Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: PAKISTAN BURMAH SHELL LIMITED and another VS Respondent: FEDERATION OF PAKISTAN JUDGMENT
Court Name: Sindh High Court Judge(s): Wajihuddin Ahmed, Mamoon Kazi, Muhammad Hussain Adil Khatri Title:PAKISTAN BURMAH SHELL LIMITED and another vs FEDERATION OF PAKISTAN
JUDGMENT
Reported As: 1998 PTD 1804 Result: Petition dismissed Judgment JUDGMENT HUSSAIN ADIL KHATRI, J.---In the above Constitutional Petitions the vires of the amendments made in the Income Tax Ordinance (XXXI of 1979) (hereinafter referred to as "the Ordinance") by the Finance Acts of 1991 and 1992, whereby sections 80-C, 80-CC and 80-D have been incorporated and amended also corresponding amendments have been made in section 50 and Part I of the First Schedule to the said Ordinance, has been challenged. 2. The relevant statutory provisions have been reproduced in the detailed judgment of my learned brother. The important features of the said provisions are recapitulated below to highlight their impact on the tax incidence. Section 80-C read in association with section 50(4) provides that any amount which is received by or accrues or arises or is deemed to accrue or arise to any person being resident, on account of supply of goods or the execution of a contract with the Government or a local authority or a company or a registered firm or any foreign contractor or consultant or consortium, the whole of such amount shall be deemed to be income of the said person and tax shall be charged thereon and collected at the source of payment in advance, at the rates prescribed in paragraph CCC of
---
## Page 2
Part I of the First Schedule to the Ordinance, and similarly when read in association with section 50(5) the income tax is to be collected in advance by the Collector of Customs at the same time and in the same manner as customs duty, from every importer of goods, on the basis of value of imported goods as increased by the customs duty and sales tax, at the prescribed rate of two per cent. Of such value. Raw material imported by any industrial undertaking for its own consumption is not liable to be charged with the tax. The above provisions are applicable to residents of Pakistan. So far as non-residents are concerned, the advance tax is deductible on the amount representing payments on account of a contract for construction, assembly or like projects in Pakistan under section 50(4). In section 80-CC read in conjunction with section 50 (5-A) all the foreign exchange proceeds realized on account of export of goods by a person being an exporter, the whole of such amount is deemed to be the income of the said person and the tax thereon is to be charged at the rates specified in paragraph CCCC of Part I of the First Schedule respectively. Subsection (3) of section 80-C and subsection (2) of section 80-C respectively provide that nothing contained in the Ordinance shall be so construed as to authorize any allowance or deduction against the income as determined under the respective subsection (1) of the said two sections or any refunds of tax deducted or collected under the corresponding provisions of section 50 or set off of any loss under any provision of the Ordinance. Under section 80-D, where no tax is payable or paid by a company or registered firm, resident in Pakistan or the tax payable or paid is less than one-half per cent. Of the amount representing its total turnover from all sources, the aggregate of the declared turn over shall be deemed to be the income of the said company or registered firm and tax thereon shall be charged in the manner that where no tax is payable or paid is equal to one-half per cent of the said turnover or if the tax payable or paid is less than the above percentage of the turnover, equal to the difference between the tax payable or paid and the said percentage. The turnover is explained to mean the gross receipts, exclusive of trade discounts shown on invoices or bills, derived from sales of goods or from rendering, giving or supplying services or benefits or from execution of contracts. The explanation declares for the removal of doubt . That the expressions. "where no tax is payable or paid" and "the tax payable or paid" apply to all cases where tax is not payable or paid for any reason whatsoever including any loss of income, profits or gains or set off of loss of earlier years, exemption from tax, credits or rebates in tax, and allowances and deductions (including depreciations) admissible under any. Provision of the Ordinance or any other law for the time being in force. All the three sections begin with non-absente clauses, which read, "Notwithstanding anything contained in this Ordinance or any other law for the time being in force" 3. The petitioners have challenged the aforesaid provisions brought in the Income Tax Ordinance, 1979 through Finance Acts of 1991 and 1992 as ultra vires the Constitution of the Islamic Republic of Pakistan, 1973 as the said provisions militate against the powers of the Federal legislature to frame laws relating to Entry No,47 of Part I of the First Schedule. The said Entry reads as under:-- "The taxes on income other than agriculture income." The said provisions are also assailed as violative of the fundamental rights guaranteed by the Constitution vide Article 8 read with Articles 18, 23 and 25 of the Constitution, being confiscatory, expropriatory and discriminatory. 4. In the above background the submission of the learned Advocates appearing on behalf of the petitioners is that the aforesaid Entry of the constitution, provides for framing of laws for imposing tax on income and, therefore, the Legislature can levy taxes on income alone. According to them the gross receipts or turnover or the total value of imports and exports or contracts do not fall
