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Petitioner: GOVERNMENT CONTRACTOR's ASSOCIATION VS Respondent: GOVERNMENT OF PAKISTAN
Court Name: Lahore High Court Judge(s): Mian Allah Nawaz, Ahmad Saeed Awan Title: GOVERNMENT CONTRACTOR's ASSOCIATION vs GOVERNMENT OF PAKISTAN Case No.: W.P.No. 8621 of 1991 Date of Judgment:1995-01-22 Reported As: KL.R. 1995 Tax & Custom Cases 49 Result: orders set aside
JUDGMENT
JUDGMENT MIAN ALLAH NAWAZ, J.- This judgment will govern three batches of Constitution petitions. The first batch comprises of 283 petitions which have been filed by Public Limited Companies, Private Limited Companies and Registered Firms. These, in substance, seek to challenge the constitutional validity of Section 80-D of the Income Tax Ordinance (XXXl of 1979). It shall be hereinafter referred as the "Ordinance" Section 80-D was inserted in it by Finance Act (XII of 1991). This Act was passed by the Majlis-e-Shoora/Parament and received the assent of the President on 20th June, 1991. It was promulgated w.e.f, first day of July, 1991. The second batch members 61 petitions and is by contractors and importers. These petitions and the vires-of Section 80-C of the Ordinance, which was inserted into the Ordinance by means of Act (XII of 1991). This Act was passed by the Majlis-e- Shoora/Parliament and received the assent of the President on 30th Jude, 1991. It was promulgated w. e f. First day of July, 1991. The third batch consists of 70 petitions. These have been moved by exporters and call in question the legality of Section 80-CC which was inserted into Ordinance by Finance Act (VII of 1992). The array of parties of first, second and third batch of the petitions is completely given in Appendix-A, B and C respectively. 2. The aforesaid provisions of the Ordinance were debated by the learned counsels for the parties thoroughly and comprehensively. On behalf of the petitioner, Raja Muhammad Akram, Senior Advocate, Dr., Ilyas Zafar, Mian Ashiq Hussain, Mr, Imtiaz Javed Hashmi, Mr. Umar Atta Bandial, Mian Saqib Nisar, Dr. A Basit, Mr. S.H. Rizvi, Syed Zahid Hussain, Syed Ali 7-afar and Dr. M. Mohy-ud-Din Qazi, Advocates argued to assail the challenged provisions. While on behalf of respondent No.1, Mr. Faqir Muhammad Khokhar, learned Deputy Attorney General of Pakistan entered appearance. He
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represented the Attorney General of Pakistan #ho was not available on account of his unavoidable engagements. Mr, Muhammad Ilyas Khan, Advocate, appeared on behalf of respondents No. 2,3 and 4. 3. Raja Muhammad Akram, Advocate, while leading the arguments on behalf of the petitioners' side, raised following points in order to demonstrate the constitutional invalidity of challenged provisions: (i) That no tax can be levied without the authorization by Majlis-e- Saoora/Parliament under Article 77 of the Constitution. Furthermore the Majlis-e-Shoora can only enact tax laws within the ambit of entry 47 contained in Part-1 of Fourth Schedule under Article 70(6) of the Constitution of Pakistan (1973) (here-in-after referred as entry 47 of the Schedule). According to the learned counsel the word "Income" embodied in entry 47 of the Schedule, contained the principle of profits/losses; that the tax could be levied on the gains of the assessee and not on the basis of his gross income. On the basis of this submission, it was represented that Section 80-C, 80-D made the turnover/any deemed or accrued income, as a basis of tax and so these provisions were repugnant to entry 47 of the Schedule and were so without any lawful consequence. (ii) That the laws enacted by the Parliament had to be in conformity with the basic rights contained in Part-II of the Constitution. Relying upon the above Chapter of the Constitution, the learned counsel contended that if any tax law or any of its provision enacted by the Parliament offended Articles 18, 21, 23, 24, 25 and 26 of the Constitution, such enactment or provision was void ab initio and was liable to be struk down by this Court under Article 8 of the Constitution. According to the learned counsel the challenged provisions ere violative of Articles noted above -situations arising out of the operation of challenged provisions, He cited the example of four imaginary companies with a gross tum over of rupees I0O Crores. According to him: (a) A company with a gross turn-oyer of rupees I0O Crores might make profit and the tax payable by it might be Rs.50 lacs or more and stated that this company was not hit by Section 80-D of the Ordnance. (b) Another company, having same turnover, might earn the profit which may be less and its tax