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Petitioner: MUHAMMAD HUSSAIN and others VS Respondent: PAKISTAN THE SECRETARY REVENUE JUDGMENT
Court Name: Sindh High Court Judge(s): Muhammad Shafi Siddiqui Title:MUHAMMAD HUSSAIN and others vs PAKISTAN THE SECRETARY REVENUE
JUDGMENT
Reported As: 2016 PTD 622 Result: Suit dismissed Judgment JUDGMENT MUHAMMAD SHAFI SIDDIQUI, J.---These are connected suits involving common question of law as to whether Sections 2(29), 39(1), 236(M) and 236(N) of Income Tax Ordinance, 2001 (hereinafter referred as Ordinance, 2001) as inserted through Finance Act, 2014 are ultra vires the law and the Constitution. All the learned counsel agreed for disposal of all the connected suits being a short cause matter as they agreed that no evidence is required to be led by any of the parties. 2. Brief facts as contended by the learned counsel for the plaintiffs are that through Finance Act, 2014 Federal Legislature has made amendment in Ordinance, 2001 in order to levy income tax on bonus shares. Such amendment has in fact affected Sections 2(29), 39(1), 236M and 236N etc. Of Ordinance, 2001. Through the instant suits plaintiffs have called in question above amendments inserted through Finance Act, 2014. 3. The notices were also issued to Attorney General for Pakistan under section 27-A, C.P.C. As well who has responded and assistance provided through Addl. Attorney General. 4. By consent the issues were framed as being short cause matter on 25.05.2015. 5. Since the question in relation to the maintainability of the suit was also framed, counsel for the defendants has argued on this point and in that regard relied upon Section 227 of Ordinance, 2001 and the judgment in the case of (i) Batala Engineering v. ITO (29 Taxation 190) (Supreme Court) (ii), ITRO and 2 others v. CBR (2003 PTD 1155), (iii) Abbas S. Shroff V. ITO (78 Taxation 119). 6. The counsel has also relied upon section 113, C.P.C. And in support thereof relied upon AIR 1971 Calcutta 368 and AIR 1971 AP 339 and argued that Article 175(2) of the Constitution provides that no
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court shall have any jurisdiction save as is or may be conferred by it on the Constitution or under any law. He further with reference to Article 212 of the Constitution submitted that suits are not maintainable. He added that section 9, C.P.C. Barred the proceedings and relied upon 2006 PTD 2167 (HC, Karachi). He also laid emphasis on section 56d of Specific Relief Act. 7. In reply to these objections touching maintainability, Mr. Farogh Naseem, submitted that insofar as section 227 of Ordinance, 2001 is concerned, bar is only with reference to the proceedings where orders made under the said Ordinance, 2001 and hence the available section does not preclude a challenge to the vires of law or Statute framed by the parliament. He submitted that it is now well settled principle of law that where the action by any statutory functionary is illegal or extraneous the same cannot be reckoned to be an action under the said provision of law. Learned counsel in this regard relied upon the case of Abdul Rauf v. Abdul Hamid Khan (PLD 1965 SC 671) and Hashmatullah v. KMC (PLD 1971 Karachi 514). 8. Insofar as section 9, C.P.C. Is concerned, learned counsel submitted that the ultimate jurisdiction is of Civil Court as held by Hon'ble Supreme Court in the case of Hamid Hussain v. GOWP (PLD 1974 SC 356) and HMC v. Fateh Jeans (1991 MLD 284). In relation to section 56(d) of Specific Relief Act it is contended that the law is completely misplaced as it only relates to a lawful action and relied upon the case of Shujabad v. Collector (2014 PTD 1963). Hence, learned counsel pleads that the suit is maintainable. 9. With regard to merits of the case learned counsel for plaintiffs commenced his arguments by relying upon Articles 141 to 144 of the Constitution. He submitted that the above articles show the functioning of Majlas-e-Shoora to make laws. He submitted that in essence Majlas-e- Shoora/Federal Parliament have power to make laws in relation to the subject matters enumerated in various entries detailed in Federal Legislative List contained in fourth schedule of the Constitution. He submitted that the relevant entry of the Constitution for the present matter is Entry No.47 of Part-I which relates to taxes on income other than agriculture income. 10. Learned counsel submitted that Entry 47 is in fact a constitutional mandate available to the Federal Legislature to impose tax on income. He submitted that word "income" is of wide significance since entire controversy revolves around the scope and meaning of the word "income". Insofar as interpretation of the constitutional entries are concerned, the counsel relied upon following cases:-- i) PIDC v. Pakistan (1992 SCMR 891) ii) Nishat Tak v. FOP (PLD 1994 Lahore 347) iii) Mandviwalla Muaser v. FOP (1996 CLC 1042) iv) Ellahi Cotton Mills v. FOP (PLD 1997 SC 582). v) H.A. Rahim v. Province of Sindh (2003 CLC 649) vi) Sanofi Aventis v. Province of Sindh (PLD 2009 Karachi 69). 