that it was this very correlation that ought to befall the same fate on section 4C as befell section 4B of the Ordinance before this Court[16]. The FBR's lead counsel gratuitously submitted in writing[17] that the two
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levies were of the same specie, hence, section 4B of the Ordinance would be discontinued from the next tax year. Therefore, it is in this context that we had to examine whether any protected rights were created vide section 4B of the Ordinance, in the subsistence whereof section 4C could riot be given effect. Pertinent law 9. We have been graciously assisted with a myriad of authority[18] demarcating the remit of rights, vested rights and past & closed transactions, however, we would be hard pressed to best the illumining description and distinction elucidated by an earlier Division Bench of this Court in Shahnawaz[19]: "11. The general principles applicable in relation to vested rights, and the extent to which they can be retrospectively affected, are well-settled and have been stated and reaffirmed many times. Thus, in Chief Land Commissioner, Sindh and others v. Ghulam Hyder Shah and others 1988 SCMR 715, it has been observed as follows: "In this behalf the High Court proceeded a on a correct principle of interpretation that `no rule of construction is more firmly established than this, that retrospective operation is not to be given to a statute so as to impair an existing right or obligation'. The main and primary rule is that every statute is deemed to be prospective, unless by express provision or necessary intendment it is to have retrospective effect. Also the rule that no statute shall be construed so as to have retrospective operation affecting vested rights to a greater extent than its language renders necessary is firmly established." (para 11) "There is another aspect of this matter which also fortifies the conclusion stated above. This Court in Province of East Pakistan v. Sharafatullah and others PLD 1970 SC 514, affirmed the established rule that a statute cannot be read in such a way as to change accrued rights the title to which consists in transactions past and closed or in facts which are events that have already occurred." (para 13) It will be seen that the Supreme Court spoke of both "vested rights" and "past and closed transactions". A detailed analysis of the distinction between the two need not detain us, and it suffices to note that while every past and closed transaction is normally based on, or comprises, a vested right, every vested right is not necessarily a past and closed transaction. Indeed, if rights were required to be placed in ascending order, the 'scale' could be said to comprise of a 'bare' right, a vested right and a past and closed transaction. Ordinarily, a right can be regarded as progressing from a 'bare' right to become a vested right and then perhaps even a past and closed transaction. Of course, some rights only become vested rights, and do not go beyond to become past and closed transactions. Others may vest immediately, as soon as they arise or accrue, and then may (or may not) become past and closed transactions. Some rights (though this would be a somewhat rare and unusual situation) may even become past and closed transactions once they accrue, i.e., progress to that category straight from being 'bare' rights. 12. As even this brief account shows, some care must be taken to properly analyze the nature of the right under consideration. This is all the more so because (especially in the realm of fiscal statutes) past and closed transactions appear to stand on a footing higher than vested rights. This is clearly established by the decision in Molasses Trading and Export (Pvt) Ltd. v. Federation of Pakistan and others PTCL 1994 CL. 222, a case relied on by learned counsel for the petitioners. The case was concerned with the grant of an exemption under the Customs Act, 1969. An exemption (which is granted by a notification issued under section 19 of the Act) can be regarded as a 'bare' right, one that can be availed of by the concerned importer. In the well-known case of Al-Samrez Enterprise v. Federation of Pakistan PTCL 1987 CL. 99, it was held that if the importer altered his position in reliance on the notification (e.g., by entering into a contract or opening a letter of credit), he acquired a vested right in the exemption, to which he remained entitled even if the exemption itself
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stood withdrawn by the time the goods arrived in Pakistan. The 'bare' right, in other words, had been transformed into a vested right. In order to undo the effect of this decision, section 31A was added to the Customs Act (by the Finance Act, 1988), and it was deemed always to have been part of the said Act. Thus, its position was, as presently relevant, similar to that of section 214C of the 2001 Ordinance. The question before the Supreme Court in Molasses Trading was whether section 31A had retrospectively destroyed the vested rights recognized in Al Samrez (the goods in question having been imported before 1-7-1988). The Supreme Court unanimously held that the answer to this question was in the affirmative. However, by a majority, it was also held that those cases in which the bills of entry had been filed by or before 30-6-1988 (i.e., before the Finance Act, 1988 came into force) had become past and closed transactions, and section 31A did not apply to them, notwithding the absolute terms in which it had, ostensibly, been given retrospective effect. The reason why the rights in those cases had gone from being vested rights to become past and closed transactions was that, in respect of customs duties, the levy of the tax stood crystallized on the date on which the bill of entry was filed. It is well-settled (see, e.g., the Ghulam Hyder Shah's case (supra)) that retrospective statutes affecting vested rights and/or past and closed transactions are to be given the narrowest effect and interpretation that is reasonably possible. Section 31-A, being concerned with undoing the effect of the Al Samrez case, was directed towards vested rights, and could not therefore affect past and closed transactions. Molasses Trading thus nicely illustrates both how rights can move along the 'scale' referred to above, and the distinction that exists between vested rights and past and closed transactions. In relying on this case, the petitioners clearly claim that their rights in the present case should be regarded as past and closed transactions, and hence remain unaffected by section 214C. Section 177 (under which the rights are claimed) must therefore be carefully analyzed in order to ascertain whether there are at all any rights thereunder and if so, whether they can be regarded as vested rights and/or as past and closed transactions." 