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Petitioner: Muhammad Osman Gull VS Respondent: Federation of Pakistan etc
Court Name: Lahore High Court Judge(s): Shahid Jamil Khan Title: Muhammad Osman Gull vs Federation of Pakistan etc. Case No.: W.P. No. 52559 of 2022 Date of Judgment:2023-04-06 Reported As: PTCL 2023 CL. 569 Result: Petition allowed
JUDGMENT
JUDGMENT MR. JUSTICE SHAHID JAMIL KHAN (1). Through this judgment instant writ petition as well as writ petitions mentioned in Schedule 'A' shall be decided. This judgment examines Federal Legislature's competence to levy income tax on immoveable property, invoking fiction of law by using phrase "A person shall be treated to have derived, as income chargeable to tax", on capital assets owned by resident person. This presumption is enforced by inserting Section 7E in Chapter II, captioned 'Charge of Tax', of Income Tax Ordinance, 2001 ("Ordinance of 2001") through Finance Act, 2022. Petitioners, being taxpayers, have claimed the taxation under Section 7E as ultra vires of Federal Legislature's field of competence, listed in Entries 50 (post eighteenth amendment) and 47 of Fourth Schedule to the Constitution of Islamic Republic of Pakistan, 1973 ("the Constitution"). 2. Mr. Salman Akram Raja Advocate, arguing for petitioners' side, read the Entry 50, as it stands after 18th Amendment in the Constitution and submitted that immoveable property has completely been ousted from Federal Legislature's competence to tax, therefore, taxation of income envisaged in Entry 47, cannot be deemed for immovable property. Explained that all aspects of taxing immoveable property have been entrusted to Provincial Legislatures after 18th Amendment in the Constitution. His emphasis was that excluding phrase in Entry 50 is not of the taxes on immovable property, which are already in provincial legislature's competence, but is of immovable property as component of capital assets. Contended that the legal fiction is employed, by inserting Section 7E, to overcome the impediment in the Constitution, which is not permissible. Argued that the power to invoke legal fiction is not unfettered and read
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following paragraph from the judgment in Messrs Elahi Cotton Mills Ltd. and others v. Federation of Pakistan, through Secretary M/o Finance, Islamabad and 6 others (PTCL 1997 CL. 260):-- "31. From the above case-law and the treatises, inter alia the following principles of law are deducible:-- ................................ (xxxii) That the rule of interpretation that while interpreting an entry in a Legislative List it should be given widest possible meaning does not mean that Parliament can choose to tax as income as item which in no rational sense can be regarded as a citizen's income. The item taxed should rationally be capable of being considered as the income of a citizen." (emphasis supplied) He argued that the change in scheme of the Constitution, after 18th Amendment, cannot be frustrated by employing the principle of giving widest possible meaning. Emphasized that pith and substance doctrine, needs to be invoked to foil the attempt of charging immoveable property to tax by Federal Legislature. Also placed reliance on Pak Leather Crafts Limited and others v. Al- Barka Bank Pakistan Limited (2022 SCMR 1868) and Muhammad Mubeen-us-Salam and others v. Federation of Pakistan through Secretary, Ministry of Defence and others (PLD 2006 Supreme Court 602). 3. Referring to prayer clause in Writ Petition No. 59457 of 2022 and its grounds, he has challenged exclusion of persons, in Section 7E(2)(d), by claiming it to be discriminatory, offending Article 25 of the Constitution. He placed reliance on Pakistan through Chairman FBR and others v. Hazrat Hussain and others (PTCL 2018 CL. 700) and Messrs Lucky Cement Limited through General Manager, Peshawar v. Khyber Pakhtunkhwa through Secretary Local Government and Rural Development, Peshawar and others (2022 SCMR 1994). 4. Mr. Shahbaz Butt, Advocate argued that Federal Legislator cannot target immovable property alone, while taxing capital value of assets under the Constitution, which allows taxation on the value of assets of every description. He referred to judgment reported as Haji Muhammad Shafi and others v. Wealth Tax Officer and others (1992 PTD 726) to submit that repealed Wealth Tax Act, 1963 ("Wealth Tax Act") (promulgated before the Constitution of 1973), was held within competence of the Federal Legislature under Entry 50 despite been validated by Article 268 of the Constitution. Referring to the definition of 'assets' in Section 2(1)(5) of the Wealth Tax Act, which used the phrase "property of every description moveable or immovable", he read charging provisions of its Section 3, to emphasize that levy was on the value (annual letting value) of net wealth" or "assets". Tracing the history of taxing Capital Value of Assets, he submitted that the tax under the Wealth Tax Act was suspended by inserting proviso in Section 3 through Finance Act, 2000, however, the Act was repealed through Finance Act, 2003. One time tax on capital value of assets was also levied through Section 7 of the Finance Act, 1989 and Corporate Assets Tax was introduced through Section 12 of the Finance Act, 1991. By introducing Section 8 through Finance Act, 2022 value of foreign assets are also brought to taxation, which is held intra vires by another learned Single Bench of this Court. 