1995 P T D 614
[Karachi High Court]
Before Mamoon Kazi and Mrs. Majida Razvi, JJ
EVERSHINE PAINTS (EASTERN) LTD.
Versus
COMMISSIONER OF INCOME-TAX
Income Tax References Nos.9 of 1986, 29, 124 of 1987, 45, 59, 290, 291 of 1988, 4 and 131 of 1991, decided on 25/10/1994.
(a) Income-tax---
----Retained income---Surcharge---Income-tax liability payable for the relevant assessment year can be included for the purposes of working out "retained income" for levy of surcharge.
1966 Tax 140 fol.
(b) Interpretation of statutes---
---- Explanation in a statute---Object---Main object behind an explanation in a statute is to remove a doubt or an ambiguity and is not merely an explanation but creates new rights and obligations---Explanation can be introduced to enlarge or curtail the operation of main statute.
1986 PTD (Trib.) 805; Income Tax Officer (Investigation), Circle I v. Sulaiman Bhai Jiwa PLD 1970 SC 80; Rehman Corporation, Hyderabad v. Income Tax Officer, Mirpurkhas and another 1985 PTD 787 and Naveed Textile Mills Ltd. v. Assistant Collector (Appraising) PLD 1985 SC 92 ref.
(c) Income-tax Act (XI of 1922)---
----S. 4(1)---Explanation 8 [as added by Finance Act (XLVII of 1976)]---Effect of introduction .of explanation 8 to S. 4(1) of the Income-tax Act, 1922--- Explanation 8 to S. 4(1) of the Act was not intended to be retrospective in nature---Explanation introduced in the section with effect from 1-7-1976 had burdened the assessee if it was a company with the new obligation and was applicable to the income of the previous year viz. the year ending 30th June, 1976.
The "Explanation" of section 4(1) of the Income-tax Act, 1922 no doubt, indicates that it was introduced as an explanation to the provisions embodied in section 4(1) of the Income-tax Act, 1922 but even a plain reading of the said provisions clearly indicated that it purported to impose a new tax on an assessee in case it was a company which otherwise was not liable to pay under section 4(1) in its original form as the Explanation now provided that such reduced interest as referred to therein should be deemed to be the income of the company. The said provision, therefore, left no doubt that after its introduction in the said Act with effect from 1-7-1976 the assessee, if it was company had been burdened with a new obligation.
The new amendment was applicable to the income of the previous year, that is to say, the year ending 30th June, 1976.
Section 9, Income Tax Ordinance, 1979 begins with the words "subject to the provisions of this Ordinance". The said section further provides that income-tax shall be charged or levied and paid for each assessment year in respect of the total income of the income year or years. The said section further indicates that such income-tax is to be charged etc. at the rate or rates specified in the First Schedule. The said section, therefore, can be divided into two parts, the first part referring to the charging or levying of income-tax in respect of the total income of the income year or years and the second part referring to the rates specified in the First Schedule at which such income-tax is to be calculated. Consequently, while income of any income year or years is being assessed, any amendment made in the law for a particular assessment year will become applicable with effect from that year unless a different intention is expressed by the Legislature.
No doubt, retrospective operation cannot be given to statutes creating new liabilities unless such an intention can clearly be spelt out from the statute itself, but the question is to be determined in consonance with the relevant provisions of the Income-tax law. The expression "income year", "assessment year" or "previous year" have different connotations. The same clearly indicates that assessment year and income year are different concepts under the income? tax law. Therefore, during any particular assessment year, the I.T.O. may assess the total income of the income year or years. Consequently, in no case, it can be said that the amendment which was introduced on the 1st day of July, 1976 could not be given effect to by the Income Tax Officer while he was assessing income of the assessees for the year ending 30th June, 1976. This by no stretch of imagination would amount to giving retrospective operation to the said amendment.
Notwithstanding the use of the words "has made any loan" in Explanation 8, as the said Explanation creates a new liability, nothing further can be spelt out, therefrom to indicate that the legislature intended to give it a retrospective operation.
1986 PTD (Trib.) 805; Income Tax Officer (Investigation), Circle I v. Sulaiman Bhai Jiwa PLD 1970 SC 80; Rehman Corporation, Hyderabad v. Income Tax Officer, Mirpurkhas and another 1985 PTD 787 and Naveed Textile Mills Ltd. v. Assistant Collector (Appraising) PLD 1985 SC 92 ref.
