APPELATE
TRIBUNAL INLAND REVENUE,
LAHORE BENCH, LAHORE
ITA No.1313/LB/2021
(Tax Year 2016)
M/s Al Rehman
Hospitality (Pvt) Ltd;
107, B-III, Lahore
Gulberg Town. …Appellant
Versus
CIR, Audit-III, CTO,
Lahore. …Respondent
Appellant by: Mr. Shahid Bashir, ITP
Respondent by: Ms. Arooj Mehwish Rizvi, DR.
Date
of hearing: 05-05-2021 Date of order: 05-05-2021
O R
D E R
M. M. AKRAM (Judicial
Member): The
titled appeal has been preferred by the appellant taxpayer against an order dated
07.04.2021, passed by the learned Commissioner Inland Revenue (Appeals-VI),
Lahore for the tax year 2016 on the grounds as set forth in the memos of
appeal.
2. Briefly stated, the relevant facts for the
disposal of the present appeal are that the appellant is a private limited
company engaged in the business of providing hoteling services at the domestic
level. Return of income for the tax year 2016 was filed by declaring loss (including
B.F Loss) of (Rs.12,394,973). However, the appellant worked out its tax
liability under Clause 94 of Part-IV of the Second Schedule (“Clause 94”) to the Income Tax
Ordinance, 2001 (“the Ordinance”) at
the rate of 2% on gross turnover from all sources. The return so filed by the
appellant was treated to be an assessment order under section 120(1)(b) of the
Ordinance. In order to get benefit under Clause 94 ibid, it is incumbent upon
the appellant to file an undertaking that the accounts shall be presented for
audit within one month of the date of filing of the income tax return. Further,
the said clause envisaged that the tax payable or paid on the income from
providing or rendering services shall not be less than two percent of the gross
amount of turnover from all sources. According to the appellant, it duly
complied with the conditions contemplated in the said Clause. Subsequently, the
Additional Commissioner Inland Revenue (Addl
CIR) found that the deemed order treated to have been issued under section
120(1)(b) was erroneous in so far as prejudicial to the interest of revenue. He,
therefore, issued a show-cause notice dated 24.01.2017 to the appellant under
section 122(9) read with section 122(5A) of the Ordinance on certain points
enumerated in the said notice. In response, the appellant informed the Addl CIR
that its case qualifies under Clause 94 of Part-IV of the Second Schedule to
the Ordinance, therefore; as per the said Clause, the audit may be conducted
under section 177 of the Ordinance. The aforesaid contention of the appellant
was accepted and the case of the appellant was selected by the concerned
Commissioner Inland Revenue under section 177 of the Ordinance vide letter
dated 03.05.2017. In pursuance thereto, the audit was conducted and the
proceedings were finalized by passing an amended order dated 24.04.2019 under
section 122(1)/122(5) of the Ordinance. Later on, the return of income was again
examined and it was found by the learned Addl ACIR that the assessment already
finalized by virtue of section 120(1)(b) was erroneous in so far as prejudicial
to the interest of revenue. She, therefore, again issued the notice under
section 122(9) read with section 122(5A) of the Ordinance and amended the
deemed assessment vide order dated 03.02.2021. It was observed in the said
order that the appellant was not entitled to get benefit under the said Clause
94 ibid as it did not fulfill the
mandatory conditions for eligibility contemplated in the said clause and therefore,
charged the tax at the rate of 8% on the gross receipts in terms of section 153
of the Ordinance on the services provided or rendered to the prescribed person.
The tax computed was minimum tax-deductible/payable under section 153(1)(b) of
the Ordinance. Felt aggrieved, the appellant filed the appeal before the learned
CIR(A) who vide order dated 07.04.2021 confirmed the treatment accorded by the
Addl CIR. The appellant has now come up before this Tribunal and assailed the
impugned appellate order on a number of grounds.
3. This case came up for hearing on
05.05.2021. The learned AR at the very outset contended that the proceedings
initiated by the learned Addl CIR under section 122(5A) of the Ordinance are illegal
and void ab-initio as the deemed order was earlier amended by the Assessing
Officer under section 122(1)/(5) of the Ordinance. Therefore, the earlier
amended order should have been further amended by the ACIR under section
122(5A) and not the deemed order which was merged into the amended order passed
u/s 122(1)/(5). He further argued that the appellant is involved in hotel
services duly qualifies and is eligible for the benefit contemplated in Clause
94. It has been stated that the appellant duly paid the tax @ 2% on gross
turnover from all sources and also gave the undertaking within the prescribed
time as required under the said Clause. The appellant, therefore, complied with
all the prerequisites envisaged in Clause 94 and thus, no shortfall on its part.
He contended that after accepting the contention of the appellant, the Assessing
Officer conducted the audit of the appellant’s tax affairs as per the said Clause
and thereafter passed the amended order under section 122(1)/(5) of the
Ordinance. Notwithstanding the aforesaid, the learned AR submitted that the
ACIR has erred in law in charging tax @ 8% on entire turnover without
segregating the turnover relating to the customers who are not prescribed
persons, hence, tax under section 153(1)(b) was not required to be deducted on
receipts which related to non-prescribed persons. The learned AR also
challenged the levy of minimum tax @ 8% on the gross receipts related to the
prescribed persons by stating that it is discriminatory on the ground that those
who deal with prescribed persons in
terms of section 153(3) of the Ordinance shall pay minimum tax at the rate of
8% whereas those, who deal with other than prescribed
persons have to pay normal tax. There is no intelligible criterion for the
said discrimination having nexus to the purpose of the law. As a consequence,
whereof the case of the appellant is that the application of section 153(3)(b)
of the Ordinance is discriminatory.
