I.T.A. NO. 524(IB) OF 1992-93 VS I.T.A. NO. 524(IB) OF 1992-93
1997 P T D (Trib.) 318
[Income-tax Appellate Tribunal Pakistan]
Before Ch. Irshad Ahmad, Judicial Member and Hamidullah Malik, Accountant Member
I.T.A. No. 524(IB) of 1992-93, decided on 07/12/1996.
(a) Interpretation of statutes---
---- Amendment in a statute with the provision that changes effected by amendment be deemed always to have been so made---Effect.
When a statute amends an existing statute by adding, omitting or substituting any provision in the existing statute and the amending statute specifically provides that the addition, omission or substitution shall be deemed always to have been so made, the addition, omission or substitution shall take effect from the date when the original provision was enacted. The amending provision taking effect retrospectively shall apply to the lis pending adjudication in appeals.
(b) Interpretation of statutes------
-----Rule---Two sections (parts) of same statute conflicting ---Resolution-- Ascertaining the purpose of law-maker---Principles---Court has to adopt a purposive approach to interpret the statute and statute as a whole has to be considered to ascertain the true purpose of the law-makers.
To say that one part of the statute has preference over the other part of the statute pertains to the era of the literal approach or strict constructionist view of interpretation of statutes. But, those days have long past. Now the Courts adopt a purposive approach to interpret the statutes and the statute as a whole is considered to ascertain the true purpose of the law maker.
Under the former era if two sections (parts) of the same statute were found to be repugnant the rule was that the last section (part) must prevail.
If two sections of the same statute are repugnant to each other the known rule is that the last must prevail.
Sometimes there is a conflict between two sections appearing in the same Act. One has to try to reconcile them as best as possible. If one cannot, one has to determine which is the leading provision and which the subordinate provision, and which must give way to the other.
The same is true of two subsections within one section.
Where such an inconsistency exists the Court must determine as a matter of construction which is the leading provision and which one must give way to the other.
When a statute is enacted in a background it is the duty of the Judge to make such construction of the statute as shall suppress the mischief and advance the remedy.
Manj Khan v. The Controlling Authority PLD 1968 Lah. 202; Muhammad Shafi v. Deputy Superintendent of Police PLD 1992 Lah. 178; Pepper (Inspector of Taxes) v: Hart 1993 SCMR 1019; In re: Marr and another (Bankrupts) (1990) 2 All ER 880 = (1990) 2 WLR 1264; Maxwell on Interpretation of Statutes, 1969, 12th Edn., pp.40 to 43, 96 to 99, 187 and Owens Bank Ltd. v. Gerard Cauche (1989) 1 WLR 559 ref.
(c) Interpretation of statutes---
---- Enactment with a background---Principles for construction---When a statute is enacted with a background it is the duty of the Court to make such construction as shall suppress the mischief and advance the remedy.
Maxwell on Interpretation of Statutes, 12th Edn., pp.40-43 and 96 to 99 ref.
(d) Interpretation of statutes-
---- Explanation to a provision---Purpose---Explanation to a provision of a statute is to be read to harmonize with and to clear up any ambiguity in the main provision.
Rabnawaz v. Jahana PLD 1974 SC 210 ref.
(e) Income Tax Ordinance (XXXI of 1979)---
----S.19(3), Explanation [as added by Finance Act (IX of 1996)]--- Interpretation of S.19(3), Explanation, Income Tax Ordinance, 1979-- Incoq~e from house property---Employee of the Federal Government, besides salary, received rent from his employer in respect of his house under the self---Rent, scheme---Rent, so received by the employees was chargeable to tax as employee's income from house property under S.19 of Income Tax Ordinance, 1979.
An explanation to a provision of a statute is to be read to harmonize with and to clear up any ambiguity in the main provision.
The explanation added to section 19(3) of the 1979 Ordinance by Finance Act, 1996 simply explains that when the owner of a property receives rent it will not be deemed to be in the occupation of the owner for the purposes of his residence. There seems to be no inconsistency in the language of the explanation with language of the section. The explanation has been added to the 1979 Ordinance to declare that the Tribunal's view in 1989 PTD (Trib.) 917 was not acceptable to the law-makers and subsection (3) of section 19 of the 1979 Ordinance would not apply where the owner of the property was receiving rent under the Scheme, and in the context of suppressing the mischief caused by the Tribunal's decision the provision of the "explanation" is a leading provision. Thus, even if there is any inconsistency between subsection (3) of section 19 of the 1979 Ordinance and "explanation" the provision of subsection must give way to the provision of the explanation. Therefore, the assessee shall be charged to tax in respect of the amount of rent he has received from his employer under the Self-Hiring Scheme.