Mercantile Fire and General Insurance Company of Pakistan Ltd. v. Income Tax Officer 1989 PTD 221 and Sulaiman Bhai Jiwa's case PLD 1970 SC 80 distinguished.
(d) Income Tax Ordinance (XXXI of 1979---
----S. 9---Income---Income year---While income of any income year or years is being assessed, any amendment made in the law for a particular assessment year will become applicable with effect from that year unless a different intention is expressed by the Legislature.
Section 9, Income Tax Ordinance, 1979 begins with the words "subject to the provisions of this Ordinance". The said section further provides that income-tax shall be charged or levied and paid for each assessment year in respect of the total income of the income year or years. The said section further indicates that such income-tax is to be charged etc. at the rate or rates specified in the First Schedule. The said section, therefore, can be divided into two parts; the first- part referring to the charging or levying of income-tax in respect of the total income of the income year or years and the second part referring to the rates specified in the First Schedule at which such income-tax is to be calculated. Consequently while income of any income year or years is being assessed, any amendment made in the law for a- particular assessment year will become applicable with effect from that year unless a different intention is expressed by the Legislature.
(e) Interpretation of statutes---
---- Fiscal statute---Retrospective operation cannot be given to a statute creating new liabilities unless such an intention can clearly be spelt out from the statute itself---Question of retrospectivity has to be determined in consonance with the relevant provision of the law.
(f) Income-tax---
----Expressions "income year", "assessment year" and "previous year" have different, connotations.
(g) Income-tax---
----Total income---Income year---Income Tax Officer during any particular assessment year can assess the total income of the income year or years.
(h) Interpretation of statutes---
---- Intention of the Legislature---Determination---Intention of the Legislature is to be gathered not merely by use of the words in a statute but also by the overall consequences which may follow the legislation.
(i) Interpretation of statutes---
---- Fiscal statute---Where two interpretations are possible---Duty of Court--?While dealing with a fiscal statute if two interpretations are possible, the one favouring the tax-payer must be accepted.
(j) Income-tax Act (XI of 1922)----
----S. 4(1), Explanation 8 [as added by Finance Act (XLVII of 1976]--?Application of S.4(1), Explanation 8 of the Act---Explanation 8 to S. 4(1) of the Act would apply only on loans advanced during the assessment year 1976-77 or thereafter, but would not be applicable in respect of such loans advanced before such period.
Iqbal Naeem Pasha and Sirajul Haq for Appellant. Shaikh Haider for Respondent.
Dates of hearing: 20th, 24th and 25th October, 1994.
JUDGMENT
MAMOON KAZI, J.---The common question that has been referred to us for determination in these Income Tax References is:
"Whether on the facts and circumstances of the case the Appellate Tribunal was justified in holding that interest on loans advanced prior to the assessment year 1976-77 could not be subjected to tax in the assessment year 1975-76 under explanation 8 to section 4(1) of the repealed Act."
In I.T.R. No.59/88 the learned Income Tax Appellate Tribunal has framed a second question to the following effect:
"Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in holding that the provisions made for payment of tax may be treated as retained income and should be excluded for purposes of levy of surcharge?"
2. So far as the second question is concerned, both Mr. Shaikh Haider and Mr. Iqbal Naeem Pasha, learned counsel for the applicant and the respondents respectively have pointed out that the question has already been determined by-the Supreme Court and the case is reported in 1966 Tax 140. Consequently, both the learned counsel agree that since the question has already been decided by the Supreme Court, we need not decide the second question again. Accordingly we decide the question in terms of the said judgment, that is to say, that income-tax liability payable for the relevant assessment year could be included for the purposes of working out "retained income" for levy of surcharge.
3. Turning now to the main question, it may be pointed out that by Finance Act of 1976 which came into force on 1-7-1976 an amendment was introduced in section 4(1) of the repealed Income-tax Act, 1922 by addition of Explanation 8 thereto, which provided as follows:--
"Explanation 8.---Where a company has made any loan to any person and has not charged any interest thereon, or the amount charged is at a rate which is less than the specified rate, then, interest calculated at the specified rate, as reduced by the amount of interest, if any, received by the company in respect of such loan, shall be deemed to be the income of the company; and for the purposes of this Explanation:---
(i) `specified rate' means rate of interest two per cent. above the bank rate notified by the State Bank of Pakistan, as applicable on the date the loan is made by the company; and
(ii) `loan' does not include any loan made by the company to any of its employees for a specific purpose and in accordance with his terms and conditions of service."
