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Petitioner: Service Global Footwear Limited and another VS Respondent: Federation of Pakistan JUDGMENT
Court Name: Lahore High Court Judge(s): Jawad Hassan Title:Service Global Footwear Limited and another vs Federation of Pakistan
JUDGMENT
Reported As: 2023 LHC 3837, 2023 PTD 1120, PLJ 2023 Lahore 651, PLD 2023 Lahore 471 Result: Petition Partly Allowed Judgment "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." (Judge Learned Hand, Chief Judge of US Court of Appeals for the Second Circuit)[1] JUDGMENT JAWAD HASSAN, J. Through this judgment, instant writ petition as well as writ petitions mentioned in Schedule "A" shall be decided as common question of law and facts is involved therein. The Petitioners have assailed in these petitions under Article 199 of the Constitution of Islamic Republic of Pakistan, 1973 (the "Constitution") the retrospective application of Section 4C of the Income Tax Ordinance, 2001 (the "Ordinance") and the vires of the First Proviso to Division IIB of Part I of the First Schedule of the "Ordinance", introduced through the Finance Act, 2022. I. CONTEXT OF THE CASE 2. Precisely, all the Petitioners are taxpayers and for the purpose of regulating their tax affairs, some of the Petitioners operate and opt normal tax year commencing from 1st July and ending on 30th June, while the other Petitioners operate and opt special year commencing 1st January and ending on 31st December. Through these petitions, the Petitioners, at the one hand, have made challenge to retrospective application of Section 4C while on other hand, have called in question the vires of Section 4C First Proviso to Division IIB of Part I of the First Schedule of the "Ordinance" being discriminatory in terms of Article 25 of the "Constitution" and unlawfully vitiating vested rights accrued in past and closed transactions. This judgment will interpret the language of Section 4C of the "Ordinance" with anatomy of its Chapters and Parts, more specifically its charging provisions
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under Section 4C, the tax on taxable income under Chapter III read with Procedure under Chapter X, Part I & Part IV. The Court, while hearing the case, directed the parties to file report and parawise comments alongwith supporting documents explaining the basis of inclusion of Section 4C of the "Ordinance". In compliance, the Respondent No.2/FBR filed its reply through Mr. Khalid Ishaq, ASC on 13.10.2022, while Ms. Asma Hamid, ASC filed report and parawise comments on behalf of the Respondent No.3/CIR on 02.11.2022 alongwith supporting documents. In addition, counsel for most of the Petitioners filed written arguments alongwith gist of case laws in their support. II. PROCEEDINGS BEFORE THIS COURT AND SUPREME COURT OF PAKISTAN 3. During the hearing of the petitions, the judgment of Sindh High Court cited in SHELL PAKISTAN LIMITED through Legal Counsel and others Versus FEDERATION OF PAKISTAN through Secretary Ministry of Finance and others(2023 PTD 607 Sindh) regarding Section 4C of the "Ordinance" was challenged before the Supreme Court of Pakistan wherein vide order dated 06.02.2023, interim relief was granted in the following manner: "In view of the above, the respondents have consented to deposit under protest with the tax authorities 50% of the liability claimed against them under the impugned provisions of Ordinance. However, the amount of such deposit shall be reduced by the amount of any refund that has been determined by the tax authorities in favour of the respondents. Needful to be done within one week from the date of this order." 4. Pursuant to passing of aforesaid order, an application bearing C.M.No.01 of 2023 was filed on behalf of the Respondent No.3/CIR for modification of interim order granted on 27.12.2022. The Court on 16.02.2023 modified aforesaid order by observing that: "Since the prayer made in this petition is supported with the order of Hon'ble Supreme Court of Pakistan, there is no need to issue notice to the Writ Petitioner (in this petition or the other connected petitions/C.Ms. fixed for today). Keeping in view the afore-quoted directions of the Hon'ble Supreme Court of Pakistan, the interim order dated 27.12.2022 issued in the captioned writ petition and the interim orders issued by this Court from time to time in other connected writ petitions are hereby modified in terms that all the Writ Petitions (in this petition as well as the connected Writ Petitions) will now deposit under protest with the tax authorities 50% of the liability claimed against them under the Income Tax Ordinance, 2001, within seven days. However, the amount of such deposit shall be reduced by the amount of any refund that has been determined by the tax authorities in favour of the said Writ Petitioners. This order be placed in all the connected files and will be read accordingly for all the connected petitions". 