Full Judgment Text & Judicial Ruling

2025 P T D 1465 [Peshawar High Court] Before Abdul Shakoor and Syed Arshad Ali, JJ Messrs GADOON TEXTILE MILLS LIMITED and others Versus FEDERATION OF PAKISTAN and 2 others Writ Petitions Nos. 6127-P of 2019, 415-P, 443-P, 457-P and 5627-P of 2020, decided on 7th September, 2023. (a) Income Tax Ordinance (XLIX of 2001)--- ----S. 65B [as amended by Finance Act, 2019]---Constitution of Pakistan, Art. 199---Constitutional petition---Tax credit---Vires of amendment---Retrospective effect---Applicability---Petitioners/taxpayers had assailed Constitutionality of amendment in S. 65B of Income Tax Ordinance, 2001---Validity---Tax credit once earned under a legal dispensation is a coin in the pocket/hands of taxpayer which can be adjusted against tax assessed against tax payer as per law allowing such adjustment---Legislation in question did not give any impression that it had either affected vested rights of petitioners/taxpayers nor was retrospectively applicable---High Court declined to interfere in Legislation in question as the same had been passed by a competent legislation having prospective effect except in the following manner:

(i) Petitioners/taxpayers' companies who had made investment in the manner and mode as provided under S. 65B(1) of Income Tax Ordinance, 2001 and had installed machinery and equipment in their industrial undertaking by or prior to 30-06-2018 were entitled to a tax credit of 10% for the tax year in which plant and machinery was installed and were also entitled for carrying forward the tax credit for the following two tax years @ of 10% of their investment in the manner and mode as provided under un-amended S. 65B of Income Tax Ordinance, 2001. (ii) Petitioners / taxpayers' companies who had invested any amount in terms of section 65B (1) of Income Tax Ordinance, 2001, though could not install plant and machinery by 30-06-2018 were still be entitled to tax credit @ of l0% of their investment provided before 30-06-2018 as they had purchased the machinery and executed a binding contract with the manufacturer followed by establishment of LCs and had installed machinery and equipment etc. before 30-06-2021---Constitutional petition was disposed of accordingly. Sapphire Textile Mills Ltd v. Federation of Pakistan and others C.P. D-8233 of 2019; Gulshan Spinning Mills Ltd and others v. Government of Pakistan and others 2005 PTD 259; Mollasis Trading and Export (Pvt) Limited v. Federation of Pakistan and others 1993 SCMR 1905; Shahnawaz (Pvt) Limited v. Pakistan through the Secretary Mintstry of Finance and others 2011 PTD 1558; Pak Elektron Limited and others v. Federal Board of Revenue and others 2018 PTD 778; Zila Council Jhelum through DCO v. Messrs Pakistan Tobacco Company Ltd and others PLD 2016 SC 398; Al-Samrez Enterprise v. The Federation of Pakistan 1986 SCMR 1917; Province of East Pakistan v. Sharafatulah and 87 others PLD 1970 SC 514; Al-Tech Engineers and Manufacturers v. Federation of Pakistan and others 2017 SCMR 673; Messrs Elahi Cotton Mills Ltd and others v. Federation of Pakistan through Secretary Messrs Finance and 6 others PLD 1997 SC 582; H.M. Extraction Ghee and Oil Industries (Pvt) Ltd and another v. Federal Board of Revenue and another 2019 SCMR 1081; Whitney v. IR Commissioners (1926) 10 TC 88; Commissioner of Income Tax Kanpur v. Upper Doab Sugar Mills (1978) All LJ 128; Wainwright v. Home Office [2002] QB 1334, 1345F; Gustavson Drilling (1964) Ltd v. Minister of National Revenue [1977] 1 SCR 271; Collector of Central Excise and Land Customs and 3 others v. Azizuddin lndustries Ltd, Chittagong PLD 1970 SC 439; Al-Samrez Enterprise v. Federation of Pakistan 1986 SCMR 1917; Member (Taxes) Board of Revenue Punjab, Lahore and others v. Qaisar Abbas and others 2019 SCMR 446; The Central Provinces Manganese v. The State of Maharashtra 1972 29 STC 74 Bom; Vishwas Bajirao Patil v. The State of Maharashtra AIR 2019 Bom 311; Nabi Ahmed and another v. Home Secretary, Government of West Pakistan, Lahore and 4 others PLD 1969 SC 599; Zaman Cement Company (Pvt) Ltd. v. Central Board of Revenue and others 2002 SCMR 312; Asadullah Mangi and others v. Pakistan International Airlines Corporation and others 2005 SCMR 445 and State of M.P. v. Rakesh Kohli and others 2013 SCMR 34 ref. (b) Interpretation of statutes--- ----Retrospective effect---Principle---Statute is not to be applied retrospectively in absence of express enactment or necessary intendment, especially where statute is to affect vested