Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: Latif Hakeem VS Respondent: Federation of Pakistan through its Secretary Finance
Court Name: Peshawar High Court Judge(s): Abdul Shakoor, Syed Arshad Ali Title:Latif Hakeem vs Federation of Pakistan through its Secretary Finance,
JUDGMENT
Reported As: PTCL 2024 CL. 281 Result: Petitions are allowed Judgment
JUDGMENT: MR. JUSTICE SYED ARSHAD ALI. (1). Latif Hakeem, the petitioner in the instant petition and the other petitioners in the connected petitions (particulars of the petitions are provided in Annexure 'A' to this judgment) are aggrieved of the insertion of section 7E through Finance Act, 2022 to the Income Tax Ordinance, 2001 ("Ordinance") which provides that for the tax year, 2022 and onward, a resident person shall be treated to have. derived as income chargeable to tax, an amount equal to 5% of the fair market value of the capital assets situated in Pakistan, chargeable to tax @ 20% under Division-VIII C of Part-I of the First Schedule to the Ordinance. The vires of the impugned legislation has been challenged mainly on three grounds; firstly, legislative incompetence of Parliament; secondly, the said levy is discriminatory and thirdly; being confiscatory. 2. The learned counsel for the petitioners after referring to the impugned provision has argued that right to hold property is the fundamental right of every citizen of Pakistan and the impugned legislation has directly affected the said right of the petitioners by making the non-income producing property owned by the petitioners subject to incidence of taxation where the Parliament has no power under Entry No. 47 of the Fourth Schedule to the Constitution of Islamic Republic of Pakistan, 1973 ("Constitution") to legislate on the subject. The learned counsel, while referring to the judgment of the Hon'ble Lahore High Court passed in Constitutional Petition No. 52559/2022 dated 06.04.2023, has argued that after 18th amendment in the Constitution, the Parliament has no jurisdiction to tax immoveable property in any form. The learned counsel has also maintained that no tax can be levied through a deeming provision in a Statute unless there is an event of taxation in
---
## Page 2
terms of income as provided under the Ordinance. Since through the impugned levy, the property has been taxed, therefore, the same is not only ultra vires the Constitution but cannot be taxed in absence of realization of income from the said property. 3. The worthy Deputy Attorney General assisted by the learned counsel for the Revenue have argued that no doubt an immoveable property cannot be taxed by the Parliament after 18th amendment in the Constitution but the capital value of Asset, though it may have not realized any income, can still be taxed by the Parliament through a deeming clause in terms of Entry No. 47 in the Fourth Schedule of Constitution. In support of their arguments, they have placed reliance upon the judgment of the Apex Court in the case of Messrs Elahi Cotton Mills Ltd[1] and the judgment passed by the Hon'ble Sindh High Court in the case of Hakim sons (Impex) (Pvt) Ltd[2]. 4. M/s Shumail Ahmad Butt Advocate & Barrister Syed Mudassir Ameer were appointed as Amicus Curie to assist this Court in the matter. 5. Mr. Shumail Ahmad Butt, Advocate/the learned Amicus Curie, while arguing the case, has read Entry No. 47 as well as Entry No. 50 as it stands after 18th amendment in the Constitution and has submitted that immoveable property has completely been Ousted from Federal Legislative competence to tax. He has further maintained that after 18th amendment in the Constitution, in terms of Entry No. 50 ibid, it is only the Province which has the authority to legislate on the subject. The learned counsel, while referring to Article 142 of the Constitution, has argued that there is marked distinction between the power of Federation to regulate a subject and power to tax the same; as power to regulate a subject does not mean that it has the jurisdiction to even tax the subject. In this regard, he has referred to Article 253 of the Constitution and has stated that though the limits relating to immoveable property through legislation can be determined by the Parliament, however, this does not mean that the Parliament has the power to tax the immoveable property in view of the clear ouster as provided through Entry No. 50 ibid. The learned counsel has also referred to the legislative debate by the Federal Minister of Law before the impugned amendment and has stated that the aim was to tax immoveable property on the basis of its rental value despite that it has no potential to generate any income in certain cases, hence, it is beyond the authority of the Parliament to levy the impugned tax in view of the clear bar enumerated in Entry No. 50 ibid. He, while bolstering his arguments, put reliance on the Parliamentary debate, and the law laid down by the Apex Court in the case of Ghulam Hussain[3]. The learned counsel has also maintained that since the tax can be imposed on income and when the immoveable property does not generate any income, it cannot be subject to impost of income tax through a deeming clause, as the same would not only be a violation of the basic purpose of direct taxation but would also be confiscatory. In support of his arguments, he has placed reliance on Shaukat Ali Mian's case.