4. On the contrary, the learned DR has
supported the orders of the lower authorities and contended that the impugned
order passed by the learned CIR(A) is a speaking order and there is no
infirmity in the said order. She, therefore, pleaded that the appeal be
dismissed.
5. We have heard the arguments of the parties
and perused the record. The following three key questions are involved in the
instant appeal for determination by this Tribunal:-
i. Whether
the appellant is entitled to get benefit contemplated in Clause 94 of Part-IV
of Second Schedule to the Income Tax Ordinance, 2001?
ii. Whether
the appellant has been treated discriminately under section 153(3)(b) of the Income
Tax Ordinance, 2001 read with Article 25 of the Constitution of Islamic
Republic of Pakistan, 1973Constitution?
iii. Whether
the levy of minimum tax under section 153(3)(b) is in consonance with entry 47
or 52 of the Federal Legislative List of the Constitution of Islamic Republic
of Pakistan, 1973? Or;
Whether the provision of section 153(3)(b) enacted beyond the scope of section 113 of the Income Tax Ordinance, 2001?
6. Now we take up the questions in seriatim.
It is the department’s case that firstly, proviso to Clause 94 envisages that
tax payable or paid on income from services should not be less than 2% of
turnover from all sources whereas in the appellant’s case no tax was payable on
income for the tax year 2016 as the taxpayer declared loss of Rs.12,394,973/-
in the return of income. Secondly, the appellant was under obligation in terms
of proviso to Clause 94 to present its accounts for audit within thirty days of
the filing of the income tax return which was allegedly not complied with by
the appellant. Subsequently, the said objection was overruled by the Addl CIR
while accepting the reply of the appellant. However, while deciding the appeal
of the appellant, the learned CIR(A) has illegally and without jurisdiction
rejected the stance of the appellant. Resultantly, as per the department, the
appellant allegedly did not comply with the conditions enumerated in the said Clause,
therefore, it has rightly been charged to tax at the rate of 8% on gross turnover
under section 153 of the Ordinance. Conversely, the appellant submitted that
being the loss for the year under consideration it was required to pay minimum
tax under section 113 of Ordinance and in terms of sub-section (2)(a) of
section 113, the aggregate of the turnover shall be treated as the income of
the appellant for the year chargeable to tax. Thus, the tax was payable on the
income of the appellant and the tax had rightly been paid on the gross turnover
at the rate of 2% under Clause 94. Therefore, there was no shortcoming on its
part. As far as the second objection of the department is concerned, the
learned AR submitted that the accounts were presented well within the
prescribed time and in compliance of the said Clause, the Assessing Officer
conducted an audit under section 177 of the Ordinance and in pursuance thereto,
passed an amended order dated 24.04.2019 under section 122(1)/122(5) of the
Ordinance. To properly appreciate the submissions of both the parties, it would
be beneficial to reproduce hereunder the relevant provisions of law to resolve
the controversy inter se:-
“Clause (94). The provisions of clause (b) of the proviso to sub-section (3) of section 153 shall not apply for the period beginning on the first day of July, 2015 and ending on the thirtieth day of June, 2019 to a company being a filer and engaged in providing or rendering freight forwarding services, air cargo services, courier services, manpower outsourcing services, hotel services, security guard services, software development services, IT services and IT-enabled services as defined in clause (133) of Part I of this Schedule, tracking services, advertising services (other than by print or electronic media), share registrar services, engineering services, car rental services, building maintenance services, services rendered by Pakistan Stock Exchange Limited and Pakistan Mercantile Exchange Limited inspection, certification, testing and training services:
Provided that the tax payable or paid on the income from providing or rendering aforesaid services shall not be less than two percent of the gross amount of turnover from all sources and that the company furnishes in writing an irrevocable undertaking by the fifteenth day of November, 2015 to present its accounts to the Commissioner within thirty days of the filing of the return, for audit of its income tax affairs for any of the tax years 2016 to 2019:
Provided further that for the tax year 2019, the company shall furnish an irrevocable undertaking by November, 2018, to present its accounts to the Commissioner.