5. On 16.02.2023, the Supreme Court of Pakistan heard the appeals and granted interim relief at one point by observing that "according to learned counsel for the petitioner, the accounting year of the respondents ends during the course of Tax Year 2022 to which the provisions of Section 4C are lawfully applicable". At second point, it was further observed that "the learned counsel for the petitioner submits that the said argument cannot form the basis of altogether striking down the impugned Super Tax because implicitly the respondents' arguments accepts liability to taxation at the rate of 4%. However, he is not able to explain to us the justification for charging super tax at higher rate for industries specified in the first proviso. We grant him time to prepare his case on that point". Finally, the following order was passed. "Insofar as the interim relief is concerned, the respondents which are liable to pay Super Tax at the rate of 10% under the proviso shall deposit the same within one week at the rate of 4% which is applicable to assessee industries earing incoming exceeding Rs.300 million as provided in Division II B ibid but falling outside the proviso thereto. In the event that the respondents have furnished bank guarantees on the direction of the High Court then the same shall be en cashed by the petitioner to the extent of 4% tax".
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6. Thereafter, while arguing the case from 09.03.2023 onward, the Court when confronted to learned counsel for the Respondent/CIR whether there are any document on the basis of which the judgment was passed by the other Courts, Mr. Khalid Ishaq, ASC for the Respondent No.2/FBR and Ms. Asma Hamid, ASC for the Respondent No.3/CIR stated that no such document was filed before other Courts. Consequently, this Court directed the Respondents to justify tax imposed through Section 4C of the "Ordinance" by filing proper documents. On 09.03.2023, Ms. Asma Hamid, ASC for the Respondent No.3/CIR stated that detailed reply has been submitted and requested that same may be treated as replies in all connected petitions. However, when parties again and again agitated illegalities in the documents, Ms. Asma Hamid, ASC sought further time to file supplemental reply. It is noted that when initial reply was filed on the directions of this Court, no proper document was annexed. On 22.03.2023, Ms. Asma Hamid, ASC filed C.M.No.01 of 2023 for placing on record some documents which includes Pakistan Economic Survey in 2021-2022, brief on Budget Making Process, Budget Speech, 2022-2023, policy statement and other documents by giving reasons for imposition of super tax through support of constitutional provisions. III. PETITIONERS ARGUMENTS 7. Mr. Salman Akram Raja, ASC has mainly argued that the Petitioners' company is a limited company with listed stock exchange and special year has already ended in December, 2021, its AGM was held in April, 2022 and profit was distributed to all the shareholders in May, 2022, therefore, super tax imposed through Section 4C of the "Ordinance" is not applicable being past and closed transaction. He further argued that definition of "income" in Section 4C(2) of the "Ordinance" excludes adjustments from current year revenue on account of brought forward depreciation, brought forward business losses and brought forward amortization and for determination of the same, the Petitioners have already acted upon it at the close of tax year 2022. He has relied on "MOLASSES TRADING & EXPORT fPVT.) LTD. Versus FEDERATION OF PAKISTAN etc" (1993 SCMR 1905). 8. Mr. Mansoor Usman Awan, ASC argued that the Petitioners are seeking declaration regarding exemption of super tax on the ground that Section 4C is ultra vires to the "Ordinance". He added that imposition of super tax hit by principle of past and closed transaction because in some companies, special year completed from 1st January to 31st December (the "Special Year") with cutoff date and in other set of cases the Financial year, which is a normal year starts from 1st July to 30th June (the "Normal Year"). Hence, no tax can be agitated as the Special Year as well as the Normal Years has already been ended. He further argued that imposition of supertax is based on discrimination and thus is not applicable to the case of the Petitioners. 