I.T.AS. NOS.14/KB OF 1984-85, 1422/KB OF 1986-87, VS I.T.AS. NOS.14/KB OF 1984-85, 1422/KB OF 1986-87, 3634/KB, 3635/KB OF 1987-88,, 1995 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 557 (1994)

Income Tax Ordinance (XXXI of 1979)---

----S. 2(6)---Constitution of Pakistan (1973), Art. 165-A---Expression "other body or institution" in Arf.165-A, Constitution of Pakistan ---Connotation-- Sovereign immunity- --Availability----Sovereign immunity is not available to any Corporation, Company, other body or institution owned and controlled by the Federal or Provincial Government---Service Club/Mess established by the Government and controlled by the Federal Government brings same at the most in the purview of "other body or institution owned or controlled directly or indirectly by Federal Government" and all such institutions are liable to the levy of tax under Art.165-A, Constitution of Pakistan.

The Parliament has and shall be deemed always to have had, the power to make law to provide for the levy and recovery of a tax on the income of a Corporation, Company or other body or institution established by or under a Federal law or a Provincial law or an existing law or a Corporation, Company or other body or institution owned or controlled either directly or indirectly by the Federal Government or a Provincial Government. Thus, the sovereign has itself given up its immunity from levy of tax in respect of a Corporation, Company, of the body or institution owned or controlled either directly or indirectly by the Federal or Provincial Government and, therefore, after the insertion of Article 165-A in the Constitution the plea of sovereign immunity is no more available in Pakistan to any Corporation, Company, other body or institution owned or controlled by the Federal or Provincial Government. The expression "other body or institution" occurring in Article 165-A have not been defined and, therefore, they shall be taken in their ordinary sense and as understood in common parlance. The plea that the assessee which is a Service Club/Mess established by the Government and controlled by the Federal Government brings it at the most in the purview of other body or institution owned or controlled directly or indirectly by the Federal Government and all such institutions are liable to the levy of tax under Article 165-A of the Constitution.

Provisions contained in the rules and bye-laws of the club clearly indicate that neither the properties of the club vest in Government nor any expenditure is incurred out of the Government revenue. The income earned by the club is owned by the club itself and it never goes to the Government treasury. The Managing Committee has all the discretionary powers to manage the affairs of the Club including framing of rules and bye-laws. The employees of the club are neither civil servants nor members of armed services. A perusal of the agreement for re-construction and renovation of services club executed on 27th day of July, 1977 further shows that the Managing Committee entered into an agreement with the private party for the renovation and construction of residential-cum-commercial complex. According to the recital in the agreement the Services Club was described as owners of the building on a plot of land measuring 15,000 sq. yards. The Services Club described as owners assigned and awarded the said project to the promoters for the construction of residential-cum-commercial complex.

Perusal of one condition showed that the Managing Committee of the club had been described throughout as owner of the proposed complex which had been subsequently completed and rented out. There was no stipulation that any of the acts agreed by the Managing Committee of the Services Club (Services mess) should be subject to approval by the Government or the rental income so received should be deemed to be the Government revenue.

The assessee was not a Government Department or its agent or instrumentality and, therefore, it did not enjoy any immunity from the levy of tax. At the most it could be held to be a Government-established body which was liable to the levy of tax under Article 165-A of the Constitution.

Rahimyar Khan District Council v. UBL 1989 CLC 1397; Punjab Province v. The Federation of Pakistan PLD 1956 FC 72; SITE v. CBR PLD 1975 Kar. 128; C.B.R. v. SITE PLD 1985 SC 97; West Pakistan Road Transport Corporation v. CIT 1973 PTD 499; Palkhiwala's Commentry on the Law and Practice of Income-tax, 8th Edn., p.16 and Bank Voor Handel and Scheetvaart NV v. Administrator of Hungarian Property 35 TC 111 (346) distinguished.

Pakistan Industrial Development Corporation v. C.I.T. 1979 PTD 431 and Tamlin v. Hannsford 1950 KB 18 ref.

Mansoor Ahmed Khan for Appellant.

Muhammad Nawaz, D.R. for Respondent,

Date of hearing: 21st August, 1993.

ORDER

MUHAMMAD MUJIBULLAH SIDDIQUI (JUDICIAL MEMBER).---The above appeals are directed against the order dated 29-4-1984 in ITA No.CIT(A) /Z-IV/338/1980-81 relating to the assessment year 1980-81, order dated 3-8-1986 in ITA No.61/CIT(A)/Z-IV/1981-82 relating to the Assessment Year 1981-82, order dated 1-11-1987 in ITA No.376, 377/Z-VI/1987-88 relating to the Assessment Years 1984-85 and 1985-86 and order dated 11-7-1989 in ITAs. Nos. 941 and 942/A-VI/1988-89 relating to assessment years 1986-87 and 1987-88 by various CIT (Appeals).