Section 2(29) “income” includes any amount chargeable to tax under this Ordinance, any amount subject to collection or deduction of tax under section 148, 150, 152(1), 153, 154, 156, 156A, 233, 233A, sub-section (5) of section 234 and any amount treated as income under any provision of this Ordinance and any loss of income;
Section 2(63) “tax” means any tax imposed under Chapter II, and includes any penalty, fee or other charge or any sum or amount leviable or payable under this Ordinance;” (Emphasis supplied)
It
is clear from the foregoing provisions of law that proviso to Clause 94 allows
the company that the tax payable or paid on the income from providing or rendering services shall not be
less than two percent of the gross amount of turnover from all sources, while Sub-section
(29) of Section 2 of the Ordinance defines the expression “income” which inter
alia includes that any amount treated as income under any of the provision of
this Ordinance. Section 113 of the Ordinance provides for the payment of
minimum tax firstly when no tax is payable or paid by the person for a tax year
and secondly where tax paid or payable by a taxpayer is less than 1/1.25/1.5%
of the gross turnover of that taxpayer. In that case, the taxpayer has to pay a
minimum tax equivalent to 1/1.25/1.5% of the aggregate of its gross turnover
with the exceptions provided under section 113. In the aforesaid scenario, the
appellant is a company having declared loss for the tax year was essentially required
to pay minimum tax under section 113 of the Ordinance. According to sub-section
(2)(a) of section 113 ibid, the aggregate of the turnover shall be treated as
the income of the appellant for the year chargeable to tax. It is clear from
the foregoing provisions of law that the tax was payable by the appellant under
section 113 and the gross turnover declared would have been treated as income
of the appellant. At this juncture, we find it expedient to point out that the
principles of interpreting tax statutes are well settled, some of which have
been elucidated in the judgment of the Hon’ble Supreme Court reported as M/s
Pakistan Television Corporation Vs. Commissioner Inland Revenue (Legal),
Islamabad, and others (2017 SCMR 1136) which are summarized as
under:-
i.
There is no intendment or equity about tax and
provisions of a taxing statute must be applied as they stand;
ii.
The provision creating a tax liability must be
interpreted strictly in the favor of the taxpayer and against the revenue
authorities;
iii.
Any doubts arising from the interpretation of
fiscal provision must be resolved in the favor of the taxpayer;
iv.
If two reasonable interpretations are
possible, the one favoring the taxpayer must be adopted;
v.
When a tax is clearly imposed by a statutory
provision, any exemption from it must be clearly expressed in the statute or
clearly implied from it;
vi.
Where the taxpayer claims the benefit of such
express or implied exemption, the burden is on him to establish that his case
is covered by the exemption;
vii.
The terms of the exemption ought to be
reasonably construed;
viii. If a taxpayer is entitled to an exemption on a reasonable construction of the law it ought not to be denied to him by a strained, strict, or convoluted interpretation of the law.
Applying
the foregoing principles of interpretation, it is clear beyond any doubt that
the appellant was essentially required to pay tax under section 113 of the
Ordinance on its gross turnover, and under the law, the declared gross turnover
is treated to be its income. Accordingly, the appellant has rightly paid the
tax at the rate of 2% on the gross amount of turnover from all sources and
consequently, the first prerequisite of the proviso to Clause 94 has duly been
complied with by the appellant. For the foregoing reasons, the first objection
of the department is overruled.
As far as the second objection of the department that the
appellant had not presented the accounts within the specified period of 30 days
from filing of return despite furnishing of undertaking to this effect is also
misconceived and ill-founded. There is no cavil that the appellant is a company
as defined in section 2(12) read with section 80 of the Ordinance and continued
to furnish complete tax return under section 114 of the Ordinance. Section
114(2) read with rule 34 of the Income Tax Rules, 2002 clearly provides that
the return of total income has to be filed in the prescribed form and shall be
accompanied with the annexures, statements, or documents as may be prescribed;
shall fully state all the relevant particulars or information as specified in
the form of return; shall be signed by a person, being an individual, or the
person’s representative where section 172 applies. Rule 34 of the Income Tax
Rules, 2002 is reproduced hereunder:-
“Rule 34. Return of income.-
(1) This rule shall apply to provide for the furnishing of returns of income.
(2) A
return of income as required to be furnished under section 114 shall be in the
form as specified in Annexure-XIII of Part VI of the Second Schedule.
(3) A
return of income shall be verified in the manner specified in the form.
(4) A
return of income shall be accompanied by the following, namely:-
(a)
applicable documents;
(b)
statements;
(c)
certificates;
(d)
annexes; and
(e) in case of companies, the return of income shall be accompanied by audited accounts and reconciliation of profits as per accounts and taxable income as declared in the return.” (Emphasis supplied)
It
clearly emerges from the above rule that the appellant being a company was essentially
required to file the audited accounts along with the return. Undisputedly, the
appellant filed its accounts along with the return of income. It is pertinent
to mention here that the expression “accounts”
has been used in the proviso to Clause 94 and not the expression “books of accounts”. There is a marked
distinction between the two expressions. The Income Tax Rules, 2002 has
independently catered the expression “Books of accounts” in Chapter-VII of the
said rules. The legislature is conscious about the fact that where it intends
to use the words “books of accounts” it uses the same. For instance, in section
177 of the Ordinance the words “books of accounts” have specifically been used. Had it been the intention of the
legislature than the words “books of accounts” would have been used in Clause
94 instead of the word “accounts”. It is settled principle
of interpretation of the statutes that each and every word appearing in a
section is to be given effect to and no word is to be rendered or surplus so
was held by the Apex Court in the cases of (i) In the matter of Reference by
the President of Pakistan under Article 162 of the Constitution of Islamic
Republic of Pakistan PLD 1957 SC
(Pak.) 219,(ii) Muhammadi Steamship Company Ltd Vs CIT,
(Central) Karachi (PLD 1966 SC 828), (iii) M/s V. N. Lakhani and Company
Vs M. V. Lakatoi Express and 2 others (PLD 1994 SC 894) and (iv) Director General Intelligence and
Investigation FBR Vs Sher Andaz and 20 Others (2010 SCMR 1746). Thus, for the foregoing reasons, the requirement
of Clause 94 to the effect that the appellant presents its accounts for audit
within 30 days of the filing of return has duly been complied with even at the
time of filing of its income tax return well before the prescribed time of 30
days of the filing of return. It is pertinent to mention that the contention of
the appellant was also accepted by the ACIR while passing the amended order
under section 122(5A) of the Ordinance on page 5 of 11. The relevant extract of
the amended order is reproduced hereunder:-
“In the reply taxpayer contended that word “accounts” has been used and not “books of accounts”. Further, account represents summarized summary whereas books of account mean cash books, ledger accounts, day-to-day recording transactions, etc. To this extent, the contention of the taxpayer is logical, and hence accepted.”
