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Official Citation: 2024 PTD 889
Court / Jurisdiction: Lahore High Court
Year of Decision: 2024
Decision Date: 2024-02-15
Parties: Commissioner Inland Revenue vs Muhammad Osman Gul
Ruling Summary: This decision was rendered by the Lahore High Court on 2024-02-15, officially reported as 2024 PTD 889. In this matter between Commissioner Inland Revenue and Muhammad Osman Gul, 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 889
Court Name: Lahore High Court Judge(s): Shahid Karim, Rasaal Hasan Syed Title: Commissioner Inland Revenue vs Muhammad Osman Gul Case No.: ICA No.35908 of 2023 Date of Judgment:2024-02-15 Reported As: 2024 LHC 463, PTCL 2024 CL. 341, 2024 PTD 889 Result: Appeal Allowed
JUDGMENT
JUDGMENT Shahid Karim, J:-. This judgment will decide a cluster of Intra Court Appeals (Appendix-I) brought by the Income Tax Department / Federal Board of Revenue (FBR) and (Appendix-II) brought by the private parties to challenge the judgment passed by a learned Single Judge of this Court in W.P No.52559 of 2022 and a large number of connected constitutional petitions which were decided by the same judgment (The Impugned Judgment). At the centre of controversy is the provisions of Section 7E in Chapter II (Section 7E) with the caption 'charge of tax' in the Income Tax Ordinance, 2001 (The 2001 Ordinance) which was inserted by the Finance Act, 2022. The petitioners before the learned Single Judge (respondents in these ICAs) contended that section 7E is ultra vires the Constitution of Islamic Republic of Pakistan, 1973 (The Constitution) and beyond the powers of the National Assembly to promulgate as an impost of tax. In conclusion, the learned Single Judge held that: 27. For what has been discussed, it is held that; i. To treat the market value of immovable property as income under Entry 47 is beyond the competence of Federal Legislator, hence is declared ultra vires. ii. The provisions of Section 7E are read down to save the taxation on Capital Value of Assets, which is within competence of Federal Legislature under Entry 50. iii. The Entry 50 for taxing Capital Value of Assets requires that the assets should be valued as a whole and taxed inseparably. Curative legislation is expected to bring the provisions, of Section 7E, within the spirit of taxing Capital Value of Assets, and to harmonies it with other provisions of the Ordinance of 2001.
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iv. Exclusion of persons under clauses (i), (iii) and (iv) of Section 7E(2)(d), is discriminatory, offending the Article 25, therefore, are declared ultra vires. However, the legislature is expected to remove the pointed out expropriatory and confiscatory aspects in the provisions of Section 7E. The petitions are allowed to the extent and in the manner, noted in this judgment. 2. The conclusion set out above makes it clear that the learned Single Judge held that treating the market value of immovable property as income under Entry 47 of Fourth Schedule of the Federal Legislative List of the Constitution (Entry 47) was beyond the competence of the Parliament and proceeded to declare it unconstitutional on that basis. Further, Section 7E was read down to save the levy as a Capital Value Tax (CVT) which was held to be within the competence of the Federal Legislature under Entry 50 of the Federal Legislative List of the Constitution (Entry 50). Finally, the learned Single Judge expressed his "expectation" that the provisions of Section 7E would be amended by bringing about "curative legislation" in order to harmonize Section 7E "with other provisions of the Ordinance of 2001". This was directed on the notion that Entry 50 for the purpose of taxing capital value of assets requires that the "assets should be valued as a whole and taxed inseparably". The relief granted went on to hold that the exclusions contained in 7E (2) (d)(i), (iii) and (iv) were discriminatory and offended Article 25 of the Constitution. On that basis these provisions were also declared unconstitutional. 3. The respondents who were the petitioners before the learned Single Judge have chosen not to challenge the Impugned Judgment. Our analysis of the Judgment is that it does not strike down Section 7E and in terms of the conclusion set out above at paragraph 27(ii), the provisions of Section 7E were merely read down to save the taxation on capital value of assets which was held to be within the competence of Federal Legislature under Entry 50. In the same vein, the learned Single Judge did not deem it proper to consider the tax to be within the field of Entry 47 as in the opinion of the learned Single Judge it was merely a tax on the market value of immovable property which could not be treated as income. In sum, the learned Single Judge considered the tax to be one covered by Entry 50 as a tax on the capital value of assets but merely required an amendment to bring the entire set of capital assets within