11. Learned counsel submitted that in all the above referred cases the broadest interpretation was offered to the entries. He submitted that it has been held in the most celebrated judgment of Ellahi Cotton Mills that the rule of interpretation while interpreting any entry in the legislative list is that it should be given widest possible meaning but does not mean that the parliament can choose to tax as income any item which in no rational sense can be regarded as a citizens income. He contended that item taxed should rationally be capable of being considered as income of a citizen. 12. He submitted that the crucial question that is to be resolved is as to whether the bonus shares in the hands of the shareholder in pith and substance or in a rational sense can be considered to be income of the said shareholder within the meaning of Entry 47 of the Federal Legislative List of the Constitution.
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13. As regards Section 2(29) of Ordinance, 2001 which include "any amount treated as income under any provisions of this Ordinance", learned counsel submitted that such issues have already been addressed in the case of Elahi Cotton Mills referred above. He submitted that the stance taken by the defendants that the Federal Legislature is permitted to treat or deem something to be income which does not otherwise so, is bad in law and under the Constitution. 14. He submitted that in order to ascertain the real controversy one needs to understand, whether in rational sense such bonus shares could be construed as income. He submitted that the bonus shares have not been defined in the Companies Ordinance, 1984 but it is defined in Section 2(9) of the Ordinance, 2001 which includes the bonus-unit in a unit-trust and hence it does not provide any assistance insofar as the question involved in these suits is concerned. He submitted that the bonus shares are nothing but shares of a company. The word 'share' has been defined in Ordinance, 1984 as a share which in fact is a share in the capital of the company, which is a moveable property, transferable in the manner provided by the Articles of the Company. He thus concludes that the bonus share is nothing but a share of company and therefore it falls within the ambit of Section 89(1) of Ordinance, 1984. He also relied upon Sales of Goods Act in terms of Section 2(7) whereof goods include shares and therefore considered as a moveable property or an asset. He questioned that such definitions can hardly forward a case of anybody that such asset or property could be equated with income and that in rational sense bonus share could be construed as income. 15. Learned counsel further argued that the company upon making profits pays income tax thereon and there is no dispute in this regard. At this stage the amount is either distributed to the shareholders as dividend or instead the same is taken by the company to its capital reserves from where the company issues bonus shares to its existed shareholders in the proportion of their shareholding as existed in the company register. In case the shareholders are paid dividends they are liable to pay income tax but does not liable to pay such taxes on receipt of bonus shares since same is not income in any rational sense but construed as an asset and moveable property in the hands of the shareholders. 16. He argued that tax payer under the law is permitted to arrange the tax affairs in the best tax efficient manner which may be called as tax avoidance but permissible under the law. He argued that it is only tax evasion, which entails consequence of concealment and suppression of income and transaction, which is not permissible and is prohibited under the law. Hence, if the tax payer has taken any action to avoid payment of taxes he has committed no crime. In this regard learned counsel relied upon. i) Jiyajeerao Cotton Mills Ltd. v. CIT reported as (1958) 34 ITR 888 (Supreme Court) ii) CIT v. Calcutta Discount Co. Ltd. Reported as (1973) 91 ITR 8 (Supreme Court) iii) Aruna Group of Estates v. State of Madras reported as (1965) 55 ITR 642 (Madras) iv) CIT v. Jai Narain Ram Chander reported as (1981) 128 ITR 179 (Calcutta) and v) CIT v. Fisher's Executor reported as (1926) AC 395. 17. He thus submitted that any interpretation where the dividends are equated with bonus shares would be deemed to be a complete and stark violation to corporate and fiscal jurisprudence wherein the nature and character of the dividend and their tax treatment are completely divorce to bonus shares. He submitted that a decision by company to issue bonus shares instead of dividend is essentially made when company intends to utilize undistributed profits for its use. He further submitted that the recommendation to issue dividend is made by the Board of Directors while such recommendation subsequently is ratified by the General Meeting of the company. 18. Learned counsel contended that once there was a dispute with regard to the evaluation of bonus shares in the case of CIT V. Umer Saigal (1973 PTD 450) and the learned Division Bench of Lahore High Court was pleased to held that the cost of bonus shares was its face value, which view