5. Mr. Tahir Mehmood Butt, Advocate developed his arguments eloquently by referring to various provisions of the Ordinance of 2001 and enactments dealing with taxation on capital value of assets. It is argued that a receipt or a benefit received can only be deemed as income for the purpose of taxation under the Entry 47. He read definition of income under Section 2(29) to submit that it can be divided into three types; first is the conventional form of income chargeable to tax under different heads of income; second is the withholding or deduction of tax on the transactions under the Sections mentioned therein and third type is "any amount treated as income". The definition is reproduced:--
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"2. Definitions.-- (29) "income" includes any amount chargeable to tax under this Ordinance, any amount subject to collection or deduction of tax under sections 148, 150, 152(1), 153, 154, 156, 156A, 233, subsection (5) of section 234 and any amount treated as income under any provision of this Ordinance and any loss of income." (emphasis supplied) He also read Section 4 of the Ordinance of 2001, with the caption `Tax on Taxable Income' and submitted that Section 7E is placed under Section 4(4)(a) as separate taxation, whereby immovable property is taxed, invoking fiction of treating 5% of the market value as income of the property for every tax year. The fiction, he submitted, is against the settled principles of taxing income. He explained that value of acquiring an immovable property is accepted as declared and on its sale the difference between cost of acquisition and sale is taxed as capital gain, which is tax on person not property. He continued that fair market value is determined under Section 68 based on DC rates, meant for one time levy at the time of a transaction of immovable property. Fair market value is the expected saleable price at a relevant point of time, which being uncertain is speculative gain (not actually received), therefore, cannot be a yardstick to deem it as income and tax. The saleable price could be relevant for determining value of an immovable property as capital asset, like under the Wealth Tax Act annual rented value of an immovable property was the yardstick for taxation. He read the judgment dated 28.10.2022 by learned Sindh High Court (in C.P. No. D-4614 of 2022), whereby the impugned Section 7E is held intra vires. Submitted that the judgment is based on Elahi Cotton Mills' Case (supra), but relevant part of the judgment (in paragraph No. 34) was neither reproduced nor discussed. It is argued that tax under Sections 80C & 80CC was held intra vires, by invoking Entry 52 to tax capacity of income. Contended that in this case the speculative value cannot be termed as capacity of an immovable property. 6. Mr. Muhammad Mansha Sukhera, Advocate submitted that "Capital Assets" is recognized by the statutes taxing income in the Subcontinent, starting from Income Tax Act, 1922 till the Ordinance of 2001 and Indian Income Tax Act, 1961. In the Ordinance of 2001, it is defined under Section 37(5), while charging tax on `capital gain'. Placing reliance on Messrs Julian Hoshang Dinshaw Trust and others v. Income-Tax Officer, Circle XVIII South Zone, Karachi and others (1992 PTD I), he argued that capital gain on immoveable property cannot be taxed by the Federal Legislature under Entry 50, after the 18th Amendment. Submitted that word `assets' is synonymous to word property' which is defined under Article 260 as under:-- "Property" includes any right, title or interest in property, moveable or immoveable, and any means and instruments of production;" Further submitted that under Section 75(7) business assets and personal assets are treated differently for the purpose of value. Valuation of personal assets is provided under Section 76 to determine cost for the purpose of statement under Section 116, which can be re-determined by the Commissioner Inland Revenue under Section 111 read with Section 122. He concluded that an immoveable property cannot be taxed by Federal Legislature in any form. Mian Ashiq Hussain, Advocate presented a comparative chart of Entries, allowing taxation on Capital Value of Assets, to show the changes from Government of India Act 1935 till 18th Amendment in the Constitution of 1973. His emphasis is that 18th Amendment has taken away power of imposing all taxes on immovable property including capital gain tax. 7. Mr. Khalid Ishaq, Advocate, representing Federal Board of Revenue ("FBR"), opened arguments from respondents' side and submitted that provisions of Section 7E derives legislative competence from the Entry 47; the word `income' used in the Entry is to be given widest possible meaning; a legislature having competence to tax can impose it in any legislative instrument, be it Finance Act
