Income Tax Ordinance (XXXI of 1979)---

---Ss.80-C & First Sched., para. CCC & 50(4)---Tax on income of contractor---Deduction at source---Promissory estoppel ---Application---Construction contract contained the stipulation that an amount equal to 3% on the value of total work done shall be deducted as income-tax from all Payments made to the contractor---Deduction of tax under S.50(4) of the Income Tax Ordinance. 1979, was however, enhanced from 3% to 5% with effect from 1-7-1995 by Finance Ordinance, 1995---Assessee, thus, was asked to pay tax on the payments which had been made to him prior to the first July, 1997 at the rate of 5 %---Validity---Held, assessee was not being asked to pay tax at the enhanced rates on the payments made to him prior to the 1-7-1995 but the tax at the revised rate of 5% was being collected on the payments received by him on and after 1-7-1995 when the rate of tax was enhanced under the Finance Act, 1995 from 3 % to 5 % on the payments-- Doctrine of promissory estoppel being not applicable to the case of assessee,, deduction of tax at the enhanced rate could not be said to have been given retroactive operation in circumstances.

Malik Qamar Afzal Khan for Appellant.

Sardar Muhammad Aslam and Mansoor Ahmad, Legal Advisor, Income-tax for

Respondents Nos. l and 2.

Date of hearing: 11th March, 1998.

JUDGMENT

Messrs Moin Sons (Pvt.) Ltd., Rawalpindi: hereinafter to be called the petitioner, was awarded a contract on 19-5-1994, by the Capital Development Authority, Islamabad, for the Construction of Faizabad Interchange Bridges. The said contract contained the following stipulation for deduction of income tax from the payments made to the petitioner:

Sub-clause 73.1. PAYMENT OF INCOME-TAX

An amount equal to 3% (three per cent.) on the value of the total work done shall be deducted as income-tax from all payments made to the contractor. "

2. By virtue of the Finance Act, 1995, an amendment was made in the First Schedule to the Income Tax Ordinance, 1979, whereby the rate of deduction of tax deductable under section 50(4) of the said Ordinance, was enhanced from 3 % to 5 % with effect from 1-7-1995. In pursuance of the said amendment, the Capital Development Authority made deduction on the bills paid to the petitioner in accordance with the enhanced rate of tax as stated above. The petitioner, is aggrieved of the aforesaid enhanced deduction of income-tax on the ground that by virtue of the agreement executed with the Capital Development Authority the rate of tax to be deducted on payment of the bills was limited to 3%, hence, the deduction of tax at the enhanced rate (notwithstanding any change in the Income Tax Ordinance, 1979) by the respondent's Authority was without any lawful authority. The present Constitutional petition has, therefore, been brought for declaring such deduction at enhanced rate to be illegal and mala fide.

3. The petition was vehemently opposed by the Capital Development Authority. I have heard the learned counsel for the parties and was also benefited by the views of Mr. Mansoor Ahmed, the Legal Advisor of the Income Tax Department:

4. Malik Qamar Afzal Khan, Advocate, learned counsel for the petitioner, submitted that under section 9 of the Income Tax Ordinance, 1979, income-tax is payable ' in respect of the total income of the income year or years, as the case may be, of every person at the rate or rates specified in the First Schedule' to the Ordinance., He was, thus, of the view that no change in the rate of tax could be made from a previous date. In this connection, he pointed out that the agreement between the petitioner and the respondent No .l had come into being before the amendment was made in the First Schedule to the Ordinance and thereby the rate of deduction of tax on payments made to the petitioner was fixed at 3%. This rate, therefore, could not be enhanced upward even if any change was made in the law. Learned counsel, thus, contended that charging of tax at the rate of 5 % on receipts would tantamount to giving the said change in law a retroactive operation which was not the intention of the Legislature nor such a law could be passed under the Constitution. He also claimed that the tax is charged on the basis of each assessment year and for that purpose even if the enhanced tax was payable, it. could not be charged for the year 1994-95.

5. The deduction of income-tax, inter alia, on the payments made to the contractors is made in pursuance of clause (a) of subsection (4) of section 50 of the Income Tax Ordinance, 1979, the relevant extract of which is reproduced below:

"(4) Notwithstanding anything contained in this Ordinance---

(a) any person responsible for making any payment in full or in part (including a payment by way of an advance) to any person being recipient (hereinafter referred to respectively as 'payer' and 'recipient'), on account of the supply of goods or for service rendered to, or the execution of a contract with the Government, or a local authority, or a company, or a registered firm, or any foreign contractor or consultant or consortium shall deduct advance tax, at the time of making such payment, at the rate specified in the First Schedule, and credit for the tax so deducted in any financial year shall, subject to the provisions of section 53, be given in computing the tax payable by the recipient for the assessment year commencing on the first day of July next following the said financial year, or in the case of an assessee to whom section 72 or section 81 applies, the assessment year, if any, in which the 'said date', as referred to therein, falls whichever is the later:'

Provided that the provisions of this clause shall, mutatis mutandis, apply to any payment made on or after the first day of July, 1992, to any non-resident person as they apply to any payment made to a resident recipient on account of execution of a contract for construction, assembly or like project in Pakistan."