rights, past and closed transactions or facts or events that have already occurred---Such principle is attracted to fiscal statutes which have to be construed strictly, for they tend to impose liability and are therefore burdensome (as opposed to beneficial legislation)---It is not only the wording/text of the statute which is to be considered in isolation---Courts are not to examine simpliciter whether such law has a retrospective effect or not, rather it has to be examined holistically by considering several factors such as, the dominant intention of the Legislature which is to be gathered from the language used, the object indicated or the mischief meant to be cured, the nature of rights affected, and the circumstances under which the statute is passed. Zila Council Jehlum through District Coordination Officer v. Messrs Pakistan Tobacco Company Ltd and others PLD 2016 SC 398 rel. Salman Akram Raja and Qazi Ghulam Dastagir for Petitioners. Sanaullah DAG, Rehmanullah and Mukhtar Ahmad Maneri along with Siraj Muhammad, Assistant Commissioner Inland Revenue for Respondents. Date of hearing: 7th June, 2023. JUDGMENT SYED ARSHAD ALI, J.---By this common judgment, we intend to dispose of the instant petition as well as connected Writ Petitions Nos. 415-P/2020, 443-P/2020, 457-P/2020, and 5627-P/2020 whereby the petitioners have challenged the constitutionality of amendment in Section 658, of the Income Tax Ordinance, 2001 ("Ordinance") through Finance Act, 2019 ("Impugned Legislation"). 2. Messrs Gadoon Textile Mills and 02 others have jointly filed this petition challenging vires of the Impugned Legislation amending section 65B of the Ordinance. It is the contention of the petitioners that in pursuance to the tax incentives offered under section 65B of the Ordinance, the petitioners had invested a huge amount of money in the expansion and upgradation of their textile plant during the period 1st July, 2018 to 30th June, 2019, purchased additional machinery which was installed by the petitioners between 1st July, 2018 to 30th June, 2019. Thus, they are entitled to a tax credit in terms of section 65B of the Ordinance on the date of installation. The petitioners contended that the proviso added to section 65B of the Ordinance reducing the tax credit from 10% to 05% for the tax year 2019 and the curtailment of sunset clause from 30th June, 2021 to 30th June,2019, could not be applied retrospectively so as to vitiate the vested right acquired by the petitioners by making investment as per section 65B ibid beside the same being a past and closed transaction. 3. The respondents have filed their para-wise comments. It is their case in the comments that though the industrial undertakings on investment in plant and machinery during the crucial period were allowed a tax credit equal to l0% of amount invested, however, the same has deprived the State Revenue from collection of minimum tax as well as final tax which are adjustable against it. The tax credit resulted in tax loss of rupees eighty-seven billion to the revenue for the tax year 2017 alone. Thus, the obvious purpose of the impugned legislation i.e. curtailing tax credit was to generate revenue amounting to rupees eighty-five billion approximately. It is also pleaded that the Impugned Legislation was passed by competent legislation which cannot be struck down on the basis of the claim as raised in the petition. 4. Messrs Lucky Cement Ltd has, inter-alia, pleaded that pursuant to the incentives introduced through section 65B ibid, the petitioner/company has installed and expanded the modernization of its already cement plant by adding Vertical Cement Mills, Waste Heat Recovery Systems etc. at Pezu and Karachi in the year 2017 and was able to install the same before 30th June, 2019 against huge investment and thus tax credit has become its vested right which cannot be denied to it. Additionally, the petitioner/company has entered into a contract with Tianjin Cement Industry Design and Research Institute Company Ltd on 01.06.2018 for purchasing machinery etc, therefore, is eligible for tax credit at the rate of 10% for the tax year 2020. The significant partition of the machinery purchased was installed prior to 30th June, 2019 and the new project is now completely functional. 