liability might be Rs 10 lacs. Even this company will not be hit by Section 80-D. (c)Another company, with the same turn-over might not earn any profit , but still this company will have to pay the tax under Section 80-D of the Ordinance. This company when examined within company (a) and (b) shall be accorded uneven and unequal treatment and would have . To pay same tax which the company (a) and (b) would pay. (d) Last but least there may be another kind of company/companies, with the same turn-over but they might be in a loss and might have not earned any profit at all This company, regardless of its loss, will have to pay rupees 50 lacs from its own resources. Proceeding further, he submitted that the company a,b,c, and d, irrespective of their losses and gains will have to pay rupees 50 lacs as tax As far as company (a) is concerned it is not affected by the operational parameters of Section 80D of the Ordinance. The companies/company (b), (c)
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and (d) are hit by the above provisions. The companies (c) and (d) fall in extremely awkward position. These companies, while clearing their tax liability, will have to pay from their own resources and to sell their properties. Section 80-D on above analysis, according to the learned counsel, is confiscatory in nature and in second instance provides no reasonable classification. It actually makes uneven, even, and accords same ' treatment between equals and unequals. The net effect of Section 80-D of the Ordinance is that this provision contravenes noble constitutional doctrines of equal treatment and provision forbidding confiscation of the properties of the people without compensation. The same principle, according to the learned counsel, applies to Sections 80-C and 80 CC of the Ordinance. Raja Muhammad Akram, Advocate relied upon following decisions to support the above proposition: (i) KP. Moopil Nair vs. State of Kerala ([AIR 1961 SC 552J. (ii) Anandige Sham Bhai vs. AgrU.T. Officer [AIR 1963 SC 591]; (iii) State of Kerala vs. Haji Kutty [AIR 1969 SC 378]; (iv) Bhupinder Singh vi. The State [AIR 1986 H.P33]; and (v) Govemment of Pakistan vs. Muhammad Ashraf [PLD 1993 SC 176]. (iii) That sections 80-D, 80-C and 80-CC provided fictional income/deemed income as a basis for computation of tax on flat rate. This prescription completely overlooks the realities and ignores the principle of gains, losses, deductions and exemptions contained in the scheme of Income Tax Ordinance, 1970. According to the learned counsel, the legislature has clubbed genuine tax payers, and tax evaders together, on the basis of a deemed income. These provisions, therefore, have no nexus with the object of Finance Act, 1991 or Finance Act, 1992 mid are discriminatory in nature. The written notes, too, Were submitted by Raja Muhammad Akram, Advocate, which have been placed on the record of Constitution Petition No. 8621/91. 4. Dr. Ilyas Zafar, while appearing in Constitution Petitions No. 11794/92 and 9532/92, submitted that Section 80-C was violative of Agreement concluded between Islamic Republic of Pakistan and Peoples Republic of China vide an instrument dated 27.12.1984. This instrument was executed under Section 173 of the Ordinance. It was agreed therein that the Govemment of Pakistan ( would tax the petitioner on the basis of principle of profits and losses and not on the basis of turn-over. According to the learned counsel, the above petitioners had sustained heavy losses, and, therefore, did not owe any tax liability in the terms of Memo of Understanding dated 27.12.1984. On the above circumstance, it was represented that the respondents were estopped on the principle of promissory estoppel to enforce the provision of Section 80-C of the Ordinance against the petitioners. According to the learned counsel, the instrument of understanding between the Government of Pakistan and Peoples Republic of China, was contained in NTR 1992. SL174. 4-A. - On behalf of the petitioner in W.P. 884/94, learned counsel represented that the petitioner in this writ petition was Lahore Development Authority; that it was not a commercial organization and had been created to develop the city of Lahore. According to the learned counsel, the Lahore I Development Authority was immune from any tax under Section 80 of the Ordinance and so the respondent had no jurisdiction whatsoever to tax the LDA under challenged provisions. The learned counsel relied upon following precedents in support of his contention; (i) Ata-ul-Haq vs. Chaiman and Members of the Election Appeal Committee (PLD 1964 Dacca 70) (ii) Zakir Ahmad vs. University of Dacca (PLD 1965 Dacca 122).
