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Petitioner: M/s Fauji Fertilizer Company Limited and another VS Respondent: Federation of Pakistan and others
Court Name: Islamabad High Court Judge(s): Sardar Ejaz Ishaq Khan Title:M/s Fauji Fertilizer Company Limited and another vs Federation of Pakistan
and others Case No.: Writ Petition No.4027 of 2022 Date of Judgment:2023-04-18 Reported As: 2023 IHC 388, PTCL 2024 CL. 594 Result: Order Accordingly Judgment
Sardar Ejaz Ishaq Khan, J: 1 PREFACE 1.1 THE PETITIONS 1.2 SECTION 4C 1.3 COMMON GROUNDS AND INDUSTRY SPECIFIC GROUNDS 2 COMMONS GROUNDS 2.1 RETROSPECTIVE LEGISLATION TAKING AWAY VESTED RIGHTS 2.2 PAST & CLOSED TRANSACTIONS 2.3 MOMENT OF CRYSTALLISATION OF TAX LIABILITY 2.4 SECTION 4B CASES 2.5 IRRECONCILABLE CONFLICT OF THE NEW CATEGORY OF INCOME (NOT DOUBLE TAXATION) 2.6 LEGISLATIVE COMPETENCE TO REDEFINE EXTANT CATEGORIES OF INCOME 2.7 PRESUMPTIVE TAXATION 3 FUNDAMENTAL RIGHTS 3.1 PREFACE 3.2 THE CONTEXT FOR EVALUATION OF LEGISLATION 3.3 THE CONTEXT FOR SUPER TAX AND ENCROACHMENT OF FUNDAMENTAL RIGHTS 3.4 EX-ANTE CERTAINTY OF TAX 3.5 WINDFALL PROFITS OF HIGH EARNING PERSONS 3.6 AMOUNT - REAL OR IMAGINARY?
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3.7 DUE PROCESS 3.8 UNLAWFUL DISCRIMINATION 4 INDUSTRY SPECIFIC GROUNDS 4.1 BENEVOLENT FUNDS 4.2 PETROLEUM INDUSTRY 5 CONCLUSION AND ORDERS 1 PREFACE 1.1 THE PETITIONS 1.1.1 The petitioners in the writ petitions listed in the Annex to this judgment are aggrieved by the levy of super tax' imposed under 4C of the Income Tax Ordinance 2001 (the Ordinance), and some of them have also received and impugned notices from the Commissioner demanding super tax. There are grounds common to all petitioners, and there are grounds specific to some petitioners only. 1.1.2 I cannot think of a better summation of the mood that pervaded the submissions of the learned counsels for the petitioners, with its grim pall hung over the court room, than the following sentence from Palkhiwala[1]: ...[A]s long there are absurd revenue targets, outrageous tax demands will continue. The revenue would have none of that, its submissions rooted in and sustained throughout by the appeal to that mantra-absolute, the supreme will of the Parliament, to impose taxes on anything under the sun it wishes to categorise as income, and on the precedents of three High Courts affirming that principle in the (almost) identical super tax levied earlier under 4B of the Ordinance. 1.1.3 There are but some differences between 4C and 4B, not just in the circumstances, but the Court was informed, also in the submissions that were being advanced before this Court that were not made in the cases heard under 4B, and this submission is borne out on a review of those 3 cases. This will become clear during the course of this judgment. 1.2 SECTION 4C 1.2.1 Section 4C, inserted vide Finance Act 2022, expressed to become effective on 01.07.2022, reads as follows: 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 (iv) income computed, other than brought forward depreciation, brought forward amortization and brought forward business losses under Fourth, Fifth and Seventh 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.
