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Official Citation: 2024 PTD 1271
Court / Jurisdiction: Lahore High Court
Year of Decision: 2024
Decision Date: 2024-06-04
Parties: Service Global Footwear Limited & another vs Federation of Pakistan through Secretary Revenue Division & others
Ruling Summary: This decision was rendered by the Lahore High Court on 2024-06-04, officially reported as 2024 PTD 1271. In this matter between Service Global Footwear Limited & another and Federation of Pakistan through Secretary Revenue Division & 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 1271
Court Name: Lahore High Court Judge(s): Shahid Karim, Rasaal Hasan Syed Title:Service Global Footwear Limited & another vs Federation of Pakistan
through Secretary Revenue Division & others Case No.: ICA No.48745 of 2023 Date of Judgment:2024-06-04 Reported As: 2024 LHC 2738, 2024 PTD 1271 Result: Appeal Allowed Judgment
Shahid Karim, J:-. This appeal and a cluster of appeals have assailed the judgment by a learned Single Judge of this Court. In a set of constitutional petitions the learned Single Judge dismissed the challenge to section 4C of the Income Tax Ordinance, 2001 in its retrospective application to tax year 2022 and upheld it with regard to inherent discrimination which lies in Division IIB of Part I of First Schedule. Both the taxpayers (petitioners before the learned single bench) and Federal Board of Revenue (FBR) have come in appeals. The Scheme of Law: 2. Section 4C was inserted in the Income Tax Ordinance, 2001 ("the Ordinance") through Finance Act, 2022 and provides that: 4C. Super tax on high earning persons. (1) A super tax shall be imposed for tax year 2022 and onwards at the rates specified in Division IIB of Part I of the First Schedule, on income of every person: Provided that this section shall not apply to a banking company for tax year 2022. (2) For the purposes of this section, "income" shall be the sum of the following:-- i. profit on debt, dividend, capital gains, brokerage and commission; ii. taxable income (other than brought forward depreciation and brought forward business losses) under section 9 of the Ordinance, excluding amounts specified in clause (i); iii. imputable income as defined in clause (28A) of section 2 excluding amounts specified in clause (i); and
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iv. income computed, other than brought forward depreciation, brought forward amortization and brought forward business losses under Fourth, Fifth, Seventh and Eighth Schedules. (3) The tax payable under sub-section (1) shall be paid, collected and deposited on the date and in the manner as specified in sub-section (1) of section 137 and all provisions of Chapter X of the Ordinance shall apply. (4) Where the tax is not paid by a person liable to pay it, the Commissioner shall by an order in writing, determine the tax payable, and shall serve upon the person, a notice of demand specifying the tax payable and within the time specified under section 137 of the Ordinance. (5) Where the tax is not paid by a person liable to pay it, the Commissioner shall recover the tax payable under sub-section (1) and the provisions of Part IV, X, XI and XII of Chapter X and Part I of Chapter XI of the Ordinance shall, so far as may be, apply to the collection of tax as these apply to the collection of tax under the Ordinance. (5A) The provisions of section 147 shall apply on tax payable under this section. (6) The Board may, by notification in the official Gazette, make rules for carrying out the purposes of this section. 3. Section 4C imposed a super tax on high-earning persons (a term used in the budget speech by Finance Minister) and did so for the tax year 2022 and onwards at the rates specified under Division IIB of Part I of the First Schedule on income of every person ("Division IIB"). Division IIB at the relevant time stated the rate of tax under Section 4C to be the following: S.No Income under section 4C Rate of tax (1) (2) (3) 1. Where income does not exceed Rs. 150 million 0% of the income 2. Where income exceeds Rs. 150 million but does not exceed Rs. 200 million1% of the income 3. Where income exceeds Rs. 200 million but does not exceed Rs. 250 million2% of the income 4. Where income exceeds Rs. 250 million but does not exceed Rs. 300 million3% of the income 5. Where income exceeds Rs. 300 million 4% of the income
Provided that for tax year 2022 for persons engaged, whether partly or wholly, in the business of airlines, automobiles, beverages, cement, chemicals, cigarette and tobacco, fertilizer, iron and steel, LNG terminal, oil marketing, oil refining, petroleum and gas exploration and production, pharmaceuticals, sugar and textiles the rate of tax shall be 10% where the income exceeds Rs. 300 million: Provided further that in case of banking companies for tax year 2023, the rate of tax shall be 10% where the income exceeds Rs. 300 million. 4. Division IIB was substituted by the Finance Act, 2023 and now provides that: S.No Income under section 4CRate of tax For tax year 2022For tax year 2023 and onwards (1) (2) (3) (4) Where income does not exceed Rs. 150 million0% of the income 0% of the income