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or the Ordinance of 2001 and that income includes deeming income as is defined under Section 2(29) of the Ordinance of 2001. The arguments were elaborated by referring different provisions of laws and various judgments from Pakistani and Indian jurisdiction. The emphasis, mainly, was on Elahi Cotton Mills' judgment to argue that anything can be deemed as income by invoking the fiction of law. He read from page 624 of the cited judgment to argue that an interpretation intending to narrow down the meaning of word 'income ' in the Entry 47 should be avoided. Reading the judgment from page No. 638, he submitted that reasonableness cannot be a ground to declare a legislation as ultra vires and that taxing the immovable property, being policy matter, is legislative prerogative. He cited The Madurai District Central Co-operative Bank Ltd. v. The Third Income Tax Officer, Madurai (AIR 1975 Supreme Court 2016) and referred page No. 656 to support the argument that a tax, within competence, can be charged through legislation in parent statute or separately through a Finance Act. Relied upon judgments in Muhammad Khalid Qureshi v. Province of Punjab (2017 PTD 805), M.P. v. Rakesh Kohli and another (2013 SCMR 34) and Lahore Development Authority through D.G. and others v. Ms. Imrana Tiwana and others (2015 SCMR 1739) to highlight the guidelines for Courts, while dealing with constitutional validity of a taxing statute. He placed reliance on Hari Krishna Bhargav v. Union of India and another (1966 AIR 619) to submit that competence can be gathered from various Legislative Entries, different nature of taxes can be imposed in one statute. He read paragraphs No. 23 and 24 from DG Khan Cement Company Limited through Chief Financial Officer and another v. The Federation of Pakistan through Secretary Revenue, Islamabad and 3 others (PTCL 2020 CL. 443) and paragraph No. 5 from judgment in Federation of Pakistan through Chairman FBR and others v. Saleem Raza (PTCL. 2020 CL. 543). Relied upon judgment in Bhagwan Dass Jain v. Union of India and others (AIR 1981 Supreme Court 907), M/s Chelmsford Club v. Commissioner of Incqme Tax (AIR 2000 Supreme Court 1092) and Sakarlal Balabhai v. Income Tax Officer, Special [(1975) 100 ITR 97 Guj)]. He opposed the arguments on discrimination by Mr. Salman Akram Raja, Advocate and submitted that exclusion of persons from chargeability of tax is based on intelligible differentia and placed reliance on Elahi Cotton Mills's Case, ibid. 8. Ms. Asma Hamid, Advocate after adopting arguments by Mr. Khalid Ishaq Advocate, added that the object of taxing immovable property is to discourage accumulation of wealth, for encouraging investment in industry and other productive economic activities. She relied upon judgments in Commissioner of Income Tax Peshawar v. Director General, NWFP Employees Social Security Institution, Peshawar and another (PTCL 2019 CL. 102) and Messrs Aisha Spinning Mills Ltd v. Federation of Pakistan through Secretary, Ministry of Finance, Islamabad and 3 others (1995 PTD 493). 9. Mirza Nasar Ahmad, Additional Attorney General representing Federation and responding to the notice under Order XXVII CPC, advanced different arguments, without prejudice to the arguments already made from respondents' side. Submitted that incidence of tax, under the impugned Section 7E, is the value of immovable property, even if we ignore the deeming phrase used in Section 7E of the Ordinance of 2001. The tax is at 5% of fair market value of the Capital Asset, he emphasized. Reiterated that competence to legislate can be gathered from two different Entries and different taxes can be imposed in one statute. Relying on the principle that courts should strive hard to save a legislation, he submitted that the impugned provisions can be read down to harmonize it with the competence available under Entry 50, which allows taxation on Capital Value of Assets and the term assets includes immovable property. He read Entry 50 in comparison with Entry 47 and submitted that exclusion of agriculture income is from the income, being its component, whereas in Entry 50 the exclusion is of taxes on immovable property and not of immovable property as component of capital assets.
