Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: UCH POWER (PVT.) LTD. and others VS Respondent: INCOME TAX APPELLATE TRIBUNAL and JUDGMENT
Court Name: Supreme Court of Pakistan Judge(s): Khilji Arif Hussain, Anwar Zaheer Jamali, Sardar Muhammad Raza Khan Title:UCH POWER (PVT.) LTD. and others vs INCOME TAX APPELLATE TRIBUNAL and
JUDGMENT
Reported As: 2010 SCMR 1236 Result: Questions answered accordingly Judgment JUDGMENT ' ANWAR ZAHEER JAMALI, J.---all the above titled forty three civil petitions for leave to appeal/civil appeals, (Civil Petitions for Leave to Appeals Nos.1462 to 1482/2009, 1718 to 1724/2009 and Civil appeals Nos.1328 to 1336/2009, preferred against the judgment dated 19-5-2009, passed by Islamabad High Court, Islamabad in T.R. No,26/05 and twenty other connected T.Rs; Civil Appeals No,2652 to 2654/2006 preferred against the judgment dated 13.3.2006, passed by the Lahore High Court, Lahore in P.T.R. Nos.87, 88.And 457/2002; Civil Petitions for Leave to Apeals Nos.1772 to 1774/2009, preferred against the judgment dated 27-7-2009, passed by the Islamabad High Court, Islamabad in T.R. Nos.3, 20 and 55/2009) involving common questions of law and similar controversy for adjudication by this Court are being disposed of by this common judgment. 2. Though, broadly speaking, the questions of law for consideration involved in all these petitions for leave to appeal/civil appeals are about the interpretation and applicability of Clause- 176 of Part-I of the IInd Schedule to the repealed Income Tax Ordinance, 1976 [now corresponding to clause-132 of the Second Schedule to the Income Tax Ordinance, 2001] (hereinafter referred to as "clause 176"), but for better understanding of relevant facts, it will be useful to classify these petitions into five different categories as under:--- (a) Civil Petitions for Leave to Apeals Nos.1462 to 1482/2009 (twenty one in number), have been preferred by the Commissioner of Income Tax/Revenue to questions the legality of the impugned judgment dated 19-5-2009, to the extent, whereby keeping in view the provisions of clause (vii) to section 23(1) with section 34 and the scope of Clause 176 of the Ordinance of 1979, set off of losses
---
## Page 2
incurred by the respondent-companies, in their respective businesses, were allowed against their interest income specified under section 30 of the Ordinance, 1979, although their business income as assessees was already exempt from levy of income tax under Clause 176 (ibid). (b) Civil Petitions for Leave to Appeals Nos.1718 to 1724/2009 (seven in number), have been preferred by the petitioners, who are engaged in the Private Sector Power Generation Projects, which have been set up in Pakistan on or after 1st. July, 1988. In these petitions, the petitioners have challenged the same impugned judgment of the Islamabad High Court, Islamabad dated 19-5- 2009, to the extent, whereby, they have been denied exemption under Clause-176 (ibid) on their income generated during the relevant assessment year from interest/profit received on bank accounts, though such Bank accounts were maintained by these companies exclusively for the purpose of their respective power projects, and therefore, such income was incidental to the power projects and thus, entitled for exemption. (c) Civil Appeals Nos.1328 to 1336/2009 (nine in-number), are other civil appeals involving similar controversy as raised in the cases at category 'b' (supra), wherein, leave was granted by this Court to examine, inter Alia, the following contentions raised in these petitions:--- "(1) Whether profits and gains on deposit of funds in Banks maintained for the purpose of Company's electric power generation project, as part of Company's normal business, is exempt from Income Tax Ordinance, 1979? (2) Whether interest paid on the amount borrowed is deductible under clause (b) of section 3(1) of the Income Tax Ordinance, 1979 from profit earned on deposits of such amount in Bank? (3) Whether the learned Islamabad High Court has correctly interpreted clause 176 of the Second Schedule Part-I and section 31(1)(b) of the repealed Income Tax Ordinance, 1979? (4) Whether exemption of "profits and gains from electric power generation project" under Clause 176 of Part-I of the Second Schedule to the repealed Income Tax Ordinance, 1979 includes within its scope the entire income, as consequence of deliberate insertion of the word "Project"? (5) Whether the judgment in the Genentech case is distinguishable from the present case? And (6) Whether the learned High Court has correctly interpreted the provisions of the Economic Reforms Act of 1992?" (d) In Civil Appeals Nos.2652 to 2654/2006 (three in number), judgment of Lahore High Court, Lahore dated 13-3-2006, has been challenged by a public limited company (M/s Kohinoor Energy Limited, Lahore), who are engaged in a Private Sector Power Generation Project, whereby, while interpreting Clause-176 (ibid) vis-a-vis section 5(2) of the Protection of Economic Reforms Act, 