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(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. (6) The Board may, by notification in the official Gazette, make rules for carrying out the purposes of this section. 1.3 COMMON GROUNDS AND INDUSTRY SPECIFIC GROUNDS 1.3.1 This judgment deals separately with grounds common to all petitioners and with grounds specific to certain industries, interleaved with the heading of fundamental rights. 1.3.2 The submissions touching fundamental rights, though common to all, are not dealt with under the common grounds heading, but under a separate heading, due to the emphasis in counsels submissions for these to be addressed so that they remain available explicitly for consideration by the Supreme Court in appeal. The question of fundamental rights would not have been gone into due to the principle that Constitutional questions are not to be gone into if the lis can be disposed of on other points[2], had it not been the case that some petitioners do not qualify for the industry specific additional grounds for the challenge to 4C. These grounds are therefore examined, and to the extent agreed with, their benefit cannot be withheld from the industry-specific petitioners who succeed on grounds specific to their industries. The need to write this judgment with chapters specific to certain industries arose due to the grounds of challenge specific to those industries and not common with the other petitioners. 2 COMMONS GROUNDS 2.1 RETROSPECTIVE LEGISLATION TAKING AWAY VESTED RIGHTS 2.1.1 Ms. Hamid, valiantly leading the respondents case (though appearing for respondent no.3, the Commissioner Large Tax Payers Unit), cited numerous judgments (the list it seemed would never end) for her submission that the Parliament can legislate retroactively[3] to take away vested rights, a brief prcis of which is given below: i. A statute is to be deemed to be retrospective, if it takes away or impairs any vested right acquired under existing laws, or creates a new obligation, or imposes a new duty, or attaches a new disability in respect of transactions or considerations already past and closed.[4] ii. It may be mentioned that by now, it is well-settled proposition of law obtaining in Pakistan that if an exemption from payment of excise duty or any other tax, has been granted for a specified period on certain conditions and if a person fulfills those conditions, he acquires a vested right ... but he can be denied his vested right by a legislative provision, like section 31-A, which has been incorporated in the Customs Act in 1988.[5] iii. ...It is agreed on all hands that the well settled principles of interpretation of statutes are that vested rights cannot be taken away save by express words or necessary intendment... Therefore, vested rights can be taken away by such a legislation and it cannot be struck down on that ground...[6] iv. No doubt the Legislature is competent to give retrospective effect to an Act and can take away the vested right of the parties... while construing a legislation which has been given retrospective effect and interferes with the vested rights of the parties, the words used therein must be construed strictly and no case should be allowed to fall within the letter and spirit of Act which is not covered by the plain language of the legislation...[7] 2.1.2 Paragraphs from several other judgments[8] were also cited out of context lifting sentences out of those paragraphs as if they were statutory provisions on retrospectivity, but those paragraphs cannot be read out of the factual context before the respective courts, for the context determined the observations on retrospectivity as applicable to those cases[9]. And several of those judgments related to laws other than taxation.
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2.1.3 Parliament taking away vested rights by retrospective legislation' implies that those rights vested in the first place by some legislative act, or by grant of an exemption (such as in Molasses[10]), or like legislative or executive act, by which non-existent rights were created and vested in the citizens. This principle has no application where a natural right existed, not dependent on any beneficence of the legislature or the executive, that could be taken away, if at all, retrospectively. The right of a citizen to earn and keep the fruits of its labour is an inherent natural and a fundamental right, that does not depend on any legislative or executive act. This right is only subject to such laws on taxation by which the citizen pays a part of his earnings to the State by way of tax. When that right is curtailed by any legislation, it can only be prospective and never retroactive for not being a right vested by legislation in the first place. This critical distinction was entirely lost while citing all the judgments on the competence of the legislature to pass retroactive legislation taking away vested rights. 