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Petitioner: COMMISSIONER OF INCOME-TAX, KARACHI VS Respondent: NAZIR AHMED AND SONS (PVT.) JUDGMENT
Court Name: Sindh High Court Judge(s): Shabbir Ahmed, Muhammad Mujeebullah Siddiqui Title:COMMISSIONER OF INCOME-TAX, KARACHI vs NAZIR AHMED AND SONS (PVT.)
JUDGMENT
Reported As: 2004 PTD 921 Result: Appeal dismissed Judgment JUDGMENT ' MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---This appeal under section 136(1) of the Income Tax Ordinance, 1979, is directed against the order of Income Tax Appellate . Tribunal in I.T.A. No,208/KB of 1999-2000, dated 4-4-2000. ' The Revenue being aggrieved with the finding of Tribunal has proposed following question of law for our opinion:- "Whether on the facts and in the circumstances of the case the learned Income Tax Appellate Tribunal was justified to delete the addition made under section 52/86 for Failure to deduct and deposit tax under section 50(4) from the payments made towards the purchases by holding that the explanation added to section 50(4) by the Finance Act, 1998, cannot he applied retrospectively? ' The relevant facts as stated in the impugned order of the Tribunal are that in the Assessment year 1995-96, the respondents had purchased parts for repairing of its fork-Lifters and Top-Lifters, which are used in handling cargo. The respondent did not deduct tax under section 50(4) of the Income Tax Ordinance, 1979 (hereinafter referred to as the -Ordinance) and therefore, the Assessing Officer, treated the respondent as defaulter under section 52 of the Ordinance and further imposed additional tax under section 86 of the Ordinance. The respondent preferred first appeal before the learned CIT(A) which was dismissed . Still dissatisfied they preferred second appeal before the Tribunal, contending that under section 50(4) of the Ordinance, as it stood during the relevant period the tax was required to be deducted on supplies only and purchases were not liable to deduction of tax. In support of this contention reliance was placed on the judgments of Tribunal in
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the case of respondent itself pertaining to the Assessment years 1991-92 and 1996-97, wherein it was held that purchases were not covered under section 50(4) of the Ordinance and consequently section 52 was not attracted. ' During the course of arguments it was pointed out that by Finance Act, 1998 an explanation was added to section 50(4) of the Ordinance which reads as follows:-- "Explanation: for the purpose of clause (a) the expression -Supply of Goods" includes both cash and credit purchases of goods by the payer, whether under a contract or not on credit or in cash." ' A plea was taken on behalf of the department that by virtue of this amendment the distinction between supplies and purchases was removed and the meaning of supplies was extended to include purchases for the purpose of deduction of tax under section 50(4) of the Ordinance. It was further contended that the learned CIT(A) has upheld the treatment given by the Assessing Officer, with reference to the above explanation which is of clarificatory nature and is retroactive in operation and shall apply to all pending proceedings. The learned Members of the Tribunal did not accept the contention holding that the nature of amendment was such that it could not be applied retrospectively, because at the time when goods were purchased there was no provision for deduction of tax on payments on account of purchase. It was further held that with the insertion, of explanation, the purchases were included in the supply of goods and therefore, the requirement of deduction of tax was made applicable from the date of insertion of the explanation in the Ordinance and prior to the insertion of the explanation there was no requirement to deduct tax under section 50(4) of the Ordinance, on the payments made on purchases. ' With the above observations the addition made under sections 52/86 of the Ordinance in the assessm ent year 1995-96 were deducted and the appeal was allowed. ' The Revenue feeling aggrieved has preferred this appeal seeking our opinion on the questions of law already reproduced. ' We have heard Mr. Aqeel Ahmed Abbasi, learned counsel for the appellant, who submitted that every explanation enacted by the Legislature is declaratory and clarificatory and therefore, has retrospective application. In support of his contention he has placed reliance on the judgment of Lahore High Court, in the case of Dream Land Cinema v. CIT PLD 1977 Lah. 292. We have considered the contention raised on behalf of Revenue and we are of the opinion that point of law already stands settled and now it is a matter of application only. Looking to the nature of explanation inserted in section 50(4) of the Ordinance, we are of the opinion that the learned Tribunal has rightly decided the point under consideration and therefore, the question proposed for our opinion requires no fresh finding and consequently the appeal is liable to be dismissed in limine. ' However, since Mr. Aqeel Ahmed Abbasi, insisted that every enactment/legislation under the nomenclature of explanation has retrospective effect therefore, we will discuss the issue at some length. ' First, we would like to examine the judgment on which the learned counsel has placed reliance. In the cited case Explanation (ii) added to section 24(2) was considered which reads as follows:-- "Explanation 2." For the avoidance of doubt it is hereby declared that" (a) No loss of an unregistered firm shall be carried forward and setoff under this section, under any circumstances against its income, profits and gains of the subsequent year if is registered in that year under section 26-a is treated as a registered firm in such year under clause (b) of subsection (5) of section. ' The learned Division Bench of the Lahore High Court, after considering two judgments of Hon'ble Supreme Court to the effect that after an amendment has been brought about only to avoid any doubt its application would be from the inception of the original provisions and that if an