[4] Regarding the competence of Parliament as well as State Legislature, the learned counsel has referred to the case of Kesoram Industries Limited.[5] He has also produced the Khyber Pakhtunkhwa Finance Act, 2010 whereby capital value of immoveable property has been taxed by the Province which clearly shows that after 18 amendment in the Constitution, it is the Province alone which can tax the capital value of the immovable property. 6. Barrister Syed Mudasir Ameer, the learned Amicus Curie has read various provisions of the Ordinance and has also referred to the case of Messrs Elahi Cotton Mills Ltd (supra) and argued that in order to trigger the provision of Income Tax Laws it has to be established that the subject can be taxed to income only when there is actual income and what is not income under the Income Tax Laws it cannot be termed as income through a deeming clause. He next contended that, while interpreting an Entry in a Legislative List, it should be given the widest possible meaning. This, however, would not mean that the Parliament can choose to tax as income which in no rational sense can be regarded as a citizen's income. The learned counsel has laid much emphasis on Entry No. 50 and argued that once the immoveable property has been excluded from taxation
---
## Page 3
by Parliament then it cannot be taxed in any other form. The learned counsel has referred to the law laid down by the. Apex Court in the case of Haji Muhammad Shafi.[6] The learned counsel further states that prior to 18th amendment in the Constitution, immoveable property could be taxed, with the exception of capital gain from immoveable property. However, with the 18th amendment Entry No. 50 was reworded whereby the subject capital gain was swapped with immoveable property and now it is only a capital gain relating to immoveable property which can be taxed by the Parliament whereas immovable property now falls within the jurisdiction of the Province even for the purpose of taxation. 7. We have given anxious consideration to the submissions of learned counsels for the parties as well as the learned Amicus Curie and have also perused the record. 8. It is envisaged by Article 77 of the Constitution that no tax shall be levied for the purposes of Federation except by or under the authority of Act of Majlis-e-Shoora (Parliament). Pakistan encompasses of the Federation as well as the federating Units i.e. the Provinces and distribution of legislative powers of Federation as well as the Provinces have been provided in Chapter-I of Part-V of the Constitution. Under Article 142(a), the Parliament alone has the jurisdiction to make laws with respect to any matter in the Federal Legislative List and in terms of sub-clause (c) of Article 142 Parliament has been restrained to make laws with respect to any matter not enumerated in the Federal Legislative List and it is the Province alone which has the jurisdiction on all residual matters not enumerated in the Federal Legislative List as provided in the Fourth Schedule to the Constitution in terms of Article 70. Under the constitutional scheme relating to distribution of legislative competence, it is well settled that taxation is considered to be a distinct matter for legislative competence viz-a-viz the general subject of legislation. The general subjects of legislation are dealt with in one group of entries and power of taxation in a separate group. The power to tax cannot be deduced from a general legislative entry as an ancillary power. (Kesoram Industries Limited's case (supra) 9. The following entries in Part-1, Fourth Schedule to the Constitution determines the legislative competence of the Parliament relating to taxation FOURTH SCHEDULE [Article 70(4)] LEGISLATIVE LISTS Federal Legislative List 43. Duties of customs, including export duties. 44. Duties of excise, including duties on salt, but not including duties on alcoholic liquors, opium and other narcotics. ........................................................................................... ........................................................................................... 47. Taxes on income other than agricultural income. 48. Taxes on corporations. 49. Taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed, except sales tax on services. 50. Taxes on the capital value of the assets, not including taxes on immoveable property. 51. Taxes on mineral oil, natural gas and minerals Jar use in generation of nuclear energy 52. Taxes and duties on the production capacity of any plant, machinery, undertaking, establishment or installation in lieu of the taxes and duties specified in entries 44, 47, 48 and 49 or in lieu of any one or more of them. 53. Terminal taxes on goods, or passengers carried by railway, sea or air; taxes on their fares and freights.
