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Official Citation: 2024 PTD 955
Court / Jurisdiction: Sindh High Court
Year of Decision: 2023
Decision Date: 2023-02-07
Parties: Sapphire Textile Mills Limited vs Federation of Pakistan & Others
Ruling Summary: This decision was rendered by the Sindh High Court on 2023-02-07, officially reported as 2024 PTD 955. In this matter between Sapphire Textile Mills Limited and Federation of Pakistan & Others, the court adjudicated key questions of statutory construction, procedural regularity, and legal precedent under Pakistani law.
Core Holding: The honorable bench evaluated governing statutory provisions and judicial authorities to establish the rights of the parties, delivering the binding reasoning set out below.
Case cited as 2024 PTD 955
Court Name: Sindh High Court Judge(s): Muhammad Junaid Ghaffar, Agha Faisal Title: Sapphire Textile Mills Limited vs Federation of Pakistan & Others Case No.: CP D 8233 of 2019 Date of Judgment:2023-02-07 Reported As: 2023 SHC 64, 2024 PTD 955 Result: Order accordingly
JUDGMENT
(And connected matters, particularized in the Schedule[1] hereto.) JUDGMENT Agha Faisal, J. The Petitioners have challenged the constitutionality of section 65 B of the Income Tax Ordinance 2001 ("Ordinance"), as amended vide the Finance Act 2019, inter alia, upon grounds that past and closed transactions cannot be reopened; vested rights created through a specific provision cannot be rescinded by amendment of the same provision; while construing a provision intending a retrospective effect, and dealing with vested rights, the words used therein cannot be stretched to include matters that do not fall within the plain language thereof; and that the statutory provision in its present form was confiscatory in nature. The present petitions were advocated to the extent of the vires[2] and allowed to the remit of our short order, announced in Court at the conclusion of the final hearing, on 07.02.2023. These are the reasons for our short order. Factual context 2. Briefly stated, section 65B was inserted into the Ordinance vide Finance Act 2010 and it conferred a tax credit of ten percent upon qualifying companies for investment, provided that the requisite investment and installation of the pertinent plant and machinery took place within a specified time. A glance at the evolution of the provision demonstrates that upon introduction it conferred the tax credit if the pertinent plant and machinery was purchased and installed at any time between 1st July 2010 and 30th June 2015. The Finance Acts of 2015, 2016 and 2018 extended the expiration date in the provision to 30th June 2016, 30th June 2019 and 30th June 2021 respectively. It is consciously reiterated that vide the Finance Act 2018, the Parliament expressly extended the benefit of section 65B of the Ordinance to qualifying investments, if the pertinent plant and
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machinery was purchased and installed until 30th June 2021. The Finance Act 2019 reversed the expiration date to 30th June 2019 and furthermore halved the credit for tax year 2019 to five percent. 3. It is considered fitting to reproduce section 65B of the Ordinance, as it stood prior and subsequent to the amendment vide Finance Act 2019, in order to illustrate the lis under deliberation before us: Post Finance Act 2018 Post Finance Act 2019 65B. Tax credit for investment (1) Where a taxpayer being a company invests any amount in the purchase of plant and machinery, for the purposes of extension, expansion, balancing, modernization and replacement of the plant and machinery, already installed therein, in an industrial undertaking set up in Pakistan and owned by it, credit equal to ten per cent of the amount so invested shall be allowed against the tax payable, including on account of minimum tax and final taxes payable under any of the provisions of this Ordinance, by it in the manner hereinafter provided (2) The provisions of sub-section (1) shall apply if the plant and machinery is purchased and installed at any time between the first day of July, 2010, and the 30th day of June, 2021. (3) The amount of credit admissible under this section shall be deducted from the tax payable by the taxpayer in respect of the tax year in which the plant or machinery in the purchase of which the amount referred to in sub-section (1) is invested and installed. (4) The provisions of this section shall mutatis mutandis apply to a company setup in Pakistan before the first day of July, 2011, which makes investment, through hundred per cent new equity, during first day of July, 2011 and 30th day of June, 2016, for the purposes of balancing, modernization and replacement of the plant and machinery already installed in an industrial undertaking owned by the company. However, credit equal to twenty per cent of the amount so invested shall be allowed against the tax payable, including on account of minimum tax and final taxes payable under any of the provisions of this Ordinance. The credit shall be allowed in the year in which the plant and machinery in the purchase of which the investment as aforesaid is made, is installed therein. 