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Where income exceeds Rs. 150 million but does not exceed Rs. 200 million1% of the income 1% of the income Where income Exceeds Rs. 200 million but does not exceed Rs. 250 million2% of the income 2% of the income Where income exceeds Rs. 250 million but does not exceed Rs. 300 million3% of the income 3% of the income Where income exceeds Rs. 300 million but does not exceed Rs. 350 million4% of the income 4% of the income Where income exceeds Rs. 350 million but does not exceed Rs. 400 million6% of the income Where income exceeds Rs. 400 million but does not exceed Rs. 500 million8% of the income Where income exceeds Rs. 500 million10% of the income:";
5. A comparison of the two tables set out above shows that initially Division IIB contained five sets of incomes and the highest rate of tax was intended to be imposed on persons whose income exceeded Rs.300 Million. There was however a proviso inserted originally which prescribed a still higher rate of tax on certain category of persons mentioned in the proviso (The Proviso). This was irrespective of whether their income exceeded Rs.300 Million yet in respect of persons engaged in businesses mentioned in the proviso, the rate of tax had been imposed at 10% of their income. We harbour no doubt that section 4C embodies the theory of taxation based on ability to pay. 6. The petitioners before the learned Single Judge challenged the imposition of super tax for the tax year 2022 which, in the opinion of the petitioners, operated retrospectively and impaired the vested rights of those persons. This contention did not find favour with the learned Single Judge and the constitutional petitions to this extent were dismissed. The second contention related to discrimination inherent in the proviso to isolate a category of persons to impose a higher rate of tax simply because their incomes exceeded Rs.300 Million. This challenge was accepted by the
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learned Single Judge who struck down the proviso and consequently the higher rate of tax at 10% so that these petitioners were also subjected to the rate of tax at 4% of the income. This part of the judgment has been challenged in separate set of appeals by the Federal Board of Revenue (FBR). While the persons subjected to tax under Section 4C have brought a challenge to the portion of the judgment which dismissed the constitutional petitions on the ground of retrospectivity and the imposition of section 4C to the tax year 2022 it is made clear that the appellants do not contend that super tax is ultra vires or unconstitutional by its very nature but merely intend to seek the indulgence of this Court regarding the aspect of retrospectivity and the levy of super tax from the tax year 2022. Taxpayers' Appeals: (Appendix A) 7. We shall firstly take up the appeals of the taxpayers who are aggrieved of the judgment of the learned Single Judge who refused to accept the plea that the vice of retrospectivity inhabited in the words "for the tax year 2022 and onwards" and thus rendered section 4C as unconstitutional. Appellants' case can be captured in the following contentions: Legislature, though having power to enact a law retrospectively, cannot do so to upset past and closed transactions and accrued rights. 8. To reiterate, section 4C was inserted on 01.07.2022 through the Finance Act, 2022. Under the law tax year 2022ended on 30th June, 2022. This is stated in section 74 of the Ordinance whose Sub- section (1) provides that: " (1) For the purpose of this Ordinance and subject to this section, the tax year shall be a period of twelve months ending on the 30th day of June (hereinafter referred to as 'normal tax year') and shall, subject to sub-section (3), be denoted by the calendar year in which the said date falls. 9. Thus, the legislature itself has defined the term 'tax year' to mean a period of twelve months ending on the 30th day of June and shall be denoted by the calendar year in which the said date falls. The law envisages a special tax year as well which may be allowed by the Commissioner concerned if a person applies in writing to allow him to use a 12 months' period other than normal tax year. Some of the appellants (and petitioners before the learned Single Judge) have special tax years ending on 30th September 2021 (in the case of sugar industry) and 20.12.2021 (in respect of some other categories of taxpayers) which is an undisputed fact. 10. The arguments in this Court and the precedents to support them will be discussed during the course of this opinion and need not be separately stated. History of super tax: 11. Ms. Asma Hamid, Advocate for FBR collated an executive summary of the brief history of super tax which may be set out