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explanation does not amount to original explanation but is only clarificatory in nature to explain the intent of the Act as it has always been there, held that, "the amendment under review is, however, of explanatory type stated to have been introduced 'for the avoidance of doubt. The rule about interpretation of such statutes is distinct though the principles of interpretation of taxing statutes would apply if attracted in the situation." ' The learned Division Bench of the Lahore High Court referred to the Construction of the Statute by Crawford wherein it is observed that, the declaratory statutes declaring meaning of an existing law are to be construed as intended to lay down a rule for future cases, and to act retrospectively. They closely resemble in interpretation clause and their paramount purpose is to remove doubt as to the meaning of existing law or to correct a construction considered erroneous by the Legislature. ' A reference was made to a passage from Caries on Statutes law, which reads as follows:-- "For modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. ' The usual reason for passing a declaratory Act is to set aside what Parliament deemed to have been a judicial error, whether in the statement of the common law or in the interpretation of statute." ' Another passage was also referred to which reads as follows:--"Whether a statute is passed for the purpose of supplying an obvious omission in a former statute or, as Parke J. (afterwards Baton Parke) said in R.v. Dursley (1832) 3B and Ad, 465(469), to 'explain' a former statute, the subsequent statute has relation back to the time when the prior Act was passed. ' A passage from Maxwell cr. The Interpretation of Statute was also, reproduced which is as under:- "If a statute is in its nature a declaratory Act, the argument that it is not be construed, so as to take away previously vested rights is inapplicable." ' After referring above passages, it was observed that, there was unambiguous view that declaratory statutes apply retrospectively and that reading of the explanation under consideration showed that intention of the legislature was to remove the doubt and explain extended import of the original provision." ' However, it was further explained as to what is meant by a declaratory Act. Reliance was placed on a judgment from Indian jurisdiction in the case of Muhammadi Bibi v. Kashi Upadhya AIR 1926 725, wherein it was held that a declaratory Act is an Act to remove doubts existing as to the meaning or effect of statutes and the individual reason for passing a declaratory Act is to set aside what the Legislative Body deems to have a judicial error. ' Ratio of another judgment in Joti Ram Khan v. Jonaki Nath Jhosi 33 IC 54, was also referred, wherein it was held that the provision of section 3 of the Bengal Tenancy Amendment Act, 1907, cannot be given a retrospective operation as the Act is not a declaratory one, but has effected the fundamental alteration in the law. ' Large number of cases were examined in this behalf. A judgment,by Judicial Committee in the case of Young v. Adams 1898 AC 469, was also considered. The relevant finding reads as follows:-- "They think that in a case like the present the learned C.J. Was right in saying that a retrospective operation ought not to be given to the statues unless the intention of the legislature that it should be so construed is expressed in plain and unambiguous language, because it manifestly shocks one's sense of justice that an act legal at the time of doing, it should be made unlawful by some new enactment. It will serve no useful purpose to refer to other cases cited before us in this connection because here we are able, as we shall presently proceed to show, to distinguish upon the words of the Act itself the language of the Act in that respect being plain and, unambiguous, which of its provisions are retrospective and which prospective and we have not to rely upon any
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presumption as to intent relating to its operation to be inferred from the character of the At being declaratory or otherwise." ' The learned Division Bench of the Lahore High Court, ultimately held that the upshot of whole discussion is that the addition of Explanation 2 to section 24(4) was with the object of removing a doubt (probably created by the two judgments of the West Pakistan High Court) referred to in the judgment. The Enactment was expressly explanatory in nature and therefore, it had to apply retrospectively to all the cases pending at that time. ' The issue was considered by a Division Bench of this Court in the case of Pakistan Petroleum v. Commissioner of Income-tax 1985 PTD 1. An Explanation added by Finance Act, 1975 to clause (d) subsection (4) of section 10 of the Income Tax Act 1922, was considered and it was held that, that the explanation was merely Explanatory. It either added to nor substracted to any liability in the then existing provisions of section 10 of the Act. It was enacted with the object to clarify the existing provision of law for guidance. ' The issue pertaining to the retrospective application of the explanation was considered by another Division Bench of this Court in the case of Rehman Corporation v. Income-tax Officer 1985 PTD 787. The question came for consideration in the following perspective:-- ' Under subsection (7,-A) of section 50 of the Ordinance, any person making sale, by public auction, of any property belonging to the Government, a local authority or a public company, or a foreign association declaring to be a company under clause 16(2) or a foreign contractor or consultant or consortium was required to collect advance tax on the sale price of such property. A question came for consideration whether a contact to collect Octroi was a property or not as envisaged in section 7-A of section 50 of the Ordinance. Export tax contract was given to the petitioner for the year 1983-84. An explanation was inserted in section 7-A of section 50 of the Ordinance by Finance Act, 1984, which reads as