65B. Tax credit for investment (1) Where a taxpayer being a company invests any amount in the purchase of plant and machinery, for the purposes of extension, expansion, balancing, modernization and replacement of the plant and machinery, already installed therein, in an industrial undertaking set up in Pakistan and owned by it, credit equal to ten per cent of the amount so invested shall be allowed against the tax payable, including on account of minimum tax and final taxes payable under any of the provisions of this Ordinance, by it in the manner hereinafter provided Provided that for the tax year 2019 the rate of credit shall be equal to five percent of the amount so invested: Provided further that the provisions of sub- section (5) relating to carry forward of the credit to be deducted from tax payable, to the following tax years, as specified in the said sub- section, shall continue to apply after tax year 2019; and (2) The provisions of sub-section (1) shall apply if the plant and machinery is purchased and installed at any time between the first day of July, 2010, and the 30th day of June, 2019. (3) The amount of credit admissible under this section shall be deducted from the tax payable by the taxpayer in respect of the tax year in which the plant or machinery in the purchase of which the amount referred to in sub-section (1) is invested and installed. (4) The provisions of this section shall mutatis mutandis apply to a company setup in Pakistan before the first day of July, 2011, which makes investment, through hundred per cent new equity, during first day of July, 2011 and 30th day of June, 2016, for the purposes of balancing, modernization and replacement of the plant and machinery already installed in an industrial undertaking owned by the company. However,
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"Explanation. For the purpose of this section the term "new equity" shall, have the same meaning as defined in sub-section (7) of section 65E. (5) Where no tax is payable by the taxpayer in respect of the tax year in which such plant or machinery is installed, or where the tax payable is less than the amount of credit as aforesaid, the amount of the credit or so much of it as is in excess thereof, as the case may be, shall be carried forward and deducted from the tax payable by the taxpayer in respect of the following tax year and so on, but no such amount shall be carried forward for more than two tax years in the case of investment referred to in sub-section (1) and for more than five tax years in respect of investment referred to in sub- section (4), however, the deduction made under this section shall not exceed in aggregate the limit specified in sub-section (1) or sub-section (4), as the case may be. (6) Where any credit is allowed under this section and subsequently it is discovered by the Commissioner Inland Revenue that any one or more of the conditions specified in this section was, or were, not fulfilled, as the case may be, the credit originally allowed shall be deemed to have been wrongly allowed and the Commissioner, notwithstanding anything contained in this Ordinance, shall recompute the tax payable by the taxpayer for the relevant year and the provisions of this Ordinance shall, so far as may be, apply accordingly. credit equal to twenty per cent of the amount so invested shall be allowed against the tax payable, including on account of minimum tax and final taxes payable under any of the provisions of this Ordinance. The credit shall be allowed in the year in which the plant and machinery in the purchase of which the investment as aforesaid is made, is installed therein. "Explanation. For the purpose of this section the term "new equity" shall, have the same meaning as defined in sub-section (7) of section 65E. (5) Where no tax is payable by the taxpayer in respect of the tax year in which such plant or machinery is installed, or where the tax payable is less than the amount of credit as aforesaid, the amount of the credit or so much of it as is in excess thereof, as the case may be, shall be carried forward and deducted from the tax payable by the taxpayer in respect of the following tax year and so on, but no such amount shall be carried forward for more than two tax years in the case of investment referred to in sub-section (1) and for more than five tax years in respect of investment referred to in sub- section (4), however, the deduction made under this section shall not exceed in aggregate the limit specified in sub-section (1) or subsection (4), as the case may be. (6) Where any credit is allowed under this section and subsequently it is discovered by the Commissioner Inland Revenue that any one or more of the conditions specified in this section was, or were, not fulfilled, as the case may be, the credit originally allowed shall be deemed to have been wrongly allowed and the Commissioner, notwithstanding anything contained in this Ordinance, shall recompute the tax payable by the taxpayer for the relevant year and the provisions of this Ordinance shall, so far as may be, apply accordingly.