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was subsequently followed in the case of Shirin Ayub Khan v. CIT (PLD 1976 Lahore 1028) and held that the bonus shares were not received by the shareholders free of cost but on payment. These two judgments somehow vary with the view taken by this Court which controversy was ultimately resolved in the case of Ebrahim Brothers Ltd. v. CIT (1992 SCMR 1935) wherein it was held that bonus shares at the time of allotment cost nothing to the shareholders. He argued that it may have a market value but in order to calculate such value neither it could he termed as NIL nor as having a market value. It was further observed by the Hon'ble Supreme Court that the only reasonable method to calculate cost of the bonus share was that the cost of the share held by the shareholder on the basis of which bonus shares have been allotted be spread over on all shares taken together and then the average price they have, be considered as average price. Thus, issuance of bonus shares is adding of a number to the existing number of shares while total cost of the shares are to be spread over total number of shares to get the average value. It is just held to be an accounting entry. 19. He submitted that the idea behind issuance of bonus shares is that company utilizes it after tax on profit for the purposes of its business which may inter alia include acquisition of plant, machinery, land, adjustment of debts or even expanding of its business. He argued that subsequent sale of bonus shares may entail gains but it is at that stage that at the time of subsequent sale of bonus share that it will have relevance for the tax authorities to impose tax on capital gains under section 37 of the Ordinance, 2001 or under section 18 thereof, as the case may be. 20. It is further contended that in case of Ebrahim Brothers (Supra) the subject bonus shares issued and received were held as corpus i.e. The property and not as income which judgment is binding on all Courts below. 21. Counsel lastly and mainly relied upon the case of Eisner v. Macomber (252 US 189 (1920)) and submitted that in fact it is the precise question involved and settled by US Supreme Court. The aforesaid judgment of Eisner has also been cited with the approval by the Hon'ble Supreme Court of Pakistan in the case of Ebrahim Brothers (1992 SCMR 1935). Counsel submitted that the House of Lords also in consonance with the reasoning of the case of Eisner (Supra) and also the case of John Blott. It is thus the consistent approach of Courts such as Pakistani, British, American, Indian and Sri Lankan Courts which have consistently held that the bonus shares do not constitute income. 22. Thus in the light of the above counsel concludes that the bonus shares are neither income nor same can be deemed to be income. The bonus shares in no rational sense or in pith and substance can constitute income and it is submitted,that the impugned legislative amendment may be declared as ultra vires the Constitution, in particular to Entry 47 to Part I, 4th Schedule to the Constitution read with Article 52 of the Constitution and thus may be annulled. 23. On the other hand both Messrs Amjad Jawed Hashmi and Irshadur-Rehman appearing for the departments in different suits, jointly argued as under:-- 24. That income has been defined in section 2(29) of Ordinance, 2001 which is inclusive of definitions as under:-- i) Any amount chargeable to tax under this Ordinance ii) Any amount subject to collection or deduction of tax under various provisions of Ordinance including 236M iii) Any amount treated as income under any provision of Ordinance iv) Any loss of income (negative income) 25. It is contended that section 69 of Ordinance, 2001 is in fact outcome of powers available to the legislature by virtue of Entry 52 read with Entry 47 of the 4th Schedule of the Constitution and hence they enjoy widest powers to levy tax on any amount or value susceptible to income and which for
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any reasonable understanding can fairly be regarded as income though no amount has been received. 26. It is argued that in terms of section 69 of Ordinance, 2001 a person shall be treated as having received the amount, benefit or prerequisite, if it is, (a) actually received by the person (b) applied on behalf of person, at the instructions of the person or under any law. They further argued that under company law the value of the bonus share is implied/transferred from surplus account to the capital assets of the company in the name shareholders. Thus both conditions simultaneously are fulfilled, the taxation of issuance of bonus shares by virtue of sections 236M and 236M read with section 39 of Ordinance, 2001 is within the competence of legislature. 