(2) Heard Mr. Mansoor Ahmed Khan, learned counsel for the appellant and Mr. Muhammad Nawaz, learned representative for the department. Mr. Mansoor Ahmed Khan, learned counsel for the appellant has stated at the very outset that he will press one objection only, to wit, the appellant is a part and parcel of Federal Government and is, therefore, immune from the levy of income-tax. In addition to the lengthy arguments addressed by Mr. Mansoor Ahmed Khan he has submitted written arguments as well. For the sake of convenience the written arguments submitted by Mr. Mansoor Ahmed Khan are reproduced below:--

"The facts in the appeals, in principle, are uniformly the same. These have been succinctly stated in the order of CIT(Appeals) in respect of the assessment year 1980-81 to the effect:-

This is the case of an A.O.P. running a club deriving income from property, interest and dividends etc. Return was filed showing NIL income. However, income to the extent of Rs.10,29,397 was disclosed and claimed exemption with the remarks that `income of Central Government Trust Defence Officers Mess. In response to statutory notices, it was deposed before the Income Tax Officer that since the Club was organized by the Ministry of defence out of the funds from Karachi War Memorial Fund and that since it is run on no-profit/ no-loss basis, provisions of Income Tax Ordinance are not attracted. The Income Tax Officer, however, did not agree with the intention of the appellant at the assessment stage for the reasons that since no Government Notification is available in support of exempt on and since the learned Commissioner of Income-tax, Central Zone, Karachi, had already held in appeals for the assessment years 1969-70 to 1974-75 that in the case of the appellant income from property, dividends and charges paid by non-members are mixable, the income of the club to that extent is taxable. He, therefore, brought to tax property income after allowing statutory allowance of repairs at Rs.6,03,124, interest income at Rs.76,129 and notional income under section 12(13) amounting to Rs.24,000..

On the basis of the above facts, the CIT (Appeals) dismissed the appeal making the following observations:--

"It is against the above treatment that this appeal has been filed. The main contention is that the Club is run through Trust funds in the premises owned by the Government of Pakistan through the officers of the Defence Services and enjoys income only from properties and assets or dealing with its members and has no business venture and as such it is exempt from tax under the provisions of clauses 93 read with 62 and 62A of the Second Schedule of Income Tax Ordinance, 1979.

(2) With permission, an Affidavit of Facts was submitted under rule 13 of the Income Tax Appellate Tribunal Rules, 1981. The counter-affidavit by the department does not dispute the said statement of facts, which may be briefly referred to, as in the said affidavit, and in the Annexures thereto, briefly as under:--

(i) in or about the year 1920 certain officers of the then British/Indian Army, together with some benevolent members of the public, opened three funds and collected donations for the same;

(ii) in order to give legal and regular shape to the operation of the funds for providing rest and recreation to soldiers and sailors, returning from war zone, a trust was constituted under the name and style of `Karachi War Memorial Fund' with its Trustees, ex officio and others named therein;

(iii) the Trustees acquired lease of a plot of land, admeasuring 15,000 sq. yds., from the Collector of Karachi vide lease, dated 22-4-1933, for the term and annual rent mentioned therein;

(iv) that on the said plot (its location in the present context is the crossing of Abdullah Haroon Road and Merewether Road), the Trustees constructed building and gave it a name: British Union Jack Club for the benefit of British and Indian soldiers and sailors and their dependents and for entertainments of troops returning to Karachi from the War Zone and for the relief of the troops, in the event or distress arising out of the War.

(3) In the exercise of his powers under the lease deed dated 22-4-1933, the Collector of Karachi determined the lease and paid the Trustees a sum of Rs.2,54,000 as compensation for the Club's buildings on the said leasehold plot/land. This action of the Government (through the Collector of Karachi) was in the consideration of the fact that the purpose for which the Trust was set up was no longer in existence.

(4) Upon resumption of the leasehold plot and the buildings/constructions thereon, upon payment of the compensation, the plot and buildings became the property of the Federal Government. The Government allowed its said property to be used for the benefit of officers of the Armed Forces and called it `Services Club" (now named "Services Mess"), to be managed by a Managing Committee, appointed by the Government of Pakistan, essentially consisting of ex officio responsible highly ranking officers of the Armed Forces e.g. the Chief of Joint Secretariat Staff is to be the ex officio President and its other ex offcio members may be the Director of Joint Services Administration, the Station Commander of Karachi, the Naval Officer Incharge, Assisting Chief of Staff PAF and three Members to be elected each from the Army, Navy and the Air Force. The Honorary Secretary is appointed by the President/Managing Committee. The Managing Committee of the Club continues to be constituted by high ranking Armed Forces Officers. The property remains the property of the Federal Government who has allowed use thereof as a Club. The property is administered as provided in the rules framed by the Federal Government. The position occurred or resulting from the above is--

(i) that the club has been organized by the Ministry of Defence out of `Funds' vested in it from Karachi War Memorial Fund and is run on no-profit/no-loss basis;

(ii) that the provisions of the Income Tax Ordinance, 1979 are, therefore, not attracted or applicable as the property from which rental or other income is derived is Government property in itself the Club is neither a person not an AOP as it, nor any one else, except the Government has any financial interest, direct or indirect, in it;

(iii) that the income, therefore, arises or accrues from Government property or fund which has immunity from taxation; and

(iv) that the I.T.O (from Appellant's `nil' income return) and the CIT (Appeals) at the appellate stage, repealed the claim of immunity and taxed the appellant's income, over which there was/is no jurisdiction and in violating the Constitutional immunity, the impugned orders are and each is bad in law and of no effect.