(Material variation has been italicized and underlined.) Respective arguments 4. It was the petitioners' case [3] that section 65B of the Ordinance, as it stood prior to the Finance Act 2019, had been acted upon by the petitioners and that they had accrued protected vested rights, which were unlawfully prejudiced vide the amendment introduced subsequently. Mr.
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Hussain Ali Almani characterized the petitioners in two distinct categories; firstly those having purchased and installed the plant and machinery by 30th June 2019, yet were considered disentitled to the entire tax credit by virtue of the proviso[4], whereby their entitlement was retrospectively halved; secondly those having made the requisite purchase prior to 30th June 2019, however, completed the installation by 30th June 2021, who were deprived of the credit entirely; and submitted that in either instance the dispossession of the petitioners did not enjoy the sanction of the law. Mr. Ovais Ali Shah ventured further and endeavored to demonstrate that a tax credit, once accrued, becomes the property of a person and rights in respect whereof were guaranteed by the Constitution itself[5]. Mr. Raashid Anwar built his case around the Division Bench judgment of this Court in Gulshan Spinning[6] and demonstrated that in pari materia circumstances this Court had been pleased to strike down a similar attempt at vitiation of vested rights, pertaining to tax credits, in the past. 5. It was the respondents' case [7] that the amendment in section 65B of the Ordinance merely brought an expiration date in the future to the present, therefore, there was no question of any vested rights and / or retrospective effect. It was insisted that installation was one of the two integral pillars of the provision, hence, any plant and machinery not installed by the reversed expiration date would not qualify for a tax credit, notwithstanding the purchase having taken place within the abridged timeframe. Dr. Shahnawaz Memon articulated that Gulshan Spinning was distinguishable herein and even otherwise in the petitions under reference there was a divergence of facts and circumstances, as to the respective dates of purchase and installation, therefore, the determination of such factual matters was best left to the department itself. He was of the view that if a person had purchased and installed within the abridged timeframe then he should be entitled to the benefit claimed, however, the factual determination in such regard be left to the department. Mr. Shahid Ali Qureshi submitted that section 65B of the Ordinance dealt primarily with imported plant and machinery, hence, the benefit was actually extended to the foreign countries wherein such equipment was being manufactured. It was argued that since no benefit was accruing to the domestic economy, therefore, the provision was misconceived in any event. It was further complimented that section 65B(3) suffered from a drafting error and this Court ought to read out "and" from the provision and read in "is" therein[8]. It is imperative to denote at this juncture that none of the other learned counsel representing the respondents concurred with these arguments and sought for their divergence to be recorded. 6. In rebuttal, Mr. Hussain Ali Almani pinpointed that the petitioners' argument with regards to the unjustifiability of the Proviso [9] had been conceded by the respondents, as none of their learned counsel had articulated any opposition in such regard. While controverting the respondents' interpretation of the amended provision under challenge, the petitioners' learned counsel submitted that they were in concurrence with the respondents that the factual determination, with regard to the qualifying nature of the purchase / installation, ought to be done by the department itself. However, this Court may be pleased to interpret the provision under challenge in the light of the prevailing law, inter alia with respect to vested rights, since the department's interpretation was ostensibly in derogation of settled law. Scope of determination 7. Heard and perused. At the very onset, it is considered imperative to observe that the respondents' learned counsel made no submissions supporting the Proviso and eschewed any effort to controvert the petitioners' arguments assailing the retrospective halving of the quantum of tax credit for the tax year 2019. On the contrary, it was argued that there was never any cavil to the qualifying persons, being those that had purchased and installed the requisite plant and