Section 4(1) of the said Act provided that:--
"4(1). Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which:---
(a) ?????? ?are received or are deemed to be received in Pakistan in such year by or on behalf of such person; or
(b)??????? if such person is resident in Pakistan during such year:---
(i)???????? accrue or arise or are deemed to accrue or arise to him in Pakistan during such year, or,
(iii)?????? accrue or arise to him without Pakistan during such year, or
(c) ?????? if such person is not resident in Pakistan during such year, accrue or arise or are deemed to accrue or arise to him in Pakistan during such year:
Provided that where any amount consisting of either the whole or a part of any income, profits and gains has been included in the total income of an assessee for any previous year under clause (b), it shall not be included in any other previous year under clause (a):
Provided further that, in the case of a person not ordinarily resident in Pakistan, income, profits and gains which accrue or arise to him without Pakistan shall not be so included unless they are derived from a business controlled in or a profession or vocation set up in Pakistan or unless they are brought into or received in Pakistan by him during such year."
The above question arose before the learned Appellate Tribunal as income of the respondents in these cases was assessed by the Income Tax Officer after the said amendment was introduced in the said Act. The provisions embodied in Explanation 8 to section 4(1) of the said Act were, however, applied by the Income Tax Officer retrospectively in some cases. When the matter went before the learned Appellate Tribunal, it agreed with the view taken by the Income Tax Officer or the Appellate Commissioner, holding that the said provisions could be given retrospective effect. However, the assessee in each case was aggrieved and the question has consequently been referred to this Court for determination.
4. We have heard Mr. Iqbal Naeem Pasha and Mr. Sirajul Haque on behalf of the assessees and Mr. Shaikh Haider on behalf of the Department.
5. It is pertinent to point out that this question was earlier dealt with by a Full Bench of the Income Tax Appellate Tribunal in Appeal Nos.818/KB of 1979-80 and 14 others (1986 PTD (Trib.) 805) and it was held that the words "has not charged any interest" or "has made any loan" used by the Legislature in Explanation 8 indicated that an action was already complete and, therefore, the Explanation should apply retrospectively. However, Mr. Iqbal Naeem Pasha and Mr. Sirajul Haque Memon, learned counsel appearing on behalf of the assessees have questioned the propriety of the said decision, the main contention raised by them being that no legislation can be construed so as to apply retrospectively unless such an intention is clearly spelt out either from the express language of the statute itself or by necessary implication. In the present case, nothing can be spelt out from the language employed by the Legislature in Explanation 8 to indicate that retrospective operation was intended to be given to it. Mr. Shaikh Haider, learned counsel for the Department, on the other hand, has fully supported the view taken by the Full Bench of the learned Income Tax Appellate Tribunal in the aforesaid case. Reliance has further been placed by the counsel upon the case of the Income ?Tax Officer (Investigation) Circle-I v. Sulaiman Bhai Jiwa (PLD 1970 SC 80). In this case, while enunciating the principle in regard to retrospective operation of statutes, M.R. Khan, J., who delivered the judgment for the Supreme Court, has observed that the use of the words by the Legislature such as "shall" or "hereafter" should be taken to indicate an intent -that the statute is to be construed as prospective only, whereas the use of words denoting past time, such as "has been" or "hereto before" constitute an explicit declaration that the Act is to be construed retrospectively. Learned counsel for the department has also placed reliance upon the case of Rehman Corporation, Hyderabad v. The Income Tax Officer, Mirpurkhas and another (1985 PTD 787). In this case, a new "Explanation" was added to subsection (7-A) of section 50 of the Income Tax Ordinance. The question that arose before the Division Bench which decided the said case was, whether the said Explanation could be given retrospective effect. The question was answered in the affirmative because, according to the learned Division Bench, the Explanation added to subsection (7-A) was declaratory in nature showing what the law was and ought to be understood. It was further held that a declaratory Act was an Act to remove doubt existing as to the meaning or effect of a statute and the usual reason for passing such an Act was to set aside what, the legislative body had deemed to have been a judicial error. The Division Bench further explained that the necessity for adding the "Explanation" had arisen only after a decision had been given to the contrary by the Lahore High Court in the case of Muhammad Younus v. Chairman, Municipal Committees, Sahiwal and others.