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(iii) Deputy Manager Director, National Bank of Pakistan vs. Ata-ul-Haq (PLD 1965 SC 201). (iv) Chief Secretary, Govemment of Punjab vs. Commr of I.T. (PLD 1976 I Lah.258) Dr. Ilyas Zafar, Advocate, while arguing Petitions No. 776/91, 9365/912, 9527/91, 1029/92, 536/92, 145/92, 1835/92, 5334/93, 11358/92,1051/93 and 13274/94, stressed that the petitioners in the above- noted petitions were those undertakings which were exempted from tax liability under Sections II8, 118-B, 118-D, 120, 122-D, 125 and 125-A of the Ordinance. Under these ' provisions the investors/companies were given Highlighting the above, it was argued that the respondents had no jurisdiction whatsoever to take away the above concessions granted to the above petitioners on the principle of promissory , estoppel. Reliance was placed on M. Afzal & Sons vs. Federal Govemment of Pakistan (PLD 1978 Lah. 468). Collector of Central Excise & Land Customs vs. Aziz- ud-Din Industries Ltd. (PLD 1970 SC 439), WAPDA vs. Capt Nazir Hussain and Others (1986 SCMR 96) and AsstL Commissioner vs. Dhannendra Trading Co. (1989 PTD 839). He concluded by saying that Section 80-D was repugnant to the Injunctions of Islam which commands the Muslims to fulfil their promise/undertakings given. Reference was made to verse: 177 of Surah Baqra of the Holy Qur'an. Winding up his arguments, the learned counsel pointed out that ' the petitioners in petitions No. 8931/91, 9526/91, 12269/91 535/92, 3541/92, 301/93,161/93, 640/93, 6027/92 and 569/92, were the undertakings which had sustained heavy losses and they are under no liability to pay tax. According, to the ' learned counsel Section 80-D nullifies the effect of Sections 34 and 35 of the Ordinance and so is harsh, unreasonable and oppressive legislative prescription having no regard for the concrete concept of income. 5. Mr. Zia-Ullah Kiani, Advocate, appearing on behalf of M/s Govemment Contractors Assedation/petitioner in writ petition bearing Np. 8575 of 1991, relying upon the following precedents, contended that Section 80-C of the Ordinance was beyond the term of Entry 47 in Fourth Schedule and was violative of the definition other Income contained in Section 2(24) of the Ordinance. He placed reliance upon. (i) (ii) #tbs (iii) 1995 (iv) #the (v) (vi) #tbs (vii) Key Law Reports (viii) #the (ix) (x) #tbs (xi) Tax.& C. 54 (xii) #the (xiii) (xiv) #tbs (xv) I (xvi) \ (xvii) #the (xviii) Commissioner Income Tax vs. Shaw Wailance [AIR 1932 P.C.138] (xix) Kamkshy Narain Singh vs. Commissioner of Income Tax [(194311ITR 513 (P.C.)]. (xx) Pakistan Industrial Development Corpn, vs. Pakistan (1992 P.T.D. 576). (xxi) Commissioner of I.T. Vs. Smith, Kline & French of Pakistan Ltd. [(1991 SCMR 2374)] (xxii) Commissioner of Income Tax vs. Harprasad & Co. (P) Ltd. (1975) 99 ITR 118] (xxiii) Commissioner of Income Tax vs. Moula Bux Corpn. Ltd. (PLD 1990 S.C. 1990).