6. By virtue of section 80-C of the Income Tax Ordinance, 1979, the deduction made under section 50(4) thereof made on connectors on the receipts received by them is considered to be the income of the contractors. In this respect in Messrs Elahi Cotton Mills Ltd. and others v. Federation of Pakistan through Secretary, M/o Finance, Islamabad and 6 others (PLD 1997 SC 582) wherein, inter alia, the legality of deduction or collection of tax from the contractors and importers under the provisions of section 80-C of the income tax Ordinance, 1979, was assailed, the Supreme Court had held such deduction and collection of tax to be in order and upheld the view that what is not income under the Income Tax Law can be made income under the Finance Act. It was also laid down by the Court that such tax falls within the category of presumptive tax whereunder a person pays a predetermined amount of presumptive tax in full and final discharge of his liability in respect of transactions on which the above tax is levied.

7. Relying upon AI-Samrez Enterprise v. The Federation of Pakistan (1986 SCMR 1917), it was next contended by the learned counsel for the petitioner that, since under the agreement the Capital Development Authority had agreed to deduct the income-tax at the rate of 3 % only, any deduction at a rate higher than 3 % would not only be violative of the agreement but even under the principle of promissory estoppel, the Capital Development Authority was debarred to deduct the tax at the enhanced rate. In this respect, it may, however, be pointed out that in the first instance this was an agreement between the petitioner and the Capital Development Authority for which the Parliament or the Legislature could not be bound down to abide by the said agreement. Even otherwise, had sub-clause 73.1 not been incorporated in the agreement, the Capital Development Authority would be under an obligation under the law to deduct income-tax on all the bills to be paid to the petitioner in accordance with the rate or rates specified in the First Schedule to the Income Tax Ordinance, 1979, pursuant to sub section (4) of section 50 thereof. In the case, of failure to deduct tax in accordance with the rates specified in the First Schedule to the Ordinance the Capital Development Authority will be liable to penal action specified in section 52 of the Income Tax Ordinance, 1979, meaning thereby that irrespective of sub-clause 73.1 of the agreement between the petitioner and the Capital Development Authority the liability of payment of tax at the rate or rates specified in the First Schedule to the Ordinance will remain intact. As held by the Supreme Court in Pakistan through Secretary; Ministry of Commerce and 2 others v. Salahuddin and 3 others (PLD 1991 SC 546), The doctrine of promissory estoppel cannot be invoked against the Legislature or the laws framed by it.

8. In Altaf Construction Co. v. Central Board of Revenue and others (1995 PTD 804), wherein deduction of income-tax at the rate of 5 % on the collected amount had been assailed, it:-was held by this Court that the ''collection of tax is the right-of the Government which has to run the affairs of the State. The Court also held that the agreement wherein it was agreed that the tax shall be collected at the rate of 3 % , was of no consequence. Likewise, in Sarwar & Co. v. C.B.R. and others 1997 PTD (Trib.) 1138 where a similar dispute had arisen, it was held by the Court that payments received by the contractors are deemed to be their income in terms ' of section 80-C of the Income Tax Ordinance, 1979, which does not contain any provision that the rate of tax shall relate back to the date on which agreement was entered into and not when the payments were received. It was, thus, held therein that the contractors were liable to pay tax on the payments received by them under the contracts of the nature specified by subsection (2) of section 80-C of the Income Tax Ordinance, 1979, at the rate prevailing at the time of receipt of payments and not on the date the contract under which these payments were made were entered into.

9. In the instant case, the petitioner is not being asked to pay tax at the enhanced rate on the payments which had been made to him prior to the first July, 1995, but the tax at the prevailing rate of 5 % is being collected on the payments to be received by him on and after the first July, 1995, when the rate of tax was enhanced under the Finance Act, 1995, from 3 % to 5 % on the payments to be made to the contractors. Hence, in view thereof, the deduction of tax at the enhanced rate cannot be claimed to have been given retroactive operation.

10. In the light of the above discussion, there is no merit in the present petition which is accordingly dismissed with no order as to costs.

M.B.A./M-677/L Petition dismissed.