(5) The aforestated facts have been placed in the proceedings before the Hon'ble Tribunal. These were again put in the shape of one concerted `Affidavit of Facts', sworn by the Administrator of Services Club, in which the history leading to the establishment of the Services Club has been traced from the time of World War 1 (1914-1918). The developments leading to the present status of the `property' and naming/establishing the Club may be summarised from the affidavit as under:--

(i) that by the joint efforts of the public and Government and establishment for rest, recreation, mitigating distress etc. was constituted for armed forces men returning from the War Zone (1914 18) the funds and establishment were brought under a Trust constituted for the purpose;

(ii) that the War having ended, the Trust, upon due application was wound up by Court and acting by the winding up order of the District Judge, Karachi, dated 9-5-1959, in Miscellaneous Petition No. 160 of 1958, the property vested in the Federal Government and remains its property;

(iii) that following the extinguishment of the Trust by Court order ordained take over of its funds and property was by the Government of Pakistan. As per the Collector's resumption of lease of Government plot, the plot/land also came back to Government's possession;

(iv) that the plot of land, with buildings and construction thereon have, upon resumption of the Government land and on payment of compensation for the buildings and constructions became, have been and are the sole and exclusive properties of the Federal Government;

(v) the Services Club (Mess) is merely a name given to the Government properties (the land the buildings thereon and the funds) which are all severally and compositely, Government property;

(vi) that the said Government property has been put to specific use, essentially as `service mess' i.e. for providing sports and entertainment recreational, catering and lodging. The facilities, at no-profit/no-loss basis, are, as far as possible provided, by the Armed Forces (i.e., the Government) to its members, serving or retired or their dependents. The no-profit/no-loss service is accepted as `tax-free' in the impugned orders.

(6) As is well-known and visible to all and sundry, on one side of the club, there were and are the old rentable shops and office premises. A new block and upper storey, as a new block, has been added (constructed under Agreement). The premises/shops in the ',old' and `new' blocks are let out and yield rental income. In addition to the rental income, there is some income by way of interest and dividends on investment of surplus funds. There is no other income. The 'deemed' income presumed under section 12(13) of the Ordinance is baseless and has no propriety in law or facts and the addition, on this score, is liable to be deleted in any event.

(7) The aforesaid income accrues, arises and is derived from Government property/funds. The club not being a person or otherwise an AOP has no claim, right or interest in the said income or any part thereof. It is income of the Federal Government used/assigned in one of its ordinary ways----`army mess'. The club is merely in name and devise of supervision and control in the manner laid down. The Management Body, nor any member of the Club and nor any other person has not even a pretence of claim, title or interest in the corpus or its income which also highlights the ownership and income to be of the Federal Government.

(8) Inferring from the position stated and elaborated above, services club/mess is not a body/person/AOP having any or whatsoever financial claim, title or interest in the properties/funds/finance. It is merely a name given to a device to put the Government property/funds to use in the manner laid down or as the Government may direct. The inter se relationship may be illustrated as Principal (the Government) and agent (the Club's Management). The claim of the appellant is thus lodged in the immunity from taxation provided to the Federal Government in respect of its property or income in Article 165 of the Constitution, which reads as under:--

165. Exemption of certain public property from taxation.--(1) The Federal Government shall not, in respect of its property or income, be liable to taxation under any Act of Provincial Assembly and, subject to clause (2), a Provincial Government shall not, in respect of its property or income, be liable to taxation under Act of Majlis-e-Shoora (Parliament) or under Act of the Provincial Assembly of any other Province.

(2) If a trade of business of any kind is carried on by or on behalf of the Government of a Province outside that Province, that Government may, in respect of any property used in connection with that trade or business or any income arising from that trade or business is carried on.

(3) Nothing in this Article shall prevent the imposition of fees for services rendered.

The article provides unqualified immunity to the Federal Government from taxation in respect of its properties and income.

(9) A different aspect arose when under the Economic Reforms Order, 1972 (P.O. 1 of 1972) and the nationalisation law brought running and established companies under 100% Government ownership. Doubts arose whether the 100% owned companies and Corporations were entitled to the immunity from taxation under Article 165. Two views are found to have been urged:--

(a) that the personality of a Company is distinct from its shareholders even if the shareholders is one (Solomon v. Solomon) as such it mattered not if 100% shares are held by the Federal Government, the Company would be dealt with according to its own legal personality under the law (and, therefore, taxed in respect of its property and income);

(b)that despite Solomon v. Solomon, Court have allowed the veil of in corporation to be lifted/pierced and dealt with the real person behind the veil (in Sh. Shaukat Ali, PLD 1971 SC 585 at p.616).

Since a major sector had been nationalized and question in relation to numerous existing (nationalized) companies whether their income should be deemed immune from taxation that the Legislature removed doubts by legislating an amendment in the Constitution, adding Article 165-A by the Constitution (Amendment) Order, 1985 (P. O. 11 of 1985, with effect from 24-Z-1985, reading as under:-- .

165.A. Power of Majlis-e-Shoora (Parliament) to impose tax on the income of certain Corporations, etc.--(1) For the removal of doubt, it is hereby declared that Majlis-e-Shoora (Parliament) has, and shall be deemed always to have had, the power to make a law to provide for the levy and recovery of a tax on the income of a Corporation, Company or other body or institution established by or under a Federal Law or a Provincial Law or an existing Law or a Corporation, Company or other body or institution owned or controlled, either directly or indirectly, by the Federal Government or a Provincial Government, regardless of the ultimate destination of such income.

(2) All orders made, proceedings taken and acts done by any authority or person, which were made, taken or done, or purported to have been made, taken or done, before the commencement of the Constitution (Amendment) Order, 1985, in exercise of the powers derived from any law referred to in clause (1), or in execution of any orders made by any authority in the exercise or purported exercise of powers as aforesaid, shall, notwithstanding any judgment of any Court or Tribunal, including the Supreme Court and a High Court be deemed to be and always to have been validly made, taken or done and shall not be called in question in any Court, including the Supreme Court and a High Court, on any ground whatsoever.