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10. Heard. Record perused. 11. The arguments can be summed up in following legal propositions, which need to be resolved for determining the lis in this case. First is, the extent of legal fiction for treating anything as income Tax', under Entry 47, and if impugned tax fails the test of legal fiction, Second is, whether the provisions of Section 7E can be saved to tax capital value of immovable property, under Entry 50, and Third is, sustainability of the provisions of impugned Section 7E, on being examined in light of the referred judgments and constitutional mandate alongwith discriminatory aspects. 12.The legal questions raised and argued are complex to answer without understanding the spirit and nature of different types and kinds of taxes. The task is well explained in the words of great physicists of all time Albert Einstein, who influenced the philosophy of science, The hardest thing in the world to understand is the income tax" Taxation is the basic attribute of sovereign authority, a state cannot be run without imposition and collection of taxes as is concisely expressed by founding father and framer of the United States constitution, Benjamin Franklin, who said, "Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes." Montesquieu (the French Political Philosopher) in "Spirit of Law" explained the purpose of taxation in following words, "what are taxes but the revenue collected from people for objects in which they are interested; the contribution of the people for things useful and conclusive to their welfare". Taxation is compulsory exaction or enforced contribution, collected by state, under its sovereign authority, to carry into effect its mandates and for performance of manifold functions by the governments at Federal, Provincial or Local Government level. Mukherjee J., opined in Hindu Religious Endowments v Sri Lakshmindra (AIR 1954 SC 282); "A neat definition of what' tax' means has been given by Latham C.L. of the High Court of Australia in - Matthews v Chicory Marketing Board. A 'tax' according to learned Chief Justice, is a compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered.... It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer's consent and the payment is enforced by law. The second characteristic of tax is that it is an imposition made for the public purpose without reference to any special benefit to be conferred on the payer of the tax. Another feature of taxation is that as it is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay. 13. Taxes are mainly classified as direct and indirect. Direct tax is one, burden of which cannot be shifted to someone else, but for indirect tax, it can be to end consumer. Direct taxes are primarily taxes on a natural person's net income or net worth. Taxes on net income are based on the taxpayer's ability to pay and taxes on net worth are levied on the total value of his assets owned, minus liabilities. Indirect taxes are levied on the production or consumption of goods and services or on transactions, including imports and exports. The chief reason for resorting to indirect taxes is that this method enables the government, in words of the French economist Anne Robert Jacques Turgot, "to pluck the goose without making it cry out" because those who are paying it would not perceive that what they are paying as price is really a tax. Montesquieu (the French Political Philosopher) exemplified the indirect taxation in following words; "There are two states in Europe imposts are very heavy on liquors; in one the brewer alone pays the duty, in the other it is levied indiscriminately upon all the consumers, in the first, nobody feels the rigor of the impost, in the second, it is looked upon as a grievance. In the former, the subject is
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sensible only of the liberty he has of not paying, in the latter, he feels only the necessity that compels him to Pay. - In American Taxation system taxes are divided in three basic categories; (i) tax on what you earn, (ii) tax on what you buy and (iii) tax on what you own. Taxes on earnings include income tax on individual and corporation, payroll tax (paid on the wages and salaries of employees to finance social securities) and capital gain tax. Taxes on buying include sales tax, value added tax and excise tax, which are also called tax on transaction. Taxes on what you own include property tax, estate, inheritance and gift tax, wealth tax or tax on value of assets. The event or incidence of all kinds of taxation, direct or indirect, is to be decided by the legislature through enactment, influenced by political, economic, and social factors, as well as international agreements and treaties. The incidence of taxation