1992, and relying upon the judgment of this Court in the case of Genentech Pakistan Ltd. And others v. Income Tax Appellate Tribunal of Pakistan, Lahore and others 2004 SCM R 1319, it was held that income of the petitioners from interest/profit on bank accounts maintained wholly and solely for the purpose and in connection with Power-Generation Project was not exempt from income tax by virtue of either Clause-176 (ibid) or section 5(2) of the Act of 1992. In these cases leave was granted by this Court vide its order dated 13-12-2006, inter Alia, to examine the applicability of the above referred judgment of this Court as well as the other subsequent judgment of this Court in the case of AES Pak. Gen (Pvt.) Ltd. v. Commissioner Income Tax C.Ps No,221I and 2212-L of 2005 decided on 16-6-2006. (e) Civil Petitions for Leave to Appeal No,1772 to 1774/2009 (three in number), arise from the common judgment dated 27-7-2009, passed by the Islamabad High Court, Islamabad, whereby, T.R, Nos.3, 20 and 25/2009, preferred by the petitioner, a public limited company (M/s Fouji Kabir Wala Power Company Limited), engaged in the Private Sector Power Generation Project, containing following questions of law for the opinion of the Court, were disposed of:--- (i) Whether the interest income of Messrs Fauji Kabirwala Power Company Ltd., is exempt from income Tax in view of entry 176 of Part-I of the Second Schedule and the said income is included in
---
## Page 3
the profit and gains derived by the assesses from an .Electric power generation projects? (ii) Whether the interest paid in respect of capital borrowed by the assesses can be deducted while computing interest income under clause (b) of section 31 (1)? (iii) Whether the petitioner is liable to pay worker welfare fund on the interest income? (iv) Whether exchange loss is not a revenue expenditure on revaluation of Assets and Appellate Tribunal was justified in rejecting the arguments of the petitioner?" (v) Whether the income earned by the petitioner on letting out of property is assessable under section 19 instead of section 22 and Appellate Tribunal was justified in confirming the order of Assessing Officer? (vi) Whether the interest received by the petitioner from WAPDA on delayed payments is not exempt under clause 176 of 2nd Schedule to the Ordinance being attributable to the business Activities of its electric power generation project?" ' These questions were answered by the High Court in the manner that following its earlier view contained in the judgment dated 19-5-2009, passed in T.R. No,26 of 2005 and other connected T.Rs,, questions Nos. I and II were answered in 'negative and question. No, Ill was answered in positive. Further, questions Nos. IV, V and VI were also answered in positive. 3. As stated earlier whole controversy involved in these petitions revolves around the interpretation and applicability of Clause 176 of Income Tax Ordinance 1979 (in short the Ordinance), inserted through S.R.O. No,1046(I)/88 dated 21-11-1988, to the facts of each case. Therefore, it will be advantageous that before recording respective contentions of the learned counsel in this context, for better understanding, same may be reproduced here as under:- (176) Private Sector Power Projects.---Profits and gains derived by an assessee from an electric power generation project set up in Pakistan on or after the 1st day of July, 1988: ' [Provided that the condition laid down in sub-clause (a) shall not apply to the Hub Power Company Limited] The exemption under this clause shall apply to such project which is.--- (a) owned and managed by a company formed for operating the said project and registered under the Companies Ordinance, 1984 (XLVII of 1984) and having its registered office in Pakistan; (b) not formed by the splitting .Up, or the re-construction or reconstitution, of a business already in existence or by transfer to a new business of any machinery or plant used in a business which was being carried on in Pakistan at any time before the commencement of the new business; and (c) owned by a company fifty per cent of whose shares are not held by the Federal Government or Provincial Government or a local authority or which is not controlled by the Federal Government or a Provincial Government or a local authority. 'Provided that the condition laid down at .Sub-clause (a) shall not apply to the Hub Power Company Limited." 4. Mr. Wasim Sajjad, learned Senior Advocate Supreme Court, who first made his submissions on behalf of some of the public limited companies, engaged in private sector power generation projects, making specific reference to the words "profits and gains" and "projects" used in clause 176, vehemently argued that keeping in view the true import and connotation of these words no room was left for the revenue to disallow exemption to the power generating projects of the companies, under clause 176, on their incomes earned by way of interests/profits on their bank accounts, which were wholly opened and maintained by them for the purpose of management of accounts of such projects. According to learned counsel, the income so derived by the companies engaged in private sector power projects was incidental in nature, which was covered by the words "profits and gains" of the company derived from their electric power generation projects set up in Pakistan, therefore, treatment to the contrary given to such companies by the revenue/ department, as upheld in the impugned judgments of the High Courts, is contrary to the