(3) Every judgment or order of any Court or Tribunal, including the Supreme Court and a High Court, which is repugnant to the provisions of clause (1) or clause (2) shall be, and shall be deemed always to have been void and of no effect whatsoever.

(10)Article 165 would be read to grant that the Federal Government shall not, in respect of its property or income be liable to taxation under any Act of Parliament or of any Provincial Assembly. Its sub-Article (1) is to be read as providing full and complete immunity to income or property from taxation. The distinction between immunity and exemption will be reckoned that whereas exemption presupposes liability to tax and is a conscious withdrawal from taxation, by immunity property and income is taken out of the tax net. Immunity is thus contradistinction from exemption.

(11) In respect of the unqualified immunity from taxation provided in Article 165, in respect of some properties/incomes purporting to be of the Federal Government, Article 165-A is an exception or a proviso on Article 165 or removes doubts and cannot be read as to abrogate, delete the immunity, annul and destroy Article 165 or to make it redundant and a surplus age. These pitfalls must be avoided and a proper understanding filtered from the apparent conflict or repugnancy.

(12) The marginal note of Article 165-A reads: Power of Parliament to impose tax on income of certain Corporation etc.--If its sub-Article (1) will be seen to say--

-----that its purpose is removal of doubts which implies that it is not substantive but explanatory for removing doubts;

---- that it is declaratory of Parliament's power when it says: It is hereby declared that Parliament has, and shall be deemed always to have had, the power to make, law to provide for levy and recovery of a tax and may be read as an enabling provision in the said behalf;

---- that whereas has the power to make a law in respect of tax on income of Corporation, Company or other body or institution, establishment by or under, a Federal or Provincial law or any existing law or a Corporation, Company or other body or institution, owned or controlled either directly or indirectly by the Federal Government, such law must be made to do any application of the rule of immunity provided in Article 165 that (if such law is made, i.e., in the exercise of power under Article 165-A);

---- it is immaterial and will not be regarded as of any material consequence as to what is the ultimate destination of such income.

(13) The two Articles, namely 165 and 165-A are thus to be read coherently and not in contradiction. Article 165, as stated, grants unqualified general immunity to its context. Article 165-A, as curbing the said immunity must be clearly read and understood in the best legal tradition of interpretation and construction as some sort of an exception or proviso to Article 165. The scope of proviso, it is well known and understood is to limit the operation of the substantive section to which it is appended. The Federal Government is a monolith and a unity (Article 41); its ministries, divisions, departments, bodies and institutions etc. are for ease of administration and not suo motu to persons. The Corporation, Company or other body or institution mentioned in Article 165-A refer to legal persons in their own right but owned or controlled by the Federal Government, otherwise, Article 165 would be read as completely subverted and destroyed in respect of the immunity provided in it and lead to the absurdity of bringing all ministries, divisions, departments etc. of the Government to tax. Such cannot be the intention of the legislature, keeping the whole Government scenario in view. The rule of reconciliation in the matter of interpretation, especially of constitution, would not allow such conflict or repugnancy to prevail or render Article 165 a surplusage. For the purposes of proper reconciliation or interpretation, a line, with legal surety/certainly has to be drawn between whether the powers of taxation has been ceded in Article 165-A in the field of immunity commanded in Article 165.

(14). In order to arrive at a proper understanding interpretation and Constitution of the apparently rivaling/conflicting articles, the historical background, referred above may be of assistance. The reference to the historical background of legislations is both legitimate and relevant means of understanding of the legislative intent or purpose. There were numerous Companies and Corporation, in view, in the fields of banking, shipping, iron and steel industry basic metal industry, heavy engineering industry, heavy electrical industry, assembly and manufacture of motor vehicles and tractors, heavy basis chemical and petro-chemical to name the few. The nationalisation, therefore, brought under 100% ownership of the Government companies, Corporations etc. which were already in existence as bodies corporate, incorporated under the Companies Act, 1913/Campanies Ordinance, 1984. The ownership of these industries vested in the Federal Government upon nationalisation. The argument, therefore, developed that since they were the properties of companies in which 100% share-capital was owned by the Federal Government, their income shall, therefore, shall be deemed income of the Federal Government and, therefore, immune from the liability of taxation. The argument gave rise to doubt, hence the need for a Constitutional provision to remove doubts where the Government is not the owner but behind the veil of incorporation may be so deemed. Article 165-A does not destroy the immunity from taxation of properties or income directly relatable to the Federal Government, as in the instant case, where neither the property nor the income claimed or is claimable by another person, though its mere administration is given to the Government's nominated Managing Committee which has no financial interest therein of any sort or kind. This fundamental position and fact must be kept in mind in coming to the conclusion whether Article 165-A has any application at all. The submission is that it has no application whatsoever. The Lahore High Court in the case of Rahimyar Khan District Council v. UBL, 1989 CLC 1397 at p.1401, referring to Article 165-A observed:---

The Article was added by the Constitutional (Amendment) Order II, 1985. It simply declares the power of the Parliament to legislate law for the recovery of the tax even from the institutions owned or controlled either directly or indirectly, by the Federal Government or Provincial Government. Article 165-A does not come in conflict with Article 165 of the Constitution because exemption has been granted from the liability of taxes to the Federal Government when the tax is imposed by the Provincial Government. In this manner, the exemption clause contained in Article 165 has safely been extended to the instant case and the learned lower Courts have not committed any illegality or material irregularity in exercise of their jurisdiction.