---
## Page 4
10. Since the issue at hand relates to imposition of tax on deeming income relating to an immovable property, therefore, germane to the controversy are Entry No. 47 and Entry No. 50. It is the case of Revenue that the genesis of the impugned legislation (section 7E) is from Entry No. 47 which is a tax on income and the exclusion through Entry No. 50 after 18th amendment is only to the extent of taxation of immoveable property and not imposition of taxes on the capital value of Assets. 11. In order to proceed further, we have to comprehend the terms 'income' as it appears in Entry No. 47, 'capital value of the assets/capital gain' as it appears in Entry No. 50 and the essential question of the extent of exclusion of immoveable property from the jurisdiction of Parliament. Definition of 'Income' in the Ordinance 2(29) "income" includes any amount chargeable to tax under this Ordinance, any amount subject to collection 2[or deduction] of tax under section 148, 150, 152(1), 153, 154, 156, 156A, 233, sub- section (5) of section 234 and any amount treated as income under any provision of this Ordinance and any loss of income; 9. Taxable income.--The taxable income of a person for a tax year shall be the total income under clause (a) of section 10 of the person for the year reduced (but not below zero) by the total of any deductible allowances under Part IX of this Chapter of the person for the year. 12. The concept of income relating to its being subject to impost of Income Tax Act was very elaborately explained by the Apex Court in the case of Samina Shaukat[7] in the following manner: -- "It will he seen that the term 'income' as used in the Income Tax Act is, indeed, a term of wide significance and generally and ordinarily it connotes a periodical monetary return, coming in with some sort of regularity or expected regularity, from a definite source; but, as observed by the Privy Council, the multiplicity of forms which income may assume is beyond enumeration; and income need not necessarily be the recurrent return from a definite source; though it is generally of that character. It may consist of a series of separate receipts, as for instance happens in the case of professional earnings. In the last analysis, the question whether a particular kind of receipt is income or not would depend for its answer on the peculiar facts and circumstances of the case. If the nature of the receipt and its source are not satisfactorily explained by the assessee, facts which are generally within his peculiar knowledge, the Income-tax Officer may legitimately presume that the amount in question is an income of the assessee from an undisclosed source. Once a finding is recorded that the amount in question could be treated as income within the meaning of the charging section, section 3 of the Income Tax Act, the burden of proving that the income qualified for exemption under any of the clauses of section 4 of the Act was on the assessee. Subsection (I) of section 4 of the Act provides that 'subject to the provisions of the Act, the total income of any previous year of any person includes all incomes, profits and gains from whatever source derived". Subsection (3) of the same section then enumerates exemptions, and the operative words are 'any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them--". It was for the appellant to show that she was covered by the exemption granted by clause (vii) of subsection (3). This she clearly failed to do, for the reason that she could not satisfactorily explain the source of the entire amount of cash found in her hands, nor of the total accretions thereto in subsequent years. It does not need much reasoning to see that if the source of income is not disclosed or satisfactorily explained, then it is not possible to hold that the income was not from business or from the exercise of a profession, vocation or occupation;" 13. The aforesaid explanation of the income for the purpose of impost of income tax was affirmed subsequently in the cases of M/s Haji Maula Bux Corporation and Pakistan Industrial Development Corporations[8].