9. Mr. Shazib Masud, ASC and Barrister Waqas Mir, ASC argued that general rates of super tax for all sectors except mentioned in first proviso to Division IIB to Part I of First Schedule to the "Ordinance" declaring income over 300 million is 4% whereas proviso to Division IIB states for year 2022, the persons engaged, whether partly or wholly, in the business of airlines, automobiles, beverages, cement, chemicals, cigarette and tobacco, fertilizer, iron and steel, LNG terminal, oil marketing, oil refining, petroleum and gas exploration and production, pharmaceuticals, sugar and textiles the rate of tax shall be 10% where the income exceeds Rs.300 million therefore, applicability of different rates of taxes on different sectors is discriminatory and violative to Article 25 of the "Constitution". 10. Barrister Haroon Dugal, ASC argued that super tax under Section 4C of the "Ordinance" is a tax and Section 4B of the "Ordinance" till date has occupied the same field and incidences of both the taxes under above said sections are same therefore, two charging sections for the same tax are neither permissible under the law nor the same can be imposed through two charging sections. He further argued that there is no machinery provision for the collection of super tax as no rules in terms of Section 4C(6) of the "Ordinance" have been framed.
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11. Mr. Hassan Kamran Bashir, Advocate argued that Section 4C of the "Ordinance" was added through the Finance Act, 2022 with effect from 01.07.2022 after the close of Petitioners' tax year 2022 on 31.12.2021 and 30.06.2022 hence, for the purpose of tax affairs, it becomes a past and closed transaction before the Finance Act, 2022 became effective. He added that Section 4C of the "Ordinance" is a charging section, hence cannot be applied retrospectively to transactions that have become past and closed. He next argued that retrospective application of the section ibid would create a new tax obligation for a tax year that has already been closed as the liability of the Petitioners had attained finality on the last date of tax year. 12. Mr. Muhammad Mansha Sukhera, Jahangir Ahmad, Muhammad Zulqarnain, Hassan Kamran Sheikh, Asfandyar Khan Tareen and Zoe K. Khan, Advocates adopted the arguments advanced by above mentioned learned counsels and also filed their written arguments alleging discrimination. Learned counsels in other connected petitions also adopted the same arguments. IV. RESPONDENTS ARGUMENTS i. Arguments of Respondent No.2-FBR 13. Mr. Khalid Ishaq, ASC for the Respondent No.2/FBR filed report and parawise comments and objected qua maintainability of the petitions. He argued that the Petitioners are liable to pay tax under Section 4C of the "Ordinance" and cannot take advantage of the benefit granted to them under Section 74 of the "Ordinance". He further argued that Section 2(68) of the "Ordinance" defines "tax year" as tax year defined in sub-section (1) of Section 74 and in relation to a person, includes a special tax year or a transitional tax year that the person is permitted to use under Section 74 of the "Ordinance". He pointed out that many a Petitioners adopted a special tax year in terms of Section 74(3) of the "Ordinance" which extends from 1st January to 31st December and mere objecting to applicability of Section 4C of the "Ordinance" based on doctrine of past and closed transactions is of no avail as payments of dividends and purported investments, do not constitutes as events that render the finalization of accounts therefore, the reliance on the entire doctrine of past and closed transaction is misplaced and has wrongly been stretched by many a Petitioners just to obtain exemption from their tax obligations. ii. Arguments of Respondent No.3-CIR 14. Ms. Asma Hamid, ASC for the Respondent No.3/CIR filed report and parawise comments and objected qua maintainability of the petitions. She argued that most of the Petitioners were permitted to pay their tax liability by using a special year in terms of Section 74 of the "Ordinance" which is only a concession and distinct from normal tax year i.e. from 1st July of any given year to 30 June of the next year hence does not alter the liability to be taxed at the rate of tax to be announced through Finance Act, 2022 on 30.06.2022 and its liability to pay tax through filing returns by or on 30.09.2022. She added that audited accounts and paid dividends relate to internal accounting principles and thus have no nexus with liability to pay income tax on its computed taxable income at the rate enacted by the legislature. She argued that previously the Petitioners have been used to pay super tax in terms of Section 4B of the "Ordinance" which