the ambit of the law. If we were to view the conclusion drawn by the learned Single Judge holistically, the result reached was that the provisions of Section 7E were saved as also the tax which was imposed thereby. Counsel's submissions: 4. Learned counsel for the appellants, however, submitted that notwithstanding the conclusion set out above, the learned Single Judge took an erroneous view of Entry 47 as a field of legislative competence. According to the arguments in this Court, tax under Section 7E is squarely covered under Entry 47 and to transpose the tax to Entry 50 by the learned Single Judge was clearly erroneous. The Appellants discountenanced the construction put on Section 7E and asserted that despite a clear holding by the superior courts, the learned Single Judge while ignoring those precedents went on to hold that tax on deemed income was unconstitutional. Finally, it was stated that the Sindh High Court had upheld the provisions of Section 7E and the challenges made in Sindh to Section 7E were dismissed. 5. Mr. Shahryar Kasuri, Advocate one of the counsels for the respondents contended that Section 7E was not covered by Entry 50 as the Federal Legislature could not impose CVT on immovable property. Secondly, that the assets which had been acquired and on which income tax had already been paid were exempt from payment of tax subsequently. Thirdly, the plea of double taxation was also taken and in this regard it was argued that Section 7E would be tantamount to exproprietary taxation. The learned counsels for respondents addressed more or less the same arguments while Mr. Shahbaz Butt, Advocate additionally argued that the tax was akin to one paid under Section 37
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of the 2001 Ordinance which was capital gain tax and therefore according to him Section 7E suffered from the vice of double taxation. 6. Mr. Nasar Ahmad, learned Addl. Attorney General made submissions on behalf of the Federal Government and while supporting the appeals contended that a number of taxes on income could be levied and the Legislature was not constrained in any way to do so. He also alluded to the purpose of Section 7E which was not only to generate revenues but also to discourage a certain set of behaviour on the part of taxpayers. The Appellants and the learned Addl. Attorney General placed entire reliance upon a case decided by the Supreme Court of Pakistan and reported as Elahi Cotton Mills v. Federation of Pakistan (PLD 1997 SC 582) to which we shall advert during the course of our opinion. Taxation and its Attributes: 7. It has been said by Martin Loughlin in 'Idea of Public Law' (Oxford OUP, 2003) that tax law is a practice of public law and is therefore a constitutive of the State. It shapes the distribution of goods in society by allocating tax burden and tax transfers in furtherance of political decisions (John Snape in a book titled 'Legal Interpretation of Tax Law (2nd Edition)). We may emphasize the political nature of tax law as embodying reasons of state. It has famously been said by Rowlatt J. in Cape Brandy Syndicate v IRC (1921) 12 TC 358 that "there is no equity about a tax". It was said in Lehnhausen v lake Shore Auto Parts Co. 410 U.S 356, 364 (1973) by the US Supreme Court that a 'tax is presumed to be constitutional and the burden is on the one attacking legislative arrangement to negative every conceivable basis which might support it". In 'Treatise on the Law of Taxation" by Thomas M. Cooley (relied upon by the learned Addl. Attorney General and a masterpiece on the law of taxation), the taxing power has been stated to be an incident to sovereignty. The concept has been articulated in the following words: "The taxing power an incident to sovereignty. The power of taxation is an incident of sovereignty, and is possessed by the government without being expressly conferred by the people. It is a legislative power; and when the people, by their constitutions, create a department of government upon which they confer the power to make laws, the power of taxation is conferred as part of the more general power. Even a wrongful government, if it be for the time being a government de facto, maintaining its authority and enforcing obedience to its laws, may exercise the power of taxation, and the power, so far as it has been completely enforced, must be recognized as lawful. But the overthrow of the de facto government defeats the power; and the rightful government will not thereafter aid in enforcing the uncollected levies. Every thing to which the legislative power extends may be the subject of taxation, whether it be person or property, or possession, franchise or privilege, or occupation or right. Nothing but express constitutional limitation upon legislative authority can exclude anything to which the authority extends from the grasp of the taxing power, if the legislature in its discretion shall at any time select it for revenue purposes. And not only is