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Petitioner: Haider Industries through its Managing Partner VS Respondent: Federation of Pakistan, through its Secretary, Law Division at Islamabad & others
Court Name: Lahore High Court Judge(s): Shahid Karim Title:Haider Industries through its Managing Partner vs Federation of Pakistan,
through its Secretary, Law Division at Islamabad & others Case No.: Writ Petition No.30425 of 2014 Date of Judgment:2015-12-17 Reported As: 2015 LHC 8296 Result: N/A Judgment Shahid Karim, J:- This petition under Article 199 of the Constitution of Islamic Republic of Pakistan, 1973, has the following prayer:-- i. "That condition no. v of notification SRO No.717(I)/2014 dated 07th August, 2014 is illegal and has been issued by Respondent No.2 by traveling beyond the scope of powers contained in proviso to clause (72B) of Part-IV of Second Schedule to the Income Tax Ordinance, 2001. ii. That condition no. v of notification SRO No.717(I)/2014 dated 07th August, 2014 places restrictions and can by stretch be termed as "conditions". iii. That condition no. v of notification SRO No.717(I)/2014 dated 07th August, 2014 may graciously he declared illegal." 2. This judgment shall also decide the connected petitions, which raise an identical question of law and a list of which is attached with this judgment as Annexure A?. The primary challenge in these petitions are to conditions No.V & VIII, enumerated in SRO No.717(I)/14 dated 07.08.2014 (Notification). The said Notification has been issued in terms of proviso to clause 72B of the 2nd Schedule to the Income Tax Ordinance, 2001 (Ordinance, 2001). 3. For the purpose of decision of these petitions, it would suffice to refer to the basic facts with regard to the instant petition (W.P 30425 of 2014):
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"xi. That in the meanwhile, the Petitioner on the basis of the earlier Circular No.8 as amended (Annexure-H) had applied for obtaining the exemption certificate vide letter No.JC/H-67/14/2495 dated 04th August, 2014. The Respondent No.3 issued exemption certificate dated 07th August, 2014 to the Petitioner on the basis of earlier circular of the Respondent No.2. Later the said exemption certificate was amended by Respondent No.3 on another application filed by the Petitioner on 22nd August, 2014. (Copies of the applications and exemption certificates are Annexureures-Kto K/3, respectively). Xii. The Petitioner after issuance of the notification (Annexure-J), re-applied for amendment of the earlier exemption certificate (Annexure-K/3) after fulfilling all the statutory requirements and conditions contained in the governing notification. The application was made vide letter No. JC/H67/14/2543 dated 12th September, 2014 which accompanied an application on the prescribed format provided through the notification (Annexure-J). The Respondent No.3 amended the certificate keeping into account the restriction placed by condition v. Of the notification i.e. 110 percent of the quantity of raw material imported and consumed in the previous tax year. (Copies of application and amended certificate are Annexures-K/4 and K/5). Xiii. That the Petitioner during the Tax Year 2015 commencing from 01st day of July, 2014 has paid a huge sum of Rs.11,205,604/- till to date at import stage in terms of section 148 of the Ordinance for the reason of non-issuance of exemption certificate for the desired quantity of raw material to be imported which matches the production capacity of the Petitioner, despite the fact that the liability for obtaining the exemption certificate was only Rs.1,280,053/-. " A common thread which runs through these petitions is that the petitioners are industrial undertakings within the meaning of section 2 (29 c) of the Ordinance, 2001. The petitioners import raw material for the purposes of self consumption.Advance tax is liable to be collected at import stage in terms of section 148 of the Ordinance, 2001. The tax which is collected at the import stage is adjusted against the tax liability of the petitioners for that tax year determined by the taxpayer while furnishing the return of total income under section 168 of the Ordinance. The provisions which will have an impact on the decision of the instant petitions are section 53, section 148 and clause 72B of the 2nd Schedule to the Ordinance, 2001. Rules Special to Taxing Laws: 4. It is settled by now that where a provision in a taxing statute can be reasonably interpreted in two ways, that interpretation which is favourable to the assessee has to be accepted. CIT v. Naga Hills Tea Co. Ltd. (AIR 1973 SC 2524). Also if two views are possible, the one favourable to the assessee has to be accepted. Sun Export Corporation v. Collector of Customs (1997) 6 SCC 564. It has also been established by respectable authority that circulars or instructions of the Board cannot override the Act. Kerala Financial Corporation v. CIT (1994) 4 SCC 375. 5. The rules regarding exemptions under taxing statute have also been established by precedents. One, exemptions under taxing statute must be strictly construed. The said rules have been brought out in Sutherland on Statutory Construction (Third Edition vol. 3) in the following words:-