---
## Page 3
within the meaning of the term ' income' and, therefore, no tax can be levied thereon. It is further submitted that the Legislature by incorporating a deeming clause cannot term the gross receipts or total turn-over or the foreign exchange proceeds received on export of goods or the value of the imported goods as increased by custom duties and sales tax, as income. The resolution of the point urged, therefore, depends on the meaning of the word ' income'. It is settled law that the entries in the legislative lists cannot be read in restricted sense and, therefore, the word ' income' occurring in Entry No,47 in Part I of the Fourth Schedule to the Constitution cannot be interpreted in a narrow and pedantic sense, but is to be read and understood in its ordinary, natural and grammatical meaning, with normal concept and connotation conveyed by it and as it is understood in common parlance. The word ' income' as used in the aforesaid Entry, cannot be restricted to the connotations acquired by it under the definition of the said term as given in the Income Tax Ordinance, 1979. However, the question arises whether the Legislature by a deeming clause can term as income something which, in fact is not income. From the definitions of the term 'income', as detailed in Corpus Juris Secundum, Black's and Ballentine's Law Dictionaries and Strout's Judicial Dictionary and so also the case-law on the subject, it can be concluded, without fear of contradiction that an amount which can by no stretch of imagination be called income can be treated as income by the Parliament. The concept of profit or gain is inherent in the concept of income. Therefore, any amount to be called income must have some characteristic of income as the term is ordinarily understood with its above connotations. For tax purposes the gain derived from capital, labor or from both combined including profit or gains through or conversion of capital assets are income. Income is that which 'comes in' not being capital. Even in its broadest connotation income refers to monetary return coming in and is conceptually contradictory to loss and the Parliament cannot choose to take an item as income which in no rational sense can be regarded as income. The exposition of the term 'income: in the case of Samina Shaukat Ayub v. Commissioner of Income Tax, Rawalpindi PLD 1981 SC 85, reproduced in the judgment of my learned brother has been re- affirmed recently by the Supreme Court in the case of Pakistan Industrial Development Corporation v. Pakistan 1992 PTD 576. Their Lordships in the said case have also quoted the following observations from the United Provinces v. Mst. Atiqua Begum and others AIR 1941 FC 16:-- "None of the items in the list is to be read in a narrow or restricted sense and that each general word should be held to extend to ancillary or subsidiary matters which can fairly or reasonably be said to be comprehended in it." In the aforesaid case of Pakistan Industrial Development Corporation, vires of the amendment made in section 2(6)(c) of the Income-tax Act, 1922 by Finance Act 1967, and the Explanation 5 added to section 4 of the Income Tax Act by the Finance Act, 1968 were challenged on the proposition that Free Reserve of the company exceeding the paid-up ordinary share capital of the company cannot be treated as income. Their Lordships while dealing with the term income made the following observations:-- "7. In this background we have to consider Entry No,43(c) which authorized the Central Legislature to levy tax on income and Corporations. The definition of the word 'income' in the Act is inclusive in nature and is not exhaustive. In this state of Statutory affairs the word ' income' has not to be given its literal and dictionary meaning but it is to be expanded to all possibilities and amplitude which may be covered by it in a wider and liberal sense particularly to save the purpose for which the statute has been enacted. According to the judgments referred above income is a receipt in the hands of assessee not necessarily a recurrent return from a definite source but generally in the light of the Act it is a periodical monetary return from known or unexplained source. But the determination of receipt as income depends upon the facts and circumstances of the case.