10. If a right is found to qualify on the anvil recognized by Shahnawaz, the next issue would be to determine the protection afforded thereto under the law and the judgment directly on point in such regard is Anwar Yahya[20]. The Court was seized of a matter where exemption with regard profits earned on account of shares purchased, given zero rating, was taken away by a subsequent amendment to the law. It was held that the tax payer had acquired a vested right and the attempt by the legislature to vitiate that right was struck down. It is considered expedient to reproduce the pertinent discussion herein: "8. ... In our view, on a proper interpretation of section 37A the question of any rights, vested or otherwise, turns not on the state of the Table as on the date of acquisition of the shares but rather on the substantive provisions of the section itself. Here, the most crucial provision is the proviso that was omitted by the Finance Act, 2014. It will be recalled that this was in the following terms: "Provided that this section shall not apply if the securities are held for a period of more than a year". Thus, the proviso disapplied the section in its entirety in respect of shares held for more than one year. As learned counsel for the petitioners rightly submitted, section 37A is a charging provision in a fiscal statute. The proviso had therefore to be read and applied literally. In other words, it meant precisely what it said: if a given lot of shares were held for more than a year, the section simply did not apply. The question of whether there was anything to tax (i.e., whether there were any capital gains) became moot and, in effect, disappeared. It must be kept in mind that this situation is materially different from reading and applying the relevant rate from the Table. To apply the Table necessarily means (and meant) that there is something to tax and the rate of "zero" percent means only that the capital gains are being so taxed. The practical effect would of course be the same, but this should not obscure the fact that, on the legal plane, the proviso operated differently. It operated on its own footing, completely detached from and independently of the Table and,
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inasmuch as it disapplied the section itself, irrespective of whether there were any capital gains or not. Furthermore, the proviso had effect on a basis that could be ascertained objectively. 9. For the reasons just stated, in our view it was the proviso that could, and did, create vested rights. As soon as any given lot of shares had been held for more than a year, the proviso created a right in the taxpayer that vested, the right being that section 37A did not apply in respect of those shares. And since this was a vested right, the usual rules of interpretation applicable to such rights would apply. (Those rules, being well known and established, require no elaboration and in particular the case law cited by learned counsel for the petitioners need not be considered in any detail.) In particular, the omission of the proviso could not affect the rights that had become vested in a taxpayer in respect of a lot of shares that had been held for more than one year. The omission of the proviso by the Finance Act, 2014 did not therefore affect rights that had vested by the time of the omission. It is to be noted that the omission did not even purport to be retrospective. Since the omission took effect from 01.07.2014, this meant that it was a vested right that section 37A would not apply in respect of any shares held for more than a year by a taxpayer, as on or before 30.06.2014. Any capital gains made on such shares, even if the disposal took place on or after 01.07.2014, could not therefore be brought to tax. Applying the foregoing analysis to the illustrative case (see para 4 above), as on 30.06.2014 the petitioner No. 3 had held the 430,000 shares in PTCL for more than a year (since the same were acquired on 28.06.2013). By reason of the proviso the petitioner had acquired a vested right in section 37A not applying to the said shares on 29.06.2014. The subsequent omission of the proviso was therefore irrelevant and any capital gains made by the petitioner on the disposal of the said shares could not be taxed in terms of section 37A regardless of the date on which they were disposed off." In appeal[21], the Supreme Court recently upheld the judgment while unequivocally observing that they could not be persuaded to take a different view from that taken in Anwar Yahya. Import of section 4B of the Ordinance 11. Section 4B was inserted in the Ordinance vide the Finance Act, 2015 and originally it read as follows: "4B. Super tax for rehabilitation of temporarily displaced persons. (1) A super tax shall be imposed for rehabilitation of temporarily displaced persons, for tax year 2015, at the rates specified in Division IIA of Part I of the First Schedule, on income of every person specified in the said Division.." The rate of tax of tax was provided in the relevant schedule as being 4% of the income for banking companies and 3% of the income for persons other than a banking company, having income equal to or exceeding Five Hundred Million Rupees. 12. Through successive finance acts, section 4B was varied to include subsequent tax years and in the present form it applies in respect of "tax years 2015 and onwards". The relevant schedule was also subjected to statutory amendments from time to time and in 2019 the said provision stood modified as follows: Tax year 2018Tax year 2019Tax year 2020Tax years 2021 2022 Banking Company 4% 4% 4% 4% Person other than banking company having income equal to or exceeding Rs. 500 million3% 2% 0% 0% 13. It is manifest that in the year 2019, vide the Finance Supplementary (Second Amendment) Act, 2019 assented on 9th March 2019, the rate of super tax upon all persons, other than a banking company, having an income equal to or exceeding Rs. 500 million was to be zero percent (0%) for the tax years 2020, 2021 and 2022. It merits unequivocal mention that this position remained unvaried vide Finance Act, 2022 and subsists till date.