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As a general rule grants of tax exemptions are given a rigid interpretation against the assertions of the taxpayer and in favour of the taxing power. The basis for the rule is the same as that supporting a rule of strict construction of positive revenue laws that the burdens of taxation should be distributed equally and fairly among the members of society." 6. This rule against exemptions, however, is not an absolute proposition. In Swadeshi Polytex Ltd. v. Collector of Central Excise (1990) 2 SCC 358, the Supreme Court of India observed as follows: `It is true that in a fiscal provision if benefit of exemption is to be considered this should be strictly construed. But the strictness of the construction of exemption notification does not mean that the full effect of the exemption notification should not be given by any circuitous process of interpretation." The following observations from Interpretation of Taxing Statutes by Markandey Katju (Second Edition) would be relevant: `An exemption clause should be interpreted to further the object of the provision. In Gujarat Industrial Corp v. CIT the assessee was a statutory body created for developing industries in Gujarat and to assist generally in the development thereof. Section 10(20A) of the Income Tax Act grants exemption to the income of an authority constituted in India by or under any law enacted for the purpose of planning, development or improvement of cities, towns or villages?. The question was whether under this provision the assessee was entitled to exemption. It was held, development of an industrial area would have a direct impact on the development or improvement of that part of the city, town or village where such an area was located, and hence the exemption was available. In Broach Dist Cooperative Cotton Sales Ginning and Processing Society Ltd v. CIT, Ahmedabad while interpreting the proviso to s 81 (i)(c) of the Income Tax Act the question considered was whether for the purpose of claiming exemption, the process of ginning and processing could be taken as antecedent to the process of marketing of the cotton, in which case the income from those processes also could be exempt. The Supreme Court observed that the object of s 81(i) was to encourage and promote the growth of cooperative societies, and consequently a liberal construction must be given to the operation of that provision. The Court held that the entire activities of marketing, processing and ginning were to enjoy the exemption from income tax. Thus the Court adopted a liberal interpretation of the exemption." 8. A statement on the issue expressed in Maxwell on the Interpretation of Statutes, twelfth edition, page 256 has been oft-quoted with approval by the superior Courts: According to Maxwell: "Statutes which impose pecuniary burdens are subject to the same rule of strict construction. It is a well-settled rule of law that all charges upon the subject must be imposed by clear and unambiguous language because in some degree they operate as penalties: the subject is not to be taxed unless the language of the statute clearly imposes the obligation, and language must not be strained in order to tax a transaction which, had the legislature thought of it, would have been covered by appropriate words. In a taxing act', said Rowlett, J., one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at
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the language used'. But this strictness of interpretation may not always enure to the subject's benefit, for if the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be'. As a general rule, and in accord with the prevailing view, revenue laws, and particularly tax laws, should be construed in favour of the taxpayer and against the Government. In fact, they are to be construed liberally in favour of the taxpayer and any substantial doubt resolved in favour of the citizen. Hence, any tax proceedings must be in strict accord with the provisions of the statures relating thereto." 9. In Messrs Mehran Associates Limited v. The Commissioner of Income Tax, Karachi (1993 SCM R 274), the Supreme Court of Pakistan laid down the basic rule as follows: "The cardinal principles of interpretation of a fiscal statute seem to be that all charges upon the subject are to be imposed by clear and unambiguous language. There is no room for any intendment nor there is any equity or presumption as to tax. A fiscal provision of a statute is to be construed liberally in favour of the tax-payer and in case of any substantial doubt the same is to be resolved in favour of the citizen." Advance Tax: 10. The concept and nature of advance tax paid by the taxpayer and contemplated inter alia under section 147 of the Ordinance, 2001, has been considered in