---
## Page 4
8. Section 4 makes the Act applicable to the total income of the assessee received or deemed to be received in Pakistan during the previous year by or on behalf of the assessee or accrues or arises or deemed to accrue or arise in Pakistan during the previous year if he is a resident or accrues or arises to such person outside Pakistan. The fact remains that Free Reserve is a part of total income which has been assessed to Income-tax Free Reserve is that part of total income which represents profit earned by the appellant but not distributed among the shareholders. Such income had been made subject to a further tax mainly for the reason to discourage the practice to accumulate profit without distributing it among the shareholders. 9. It is only if the income is received, arises or accrues or is deemed to receive, arise or accrue when an assessee is subjected to tax. The deeming provision presupposes accrual of income to the assessee but by fiction of law shifts the 'locale of accrual of the income'. A deeming clause makes a thing to be as provided by Statute though in reality it is not so. According to Privy Council in C.I.T. v. Bombay Trust Corporation 4 I.T.C. 312, the term 'deemed to receive or accrue' conveys the meaning that in reality it is not so but the Statute treats it as if it were. According to Kanga and Palkhiwala in Income Tax. Volume I. VIIth Edition:-- Thus, the phrase 'deemed to accrue or arise to him in India during such year' and the corresponding phrase with reference to receipt in this section, involve four possible concepts; (a) artificial accrual or receipt, (b) artificial place of accrual or receipt, (c) artificial chargeability of a person other than the actual owner of the income, and (d) artificial year of taxability." Thus, the deeming provision in section 4 of the Act relates to the afore stated possibilities in relation to receipt or accrual of income. By this provision anything which is not income cannot be treated as income. It, therefore, follows that receipt is not the sole test of chargeability. Any income may not have been actually received but if it is deemed to arise, accrue or receive then it is chargeable to 'tax'. See Keshav Mills Limited v. CIT 23 ITR 230 and CIT v. Thiagaraje C. Chetty 24 ITR 525. The material words 'receive, accrue or arise' play important role in fixing the chargeability to tax. The words 'accrue and arise' convey the same meaning but as pointed out by Fry, J. In Colquloun v. Brooks (1882) 21 Q.B.D. 52, 59 (....) that both the words are used in contradistinction to the word ' receive'. And indicate the right to 'receive'. Reference can be made to C.I.T. v. Ahmedbhai Umerbhai, 18 I.T.R. 472 (SC). Therefore, unless during the previous year income has been received, accrued or arisen or deemed to be so income tax cannot be charged. Before charging tax an assessee must be shown to have received income or it has arisen and accrued or deemed to be so under the Statute. Any amount which is not an income cannot be subjected to tax. In Corpus Juris Secundum, Volume 89, at page 731, it has been observed: "Income for any given period of time is the amount of gain so derived during the designated period. That which is not income cannot be made taxable by calling it income." Underlined for emphasis). The conclusion drawn by their Lordships with regard to the meaning of the word income appearing in the relevant legislative entry reads as under (para. 12 at page 591 of the report): "Under Item No,43(c) of the Third Schedule of the late Constitution of 1962, the Central Legislature has exclusive powers to make laws in respect of 'corporation taxes and taxes on income other than agriculture income' . Any money which is not an income cannot be classified as income and subjected to tax on income." Thus in view of the above pronouncement of the Supreme Court no amount, which is not an income, can be converted into income by deeming to be income. The impugned provisions are to be tested in juxtaposition of the law laid down as above. Section 80-C provides impost on the total value of the supplies and contracts and in case of the imports, on the basis of the value of goods as increased by the custom duties and sales tax, being deductible in the first case by the person responsible for making payment, at the time the payment
---