is identical in language and retrospective in operation and effect than that of Section 4C of the "Ordinance" thus the Petitioners are estopped by conduct to challenge it on the ground of retrospectivity when Section 4B of the "Ordinance" levies super tax with retrospective effect. She, by relying on a chain of judgments, argued that past and closed transactions can be disturbed through legislation where retrospective application is expressed through unambiguous, clear language. Moreover, she has also placed on record policy considerations for enactment of Section 4C of the "Ordinance", the competency of the legislature to impose super tax with retroactive and retrospective effect alongwith policy statement of Member (FBR), policy guidelines of Annual Budget Statement 2022. V. DETERMINATION BY THE COURT i. History and legal anthropology of Super Tax
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15. From the arguments advanced by learned counsel for the parties alongwith documents and case law, grounds viz.a.viz retrospective application of Section 4C of the "Ordinance" based on the past and closed transaction, discrimination with respect to imposing super tax on a particular class of persons and its vires, have been agitated. Before proceeding further, it would be advantageous to highlight brief history and legal anthropology of the super tax. It is an additional tax which is typically levied on high-income individuals or corporations as a means to generate additional revenue and promote income redistribution. The history of super tax can be traced back to various countries and different time periods. During World War-I (1914-1918), several countries including United Kingdom, Australia and Canada introduced super taxes on wealthy individuals and corporations, imposing higher tax rates on their income and profit, with the sole purpose to finance the war efforts and cover the increased government spending. Super taxes were also implemented, during the great depression of 1930s, when many countries faced economic crises and sought ways to address income inequality and fund social welfare program, as a measure to redistribute wealth and support government initiative. For example, the United States introduced the Wealth Tax Act of 1935, imposing a surtax on high-income individuals. After World War II, super taxes continued to be utilized in various forms. In the United Kingdom, a supertax was introduced in 1949 to address post-war economic challenges. The tax primarily targeted high-income individuals and aimed to fund reconstruction efforts and social welfare programs. In Indian sub- continent, levy of super tax was introduced through Super Tax Act of 1917. Thereafter, the Legislative Council of India enacted the Super Tax Act of 1920 which repealed the Super Tax Act of 1917. Till this period, the impost of tax in addition to income tax (i.e., super tax) was being made through separate legislative enactments until the Legislative Council of India, on the recommendations of the All-Indian Income Tax Committee, consolidated income tax and tax in addition to income tax (i.e., super tax) in the Indian Income Tax Act, 1922. Even though the Income Tax Act, 1922 dealt with both income tax and super tax, it still maintained the distinction and identities of the two categories of taxes, and designated a separate chapter for super tax, i.e., chapter IX of the Indian Income Tax Act, 1922, which contained a distinct charging provision, and specified the definition of income and the exemptions applicable with respect to the computation of super tax. In other words, Chapter IX of the Indian Income Tax Act, 1922 was a self-contained chapter dealing with the charge, assessm ent, collection, and recovery of super tax. It is also worth noting that even though the Indian Income Tax Act. 1922 defined super tax as tax in addition to income tax, it did not include the same within income tax; the legislature, in its wisdom, clearly kept the separate identity of super tax maintained. 16. After its independence, the Islamic Republic of Pakistan adopted, as is, the Income Tax Act of 1922 as its code on direct taxation. However, from time to time, through parliamentary enactments and ordinances, the charges levied, definitions, and computation and recovery methods were amended. Thereafter, the Income Tax Act of 1992 was repealed by the Income Tax Ordinance 1979 which, with respect to the levy of super tax, adopted a similar scheme and maintained the super tax's distinct and self-contained identity. Thereafter, the promulgation of the "Ordinance" repealed the Income Tax Ordinance, 1979 and super tax was reintroduced in the "Ordinance" through the Finance Act, 2015, by adding section 4B (super tax for rehabilitation of Temporarily Displaced Persons) that imposed a super tax on certain persons with retroactive effect on tax year 2015. Recently through the Finance Act of 2022, the Parliament inserted Section 4C in the "Ordinance" which imposed a super tax on certain high-earning persons with retroactive effect for the tax year 2022 and onwards; except for the banking companies which were liable to pay super tax from the tax year 2023. ii. Legality of Section 4C of the "Ordinance"