---
## Page 4
established principle of interpretation of fiscal statutes. In order to fortify his submissions, he also made reference to the definition of words "profits and gains" from the Black's Law Dictionary, which read thus; ' Profit: Most commonly, the gross proceeds of a business transAction less the costs of the transAction; i,e, net proceeds, Excess of revenues over expenses for a transAction; sometimes used synonymously with net income for the period. Gain realized from business or investment over and above expenditures. ' Profit means accession of good, valuable results, useful consequences, avail, gain, as an office of profit, excess of returns over expenditures or excess of income over expenditure. "Gain: Profits; winnings; increment of value. Difference between receipts and expenditures; pecuniary gain. Difference between cost and sale price. Appreciation in value or worth of securities or property. ' Excess of revenues over expenses from a specific transaction. Frequently used in the context of describing a transAction not part of a firm's typical, day-to-day operations. 5. Mr. Wasim Sajjad also discussed in detail the contents of Implementation Agreement (IA) dated 24-9-1994 (as amended on 19-11-1995) between the President of Pakistan and petitioner Uch Power Private Limited (UPL), the Power Purchase Agreement (P.P.A) between petitioner (un) and WAPDA dated 23-11-1995, and the common Debt Agreement (CDa) dated 17-5-1999, to amplify the meaning of word "project" used in clause 176. In addition to it, learned counsel made reference to section 3 of Protection of Economic Reforms Ordinance, 1992 (POER) to gain force to his submissions regarding exemption from tax of their income from interest/profit on the bank accounts earned by the companies, as, According to him, any view contrary to it will be a violation of such commitments made by the Government. In the end, learned counsel also candidly discussed the effect of two judgments of this Court in Genertech Pakistan Ltd. v. Income Tax appellate Tribunal of Pakistan (2004 SCM R 1319) and AES Pak. Gen (Pvt.) Ltd. v. Commissioner of Income Tax (in Civil Petitions No,2211 and 2212-L of 2005) decided on 16-6-2006. According to him, though, in these two judgments, the apex Court has formed a view contrary to the interest of the public limited companies engaged in Private Power Generation Projects, but on different premises, and therefore, these cases are distinguishable and have no relevancy or applicability to the controversy raised in these petitions. 6. Mr. Shahid Hamid, learned counsel for the appellants, in Civil Appeals Nos.2652 to 2654 of 2006, while adopting the arguments of Mr. Wasim Sajjad, further argued that in Pakistan total sixteen companies from private sector are engaged in the Power Generation projects, having' total production capacity of 4000 megawatts (MW) of electricity per day, all these companies ventured to enter in this field on clear understanding from the. Government for extra concessions ensured to them as incentive, independent from the power supply agreement with WAPDA; policy framed by the Government in this regard, and section 3 of Protection of Economic Reforms Act 1992, and Power Policy of 1994. Precisely, According to the learned counsel, the treatment of interests/profits earned by the petitioner companies on their bank accounts given by the income tax department, as also upheld by the Lahore High Court in its impugned judgment dated 13-3-2006, is a clear negation of such protected rights of the petitioners. According to him clause 176 (ibid) because of the use of words "profits and gains" of the "project" of electricity generation, is to be widely interpreted, in favour of Assessee-companies, in the manner that all incomes derived by such companies from, any source shall be deemed to be exempt and not merely their income from business, which will amount to a narrow interpretation of a beneficial provision of statute, particularly, relating to fiscal matters. He further contended that the income derived in the form of interest/profit on the bank accounts/deposits maintained by the companies 'in connection with the working of their projects cannot be bifurcated for the purpose of tax exemption under clause
---