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Creation of protected right 14. It appears that the legislature, while levying tax in the specie of super tax upon persons, other than banks, earning the qualifying quantum of income, absolved such persons from paying the said tax for the tax years 2020, 2021 and 2022. This was done in 2019 by reducing the rate from one percent (1%) to zero percent (0%), vide Finance Supplementary (Second Amendment) Act, 2019 assented on 9th March 2019, and the benefit with respect to tax years 2020 and 2021 has already been availed by the tax payer. So in summation persons earning less than Rs. 500 million were not subjected to the levy of super tax and persons earning equal or exceeding the said amount were given a respite from levy thereof for the period, including the tax year 2022 in scrutiny before us. 15. The Parliament has the right to levy, assess and recover tax and is equally empowered to confer any exemption or benefit in such regard[22]. Such a benefit/exemption is a statutorily conferred right, as valid during its subsistence as the levy from which it absolves a tax payer. In the said context the exemption from payment of super tax for the relevant tax periods, including tax year 2022, is a statutorily conferred protected right conferred upon the tax payer and nothing has been demonstrated before us to consider the same as anything but a vested right, as recognized in Shahnawaz[23]. Subsistence of the vested right 16. While the legislature had the right to confer a right, being a benefit in the present case, nothing was placed before us to consider any hindrance upon the legislature to expressly modify, vary and/or determine the same. It is apparent that the legislature has not made any effort to determine, in any manner whatsoever, the benefit extended to the tax payer from payment of super tax for the tax years 2020, 2021 and 2022. However, it was the respondents' case that the protected right created vide section 4B stood impliedly superseded, with retrospective effect, by insertion of section 4C. 17. Mr. Khalid Jawed Khan had drawn parallels with similar litigation in the past and demonstrated that in Elahi Cotton[24] the presence of a non-obstante clause was crucial to saving the levy and; in PIDC[25] the existence of the express phrase "in addition to" was considered crucial. He articulated that section 4C was devoid of any non-obstante provision, deeming provision, the phrase "in addition thereto" or even the phrase "subject to this Ordinance"[26], hence, could hot be sustained inter alia as impermissible double taxation. While considering this argument in its entirety might imperil our conscious endeavor to eschew any deliberation that might have an implication on section 4B of the Ordinance, however, we see no cavil to circumscribing the consideration of this argument to the extent that without any overriding effect expressed in section 4C, could the same be permitted to vitiate the protected vested rights created vide section 4B of the Ordinance. The answer to this issue has already been illumined by a Division bench of this Court in Anwar Yahya[27]. 18. In Anwar Yahya an exemption given by statute was subsequently rescinded by amendment of the said provision itself. This High Court found that since vested rights had been created in favor of the tax payer, therefore, the rescission undertaken was found to be impermissible. The judgment found favor with the Supreme Court and the appeals there against were recently dismissed[28]. It is our considered opinion that the petitioners case before us stands on a much more advantageous footing since the protection granted/vested right created in favor of tax payers, with respect to super tax, vide section 4B of the Ordinance remains in the field and consequently it is now incumbent upon this Court to determine the effect, if any, to be given to section 4C. Recourse to settled principles of interpretation of fiscal statutes 19. Rowlatt J observed in Cape Brandy Syndicate[29] more than a century ago that in a taxing Act one has to look merely at what is clearly said. There is no presumption as to tax and one ought to only look fairly at the language employed. Our jurisprudence[30] enshrines the legal principles that
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there is no intendment or equity about tax, especially with regard to a charging provision[31], and the provisions of a taxing statute must be applied as they stand; a provision creating a tax liability must be interpreted strictly in favor of the taxpayer and against the revenue authorities; any doubts arising from the interpretation of a fiscal provision must be resolved in favor of the taxpayer; if two reasonable interpretations are possible, the one favoring the taxpayer must be adopted; when a tax is clearly imposed by a statutory provision any exemption from it must be clearly expressed in the statute or clearly implied from it; where the taxpayer claims the benefit of such express or implied exemption, the burden is on him to establish that his case is covered by the exemption; the terms of the exemption ought to be reasonably construed; and if a taxpayer is entitled to an exemption on a reasonable construction of the law it ought not to be denied to him by a strained, strict or convoluted interpretation of the law. 20. The view of the Indian Supreme Court had also been consistent with the aforesaid until the same was revisited[32] recently and it was held that while the benefit of any ambiguity in a fiscal statute, in so far as chargeability is concerned, may inure to the benefit of the assesse, however, an ambiguity with respect of an exemption clause Must be resolved in favor of revenue. The five member bench, while overruling the earlier view conferring primacy upon the assesses even in exemption matters as enunciated inter alia by a three member bench in Sun Exports[33], held that an exemption may only be allowed to an entity that has demonstrated that its case fell squarely within the parameters enumerated in the relevant instrument…
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