5. Messrs Cherat Cement Company Ltd. through W.P. No. 443-P/2020 claims that in pursuance of incentives offered through section 65B of the Ordinance, it initiated the process of setting/expansion of additional dry clinker Production Line No. III of 6700 tons of clinker production per day along with Waste Heat Recovery Plant etc by investing in the purchase of the aforesaid plant and machinery for the purpose of extension, expansion, balancing, modernization, and replacement of the plant and machinery. The said installed plant and machinery commenced its production by January, 2019; thus, the petitioner is entitled to the full tax credit of l0% as provided in section 65B of the Ordinance. 6. Messrs Cherat Packaging Ltd. through W.P. No. 457-P/2020 claims that in pursuance and acting upon the entitlement available to the petitioner/company under section 65B of the Ordinance, it initiated the process of setting up a flexible packaging project/division in the year 2017 which was installed and commenced its production in the month of October, 2018, therefore, the petitioner is entitled to 10% of the tax credit against the total amount invested. 7. Mr. Salman Akram Raja, Advocate, the learned counsel on behalf of one of the petitioners has addressed the lead arguments. The leamed counsel has maintained that as evident from un-amended provision section 65B of the Ordinance; as it was on statute book; before the Finance Act, 2019; any company that has invested any amount in the company for expansion of the industrial undertaking set up in Pakistan, a credit equal to 10% of the amount so invested shall be allowed against a tax payable. In pursuance of the said incentives, the petitioner-company invested a huge amount in the industrial undertaking for the purpose mentioned in section 65B of the Ordinance, however, by amending section 65B through Finance Act, 2019, not only the tax credit has been halved but the period provided for installation of the machinery by 30th June, 2021 was curtailed/brought back to 30th June, 2019. This Impugned Legislation cannot deprive the petitioner-company of the tax credit which had become the property of the petitioner as neither the Impugned Legislation could be retrospectively applied to the case of the petitioner nor the vested right accrued to the petitioner by making investment as contemplated through section 65B of the Ordinance could be vitiated. The learned counsel has referred to the judgment passed by the worthy Sindh High Court in the case of C.P. D-8233 of 2019 (Sapphire Textile Mills Ltd v. Federation of Pakistan and others) decided on 07.02.2023 wherein a similar issue has been effectively resolved. The learned counsel has also relied upon the law settled by the superior courts relating to the retroactive application of taxing law in the cases of Gulshan Spinning Mills Ltd and others v. Government of Pakistan and others (2005 PTD 259), Mollasis Trading and Export (Pvt) Limited v. Federation of Pakistan and others (1993 SCMR 1905), Shahnawaz (Pvt) Limited v. Pakistan through the Secretary Mintstry of Finance and others (2011 PTD 1558), Pak Elektron Limited and others v. Federal Board of Revenue and others (2018 PTD 778), Zila Council Jhelum through DCO v. Messrs Pahistan Tobacco Company Ltd and others (PLD 2016 SC 398), Al-Samrez Enterprise v. The Federation of Pakistan (1986 SCMR 1917), Province of East Pakistan v. Sharafatulah and 87 others (PLD 1970 SC 514) and Al-Tech Ensineers and Manufacturers v. Federation of Pakistan and others (2017 SCMR 673). 8. The worthy counsel has finally proposed that the factual aspect of the case as to whether a person had purchased and installed the equipment machinery within the period as contemplated by section 65B ibid or otherwise be determined by the department in any appropriate proceedings, however, this Court may only determine the interpretation of Finance Act, 2019 for having neither any retroactive application to the past and closed transaction nor can vitiate the vested rights acquired by the Petitioners as agitated in preceding paras. 9. Messrs Sanaullah worthy Deputy Attorney General, Rehmanullah and Mukhtar Ahmad Maneri, Advocates, the learned counsels on behalf of the respondents have argued that the Impugned Legislation was passed by the competent legislative assembly i.e. Parliament and the Parliament always has the power, to such extent, to take away the vested right. In support of their arguments, they have relied upon the law laid down by the Apex Court in the case of Messrs Elahi Cotton Mills Ltd and others v. Federation of Pakistan through Secretary Messrs Finance, Islamabad and 6 others (PLD 1997 SC 582). They do not object to the scope of determination by this Court as proposed by the learned counsel for Petitioners.