A Division Bench of the Sindh High Court, in the case of Rice Export Corporation of Pakistan v. KMC, PLD 1990 Karachi 186 allowed full play of the immunity to the Government-owned Corporation from octroi.

(15) In the light of the aforesaid submission, the status of the properties and income of Services Club/Mess is liable to be considered as wholly immune from income-tax and the impugned order(s) without jurisdiction, illegal and no lawful effect liable to be set aside in toto. In the alternative the deemed income, in any event be deleted, the dividend income given exemption under the Second Schedule and. property income remanded to ITO for re-determination of statutory deductions which have not been allowed."

3. A perusal of the above arguments shows that the main plank of arguments advanced by Mr. Mansoor Ahmad Khan is that notwithstanding the insertion of Article 165-A by the Constitution Amendment Order, 1985, clarifying that the Parliament has and shall be deemed always 'to have had, the power to make law to provide for the levy and recovery of tax on the income of a Corporation, Company or other body or institution established by or under a Federal law or a Provincial law or an existing law or Corporation, Company or other body or institution owned or controlled either directly or indirectly by the Federal Government or Provincial Government, regardless of the ultimate distinction of such income, the unqualified immunity from-taxation provided in Article 165 of the Constitution contains to provide protection to the appellant. The attention of Mr. Mansoor Ahmed Khan was drawn to the fact that the provision contained in Article 165 of the Constitution was not applicable to the appellant even if entire contention of the appellant is accepted, just for the sake of arguments for the simple reason that Article 165 of the Constitution provides exemption to certain public properties held by Federal Government from levy of tax by an act of the Provincial Assembly and likewise the public properties held by the Provincial Government from levy of tax under Act of Parliament or under Act of the Provincial Assembly or any other province. Article 165 of the Constitution is not applicable if any property held by Federal Government is subjected to tax under an Act of the Parliament. It has been held by the Hon'ble Lahore High Court in the case of Rahim Yar Khan District Council v. U.B.L. 1989 CLC 1397 that Article 165 of the Constitution has granted exemption from liability of taxes to the Federal Government when the tax is imposed by the Provincial Government. Mr. Mansoor Ahmed Khan in support of his plea of immunity from tax placed reliance on the judgment of Hon'ble Federal Court of Pakistan in the case of the Punjab Province v. The Federation of Pakistan PLD 1956 FC 72, SITE v. C.B.R. PLD 1975 Kar. 128, (Sindh High Court), C.B.R. v. SITE PLD 1985 SC 97 and West Pakistan Road Transport Corporation v. C.I.T. 1973 PTD 499. In all these judgments it was held that the Provincial Government enjoyed immunity from levy of tax under an Act of the Federal Government. When confronted with the above situation it was contended by Mr. Mansoor Ahmed Khan that 'it is a matter of trite understanding that taxes are owed to the Federal Government and payable to it. The Federal Government, therefore, from this jurisprudential angle comes within the well-accepted concept known as "Immunity of the crown". He contended that the Federal Government cannot, therefore, be taxed or tax itself to add to its revenues by paying from the revenue receipts. In support of his contention he has placed reliance on an observation in the Palkhiwala's commentary on the Law and Practice of Income-tax (8th Edition) wherein on page 16 it has been stated as follows:--

"The Act does not bind the. Government... ...The Government can claim immunity in respect of the income received by it as well as in respect of its income received on its behalf by a Government servant in the course of his official duties. The principles are applied by the House of Lords, in Bank Voor Handel enn Scheetvaart v. Administrator of Hungarian Property 35 TC 111(346)."

4. Mr. Mansoor Ahmed Khan has finally summarized his arguments as follows:

(a) That the Service Club/Mess is a wholly owned Government establishment for service to the Members of the armed forces which service is normal and well-known to be afforded in the ordinary course and manner;

(b) being a Government establishment, the rule of immunity is attracted for a sovereign cannot be taxed or tax itself, and if it does, the contradiction will be evidenced that it shall be paying from its collected revenue to pay into the same cauldron which law does not allow;

(c) that the tax levied is ultra vires the powers and in excess of jurisdiction and the impugned assessment/appellate order is a nullity and of no force of effect in law.