the judgments of our superior courts. In these judgments, the precise purpose for the enactment of advance tax and its raison d'etre has been brought forth. These judgments shed light on the concept underlying advance tax and clears the cobwebs surrounding the whole concept. Firstly, a few observations regarding the nature of advance tax contained in the Law and Practice of Income Tax' by Huzaima Bukhari and Dr. Ikram ul Haq, would be pertinent. They are reproduced as under: "Over the period of time, this section has been used to meet day to day cash requirements of the government of Pakistan. Payment of tax utilized in advance, before its adjustment at the time of filing returns, causes heavy cost to the payers as they could employ this amount in their business capital to earn profits..." Parallel to section 53 of the RO, the basis of payment of advance tax remained the same i.e. On quarterly basis, except in the case of banks from 1st January, 2008. The FBR kept on changing the calculation from turnover to income and now back to turnover. Prior to 1.7.2004, it was on the basis of tax to turnover ratio which was to be applied to each quarter's turnover for which advance tax was due in the case of taxpayers other than individuals. Then through an amendment vide Finance Act 2004, the concept of estimated income was reintroduced but not for long as in the case of companies, Finance Act 2009 has reverted back to advance tax on the basis of turnover for the quarter." The liability to pay advance tax on tax-to-turnover ratio has been reverted to declared/ assessed/ estimated income basis by Finance Act, 2004. It took seven years for the CBR to realize that what it was collecting in the name of advance tax was in fact debt owed to taxpayers. This amendment had prevented overpayment in the name of advance tax and there were fewer refunds at the time
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of filing of returns. The amendment vide Finance Act, 2004 restored the pre-1997 position when advance tax was paid on the basis of last declared/assessed income with the right to give estimate of income." 11. In Commissioner of Income Tax v. M/s. Habib Sugar Mills Ltd. (1993 PTD 343), the Supreme Court of Pakistan had the occasion to dilate upon the concept of advance tax in the course of interpretation of section 18-A of the Income Tax Act, 1922, which was a predecessor of the provisions regarding advance tax in Ordinance, 2001. The concept was elaborated upon in the following words: "...These provisions show that the payment being made under section 18-A is a payment made merely on account, to be adjusted against the charge of income tax as finally ascertained and determined on completion of the regular assessment by the I.T.O for the relevant assessment year. This is manifest from the circumstance that simple interest at the rate of 4% per annum is to be paid by the Central Government on the amount paid under section 18-A from the date of the payment to 30th June of the financial year in which the amount was paid. This fact indicates that the amount payable under section 18-A is not a tax but merely a pre-payment of an amount towards the tax due. The said amount does not become the property of the Central Government but remains vested in the assessee company. Undoubtedly, it is an amount which must be paid in advance, in respect of tax, before it becomes due. But it (the tax) becomes due only after regular assessm ent and if on regular assessment nothing or a lesser amount is found due and payable; the Government, in that event, shall have to return the amount paid or the sum paid in excess with interest from the date of payment to the date of such assessment. Accordingly, in our opinion the amount paid under section 18-A is not a payment of the "income tax" in advance but merely the credit of an amount with the Central Government, which can be utilized and adjusted to the extent necessary towards the ultimate liability of income tax found due after it has been determined..." It will be noted that the payment under section 53 of the present law expressly stated to be by way of "advance tax". This change made in law, which has replaced the earlier law (namely the Income Tax Act of 1922) confirms our opinion that the payment required to be made under section 18-A of the said Act to the Central Government was a payment on account towards the payment of a tax which is determined after regular assessment to be payable in the future assessment year." 12. In a nub, the Supreme Court of Pakistan concluded that advance tax was an amount which must be paid in advance, in respect of tax, before it becomes due and the tax becomes due only after regular assessm ent and the determination of the ultimate tax found due. 13. In Call Tell and another v. Federation of Pakistan and others (2005 PTD 833) a challenge was led to section 236 of the Ordinance, 2001 which provision envisages the collection of advance tax and the refund of advance tax already collected. The challenge was repelled by the Sindh High Court in the following words: "7. First of all, we would lie to point out that the collection/ deduction of advance tax is not a new concept introduced by the Income Tax Ordinance, 2001. The concept was introduced for first time in the Indian subcontinent in the year, 1944 and since then it has continuously occupied the field in the realm of Income Tax..." 8. In fact the collection of advance tax does not amount to levy of tax as alleged by the learned