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(xxiv) Shrin Munir vs. Govt, of Punjab (PLD 1990 SC 295). (xxv) State vs. Zia-ur-Rehman (PLD 1973 SC 49). (xxvi) Federation of Pakistan vs. Saeed Ahmad Khan, (PLD 1973 S.C. 49). (xxvii) Commissioner of Income Tax vs. Anwarafy Haji Noor Muhammad (1992 SCMR 458). (xxviii) Inamur-Rehman vs. Federation of Pakistan (1992 SCMR 563). (xxix) KTMoopil Nair vs. State of Kerala (AIR 1961 S.C. 552). (xxx) Luchman Dass vs. State of Punjab (AIR 1963 S.C. 222). (xhr) A. Appukutty vs. Sales Tax Officer (AIR 1966 Kerala 55). (xv) M/s. Chhotabhai vs. Union of India (AIR i962 SC 1006). , (xvi) Chhatrasinhji Kesansinhji Thakore vs. CJ.T. [(1966) 59 ITR 562 (SC)]. (xvii) State of Andh. Vs. Raja Reddy (AIR 1967 SC 1458). (xviii) va/w Fraser & Co Ltd vs. C.L T. [1982) 137ITR 493]. (xix) C/.7V vs. B.C Snnivaso Setty [198l) 128 ITR 294 (SC)]. (xx) Shree Sajjan Mills Ltd. Vs. CL T. [1985)156 ITR 585] (xxi) K V.ALM. Reemanathan Chettiar vs. CI.T. [(1973) 88 ITR 169 (SC)]. {{MISARRANGED DATA}} 6. Mian Ashiq Hussain, Advocate entered appearance in 9150/91, 9943/92 and 5359/92 and argued that Section 80-C of the Ordinance, in final analysis amounted to erosion of distribution of Revenue between Federation and Provinces ordained under Article 160 of the Constitution and, therefore, it was a void provision. He relied upon P.ID.C.\s. Pakistan (1992 PTD 576) to contend that deeming income, as made basis in the challenged provision, was wholly offensive to the object of Finance Act, 1991 as well as of 1992. He further stressed that the concept of Income was inseparably linked to the concept of gains and losses and income tax can be only levied upon the income which was a gain to the Assessee, after deducting the expenditure and losses, if any. He banked upon the definition of income given in Corpus Juris Secundum Vol 89, page 731, Patiala State Bank's case (AIR 1941 Bom.93). Mr. Ali Bin Abdul Qadir, a Senior Member of the Tax Bar Association, Lahore, strenuously ^contended that the definition of income contained in Entry No. 47 in Fourth Schedule be considered with reference to the meaning which were in the mind of the framers of the Constitution. He traced chronology of this entry and stated that the similar entry existed in the Govemment of India Act, 1933 and previous Act of 1922 which was replaced by the Ordinance of 1979. According to the learned counsel, the legislative chronology indicated that the income tax was to be levied on the income after deducting the expense and losses and after taking into consideration the exemptions contained in the Income Tax Act, 1922 and Ordinance of 1979. According to the learned counsel, the challenged provisions had totally abolished the above concepts and had demolished edifice on which the Scheme of Taxation rested. This being the position, challenged provisions as a matter of act are tax on turn-over and so they, in reality are imposed on sales of assessee and mot on the income. 7. Mr. Saqib Nisar, while entering the debate, laid stress upon the construction of definition of word income by Privy Council in Commissioner, Income Tax vs. Shaw Wallace (AIR 1932 PC 138). According to the- learned counsel the income is a fruit of a tree or a fruit of harvest That fruit had to be obtained after taking into consideration all what has been spent in harvesting or rearing of the tree. He relied upon the definition of income given in Corpus Juris Secundum and definition of the same word' in Black's Law Dictionary. He concluded that word turn-over in Section 80-D of the Ordinance, could not be substituted for income. He also stressed that a fiction cannot be extended to provide for results which are foreign to object of Statute. Relying upon JJC Jute Mills Co, vs, State of UP. (AIR 1961 SC 134) and Entry Club vs. State of Mysore (AIR 1967 Mysore 25)'the contended that the result of the application of challenged provisions will be simily disastrous. The learned counsel