5. Thus, after being confronted with the contents of Article 165 it appears that Mr. Mansoor Ahmed Khan instead of taking refuge in Article 165 of the Constitution has taken protection in the principle of sovereign immunity. It would not be out of place to mention that initially the assessee had taken plea before the assessing officer and the first appellate authority that the appellant enjoyed exemption under clause 93 of the Second Schedule to the Income Tax Ordinance, 1979 read with section 62-A of the Income Tax Ordinance. This plea was subsequently given up and exemption was sought under Article 165 of the Constitution. Ultimately protection has been sought in the concept of sovereign immunity. The written arguments submitted by Mr. Mansoor Ahmed Khan on 6th of March, 1993 contains that, "the Services Club/Mess establishment is a wholly owned Government establishment for service to the members of armed forces which service is normal and well known to be afforded in the ordinary manner and course". Thus, it will be seen that the learned counsel has not taken the plea that Services Club/Mess is a Government department but the plea has been taken that it is an establishment wholly owned by Government. Now if this plea is read with Article 165-A of the Constitution we find that the legislature has deemed fit acting as constituent assembly to incorporate in the fundamental and supreme law of the land that the Parliament has and shall be deemed always to have had, the power to make law to provide for the levy and recovery of a tax on the income of a Corporation, Company or other body or institution established by or under a Federal Law or a Provincial Law or an existing law or a Corporation, Company or other body or institution owned or controlled either directly or indirectly by the Federal Government or a Provincial Government. Thus, the sovereign has itself given up its immunity from levy of tax in respect of a Corporation, Company, other body or institution owned or controlled either p` directly or indirectly by the Federal or Provincial Government and, therefore, after the insertion of Article 165-A in the Constitution the plea of sovereign immunity is no more available in Pakistan to any Corporation, Company, other body or institution owned or controlled by the Federal or Provincial Government. The expression "other body or institution" occurring in Article 165-A have not been defined and, therefore, they shall be taken in their ordinary sense and as understood in common parlance. The plea that the appellant which is a Service Club/Mess established by the Government and controlled by the Federal Government brings it at the most in the purview of other body or institution owned or controlled directly or indirectly by the Federal Government and all such institutions are liable to the levy of tax under Article 165-A of the Constitution. As already stated all the judgments on which Mr. Mansoor Ahmed Khan has placed reliance are distinguishable from the facts of the present case for the reason that in all those cases it has been held that the Federal Government enjoys immunity from levy of tax under the Act of the Provincial Government and the Provincial Government enjoys immunity from the levy of tax under the Act of Parliament. Secondly, all those judgments were pronounced before the insertion of Article 165-A in the Constitution. After the insertion of Article 165 in the Constitution of Islamic Republic of Pakistan, the plea of immunity is not available to the bodies or institution owned or controlled directly or indirectly by the Federal or Provincial Government and now the immunity is available to the Federal and Provincial Government only or to the institutions which have been granted specific exemption from income-tax or other taxes such as State Bank of Pakistan granted exemption under section 49 of the State Bank Act, 1956 and Agriculture Development Bank of Pakistan granted exemption under section 27-A of the Agriculture Development Bank Ordinance, 1961 as amended by Ordinance No.45 of 1978. I have been able to lay hand on a judgment of Hon'ble Sindh High Court in the case of Pakistan Industrial Development Corporation v. C.I.T. 1979 PTD 431 which is much closer to the case of appellant on facts. In this judgment the Hon'ble Sindh High Court examined the judgments on which Mr. Mansoor Ahmed Khan has placed reliance. Pakistan Industrial Development Corporation has been set up as a statutory Corporation under the Pakistan Industrial Development Corporation Act, 1950 and the entire share capital of the Corporation was held by the Central Government which also control the business of the Corporation through a nominated Board of Directors. A plea has been taken in the present appeal by Mr. Mansoor Ahmed Khan that the appellant Services Club/Mess is agent of its principal, the Government of Pakistan and a similar plea was taken on behalf of the Pakistan Industrial Development Corporation. It was contended that the Corporation was a limb of the Government or it was an agency or instrumentality of the Central Government. The plea was rejected by the Income Tax Appellate Tribunal and the matter was taken before the Hon'ble High Court in reference. In the case of Pakistan Industrial Development Corporation the Income-tax Department was represented by Mr. Mansoor Ahmed Khan, Advocate. The points for consideration before us are very much akin to the points considered by the Hon'ble High Court in the case of Pakistan Industrial Development Corporation, therefore, it would be appropriate to reproduce the relevant passage from the judgment of Hon'ble High Court:

"Mr. Ali Athar, learned counsel for the Corporation conceded that the Corporation was a `Company' within the definition of section 2(5-A) of the Act and also that it was a `person' as defined in section 2(9) of the Act as it now presently stands after it was amended in 1963. But he submitted that the corporate personality of the Corporation will not detract from its real nature and character, for it is well-settled principle that for tax purposes, regard must be had to the substance and not the form of the transaction; also that if the veil of the Corporation is lifted, it will be seen that the Corporation was wholly owned and controlled by the Central Government and was established only for the purpose of carrying out its Constitutional functions for promoting and developing certain specified industries as provided under Federal Law under Entry No.34 of List 1 to Schedule VII of the Government of India Act, 1935. Such Government functions are being performed in numerous cases nowadays through the agency or instrumentality of statutory Corporations which are created specially for that purpose under effective Government Control. As observed in Salahuddin v. Frontier Sugar Mills and Distillery Ltd. PLD 1975 SC 244 despite the fact that a statutory Corporation is a separate entity, it will be regarded as performing functions in connection with the affairs of the Federation or Province, like a Government Department. Mr. Ali Athar, however, conceded that where a statutory Corporation is not wholly owned by the Government and in which there are minority shareholders from the public, it would be difficult to maintain that the Corporation was functioning as a Department of Government. However, the position was different in the instant case as the Corporation was wholly owned by the Central Government. Not only that, but it was also wholly controlled as all the directors were appointed by the Central Government who were obliged to follow its directions on pain of removal. It was, therefore, contended by counsel that the Corporation was in substance functioning and operating as a Department of Government, just like the Post Office, the Railways, etc. and that the income earned by the Corporation belonged to the Central Government and as such was entitled to immunity from taxation. The Constitutional position prevailing on the relevant date before coming into force of the 1956 Constitution was that in theory the Federal Government was acting through the Governor-General on behalf of the Crown. Counsel cited the Punjab Province v. Federation of Pakistan PLD 1956 FC 72 in which it was observed by the Federal Court that the Crown had the prerogative of immunity from taxation unless it was expressly taken away by statute. The position today is that the Federal Government is not amenable to Federal Income-tax, not being a person as defined in section 2(9) of the Income Tax Act.