1989 PTD (Trib.) 917 ref.
(f) Income Tax Ordinance (XXXI of 1979)---
----S.19(3), Explanation---Income from house property---Employee of the Federal Government received rent from his employer in respect of his house under the Self-Hiring Scheme----Quantum of income that shall be charged to tax which the assessee has received as rent from his employer under Self Hiring Scheme---Real income, concept of ---Chargeability to tax---Principles.
Where an employer rents the employee's house under the Self- Hiring Scheme he does not pay the employee the true rent of the house but pays him only a rate prescribed with reference to the employee's status, and does not pay the house rent allowance which under the rules regulating the terms and conditions of his employment, the employee is entitled to receive and which to the extent of 45 % of the minimum time scale of the employee's basic salary is exempt from tax. Thus, the provision of section 19 of the 1979 Ordinance shall apply to that part of the rent received by an employee under the Scheme which is in excess of 45 % of the minimum time scale of his basic salary, because that is his real income. The concept of real income is well-recognized in the administration of income-tax law.
Applying the concept of real income to the cases concerning the Scheme, it is clear that what really an employee receives as rent of his property under the Scheme is the amount at prescribed rate minus the house rent allowance which is payable to him under the rules regulating the terms and conditions of his employment and which to the extent of 45 % of his minimum time scale is exempted from tax. In view of the concept of real income the assessee shall be required to pay tax on his real income.
The rent received by the assessee minus the house rent allowance admissible to him under the terms and conditions of his employment not exceeding 45 % of the minimum of his scale, shall be charged to tax as his income under section 19 of the Income Tax Ordinance, 1979.
Khawaja Muhammad Sadiq Butt, D.R. for Appellant.
Respondent in person.
Date of hearing: 3rd November, 1996.
ORDER
The assessee who earns income from salary as an employee of the Federal Government, besides salary, received rent from his employer in respect of his house under the Self-Hiring Scheme (the Scheme). The assessing officer included the amount of the rent received by the assessee from his employer under the Scheme in his taxable income as his income from house property under section 19 of the Income Tax Ordinance, 1979 (the 1979 Ordinance).
2. On assessee's appeal the Appeal Commissioner following this Tribunal's decision in I.T.A. No. 2234(KB) of 1986-87, dated 26-6-1989, 1989 PTD (Trib.) 917; directed that the rent received by the employee from his employer under, the Scheme shall not by included in his income chargeable to tax.
3. The Income Tax Officer has objected to the order of the Appeal Commissioner on the ground that the rent received by the assessee was his income from house property chargeable to tax under section 19 of the Ordinance.
4. This appeal raises the question: whether the rent received by an employee from his employer in respect of his (employee's) house under the Scheme is chargeable to tax as employee's income from house property under section 19 of the 1979 Ordinance.
SELF-HIRING SCHEME:
5. The rules regulating the terms and conditions of employment under the Federal Government and the public sector corporations provide that in addition to salary the employees shall be paid house rent allowance. The rate of the allowance varies with reference to the size of the city in which the employee is employed. At some places the employers own living accommodation which they provide to their employees. At some selected cities if an employer does not own living accommodation or the living accommodations which it owns are insufficient to cater for the needs of all its employees the employer would rent an accommodation for the employee. While renting an accommodation for an employee the employer may rent an accommodation owned by the employee. Where an employer rents the employee's house for the employee the arrangement has come to be known as "Self-Hiring Scheme". When an employee lives in the accommodation provided to him by the employer rented under the Scheme the employee is not paid the house rent. Under the Scheme the employee's house is not rented at the rental value on which his house might reasonable be expected to let from year to year rather it is rented at the prescribed rate with reference to the employee's scale of 'pay irrespective of the fact that the annual rental value of the house is much higher. To complete the statement of pertinent facts relevant to the scheme it is quite relevant to mention that if an employer does not provide living accommodation to an employee and pays him the house rent allowance in cash the allowance paid by the employer to the employee is, to the extent of 45 % of the minimum time scale of the basic salary of the employee, exempt from payment of tax under rule 4 of the Income Tax Rules, 1982.