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sought support from A. .Sanyasi Rao vs. Govt of A.P (1989) 178 I.T.R 31 8. Mr. Umar Ataa Bandial, Advocate, explained the concept of tum over to argue that the same could not be made legitimate basis for the purpose of levying income tax. He relied upon Federation of Hotel & Restaurant vs. Union (AIR 1990 Sc 1937) The Elel Hotels and Investment Ltd. Vs Union of India (AIR 1990 SC 1664) and R.P Engineering Co. Vs Zila Panshad, Bareilly(AIR 1980 SC 1088) 9. Dr. Abdul Basit, Senior Advocate, entered the debate in the last He at the very out set, contended that the Ordinance was promulgated by late Gen. Muhammad Zia-ul-Haqon 28.6.1979 that he had broken the Constitution and was a usurper. Continuing, he contended that the Ordinance was issued by a person who was not competent to enact the same so the Ordinance was not a valid piece of legislation. He further argued the illegally constituted Assembly by the usurper, was not competent to can Article 270-A in the Constitution and validate the invalid laws. On this basis it was contended, that the Ordinance was anviled piece of legislation and any amendment in the same suffered from the inherent legal infirmity. He relied upon Editorial notes contained in a quarterly journal LEGAL OPINION printed and published by Amir Ali Shah for Idara Technic Qanoon om its Head office located at Qanoon Manzil, Behind High Court, Lahore. These notes occur at page 22 of the aforesaid Legal Opinion. He further contended that as far as non-bobstante clauses in 80-C, and 80-CC are concerned, these are not a bar to the power of judicial review of this Court under Artical 199 of the Constitution. While owning the arguments of the other counsels, he contended that neither 80-D, and 80-CC were retrospective nor these provisions were applicable to finance year 1991-92. 10. Mr. Muhammad Ilyas Khan, Senior Advocate, Supreme Court of Pakistan, while defending the challenged provisions, raised following points. Firstly, that the Constitution deals with the structure of the State. It the State. It confess powers, rights and privileges on the various limbs of the State. It deals with the distribution of power between the Federal Govemment and the Provincial Governments. It is a living document and is to be interpreted in the widest possible manner to ensure the continuity and balanced in the various organs of the State. The entry No. 47 of the Schedule is to be interpreted not in a restricted manner but with wide and comprehensive connotation in order to meet the grown sodo-dynamies of the Sate. He relied upon Shridhar vs. Poona City Municipality (AIR 1941 Bombay) Elel Hotels & Investments Limited and others vs. Union of Lndia (AIR 1996 SC 1964). Navinchandra Mafatla, Bombay vs. Commissioner of Income Tax, Bombay City (1954) 26 I.T.R. 758 (S,C, of India), Bhagwan Dan Jain vs. Union of India & others (1981) 128 I.T JR 315 (S.C.).Sakarla Balabhai vs. Bala Bhai (1975) 100 LR.T. (Guj) Page. 97). PXD.C. Vs Pakistan (1992 SCMR 891). And Docars Teea Co. Limited vs. Commissioner of Agricultural I. Tax, (1961) 4 I.T.R. 6 (S.C. India). Secondly, that the concept of deemed income incorporated in challenged provisions, was not foreign to taxation scheme in vogue in the subcontinent According to the learned counsel, it was fully ingrained in Income Tax Act, 1922 and then in Income Tax Ordinance, 1979 Explaining further the learned counsel relied upon following provisions: S. No. Relevant Section Subject 1. 2(20) Deemed dividend. 2. 2(24) \ Bonus shares - not to be considered as income in certain cases.