Surprisingly,
the learned CIR(A) has taken up this objection in appeal and rejected the
contention of the appellant without any cogent reason. Therefore, the objection
of the learned CIR(A) that the appellant did not present its accounts within
the specified period is misconceived and uncalled for. Admittedly, the
assessing officer after considering the claim of the appellant under Clause 94,
conducted an audit of the tax affairs of the appellant under section 177 and in
consequence thereof, passed the amended order under section 122(1)/(5) of the
Ordinance. Accordingly, this objection of the learned CIR(A) is also overruled.
Further, the Add CIR has erred in law in charging the tax at the rate of 8% on
gross turnover without segregating the receipts related to the non-prescribed
person and even without considering the fact that as per SRO. 586(I)/91 dated
30th June, 1991 which is still saved under section 239(12) of the
Ordinance which provides that if the prescribed person paid the amount in cash
to the service provider i.e hotels and restaurants, then it is not required by
the payer to deduct tax under section 153(1) of the Ordinance as the exemption
from withholding tax has been granted to the recipient.
7.
Adverting to the second question that
whether the appellant has been treated discriminately under section 153(3)(b)
of the Income Tax Ordinance, 2001 read with Article 25 of the Constitution of
Islamic Republic of Pakistan, 1973 (hereinafter referred to be “the Constitution”)? The appellant
contended that the levy of minimum tax @ 8% on the gross receipts related to
the prescribed person is discriminatory on the ground that the taxpayer who
deals with prescribed persons in
terms of section 153 of the Ordinance shall pay minimum tax at the rate of 8%
whereas those irrespective of their legal status, whether individual, an association
of persons, firms or companies who deal with other than prescribed persons have to pay normal tax. There is no intelligible
criterion for the said discrimination having nexus to the purpose of the law.
In a nub, the learned AR for the appellant contends that levy of minimum tax @
8% to the taxpayers who are providing services to the prescribed persons is
discriminatory against the taxpayers who are providing services to the
non-prescribed person without there being any corresponding taxable income
under the Ordinance. This impinges upon the rights of the appellant under
Article 25 of the Constitution.
It is not disputed that the appellant
is a taxpayer within the meaning of provisions of the Ordinance and diligently
files its return under section 114. It is also not in dispute that the
appellant is engaged in hotel services and the only distinction drawn in the
provision of section 153 is to providing or rendering services to the
prescribed person as defined in the said section which creates a class apart
from the general class of person to which the appellant along with companies
who are engaged in the hotel business for providing or rendering services to the
non-prescribed person. The true construction of Article 25 of the Constitution
is that the legislature is entitled to create a benefit or a right in favour of
the class of persons and in respect of that class of persons who are similarly
placed, no distinction can be made which would work discriminately amongst
persons within that class. The only condition which is a sine qua non is that the class which is created is based on
intelligible criteria having nexus to the policy of the law under which the
class of persons has been created. In the instant case, a distinction cannot be
drawn on the basis of transactions to the prescribed persons. In our humble
opinion, the provisions of section 153(3)(b) creates discrimination between the
persons who are similarly placed, engaged in the same business of providing or
rendering services in Pakistan on the basis of criteria which is hardly
intelligible and has no nexus with the policy of the law. The terms of the
provision of section 153(3)(b) are expropriatary and also temple upon the
rights of the appellant guaranteed under Article 19 of the Constitution to
carry on trade and business and in fact, would tantamount to creating an
utterly unfavourable atmosphere of conducting business for the appellant. For
instance;-
i.
The person, being individual providing
or rendering the services to the prescribed persons has to pay minimum tax @ 10%
of his gross-receipts even if such receipts are below Rs.400,000/- while similarly
placed individual providing or rendering the services to a non-prescribed
person pays no tax on his net income up to Rs.400,000/-.
|
|
Gross
Turnover Rs. |
Minimum
Tax @ 10% on gross receipts |
Tax liability Rs. |
|
Services are provided to a prescribed person. |
400,000 |
40,000 |
40,000 |
|
Services are provided to the non-prescribed person. |
400,000 |
NA |
0 |
|
Excess tax for providing services to a prescribed
person. |
|
|
40,000 |
ii.