also determines whether the tax is on a person, property or a transaction. Taxes on a person or property are generally direct taxes, and tax on transaction is indirect for it goes with the transaction and falls where the transaction terminates. The state's power to tax is the incident of sovereignty, exercised through legislative discretion, which cannot be curtailed on ground of being harsh or unreasonable. Nothing but express constitutional limitation upon legislative authority can exclude anything from the grasp of taxing power. The judicature cannot redress oppressive taxation, being policy decision, unless the taxation exceeds legislative power or competence under the Constitution and if it offends the fundamental rights guaranteed by the Constitution. 14. The Constitution of Pakistan recognizes the power of taxation, as basic characteristic of sovereignty, under its Article 7, with only condition that the state should be empowered by law' to impose any tax or cess;'empowered "7. In this Part, unless the context otherwise requires, "the State" means the Federal Government, Maljlis-e-Shoora (Parliament), a Provincial Government, a Provincial Assembly, and such local or other authorities in Pakistan as are by law empowered to impose any tax or cess." (emphasis supplied) The condition is reiterated in Article 77 as is reflected in its caption "Tax to be levied by law only". Article 142 bestows legislative competence upon the Federation and the Provinces. The Federation has exclusive power to impose tax, through legislation, with respect to the kinds and nature of taxes mentioned in the Federal Legislative List [means Federal Legislative List in Fourth Schedule as defined in Article 70(4)] ("FLL") and the taxes not listed therein can only be imposed by the Provinces. Following Entries in Part I, Fourth Schedule are determining the fields or areas (the kinds and types of taxation), within Federation's power of taxation. "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. 4The words "on capital gains" omitted ibid. 51. Taxes on mineral oil, natural gas and minerals for 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."
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(emphasis supplied) Entries 47 and 50 are the subject of the queries to be answered, for which phrases Capital Value of Assets', 'taxes on immovable property', and 'income other than agriculture income' need to be understood by exploring legislative history of the Entries, spreading in different Constitutions of Pakistan, since Government of India Act 1935; "Government of India Act, 1935. 54. Taxes on income other than agricultural income. 55. Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and companies; taxes on the capital of companies. Constitution of 1956 26. Duties of customs (including export duties); duties of excise (including duties on salt, but excluding alcoholic liquor, opium and other narcotics), corporation taxes and taxes on income other than agricultural income; estate and succession duties in respect of property other than agricultural land; taxes on the capital value of assets exclusive of agricultural land; taxes on sales and purchases; terminal taxes on goods or passengers carried by sea or air; taxes on their fares and freights; taxes on mineral oil and natural gas. In both, the Government of India Act 1935 and Constitution of 1956, exclusion of agriculture land implies itself that immoveable property was part of the Capital Assets. As a State policy, agriculture income and agriculture land were excluded or left out of the Centre's legislative competence to tax. Same is the position in the Constitution of India till date; "The Constitution of India. 82. Taxes on income other than agricultural income. 86. Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and companies; taxes on the capital of companies." The proposition, or existing confusion, stems from the Constitution of 1962 whereby 'capital gains on immovable property' was excluded in the Entry 42(e), determining taxation on 'Capital Value of Assets' as a field of legislation, which is reproduced:-- "Constitution of 1962 42. Duties and taxes, as follows:-- (c) corporation taxes and taxes on income other than agricultural income; (e) taxes on the capital value of assets, not including taxes on capital gains on immovable property;" The intention was to save the gain from sale or transfer of immoveable property from taxation as a limb of income tax. The Exclusion' of 'capital gain on immoveable property' in the Entry 42(e) had adverse effects as investments in immoveable property became more 'profitable and secure than in industry and trade, particularly in politically turbulent times. On socio-economic side, gap…
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