follows:-- "Explanation. For the purposes of this subsection, sale of any property includes the awarding of any lease to any person, including a lease of the right to collect octroi duties, tolls, fees or other levies, by whatever name called." ' It was ultimately held that the explanation was declaratory in nature inserted for the purpose to remove doubt and therefore, it was held that the explanation would apply retrospectively. Another consideration in arriving at the above opinion was that the prOvisions were not in the nature of charging sections. They only provided a mechanism for the collection of Revenue but the liability\ for the payment of tax by the petitioner has to be determined by independent proceedings under the Income Tax Act and the amount so collected is liable to be refunded partly or wholly in case it is found to be in excess of liability or where no liability to pay tax is incurred. It was specifically held that the explanation shall have retrospective effect. ' We will presently show that with the introduction of presumptive tax regime and insertion of section 80-C in the Income Tax Ordinance, 1979, by Finance Act, 1991, the tax deducted under subsection (4) of section 50, shall be treated as final discharge of the tax liability and no amount out of the tax so deducted shall be refunded. ' The issue has been considered in the Indian jurisdiction also in large number of cases including Commissioner of Income-tax v. Mangalors Ganesh Beedi Works (1992) 193 ITR 77. In this case the Karnataka High Court considered a large number of cases, it referred to an observation by the Rajasthan High Court in the case of Gajanand Poonam Chand and Brother v. CIT (1988) 174 ITR 346, wherein the principles pertaining to Explanation have been laid down as follows:- "The ordinary purpose of an explanation is to clarify that which is already enacted and not to enact something new. No doubt, an explanation some times, may be a distinct enacting provision itself. However, it would then not be performing its ordinary or normal function of an explanation."
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' Another judgment of Punjab and Haryana High Court in the case of Hindustan Steel Forgings v. CIT (1989) 179 ITR 280, was cited, wherein while considering an amendment by way of an explanation it was held as follows:-- "Therefore, it is clear that the amendment brought in by the Amendment Act, 1984, was only clarificatory with a view to explain what was the hidden so as to make it apparent to the naked eye. Such an amendment is always considered retrospective so that what looked hidden hitherto fore should be considered as apparent and if that is so, the clarification which has been brought about by the amendment ,should be read as if the unamended provision was also to be read in the same way." ' Law pertaining to the prospective or retrospective effect of explanation was considered by a Full Bench of Allahabad High Court in CIT v. Nitro Phosphetic Fertilizer (1998) 174 ITR 269. It was held as follows:-- ' An Act can be considered declaratory when a provision is made to that effect in the Amending Act itself. In the instant case, nothing was said by Parliament indicating its intention as to whether it wanted to affect the past assessme nt years as well. If the intention had been to affect the past years as well, one would have expected a provision for reopening of assessments which had become final. Its absence is a clue to the view that the amendment is not retrospective. Parliament was aware of the same and it was for this reason that the Explanations were made applicable with effect from 1985-86. In the absence of any indication in the Statement of Objects and Reasons, it is difficult to hold that the said section was retrospective. We have noticed above that no Court had ever held section 40(b), to be suffering from ambiguity. There was, no doubt, a difference of opinion amongst the Courts about the interpretation of section 40(b), but that could not be considered to be an omission for the clearing of which the Explanations have been added. One line of thinking can be that the> Explanations have been added with the object of laying down that in future, that is, after 1985-86, the interest paid by an individual on the investments of his 'monies would be liable to be deducted. In Central Bank of India v. Their Workmen (1959) 29 Comp. Cas. 367 (SC), the proviso introduced in section 10(b) (iii) of the Banking Companies Act, 1949, by the Amending Act of 1956, though held to be remedial, was not applied for a period anterior to the date of operation of the Amending Act. S.K. Das J., in that case, observed (at p.392): ' A remedial Act, on the contrary, is not necessarily retrospective; it may be either enlarging or restraining and it takes effect prospectively, unless it has retrospective effect by express terms of necessary intendment.' ' Section 10 of the Taxation Laws (Amendment) Act, 1984, neither is, nor purports to be, declaratory or retrospective from a date prior to the assessment year 1985-86. At least, if the Amending Act had been made retrospective, one could have thought it was a clarificatory piece of legislation. But the Legislature has given effect to the Amending Act from 1985-86. This would mean that the Explanations as inserted by the Taxation Laws (Amendment) Act, 1984, would not apply to earlier assessm ent years." ' The scope of explanation was also considered by a dissenting opinion in the above judgment of the Allahabad High Court, wherein it was observed as follows:-- "...It is manifest that the object of an Explanation to a statutory provision is: to explain the meaning and intendment of the Act itself: where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to sub serve. ' An Explanation cannot in any way interfere with or change the-enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act, it can help or assist the Court in interpreting the true