6. It hardly needs to be emphasised that the main object behind an explanation in a statute is to remove a doubt or an ambiguity. However, an explanation in a statute may not be merely an explanation but it may even create new rights or obligations. In Naveed Textile Mills Ltd. v. Assistant Collector (Appraising) (PLD 1985 SC 92), the Supreme Court while referring to an explanation in a statute observed:
?We have heard the learned counsel at length. We are in agreement with him that the ordinary function of an explanation is to clarify, to facilitate the proper understanding of a provision, to serve as a guide, as held in the case of Muhammad Hussain Patel. Nevertheless, it does not exhaust or complete the function and the purpose of an explanation. In the Privy Council case of Krishna Ayyangar: In re: ILR 43 Mad. 550, it was held that `The construction of the Explanation must depend upon its terms, and no theory of the purpose can be entertained unless it is to be inferred from the language. In another case from Indian Jurisdiction, State of Bombay v. United Motors (AIR 1953 SC 252), the Explanation was found to contain a legal fiction, to provide a simpler and workable test directed at facilitating the operation of the statute itself.?
Therefore, although a provision may be introduced as an explanation in a statute yet it may enlarge or curtail the operation of the main statute. The "Explanation", in the present case, no doubt, indicates that it was introduced as an explanation to the provisions embodied in section 4(1) of the Income-tax Act, 1922 but even a plain reading of the said provisions clearly indicates that it purports to impose a new tax on an assessee in case it is a company which otherwise it was not liable to pay under section 4(1) in its original form as the Explanation now provides that such reduced interest as referred to therein p shall be deemed to be the income of the company. The said provision, therefore, leaves no doubt that after its introduction in the said Act with effect from 1-7-1976 the assessee, if it is company, has been burdened with a new obligation.
7. Mr. Shaikh Haider while relying upon the case of Sulaiman Bhai Jiwa (PLD 1970 SC 80) reference to which has earlier been made by us in this judgment, has nevertheless contended that the use of the words "has made any loan" denote retrospectivity, 'and therefore, the new change brought about in the law must be applicable even to the assessment years prior to the year 1976-77. The learned counsel has referred to the meaning of the word "year" given in section 2(17) of the Income-tax Act, 1922, which is as follows:--
"2(17). `year' means---
(a)??????? as respects any period before the first day of April, 1958, the period of twelve months beginning on the first day of April and ending on the thirty-first day of March next following;
(b)??????? as respects the period beginning on the first day of April, 1958 and ending on the thirtieth day of June, 1959, the said period; and
(c)??????? as respects any period beginning on or after the first day of July, 1959, the period of twelve months beginning on the first day of July and ending on the thirtieth day of June next following."
However, it is also necessary to refer to the meaning of the expression "assessment year." Although "assessment year" has not been defined in the said Act but in the Income Tax Ordinance, 1979, the said expression has been defined by section 2(8) to mean as "the period of twelve months beginning on the first day of July next following the income year and includes any such period which is deemed, under any provision of this Ordinance, to be the assessment year in respect of any income of any income year". However, reference may be made to the definition of the expression "previous year" as given in section 2(11) of the repealed Act which is as under:--
"2(11).?Previous Years means---
(i)???????? in respect of any separate source of income, profits and gains---
(a)??????? the twelve months ending on the thirtieth day of June next preceding the year for which the assessment is to be made, or, if the accounts of the assessee have been made up to a date within the said twelve months in respect of a year ending on any date other than the said thirtieth day of June, then at the option of the assessee, the year ending on the date to which his accounts have been so made up:
Provided that where in respect of a particular source of income, profits and gains an assessee has once been assessed, or where in respect of a business, profession or vocation newly set up an assessee has exercised the option under sub-clause (c), he shall not in respect of that source or, as the case may be, business, profession or vocation exercise the option given by this sub-clause so as to vary the meaning of the expression `previous year' as then applicable to him except with the consent of the Income-tax Officer and upon such condition as the Income-tax Officer may think fit to impose; or
(b)??????? in the case of any person, business or company or class of person, business or company such period as may be determined by the Central Board of Revenue or by such authority as the Board may authorise in this behalf, or
(c)??????? where a business, profession or vocation has been newly set up in the financial year preceding the year for which assessment is to be made, the period from the date of the setting up of the business or profession or vocation to the thirtieth day of June next following or to the last day of the period determined under sub-clause(b), or, if the accounts of the assessee are made .up in respect of a period not exceeding twelve months from the date of the setting up of the business, profession or vocation and the case is not one for which a period has been determined under sub-clause(b), then, at the option of the assessee, the period from the date of the setting up of the business, profession or vocation to the date to which his accounts have been so made up:
Provided that when the date to which the accounts have been so made up does not fall between the setting up of the business, profession or vocation and the next following thirtieth day of June, inclusive, it shall be deemed that there is no previous year for the said assessment year and the previous year which would otherwise have been determined according to the option exercised by the assessee shall be deemed to be the previous year for the next succeeding assessment year;
(ii)??????? in respect of the share of the income, profits and gains of a firm where the assessee is a partner in the firm and the firm has been assessed as such, the period as determined for the assessment of the income, profits and gains of the firm."