the power unlimited in its reach as to subjects, but in its very nature it acknowledges no limits, and may be carried to any extent which the government may find expedient. It may therefore be employed again and again upon the same subjects, even to the extent of exhaustion and destruction, and may thus become in its exercise a power to destroy. If the power be threatened with abuse, security must be found in the responsibility of the legislature which imposes the tax to the constituency who are to pay it. The judiciary can afford no redress against oppressive taxation, so long as the legislature in imposing it, shall keep within the limits of legislative authority and violate no express provision of the constitution. The necessity for imposing it addresses itself to the legislative discretion and it is or may be an urgent necessity which will admit of no property or other conflicting right in the citizen while its remains unsatisfied." From the portion of the 'Treatise' set out above, it is clear that the power of taxation is unlimited in its reach as to subject and by its very nature it acknowledges no limits and may be carried to any
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extent which the government may find expedient. The judiciary can afford no redress against taxation so long as the legislature in imposing it keeps within the limits of legislative authority and violate no express provisions of the constitution. The 'Treatise' by Cooley relied upon hereinabove is a seminal study of taxation and is considered as an authority on the subject of taxes and their nature and kinds. 8. In the context of the true construction of the word 'income' as used in the Constitution and 2001 Ordinance, we may refer to the observations made by a prominent US Supreme Court Judge Justice Oliver Wendell Holmes who stated in 254 US 418 with regard to the meaning to be ascribed to a word that "a word is not crystal, transparent and unchanged, it is the skin of a living thought and may vary in colour and content according to the circumstances and the time in which it is used". 9. This is true basis on which we have proceeded to consider the extent and meaning of the word 'income' as used in the Constitution and the law and have arrived at the conclusion by recognizing that the word 'income' has taken colour and content according to the circumstances and the times in which it has been used in the 2001 Ordinance. 10. The sixteenth amendment to the US Constitution grants power on the Congress to impose taxes. It provides that "the Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States and without regard to any census or enumeration." 11. The courts in the U.S have had the occasion to dwell upon the power of the Congress to lay and collect taxes on incomes and the question regarding true import of what constitutes income have also arisen in various cases. We may refer to some of the statements in 'Words and Phrases Permanent Edition Volume 20B', which on the basis of the decisions of the courts referred to the interpretation of the word 'income' by the courts in the US. The distilled essence of the decisions and the conclusions drawn by courts on the term 'income' has been stated in the 'Treatise' in the following terms: "U.S 1947. "Income" within Sixteenth Amendment is not limited to direct receipt of cash. U.S.C.A. Const. Amend. 16.__Crane v. C.I.R., 67 S.Ct. 1047, 331 U.S 1, 91 L.Ed. 1301.__ Int Rev 3110 C.C.A.2 1946. Income which is subject to a man's unfettered command, and which he is free to enjoy at his own option, may be taxed to him as his "income" whether he sees fit to enjoy it or not. __ Hedrick V. C.I.R., 154 F.2d 90, certiorari denied 67 S.Ct. 53, 329 U.S 719, 91 L.Ed.623.__Int Rev 3110 The term "income" as used in the Sixteenth Amendment and in the revenue statutes is not limited to cash income." 12. "In all interpretations, our starting point of course is the language of the statute itself". (464 U.S 206, 214 [1984]). Judge Learned Hand's statement remains a classic invocation of the interpretive approach of purposivim. The judge said "it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning". Cabell v Markham 148 F.2 d 737, 739. 13. The chargeability to tax of deemed income is a universally accepted notion. The subject, in the context of United Kingdom, is discussed in Halsbury's Laws of England (Fourth Edition) (23) in the following words: "54. Deemed income. For the purpose of preventing the avoidance of tax by such devices as settlements on infant children, gratuitous covenants to pay income to others, and the transfer of assets abroad, the Income Tax Acts contain provisions which deem for the purpose of those Acts income arising under such transactions to be that of someone other than the person to whom under the general law it would belong. In the absence of specific statutory authority income once deemed to be that of someone else cannot be further deemed to be that of yet another person."