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counsel for the petitioners. The Hon?Ble Supreme Court of Pakistan has held in the case of CIT v. Asbestos Cement Industries Ltd. 1992-66 Tax 140, that the advance tax is a payment made merely on account to be adjusted against the charge of income tax as finally ascertained. It is not a tax but merely a provisional payment of an amount towards tax due. The said amount does not become the property of the Central Government but remains vested in the assessee. 9. Thus the deduction/collection of advance tax does not amount to levy of tax, except in the cases falling under the presumptive tax regime where the deduction/collection of tax amounts to final payment of tax and no refund is made..." Once again, the concept of advance tax has been elaborated upon and while doing so reliance on the judgment of the Supreme Court of Pakistan was also made. It was conclude that advance tax was a payment made merely on account to be adjusted against the charge of income tax as finally ascertained. It is merely a provisional payment of an amount towards tax due. A further enunciation of the concept can be found in two judgments of this Court which shall be referred to hereinbelow. The Law: 15. We may begin the discussion by reference to the observations made by Lord Templeman, Formerly a Lord of Appeal in Ordinary (UK), in his article Tax and the Taxpayer? Published in volume 117 (2001) of the Law Quarterly Review. The Law Lord had this to say with regard to reduction of burden of tax: "Taxes are universally unpopular though they have been described as the price we pay for civilization. There are three methods by which an individual taxpayer may seek to reduce his burden of tax. The first method is tax evasion and is a criminal offence. The taxpayer conceals or fraudulently misrepresents to the Revenue the incidence and ambit of his tax affairs..." The second method is tax avoidance, which does not involve unlawful conduct. The taxpayer?s advisers invent a scheme whereby he can hope to enjoy the benefit of a taxable event without becoming liable to pay the tax. A tax avoidance scheme includes one or more interlinked steps which have no commercial purpose except for the avoidance of tax otherwise payable, and can conveniently be described as artificial steps. "The third method is tax mitigation whereby a taxpayer incurs expenditure which reduces his taxable income or his taxable assets or whereby a taxpayer incurs expenditure which Parliament wishes to encourage or reward by a tax allowance or deduction. Tax mitigation may take a variety of forms but is distinguishable from tax avoidance; tax mitigation does not include any artificial step though the motive which inspires a taxpayer may be mainly or wholly the desire to reduce tax. A taxpayer may consider that premium bonds are a bad investment or that an ISA has a poor chance of increasing in value or that his children do not deserve his bounty. Nevertheless if he makes an investment or divests himself of property and otherwise fulfils the requirement of the legislation, then even though he may do so to reduce his tax, his motive is irrelevant." 16. The 2nd Schedule which relates to exemption from specific provisions has its provenance in section 53 of the Ordinance, 2001. Section 53 in turn deals with the exemptions and tax concessions to be given in the 2nd Schedule and relates to the income or class of income or persons or class of persons specified in that Schedule who shall be exempted from tax under the Ordinance subject to any conditions and to the extent specified therein. Moreover, the said provision deals with the
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income or class of income or persons or class of persons who are subject to tax under the Ordinance at such rate as may be specified or are allowed a reduction in tax liability under the Ordinance, 2001. It also relates to the exemption from the operation of any provision of the Ordinance, 2001 subject to any conditions and to the extent specified therein. By subsection (2) of section 53, the Federal Government has been given the power to make such amendment in the 2nd Schedule by adding any clause or condition or making any change in any clause or condition therein. 17. It is common ground between the parties that clause 72B was inserted by Finance Act, 2013. Clause 72B reads as under:-- "(72B) The provisions of section 148 shall not apply to an industrial undertaking if the tax liability for the current tax year, on the basis of determined tax liability for any of the preceding two tax years, whichever is the higher, has been paid and a certificate to this effect is issued by the concerned Commissioner. 