2010 P T D (Trib.) 355
[Income-tax Appellate Tribunal Pakistan]
Before Khalid Waheed Ahmed, Chairman, Munsif Khan Minhas, Judicial Member and Istataat Ali, Accountant Member
I.T.As. Nos.537/IB to541/IB of 2008, decided on 31/03/2009.
(a) Income Tax Ordinance (XLIX of 2001)---
----S. 122(5A)---Amendment of assessment---Tax year, 2003---Provisions of S.122(5) of the Income Tax Ordinance, 2001 did not apply to tax year, 2003---Order passed under S.122(5A) of the Income Tax Ordinance, 2001 for tax year, 2003 was illegal and a nullity which was annulled by the Appellate Tribunal.
(b) Income Tax Ordinance (XLIX of 2001)---
----S.11 & 39---Heads of income---Income from other sources-Income of Oil and Gas Regulatory Authority---Section 11 of the Income Tax Ordinance, 2001 included salaries, rent of property, business, capital gains and income from other sources---Any income which did not fall in the definition of any of such specific heads was taxable as "income from other sources "---Certain specific sources of income had been specifically classified as "other sources" of income under S.39 of the Income Tax Ordinance, 1979---Income of Oil and Gas Regulatory Authority did not fall in any category of income classified as other sources under S.39 of the Income Tax Ordinance, 2001---Such was apt income from business and trade---Oil and Gas Regulatory Authority was in receipt of consultancy charges and fees from business of regulatory activities of oil and gas sector---Taxpayer was clearly engaged in a regular business/trade and it's income would not fall in any of the categories mentioned in section 39 of the Income Tax Ordinance, 2001.
(c) Income Tax Ordinance (XLIX of 2U01)---
----Ss. 18 & 40---Income from business---Deductions in computing income chargeable under the head "income from other sources"---Income of Oil and Gas Regulatory Authority was income from business and not income from other sources---Said Authority was entitled to claim all deductions admissible against income front business---Nature of such income was similar to the income of consultancy companies and professional consultants---If their income was assessed as business income, income of Oil and Gas Regulatory Authority was also assessable as income from business---Oil and Gas Regulatory Authority's income was assessable as "business income" in the light of provisions of section 18 of the Income Tax Ordinance, 2001 and said authority was entitled to claim all expenses/deductions admissible under the law against income from business.
(d) General Clauses Act (X of 1897)---
----S.3(28)---Local authority---Characteristic of "Local Authority"---Under S.3(28) of the General Clauses Act, 1897 a `local authority' means a Municipal Committee, District Board, Body of Port Commissioners or other authority legally entitled to, or entrusted by the Government with, control or management of a municipal or "local fund"---Entity can be considered as a `local authority' if it: (i) has its own juristic personality distinct from its members (ii) within its own local self-Government (iii) chalks out its schemes for the development of a local area under its control and provide civic amenities for the inhabitants of that very area; (iv) prepares areas with its own annual budget for submission to the Provincial Government; (v) exercises its powers within a limited territory included in a Province; (vi) exercises powers which belong to the Province but, which by statute, are delegated to the local authority; (vii) has powers of imposing taxes; and, (viii) maintains/administers a local fund.
(e) Income-tax---
----Local authority---Status of Oil and Gas Regulatory Authority with reference to "local authority".
(f) Oil and Gas Regulatory Authority Ordinance (XVII of 2002)---
----S. 18---Local fund---National fund---Provisions of S.18 of the Oil and Gas Regulatory Authority Ordinance, 2002 did not lead to that the Oil and Gas Regulatory Authority fund was "local fund"---Local fund means the fund vested in any authority which had its operations restricted to "local area", whereas Oil and Gas Regulatory Authority's operations were spread all over the country and its funds could not be treated as a "local fund"-Oil and Gas Regulatory Authority's fund was a "national fund".
(g) Income-tax---
----Local authority---Regulatory authority---Status of Oil and Gas Regulatory Authority---Local authority, in addition to other features, has the powers to lay out towns, mandis, market places, villages, roads, break up land for cultivation etc---Such features essentially lead to infer that all the operations of a local authority were restricted in a limited area for theuplift and welfareof inhabitants of that very area--Local authority generates its own revenue through imposition of local taxes and shortfall of finances, if any, was met out of the grants from the Provincial Government---Characteristic of Oil and Gas Regulatory Authority's operations were in no way similar 'to those of a local authority---Oil and Gas Regulatory Authority was not a local authority, it was rather a regulatory authority which was specifically established to regulate the ' functions' of oil and gas sector in the country.
PLD 1976 Lah. 258 and 1981 PTD 66 rel.
AIR 1962 SC 1753; Black's Law Dictionary: Adnan Afzal v. Sher Afzal PLD 1969 SC 187; CIT v. Eastern Federal Union Insurance Company PLD 1982 SC 247; Pakistan v. Messrs Hashwani Hotel Ltd. PLD 1990 SC 68; Messrs Army Welfare Sugar Mills Ltd. v. Federation of Pakistan 1992 SCMR 1652; Messrs Bisvil Spinners Ltd. v. Superintendent Central Excise and Land Customs PLD 1988 SC 370; Abdul Rahim v. United Bank Ltd. PLD 1997 Karachi 62; C.I.T. v. Nazir Ahmad and Sons (Pvt.) Ltd. 2004 PTD 921; Heritage Illustrated Dictionary of English Language; Messrs Commissioner of Income Tax v. Idrees Cloth House 2008 PTD 1420; Messrs Innovative Trading Company Limited v. Appellate Tribunal and 2 others 2004 PTD 38; Messrs Calibrative Heavy Industries (Pvt.) Limited v. CIT/WT Coys. Zone-II, Lahore 2005 PTD 2525; Federation of Pakistan v. Haji Muhammad Sadiq and others 2007 CLD 1 = 2007 PTD 67; 1996 PTD 489; Collector Sahiwal v. S.M. Akhtar 1971 SCMR 681 (SC Pak); Chief Secretary Government of Punjab v. Commissioner of Income Tax PLD 1976 Lah. 258; Chief Secretary, Government of Punjab v. Commissioner of Income Tax PLD 1965 SC 201; CIT v. Lyallpur Cold Storage 58 Tax 1 (SC Pak.); Khalid Qureshi and 5 others v. United Bank Limited I.I. Chundrigar Road, Karachi 2001 SCMR 103; Al-Habib Flour Mills v. CIT, Rawalpindi 2008 PTD 1715; CIT v. Haji Maula Bakhsh PLD 199 SC 990 = 1990 PTD 821; CIT Bengal v. Shaw Wallace and Company AIR 1932 PC 138; Mrs. Samina Shaukat Ayub Khan v. CIT, Rawalpindi PLD 1981 SC 85; CIT v. Smith Kline and French of Pakistan Ltd. and 2 others 1991 PTD 999 = 1991 SCMR 2374; I.T.A. No. 207 etc./IB/08, dated 20-11-2008; S.A. Builders Ltd. v. CIT (Appeals) (2009) 99 Tax 9 (SC India); CIT v. Dalmia Cement (B) Ltd. and (200)(sic) ITR 377 (Delhi HC); 2007 PTD (Trib.) 345; 2000 PTD 2407; PLD 1975 SC 506 (Page 554); 1981 PTD 66; Sallahuddin and 2 others v. Frontier Sugar Mills and Distillery Ltd. PLD 1975 SC 77; CIT Muzaffarabad v. Altaf Ahmed Mir AVP, NBP, RHG 2001 PTD 1538; 2001 PTD (Trib.) 865; 2000 PTD (Trib.) 2853; 2000 PTD SC 892; 1987 PTD 73.9; Hasbury's Laws of England and PLD 1977 Lah. 292 ref.
(h) Interpretation of statutes---
----Retrospective or prospective effect---Unless the statute itself so provides, the provision creating a charge or otherwise dealing with substantive right cannot be made retrospective---In the absence of clear intention of the legislature a provision of statute cannot apply retrospectively and has always prospective application.
(i) Income Tax Ordinance (XLIX of 2001)---
----S.49(4)---Constitution of Pakistan, 1973, Art. 165A---Federal Government, Provincial Government, and Local Government income---Amendment made under S.49(4) of the Income Tax Ordinance, 2001---Nature of---Prospective effect---Amendment made under S.49(4) of the Income Tax Ordinance, 2001 was not clarificatory in nature but was of substantive character because it creates a tax burden against certain , entities which did not figure anywhere in. the taxable regime---Provision of law inserted without stating effective date of operation, takes effect prospectively and not retrospectively---Very fact that provision had been added would mean that same would come into force from the date of incorporation in law---If the law makers intended to make it effective from the past, the amendment would/could/should have been made by way of "explanation "---Legislature had been empowered through Art.165A of the Constitution, to give retrospective effect to any piece of legislation, if so intended---In case of amendment under S.49(4) of the Income Tax Ordinance, 2001 inserted through Finance Act, 2007 no such intention was expressed by the legislature which meant that the said amendment had to take prospective effect from 1-7-2007---Substantive/new enactment had been made through subsection. (4) of S.49 of the Income Tax Ordinance, 2001---Charging provisions of substantive nature had been enlarged through said amendment and exemption from tax had been denied to certain entities---It had not been specifically provided in such amending provisions of law that same will have retrospective effect---Such amendment was not been specifically provided in such amending provisions of law that same will have retrospective effect---Such amendment was not explanatory, declaratory or clarificatory in nature but had the effect of enlarging and extending the substantive provisions of law creating new liabilities in respect of certain entitles and it was not clearly provided in the amendment that same will-apply retrospectively---In the absence of any such clear provision same would prospectively apply from the date of its insertion in law.
Al Habib Flour Mills v. CIT Rawalpindi 2008 PTD 1715 rel.
(j) Interpretation of statutes---
----Retrospective effect of provisions---Principles---Where Legislature had intended to give retrospective effect to any provision of law it had specifically stated so---Scope of legal provisions could not be stretched in any manner which was not clearly intended---Whenever a new or substantive law was made, the legislature had to clearly specify that it will apply retrospectively, if so intended---If no such intention was early shown, it will automatically mean that such law will have prospective effect---Fate of past transactions will remain sealed in such circumstances and no tax authority had the powers to open or reopen such closed transactions---Role, intent and purpose of a provision had to be inferred in accordance with letter of law and no guess work had any role to play.