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3. 12(8) A discontinued business shall be deemed to have continued for the purpose of Income Tax Ordinance. 4. 12(12) - Assets other than stocks and shares purchased from Co. At less than market value difference deemed to be income of the purchaser. 5. 12(13) Un-adjustable advance rent deemed to be income to be taxed in ten years (l/10th each year). 6. 12(18) Bonus exceeding Rs. 1.00,000 received otherwise than through crossed cheque deemed to be income of the recipient of loan. 7. 12(19) Payment received by lessor against leased assets to be income of certain persons. 8. 13(l)(a) Un-explained credits in books to be income of the assessee. 9. 13(l)(aa) Un-explained investment etc. To be income. 10. 13(l)(b) Ua-explained/uorecorded investment etc, to be income, 11. 13(l)(c) Money or valuable article, the sources of which remain received is deemed to be income and tax is collected at ' 20% of such income. #tbs unexplained, is deemed income. 12. 13(1) (c) Un-explained expenditure deemed income. 13. 19 The charge is on ALV rather than the actual rent received. 14. 25(c) Trading Lability remaining unpaid for more than three years deemed to be income. 15. 29 Clandestine transactions deemed to be transactions of the beneficiary. I6. 50(3) Any sum (chargeable to tax) when paid out to a nonresident such sum is deemed to be income and tax is to be withheld at normal rates. 17. 78 Every agent who is declared to be or is treated as an agent is deemed to be an assessee. 18. 79 When business transaction is arranged between a resident and a non-resident where no profit or loss arise to a resident reasonable profits be determined by 1TO to be income of resident. 19. 80 Shipping business of nonresident Aggregated receipts to be deemed to be income and tax at 8% is collected. 20. 80(A) Ali-line business of a nonresident Aggregate receipts are to be deemed to be income and tax at 3% is collected. 21. 80(AA) Aggregate of technical fees #the finance Act, 1991 Inserted Sections 80-B.80-C & 80-D #tbs 156 #the #tbs 132 #the #tbs 99(5) #the #tbs 25. #the #tbs 24. #the
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#tbs 23. #the #tbs 22. 88 All income arising to any person by virtue of a revocable transfer of assets, is deemed to be income of the transferor. Where department takes no action upon refund application of assessee till 30th June, amount of refund is deemed to be due to assessee. Where appeal is not decided within three months, the relief claimed shall be deemed to have been given. If the mistake pointed out by the assessee is not rectified by the department within a given period, the mistake is deemed to have been rectified.{{TABLE MISARRANGED}} On the above basis, it was represented that the law-makers with a devoted loyalty, had incorporated the concept of deeded income in taxation schemes of this country, in various provisions of Income Tax Act, 1992 and Income Tax Ordinance, 1979; that the assessee have accepted this concept without any demur mid have been paying tax in consonance with the "deemed income" Now, it was too late for the petitioners to signal out the challenged provisions and throw challenge to them. Reliance was placed on Commissioner of Income Tax, Bombay vs. Mani Lai Dhanji (44 I.T.R. 876 S. VC (India) Commissioner of Income Tax, A.P. Vs. C.P. Sarathy Mudaliar (83 I.R.T. 170 S.C. (India) Dahi Laxmi Dal Dactory vs. Income Tax Officer (103 I.T.R,. 353). Thirdly, That it is settled that the legislature has full power to make/eoact retrospective legislation. Reliance was placed on M/s Haider Automobile Ltd. Vs. Pakistan (PLD 1969 SC 623), Madurai Distt Central Co-op, Bank limited vs. IIIrd Income Tax Officer (1975) LTU. Volume 101 Mst. Rafiquen Nessa vs Lai Bahadur Ghetn (AIR 1964 Sc 1511). Collector of Central Excise vs. Azizuddin Industries Ltd. (PLD 1970 SC and Monnuid-un-Nasa vs. Land Commissioner (PLD 1975 S.C. 397). On the above arguments, it was prayed that all these petitions be dismissed. 11. Mr. Faqir Muhammad Khokhar, the learned Deputy Attorney General of Pakistan, appeared on behalf of learned Attorney General of Pakistan who did not appear in this Court on account of his unavoidable engagements. Mr. Khokhar represented the Federation with immeasurable industry and defended the challenged provisions of the Ordinance, in addition to the points raised by Mr. Muhammad Ilyas Khan, learned counsel for the Department, on the following reasons: Fristly, That the fundamental rights enumerated in Para-II of the Constitution were divisible into two classes; that one class was applicable to the citizens while the other class was applicable to citizens and non-citizens. He pointed out that Articles 15,16.17,18,19,20,23,25, and 28 pertained to basic rights to the citizens and non-citizens; that Articles 18 and 25 were not applicable to public limited companies, private limited companies, registered and unregistered firms which were not, by any stretch of imagination, citizens but were legal entities. On the above view, he contended that the petitions which challenge the validity of Section 80-D of the Ordinance are not maintainable. In order to fortify his point of view, he cited following decisions of superior judiciary: (i) S.T. Corpn, of India vs. Commercial Tax Officer (AIR 1963 SC 1811). (ii) Indo. China S. Navign Co. Vs. Jaspis (AIR) 1964 SC 1140). (iii) Barhum Cherminals…
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