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17. The Petitioners have agitated the applicability of Section 4C of the "Ordinance" retrospectively. It has been settled in plethora of judgments by the Superior Court that legislature is competent to give retrospective effect to an Act and can also take away the vested rights of the parties but to provide for such consequences, the Legislature must use words which are clear, unambiguous and not capable of any other interpretation or such interpretation follows as a necessary implication from the words used in the enactment. In order to narrow down the question of retrospectively, it is imperative to reproduce Section 4C of the "Ordinance" which 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. (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.] Division IIB Super Tax on high earing persons The rate of tax under section 4C shall be-- Sr.No.Income under section 4c Rate of tax (1)(2) (3) 1. Where income does not exceed Rs.150 million 0% of the income 2. Where income exceeds Rs. 150 million but does not exceed Rs. 200 million1% of the income 3. Where income exceeds Rs. 200 million but does not exceed Rs. 250 million2% of the income 4. Where income exceeds Rs. 250 million but does not exceed Rs. 300 million3% of the income 5. Where income exceeds Rs. 300 million 4% of the income
Provided that for tax year 2022 for persons engaged, whether partly or wholly, in the business of airlines, automobiles, beverages, cement, chemicals, cigarette and tobacco, fertilizer, iron and steel, LNG terminal, oil marketing, oil refining, petroleum and gas exploration and production, pharmaceuticals, sugar and textiles the rate of tax shall be 10% where the income exceeds Rs. 300 million:
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Provided further that in case of banking companies for tax year 2023, the rate of tax shall be 10% where the income exceeds Rs. 300 million.] Plain reading of above section reveals that it imposes a super tax for the "tax year 2022 and onward" at the rates specified in above Division IIB on income of every high earning person. While Division IIB of the First Schedule provides the slabs of income brackets that will be put to progressive rates of super tax under section 4C; the proviso to Division IIB provides for a onetime levy of super tax at 10% for the tax year 2022 on those persons involved in specific sectors/businesses subject to their income exceeding Rs.300 million in tax year 2022 only; and the second proviso to Division IIB subjects the banking companies to a one time levy of super tax at rate of 10% for the tax year 2023 subject to their income exceeding Rs. 300 million. The said section also defines "income" as the sum of four heads listed in subsection 2(i) to (iv) of Section 4C of the "Ordinance" and proviso to the section ibid excludes the imposition of super tax on banking companies only for the tax year 2022. It further reflects that entire distinct mechanism for assessm ent, collection and recovery of super tax has been provided within the newly inserted section. 18. Pertinently, the word "person" is defined under Section 2(42) which means a person as defined in Section 80, Chapter V, Part-I, Division-I of the "Ordinance" which reads as: 80. Person. --(1) The following shall be treated as persons for the purposes of this Ordinance, namely: -- (a) An individual; (b) a company or association of persons incorporated, formed, organised or established in Pakistan or elsewhere; (c) the Federal Government, a foreign government, a political sub-Division of a foreign government, or public international organisation. (2) For the purposes of this Ordinance -- (a) "association of persons" includes a firm, a Hindu undivided family, any artificial juridical person and anybody of persons formed under a foreign law, but does not include a company; (b) "company" means -- (i) a company as defined in the [Companies Act, 2017 (XIX of 2017)]; (ii) a body corporate formed by or under any law in force in Pakistan; (iii) a modaraba; (iv) a body…
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