below in order to lend actuality to the analysis: 1. Tax on income in addition to income tax is commonly termed, inter alia, as "super tax". Amongst the earliest enactments that introduced the levy of super tax in the Indian sub-continent was the Super Tax Act of 1917. Thereafter, the Legislative Council of India enacted the Super Tax Act of 1920 which repealed the Super Tax Act of 1917. It may be noted that till this period, the impost of tax in addition to income tax (i.e., super tax) was being made through separate legislative enactments until the Legislative council of India, on the recommendations of All-Indian Income Tax Committee, consolidated income tax and tax in addition to income tax (ie., super tax) in the Indian Income Tax Act, 1922. Even though the Income Tax Act, 1922 dealt with both income tax and super tax, it still maintained the distinction and identities of the two categories of taxes, and designated a separate chapter for super tax, i.e., chapter IX of the Indian Income Tax Act, 1922 which contained a distinct charging provision, and specified the definition of income and the exemptions applicable with respect to the computation of super tax. In other words, Chapter IX of the Indian Income Tax Act, 1922 was a self contained chapter dealing with the charge, assessment, collection, and recovery of super tax. It is also worth noting that even though the Indian Income
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Tax Act 1922 defined super tax as tax in addition to income tax, it did not include the same within income tax; the legislature, in its wisdom, clearly kept the separate identity of super tax maintained. 2. After its independence, the Islamic Republic of Pakistan adopted, as is, the Income Tax Act of 1922 as its code on direct taxation. However, from time to time, through parliamentary enactments and Ordinances, the charges levied, definitions, and computation and recovery methods were amended. Thereafter, the Income Tax Act of 1992 was repealed by the Income Tax Ordinance 1979 which, with respect to the levy of super tax, adopted a similar scheme and maintained the super tax's distinct and self contained identity. Thereafter, the promulgation of the Income Tax Ordinance, 2001 repealed the Income Tax Ordinance, 1979. Super Tax was reintroduced in the 2001 Ordinance through the Finance Act, 2015, by adding section 4B (super tax for rehabilitation of Temporarily Displaced Persons) that imposed a super tax on certain persons with retroactive effect on tax year 2015. It is important to note that in March 2011, a surcharge of income tax was initially added by section 4A through the Income Tax (Amendment) Ordinance 2011 dated 16.03.2011 and then 30.05.2011 and finally omitted by Finance Act 2014. It was a tax that was an additional charge/amount in addition to the due income tax that increased the amount of income tax, however, it was not a distinct category of tax in the same nature as, super tax. It may be noted, however, that although the nomenclature is different, a surcharge or surtax has in common with super tax, the quality of being in addition to a charge of normal tax/increasing the amount of tax liability. It is pertinent to note the levy of surcharge by section 4A was challenged by petitioner who was a special tax year taxpayer on the ground that as its tax year 2011 had ended prior to the passing of the Ordinance through which the surcharge was levied, therefore it was not liable to pay. The Hon'ble Sindh High Court dismissed the petition, holding that a special tax year use did not in any way, entitle a taxpayer allowed to use the same, to evade tax; the judgment was assailed in the Hon'ble Supreme Court where it remained intact, hence attained finality. 3. It must be noted that section 4B of the Income Tax Ordinance, 2001 was subjected to many constitutional challenges before the Hon'ble High Courts of Sindh, Lahore and Islamabad; however, the constitutional courts of Pakistan unanimously upheld its vires and the appeal preferred by the appellants against the said decision is currently pending before the Hon'ble Supreme Court which granted leave to appeal to the appellants subject to the payment of 50% deposit of the super tax due under section 4B of the Income Tax Ordinance, 2001. 4. In the recent past, through the Finance Act of 2022, the Parliament inserted, inter alia, section 4C (Super Tax on High Earning Persons) in the Income Ordinance 2001 which imposed a super tax on certain high earning persons with retroactive effect for the tax year 2022 and onwards; except for the banking companies which were liable to pay super tax from the tax year 2023. 12. We may point out that section 4B is still part of the law and has not been repealed by the insertion of section 4C. The significance of this aspect will be adverted to in the later part of this opinion. 