27. They argued that Section 236M begins with non-obstante clause and provides (i) for rate of deduction/correction; (ii) for determination of valuation of bonus shares on the basis of day-end price on the first day of closure of books. 28. The learned counsel defined income as increase or accretion of one's powers to satisfy his wants in a given period insofar as that power consists of (a) money itself or (b) anything sugceptible of valuation in terms of money. They argued that it cannot under any stretch of imagination be considered that the "issuance of bonus shares" has been treated by the legislature against limit prescribed in the principle of "pith and substance" which means that the words in constitutional entries are to be given most liberal construction but at the same time cannot be stretched to such limit so as to occasion unfair, unreasonable or absurd construction when Entry Nos.47 and 52 of the 4th Schedule of the Constitution are read. They argued that the bonus share rationally is capable of being treated as deemed income. They argued that it is not denying fact that by issuing bonus shares nothing in terms of money is received by the shareholders. It increases ownership of shareholder in the company and that the bonus shares is susceptible of valuation in terms of money and thus the value of one's wealth increases by that income/accretion which increase could not have been considered without such act of issuance of bonus share. 29. Thus, they argued that the income as arisen out of the act of issuance of bonus shares to the shareholder is a presumptive income and tax levied thereon in presumptive tax. They submitted that since the capacity to earn increases capacity to tax increases. The presumptive tax is income akin to capacity tax i.e. Capacity to earn under Entry No.52 and hence tax on capacity in lieu of tax in Entry 47 can be imposed. 30. While applying the deeming provision generally its effect in a taxing statute is that it brings within the tax net an amount or gain or benefit which "ordinarily" would not have been treated as an income. They argued that since power of taxation is contained in the Constitution, one's approach while interpreting the same must be dynamic, progressive and oriented with the desire to meet the situation which is arising effectively. They argued that the entries contained in the legislative list indicate the subject at which particular legislation is competent but they do not provide any restriction as to the power for the legislation concern. The list providing subject may be restricted/limited but the subject itself is not limited. 31. By taxing on "issuance of bonus shares" under sections 236M and 236N at 5% the legislature has not eroded any fundamental right of the subject. It is argued that insofar as the Eisner's case is concerned that is not applicable as it is not existed and does not define the word "income" in all capable definitions. 32. Mr. Salman Talibuddin, learned Addl. Attorney General, appearing on behalf of Federation of Pakistan has submitted that the bonus shares declared and resolved to be issued by a company in a shareholders meeting are dividend within the meaning of term in section 2(19)(a) of the Ordinance, 2001 and constitute distribution of profit of a company as they. Can only be issued out of free reserves pursuant to the Companies Ordinance, 1984 and free reserve comprises of profit of the company. He further argued that the bonus shares have a value on the day when they were
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issued to the shareholders, the tax payer or shareholders receive a fully paid up shares the consideration of which is paid by the company of its free reserves i.e. The only pool of fund from which dividends can be paid pursuant to Companies (Issue of Capital) Rules, 1996. He concluded that on this score alone the bonus shares are termed as dividend issued out of the profit of the company in a form other than cash and hence in essence the income of the shareholder is reinvested into the stock of the company instead of being consumed for personal benefit. 33. The, above background as applied to all the amendments as incorporated and inserted and challenged, it is the case of Federation as presented that the reasoning provided in support of the case of the plaintiffs through Eisner's case is not applicable as the Courts in Pakistan derive their jurisdiction under the Constitution and statutes and the principle of English common law or equity or good conscience cannot be pressed into service as having statutory force and hence the decision in Eisner, Blott and Hunser Plywood are in no way binding on this Court and cannot be relied upon to create exceptions within the statutory law. 34. The other distinguishable feature as argued by the learned Addl. Attorney General was that surplus and undivided profits of the company in Eisner's case had already been invested in plant, property and business required for the corporation, a stock dividend had been issued only in order to readjust such capitalization and therefore there was no profit that was capable of distribution whereas in the instant case the profit of the company are available. 