(k) Income Tax Ordinance (XLIX of 2001)---
----S.49(4)---Constitution of Pakistan (1973), Art. 165A---Income of Federal Government, Provincial Government, and Local Government--Amendment made in S.49(4) of the Income Tax Ordinance, 2001---Whether explanatory or charging---Subsection (4) of S.49 of the Income Tax Ordinance, 2001 did not explain the meaning of any existing provision of law but it created a new provision through which exemption from tax had been withdrawn from certain entities who were previously provided with such exemption---Whenever there was any ambiguity or vagueness in the main enactment, it was, always clarified through an "explanation" and clear intention of law was conveyed to the stakeholders---Section 49 of the Income Tax Ordinance, 2001 was amended by Finance Act, 2007 and subsection (4) was added creating a charge of tax against certain entities---If such charge was intended retrospectively, a clear intention should have been reflected in the enactment itself---In absence of any such clarification it could not be presumed that it was of explanatory character and had retrospective application.
(l) Interpretation of statutes---
----Substantive provision of law is only applied prospectively---Unless the statutes itself so provides, the substantive pr1visions of law should not have any retrospective application---Every statute by general rule, is deemed to prospective unless by express provisions or necessary implication it is given retrospective effect---Acid test for ascertaining whether the statute or an amendment operates prospectively or retrospectively is the legislative intent.
(m) Income Tax Ordinance (XLIX of 2001)---
----S.49(4)---Income of Federal Government, Provincial Government, and Local Government---Provision of subsection (4) of S.49 of the Income Tax Ordinance, 2001 was substantive in nature and did not have any retrospective application.
(n) Income Tax Ordinance (XLIX of 2001)---
----S.49(4)---Income of Federal Government, Provincial Government, and Local Government---Prospective in effect and not retrospective--Where two interpretations of law are possible, one favourable to the taxpayer should be adopted--Provisions of law relating to exemptions should not be interpreted liberally---Such rule of interpretation did not come into play when the law itself was very clear and candid and there was no doubt or ambiguity in it---Section 49 of the Income Tax Ordinance, 2001 did not specifically provide that the amendment in question shall have retrospective application---In absence of any clear provision, it could not be deemed that it was retrospective in nature.
(o) Income Tax Ordinance (XLIX of 2001)---
----S.49(2)---Income of Federal Government, Provincial Government, and Local Government---Exemption---Oil and Gas Regulatory Authority being not a "local authority", it was not covered under S.49(2) of the Income Tax Ordinance, 2001 for the purpose of exemption from tax.
(p) Income Tax Ordinance (XLIX of 2001)---
----S.80(2)(b)---Oil and Gas Regulatory Authority Ordinance, (XVII of 2002), S.3(2)---Person---Company---Status of Oil and Gas Regulatory Authority---Claim of exemption from tax---Validity---Under the provisions of S.3(2) of Oil and Gas Regulatory Authority Ordinance, 2002, the Oil and Gas Regulatory Authority was a "body corporate"---Said Authority had rightly been treated as a "public company" for the purposes of taxation in the light of provisions contained in section 80(2)(b) of the Income Tax Ordinance, 2001---Oil and Gas Regulatory Authority was not registered under the Companies Ordinance, 1984 yet it fell within the definition of a "company" as contained in section 80 of the Income Tax Ordinance, 2001---Oil and Gas Regulatory Authority was a body corporate having the status of "public company", its claim of exemption from tax was not maintained by the Appellate Tribunal.
Sh. Mohammad Ilyas, F.C.A. and Imran Ilyas, F.C.A. for Appellants.
Mohammad Asif, DR and Mohammad Sajid, Taxation Officer, for Respondent.
ORDER
These appeals have been filed against combined order, dated 14-11-2008 passed by CIT(A), Islamabad. As per facts the assessee a body corporate having the status of a public limited company derives income from licence fee and interest from bank deposits etc. The Additional Commissioner, LTU, Islamabad on examination of assessment record found that assessments already deemed to have been made under section 120 were erroneous insofar as being prejudicial to the interest of Revenue. Proceedings were accordingly started for amendment of assessment and after taking into account explanation of the assessee final orders were passed under section 122(5A) and income of the assessee was subjected to tax and its claim of exemption was rejected. Income was assessed at Rs.644559558, Rs.60910011, Rs.60693863, Rs. 131274123 and Rs.132039942 for tax years, 2003, 2004, 2005, 2006 and 2007 respectively, which also included additions of certain P&L account expenses. The assessee filed appeals before CIT(A) contesting that the Assessing Officer was not justified to reject the claim of exemption. Assessments of income under section 39 instead of section 18 and additions out of P&L account expenses were assailed. Learned CIT(A) vide his impugned order, dated 14-11-2008 rejected the appeals of the assessee. Consequently second appeals have been filed on the following common grounds:---
(i) That the order passed by the Additional Commissioner Audit-II/ Taxation Officer of Income Tax, Large Taxpayers Unit, Islamabad, and Commissioner of Income Tax (A), Islamabad, is bad in law and contrary to the facts on record.
(ii) That the Assessing Officer is wrong to assess the income of the taxpayer which is not taxable under the Income Tax Ordinance, 2001 and the Commissioner of Income Tax (A) is wrong to maintain the same.
(iii) That the learned Assessing Officer is wrong to assess the income under section 39 and the honourable Commissioner of Income Tax (A) is wrong to maintain the same.
(iv) That the Assessing Officer is wrong in making and the Commissioner of Income Tax (A) is wrong to maintain the additions on account of (a) Excess of receipts over expenditure; (b) Depreciation expenses; (c) Outside relationship; (d) Other administrative charges; (e) Amortization of deferred cost; and (f) Financial charges.
2. Learned AR stated that after insertion of section 49(4), OGRA was served notices under section 114. In compliance, the assessee filed returns, which were deemed as assessment orders under section 120, Notices under section 122(5A) read with section 122(9), dated 28-4-2008 were served and re-assessment was' made vide orders under section 122(5A), dated 15-7-2008, by the Additional Commissioner Audit (II)/Taxation Officer, for all five years. These assessments were contested on legal grounds claiming that assessee's income was exempt from tax. But the CIT(A) through order, dated 14-11-2008 rejected the appeals. Learned AR stated that the Oil and Gas Regulatory Authority has been set up under the Oil and Gas Regulatory Authority Ordinance. The Authority is engaged in the statutory duty of regulating the oil and gas sector in the country. The assessee derives income by way of rendering services and in consideration thereof charging fees from the oil and gas units. Income of the assessee was clearly exempt under section 49 of the Income Tax Ordinance, 2001. Therefore, the assessee never filed returns voluntarily for all the five years now under appeal.
3. Learned AR contended that Authority's income is not taxable. Moreover the assessment was made in an illegal and void manner. He stated that section 4 of the Income Tax Ordinance, 2001, was amended by the Finance Act, 2007. Up to 30-6-2007 (before the amendment) it provided that (i) The income of the Federal Government shall be exempt from tax. (ii) The income of a Provincial Government or a local authority in Pakistan other than income from a business carried on outside its jurisdictional area shall be exempt from tax; (iii) Subject to subsection (2), any payment received by the Federal Government, a Provincial Government or a local authority shall not be liable to any collection or deduction of advance tax. However, w.e.f. 1-7-2007 (after the amendment) it provided that (i) the income of the Federal Government shall be exempt from tax. (ii) The income of a Provincial Government or a local authority in Pakistan shall be exempt from tax under this Ordinance, other than income chargeable under the head "income from business" carried on outside its jurisdictional area. (iii) Subject to subsection (2), any payment received by the Federal Government, a Provincial Government or a local authority shall not be liable to any collection or deduction of advance tax. (iv) Exemption under this section shall not be available in the case of corporation, company, a regulatory authority, a development authority, other body or institution established by or under a Federal law or a Provincial Law or an existing law or a corporation, company, a regulatory authority, a development authority or other' body or institution set up, owned and controlled, either directly or indirectly, by the Federal Government or a Provincial Government, regardless of the ultimate destination of such income as laid down in Article 165A of the Constitution of the Islamic Republic of Pakistan.
4. Learned AR stated that subsection (4) was introduced by way of amendment through Finance Act, 2007. Section 49 appears in Part VII of Chapter III of the Ordinance. This Part deals with "exemptions and tax concessions". The exemptions are not contained in the Second Schedule but in the Ordinance itself. Subsection 49(4) deprives certain bodies including OGRA which enjoyed exemption from taxation. Notwithstanding the effective date of application of the subsection (4), income of OGRA is now taxable because exemption is not available to it under the said subsection. Resultantly, there are two options, (i) OGRA had the exemption before and has been exceptioned out now with effect from 1-7-2007 or (ii) OGRA income is taxable with presumed 49(4). Option (i) means that its income was not taxable up to 2007. Option (ii) means that its income was not taxable up to 2007. Option (ii) means that OGRA's income was taxable up to 30-6-2007 under the presumed law and thereafter under the known law. Article 12 of the Constitution of the Islamic Republic of Pakistan requires that every body shall be governed under the known law. Law at the time of the act or omission relates not to law deemed to be in force but to law factually in operation at the material time. He stated that in the judgment of Supreme Court of India reported as AIR 1962 SC 1753, it was held that a law in force at the relevant time will apply and it will exclude retrospective application of any subsequent law.
5. Learned AR contended that the new subsection brings various bodies into the ambit of taxation. Being a substantive provision of law, it is applicable from 1-7-2007 onwards and not retrospectively. The insertion of law that exemption under this section shall not be available in the case of a corporation, company a regulatory authority as from 1-7-2007 clearly means and implies that exemption under this section was available in the case of a regulatory authority, up to 30-6-2007. Learned AR relied on following interpretation available in Black's Law Dictionary:
"Substantive law (substantive). The part of law creates, defines, and regulates the right powers of parties. CF. PROCEDURAL LAW.
"So far as the administration of justice is concerned application of remedies to violate rights the substantive law defines the remedy and the law of procedure defines the modes and the application of the one to the other jurisprudence 476 (Glanville L. Williams)."