2.2 PAST & CLOSED TRANSACTIONS 2.2.1 Ms Hamid citing a copious number of citations for the Parliament's unfettered power to impose retrospective legislation by clear language was really quite unnecessary. That rule was never in question by the petitioners as a primary premise to start with. But that rule exists in parallel with, and does so without dissonance, with two exceptions, namely, that retrospective (or any) legislation cannot override fundamental rights, nor can override rights acquired under transactions past and closed or, preferably, rights acquired under facts and events that have already occurred'[11]. It is quite pointless to ask that the former rule alone be applied, and its exceptions ignored. The petitioners accept the rule, and rest their case on its exceptions. It is therefore not necessary to visit any further the citations by Ms. Hamid affirming the rule. Mr. Salman Akram Raja for the petitioners in several petitions summarized it well that the rule of past and closed transactions was unique to our jurisprudence, though Mr. Sukhera demonstrated later that it was not, and I add that this is a jurisprudential landmark to be proud of, and not, as Ms. Hamid would have us believe, to be apologetic about as if it were an inadvertent incongruity with the rule. This exception to the rule was consciously laid down by the Supreme Court and then followed consistently. Its coordinate principles in other jurisdictions are arbitrariness, unreasonableness, and unexpected liability[12]. It is a good exception. It must stay. 2.2.2 Mr. Salman Akram Raja led the submissions on this ground, and his submissions were adopted largely by most of the other counsels. Though Mr. Raja's submissions were confined to his clients' cases, who were allowed a special tax year under 74 of the Ordinance ending on 31st December, other learned counsels for the petitioners following normal tax years urged that the same principles applied for their clients also. But given that Mr. Raja's petition for Fauji Foundation was the first one, and the rest followed suit, it is appropriate that his client's past and closed transactions be summarised to illustrate, for the other petitioners have argued closure of their respective tax affairs for their tax accounting years in similar fashion. 2.2.3 He began by recounting that Fauji Foundation closed its tax accounts on 31 December 2021. Super tax was levied on 01.07.2022 for the tax year 2022 and onwards, latching on to tax year 2022 for Fauji Foundation, which, for the purposes of chargeability of income to tax, closed on 31.12.2021. Between 31.12.2021 and 30.06.2022, several transactions were undertaken by his clients without super tax being visible on the horizon. He challenged super tax for being charged on events that had already occurred' or transactions past and closed', and relied on Molasses to urge that super tax could not be levied for the tax year 2022 in any event. He made these submissions without prejudice to his additional submissions that the levy of super tax was violative of the fundamental rights under Articles 18, 23 and 24 of the Constitution. While responding to Ms. Hamid's stance of the complete freedom of the Parliament to impose taxation retroactively, he asked rhetorically, but quite pertinently, what would the Courts of this country do if this freedom of the Parliament wasst
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translated into legislating that Fauji Foundation would pay another tax on their income, say, for the year 2000? He has a point. 2.2.4 The facts and events already occurred were readily identified by him with reference to the audited financials. He added that Fauji was under statutory obligations fastened by the Companies Act, 2017 to finalise its audited accounts and lay them for approval in an annual general meeting, which was duly done. He cited the following provisions of the Companies Act with reference to actions completed by Fauji: i) 132 - the annual general meeting (AGM) was to be held no later than 30.04.2022; ii) 134 - the audited accounts were to be laid before the AGM; iii) 223, 225 - the financial statements were to be approved, with taxation to be expressly stated; iv) 241 - as dividends could be paid only out of profits, the financial statements had to state the final profitability figure, which in turn depended materially on the post-tax profits and such reservations from profit for reinvestments that were finally locked in the audited financial statements approved in the AGM. Based on the finalised audited accounts, the company declared and paid dividends at 46.5% of post-tax profits, in the sum of Rs. 5.9 billion. The payment of dividend and other financial commitments made these past and closed transactions. If Fauji had known super tax to be payable, its profitability would have been lower with post-tax profits, and dividends would either not have been paid or would have been in a lesser sum. He added that the taxation liability was a material item in Fauji's financial statements, with an immediate and direct impact on its share prices for being a listed company. 