6.In support of his submission Mr. Ali Athar called on the decision in West Pakistan Road Transport Board v. Commissioner of Income-tax PLD 1973 Lah. 503 and Sindh Industrial Trading Estate Ltd., Karachi v. Central Board of Revenue and others PLD 1975 Kar. 128. We have considered these cases, but in our opinion, they are distinguishable on their special facts. In the former case, section 43-A of the Motor Vehicles Act, 1939, permitted Provincial Government to set up a Road Transport Board which was to be a body corporate when it decided to operate Road Transport Service in Province itself. The Board was wholly financed and managed by the Provincial and Central Governments through their appointed directors. But on the facts, it was found that the Board was really performing the functions of operating road transport services on behalf of- the Provincial Government which had decided to operate services itself and the Board was, therefore, equated as a Government department or agency or instrumentality of the Government. In the second case, relying on the decision of the first case, similarly Government of Sindh had decided by resolution to set up industrial and trading estate at Karachi and other cities in the Province and, for this purpose, employed the device of incorporating a Company under the Companies Act, 1913 without a share capital and limited by guarantee. The Government provided the entire working capital and the land required for the trading estates and controlled the Management of the Company through Departmental Secretaries and Director of Industries and the resolutions of the Board of Directors of the Company were liable to be suspended or modified by the Provincial Government. The functions left to the Company were mainly municipal. In these circumstances the Court held that the Company was functioning as a Department of the Provincial Government and, as such, its income was not liable to tax.

7.The main question, which is one of fact, is whether the business of the Corporation was being carried on by or on behalf of the Central Government as a Department or as its agent or instrumentality. Now, it is well-settled that in certain exceptional case, including for tax purposes, the Court is entitled to lift the veil of incorporation and pay regard to the substance and reality behind the legal fiction. Thus principle was recently applied by the erstwhile High Court of West Pakistan, Karachi Bench in Commissioner of Income-tax v. Gammon (Pak.) Ltd., Karachi 1968 PTD 622 cited by Mr. Ali Athar,. The Supreme Court also in the President v. Mr. Justice Shaukat Ali PLD 1971 SC 585 approved of the principle and observed that `there is no bar to the Courts lifting the veil of incorporation to determine the true relation-ship of the shareholders with regard to their dealings with the Company or to ascertain the true nature of the Company itself in matters which are governed by other statutes. The veil of incorporation has been pierced in several cases by the Courts for purposes of taxation, despite the doctrine laid down by the House of Lords in A. Salomon v. A. Salomon & Company Ltd. 1897 AC 22 that a Company is a legal person distinct from its shareholders. Therefore, there is no force in the submission of Mr. Mansoor Ahmed Khan that the veil of incorporation cannot be lifted unless special provision is made in the taxing statute.

8. On an examination of the provisions of the Pakistan Industrial Development Corporation Act, under which the Corporation was set up, we have reached the conclusion that there is no force in the contention that the Corporation was functioning as a Department of Government or as its agent or instrumentality Despite the fact that the capital was wholly owned by the Government and its management controlled through its appointed directors, the Corporation retained on appreciable decree of independence and freedom of action within the controlled sphere. Section 5 of the P.I.D.C. Act vests in the Board of Directors wide discretionary power of management and is required to act on commercial considerations. Section 14 of the Act gives to the Corporation wide discretion in the matter of framing scheme for establishment of industries. The property which the Corporation acquires is its own property. Its directors and officers are paid out of the Corporation's revenues and are not Government servants as held in a number of cases. It sued and is used by its own name. It has power to borrow moneys required for development of industries under section 49 of the said Act. The absence of a specific provision in the P.I.D.C. Act exempting it from income-tax and others is significant, as in the cases of the State Bank of Pakistan, which has been granted specific exemption from income-tax and other taxes by section 49 of the State Bank Act, 1936, and in the case of the Agricultural Development Bank of Pakistan, by section 27-A of the Agriculture Development. Bank Ordinance, 1961 as amended by Ordinance No.45 of 1978. Mr. Mansoor Ahmed Khan also referred to Tamlin v. Hannaaford 1950 KB 18 in which in similar circumstances, the British Transport Commission, although controlled by a Minister of the Government, was yet held to be acting on its own behalf and not as a servant or agent of the Crown. Lord Denning observed:

There are great powers but still we cannot regard the Corporation as being his agent, any more than a Company is of a sole shareholder. In the eye of the law, the Corporation is its own matter and answerable as fully as any other person or Corporation is not Crown property. It is not the Crown and has none of the immunities or privilege of the Crown. Its servants are not civil servants, and its property. It is as much bound by Act of Parliament as any other subject of the King. It is, of course, a public authority and its purposes, no doubt, are public purposes, but it is not a Government Department nor do its powers fall within the province of Government:

Counsel also referred to Andhra Pradesh State Road Transport Corporation v. The Income Tax Officer, Hyderabad and others (1964) 52 ITR 524 in which it was observed that merely because the majority of shares of the Andhra Pradesh State Road Transport Corporation was owned by the Provincial Government and its activities controlled by the State, the Corporation had a separate personality of its own and it could not be said that the State as a shareholder owned the property of the Corporation of its income. To treat the Corporation as it were a department of Government, would defeat the real object or incorporating statutory Corporations for undertaking Government functions relating to industrial and commercial development, by freeing it from the red-tapism or inflexibility for which Government departments are notorious.