6. Learned AR referred to principles laid down in the case of Adnan Afzal v. Sher Afzal (PLD 1969 SC 187) and followed again in the case of CIT v. Eastern Federal Union Insurance Company PLD 1982 SC 247 which explained that:--
"The general principle with regard to the interpretation of statutes as laid down in the well known case of the Colonial Sugar Refining Company Limited v. Irving is 1905 AC 369 that "if the matter in question be a matter of procedure only" the provision would be retrospective. "On the other hand, if it be more than a matter of procedure, if it touches a right in existence at the passing of the Act", then "in accordance with a long line of authorities extending from the time of Lord Coke the present day", the legislation would not operate retrospectively, unless the Legislature had either "by express enactment or by necessary intendment" given the legislation retroactive effect. To the same effect are the observations of Jassel, Master of the Rolls, in the case of In re: Joseph Suche and Co. Limited (1875) 1 Ch.D. 48 where it was observed that as "a general rule when the Legislature altered the rights of parties by taking away or conferring any right of action, its enactments, unless in express terms they apply to pending actions, do not affect them. It is said that there is one exception to that rule, namely, that these enactments merely affect procedure and do not extend to rights of action, they have been held to apply to existing rights." ."Nevertheless, it must ,be pointed out that if in this process any existing rights are affected or the giving of retrospective operation cause inconvenience of injustice, then the Courts will not even' in the case of a procedural statute, favour an interpretation giving retrospective effect to the statutes." Keeping these principles in view, we are of the opinion that, even though the amending provisions in question, were a part of the 'procedural laws, they cannot be given retrospective effect, in the facts of the present case".
7. It was contended by learned AR that similar legal position was explained in a judgment reported as (2004 PTD 38) in case of Messrs Innovative Trading Company Limited v. Appellate Tribunal and another case reported as (2007 PTD 67) = 2007 CLD 1 in case of Federation of Pakistan v. Muhammad Sadiq and others where it was settled that language implied in fiscal statute is required to be interpreted in its literal and ordinary meanings, in favour of taxpayers, as it has been held in the case of Government of Pakistan v. Messrs Hashwani Hotel Ltd. (PLD 1990 SC 68), Messrs Army Welfare Sugar Mills Ltd. v Federation of Pakistan (1992. SCMR .1652), Messrs Bisvil Spinners Ltd. v. Superintendent Central Excise and Land Customs (PLD 1988 SC 370) and Abdul Rahim v. United Bank Ltd. (PLD 1997 Karachi. 62). Learned AR stated that substantive provisions including explanation to such an effect apply prospectively. This principle was also explained in the case of CIT v. Nazir Ahmad and sons (Pvt.) Ltd. and 2005 PTD 2525 in the case of Celebrative Heavy Industries (Pvt.) Ltd. v. CIT/WT Coys Zone-II, Lahore 2004 PTD 921. He asserted that a new enactment has been made or a new definition is added or a deeming provision is inserted or the scope of a provision particularly a substantive/charging provision is enlarged or extended it shall not have the retrospective effect until and unless specifically specified so by the Legislature. It is settled principle of taxing statutes that where two interpretations are equally possible then the one favourable to the subject is to be adopted.
8. Learned AR stated that the words used in section 49(4) are "shall not be available." In simple connotation, it means that what was available before, thenceforth shall not be available. Had the amendment been clarificatory in nature, the words used would have been "is not available." He stated that the Heritage Illustrated Dictionary of English Language published by McGraw-Hill, USA defines that word "shall" is for, "simple futurity" and 'Black's Law Dictionary, 8th Edition printed by Thonson West explains that `shall' has "mandatory sense" presumably with reference to futurity. He stated that language employed in fiscal statutes is required to be interpreted in its literal and ordinary 'meanings, in favour of taxpayers. Learned AR stated that fiscal statutes must be construed strictly and in case of doubt the benefit must be given to assessee. The Honourable Supreme Court of Pakistan has determined the following principles of interpretation of fiscal statutes in case of Messrs. Bisvil Spinners Limited v. Superintendent, Central Excise and Lands Customs Circle Sheikhupura cited as PLD 1988 SC 370:--
(a) The subject is to be taxed unless the language of the statute clearly imposes the obligation, and language must not be strained in order to tax a transaction which, had the legislature thought of it, would have been covered by appropriate words. (Insertion of section 153 (6B) in the year, 2005 is a case in point).
(b) Exemptions claimed by the State or its sub-divisions are usually liberally construed and the same rule has frequently been applied to exemptions made in favour of charitable organization.
9. Learned AR contended that income of the Authority is not taxable as the amendment in law cannot be enforced retrospectively as has again been held in a recent judgment of Lahore High Court, Lahore in the case of Commissioner of Income Tax v. Idrees Cloth House 2008 PTD 1420. Upholding the principle of prospective application of law, the aforesaid judgment reads as hereunder:--
In this regard the settled principle is that unless the statute itself so provides in un-equivocal and clear terms a provision creating a charge or otherwise dealing with a substantive right cannot be made retrospective. The judgments which can be referred with advantage are (2004 PTD 38) in case of Messrs Innovative Trading Company Limited v. Appellate Tribunal and 2 others (2005 PTD 2525) in the case of Messrs Calibrative Heavy Industries (Pvt.) Limited v. CIT/WT Coys. Zone-II, Lahore 2007 CLD 1 = (2007 PTD 67) in case of "Federation of Pakistan v. Haji Muhammad Sadiq and others." In the last mentioned case it was held:--
"It is a settled principle of law that in the absence of clear intention of the legislature to apply a provision of statute with retrospective effect it would be deemed that it would be applicable prospectively".
10. Learned AR stated that with reference to the notification issued by F.B.R. to give retrospective effect to the amendment in section 122(5A), the Honorable Supreme Court held that F.B.R. could 'not act as parallel legislature. The Legislature could not abdicate its legislative functions. Thus, a provision inserted now, without stating its effective date or stating it to have retrospective effect, cannot be given a retrospective effect. The fact that it has been added now means it has been said and added now. The amendment has been made as a substantive provision of law to become effective from the date of its enforcement. Had the intention of the law makers been otherwise, the legislature would have surely shown the same. He stated that the contents of Circular No.1 of 2007 are ultra vires the provision of law. Through the Circular, the scope of any section/provision cannot be widened. Furthermore, the issuance of the said Circular, in fact, confirms that the legislature intended something different yet the Board interpreted it differently. The Finance Act clearly states that effective date. Had it been intended to give any retrospective effect, the same would have been made applicable as from the desired date. No individual or the F.B.R. can act to be wiser than the law.
11. Learned AR stated that case-law quoted by the taxation officer is self-contradictory and not relevant to the issues involved. The first case referred by him is 1996 PTD 489. The Taxation Officer himself quoted that legislature has the powers to legislate retrospectively. The extract quoted by him is only suggestive and is obiter dictum. The extract conveys nothing. Learned AR stated that in the interpretation of statute, it is the intention and spirit of law which is to be considered. Even if the provision is tuned to two or more interpretations, the one favourable to assessee is to be followed. He stated that the Taxation Officer has sent notices under section 122(9) of the Income Tax Ordinance, 2001, one after the other. This shows lack of application of mind, which is against the provisions of section 122(9) where it is clearly provided that no assessment shall be amended, or further amended, unless the taxpayer has been provided with an opportunity of being heard. The emphasis is on "an opportunity of being heard". The law clearly envisages "an opportunity" and not "opportunities". Notice under section 122(9), dated 28-4-2008, was duly replied to the Taxation Officer vide letter, dated 5-5-2008 and letter, dated 19-5-2008. This second show-cause notice under the same provision of law was patently void ab initio in the light of ratio settled in the case of Collector Sahiwal v. S.M. Akhtar (1971 SCMR 681 (SC Pak.)). Any further action by the Taxation Officer on the basis of this show cause notice is thus void. The second and the different notices under section 122(9) tantamount to change of opinion and was replied only "under protest". The order based on change of opinion makes it illegal and void.
12. Learned AR contended that assessment for tax year, 2003, in any case, is time-barred because section 122(5A) is effective from 1-7-2003 in the light of principles settled in the case of Commissioner of Income Tax v. Idrees Cloth House 2008 PTD 1420.
13. About treatment of the taxpayer as local authority, learned AR stated that the authorities quoted by the Taxation Officer are not on all fours and have been misquoted. In the reported case of Chief Secretary Government of Punjab v. Commissioner of Income Tax, cited as PLD 1976 Lahore 258 the Honourable Supreme Court has held as follows:--
"In that connection, reliance was placed on behalf of the petitioner before the Tribunal on the reported case of Dy. Managing Director, National Bank of Pakistan v. Ataul Haq (PLD 1965 SC 201). In that case, the Supreme Court in the context of the provisions contained in Article 98 of the late Constitution of the Islamic Republic of Pakistan 1962 defined the term local authority as generally understood in this sub-continent to mean an authority which is entrusted with the administration of local fund and charged with the functions of the type of local self-Government within its territorial jurisdiction."
14. In addition to the above, it was also held in the same case as follows:
"As already mentioned above, the term `local authority' is nowhere defined in the Income Tax Act, 1922. But section 2(9) of the Act defines a `person' to include an individual, a Hindu undivided family, a firm, an association of persons or a body of individuals, whether incorporated or not, a company, Government of a Province, a local authority and every other artificial juridical person. This definition in itself implies that for the purposes of Income Tax Act, a local authority is an artificial juridical person distinct from a company and an association of persons whether incorporated or not. This definition read with section 3 leaves no room for doubt in our mind that the `local authority' itself is a unit of assessment quite distinct and separate from a company, firm or other association of persons. In fact local authority occupies a unique position under the Income Tax Act and is taxable only in respect of that part of its income which arises from any business carried on by it."
15. Learned AR stated that the term `local authority' as defined in section 3(28) of the General Clauses Act, 1897 means a Municipal Committee, District Boards, Port Commissioner with the control or management of municipal or local fund. The term `local fund' as defined in the Compilation of Treasury Rules (Vol.I) means (a) revenue administered by bodies which by law or rule having the force of law come under the control of Government whether in regard to the budgets, sanction to creation of filling up of particular appointments, the encashment of leaves, pension or similar rules; and (b) the revenues of any body which may be specifically notified by the Government as such. In addition to the above the term has been defined in Law Lexicon by Aiyer as local fund means any fund under the control or management of a local authority." PLD 1976 Lah. 258.