CHARGEABILITY OF THE RENT RECEIVED UNDER
SELF-HIRING SCHEME:
6. Section 19 of the Ordinance provides that annual value of the property shall be chargeable to tax under the head "income from house property". Subsection (3) of section 19 of the Ordinance, however, provides that nothing contained in the section shall apply in the case of any such property which is in the occupation of the owner for the purposes of his own residence. Since under the Scheme the employee's house remains in the occupation of its owner for the purposes of his residence a question arose whether or not the rent received by an employee in respect of his own house under the Scheme was chargeable to tax or not. A majority of three-member Bench of this Tribunal in its decision in I.T.A. No.2234(KB) of 1986-87, dated 26-6-1989 reported in 1989 PTD (Trib.) 917; held that since in the case of the Scheme the property remains in the occupation of the owner for the purpose of his own residence as provided for in subsection (3) of section 19 of the Ordinance no tax was chargeable in respect of the rent received by the employee from his employer.
7. By section 13(1)(2) of the Finance Act, 1996, the 1979 Ordinance, has been amended to provide that in section 19, after subsection (3) of the 1979 Ordinance, the following explanation has been added and shall be deemed always to have been so added, namely:---
"Explanation:---For the purpose of this section, any property, the owner of which is in receipt of any rent, whether in cash or otherwise, whether from employer or otherwise, shall not be taken to be in the occupation of such owner for the purpose of his own residence."
8. It is a trite rule of construction of statutes that when a statute amends an existing statute by adding, omitting or substituting any provision in the existing statute and the amending statute specifically provides that the addition, omission or substitution shall be deemed always to have been so made, the addition, omission or substitution shall take effect from the date when the original provision was enacted. It is also an established principle that the amended provision taking effect retrospectively shall apply to the lis pending adjudication in appeals. If needed reference may be made to 1995 PTD (Trib.) 1145.
9. An argument has been raised on behalf of the assessee that since the provision of subsection (3) of section 19 of the 1979 Ordinance are in conflict with the newly-added explanation the explanation must give way to the provision of the section. In support of the above submission reliance has been placed on decisions of the Lahore High Court in Manj Khan v. The Controlling Authority PLD 1968 Lahore 202. We have no doubt in our mind that the explanation has been added to section 19 of the 1979 Ordinance to nullify the effect of the Tribunal's decision reported in 1989 PTD (Trib.) 917. To say that one part of the statute has preference over the other part of the statute pertains to the era of the literal approach or strict constructionist view of interpretation of statutes. But, those days have long past. Now the Courts adopt a purposive approach to interpret the statutes and the statute as a whole is considered to ascertain the true purpose of the law-maker. For full discussion regarding the replacement of "literal approach" by "purposive approach" reference may be made to a Full Bench decision of the Lahore High Court in Mr. Muhammad Shaft v. Deputy Superintendent of Police PLD 1992 Lahore 178 and the decision of the House of Lord in Pepper (Inspector of Taxes) v. Hart 1993 SCMR 1019 (page 1026). A recent decision by the English Court of Appeal in Re: Marr and another (Bankrupts) (1990) 2 All ER 880 = (1990) 2 WLR 1264 can perhaps be quoted as the best example how the Courts have replaced "literal approach" era rules of interpretation of statutes by "purposive approach" rules. Under the former era if two sections (parts) of the same statute were found to be repugnant the rule was that the last section (part) must prevail. (Maxwell on the Interpretation of Statutes (1969 12th Edition, page 187). The Court of Appeal has held that such a rule cannot be accepted today. Lord Justice Nicholls said:---
" .. the Judge referred to 'the rule of last resort' mentioned in Maxwell on the Interpretation of Statutes (1969, 12 Edition, page 187) quoting a dictum in Wood v. Riley (1867) LR 3 CP 26 at 27 to the effect that, if two sections of the same statute are repugnant, the known rule is that the last must prevail. Or for those who still like their law in Latin, leges posteriors priores contraries obrogant.
I cannot accept that there is such a rule today. If there ever was such a principle, it is long since obsolete. Such a mechanical approach to the construction of statutes is altogether out of step with the modern, purposive approach to the interpretation of statutes and documents. As long ago as 1894 Lord Herschell LC in Institute of Patent Agents v. Lockwood (1894) AC 347 at 360 stated what should be done when two sections in the same Act were irreconcilable.
....there is a conflict sometimes between two sections to be found in the same Act. You have to try and reconcile them as best you may. If you cannot, you have to determine which is the leading provision and which the subordinate provision, and which must give way to the other.
The same is true of two subsections within one section."