10. In order to appreciate the legal issues propositioned by the learned counsel for the petitioners, we deem it appropriate to re-produce the un-amended section 65B of the Ordinance as it was prior to the amendment vide Finance Act, 2019; "65B. Tax credit or investment. (1) where a taxpayer being a company invests any amount in the purchase of plant and machinery, for the purposes of extension, expansion, balancing, modernization and replacement of the plant and machinery, already installed therein, in an industrial undertaking set up in Pakistan and owned by it, credit equal to ten percent of the amount so invested shall be allowed against the tax payable, including on account of minimum tax and final taxes payable under any of the provisions of this Ordinance, by it in the manner hereinafter provided. (2) the provisions of subsection (1) shall apply if the plant and machinery is purchased and installed at any time between the first day of July, 2010, and the 30th day of June, 2021. (3) The amount of credit admissible under this section shall be deducted from the tax payable by the taxpayer in respect of the tax year in which the plant or machinery in the purchase of which the amount referred to in subsection (1) is invested and installed. (4) The provisions of this section shall mutatis mutandis apply to a company setup in Pakistan before the first day of July, 2011; which makes investment, through hundred percent new equity, during first day of July, 2011 and 30th day of June, 2016, for the purposes of balancing, modernization and replacement of the plant and machinery already installed in an industrial undertaking owned by the company. However, credit equal to twenty percent of the amount so invested shall be allowed against the tax payable, including on account of minimum tax and final taxes payable under any of the provisions of this Ordinance. The credit shall be allowed in the year in which the plant and machinery in the purchase of which the investment as foresaid is made, is installed therein. Explanation. For the purpose of this section the term "new equity" shall, have the same meaning as defined in subsection (7) of section 65E. (5) Where no tax is payable by the taxpayer in respect of the tax year in which such plant or machinery is installed, or where the tax payable is less than the amount of credit as aforesaid, the amount of the credit or so much of it as is in excess thereof, as the case may be, shall be carried forward and deducted from the tax payable by the taxpayer in respect of the following tax year and so on, but no such amount shall be carried forward for more than two tax years in the case of investment referred to in subsection (1) and for more than five tax years in respect of investment referred to in subsection (4), however, the deduction made under this section shall not exceed in aggregate the limit specified in subsection (1) or subsection (4), as the case may be. (6) Where any credit is allowed under this section and subsequently it is discovered by the Commissioner Inland revenue that any one or more of the conditions specified in this section was, or were, no fulfilled, as the case may be, the credit originally allowed shall be deemed to have been wrongly allowed and the Commissioner, notwithstanding anything contained in this Ordinance, shall recompute the tax payable by the taxpayer for the relevant year and the provisions of this Ordinance shall, so far as may be, apply accordingly." 11. The essential and salient features of section 65B can be illustrated as following; i) that a taxpayer company may invest an amount of money in the purchase of plant and machinery for the purpose of expansion, balancing, modernization and replacement of the plant and machinery already installed in an industrial undertaking setup in Pakistan and owned by it; ii) The plant and machinery so purchased should be installed by or before 30th June, 2021. iii) the said company shall be entitled to a tax credit equal to l0% of the amount so invested against the tax payable including on account of minimum tax and final tax payable under any provision of the Ordinance; iv) the tax credit would be allowed against the income tax liability in respect of tax year in which the plant or machinery is purchased and installed; v) when in the said tax year, the company was not required to pay any tax or its tax liability in the said year is less than the amount of tax credit as stated above, the said tax credits are so much of it is in excess thereof, as the case may be; shall carry forward and deducted from the tax payable by a tax payer for the following two consecutive tax years; vi) at any time, if the Commissioner finds that the tax credit has been availed by the taxpayer without fulfilling the essential conditions stated above, the competent authority may recomputed tax payable by the taxpayer in accordance with law. 12. Unlike; as envisaged by section 65D of the Ordinance and subsection (4) of section 65B, subsection (1) of section 65B does not explain the mode of investment through raising of new equity, therefore it is open to the taxpayer company that in order to avail the tax credit it may opt any option for investment either from its own resources or through a financial institution or a bank. 13. The term "tax credit" has not been defined under the Ordinance, however, the Apex Court in the case of H.M. Extraction Ghee and Oil Industries (Pvt) Ltd1 has very elaborately explained the same while referring to a well-known passage of Lord Dunedin rendered in the case of Whitney2 and has held that: "Now, there are three stages in the imposition of tax: there is the declaration of liability, that is the part of statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment. That, ex hypothesi, has already been fixed. But assessment particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay." It was finally concluded by the Apex Court while drawing distinction between exemption and tax credit, that the exemption inserts itself between the first two stages i.e. between what is leviable and what is payable where the tax credit inserts itself between the second and third stages i.e. between what is payable and what is recoverable. 