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14. The subject of statutory definitions has been at the forefront of our thoughts throughout the opinion. "Statutory definitions are a common feature in legislation and are typically used for one or more purposes... to enlarge or narrow the natural meaning of a term". (Bennion, Bailey and Norbury on Statutory Interpretation, Eighth Edition). Bennion further refers to the kinds of definition as Inclusive and Exclusive definitions. The term Inclusive definition has been stated to mean: (1) "An inclusive definition modifies the natural meaning of the defined term by enlarging it or clarifying potential doubt about what is covered. This kind of definition typically takes the form 'X includes'. An inclusive definition is used to enlarge the meaning of the defined term to cover things that are not or might not otherwise be caught. It 'does not normally affect the width of the term being enlarged'. The term as used in the Act has its natural meaning (which is left undefined) and in addition has the special meaning given to it by the inclusive definition. 15. The term 'income' as defined in the 2001 Ordinance, is a case of inclusive definition and is used to modify the natural meaning of 'income'. The definition has enlarged the meaning of the term to cover things that are not or might not otherwise be caught. This is where a link may be established with an expanding field of fiscal sociology around the globe to emphasise that the terminology applies broadly to the role of taxation in social change. In the contemporary constitutions of modern developed states, the institutional focus on the Economic and Political Constitution resonates strongly with the study of questions of tax law. Scholars are influenced by the idea that a constitution is made up of a series of political decisions as to the basic structure of economic life. (For a fuller discussion, see Tax Law, State-Building and the Constitution by Dominic de Cogan). 16. In the words of John McEldowney, (The Changing Constitution, 8th edn. (Oxford, 2015): Political and economic pressures for the reduction of the budget deficit continue to require major cuts in public expenditure. This has had simultaneous effects on the delivery of many public services across most sectors of the economy. The financial crisis and political influences dominate the technical rules of financial reporting and control, with significant constitutional ramifications... 17. Applying the purposive approach to the interpretation of Section 7E, we have no doubt that the purpose that the provision was enacted to accomplish, was to treat as income chargeable to tax, an amount equal to five percent of the fair market value of capital assets, which the taxpayers use for increase in wealth on account of rise in value of the immovable property. The purpose is also clear from the speech of the Finance Minister and the accomplishment of the object of section 7E cannot be frustrated by holding that the legislature does not have power to tax deemed income. Statutory and Constitutional framework: 18. Section 7E of the 2001 Ordinance provides that: "7E. Tax on deemed income.- (1) For tax year 2022 and onwards, a tax shall be imposed at the rates specified in Division VIIIC of Part-I of the First Schedule on the income specified in this section. (2) A resident person shall be treated to have derived, as income chargeable to tax under this section, an amount equal to five percent of the fair market value of capital assets situated in Pakistan held on the last day of tax year excluding the following, namely:- (a) one capital asset owned by the resident person; (b) self-owned business premises from where the business is carried out by the persons appearing on the active taxpayers' list at any time during the year; (c) self-owned agriculture land where agriculture activity is carried out by person excluding farmhouse and land annexed thereto; (d) capital asset allotted to - (i) a Shaheed or dependents of a shaheed belonging to Pakistan Armed Forces;
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(ii) a person or dependents of the person who dies while in the service of Pakistan armed forces or Federal or provincial government; (iii) a war wounded person while in service of Pakistan armed forces or Federal or provincial government; and (iv) an ex-serviceman and serving personal of armed forces or ex-employees or serving personnel of Federal and provincial governments, being original allottees of the capital asset duly certified by the allotment authority; (e) any property from which income is chargeable to tax under the Ordinance and tax leviable is paid thereon; (f) capital asset in the first tax year of acquisition where tax under section 236K has been paid; (g) where the fair market value of the capital assets in aggregate excluding the capital assets mentioned in clauses (a), (b), (c), (d), (e) and (f) does not exceed Rupees twenty-five million; (h) capital assets owned by a provincial government or a local government; or (i) capital assets owned by a local authority, a development authority, builders and developers for land development and construction, subject