## Page 5
176, even on the ground that for this purpose the income of the projects shall be deemed to have commenced from the date of their commercial production, as the word "project" makes such benefit allowable to such companies from the date, of their incorporation and sanction of the scheme for installation of Power Generation Projects. In support of his submissions, learned counsel cited the following cases:--- (1) Pakistan v. M/s Lucky Cement (2007 PTD 1656). (2) C.I.T./W.T. v. Surraya Zafar (2008 PTD 202). (3) Federation of Pakistan v. Muhammad Sadiq (2007 PTD 67). (4) Factor Belarus Tractors Ltd. v. Pakistan (2001 PTD 1829). (5) Packages Ltd. v. Commissioner of Income Tax (1993 SCM R 1224). (6) Sanam Progetti S.P.a. v. Addl. C.I.T. (Delhi) (1981 (132) ITR 70). (7) (1995 (216) ITR 535. (8) A&B Food Industries Ltd. v. Commissioner of Income Tax/Sales (1992 SCM R 663). (9) State v. Qaim Ali Shah (1992 SCM R 2192). (10) B.P. Biscuit Factory Ltd. v. Wealth Tax Officer (1996 SCM R 1470). (11) Muhammad Rafique Goreja v. Islamic Republic of Pakistan (2006 SCM R 1317). (12) Messrs AES Pak GEN (Pvt.) Company. Lahore v. Income Tax appellate Tribunal, Lahore and another (2006 PTD 1). 7. a careful reading of above cited cases goes to show that in all these cases superior Courts have labored to elucidate and amplify different principles of interpretation of statutes, particularly in fiscal matters. In the case at serial No,1, dilating upon the subject of interpretation of statutes this Court held that:-- (a) Where two interpretations of some statutory provisions were possible or any ambiguity existed therein, the interpretation favorable to tax payer is to be preferred. (b) While interpreting a statute, words used therein are to be assigned their ordinary meaning unless text dictates otherwise. (c) Different words used in same section or subsection of statute reveal intention of legislature not to assign them the same meaning. ' In the case at serial No,2, discussing the principles of interpretation of statutes, it was observed that every word in a statute is to be assigned some meaning, and of course all provisions, ostensibly conflicting, have to be reconciled. In the case at serial No,3, amplifying the principles of interpretation of a statute, it was held that:- (a) in the absence of clear intention of legislature to apply provision of statute with retrospective effect, same would be deemed applicable prospectively. (b) the Courts while interpreting laws relating to economic Activities view the same with greater latitude than the law relating to civil rights, keeping in view the complexity of economic problems which do not admit of solution through any doctrine or straitjacket formula. (c) it was not safe to compare language of one statute with another, even though subject covered by the two statutes may involve similarities. (d) the language used in a fiscal statute would be interpreted in its ordinary meaning in such a manner that, if possible, some should be saved rather than destroyed. 8. In the case at serial No,4, the effect of section 3 of the Economic Reforms Act, 1992, regarding its overriding effect on other laws, was examined with reference to economic Activities and it was held that while interpreting laws relating to economic Activities the Courts should view the same with greater latitude and interpret it in the light of its phraseology and language. In the case at serial No,5, discussing the scope of section 10(2)(iii)(xvi), it was held that where the assessee was running a business and has obtained loan for purchase of Additional machinery, which was not obtained for installation of machinery in order to go for new products, but to improve efficiency of existing
---
## Page 6
production, the amount of interest paid by him, being an integral part of profit earning process relating to carrying and conduct of business had brought his case within the fold of such provision of Income Tax Act, 1922. Therefore, deduction of interest was to be allowed in full regardless of the fact whether it was at pre-production stage or otherwise. In the case at serial No,6 from Indian jurisdiction of Delhi High Court, it was held that when the assessee had not come from abroad to make bank deposits in India but had come to carry on business the income earned by it by depositing spare funds in banks and earning interest thereon would also be business income and for the purpose of set-off it could not be treated as separate from business income. Following this principle, loss brought forward by the assessee was allowed as set-off against interest income of the assessee for the subsequent year. In the case at serial No,7, another case from Indian jurisdiction of Madras High Court, discussing the term "business" it was held that word business carry very wide connotation and by no means determinate its scope, which has to be considered with reference to each particular kind of Activity and occupation of the concerned person. It was "'further held that where the interest has accrued on short-term deposits of the assessee made out of business funds available with the assessee before they were utilized for Actual business, the same was incidental to the business Activity of the assessee