16. Learned AR stated that OGRA was established by the Federal Government under the provisions of section 3 of the OGRA Ordinance promulgated on 28-3-2002 for regulating the petroleum sector, OGRA maintains a fund, called OGRA Fund in terms of section 18 of the Ordinance, whereas its budget is reviewed by Budget Committee constituted by the Federal Government in terms of section 17 of the Ordinance. Furthermore, its Chairman and Members are appointed by the Government of Pakistan in its sole discretion and OGRA Fund does not contain any element of income as it does not carry out any business activity at all. Thus OGRA for all legal purposes is a local authority as it fulfils all the prerequisites of the above mentioned definitions. The Authority does not earn any income and thus is not taxable. Reference in this regard was made to a letter issued by the Government of Pakistan, Law and Justice and Human Rights Division which clarifies the position of activities carried out by the Authority as follows:--
"A body formed to regulate a statutory function does not do business while performing the functions. In. my view, thus, I am supported by a recent judgment of the House of Lords of the UK in case of Institute of Chartered Accountants v. Customs and Excise Commissioner (1999) 2 All England Reports 449. 'The House of Lords has said that a business represents `economic activities' and performance of a function on behalf of the State to regulate an activity does not mean to carrying on of a business."
17. According to AR's view the Assessing Officer has treated the Authority as a body corporate having the status of public company whereas it is a Regulatory Authority having distinct status from a company. The words .Regulatory Authority" would not have been used separately in subsection (4) of section 49 of the Income Tax Ordinance, 2001 when the wads "corporation" and "company" were used in the same subsection. In this regard, he relied on a reported ease of Chief Secretary, Government of Punjab v. Commissioner of Income Tax, cited as PLD 1965 SC 201 where the Honourable Supreme Court has held as follows:--
"But in the opinion of the Tribunal, the Authority was created under section 3 of the Thal Development Act as a body corporate and this in itself was sufficient to hold that its status was that of a company as defined in section 2(5A) of the Income Tax Act, to mean a body corporate formed by or under any law for the time being in force. In this connection as already discussed above there can be no doubt from a reading of section 2(9), with section 3 and section 4(3)(iii) of the Income Tax Act that a local authority is a separate unit of assessment distinct from a company. Both a company and a local authority have corporate existence and are corporate bodies. They have this feature or characteristic common to both of them. But at the same time they do retain their individual characteristics as well. It is not that simple because the local authority has a corporate existence, its entity was completely lost in the company and it ceased to exist in its own right and must be treated as company for all the purposes of the Income Tax Act. Indeed if this process of elimination is pressed further it would lead to many anomalies in the Act. Section 2(9) of the Act in turn defines a `person' to include an individual, a Hindu undivided family, a firm, an association of persons or body of individuals whether incorporated or not, a company, Government of a Province, a local authority and every other artificial juridical person. If the same argument is pursued we shall soon find that in the ultimate analysis all the different entities entrusted in the definition of person shall lose their distinctive characteristics and cease to exist. We cannot help observing that if, as the Tribunal has held, a local authority is treated as company simply because of its corporate existence, then the exemption allowed under section 4(3)(iii) of the Act is apt to become altogether redundant meaningless and of no avail at all. It shall for all practical purposes reduce this clause to a dead letter. In our considered opinion that company and local authority are two of the species of the corporate bodies. They do have this feature common to both but at the same time they are distinct from each other. The income of a local authority distinct from the `company' is exemption from the payment of income tax to the extent allowed under section 4(3)(iii) of the Act."
18. Learned AR stated that it was settled in the case of CIT v. Lyallpur Cold Storage 58 Tax 1 (SC Pak.) that amendments made out of abundant caution, even declaratory, shall apply prospectively. He stated that as per departmental action, if it is presumed that the law with or without the amendment is the same, it shall mean that this amendment is redundant and superfluous. Such a presumption is unlawful in the light of ratio settled in cases reported as (i) Khalid Qureshi and, 5 others v. United Bank Limited I.I. Chundrigar Road, Karachi (2001 SCMR 103) (ii) Al-Habib Flour Mills v. CIT, Rawalpindi 2008 PTD 1715 and (iii) CIT v. Nazir Ahmad and sons (Pvt.) Ltd. 2004 PTD 921.
19. Learned AR stated that the term "income" has been defined in the decisions reported as CIT v. Haji Mania Bakhsh PLD 1990 SC 990 = 1990 PTD 821, CIT Bengal v. Shaw Wallace and Company (AIR 1932 PC 138). This definition was followed by the SC of Pakistan in cases of (i) Mrs. Samina Shaukat Ayub Khan v. CIT, Rawalpindi PLD 1981 SC 85; CIT v. Smith Kline and French of Pakistan Ltd. and 2 others (iii) 1991 PTD 999 = 1991 SCMR 2374 (Para. 23 of the judgment); and also discussed in PTA order in ITA No.207 etc./IB/08, dated 20-11-2008. He contended that the Assessing Officer is wrong to assess the income under section 39 of the Income Tax Ordinance, 2001 which is patently contradictory and without jurisdiction. Section 39 of the Income Tax ordinance, 2001 takes in its ambit "income of every kind received by a person in a tax year, other than income exempt from tax". The term "income" has been defined under section 2(29) as: " income includes any' amount chargeable to tax under this Ordinance:" When OGRA makes income by rendering professional services and receiving fees in consideration thereof year after year in the same manner and form with regularity and consistency, and the same has been assessed as taxable, what else is business income. Thus the assessment under section 39 as "income from other sources" is patently unlawful. An assessment under a wrong section is unlawful and void and thus .not maintainable. While determining income the determination of relevant source of income is a condition precedent. Exact source of income should be ascertained before the receipts are brought to tax.
20. Learned AR stated that income of the Authority has wrongly been assessed. The law requires things to be done in accordance with law otherwise the same shall be without jurisdiction requiring annulment. OGRA's income was from "business" and not from "other sources". Therefore, the Assessing Officer is wrong to make the additions in the assessable income on account of (i) excess of receipts over expenditure; (ii) depreciation; (iii) retainership; (iv) administrative charges; (v) ,amortization of deferred cost; and (v) financial charges. The stock phrase used by the Taxation Officer that the foregoing `expenses merit disallowance' does not provide any basis or justification for disallowance. All the aforesaid expenses were incurred by OGRA wholly and essentially for the sake and purpose of carrying out its objectives and had to be allowed in the light of decisions reported as S.A. Builders Ltd. v. CIT (Appeals) (2009) 99 Tax 9 (SC India); and CIT v. Dalmia Cement (B) Ltd. and (2000) ITR 377 (Delhi HC). The Taxation Officer has not quoted any specific provision of law nor did he bother to state any reason for disallowing the aforesaid expenses. Before disallowing any exposes, the Taxation Officer had to state the reason for the same as the income/surplus of any person cannot be enhanced based on conjectures and surmises as held in a case reported as 2007 PTD (Trib.) 345.
21. Learned AR stated that subsection (5) of section 40 of the Income Tax Ordinance, 2001 clearly provides that provisions of section 21 shall apply in determining the deductions allowed to a person under this section in the same manner as they apply in determining the deductions allowed in computing the income of the person chargeable to tax under the head `income from business'. The provisions-of section 21 do not disallow the expenses. Moreover, subsection (1) of section 40 of the Income Tax Ordinance, 2001 provides that subject to this Ordinance, in computing the income of a person chargeable to tax under the head `income from other sources' for a tax year, a deduction shall be allowed for any expenditure paid by the person in the year to the extent to which, the expenditure is paid in deriving income chargeable to tax under that head, other than expenditure of a capital nature. Thus, "any expenditure" paid is an allowable deduction so long the expenditure- is not of a capital nature. All the expenses incurred by the OGRA were in the normal course and essentially for the sake of fulfilling its objectives and thus, are allowable deductions. The impugned assessment order being in contravention of mandatory provisions of law is a .nullity in the light of ratio settled in cases reported as 2000 PTD 2407; PLD 1975 SC 506 (Page 554) and 1971 SCMR 681.
22. In his counter arguments learned DR stated that Oil and Gas Regulatory authority was established vide the Oil and Gas Regulatory Authority Ordinance, 2002. Its jurisdiction extends to the whole of Pakistan including the off-shore area. It is apparent from the name, that Oil and Gas Regulatory Authority is a "regulatory authority" and not a "local authority" as is evident from section 3(1) of the OGRA Ordinance, 2002 which reads as under:--
"Establishment of Authority.---(1) The Federal Government hereby establishes a regulatory authority, which shall be known as the Oil and Gas Regulatory Authority."
23. Learned DR stated that as per section 3(2) of the OGRA Ordinance, 2002 the status of the Authority shall be that of a body corporate having perpetual succession and a common seal. He stated that the Authority is engaged in the statutory duty of regulating the oil and gas sector in the economy. As is evident from its name, OGRA is a regulatory authority and not a local Authority. He stated that section 49(2) of Income Tax Ordinance, 2001 provides that the income of a Provincial Government or a local authority in Pakistan, other than income chargeable under the head "income from business" derived by a Provincial Government or local authority from a business carried on outside its jurisdiction area shall be exempt from tax under this Ordinance. Learned DR contended that under these provisions of law income of a local authority, other than income from business, outside its jurisdictional area shall be exemption. Furthermore, the local authority has a restricted jurisdictional area. The taxpayer has, in effect, negated its stance by placing reliance on the aforesaid section as the jurisdiction of OGRA extends throughout Pakistan and there is no specific area, within a Province to which its activities are restricted. Section 1 of the Oil and Gas Regulatory Authority Ordinance, 2002 specifies that it extends to the whole of Pakistan including the off-shore area. Generally if there is a doubt regarding the interpretation of a certain provision of law, the interpretation favourable to the taxpayer has to be adopted. However, in the case of provisions of law dealing with exemptions the interpretation favourable to the department is to be adopted. Acceptance of the taxpayer's stance that it has status of a local authority would, in effect, be a violation of the principle enunciated by the apex Court in judgment reported as 1992 SCMR 1652 wherein it has been held that provisions of tax exemption cannot be interpreted liberally against the revenue. The term local authority has been defined in section 3(31) of the General Clauses Act, 1897 as under:--
"Local Authority means a Municipal Committee, District Boardsbody of Port Commissioners or other authority legally entitled to or entrusted by the Government with the control or management of municipal or local fund."