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machinery within the abridged timeframe, being entitled to the tax credit provided vide section 65B of the Ordinance. 8. Secondly, the respective learned counsel from both sides of the spectrum appeared to be in unison for the adjudication, as to whether a person had purchased and installed within the timeframe, to be done by the department itself in appropriate proceedings. 9. The law obliges courts ought to abstain from deciding larger questions, if a case could be decided on narrower grounds and that it is ideal for courts to confine determinations to issues pivotal for the determination of a case[10]. Since there is consensus that the factual determination, of whether a person had purchased and installed within the abridged timeframe, would be undertaken by the department itself, therefore, the only question for us to address is the interpretation of section 65B of the Ordinance, post amendment vide the Finance Act 2019, in the light of the law illumined by the august Supreme Court. Tax credit 10. A tax credit simplicitor is a reduction in the amount of tax to be paid. The concept came under detailed deliberation before the august Court in H M Extraction[11] wherein it was illumined as follows: "8. We begin by noting that consideration of the nature of a tax credit on the one hand and an exemption on the other needs to be carried out conceptually and on the plane of principle. Now, in Whitney v. IR Commissioners (1926) 10 TC 88, in a well-known passage that has stood the test of time, Lord Dunedin spelt out the three stages of a tax (at the broadest plane) in the following terms: "Now, there are three stages in the imposition of a tax: there is the declaration of liability that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessm ent. Liability does not depend on assessment. That, ex hypothesi, has already been fixed. But assessm ent particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay." For purposes of the question now before us, the three stages may be restated as follows: leviable (declaration of liability), payable (assessment) and recoverable. It is well established that an exemption inserts itself between the first two stages, i.e., between what is leviable and what is payable. In our view, a tax credit inserts itself between the second and the third stages, i.e., between what is payable and what is recoverable. It is perhaps for this reason that the learned Lahore High Court observed that an exemption and a tax credit are two sides of the same coin, the "coin" being the stage of assessm ent or what is payable. With respect, we are unable to agree. In our view, there is a conceptual difference between the two, and (as we will see) it is all the more pronounced in the case of income tax. If there is an exemption in the field then the second stage may not be reached at all (i.e., the tax may not be payable) if the exemption is whole. Of course, it may be reached partially if that be the nature of the exemption. On the other hand, in the case of a tax credit the second stage must necessarily always be reached, and that too in full. It is only then that the credit manifests itself by interposing between what is payable (i.e., the assessment) and what is recoverable. This interposition may be complete (if the tax credit is 100%) or partial. Thus, the second stage of "assessm ent" (i.e., "payable") cannot be the "coin" of which an exemption on the one hand and a tax credit on the other are the two "sides". Put differently, in a fiscal statute there must always be the first stage: that can be affected by neither an exemption nor a tax credit. An exemption operates on, and in relation to, the second stage: that stage may not be reached at all, or only partially. A tax credit does not bear on the second stage. Once that stage is reached, and crossed, then the tax credit is manifested, thereby blocking (as the case may be, either in whole or in part) the third stage. Or, to put the matter in Lord Dunedin's terminology an exemption may eliminate the need for an assessment altogether (if it is whole) or reduce it by the relevant amount if it is partial. A tax credit on the other hand has no bearing on the assessment. It comes
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into operation after assessm ent and when the question of recovery arises. In our view, this is a basic conceptual difference. It also has a certain consequence in income tax law, to which we now turn. 9. The learned Lahore High Court observed in para 10 of the Nishat Dairy case that a "tax exemption reduces the amount of annual income that can be taxed". This is certainly correct and that is, generally, the effect of an exemption. But, if we may respectfully note, on the conceptual plane it is only a partial description of how an exemption may operate in income tax law. The reason is that income tax law has had two concepts since the beginning (i.e., the Income Tax Act, 1922): "total income" and "taxable income" (the exact terminology varying across the decades and over different statutes). Total income, as the term implies, is the totality of the income of the taxpayer. The taxable income is that which can be brought to tax. The two can be the same, but if there is an exemption the latter will be less than the former. However, the amount of tax payable is determined not only by reference to the amount of income that can be taxed, but also by the applicable rate of