2.2.5 Ms. Hamid, replied both orally and in writing that restatement of audited accounts was a normal business incident, and it was customary for taxpayers to restate their accounts for a number of reasons, including as a result of revised assessments, either on the tax payer's own volition, or as a result of amended assessments by the tax department. 2.2.6 Mr. Raja responded by saying that para 7 of Ms. Hamid's reply resting on her submission noted above was based on a false analogy of reopening of assessments, for that entailed some error in arriving at the final tax liability, and never the question of chargeability to a new tax. The reopening of assessm ents could be the result of a computational dispute, a dispute on the allowable expenses, exemptions, or the like, but never on the very question whether a new tax, not existent at the time the accounts were finalised, was chargeable. He did not take issue with the broader proposition of Parliament's power to pass retrospective legislation, but only with its power to tax transactions past and closed. 2.2.7 Other petitioners with a special tax year complained in a similar vein. For instance, the trustees of Askari Bank Provident Fund approved and finalized their financial statements on 04.02.2022, disbursing circa Rs.508 million, and permanent withdrawals of circa Rs.82 million, with the remaining amounts credited to the accounts of 6330 employees of the bank. These transactions, per Mr. Adnan Haider for the petitioner funds, were irreversible transactions undertaken on the basis of the funds' tax liability for the special tax year ending on 31.12.2021, in reliance on the exemption from tax that was valid and subsisting by the end of its special tax year, and therefore a matter past and closed, which could not be disturbed by retrospective application of super tax imposed on 01.07.2022. 2.2.8 Mr. Sukhera appearing for other petitioners cited Blodgett vs Holden[13] to submit that the doctrine of past and closed transactions was not unique to Pakistan. In Blodgett, the United States Supreme Court declared 319 of the Revenue Act 1924 unconstitutional insofar as it levied a tax on transfer of property made prior to the date of enforcement of 319. The Revenue Act was passed on 2 June 1924 and levied a tax on gifts made during the calendar year 1924 . Blodgett challenged the exaction of tax on gifts made by him in January 1924. The US Supreme Court set the following
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question for it to answer: "whether Congress had the power to impose a charge upon the donor because of gifts fully consummated before such provisions came before it?" The law report records the per curiam opinion of 6 judges of the Court, with 5 concurring with the opinion of Mr. Justice Reynolds, who held as follows: As to the gifts which Blodgett made during January 1924, we think the challenged enactment is arbitrary and for that reason invalid. It seems wholly unreasonable that one who, in entire faith and without the slightest premonition of such consequence, makes absolute disposition of his property by gifts should thereafter be required to pay a charge for so doing. (emphasis supplied) Mr. Justice Holmes added his additional note, which, in material part, reads as follows: ...I think it tolerably plain that the Act should be read as referring only to transactions taking place after it was passed, when to disregard the rule would be to impose unexpected liability that if known might have induced those concerned to avoid it and use their money in other ways. The US Supreme Court found retrospective taxation of consummated transactions "arbitrary and "wholly unreasonable for imposing an unexpected liability retrospectively, and therefore invalid under the due process doctrine in the American constitution. 2.2.9 Before we find the answer to this controversy, we need to address the point in time when the liability to tax crystallises, for it is the pivotal question in terms of the doctrine of past and closed transactions for our purposes. 2.3 MOMENT OF CRYSTALLISATION OF TAX LIABILITY 2.3.1 The petitioners case was that the liability to tax crystallises on the close of the last day of the financial year on which the accounts for the purposes of the relevant tax year close. Their case was that the taxable event was the accrual of income , and all taxable events stood concluded on the close of the relevant tax accounting year. They cited Commissioner of Income Tax, Peshawar vs Islamic Investment Bank Ltd[14], where the Supreme Court held unequivocally that: [The] liability to pay income tax accrues on the taxpayer on the last day of the income year/accounting year, though the tax becomes payable after it is quantified in accordance with the procedures laid down in the Income Tax Law. 2.3.2 The petitioners also cited Fawad Ahmad Mukhtar vs Commissioner Inland Revenue[15], holding that: Each tax year is a separate unit of account, and the law has to be applied as it stood in respect of that year alone. 