## Page 5
is made on account of supplies and contracts and in the latter by the customs authorities in the same manner and at the same time as the custom duty respectively. In case of supplies and contracts, tax is to be deducted even on the amount paid as advance. There is no provision for making any reference to the prices for which supply is made and the price for which goods are purchased by the supplier and the incidental or overhead expenses or freight. In case of imports it has been presumed, before the goods are sold, that the income is made at the specified rate of the above value of the goods which has been deemed to be the income of the importer. It does not take into account the eventualities that the goods may be Destroyed or lost or damaged and, therefore, or otherwise, the importer for fore seen reason may not make any profit. Similarly the impost on export of the goods completely over-looking the cost of the goods exported and the price realized on export and so also the management expenses, commission to indenters, etc., the total foreign exchange proceeds have been deemed to be income. ' Section 80-D goes a step further by providing that where no tax is payable or paid by a company or a registered firm being resident in Pakistan, the aggregate of the declared turnover shall be deemed to be income. The gross receipts or turnover or value of the imported or exported goods, in the latter case as increased by customs duty and sales tax have been deemed to be income and the income-tax is charged and collected. By adopting the above methodology the cost paid by the supplier or exporter and importer for the subject goods, or the amount invested in contract, all taxes and custom duties paid by them, though are in the nature of capital investment, have been deemed as income. The above components of turnover or gross receipts of foreign exchange proceeds or imported goods, in no sense of the term can be deemed or construed as income, without transgressing or offending the meaning of the term, appearing in Entry No,47. Resident companies and registered firms have been subjected to tax even if they have suffered losses and have earned no income. Loss is negation of income and not income. It is, therefore, inevitable to hold that the gross receipts on account of supplies of goods or execution of contract, i,e, total turnover or gross receipts, value of the imported goods, foreign exchange proceeds of exported goods, duty and tax added value of the imported goods and the losses, cannot be treated as ' income' as understood in its literal meaning or in any rational sense thereof or even with its widest connotations and denotations and more particularly in view of the dictum of our apex Court. The Federal Legislature, therefore, exceeded its power in legislating the impugned provisions. 5. The learned Advocates appearing for the respondents contended that the Parliament can competently levy income-tax by enlarging the meaning- of the word ' income' by deeming provisions. It was further contended that such presumptive tax or levy of tax on the basis of gross receipts has been held to be permissible by Indian Courts and such practice has been in vogue in Pakistan also. The reference was made to Indian cases with reference to sections 44-AC and also 44-B, ,44-BB and 44-BBA of the Income Tax Act, 1961. They also referred to sections 80, 80-A, 80-AA and 80-B of the Income Tax Ordinance, 1979. In so far as sections 80, 80-A and 80-AA are concerned, no doubt the income-tax has been levied on the gross income of the shipping and air transport business and technical services. They apply to non-residents. Their world income is not assessed under the Ordinance, therefore, their earnings in Pakistan are subjected to tax at particular flat percentage, without following the normal procedure. Same is the nature of sections 44-B, 44-BB and 44-BBA of the Indian Income Tax Act. As far as section 80-B is concerned, it prescribes levy of income-tax on dividend payable to a shareholder by the company, or on interest or profits paid by banking company or any finance society, or on interest or profits earned on bonds, certificates, debentures, securities or instruments
---
## Page 6
of any kind issued by any banking company and other companies and on prices and winnings of Rs,25,000 or more or value thereof, prize on prize bonds or on account of winnings from a raffle, lottery or crosswo rd puzzle. The said amounts, that have been subjected to tax under the aforesaid provisions are, therefore, obviously income of a person, as some money or value is being received by them which is not capital of the person charged with tax. It is not income-tax on capital of the assessee, but on the income, something received as gain or profit. 6. In so far as Indian cases relating to section 44-AC are concerned, the Andhra Pradesh and Orissa High Courts had found that the tax levied under the aforesaid provisions, in fact, was not a tax on income. However, the said provisions were not struck down by having recourse to theory of reading down. It, however, may be pointed out that the aforesaid provisions of. The Indian Income Tax Act, 1961 were incorporated as anti-tax evasion measure. In the case of A. Sanyasi Rao and others (1989) 178 ITR 31, the learned Judge has referred to the Memorandum explaining the provisions proposed in the Finance Bill, 1988, which sets out the reason and objects to achieve which, the above provisions were sought to be inserted in the said Indian Act. The learned Judges have also noted that the persons, who normally used to acquire the contracts subjected