24. Learned DR stated that aforesaid definition of the term local authority stipulates it to be an authority confined to a limited territorial jurisdiction like that of a Municipal Committee, a District Board and a Port Commissioner empowered simultaneously to control a municipal or a local fund. On the other hand OGRA is not a local authority as its operations spread over the length and breadth of Pakistan with fairly large areas of jurisdiction hence the substantive law does not support the contention of the assessee. Learned DR explained that claim of the taxpayer is based upon the ground that it is maintaining a local fund, therefore, it falls within the definition of local authority as given in the General Clause Act, 1897. As per section 18 of the OGRA Ordinance, 2002 there shall be an Oil and Gas Regulatory Authority Fund which 'shall vest in the Authority and shall be utilized by the Authority to meet its expenses and charges properly incurred in connection with the carrying out of its functions and duties imposed or transferred to it under this Ordinance including the payment of salaries and other remuneration to the Chairman, members employees, experts, consultants and advisers of the Authority. He contended that contention of the taxpayer regarding maintenance of local fund does not merit acceptance for the reason that definition relied upon by the taxpayer in respect of local fund has been taken from Financial Rules, which has a subordinate status as compared to a statute. Financial Rules are, in fact, instructions which are issued from time to time for implementation of statutory financial provisions and the said rules cannot be equated with the provisions, of a statute. Moreover, definition of "local fund" offered by the Authority is not applicable in its case. The said definition refers to a fund in regard to matters such as sanctioning of budgets, creation and filling of posts, enactment of leave and pension rules etc. The contention of the Authority that it is performing some of these functions may be correct. However, these are incidental functions which OGRA is bound to perform under various provisions of the Act for administering the organization. The actual functions performed by the Authority, the powers administered by it and the responsibilities undertaken by it are provided in sections 17 and 18 of the OGRA Act, 2002. These provisions enumerate functions for which the legislature has constituted the Authority whereas functions upon which the taxpayer has placed reliance i.e. in respect of administration of OGRA Fund are only incidental in nature. The term local fund has to be taken into consideration with respect to the term "local authority". The definition of "local authority" as given in the General Clauses Act, 1897 equates it with Municipal Committee and District Board. Likewise the term local fund has been equated in the said definition with the term municipal fund which is administered by a municipal committee. Hence, local fund is necessarily a fund which is used for defined activities of a local entity like municipal committee. OGRA is not running a local fund but is maintaining OGRA Fund as provided under section 18 of the OGRA Act, 2002. The OGRA Fund is financed from various sources of income including fees, grants, aids loans etc. Therefore, it is clear that OGRA Fund is not a local fund and the claim of the authority that it is maintaining local fund, in consequence of which its status is, that of a local authority is not sustainable in the eyes of law.
25. It was stated by learned DR that in case reported as 1976 PTD 56 the issue of status of Thal Development Authority was discussed in detail. The Hon'ble Court held, inter alia, the following features as essential for an entity to be termed as a local authority:--
"It has its own juristic personality distinct from its members, within its own local area and it exercises considerable powers of local self-government. It may frame schemes for the development of a local area under its control and provide civic amenities for the inhabitants of the area. It has its own local fund to manage. It prepares its own' annual budget for submission to the Provincial Government. It may levy taxes in its own local area with the sanction of Provincial Government."
26. He contended that OGRA does not possess the essential features mentioned supra as the jurisdiction of OGRA is not restricted to a local area, rather its functions/operations spread over, the entire length and breadth of the country. It has no powers of local self-government, which has been held by the Hon'ble High Court as an essential feature of a local authority. It cannot frame schemes of development of a local area under its control,as under the Act, it has been established as regulator oftheoil and gas sector. The Authority does not maintain any local fund. It does not submit its budget to the Provincial Government; rather it works under the Federal Government. It is not empowered to levy taxes as under the Act it is merely empowered to collect fees etc. Factually the terms fees and taxes are not synonymous. Learned DR emphasized that in the light of above distinguishing features, the stance of the authority that its case is on all fours that of Thal Development Authority, and therefore, it should be assigned the status of a "local authority" dos not merit consideration. The above judgment when further challenged was endorsed by the Hon'ble Supreme Court in the case reported as 1981 PTD 66 in the following words:
"The Thal Development Authority (hereinafter called the said authority was set up as a body corporate under the West Pakistan Thal Development Act XV of 1949 (hereinafter called the said Act). But, although the said Authority was a body corporate, it had been conferred powers at least as wide as those of any local authority. It was empowered under sections 42 and 43 to levy taxes and to maintain an authority fund. It was empowered under section 321 to frame schemes for- development by the acquisition of land under the Land Acquisition Act and the powers conferred by this section expressly included powers to lay out towns, mandis, market places, villages, roads, break up land for cultivation, etc...."
27. Learned DR further stated that the term "local authority" has also been explained in various other judicial pronouncements as under: --
(i) The expression "local authority" (Article 98(2) of, the Constitution of Pakistan (1962)...means an authority which is entrusted with the administration of a local fund. Local Fund authorities are bodies exercising within limited territories included in a province, powers which belong to the province, but which by statute are delegated to the local authority. A local authority is ordinarily charged with functions of Self-government, maintaining and administering a local fund.... The National Bank of Pakistan which was set up by a central Ordinance.... bears no resemblance to the recognized concept of a "local authority". (PLD 1965 SC 201); DLR 1965 SC 74). (ii) The expression "local authority" generally means any body of persons for the time being invested by law with the control and administration of any specified matters within a local area." "Rustam Ali v. Chairman EPIDCE. (PLD 1964 Dac. 721; PLC 1964 Dac. (PAK) 511; DLR 1964 Dac. 651. (iii) With reference to section 2(35) W.P. General Clauses Act it has been held that mere control of government over affairs of body alone is not sufficient to confer on it the status of local authority. The words "local authority" are to be given restricted means, ejusdem generics with the words preceding the same. Pb. Co.-Op. Union v. Govt. of Pub. Excise and Taxation Deptt. (PLD 1983 Lah. 522). (iv) The Excise and Taxation Department is not a "Local Authority". (PLD 1966 Pesh. 89 (DB).
28. Learned DR stated that in light of the standards enunciated by the judicial pronouncements quoted supra it is clear that OGRA does not fall within the ambit of a "local authority". .In order to bolster the departmental stance reliance was placed on judgment of Supreme Court of Pakistan in the case reported as PLD 1965 Supreme Court 201 tilted as Deputy Managing Director, National Bank of Pakistan v. Attaual Haq wherein the Court observed as under:--
"The expression "local authority" has been used in statutory phraseology in the Indian sub-continent for a great many years, and is always understood to mean an authority which is entrusted with the administration of a local fund. Local authorities are bodies exercising within limited territories included in a Province, powers which belong to the province, but which by statute are delegated to the local authority. A local authority is ordinarily charged, with functions of the self government, and has power of making bye-laws, of imposing taxation and of maintaining and administering a local fund. In fact, it is evident from the order in which Article 98 mentions the three tiers of authorities that these are in a descending order of importance, first i.e. the center, being .the most important, a Province being next in order of importance, and a local authority being the last in that order. It is clearly impossible, in view of this clear distinction to treat the center being a "Local Authority" at whichever place in Pakistan, it conducts its affairs."
29. The DR explained that according to the above judgment of Supreme Court the essential features of a local authority are that a body within a limited territory included in Province exercises powers which belong to a Province and by statute are delegated to it. It is a third tier of the functions of the self-government. It is charged with the self-government. It has powers to impose taxes and it maintains and administers a local fund. He contended that in view of the above essential features of a local authority as explained by the apex Court it is clear that ORGA does not fall under the definition of local authority for the reason that the operations of OGRA are not restricted to a local area or a specified territory. Its operations extend all over the country. It does not maintain a local fund. It is not performing functions of self-government. It is not empowered to impose taxes and it does not function as third tier of authority. Learned DR further stated that in the case of Messrs Pakistan Telecommunication Authority Limited the learned ITAT vide order, dated 20-11-2008, after a detailed and thorough discussion held that the status of Messrs PTA is not that of a local authority. The case of Messrs OGRA is on all fours with that of PTA with respect to determination of status i.e. whether or not it is a local authority. Relevant extracts from the said judgment are reproduced below:--
"From the plain reading of the operative part of the case-law cited in support of his arguments, by the learned counsel for the petitioner, it is clear that to establish as whether an entity is a "local authority" or not, one has .to rely on the definition as to provided in the General Clauses Act read with the constitution and features enumerated by the Lahore High Court as discussed in paragraphs 9 and 10 of the judgment reported supra. Under section 3(31) of the General Clauses Act, a local authority means a Municipal Committee, District Board, Body of Port Commissioners or other authority legally entitled to, or entrusted by the Government with, control or management of a municipal or "local fund". Hence, an authority which is entrusted by the Government with a "local fund" shall be considered as a Local Authority if it (i) has its own juristic personality distinct from its members (ii) within its own local area, exercises considerable powers of local self-government, (iii) chalks out its schemes for the development of a local area under its control and provide civic amenities for the inhabitants of the area (iv) prepares its own annual budget for submission to the Provincial Government (v) exercises its powers within a limit to the province but, which by statute, are delegated to the local authority (vii) has powers of imposing taxes and (viii) maintains/administers a local fund .when we compare the essential features of a local authority as mentioned in the judgments of both the superior Courts, it would be clear that the petitioners case falls short in as much as the Thal Development Authority was not a "local authority" merely by fiction of law (that the authority shall be deemed to be a local authority under the Local Authorities Loans, Act, 1914 for the purposes of borrowing money under that Act). In the case of Thal Development Authority, the definition of local authority was enshrined in section 2 of the Thal Development Act itself. That section laid down that a "Local Authority" had the same meanings as in section 2 of the Local Authorities Loan Act, 1914 (i.e. any person legally entitled to impose any cost, rate, duty or a tax within any local area). Under section 45 of the Thal Development Act, 'The Thal Development Authority was legally entitled to impose tax within its local area. According to the Lahore High Court this factor conclusively established that the Thal Development Authority was a Local Authority for the purposes of Thal Development Act as well as Local Authorities Loans Act, 1914. The PTA does not contain the like of section 2 of Thal Development Act. The petitioner also does not exercise, within its own local area, the considerable powers of local self-government, which were hallmark of Thal Development Authority and a common feature of all local authorities....On the basis of above facts and under the circumstances of the case we are convinced that the petitioner is a Regulatory Authority and not a local authority .."