Reference to the above provisions clearly indicates that during any assessment year income-tax shall be charged for the previous year. Consequently, if this rule is applied, then the new amendment would be applicable to the income of the previous year, that is to say, the year ending 30th June, 1976. Although Mr. Sirajul Haque has vehemently argued that only the rate specified for a particular assessment year would be applicable in such cases and reference was made to him to section 9 of the Income Tax Ordinance, 1979 but the said section refers to charging of income-tax. The section begins with the words "subject to the provisions of this Ordinance". The said section further provides that income-tax shall be charged or levied and paid for each assessment year in respect of the total income of the income year or years. The said section further indicates that such income-tax is to be charged etc. at the rate or rates specified in the First Schedule. The said section, therefore, can be divided into two parts the first part referring to the charging or levying of income tax in respect of the total income of the income year or years and the second part referring to the rates specified in the First Schedule at which such income-tax is to be calculated. Consequently in our view, while income of any income year or years is being assessed, any amendment made in the law for a particular assessment year will become applicable with effect from that year unless a different intention is expressed by the legislature.
8. Mr: Iqbal Naeem Pasha and Mr. Sirajul' Haque, learned counsel appearing on behalf of the assessees have still argued that when nothing can be spelt out from the language of a statute to indicate that the Legislature intended the same to apply retrospectively, the change in the law cannot be applicable even during the same assessment year because in that case the Income Tax Officer in reality would be giving retrospective effect to the new legislation. Reliance has been placed in this regard upon a Division Bench judgment of this Court in Mercantile Fire and General Insurance Company of Pakistan Ltd. v. Income Tax Officer (1989 PTD 221). In this case a question arose whether the provisions of amended section 43-B of the Income-tax Act, 1922 which were introduced by Finance Act, 1973 with effect from 1st July, 1973, could be given retrospective effect. It is pertinent to point out that a demand for tax arrears was made from the petitioner for the years 1964-65 and 1965-66. The learned Bench came to a conclusion that such demand was unlawful because retrospective operation could not be given to the said provisions of section 43-B. In our opinion, although reference to the case of Mercantile Fire and General-Insurance is not wholly irrelevant but nothing can be spelt out from the said judgment to support the broad contention raised by the learned counsel on behalf of the assessees. As we have just pointed out, no doubt, retrospective operation cannot be given to statutes creating new liabilities unless such an intention can clearly be spelt out from the statute itself, but we would like to point out that the question is to be determined in consonance with the relevant provisions of the Income-tax law. As has been earlier pointed out the expressions "income year", "assessment year" or "previous year" have different connotations. The same clearly indicate that "assessment year" and "income year" are different concepts under the income ?tax law. Therefore, during any particular assessment year, the I.T.O. may assess the total income of the income year or years. Consequently, in no case, it can be said that the amendment in question which was introduced on the 1st day of July, 1976 could not be given effect to by the Income Tax officer while he was assessing income of the assessees for the year ending 30th June, 1976. This by no stretch of imagination would amount to giving retrospective operation to the said amendment. However, while referring to the contentions raised by Mr. Shaikh Haider, notwithstanding the use of the words "has made any loan" in Explanation 8, as the said Explanation creates a new liability, f nothing further can be spelt out therefrom to indicate that the Legislature intended to give it a retrospective operation. The observations made by the Supreme Court in the case of Sulaiman Bhai Jiwa PLD 1970 SC 80, in our view, are not germane to the facts of the present case. The intention of the Legislature is to be gathered not merely by use of the words in a statute but I also by the overall consequences which may follow the legislation. It is a rule of interpretation, now so well-established that, while dealing with a fiscal statute if t two interpretations are possible, the one favouring the tax payer must be accepted. Therefore, in the present case, it is hard for us to agree with Mr. y Shaikh Haider that the amendment in question operates retrospectively.
9. In the result, we hold that Explanation 8 wo0d apply only on loans advanced during the assessment year 1976-77 or thereafter, but the same would h not be applicable in respect of such loans advanced before such period. The parties are left to bear their own costs in view of the questions raised.
M.B.A./E-72/K ?????????????????????????????????????????????????????????????????????????????????? Order accordingly.