35. He further argued that Eisner case cannot define the definition of the term "dividend" contained in section 2(19)(a) of the Ordinance, 2001 which include the distribution of accumulated profit whether capitalized or not. In support of his arguments, learned counsel relied upon the cases reported in PLD 1976 Lahore 1028, AIR 1961 Supreme Court 1038, PLD 1997 SC 582 and 2010 PTD 1924 and submitted that with the foregoing reasons the suits are liable to be dismissed. 36. I have heard the learned counsel for the parties and perused the material available on record. Since the parties have not opted to lead the evidence, the issues, which are reproduced as under, are being discussed and answered on the basis of above arguments. Since plaintiff's counsel has requested and prayed for reframing of issue No.2, I on the basis of pleading reframed them as under since there appears to be a typing error:-- 1. Whether the suit is not maintainable being barred by law? 2. Whether Sections 2(29), 39(1)(M), 236-M and 236-N of the Income Tax Ordinance, 2001 as inserted through the Finance Act, 2014 are ultra vires of the law and the Constitution? 3. What should the decree be? 37. I first begin with the issue of maintainability of the suits since it has been argued that these suits are not maintainable. 38. The primary objection with regard to maintainability of the suit is initially with reference to Article 175(2) of the Constitution. Article 175 simply provides that no Court shall have any jurisdiction save as is or may be conferred by it on the Constitution or under any law. This Article does not bar any civil court from entertaining a challenge to the validity of law on the touchstone of the provisions of the Constitution itself. Since the instant suits involve the vires of law therefore in consideration of Article 175(2) this Court is competent to consider the challenge that has been thrown by the plaintiffs insofar as Finance Act, 2014 is concerned. 39. Article 212 of the Constitution deals with creation of administrative courts and tribunals. This provision of the Constitution to me is not applicable at all as it pertains to creation of tribunals and administrative courts. The amendments which are impugned passed by the Parliament levying tax and hence any challenge by taxpayer to the said law/amendment could only be availed through civil Court. 40. Section 113, C.P.C. Is regulated by order 46, C.P.C. Which empowers Court to answer a question of law through a Reference which could only be made where the Court hearing such issues where an
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appeal is not permitted and where for execution of such decree, questions of law or usage is in question and there are certain reasonable doubt on a point which needs to be thrashed out and for resolution of such issues it could be referred to High Court for its opinion, which is not the subject here. 41. With reference to section 9, C.P.C. Read with section 227 of Ordinance, 2001, it is now a settled law that such bar is only inter alia with regard to the proceedings or orders made under Ordinance, 2001. Thus, ex facie it does not preclude a challenge to the vires of law or statute framed or the amendment inserted therein by the parliament. If any reference is required the case of Abbasia Cooperative Bank V. Hakeem Hafiz Muhammad Ghaus (PLD 1997 SC 03) is the most appropriate decision to resolve the controversy. The civil Courts are the courts of ultimate jurisdiction and therefore this jurisdiction that is being enjoyed by the Court is sufficient to dispel any challenge of the defendants with regard to the maintainability of the present suits. If any reference is required the case of Hamid Hussain v. GOWP (PLD 1974 SC 356) and the case of HMC v. Fateh Jeans (1991 MLD 284) could be seen. Similarly the case of Sanofi Aventis v. Province of Sindh (PLD 2009 Karachi 69) decides the aforesaid question by observing that the superior Courts are not ousted in respect of executive or legislative actions, which are claimed to be completely illegal under Constitution and without jurisdiction. 42. Similarly Section 56(d) of Specific Relief Act, 1877 is not applicable where the impugned action done is claimed to be unlawful. Insofar as the judgments cited by defendants counsel regarding maintainability of the suit is concerned, none of the issues as highlighted by the plaintiffs were discussed in these judgments. The rational and the reasoning behind the judgments referred were that the orders were passed under the law which could only be remedied under the hierarchy whereas in the instant case no such situation is involved. The vires of law could be challenged by the persons aggrieved as has been done in the instant case. Hence, the judgments relied upon by learned counsel for defendants are not applicable to the facts and circumstances of the instant case. 43. Insofar as the judgment reported in 2006 PTD 2167 in relation to…
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