9. For the foregoing reasons, we would answer the question in the affirmative and hold that the Pakistan Industrial Development Corporation is not exempt from income-tax. Parties are left to bear their own cost.

6. A perusal of the above finding by the Hon'ble High Court shows that the question whether the business of the Corporation was being carried on by or on behalf of the Central Government as a Department or as its agent or instrumentality was held to be a question of facts. On examination of the provision of the Pakistan Industrial Development Corporation Act, it was held that the Corporation was not functioning as a department of Government or as its agent or instrumentality. It was so held in spite of the fact that the capital was wholly owned by the Government and its management controlled through its appointed directors. The reason for the above conclusion was that the Corporation retained an appreciable decree of independence and freedom of action within the controlled sphere. Wide discretionary power of management was vested in the Board of Directors and will discretion in the matter of framing schemes for establishment of industries was given to the Corporation. The properties which the Corporation. acquired were its own properties and the directors and officers were paid out of the Corporation's revenue and they were not Government servants. It had power to borrow moneys required for development of Industries and that no specific exemption from Income-tax or other taxes was granted to the Corporation. While arguing the case on behalf of C.I.T. Mr. Mansoor Ahmed Khan had placed reliance on the observation of Lord Denning in the case of Tamlin v. Hanneford 1950 KB 18 wherein British Transport Commission controlled by a Minister of the Government was held to be acting on its own behalf and not as a servant or agent of the Crown. One of the reasons prevailing with Lord Denning was that servants of the Corporation were not civil servants. Now applying the above principles to the facts of the present case we find that according to the rules and bye-laws of the Services Club, Karachi, the Services Club, Karachi is a Government-established body situated on Government premises but according to Rule 2 the business of the Club shall be conducted from the Honorary Secretary's Office situated in the Club premises. Thus, the business of the Club is not conducted from any office or department or agency of the Government. There is nothing in the rules to show that the property and income of the Club is the property and income of the Government. Rule 4 reads as follows:

"The income and property of the Club wheresoever derived, shall be applied solely towards the promotion of the objects of the Club as set forth in these Rules and no portion thereof shall be paid or transferred directly or indirectly by way of profit or dividend to the members."

7. From perusal of the above Rules it can be inferred that the income and property of the Club is not owned by the Government but it is owned by the Club itself. According to the Rules and bye-laws, the Managing Committee has the authority to admit the serving and retired officers of armed forces as its members and to exclude the admission of any such parson. According to Rule 18 the general control and direction of the policy affairs, funds and property of the club shall be vested in a Managing-Committee. The Managing Committee consist of President, Vice-President and Members. Mr. Mansoor Ahmed Khan has produced previous as well as the present rules of Services Club and according to both the rules the Managing Committee shall exercise general control on affairs of the Mess and performance of all acts, deeds and things which may be consistent with the aims and objects of the Club and allow the occupation of its shops and premises on licence but may not create tenancy or proprietary rights therein without special sanction of the Government. The Managing Committee is further empowered to make such rules and bye-laws as they may deem advisable and to alter or repeal the same from time to time as they may deem necessary. The Managing Committee is further authorized to invest funds of the Mess in such securities they may think fit and from time to time vary and realise such investments. According to these rules the Honorary Secretary/ Administrator shall have powers to engage or dismiss any employee of the Mess subject to the approval of Managing Committee. The Administrator is further empowered to incur non-recurring expenditure up to the prescribed limit. All these provisions contained in the Rules and bye-laws clearly indicate that neither the properties of the Club vest in Government nor any expenditure is incurred out of the Government revenue. The income earned by the Club is owned by the Club itself and it never goes to the Government treasury. The Managing Committee has all the discretionary powers to manage the affairs of the club including framing of Rules and byelaws. The employees of the Club are neither civil servants nor members of armed services. A perusal of the agreement for re-construction and renovation of Service Club executed on 27th day of July, 1977 further shows that the Managing Committee entered into an agreement with the private party for the renovation and construction of residential-cum-commercial complex. According to the recital in the agreement, the Service Club was described as owners of the building on a plot of land measuring 15,000 sq. yards. The Services Club described as owners assigned and awarded the said project to the promoters for the construction of residential-cum-commercial complex. Condition No. 13 in the agreement reads as follow:--

"That it will be responsibility of the promoters to procure and select good, decent and reliable licensees for the owners and would also endeavour to get best possible terms for the owners. The owners being proprietors of the property will complete and execute the licency agreements and leases with the prospective licensees, and that execution and completion of leases shall be done by the owners without any delay. The owner shall reserve the right to reject the proposed licensee in any particular case for the reasons best known to the owners.

8. A bare perusal of the above condition shows that the Managing Committee of the Club has been described throughout as owner of the proposed complex which has been subsequently completed and rented out. There is no stipulation that any of the acts agreed by the Managing Committee of the Services Club (Services Mess) shall be subject to approval by the Government or the rental income so received shall be deemed to be the Government revenue.

9. For the foregoing reasons we are of the considered opinion that the appellant is not a Government department or its agent or instrumentality and, therefore, it does not enjoy any immunity from the levy of tax. At the most it can be held to be a Government-established body which is liable to the levy of tax under Article 165-A of the Constitution.

10. As a result of foregoing findings it is held that the learned two officers have rightly held the appellant to be a taxable entity. The contentions raised to the contrary on behalf of the appellant are without substance.

11.The appeal stands dismissed accordingly.

M.BA./71/T.TAppeal dismissed.