10. Earlier the Privy Council in Owens Bank Ltd. v. Gerard Cauche (1989) 1 WLR 559 in the context of the lower Courts' reliance on the rule of last resort said to have been laid down by Keeting, J. in Wood v. Riley that where there is [an inconsistency] between two provisions of the same statute the later provision shall previal--to interpret two inconsistent provisions of the same statute said:
"Their lordships do not accept that there is such a rule. Where such an inconsistency exists the Court must determine as a matter of construction which is the leading provision and which one must give way to the other. "
11. It is also an accepted principle of construction of statute that when a statute is enacted in a background it is the duty of the Judge to make such construction of the statute as shall suppress the mischief and advance the remedy. This principle known as "The Mischief Rule" fully explained in Maxwell on the Interpretation of Statutes (12th Edition), pages 40--43, 96--99 is one of the main principle of interpretation of statutes. For more elaborate and fuller discussion reference must be made to the decision of the Supreme Court of Pakistan in Rabnawaz v. Jahana PLD 1974 Supreme Court 210. It is also an accepted principle that an explanation to a provision of a statute is to be read to harmonize with and to clear up any ambiguity in the main provision. The explanation added to section 19(3) of the 1979 Ordinance by Finance Act, 1996 simply explains that when the owner of a property receives rent it will not be deemed to be in the occupation of the owner for the purposes of his residence. Besides that we see no inconsistency in the language of the explanation with the language of the section we are of the firm view that the explanation has been added to the 1979 Ordinance to declare that the Tribunal's view in 1989 PTD (Trib.) 917 was not acceptable to the law-makers and subsection (3) of section 19 of the 1979 Ordinance would not apply where the owner of the property was receiving rent under the Scheme, and in the context of suppressing the mischief caused by the Tribunal's decision the provision of the "explanation" is a leading provision. Thus, even if there is any inconsistency between subsection (3) of section 19 of the 1979 Ordinance and "explanation" the provision of subsection must give way to the provision of the explanation Thus, we hold that the assessee shall be charged to tax in respect of the amount of rent he has received from his employer under the Scheme.
12. A question of fundamental importance, however, arises regarding the quantum of the income that shall be charged to tax which the assessee has received as rent from his employer under the Scheme. As explained earlier where an employer rents the employee's house under the Scheme he does not pay the employee the true rent of the house but pays shim only a rate prescribed with reference to the employee's status, and does not pay the house rent allowance which under the rules regulating the terms and conditions of his employment, the employee is entitled to receive and which to the extent of 45% of the minimum time scale of the employee's basic salary is exempt from tax. Thus, in our view the provision of section 19 of the 1979 Ordinance shall apply to that part of the rent received by an employee under the Scheme which is in excess of 45 % of the minimum time scale of his basic salary, because that is his real income. The concept of real income is well-recognized in the administration of income-tax law. In that context reference may be made to the decision of a Division Bench of the erstwhile High Court of West Pakistan in Merwan K. Irani v. The Commissioner of Income-tax 1968 PTD 429 (Karachi). In Irani s case father had 1/4th and 1/3rd share in two partnerships. He agreed to share his share of profit with his sons who would work for him in the partnerships. The question was whether the father was liable to pay tax in respect of the whole of his share of profit in the partnerships or only in respect of what remained with him after paying the share to his sons who worked for him. The Court held that father will pay tax only on that part of his share which would remain with him after paying his son's share. The Court held:
"When the question arises as to (father's) individual assessment it is not the income allocated to his share from the (partnership) that has to be taken into consideration but his real Income. Otherwise if this principle is not followed what would be assessed would not be his real income but an artificial income said to be earned by him. There can in law be no manner of doubt that his real income would be what remains after deducting the amount diverted which never constituted his income and both in law and equity it shall have to be excluded in order to determine his real income."
13. Applying the concept of real income to the cases concerning the Scheme, it is clear that what really an employee receives as rent of his property under the Scheme is the amount at prescribed rate minus the house rent allowance which was payable to him under the rules regulating the terms and conditions of his employment and which to the extent of 45 % of his minimum time scale was exempted from tax. In view of the concept of real income as expounded by the High Court the assessee shall be required to pay tax on his real income as indicated above.
14. Vacating the Appeal Commissioner's order we direct that the rent received by the assessee minus the house rent allowance admissible to him under the terms and conditions of his employment not exceeding 45 % of the minimum of his scale, shall be charged to tax as his income under section 19 of the Income Tax Ordinance, 1979.
M.B.A./296/Trib. Order accordingly.