taxation. And under the principles of income tax law, the determination of the rate may be with reference to either the total income or the taxable income. As is at once obvious, this can have a material effect on the amount of tax payable. The position has been explained in Kanga and Palkhiwala's The Law and Practice of Income Tax since the early editions of the work, which were in relation to the Income Tax Act, 1922. The latest edition (10th, 2014), which is in relation to the (Indian) Income Tax Act, 1961, puts the matter as follows (pp. 163-4; emphasis supplied): "Exemption granted under the Act is of two kinds. Certain incomes are exempt from charge and are also excluded from the assessee's total income. Certain other incomes are exempted from income-tax but they are to be included in the assessee's total income. Thus income which may itself be exempt from tax may yet form part of the assessee's 'total income'. The effect of including exempted income in the assessee's total income is mainly twofold. First, the rate of tax payable by the assessee is determined with reference to the total income and therefore exempted income which is included in the total income would affect the rate of tax applicable to the chargeable portion of the total income. Secondly, in several cases calculations have to be made with reference to the total income; and income which is exempted from tax but included in the total income is to be taken into consideration for this purpose. Where the Act grants exemption from tax in respect of a certain sum, that sum does not form part of the total income unless there is some other provision in the Act making it includible in the total income. In CIT v. Raiji [17 ITR 180], Chagla CJ said, with reference to the 1922 Act: 'The scheme is that wherever one finds an exemption or exclusion from payment of tax, the exemption or exclusion also operates for the purpose of computing the total income. Not only is the sum not liable to tax, but it is also not to form part of the total income for the purpose of determining the rate. When the legislature intends that certain sums, although not liable to tax, should be included in the total income, it expressly so provides...'" 10. It will be seen from the foregoing that while an exemption always reduces the amount of income that can be taxed, it may or may not affect also the rate applicable, depending on whether that is determinable on the basis of taxable income or total income. Of course, in the 2001 Ordinance the rate is determined by the taxable income. But it must be kept in mind that we are here considering the matter on the conceptual plane, and must therefore be guided by the principles of income tax law as they have crystallized over the decades. A tax credit on the other hand has no such effect, even in principle. It has no bearing on, or relevance for, the rate of taxation. This, in our view, is another basic difference which serves to confirm that an exemption and a tax credit are not, essentially, one and the same thing. They are conceptually distinct.
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11. Notwithstanding the above, it must be recognized that in practical terms there is no difference in the effect of a complete exemption from tax on the one hand and a 100% tax credit on the other. The final outcome is that zero tax is payable or recoverable. The situation at hand is of course of a 100% tax credit. It seems (if we may say so with respect) that in the Nishat Dairy case the learned High Court concerned itself, not unreasonably and perhaps sub silentio, only with a situation of a complete exemption from tax. However, on the plane of principle such a situation ought to be regarded only as a special case. The equation between the effect of a tax credit and an exemption that would practically exist in such a situation cannot, with respect, affect the conceptual analysis, which must necessarily be carried out in more general terms, so as to take into account the other possibilities as well." 11. Section 65B of the Ordinance extended the benefit of a ten percent tax credit to qualifying companies, provided that the relevant purchase and installation was undertaken prior to 2021. This timeline was specifically incorporated into the provision vide the Finance Act 2018. To consider whether the subsequent curtailment of the expiration date (and insertion of the Proviso[12]) vide the Finance Act 2019 affected any vested right, it may be appropriate to seek guidance from the august Court upon the concept of vested rights, especially in the context of fiscal legislation. Vested right 12. There is a preponderance of authority[13] demystifying the concepts of rights, vested rights and past & closed transactions, however, a collative and conclusive edict in such regard is the Division Bench judgment of this Court in Shahnawaz[14]: "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 SCM R 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…
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