13. As adumbrated, the appellants submit that a right had come to vest in the appellants/ taxpayers with the close of tax year on 30th June, 2022 and any imposition of a tax could not be made to apply retrospectively. Section 4C in its current form abridges and impairs the vested rights acquired under existing law and creates a new obligation in respect of transactions or considerations already past and closed. This argument is based on precedents of the superior courts which have vouched this rule successively over the years. Reference may be made to Mehreen Zebun Nisa v. Land Commissioner Multan (PLD 1975 S.C 397). There is not much sunlight between the appellants and FBR regarding settled rule of interpretation of statutes which holds that vested rights can indeed be taken away by express words and legislation cannot be struck down merely because it does so. Legislature is competent to give retrospective effect to an Act and
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thereby take away vested rights of parties. Muhammad Hussain v. Muhammad and others (2000 SCMR 367) and several other judgments (which may not be discussed in detail) may be cited to bring home this rule of interpretation. 14. Learned counsel for the appellants referred to the well-worn concept of three stages in the imposition of a tax: There is the declaration of liability, the assessment and lastly comes the methods of recovery if the person taxed does not voluntarily pay. These stages have, over time, been restated in the judgments of the superior courts and were relied upon in H.M Extraction Ghee & Oil Industries (Pvt.) Ltd. v. FBR (2019 SCMR 1081). This concept has been used by the counsel for the appellants to argue that liability crystallized on 30th June, 2022 in respect of the appellants to pay tax as per the statute and what remained merely was the assessment part which does not depend on the liability which had already been fixed by 30th June 2022. This is the sum of the arguments of the appellants. Retrospectivity of laws-general concepts: 15. Two treatises will be relied upon to articulate the rule of construction of revenue laws and retrospective taxation. In A Treatise on the Law of Taxation by Thomas M. Cooley (second edition) a brilliant exposition and methodical discussion on the principles of taxation, it has been stated that: "...We are therefore at liberty to suppose that the two main objects had in view in framing the provisions of any tax law were, first, the providing a public revenue, and second, the securing of individuals against extortion and plunder under cover of the proceedings to collect the revenue..." "The question regarding the revenue laws has generally been whether or not they should be construed strictly. To express it in somewhat different language, the question is whether, when a question of doubt arises in the application of a statute to its subject matter or supposed subject matter, the doubt is not to be solved in favour of the citizen, rather than in favour of the state upon whose legislation the doubt arises, and whether such solution is not most in accord with the general principles applied in other cases. Strict construction is the general rules in the case of statutes which may divest one of his freehold by proceedings not in the ordinary sense judicial, and to which he is only an enforced party. It is thought to be only reasonable to intend that the legislature, in making provision for such proceedings, would take unusual care to make use of terms which would plainly express its meaning, in order that ministerial officers might not be left in doubt in the exercise of unusual powers, and that the citizen might know exactly what were his duties and liabilities. A strict construction in such cases seems reasonable, because presumptively the legislatures has given in plain terms all the power it has intended should be exercised. It has been very generally supposed that the like strict construction was reasonable in the case of tax laws." "Statutes," says a learned and able writer, "made for the advancement of trade and commerce, and to regulate the conduct of merchants, ought to be perfectly clear and intelligible to person of their description. By the use of ambiguous clauses in laws of that sort, the legislature would be laying a snare for the subject, and a construction which conveys such an imputation ought never to be adopted. Judges, therefore, where clauses are obscure, will lean against forfeitures, leaving it to the legislature to correct the evil, if there be any..." "The same author on another page says: "It is a well settled rule of law that every charge upon the subject must be imposed by clear and unambiguous language. Acts of parliament which impose a duty upon the public will be critically construed with reference to the particular language in which they are expressed. When there is any ambiguity found, the construction must be in favour of public; because it is a general rule that when the public are to be charged with a burden, the intention of the legislature to impose that burden must be explicitly and distinctly shown."