The appellant is being
subjected to tax on its gross receipts while the similarly placed person
engaged in the same business but providing or rendering services to a non-prescribed
person has to pay tax on their net income after allowing all related admissible
expenses.
|
|
Gross Turnover Rs. |
Expenses Rs. |
Net Income |
Tax @ 10% on gross receipts
Rs. |
Tax Under Normal law |
Tax liability Rs. |
|
Services are provided to a prescribed person. |
400,000 |
200,000 |
200,000 |
40,000 |
0 |
40,000 |
|
Services are provided
to the non-prescribed person. |
800,000 |
400,000 |
400,000 |
0 |
0 |
0 |
|
Excess tax for providing
services to a prescribed person. |
|
|
|
|
|
40,000 |
iii. As the appellant providing or rendering services to the prescribed persons has to pay a minimum tax on its gross receipts @ 8%, whereas a similarly placed person providing or rendering services to non-prescribed persons has to pay minimum tax @ 1% under section 113 of the Ordinance. There is no rational basis for such a classification. Rather the classification is irrational and offends the fundamental rights guaranteed under the Constitution.
It
is clear from the foregoing discussion, the provision of section 153(3)(b) runs
counter to and offends the fundamental rights guaranteed under Articles 25 and
18 of the Constitution. Reliance may be placed on the judgment of the Hon’ble
Supreme Court in the case reported as M/s Elahi
Cotton Mills Ltd, and others Vs Federation of Pakistan, etc, PLD 1997 SC
582 at page 675 wherein it has been held that:-
“(iv) That the legislature is competent to classify persons or properties into different categories subject to different rates of tax. But if the same class of property similarly situated is subject to an incidence of taxation, which results in inequality amongst holders of the same kind of property, it is liable to be struck down on account of infringement of the fundamental right relating to equality.”
Looking the matter from another angle on the touchstone of
the provisions of section 113 of the Ordinance which provides for the payment
of minimum tax firstly when no tax is payable or paid by the person for a tax
year and secondly where tax paid or payable by a taxpayer is less than 1/1.25/1.5%
whatever the rate of tax stood at the relevant time of the gross turnover of
that taxpayer. In that case, the taxpayer has to pay a minimum tax equivalent
to 1/1.25/1.5% of the aggregate of its gross turnover with the exception
provided under section 113. Therefore, after having fixed the minimum tax
liability at the rate of 1/1.25/1.5% under section 113 on the basis of capacity
to pay tax, it is not legal to make the taxpayer/service provider liable to pay
any additional amount of minimum tax at the rate of 8% on the basis of the
provision of section 153(3)(b). Reliance is placed on Central
Board of Revenue and 3 others v. Seven-Up Bottling Company (Pvt) Ltd, (1996 SCMR 700).
In the said case leave to appeal was granted as an authoritative pronouncement
on the vires of the Excise Duty on Production Capacity (Aerated Water) Rules,
1990, which was issued under sections 3(4) and 37 of the Central Excises and
Salt Act, 1944, was called for. In the said case interpretation of rules 6 and
7 of the aforesaid Rules was involved. It was observed that under Rule 6 of the
Rules the factories manufacturing aerated water were categorized and the rate
of duty per filling valve or spout per financial year was provided. Whereas
Rule 7 of the Rules provided as under:
"7. All the filling valves or spouts installed in all the filling machines in a factory shall be taken into account for the purposes of this notification regardless of whether or not all or any of the filling machines or valves or spouts thereof are in working condition and the duty shall be levied on all such filling valves or spouts:
Provided, that in the case of manufacturers who have paid a higher amount of excise duty and sales tax on the aerated waters during the financial year 1989-90 than that working out under rule 6, such a higher amount shall be levied."
The respondent Seven-Up Bottling Company Limited successfully
assailed proviso to the above-quoted, Rule 7 of the Rules before the High Court,
on the ground that after having fixed the liability of Excise Duty on the basis
of capacity it was not legal to make the manufacturer liable to pay any
additional amount of Excise Duty on the basis of the proviso. The Central Board
of Revenue filed an appeal with the leave of the Supreme Court, which was
dismissed. His lordship Saiduzzaman Siddiqui, J. spoke on behalf of the Court. While
dismissing the appeal, it was held that the creation of sub-class out of a well-defined
and intelligible classification of manufacturers of the foreign brand of
aerated water, on the basis of payment of excise duty by them on the actual
production of goods in the preceding year and determining their tax liability
on that basis, bears no nexus to the object of classification envisaged by
section 3(4) of the Central Excise and Salt Act, 1944 and thus amounted to
discrimination within a well-defined category of manufacturers. By respectfully
following the aforesaid judgment, it is declared that the provision of section 153(3)(b)
of the Ordinance is inconsistent and beyond the mandate of section 113 of the
Ordinance. It infringes the fundamental right of the
appellant guaranteed under Article 25 of the Constitution. Article 25 of the
Constitution guarantees for equality of all citizens before the law and their
entitlement to get equal protection of the law. This provision casts a duty on
the legislature to ensure the enactment of laws which provide equal protection
to all citizens. Such rights of citizens cannot be defeated.
We are mindful of our jurisdiction that is indeed
different from the authority of the Judicature that is directly established
under the Constitution of Pakistan, 1973. We, therefore, limit our findings to
the deficiencies as discussed in the foregoing paragraphs relating to the
provision of section 153(3)(b) of the Ordinance. Consequently, we are not
declaring the provision of section 153(1)(b) of the Ordinance as ultra vires to the Constitution.
In view of the above, the answer to question
No. (ii) is in affirmative, in favour of the appellant.