30. Learned DR stated that it would no be out of place to reproduce an excerpt from the Supreme Courts judgment in case of Salahuddin and 2 others v. Frontier Sugar Mills and Distillery Ltd. (PLD 1975 SC 77) as cited in the case: (CIT Muzaffarabad v. Altaf Ahmed Mir AVP, NBP, RHG (2001 PTD 1538) whereby it was held that United Bank was a corporation and not a local authority. It was observed as under:---
"....in the recent years, there has been a manifest growing tendency on the part of the Government to create statutory corporations for undertaking any such functions, particularly in the industrial and commercial spheres, in the belief that free from inhibiting effects of red-tapism, these semi-autonomous bodies may prove effective, flexible and also profitable. Inevitably, Government retains effective control over their functioning by appointing the heads and other senior officers of these corporate, by regulating their composition and procedures by appropriate statutes and by finding funds for financing their activities..."
31. Learned DR emphasized that in the light of above observations of the apex-Court, it is clear that the petitioner is also a statutory entity, established as a regulatory authority to streamline the oil and gas sector. Its composition, procedure and functions are not similar to a "local authority". He further stated that in another case reported as 2001 PTD (Trib.) 865, it was observed by the Court that bodies created under an Act of legislature fall within the definition of a company. Subsection (16) of section 2 of the repealed Ordinance 1979, provided that a body corporate formed by or under any law for the time being in force is a company. Moreover, section 80(2)(b)(ii) of the Income Tax Ordinance, 2001 also stipulates that a body corporate formed by or under any law in force in Pakistan is a company. As the control and operations of OGRA are held by the Government of Pakistan, it falls within the definition of "public limited company". He stated that relying upon definition of local authority as contained in the General Clauses Act, judicial interpretations, judgments of superior Courts regarding essential elements of local authority and facts of the case it can be concluded, without a scintilla of doubt, that OGRA does not hold the status of a local authority and hence is not exempt from tax. OGRA being a body corporate created through a statue by the Federal Government can at best be equated with other state owned corporations like OGDC, NTC, PTV etc. All these corporations have been created under Acts of Parliament and are being assessed as corporate bodies.
32. About prospective application of provisions of section 49 of the Income Tax Ordinance; 2001, learned 'DR stated that it deals with exemption provided to the income of the Federal Government, Provincial Government and a local authority. It was amended vide Finance Act, 2007. Comparative position of provisions of the said section before and after promulgation of the Finance Act, 2007 is as under:--
| Before Finance Act, 2007 | After Finance Act, 2007 |
| The income of the Federal Government shall be exempt from tax under this Ordinance. | The income of the Federal Government be exempt from tax under this Ordinance. |
| The income of a Provincial Government or a local authority in Pakistan shall be exempt from tax under this Ordinance, other than income chargeable under the head "income from business" derived by a Provincial Government or local authority from a business carried on outside its jurisdictional area. | The income of a Provincial Government or a local authority in Pakistan shall be exempt from tax under this Ordinance, other than income chargeable under the head "income from business" derived by a Provincial Government or local authority from a business carried on outside its jurisdictional area. |
| Subject to subsection (2), any payment received by the Federal Government, a Provincial Government or a local authority shall not be liable to any collection or deduction of advance tax. | Subject to subsection (2), any payment received by the Federal Government, a Provincial Government or a local authority shall not be liable to any collection or deduction of advance tax. Exemption under this section shall not be available in. the case of a corporation, company, a regulatory authority, a development authority, other body or institution established by or under a Federal law or a Provincial law or an existing law or a corporation, company, a regulatory authority, a development authority or other body or institution set up, owned and controlled, either directly or indirectly, by the Federal Government or a Provincial Government Regardless of the ultimate destination of such income as laid down in Article 165A of the Constitution of the Islamic Republic of Pakistan. |
33. Learned DR stated that vide amendment in section 49 of the Income Tax Ordinance, 2001 through Finance Act, 1997, exemption from tax under the said section was explicitly denied to a corporation regulatory authority, a development authority, other body or institution established by or under a Federal Law or a Provincial Law, notwithstanding the ultimate destination of the income of such entity. He stated that section 49 of the Income Tax Ordinance, 2001 specifically exempts the income of Federal Government, Provincial Government and Local Authority Any authority which is not covered by the definition of local authority is liable to income tax unless specifically exempted. However, some authorities went into unnecessary litigation on the issue of taxability. Hence a clarificatory amendment was made in law, through Finance, 2007 by inserting- subsection (4) of section 49, which specifically clarifies that the income of a corporation, company regulatory authority, other body or institution established by or under a Federal Law or an existing law and set-up owned and controlled either directly or indirectly by the Federal Government or a Provincial Government, is chargeable to tax. It has been further clarified that the ultimate destination of such income is not a bar for the purpose of chargeability of tax as already laid down in Article 165A of the Constitution of Islamic Republic of Pakistan.
34. Learned DR stated that section 49 appears in Part-VII of Chapter III of the Income Tax Ordinance, 2001 which deals with "exemptions and tax concession". Section 49 of the Income Tax Ordinance, 2001 is an exemption provision which specifically exempts the income of Federal Government, Provincial Government and a Local Authority. The taxpayer is claiming exemption under section 49 of the Income Tax Ordinance, 2001. Before insertion of subsection (4) of section 49 of the Income Tax ordinance, 2001, the taxpayer was in no way entitled to exemption under section 49 of the Income Tax Ordinance, 2001. All the other bodies, institutions, corporations, companies, regulatory authorities etc. are taxable unless specifically exempted under the Ordinance. No exemption is available to OGRA either under the OGRA Ordinance, 2002 or under any provision of the Income Tax Ordinance, 2001. A clarificatory amendment was made in law through the Finance Act, 2007 by inserting subsection (4) in section 49 which specifically clarifies the scope of exemption available under the provisions of the said section. Under the principle of legislative drafting the amendments that "constitute" a new regime are constitutive in nature and amendments that only clarify are "declaratory" in nature. The first category shall become an evidence of the fact that the law shall have only prospective operation, whereas the second category will be an evidence of retrospective clarification of declaratory nature. In a nut-shell the amendment made in section 49(4) vide Finance Act, 2007 is declaratory and not constitutive in nature. Amendment is section 49 by insertion of subsection (4) is clarificatory in nature because section 49 is an exemption section and not a charging section. In this regard following excerpts from the case cited as 2000 PTD (Trib.) 2853 are relevant:
"It appears that my learned brother lost sight of the established principles of the interpretation of statutes which are equally applicable to general statute as well as fiscal statute. The principles have been discussed in depth in a Full Bench judgment of this Tribunal reported as 1999 PLD (Trib.) 2949. In the said judgment we have cited the following quotation from the Crawford on Statutory Constructions at (page 241):--
"A Court will resort to interpretation when it endeavours to ascertain the meaning of a word found in a statute, which when considered with the other words in the statute may reveal a meaning different from the apparent when this word is considered abstractly or when given its usual meaning .The above principle is applicable not only for ascertaining the meaning and purpose of a particular provision. It is further observed in the above full Bench judgment that, "there is accordingly growing recognition by Courts that a statute should be construed, rather than interpreted with due regard to its avowed object and to its. character...."
35. Learned DR emphasized that subsection (4) has only clarified the scope of exemption available under the provisions of section 49. This is apparent from the fact that neither has any person been included nor excluded from the ambit of exemption through the insertion of subsection (4) of section 49 of the Income Tax Ordinance, 2001. Furthermore, neither has any vested right been taken away nor any other obligation/liability been imposed through insertion of subsection (4) in section 49. In other words the same is a machinery provision. It was inserted as a clarificatory provision as various authorities had started claiming exemption under the guise of being a local authority. Before the amendment under this section exemption was available to the Federal Government, Provincial Government and a local authority (Local Government) and not to companies, regulatory authorities other bodies or institutions. After the amendment exemption is still available to none but the Federal Government, Provincial Government and local authorities (Local Government). Through this clarification neither has any entity been included nor excluded from the ambit of exemption available under section 49. No substantive change has occurred in the said section in respect of provision of exemption from tax. The amendment made in section 49 has neither affected any vested rights nor created any new obligations; hence it is not substantive in nature. No change in law regarding exemption from tax has been made. The amendment has also clarified that the ultimate destination of income is not a bar for the purpose of chargeability of tax.
36. Learned DR pressingly stated that there remains no doubt that the amendment made in section 49 through insertion of subsection (4) is clarificatory in nature. He asserted that section 49 of the Income Tax Ordinance, 2001 contains exemption provisions which specifically exempt the income of Federal Government, Provincial Government and a local authority. The taxpayer is claiming exemption under section 49 of the Income Tax Ordinance, 2001, whereas even before insertion of subsection (4) of section 49, the taxpayer was in no way entitled to exemption under section 49. He emphasized that it is an established principle of law that exemption cannot be claimed by implication; it should be expressed clearly by letter of the law. It is a general principle of interpretation of fiscal statutes that the provisions providing for exemption in taxing statutes have to be construed strictly in favour of revenue. The reason behind this philosophy is that taxes being the sole means by which sovereignties can maintain their existence, any claim on part of any one to be exempt from the full payment of this share of taxes or any portion of his property/income must on that account be clearly defined and found on plain language. There must be no doubt or ambiguity upon which the claim to the exemption is founded. No implication will indulge for the purpose of construing the language used as giving the claim for exemption, where such claim is not founded upon the plain and clearly expressed intention of the taxing power. Learned DR submitted that Crawford on statutory constructions, opines:-
"Provisions providing for an exemption may be properly construed strictly against the person who makes the claim of any exemption. In other words, before an exemption can be recognized the person or property claimed to be exempt must come clearly within the language apparently granting the exemption Moreover exemption laws are in derogation of equal rights, and this is an equally important reason for construing them strictly. (pages 506, 507)".