to presumptive tax, were fly by night operators or moon lighters, who after obtaining the contract, used to become scarce. Observations made in this regard in the above case are reproduced below: "We find it difficult to say that the submissions of learned counsel for the petitioners based upon Articles 14 and 19(1)(g) are without substance. Literally read, section 44-AC brings about a legislative assessm ent of the profits and gains of persons trading in specified goods. The normally applicable provisions, sections 28 to 43-C, are dispensed with altogether. It's declared that the profits and gains of every person from the said business, irrespective of his circumstances, volume of business, finance, expenditure or other attendant matters, shall be deemed to be the specified percentage of the purchase price. All that remains to be done thereafter is to find out whether any of the deductions provided by Chapter VI-A are to be allowed and then make an assessment. We may agree with the respondents that the persons trading in the specified goods form a class, inasmuch as they are difficult to trace once the contract period is over. We accept their submission that very often these contracts are taken in the names of dummies, in fictitious names, or in the names of faceless persons, or persons of little means. We will also accept the respondents' submission that because of the above factors, the State was losing a good amount of revenue and that there was large scale evasion by these persons. We agree fully that this situation had to be remedied. Loss of revenue had to be plugged. But the remedy should be proportionate to the evil. It should be reasonable. It should not assume the character of a confiscatory measure. It would have been enough if section 206-C had been enacted and it was provided that such collections shall be subject to a regular assessm ent. It was not necessary to dispense with sections 28 to 43-C in the matter of assessm ent of profits and gains of business as has been done by section 44-AC." And at page 64 of the report it is observed: "In such a situation we are left with the two options. One is to strike down section 44-AC and the other is to read it down to make it consistent with the guarantees in Articles 14 and 19(1)(g), We have considered the pros and cons of both courses and have come to the conclusion, keeping in view the overall object underlying the provisions and the language in subsection (4) of section 206-C, that it would serve the public interest more and further the intendment of Parliament, if we read down the provisions of section 44-AC, instead of striking it down." On reading down the provisions collection of tax on presumptive basis was treated as "only tentative collection" and it was directed " regular assessment would be made like in the case of any other assessee" under sections 38 to 43-C of the Indian Act.
---
## Page 7
The above case was followed by the Division Bench of the Orissa High Court in Sri Venkateswara Timber Depot's v. Union of India and others (1991) 189 ITR 741. The Punjab and Haryana High Courts in the case of Sat Pal & Company v. Excise & Taxation Commissioner and others (1990) 185 ITR 375, where also the petitions were filed assailing section 44-AC, the learned Judge's preferred to follow the view taken in the A. Sanyasi Rao's case to the ratio of ITK Aboobacker's case (1989) 177 ITR 358 (Kerala) as observed at page 387 of the report which reads as under: "With respect, we prefer to follow the view taken in A. Sanyasi Rao's case (1989) 178 ITR 31 (AP) to the ratio of T.K. Aboobacker's case (1989) 177 ITR 358." In Baldev Singh' v. C.I.T. (1960) 40 ITR 605, the validity of section 23-A of the Indian Income-tax Act, 1922 was questioned. The above section provided taxing the shareholders on dividends which were not distributed by a company and were not received by the shareholders. The Court reached the conclusion that the shareholders had not deliberately distributed the accumulated profits as dividend among themselves to evade the tax. The argument advanced to the effect that the dividend not received by the shareholders could not be subjected to Income Tax Act was repelled by the Supreme Court on the ground that the obvious intention of section 23-A was to prevent evasion of tax. The said provision was specifically found to deal with such situation by deeming that the accumulated profit had been distributed to the shareholders and, therefore, tax would be leviable against them on that basis. It was ruled that Entry No,54 in List No,I of the Seventh Schedule of 1935 Act should be read, not only as authorizing imposition of tax, but also has authorised such enactment which prevents the evasion of tax imposed. Andhra Pradesh High Court while justifying incorporation of section 44-AAC had followed the aforesaid rule propounded by the Supreme Court in Baldev Singh's case while interpreting the aforesaid…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.