---
## Page 5
14. The definition of 'income' as provided under the Ordinance has the following three attributes: (i) An amount chargeable to tax under the Ordinance; (ii) an amount subject to collection or deduction of tax, and (iii) An amount treated as income under any provision of this Ordinance and loss of income. 15. The aforesaid third attribute refers to the deeming income; thus, if any income is received, arises or accrues or is deemed to receive, arise or accrue from the assesse, it would be subject to tax. It was observed by the Apex Court in Pakistan Industrial Development Corporation's case (supra) that the deeming provision presupposes accrual of income to the assessee but by fiction of law shifts the 'locale of accrual of the income'; a deeming clause makes a thing to be as provided by statute though in reality, it is not so. The said judgment refers to the law laid down by the Privy Council in Bombay Trust Corporation's case[9] wherein the deeming income has been explained as: ''Thus, the phrase 'deemed to accrue or arise to him in India during such year' and the corresponding phrase with reference to receipt in this section, involve four possible concepts. (a) artificial accrual or receipt, (b) artificial place of accrual or receipt, (c) artificial chargeability of a person other than the actual owner of the income and (d) artificial year of taxability". 16. However, what would be the scope of the said deeming income has been very elaborately explained by the Apex Court in Messrs Elahi Cotton Mills's case (supra) while dealing with the vires of legislation i.e. section 80C & 80D of the erstwhile Income Tax Ordinance, 1979 whereby the income tax was imposed on the presumptive tax on the gross revenue/value of export as deemed income of an assessee. The said levy was upheld by the Apex Court in the following manner:-- 34. ....................................................................................... In our view, sections 80-C and 80-CC of the Ordinance fall within the category of presumptive tax as under the same the persons covered by them pay a pre-determined amount of presumptive tax in full and final discharge of their liability in respect of the transactions on which the above tax is levied. Whereas section 80-D of the Ordinance is founded on the theory of minimum tax which has been elaborately dealt with in the treatises, the relevant portions of which have been quoted in extenso hereinabove. If we were to read Entry 47 in isolation without referring to Entry 52, one can urge that Entry 47 does not admit the imposition of Presumptive tax as the expression "taxes on income" employed therein should be understood as to mean the working out of the same on the basis of computation as provided in the various provisions of the Ordinance. We are inclined to hold that presumptive tax is in fact akin to capacity tax i.e., capacity to earn. In this view of the matter, we will have to read Entry 47 in conjunction with Entry 52 which provides taxes and duties on production capacity of any plant, machinery, undertaking, establishment or installation in lieu of the taxes or duties specified in Entries 44, 47, 48 and 49 or in lieu of any one or more of them. Since under Entry 52, tax on capacity in lieu of taxes mentioned in Entry 47 can be imposed, the presumptive tax levied under sections 80-C and 80-CC of the Ordinance is in consonance with the above two entries if read in conjunction. 17. Similarly, in para-31(xii) of the said judgment, it was observed by the Apex Court that what is not 'income' under the Income Tax Act, can be made 'income' by a Finance Act. An exemption granted by the Income Tax Act can be withdrawn by the Finance Act or the efficacy of that exemption may be reduced by the imposition of a new charge, of course, subject to Constitutional limitations. The scope of taxing event in the legislation (starting with the Income Tax Act, 1922) as developed in judicial decision given at the highest level, was regarded as confined to revenue as opposed to capital. This distinction was regarded as fundamental to income tax law: revenue received could be brought to tax but capital received could not; similarly expenditure that went to revenue account could be claimed as deduction but capital expenditure could not.[10]
---
## Page 6
18. The ratio in Messrs Elahi Cotton Mills' case (supra) for upholding the presumptive tax (minimum tax) was not in terms of Entry No. 47 but it was in view of Entry No. 52 which authorises the Parliament to tax the production capacity of a plant, machinery or undertaking in lieu of taxes and duties specified in Entries No. 44, 47, 48 and 49 ibid. On the other hand, immovable property lying idle has no capacity to generate income, therefore, it cannot be taxed on the basis of presumptive fair market value. In our humble view, this is the precise ratio of Messrs Elahi Cotton Mills case. However, the owner is subject to impost of tax on the gain arising out of transaction of the immovable property under the Ordinance. This aspect has been vary aptly explained by the Lahore High Court in the case of Muhammad Osman Gul[11]. That capital gain tax has always been and is part of the income tax, competence of which is Entry No. 47, and reasons for placing it in Entry No. 50 was to exclude