37. Learned DR stated that in the case of Army Welfare Sugar Mills Limited and other v. Federation of Pakistan (1992 SCMR 1652) the Hon'ble Supreme Court of Pakistan settled the principle of interpretation of exemption clauses in fiscal statutes in the following words:--
"There are two basic principles of construing a provision of a statute involving exemption from payment of tax, namely, the first rule is that the burden of proof is on the person who claims exemption. The second rule is that a provision relating to grant of tax exemption is to be construed strictly against the person asserting and in favour of the taxing officer (authority)."
38. The learned DR emphatically stated that in the case reported, as 2000 PTD SC 892 it was observed as under:--
It follows from this rule that retrospective effect to a statute may be given either by express words or that the same may be inferred from the language employed....When retrospective effect to statute is not given by express words, one must, apart from the language employed look to the general scope and purview of the statute, and at the remedy sought to be applied, and consider what was the former state of the law, and what it was that the legislature contemplated."
39. He further stated that in a case reported as 1987 PTD 739 it was held as under:--
"Then as stated in Crawford, if the rule of liberal construction is to be applied as it obviously should then any doubt should be resolved in favour of retrospective operation, if such operation does not destroy or disturb vested rights, impair the obligations of contracts, if such operation will carry out the intent of the legislature as ascertained through the application of the principles of liberal construction."
40. Learned DR relied on a case cited as PLD 1977 Lah. 292 wherein it was held that "if the object of the statute is to explain the provision or to remove a doubt, the law would apply retrospectively." Learned DR asserted that it is a settled principle of interpretation that an amendment which is explanatory or clarificatory, always operates retrospectively. This principle has also been ratified by the Lahore High Court in its judgments reported as 1996 PTD 489. Regarding retrospective effect of clarificatory amendment the Hon'ble Lahore High Court in the case reported as 1996 PTD 489 held as follows:--
"as regards question of retrospectively, suffice it to say that the power of legislature to legislate retrospective is well recognized and in the present case the retrospective operation to the explanation ash been given by a specific provision in the amending law. Be that as it may it is tried law that an amendment which is explanatory or clarificatory always operates retrospectively. Max Well in his interpretation of statutes, 12th edition, at page 224 has stated that "if a statute is in its nature a declaratory act the argument that it is not to be construed so as take away previously vested rights is inapplicable. Similar statement of law appears in Carwford on the construction of statutes' in para. 74 at page 197 and carries on interpretation of statutes, 7th addition at page 394."
41. In another judgment reported as PLD 1977 Lah. 292 the Hon'ble High Court held as under:--
"The note of caution struck in the portion underlined can hardly be disputed undoubtedly we have to find out of the intent of legislature and should not be swayed merely by the use of the word "declaratory" or otherwise. If, therefore, the object of statute is to explain the previous provisions or to remove a doubt the law would apply retrospectively as held in other judgments referred to before."
42. Learned DR contended that on page 289 Hasbury's Laws of English states as under:--
"Declaratory statute means which either resolves a doubt on a particular point or statute which restates the law on a particular subject. For understanding of declaratory statute, is purpose, kinds, operation and construction be kept in mind. In this case the purpose of amendment was to remove doubt. Its kind was declaratory and its implication was to have retrospective effect."
43. Learned DR emphasized that the amendment in section 49 of the Income Tax Ordinance, 2001 through Finance Act, 2007 is of clarificatory nature having retrospective effect. If accepted, the stance of OGRA would be violative of the principle laid down in Article 165A of the Constitution of Pakistan which empowers the parliament to levy tax on the income of a corporation, company or other body or institution established by or under a Federal Law of 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 or a Provincial Government regardless of the ultimate destination of such income. It was contended that acceptance of the taxpayer's contention would also make the whole scheme of things unworkable because apart from regulatory authorities the government owned corporations, companies and other entitles like NFC, NTC, OGRA, PEMRA, PTV etc. can also claim that their income was not chargeable to tax before this amendment. He stated that in the case of Messrs Pakistan Telecommunication Authority the Tribunal vide order, dated 20-11-2008 held that subsection (4) of section 49 of the Income Tax Ordinance, 2001 is clarificatory in nature and has retrospective effect. Learned DR relied upon following part of this judgment:
"32.A careful perusal of the amended section 49 would show that the income of Federal Government, Provincial Governments, as well as Local Authorities, remains exempt from tax. Neither any entity has been included in nor excluded from the ambit of exemption. The amendment has neither deprived any entity of its vested right nor has it imposed new obligations. Income of various statutory bodies enumerated in the newly inserted subsection (4) was taxable, and remains so thereafter, regardless of the ultimate destination of such income as laid down in Article 165A of the Constitution. We are of the considered opinion that these are machinery provisions which are intended to ensure proper application of the law rather than creating any substantive liability against the taxpayer. As such they would apply retrospectively. In this regard the ratio of judgments reported as 1996 PTD 489 whereby it has been held that...it trite law that an amendment which is explanatory or declaratory, always operates retrospectively...." and PLD 1977 Lah. 292, (that"...If, therefore, the object of statute is to explain the previous provisions or to remove a doubt the law would apply retrospectively...." is applicable in the case as well."
44. Learned DR very emphatically stated that the legislature has empowered the FBR under the provisions of section 206 of the Income Tax Ordinance, 2001 to issue the circulars interpreting the Ordinance for the guidance of taxpayers and the departmental officers. The interpretation of subsection (4) of section 49 by the F.B.R. through Circular No.1 of 2007 is not only legal but also is in accordance with the principles laid down by the Honourale High Court in its judgments reported as 1996 PTD 489 and PLD 1977 Lah. 292. It has also been explained vide relevant portion of C.B.R. Circular No.1 of 2007 No.F4(1)/ITP/2007-EC, dated 2-7-2007 that regulatory authorities and development entities are liable to income tax. These authorities are covered by the definition of "company" given under Income Tax Ordinance but some of these entities have gone into litigation on the issue of taxability. In view of above a clarificatory amendment has been made in the law by adding new subsection to section 49 which specifically prescribes that income of a (i) Corporation; (ii) Company; (iii) Regulatory authority; (iv) Other body; or (v) Institution; established by or under Federal law or a Provincial law or an existing law and set up, owned and controlled (a) either directly; or (b) indirectly by the Federal Government or a Provincial Government is chargeable to tax. Further the ultimate destination of such income is not a bar for purpose of chargeability' of tax as laid down in Article 165A of the Constitution of the Islamic Republic of Pakistan."
45. A question was asked from learned AR that why and how OGRA was enjoying exemption upto tax year, 2007. He answered that OGRA is a "local authority" whose income is exempt from tax. He also stated that under the provisions of Income Tax Ordinance, 1979 (now repealed) different government controlled entities including OGRA, were not brought in tax net and departure was made for the first time in tax year, 2008 when a specific provision of law was introduced in the shape of subsection (4) of section 49 through which exemption available to regulatory authorities established by or under the Federal Government or Provincial Government was withdrawn. He stated that after withdrawal of this exemption OGRA has itself accepted the legal position that its income is now taxable and it has voluntarily started filing returns of its income. He stated that before introduction of amendment under section 49(4) OGRA's income was not liable to tax.
46. Learned DR stated that OGRA's income was never exempt from tax. In response to notices under section 122(9) it took the position that it is a local authority and its income therefore, was exempt from tax. He stated that during assessment proceedings, it was main thrust of arguments of learned AR of the assessee that it is a local authority whose income is not liable to tax. He stated that OGRA is not a local authority. It is a public company. This status was assigned to OGRA by the Additional Commissioner while passing the impugned orders under section 122(5A). Learned DR vehemently pressed that exemption from tax was ever given to it under the Income Tax Ordinance, 1979 (now repealed) or the Income Tax Ordinance, 2001. He stated that in view of provisions relating to limitation the department has started proceedings for assessment of OGRA's income with effect from tax year, 2003 onwards only and previous assessments were not touched. He contended that it does not mean that previously OGRA's income was exempt from tax. He reiterated that provisions of subsection (4) of section 49 are explanatory and are retrospectively applicable to OGRA's case. He .strongly argued that OGRA isa body corporate with the status of public company whose income has always been taxable and the assessment, proceedings for the years under appeal are fully according to law.
47. We have taken into account arguments of both the sides and analyzed the issues raised by them. We have found that following five main issues are involved in this case, i.e. (i) whether assessment for tax year, 2003 was barred by time; (ii) whether income of the taxpayer is assessable as business income under section 18 or as income from other sources assessable under section 39 of the Income Tax Ordinance, 2001; (iii) whether OGRA is a local authority; and (iv) whether amendment made under section 49 is retrospectively applicable, (v) under which provision of law OGRA's income was not liable to tax before insertion of subsection (4) of section 49. We will take up these' issues one-by-one in the succeeding parts of this order.
48. Action under section 122(5A) for tax year, 2003: During the course of hearing learned AR argued that section 122(5A) was inserted trough Finance Act, 2003. Earlier subsection (5A) was inserted by S.R.O. 633(I)/2001, dated 14-9-2002 which stands rescinded by S.R.O. 608(I)/2003, dated 24-6-2003 with effect from 1-7-2003. He also emphasized that this issue has been settled at higher appellate level that action under section 122(5A) could not be taken before 1-7-2003. His contention was focused oft the legality of action under section 122(5A) for tax year, 2003 and he claimed that such action could not be taken for the said year. This contention of learned AR was examined in the light of relevant record and it was noted that this issue has been settled in favour of taxpayer. It is, therefore, held that provisions of section 122(5A) did not apply to tax year, 2003. Impugned order under section 122(5A) for tax year, 2003 was, therefore, illegal and a nullity and is hereby annulled.