2.3.3 The liability to pay - chargeability - is the first stage of liability to tax; one can't proceed to the next until this first stage is crossed. His Lordship Mr. Justice Munib Akhtar summarised this as follows[16]: In Whitney v. IR Commissioners (1926) 10 TC 88, in a well-known passage that has stood the test of time, Lord Dunedin spelt out the three stages of a tax (at the broadest plane) in the following terms: "Now, there are three stages in the imposition of a tax: there is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessm ent. Liability does not depend on assessment. That, ex hypothesi, has already been fixed. But assessm ent particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay. For purposes of the question now before us, the three stages may be restated as follows: leviable (declaration of liability), payable (assessment) and recoverable. 2.3.4 Ms. Hamid's position remained that the liability to tax is ascertained on the date the returns of income are filed, which for all the petitioners is a date after 1st July 2022, when the Finance Act 2022 was promulgated. Her position therefore is that 4C was very much in force before the liability to tax was final for the tax payers, and cited Shahnawaz[17] for her submission, wherein a sentence
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reads that ...income tax legislation, as applicable to a given tax year, is normally regarded as being the law as it stands on the first day succeeding the tax year.' Apart from that Shahnawaz being a judgment of the High Court has to give way to Islamic Investment Bank for being a judgment of the Supreme Court, in my respectful view, that sentence in Shahnawaz reflects the position prevailing under the 1922 Act and the 1979 Ordinance, as well as the position in the United Kingdom, where under a formal assessment follows the filing of tax return, and not the position under the 2001 Ordinance where under self-assessed returns are filed on the basis of the tax regime prevailing on the last day of a tax accounting year. 2.3.5 Her reliance on other citations[18] to claim that a special tax year was a concession and did not confer a preferential right on the taxpayer to avoid a tax liability fastened after the close of its tax accounting year, but before it filed its tax return, has no relevance because the taxpayers are not claiming any preferential treatment; they claim only that their liability cannot turn on any legislation passed after the date their tax accounting years closed. 2.3.6 I therefore follow Islamic Investment Bank to hold that the taxable events for the petitioner's respective tax years closed, and the leviability of any tax on the petitioners crystallised and fell to be determined, only on the basis of the law as it stood on the date of the close of the taxpayers' tax accounting year, regardless of whether they followed a special or a normal tax year. 2.3.7 With the aforesaid background, I find on the strength of Molasses, Anwar Yahya[19], and Blodgett, that super tax under 4C could not be levied for any period prior to 30.06.2022. 2.4 SECTION 4B CASES 2.4.1 Much emphasis was laid by Ms. Hamid on the point that three High Courts have rejected the challenge to 4B of the Ordinance, which was (almost) identical to 4C, and that therefore this alone should suffice to decide these petitions. The petitioners' counsels controverted stating that fresh grounds were urged in these petitions. Their submissions appear correct. 2.4.2 The judgments in DG Khan Cement[20] and HBL Stock Fund[21] cases do not depict that the submissions on fundamental rights, except under Article 25, were rejected after reasoning and analysis, for the law reports stop at citing paras from precedents on the point, without reasoning as to why fundamental rights to conduct business and hold property were not found impinged upon, and for that reason cannot be considered laying down binding precedent on the point for not being part of their ratios[22]. Much of the Courts' opinions remained occupied with the argument that super tax was not a tax for being imposed for a specific purpose, nor was a fee, and was therefore beyond legislative competence[23]. The challenge to retrospectivity of 4B was not argued, nor was the 'post-tax income' point argued[24]. In particular, the exclusion of brought forward losses and depreciation allowances was not addressed[25]. 2.4.3 In particular, HBL Stock Fund simply reproduced the concluding passage in PIDC[26] case without adverting to the crucial distinction that super tax under consideration in PIDC was that under the Income Tax Act of 1922 was pre-existent, of contemporaneous lineage as the rest of the Income Tax Act, making it obvious to each taxpayer at the start of each tax year that it was also exposed to super tax at all times, for 56 of the 1922 Act announced ex-ante that `...the total income...shall...for the purposes of super tax be the total income as assessed for the purposes of income-tax.' There was no uncertainty for any tax payer at the start of each tax year, and he could organize his financial affairs accordingly. The opening words in 55 "[I]n addition to income tax" made that quite clear. With respect, both HBL Stock Fund and D.G. Cement overlook this crucial distinguishing factor[27].…
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