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purport and intendment of the enactment, and consequently, we find that the function of an Explanation to a statutory provision is: (c) to provide additional support to the dominant object of the Act in order to make it meaningful and purposeful; (d) to help or assist the Court in interpreting the true purport and intendment of the enactment, in order to suppress the mischief and advance the object of the Act where some gap is left which is relevant, for the purpose of the Explanation though, it cannot in any way interfere with or change the enactment or any part thereof." ' The Karnataka High Court ultimately held as under:-- "the normal principle in construing an Explanation is to understand it as explaining the meaning of the provision to which it is added; the Explanation does not enlarge or limit the provision, unless the Explanation purports to be a definition or a deeming clause; if the intention of the Legislature is not fully conveyed earlier or there has been a misconception about the scope of a provision, the Legislature steps in to explain the purport of the provision; such an Explanation has to be given effect to, as pointing out the real meaning of the provision all along." From the above proposition of law relating to the scope of explanation the following conclusions are drawn:-- (i) The ordinary object of an explanation to a statutory provision is to explain the meaning and intendment of the Act. ' Where there is any obscurity, ambiguity or vagueness in the main enactment, the explanation clarifies the same so as to make it consistent with the dominant object which it seems to be subservient. The explanation is a note of caution by the Legislature to rectify the judicial error and to give guideline for future, clarifying the intention of the Legislature. (ii) Normally, the explanation does not enlarge or limit the provision already enacted. (iii) Sometimes, the legislature steps in to convey its real, intention if not fully conveyed by the earlier enactment or there has been a misconception about the scope of a provision. (iv) Sometimes definition or a deeming clause is inserted by an explanation. (v) Sometimes on account of ineptness or lack of dexterity on the part of draftsman, substantive provisions are also enacted with the heading explanation. (vi) If an explanation is merely declaratory or clarificatory in nature or is meant to fill in certain obvious gaps or to convey the real intention of the legislature by explaining the meaning and intendment of the Act or by clarifying an obscurity or vagueness in the main enactment it is always retrospective in effect and is operative since the very inception of the enactment and shall be held to be existing all along. (vii) However, if a substantive/ a new enactment has been made or a new definition is added or a deeming provision is inserted or the scope of a provision particularly a substantive/charging provision is enlarged or extended it shall not have the retrospective effect until and unless specifically specified so by the Legislature. ' Keeping the above principles in view pertaining to the scope of explanation and prospective or retrospective application thereof, we will examine the explanation added to section 50(4) of the Income Tax Ordinance, 1979, which is the subject-matter under consideration. In order to demonstrate that the Legislature has resorted to substantive enactment and the enactments which are not strictly mere explanatory, declaratory or clarificatory in nature but having the effect of enlarging and extending the substantive provisions creating new liabilities and enacting definitive and deeming 'provisions in the Income Tax Ordinance, 1979, itself, we will examine various explanations contained in the Ordinance. However, wherever Legislature has intended to give retrospective effect to any explanation it has specifically specified so, we are resorting to this exercise for the reason that it is an established principle of interpretation of statutes to infer the real
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intent and purpose of a provision by examining the entire statute and comparing the various provisions contained therein. ' A perusal of the Ordinance shows that an explanation was added to subsection (3) of section 19 of the Ordinance as follows:-- ' Explanation.---For the purpose of this section, any property, the owner of which is in receipt of any rent, whether in cash or otherwise, whether from employer or otherwise, shall not be taken to be in the occupation of such owner for the purpose of his own residence." The above explanation is in the nature of substantive legislation and it was added by Finance Act, 1996, specifically stating that it shall be deemed always to have been so added. Although this explanation was added to nullify the effect of a judgment given by the Income Tax Appellate Tribunal and thus, it could be argued that the Legislature stepped in to correct the judicial error and convey the real intent of subsection (3) of section 19 but the Legislature realized that the provisions contained in the explanation was not within the normal scope of explanation and had enlarging effect therefore, the explanation was added with specific statement that it shall be deemed always to have been so added. There is another explanation in section 12, subsection (4) and subsection (5) which read as follows:-- "Explanation.---For the purposes of this subsection and subsection (4) of section 31. 'royalty' means consideration (including any lump-sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'Capital gains) for- (i) the transfer of all or any rights (including the granting of a license) in support of a patent, invention, model, design, secret process or formula, or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret process or formula, or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret process or formula, or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (v) the transfer of all or any rights (including the granting of licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting but not including consideration for the sale, distribution or exhibition of cinematograph films; or (vi)…
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