company, therefore, interest on the short-term deposits should be treated as business income. In the case at serial No,8, again dilating upon the principle of interpretation of fiscal statute in tax matter; it was held that reference to proceedings of legislature can be resorted to, when the words in a provision of statute were ambiguous, with, the object to discover the real intention of the law-makers. However, where there was no ambiguity in the language employed in the relevant provisions of the statute, recourse to the proceedings of the legislature cannot be made in order to construe, the same in violation of the language employed therein. It was further held that while interpreting a fiscal statute, the Court was competent to determine real nature of a particular levy with reference, to relevant statute, but it was not empowered to read something into a clear provision of a taxing statute. When the language of a statute was clear and unambiguous, the Court was bound to construe and to give its effect, without taking into consideration anything extraneous to it. In the case at serial No,9 relating to criminal proceedings in a case pending before the Suppression of Terrorist Activities, Special Court, touching the subject of interpretation of statutes, it was observed that a statute, which transgresses on the rights of a subject whether as regards his person or property should be so construed, which may preserve such rights, It was also observed that if two views of a provision, of law of penal nature were possible, one which favours an accused person be preferred over the other. In the case at serial No,10, this Court reiterated the principle of interpretation of a fiscal statute that when the language of such statute was ambiguous and several interpretations of the same provisions were possible, doubt should be resolved in favour of the citizen. In the case at serial No,11, this Court dilated upon the scope of Article 189 of the Constitution and held that the law declared by the Supreme Court was binding on the State and its officers and they were bound to follow it, whether they were in a particular case party or not to the previous proceedings. It was further held that decision per incurium do not constitute binding precedent. Such decisions are those which are given in ignorance of the terms of the Constitution or of a statute or of a rule having the force of a statute. It was also observed that an order delivered without argument, without reference to the relevant provisions of the Constitution or the Act and without any citation of authority, is per incurium. Similarly, decisions sub selection have no precedential value. Such decisions are those which are given on a point of law not perceived by the Court or present to its mind. Sometimes will considered obiter dicta of the Supreme Court is taken as precedent, but every passing expression of a Judge cannot be treated as an authority. In the case at serial No,12, discussing the principles of interpretation of a statute in fiscal cases vis-a-vis the impact of Protection of Economic Reforms Act, 1992, it was held that the provisions of law cannot be
---
## Page 7
amended, rescinded or changed by any policy guideline agreed to between the Government and certain private individuals or private entities, as any policy framework or principle laid down by the Government, in any manner, cannot take precedent over the express provisions of law. (This judgment of a Division Bench of Lahore High Court was maintained by this Court vide its judgment dated 16-62006 in C.P. Nos.2211-L and 2212-L of 2005, which will be referred to and discussed in the later part of this judgment). 9. Replying to the above submission, Mr. Muhammad Iqbal, learned counsel representing Revenue in Civil Appeals Nos.2652 to 2654 of 2006, made reference to sections 22 & 30 of the Ordinance to show that on one hand the income of respondents entitled for exemption in terms of clause 176 was only business income, which was specifically covered by section 22 of the Ordinance, as it is only under this head of income that words "profits and gains" of any business or profession are to be computed for the purpose of income tax, on the other hand section 30 of the Ordinance clearly goes to show that it is residuary provision, which covers the income from all sources, not covered by other five heads of income under section 15(a) to (e). Therefore, the income earned by the petitioner companies in the form of interests/ profits on their bank accounts was not qualified for exemption under clause 176 (ibid), as rightly held in the impugned judgments as well as by this Court in the case of Genertech Pakistan Ltd. (supra) and other case of KES Pak. Gen (Pvt.) Ltd. He again made reference to section 30 of the Ordinance to show that interest income earned by the petitioner companies was Accordingly covered by such provision of law, and thus, not covered or influenced by the scope of words,…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.