8. Now we turn to the last question. The authority to levy tax by the legislature on income is
derived under Entry No.47 of the Federal Legislative List of the Fourth
Schedule (hereinafter to be called as “the
List”) to the Constitution. The legislature is further authorized to levy
taxes and duties under Entry No. 52 of the List on the basis of production
capacity of any plant, machinery, undertaking establishment or installation, in
lieu of taxes and duties leviable under Entries Nos. 44, 47, 48, and 49 of the
List. The two different modes of levy of tax by the legislature under the
Constitution are, therefore, mutually exclusive. The legislature, may,
accordingly, elect to impose a tax on any one of the two modes mentioned above.
As a necessary corollary, therefore, it follows that where the legislature decided
to recover tax on the basis of production capacity of plant, machinery, etc it
could not demand the tax on the basis of actual taxable income. Sections 4 and
113, 148, 150, 152(1), 153, 154, 156, 156A, 233, 233A, sub-section (5)
of section 234 of the Ordinance enact these two
alternative principles for levy of tax envisaged by Entries Nos. 47 and 52 of
the List of the Constitution. The rationale behind these two mutually exclusive
modes of levy of tax is quite obvious; when the tax is recovered on the basis
of actual taxable income under section 4 of the Ordinance, the production
capacity of the plant, machinery, etc. has no relevancy at all. Similarly, when
the tax is sought to be imposed on the basis of production capacity of the plant,
machinery, etc. the actual taxable income becomes irrelevant except charging of
minimum tax under the provision of section 113 of the Ordinance.
The provision of section 153(3)(b) provides that the tax-deductible
at the rate of 8%/10% on the services rendered or provided to the prescribed
person irrespective of their legal status, whether individual, an association
of persons, firms or companies shall be treated as minimum tax under the
Ordinance. Whereas the provision of section 113 provides for the payment of
minimum tax firstly when no tax is payable or paid by the taxpayer for a tax
year and secondly where tax paid or payable by a taxpayer is less than 1/1.25/1.5%
of the gross turnover of that taxpayer. In that case, the taxpayer has to pay a
minimum tax equivalent to 1/1.25/1.5% of the aggregate of its gross turnover
with the exception provided under section 113. Therefore, after having fixed
the minimum tax liability at the rate of 1/1.25/1.5% under section 113 on the
basis of capacity to pay tax, it is not legal to make the taxpayer/service
provider liable to pay any additional amount of minimum tax at the rate of 8%
on the basis of the provision of section 153(3)(b) of the Ordinance. Relevant
provision of Section 153(3) reads as under:-
“153. Payments for goods, services and
contracts.—(1)
Every prescribed person making a payment
in full or part including a payment by way of advance to a resident person
or
(a) for the sale of goods except where payment
is less than seventy-five thousand Rupees in aggregate, during a financial
year;
(b) for
the rendering of or providing of services except where payment is less than
thirty thousand Rupees in aggregate, during a financial year;
(c) on the execution of a contract, including
contract signed by a sportsperson but not including a contract for the sale of
goods or the rendering of or providing services, shall, at the time of making
the payment, deduct tax from the gross amount payable (including sales tax, if
any) at the rate specified in Division III of Part III of the First Schedule;
Provided
that where the recipient of the payment under clause (b) receives the payment
through an agent or any other third person and the agent or, as the case may
be, the third person retains service charges or fee, by whatever name called,
from the payment remitted to the recipient, the agent or the third person shall
be treated to have been paid the service charges or fee by the recipient and
the recipient shall collect tax along with the payment received.
(2) Every exporter or an export house making a
payment in full or part including a payment by way of advance to a resident
person or permanent establishment in Pakistan of a non-resident person for
rendering of or providing services of stitching, dying, printing, embroidery,
washing, sizing and weaving, shall at the time of making the payment, deduct
tax from the gross amount payable at the rate specified in Division IV of Part
III of the First Schedule.
(3) The
tax deductible under clauses (a) and (c) of sub-section (1) and under
sub-section (2) of this section, on the income of a resident person or, shall
be final tax. Provided that,—
(a) tax deducted under clause (a) of
sub-section (1) shall be adjustable where payments are received on sale or
supply of goods, by a, —
(i) company being a manufacturer of such goods;
or
(ii) public company listed on a registered stock
exchange in Pakistan;
(b) tax deductible shall be a minimum tax on
transactions referred to in clause (b) of sub-section (1), provided that-
(i) where the aforesaid minimum tax for
providing or rendering services, in respect of sectors as specified in clause
(94) of Part IV of the Second Schedule is in excess of tax payable under
Division II of Part. I of the First Schedule, the excess amount of tax paid
shall be carried forward for adjustment against tax liability under the
aforesaid Part of the subsequent tax year;
(ii) where the excess tax is not wholly
adjusted, the amount not adjusted shall be carried forward to the following tax
year and adjusted against tax liability under the aforesaid Part for that year,
and so on, but the said excess shall not be carried forward to more than five
tax years immediately succeeding the tax year for which the excess was first
paid; and
(iii) the said excess amount shall not be carried
forward in case of a company for which provisions of this clause are not
applicable under clause (94) of Part IV of the Second Schedule;
(a)
tax deducted under clause (c) of sub-section
(1) shall be adjustable if payments are received by a public company listed on
a registered stock exchange in Pakistan, on account of execution of contracts;
……………………………………….