14. Therefore, it can be said that tax credit once earned under a legal dispensation is a coin in the pocket/hands of the taxpayer which can be adjusted against the tax assessed against the tax payer as per the law allowing such adjustment. 15. Through the Finance Act, 2019, section 65B of the Ordinance was amended/substituted in the following manner:- "(13) in section 65B,- (A) in subsection (1), for full stop, occurring at the end, a colon shall be substituted and thereafter, the following provisos shall be added, namely: - Provided that for the tax year 2019 the rate of credit shall be equal to five percent of the amount so invested: Provided further that the provisions of subsection (5) relating to carry forward of the credit to be deducted from tax payable, to the following tax years, as specified in the said subsection, shall continue to apply after tax year 2019; and (B) in subsection (2), for the figure "2021", the figure "2019" shall be substituted;" 16. The amendment introduced through the Impugned Legislation can be illustrated as following; I) The first proviso inserted as above; applies to the tax year 2019 (1st July, 2018 as per section 74 of the Ordinance) whereby the tax payer making any investment in the manner as provided under subsection 65B of the Ordinance would be entitled to a reduced rate of tax credit i.e. 5% of the investment. II) The second proviso reaffirms the carrying forward of tax credit to the following two tax years. III) The machinery or equipment purchased through an investment as envisaged by subsection (1) ibid shall be installed by 30th June, 2019. 17. The language employed in the Impugned Legislation does not give any impression of its retrospective application in clear words. However, it is the case of the revenue that the effect of the Impugned Legislation is that if taxpayer company though has invested any sum of money for purchasing plant and machinery etc, however, if it has failed to install the said machinery by 30th June, 2019, it will not be entitled to any tax credit, however, if any taxpayer company was able to have installed machinery by 30th June, 2019 in that case it will only entitled to the tax credit equal to 05% of the amount invested in the expansion of undertaking for the tax period, 2019. 18. The Allahabad High Court in the case of Upper Doab Sugar Mills3 has aptly summarized the rule of interpretation of taxing statutes as follows: "it is well settled that in a taxing statute one has to look at what is clearly said. There is no room for any intendment; there is no equity about a tax. Nothing is to be read and nothing is to be implied" 19. At common law, there is a presumption that a statute does not have retrospective effect. The statement in Maxwell on the Interpretation of Statues, 12th Edition (1969), page 215 is frequently quoted: "Upon the presumption that the legislature does not intend what is unjust rests the leaning against giving certain statutes a retrospective operation. They are construed as operating only in cases or on facts which come into existence after the statutes were passed unless a retrospective effect is clearly intended. It is a fundamental rule of English law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication." 20. Lord Woolf, LCJ while speaking for the Court in the case of Wainwright4 at para-27 has stated, "the general presumption that legislation should not be treated as changing the substantive law in relation to events taking place prior to legislation coming into force." The principle was very elaborately explained in the case of Gustavson Drilling (1964) Ltd5 by the Supreme Court of Canada wherein at page 279 to 280 Dickson Judge observed that the general rule is that statues are not to be construed as having retrospective operation unless such a construction is expressly or by necessary implication required by the language of the Act. An amending enactment may provide that it shall be deemed to have come into force on a date prior to its enactment or it may provide that it is to be operative with respect to transactions occurring prior to its enactment. In those instances, the statute operates retrospectively. Superficially the present case may seem akin to the second instance but I think the true view is to be that the repealing enactment in the present case, although undoubtedly affecting past transactions, does not operate retrospectively in the sense that it alters rights as of a past time. The section as amended by the repeal does not purport to deal with taxation years prior to the date of the amendment; it does not reach into the past and declare that the law or the rights of parties as of an earlier date shall be taken to be something other than they were as of that earlier date. The effect, so far as the appellant is concerned, is to…

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