to the condition that such persons are registered with Directorate General of Designated NonFinancial Businesses and Professions. Provided that the exclusions mentioned at clauses (a), (e), (f) and (g) of this sub-section shall not apply in case of a person not appearing in the active taxpayers' list, other than persons covered in rule 2 of the Tenth Schedule.] (3) The Federal Government may include or exclude any person or property for the purpose of this section. (4) In this section- (a) "capital asset" means property of any kind held by a person, whether or not connected with a business, but does not include - (i) any stock-in-trade, consumable stores or raw materials held for the purpose of business; (ii) any shares, stocks or securities; (iii) any property with respect to which the person is entitled to a depreciation deduction under section 22 or amortization deduction under section 24; or (iv) any movable asset not mentioned in clauses (i), (ii) or (iii); (b) "farmhouse" means a house constructed on a total minimum area of 2000 square yards with a minimum covered area of 5000 square feet used as a single dwelling unit with or without an annex: Provided that where there are more than one dwelling units in a compound and the average area of the compound is more than 2000 square yards for a dwelling unit, each one of such dwelling units shall be treated as a separate farmhouse. 19. It would be relevant to set out the definition of the term 'income' in the 2001 Ordinance which provides that: "2(29) "income" includes any amount chargeable to tax under this Ordinance, any amount subject to collection or deduction of tax under section 148, 150, 152(1), 153, 154, 156, 156A, 233, sub- section (5) of section 234, section 236Z and any amount treated as income under any provision of this Ordinance] and any loss of income. 20. The two entries in the Fourth Schedule to the Constitution at the heart of the arguments in this Court are Entry 47 and Entry 50, which provide that: "Entry 47: Taxes on income other than agricultural income. Entry 50: Taxes on the capital value of the assets, not including taxes on immovable property." Section 7E: 21. Section 7E would require unpacking as this would lend actuality to the analysis. Upon its reading, the first impression that comes out starkly is the essence of the tax given in subsection (1) to
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impose "a tax... on the income specified in this section." This is bolstered by sub-section (2) which further articulates the intention of legislature to assume that a resident person derives an income chargeable to tax on capital assets situated in Pakistan held on the last day of the tax year. That income shall be treated to have been derived and will be taxed accordingly. Having defined the incidence of tax, the measure of tax is given as an "amount equal to five percent of the fair market value of capital assets." 22. But the incidence of tax, in essence, falls on the presumptive income of a resident person which he shall be deemed to derive from capital assets held by him. Thus the legislature presumes that a capital asset in the hands of a resident person, in the ordinary course is likely to yield certain income chargeable to tax. There is no doubt in our estimation that the tax is on income (though deemed) in contradistinction to tax on capital value of an asset covered by Entry 50. The two taxes are distinct and cannot be muddled inter se. The attempt on the part of the learned Single Judge to save section 7E by treating of it under Entry 50 has no legal legs to stand upon. The concept of an income out of a capital asset has to be contrasted with the capital value of an asset. The definition of "capital asset" considered objectively leaves it in no manner of doubt that the tax ensnares immovable property of a resident person (barring certain exceptions enumerated therein) and no other capital assets. The budget speech made it evident that the Government of the day had reasonable grounds to believe that a substantial amount of investment was parked in real estate with potential for exponential growth in value. Section 7E is simply an attempt to treat the increment in value of a capital asset as income and the resident person cannot be left immersed in the thought of deriving double benefit viz. one, increase in value of his capital asset and, two, zero tax. In case he disposes of his capital asset, no tax is leviable under Section 7E. But beyond six years, the resident person does not pay capital gain tax on such sale, too. 23. The tax has been levied on notional income but not a notional asset (from which it is deemed to arise). The legislature has intended to tax an asset apparently lying dormant and not generating an income in cash but indeed capable of increment in value. It is that value addition that section 7E seeks to tax. Notionally the augmentation in value does become part of taxpayer's income. Taxing Land and Benefit from Land: 24. "Land" observed Anthony Trollope "is about the only thing that can't fly away". When income tax was first introduced it was called a tax…
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