………………………………………”
It
clearly emerges that the tax deductible under the above provision of section
153(3)(b) is treated as a minimum tax on the transaction without there being the
corresponding nexus with the taxable income of the taxpayer which is contrary
to the Constitutional constraints. The concept of minimum tax has been
arbitrarily overstretched, offending the rules of reason and the provisions of
the Constitution. It is pertinent to point out that previously
companies were exempted from this tax by virtue of Clause (79) of Part-IV of
the Second Schedule to the Ordinance wherein it was mentioned that section 153
was not applicable to the companies. Clause (79) of Part-IV of the Second
Schedule was omitted in 2015, hence 8% tax on the gross turnover became
applicable on companies who are rendering or providing services to the
prescribed person.
The Hon’ble Supreme Court of Pakistan considered in detail
the concept of minimum tax/presumptive tax in the case of M/s
Elahi Cotton Mills Ltd, and others Vs Federation of Pakistan etc, PLD 1997 SC 582
(Particularly in paragraph Nos.20 to 23) and upheld the levy of minimum tax for
the following reasons:-
i.
Minimum tax was
levied to make the person contribute some tax in National Exchequer, as such
persons were otherwise earning income but were paying little tax, due to
liberal exemptions and deductions.
ii.
The Hon’ble Court
approved the basis of levy of minimum tax provided by the department:-
·
“Minimum tax
under Section 80D was the lowest possible rate applicable to any category/class
of taxpayers.
·
The working of
minimum tax rate has arithmetical backing and had nexus with the normal tax
rules applicable to taxpayers.
·
Exporters have
willingly accepted minimum tax.
· The mode of tax enshrined simplicity and fairness and avoided complex working leading to protected litigation.”
But the levy of minimum tax under section 153(3)(b) has no nexus
with the said reasons. Besides, it is levied without any basis; hence, it is
purely arbitrary with no nexus with income/taxable income. Thus, it offends Entries
47 and 52 of the Federal Legislative List of the Constitution as well as the
provision of section 113 of the Ordinance. Section 113 of the Ordinance is enacted
on the principle embodied in Entry No. 52 of the List of Constitution which
provides for levy of tax in lieu of tax leviable under Entry No. 47 ibid. The provision
of section 153(3)(b) ibid, provides minimum tax irrespective of the fact
whether a taxpayer has taxable income for the tax year or not. The validity of
the aforesaid section is challenged on the ground of being repugnant to section
113 of the Ordinance and also on the ground that it violated the principle of
equality before law granted under the Constitution. At this stage, it will be
advantageous to reproduce here section 113, which not only fixed the rate of minimum
tax on the basis of turnover of the taxpayers but also categorized the taxpayers
for the purposes of levy of minimum tax. It reads as follows at the relevant
time:-
“113. Minimum tax on the income of certain
persons.-
(1) This section shall apply to a resident company, an individual (having
turnover of ten million rupees or above in the tax year 2017 or in any
subsequent tax year) and an association of persons (having turnover of ten
million rupees or above in the tax year 2017 or in any subsequent tax year)
where, for any reason whatsoever allowed under this Ordinance, including any
other law for the time being in force
(a) loss for the year;
(b) the setting off of a loss of an earlier
year;
(c) exemption from tax;
(d) the application of credits or rebates; or
(e) the claiming of allowances or deductions
(including depreciation and amortization deductions) no tax is payable or paid
by the person for a tax year or the tax payable or paid by the person for a tax
year is less than the percentage as specified in column (3) of the Table in
Division IX of Part-I of the First Schedule of the amount representing the
person’s turnover from all sources for that year:
Explanation.-For
the purpose of this sub-section, the expression “tax payable or paid” does not
include-
(a)
tax already paid or payable in respect of
deemed income which is assessed as final discharge of the tax liability under
section 169 or under any other provision of this Ordinance; and
(b)
tax payable or paid under section 4B.
(2) Where this section applies:
(a) the aggregate of the person’s turnover as
defined in sub-section (3) for the tax year shall be treated as the income of
the person for the year chargeable to tax;
(b) the person shall pay as income tax for the
tax year (instead of the actual tax payable under this Ordinance), minimum tax
computed on the basis of rates as specified in Division IX of Part I of First
Schedule;
(c) where tax paid under sub-section (1)
exceeds the actual tax payable under Part I, clause (1) of Division I, or
Division II of the First Schedule, the excess amount of tax paid shall be
carried forward for adjustment against tax liability under the aforesaid Part
of the subsequent tax year:
Provided
that the amount under this clause shall be carried forward and adjusted against
tax liability for five tax years immediately succeeding the tax year for which
the amount was paid.
(3) “turnover” means,-
(a) the gross sales or gross receipts,
exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on
invoices, or bills, derived from the sale of goods, and also excluding any
amount taken as deemed income and is assessed as final discharge of the tax
liability for which tax is already paid or payable;
(b) the gross fees for the rendering of
services for giving benefits including commissions; except covered by final
discharge of tax liability for which tax is separately paid or payable;
(c) the gross receipts from the execution of
contracts; except covered by final discharge of tax liability for which tax is
separately paid or payable; and
(d) the company’s share of the amounts stated above of any association of persons of which the company is a member.”