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"In every case, therefore, of doubt, such statutes are construed most strongly against the government, and in favour of the subjects or citizens, because burdens are not to be imposed, nor presumed to be imposed, beyond what the statutes expressly and clearly import." 16. Firstly, the rule has been stated regarding framing of provisions of any tax law to provide a public revenue but at the same time to secure the individuals against extortion and plunder under cover of the procedures to collect the revenue. The treatise delved into the question whether revenue laws are to be construed strictly or not. It goes on to state the general rule regarding the need for statutes being clear and intelligible to persons of their description and in particular statutes made for the advancement of trade and commerce which is the case in the instant matters. It reiterates the rule that in case of doubt courts must lean in favour of the subject or citizens. Learned counsel for the appellants contend that section 4C does not charge a burden on the tax year 2022 as this intention cannot be discerned clearly and explicitly from the language of section 4C. 17. On the subject of retrospective taxation, Thomas M. Cooley states the rule in the following terms: (p.p 291-293) "Retrospective taxation. The basis of an apportionment of taxes may as lawfully be retrospective as the reverse; that is to say, it may as well have regard to benefits theretofore received as to those which may be received thereafter. It has therefore been very properly held that there is no constitutional or other legal objection to the levy of taxes to pay for municipal improvements which had been previously made. Nor in apportioning the tax as between individuals is there any valid objection to making it on consideration of a state of things that may now have come to an end; as where a tax is imposed on the extent of one's business for the preceding year, instead of upon an estimate of business for the year to come. Where taxes are levied for a series of years upon the same valuation of property, they are necessarily retrospectives, but not therefore incompetent, though one may be taxed upon property which he has long ceased to own when the tax is levied. But there is commonly a presumption that any new tax law was not intended to reach back and take for its standard of apportionment a state of things that may no longer be in existence. "New burdens," it is very justly said, "ought always to be prospective," and it is reasonable to suppose the legislature has intended that they should be. Such a supposition is in harmony with the general rule of law which requires the courts to "always construe statutes as prospective and not retrospective, unless constrained to the contrary course by the rigor of the phraseology." This is the rule not only as a construction of the grant of power, but also as to all the incidents; though remedial provision may well be presumed to have been intended to reach back for the purposes of justice. And in cases where a tax is levied to meet expenses previously incurred, or to pay the cost of something of which the persons to be taxed have already had the benefit, any presumption against an intent to give the law retroactive operation may be overcome by the apparent justice of such a construction." 18. The crux of the statement set out above is that there is a presumption that any new tax law was not intended to reach back and take for its standard of apportionment a state of things that may no longer be in existence and that new burdens ought always to be prospective. Cooley relied upon the general rule of law which requires the courts to always construe statutes as prospective and not retrospective unless constrained to the contrary by the phraseology used. Elsewhere, Cooley recognised that: "Retrospective legislation, except when designed to cure formal defects, or otherwise operate remedially, is commonly objectionable in principle, and apt to result in injustice; and it is a sound rule of construction which refuses lightly to imply an intent to enact it." (Thomas M. Cooley, A treatise on the constitutional limitations which Rest upon the Legislative Power of the States of the American Union 62-63).
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19. Closely tied in with the above exposition, the second treatise, Bennion, Bailey and Norbury on Statutory Interpretation, Eighth Edition reweighs the subject in the section relating to retrospectivity (at pages 264 to 276). 20. Firstly, Bennion refers to the principle of legal policy that "except in relation to procedural matters, changes in the law should not take effect retrospectively". Further the term 'retrospectivity' has been defined as "legislation is retrospective if it alters the legal consequences of things that happened before it came into force". 21. Bennion too relies upon the general presumption against retrospectivity and the approach of the courts when determining whether legislation is intended to have retrospective effect. Underpinning the approach is a wider principle of legal policy that law should not operate retrospectively. "The essential idea of a legal system is that current law should govern current activities. If we do something today, we feel that the law applying to it should be the law in force today, not tomorrow's backward adjustment of it. We believe that the nature of law is such that '.... Those who have arranged their affairs ... in reliance on a decision which has stood for many years should not find that their plans have been retrospectively upset." 22. The above statement provides the underlying rationale for the presumption…
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