18. By Finance Act, 2014, a proviso was added which is to the following effect:-- "Provided that the certificate shall only be issued by the Commissioner if an application for the said certificate is filed before the Commissioner, in the manner and after fulfilling the conditions as specified by notification in the official Gazette, issued by the Board for the purpose of this clause." 19. Section 148 to the extent of its relevance to the instant petitions reads as under:-- "148. Imports.-(1) The Collector of Customs shall collect advance tax from every importer of goods on the value of the goods at the rate specified in Part II of the First Schedule. . . . (7) The tax required to be collected under this section shall be a final tax except as provided under sub-section (8) on the income of the importer arising from the imports subject to sub-section (1) and this sub-section shall not apply in the case of import of- (a) raw material, plant, machinery, equipment and parts by an industrial undertaking for its own use; (b) fertilizer by manufacturer of fertilizer; and motor vehicles] in CBU condition by manufacturer of motor vehicles. (d) Large import houses, who,- (i) have paid-up capital of exceeding Rs. 250 million; (ii) have imports exceeding Rs.500 million during the tax year; (iii) own total assets exceeding Rs. 350 million at the close of the tax year; (iv) is single object company;
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(v) maintain computerized records of imports and sale of goods; (vi) maintain a system for issuance of 100% cash receipts on sales; (vii) present accounts for tax audit every year; (viii) is registered under the Sales Tax Act, 1990 and make sales of industrial raw material of manufacturer registered under the Sales Tax Act, 1990; and (e) a foreign produced film imported for the purposes of screening and viewing." The Submissions: 20. A historical background of these provisions can be summarized as follows: I. Subsections (3) and (4) of section 148 of the Ordinance, 2001 formed part of the said provision originally. These subsections were deleted vide Finance Act, 2007. By these provisions, the power was originally vested with the Commissioner to allow a reduction of the rate of advance tax collectible at import stage. Moreover, the power was conferred on the Commissioner to issue an exemption certificate to the manufacturer importing raw material for self use on the payment of advance tax under section 147 of the Ordinance, 2001 for the period beginning from the date of issuance till the close of a financial year. With a further power under the proviso to cancel the exemption certificate if the manufacturer failed to pay an installment of the advance tax. II. The deletion of these provisions set into motion a spate of litigation which culminated in the judgment of this Court in Lone Cold Storage, Lahore v. Revenue Officers LESCO and others (2010 PTD 2502). In the wake of this judgment, a number of Notifications were issued by the Federal Board of Revenue (FBR) including SRO No.1053(I)/2010 dated 22.11.2010 and SRO No.947(I)/2008 dated 05.09.2008. III.As stated above, by Finance Act, 2013 clause 72B was inserted in Part IV of 2nd Schedule to the Ordinance, 2001. 21. As adumbrated, the primary challenge in these petitions is to conditions V & VIII given in the Notification. 22. The arguments on behalf of the petitioners were led by Mr. Khurram Shehbaz Butt Advocate and Mr. Shahryar Kasuri, Advocate. The learned counsels for the petitioners contended that the conditions inserted by way of clause V & VIII are in the nature of a restriction which cannot be done in the purported exercise of powers under the proviso to clause 72B. In a nub, according to the learned counsels for the petitioners, the Board has traveled beyond the scope of the powers given to it under the proviso and thus offends the settled principle with regard to the interpretation of proviso. Secondly, the learned counsels contended that the Board was merely exercising a delegated power in terms of proviso and by the insertion of the conditions V and VIII, the right conferred by clause 72B has for all practical purposes been taken away. Thirdly, according to the learned counsels, the conditions offend the doctrine of promissory estoppel as clause 72B was in the nature of a promise by the legislature and that promise has been breached by the insertion of the conditions contained in the Notification. The stance of the learned counsels for the petitioners was that the imposition of the conditions would be tantamount to unjust enrichment of the state at the altar of the petitioners and impinges upon the fundamental rights enshrined in Articles 4, 18, 23
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and 24 of the Constitution of Islamic Republic…
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