Section
113 of the Ordinance lays down that the minimum tax will be levied in lieu of
the levy under section 4 of the Ordinance whereas the
levy of minimum tax under section 153(3)(b) has no nexus with the income/taxable
income. Besides, it is levied without any basis; hence, it is purely arbitrary
and it offends Entries 47 and 52 of the Federal Legislative List of the
Constitution as well as the provision of section 113 of the Ordinance. We
may also mention here that the provision of section 153(3)(b) was enacted
beyond the mandate of section 113 and therefore, for this reason also it is invalid.
9. For complete justice, we have also
considered the contention of the learned AR that the amended order passed under
section 122(5A) of the Ordinance suffered from serious legal and jurisdictional
infirmities/flaws that go to the root of the case and must be considered and
settled first. He argued that the Addl CIR has amended the original assessment
order which by operation of law deemed to be considered as assessment order in
terms of section 120(1)(b) of the Ordinance by ignoring the fact that the said
deemed order was not in the field and had become merged in the amended
assessment order dated 24.04.2019 passed by the Deputy Commissioner Inland
Revenue (Audit), Range-1, Zone-VI, CRTO, Lahore under section 122(1)/122(5) of
the Ordinance. To substantiate his submissions, he placed on record the copy of
the said amended order. Thus, according to the learned AR, the action of the
learned Addl CIR by amending the deemed order i.e. order u/s 120(1), which is
not in filed is unsustainable in law. On the other hand, when confronted these
facts to the learned DR, she frankly conceded that the earlier amended order
had to be further amended under section 122(5A) or 122(5) of the Ordinance as
many times as may be necessary and as such, the learned Addl CIR has erred in
law in amending the deemed order which in fact was subsequently merged in the
amended order passed by the DCIR under section 122(1)/122(5) of the Ordinance.
The submissions made on behalf of the appellant have
substance. This Tribunal in a similar set of circumstances already decided the
issue in favour of the taxpayer in the case reported as 2007 PTD 2153. The
relevant extract of the judgment is reproduced hereunder for ease of reference:
-
“The A.R. says that law does not permit ignorance of documents already filed by the assessee separately when by operation of law they have attained the status of the assessment order. The contention of the A.R. is correct and valid. The return filed by the assessee becomes an assessment order by virtue of section 120(1). This has further been reconfirmed in section 120(1)(b) that such return shall be taken for all purposes of this Ordinance to be an assessment order issued to the taxpayer by the Commissioner on the date return was furnished. Similarly, the revised return under section 114(6) within the period prescribed therein also is to be taken for all purposes of this Ordinance to be an amended assessment order issued to the taxpayer by the Commissioner on the day on which the revised return was furnished. This has been so mentioned in section 122(3)(b). Now if Commissioner intends to amend an assessment order treated as issued under section 122(3)(b) he will have to proceed further on the basis of said assessment. There is no escape from the same hence, making an assessment in ignorance to the amended assessment order by implication of the provision of section 122(3)(b), an amended order on the basis of earlier assessment order obviously cannot stay in the field.” (Emphasis supplied)
In
the instant case, admittedly, an amended order dated 24.04.2019 was earlier
passed by the DCIR under section 122(1)/122(5) of the Ordinance, and as such
the Addl CIR had to proceed further under section 122(5A) of the Ordinance on
the basis of the said amended order and not the deemed assessment order.
Therefore, by following the above judgment of this Tribunal, the assumption of jurisdiction under section
122(5A) of the Ordinance by the Addl CIR is indeed incomplete negation thereto.
It is an immutable principle of law that defective assumption/exercise
of jurisdiction by the authorities is incurable. Reliance may be placed on Director
General Intelligence and Investigation FBR Vs Sher Andaz and 20 Others (2010 SCMR 1746), Director
General Intelligence and Investigation and others Vs M/s AL-Faiz Industries
(Pvt.) Limited and others PTCL 2008 CL 337(S.C) and Collector,
Sahiwal and 2 others Vs Muhammad Akhtar(1971 SCMR 681). In
all these judgments it was held by the Hon’ble Supreme Court of Pakistan that:
-
i. Where
essential feature of assumption of jurisdiction is contravened or forum
exercises power not vested in it, or exceed authority beyond the limit
prescribed by law the judgment is rendered Coram non-judice and inoperative
(2002 SCMR 122).
ii. If a mandatory condition for the exercise of jurisdiction before the Court, Tribunal, or Authority is not fulfilled, then the entire proceedings which follow become illegal and suffer from want of jurisdiction. Any order passed in continuation of these proceedings in appeal or revisions equally suffer from illegality and are without jurisdiction (2008 SCMR 240).”
10. For what has been discussed above, the
appeal of the appellant is accepted and the orders passed by the lower
authorities are annulled.
11. This order
consists of (22) pages and each page bears my signature.
|
Sd/- |
Sd/- (M. M. AKRAM) JUDICIAL
MEMBER |
|
(DR.
MUHAMMAD NAEEM) ACCOUNTANT MEMBER |
|
CERTIFICATE U/S 5 OF THE LAW REPORT ACT
This case is fit for reporting as it settles the principles highlighted above.
(M. M. AKRAM)
JUDICIAL
MEMBER
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