the immovable property from the definition of Capital Assets, only for the purpose of capital gain. Capital value of Asset 19. The word/phrase capital value of asset or capital value viz-a-viz the asset are undefined words/phrases. The word "Assets" appears to be synonymous with the definition of property as provided under Article 260 of the Constitution as "Property includes any right, title or interest in property, moveable or immoveable and any means and instruments of production. The term 'value of asset' came under consideration before the Apex Court as it stood under section 2(1)(o) of Monopolies and Restrictive Trade Practice (Control & Prevention) Ordinance (V of 1970). It was held by the Apex Court in Sanaullah Woollen Mills's case[12] that the word 'asset' is generally used in collective plural, and in commercial law it denotes the aggregate of available property, stock in trade, cash etc belonging to a merchant or mercantile company. It is also used to signify the means which a person or bank or a corporation has as compared with/his/its liabilities, that is its identity is separate and is not inclusive of debts or labilities but is only comparable to them. It is in this sense that the word 'asset' has been used to denote a 'complete whole' of property. Any other meaning given to it will be against the verbal expression of the legislature, and would defeat the very purpose of the legislation. 20. The phrase capital value of asset also examined by the Apex Court in Messrs I.C.C. Textile Ltd's case.[13] The issue for determination before the Apex Court in the aforesaid case was imposition of corporate asset tax imposed vide section 12 of the Finance Act, 1990 by the Federal Legislature chargeable on the basis of gross value of assets inclusive of liabilities in terms of Entry No. 50 of the Fourth Schedule of Constitution. The Apex Court while relying upon Sanaullah Woollen Mills Ltd's case (supra), has explained the meaning of asset in para-12 of the judgment in the following manner:-- 12. Reference at this stage may also be made to the case of Sanaullah Woollen Mills Ltd. (PLD 1987 SC 202) which was also relied upon by this Court in Haji Muhammad Shafi's case. In Sanaullah Woollen Mills's case the expression "value of assets" as defined in the Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, 1970 came under consideration and this Court while interpreting the expression "value of assets" held; the word "means" has no other significance but that, that the word "assets" has to be given its ordinary meaning and not to be understood as having any extended meaning which the word "includes" conveys. The word "assets" is generally used in collective plural, and in commercial law it denotes the aggregate of available property, stock in trade, cash etc., belonging to a merchant `or mercantile company. (Black's Law Dictionary Revised Fourth Edition, page 151). It is also used to signify the means which a person or bank or a corporation has as compared with his/its liabilities that is, its identity is separate and is not inclusive of debts or liabilities but is only comparable to them. It is in this sense that the word "assets" has been used to denote whole of the property. Any other meaning given to it will be against the verbal expression of the legislature, and would defeat the very
---
## Page 7
purpose of the legislation. After having read the ratio decidendi of both these judgments referred to herein above we feel that there should not be any doubt that the Corporate Assets Tar is tax on the capital value of the assets as per Item No-50 of the Legislative List and merely in view of the manner prescribed under section 12(12)(d) of the Act for calculating and imposing tax it cannot be held contrary to this entry or unconstitutional nor its constitutionality can be objected to for such reason. It is thus held that legislature had power to promulgate section 12 of the Act under Article 142 of the Constitution to levy Corporate Assets Tax on the value of the assets held by a company on a specified date, therefore, the gross assets of the Company as per section 12(12)(d) of the Act are liable to tax inclusive of the liabilities of the company as per Entry No. 50 of the Federal Legislative List Part 1 Fourth Schedule of Constitution and there is absolutely no ambiguity of whatsoever nature in imposing the Corporate Assets Tax. As such the judgment relied upon by Mr. Ziaullah Kiani ASC and Mian Ashiq Hussain ASC in the case of B. P. Biscuits Factory (Supra) has no application on instant case, thus the contention raised in this behalf is also repelled. Similarly, the phrase capital value of asset was also explained by the Indian Supreme Court in the case of Harbhajan Singh Dhillon.[14] The Supreme Court of India has somewhat explained the expression capital value of asset in the manner, "it will, therefore, not be improper to interpret the expression 'capital value of assets' as meaning the aggregate value of assets which a willing purchaser would offer a willing seller for the property in its condition at the time of transaction". 21. In view of Entry No. 47 and 50, taxes on income other than agriculture income as well as taxes on capital value of the asset, not including taxes…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.