49. Assessment of income under section 18 or 39. It was stated by learned AR that OGRA is engaged in regulating the business of oil and gas sector in the country. It derives income by way of rendering services and charging fees from oil and gas units in lieu of such services. The Assessing Officer was legally, not justified to assess OGRA's income under section 39 as "income from other sources", OGRA is rendering professional services and receiving fees consideration thereof, year-after- year in the same manner and form with regularly and consistently. It is regular business of OGRA to provide professional services. He stated that section 18 provides that income of a person for a tax year shall be chargeable to tax as business income representing (a) profits and gains; (b) any income derived by any trade, professional or similar association from the sale of goods or profession of services; (c) any income from hire or lease of tangible moveable property; (d) property the fair market value of any benefit or perquisite; (e) any management fee derived by a management company; (f) any profit on debt where money lending is undertaken as regular business; (g) leasing business; and (h) any amount received by banking or non banking finance company representing distribution by mutual fund etc. He stated that subsections (3) and (4) of section 18 place certain source's of income, otherwise being in the nature of other sources, in the category of business income.
50. Heads of income have been provided under section 11 of the Income Tax Ordinance, 2001 which include salaries, rent of property, business, capital gains and income `from other sources. Any income which does not fall in the definition of any of these specific heads is taxable as "income from other sources." Moreover certain specific sources of income have been specifically classified as "other sources" of income under section 39 of the Income Tax Ordinance, 1979. We have analyzed the issue in the light of relevant provisions of law. We' have noted that income of OGRA does not fall in any category of income classified as other sources under section 39. It is an income from business and trade. OGRA is in receipt of consultancy charges and fees from business of regulatory activities of oil and gas sector. The taxpayer is clearly engaged in a regular business/trade and its income does not fall' in any of the categories mentioned in section 39.
51. It has been provided in section 39 that income from other sources will include in addition to the above, certain other types of income such as (a) dividend; (b) royalty (c) profit on debt; (d) ground rent: (e) rent from the sub-lease of land or a building; (f) income the lease of any building together with plant or machinery; (g) income from provision of amenities, utilities or any other service connected with renting of building; (h) any annuity or pension; (i) any prize bond, or winnings from a raffle, lottery, prize on winning a quiz, price offered by companies for promotion of sale or cross-word puzzle; (j) any other amount received as consideration for the provision, use or exploitation of property, including from the grant of a right to explore for, or exploit, natural resources; (k) the fair market value of any benefit, whether convertible to money or not, received in connection with the provision, use or exploitation of property; and (1) any amount received by a person as consideration for vacating the possession of a building or part thereof, reduced by any amount paid by the person to acquire possession of such building or part thereof, (m) any amount received by a person from Approved Income Payment Plan or Approved Annuity Plan under Voluntary Pension System Rules, 2005. Careful perusal of section 39 clearly reflects that income of OGRA does not fall in any of these categories of income. We are of considered opinion that OGRA's income is income from business and not income from other sources. It was thus entitled to claim all deductions admissible against income from business. Nature of OGRA's income is similar to the income of consultancy companies and professional consultants. If their income is assessed as business income of OGRA's income is also assessable as income from business. We will not touch the issue of deductions admissible under section 40 of the Income Tax Ordinance, 2001 because this issue has become irrelevant. In a nut-shell it is hereby held that OGRA's income is assessable as "business income" in the light of provisions of section 18 of the Income Tax Ordinance, 2001 and it is entitled to claim all expenses/deductions admissible under the law against income from business.
52. Local authority: Both the AR as well as DR placed their reliance on landmark judgment of Hon'ble Lahore High Court in the case of Thal Development Authority reported as (33 Tax- 176) and supported their respective claim in the light of qualifications of local authority laid in the said judgment. In the case of Thal Development Authority it was claimed by the taxpayer that for being local authority its income was exempt from tax. Hon'ble Lahore High Court while deciding the issue had thoroughly analyzed this matter. From plain reading of operative part of the case said judgment it is clear that to establish as to whether any entity is a local authority or not; one has to rely on the definition as provided in the General Clauses Act read with the constitution and features enumerated by the Lahore High Court. Under section 3(28) of the General Clauses Act, a `local authority' means a Municipal Committee, District Board, Body of Port Commissioners or other authority legally entitled to, or entrusted by the government with, control or management of a municipal or "local fund. Hence, an entity can be considered as a `local authority' if it; (i) has its own juristic personality distinct from its members; (ii) within its own local area, exercises considerable powers of local self-governments; (iii) chalks out its schemes for the development of a local area under its control and provide civic amenities for the inhabitants of the; (iv) prepares area its own annual budget for submission to the Provincial Government; (v) exercises its powers within a limited territory included in a Province; (vi) exercises powers which belong to the Province but, which by statute, are delegated to the local authority; (vii) has powers of imposing taxes; and, (viii) maintains/ administers a local fund.
53. All the aforesaid conditions have to be simultaneously and' cumulatively fulfilled for any entity to qualify as local authority. (i) The first condition for any entity to be considered as local authority is that it has its own juristic personality distinct from its members. In the light of material produced before as it is established that OGRA fulfills this condition because it was established through an Ordinance of 2002 as a regulatory authority being independent in the performance of its functions; (ii) The next condition for an entity to qualify as local authority is that within its own local area it exercises considerable powers of self-government. This condition consists of three parts i.e. (a) it had its own local area; (b) it exercises considerable powers; and (c) these powers are of local self-government. OGRA's operations, are not restricted to any local area neither it has the powers of local self-government. Its operations are spread all over the country and its powers are not in the nature of local self-government. Therefore this condition of having local area and powers of local self-government is not satisfied by OGRA. (iii) Next condition for an entity to qualify as a local authority is that it chalks out its schemes for the development of a local area under its control and provide civic amenities for the inhabitants of the area. This condition consists of four parts i.e. (a) it chalks out is schemes; (b) these schemes for development of local area under its control; (c) provides civic amenities; and (d) these amenities are for inhabitants of the area. These conditions are not fulfilled by OGRA because although it chalks out its schemes for development but these schemes are not for the development of any "local area" under its control. In fact there is no local area under its control. Its schemes for development area of national level and are spread in all parts of the country. Moreover, it does not provide any civic amenities. The provision of civic amenities for "inhabitants of the area", therefore, is far fetched proposition for it. (iv) Next condition for an entity to qualify to be a local authority is that it prepares its annual budget for submission of the provincial government. OGRA was established by the Federal Government and its operations are controlled by the Federal Government, therefore, the condition of submission of budget to provincial government is not fulfilled. (v) Next condition for an entity to be treated as a local authority is that it exercises its powers within the limited territory included in a. province. This condition is also not fulfilled by OGRA because its operations are spread throughout the country and it does not exercise powers within a "limited territory included in a province". (vi) The next condition for an entity to qualify as a local authority is that it exercises powers which belong to the province but, which by statute, are delegated to the local authority. OGRA does not fulfil this condition because powers being exercised by it do not belong to any province. Its powers essentially belong to the Federal Government and it is performing its functions on behalf of the Federal Government. (vii) The next condition for an entity to qualify as local authority is that it has powers of imposing taxes. OGRA does not have any such powers because under section 6 of the OGRA Ordinance, 2002 it has been vested with various powers relating to prescription of rules, renewal of licenses, specifying performance standard, prescribing the form of accounts and accounting practices, promotion of efficient practices and promotion of effective competition among licensees. So many other functions and powers have been enumerated in the said section but these are entirely different from a local authority. Learned AR focused on subsection (3) of section 6 of the above mentioned Ordinance which provides that it shall impose and collect such fees and other charges in respect of any of its functions at such rates as may be determined in accordance with the rules. These provisions are also of no help to the Authority because fees and other charges are not in the nature of "taxes". Therefore, very important feature of having powers of imposition of taxes is missing in the case of OGRA. In fact the authority determines, proves and regulates tariffs and other activities of the oil and gas sector. (viii) Another important condition for an entity to qualify as local authority is that it maintains/administers a local fund. It is provided in section 18 of the OGRA Ordinance, 2002 that there shall be a fund to be known as Oil and Gas Regulatory Authority Fund, which will vest in and utilized by it to meet its expenses and charges which includes licence fees, fines, penalties, loans, grant and other proceeds. Learned AR tried to claim that this fund is in the nature of a "local fund" whereas learned DR opposed this contention. We have carefully studied section 18 supra and we could not find any prevision to lead us to hold that the OGRA Fund is a "local fund". In fact local fund means the fund vested in any authority which has its operations restricted to "local area". Whereas OGRA's operations are spread all over the country and its fund cannot be treated as a "local fund". Learned AR has tried to over stretch the connotation of "local fund" to the case of OGRA whose Fund in our opinion in a "national fund".
54. Hon'ble Supreme Court of Pakistan in its judgment reported as 1981 PTD 66 has confirmed the decision of Lahore High Court in the case of Thal Development Authority holding that in addition to other features the local authority has the powers to lay out towns, mandis, market places, villages, roads, break up land for cultivation etc. These features essentially lead to inter that all the operations of a local authority are restricted in a limited area for the uplift and welfare of inhabitants of that very area. The local authority generates its own revenue through imposition of local taxes and shortfall of finances, if any, is met out of grants from the Provincial Government. The characteristic of OGRA's operations are in no way similar to those of a local authority. We are therefore constrained to hold that OGRA is not a local authority. It is rather a regulatory authority which was specifically established to regulate the functions of oil and gas sector in the country.
55. Retrospective application of section 49(4): Section 49 provides that income of the Federal Government, Provincial Government or a local authority in Pakistan shall be exempt. However, income of provincial government or local authority from business carried on out side its jurisdictional are shall not enjoy such exemption. By way of amendment through Finance act, 2007 (effective from 1-7-2007) it was laid in subsection (4) of section 49 that:
"(4) Exemption under this section shall not be available in the case of corporation, company, a regulatory authority, a development authority, other body or institution established by or under a Federal law or a Provincial law or an existing law or a corporation company, a regulatory authority, a development authority or other body or institution set up, owned and controlled, either directly or indirectly, by the Federal Government or a Provincial Government, regardless of the ultimate destination of such income as laid down in Article 165A of the Constitution of the Islamic Republic of Pakistan."
56. It was contended on behalf of OGRA that subsection (4) was added in section 49 through Finance Act, 2007. These provisions are therefore applicable with effect from 1-7-2007 because a substantive provision of law has been brought into the statute. It was argued that insertion of law that "exemption under this section shall not be available in the case of corporation, company and regulatory authority etc. from 1-7-2007 clearly means that exemption under this section was available to such entitles upto 30-6-2007. Learned DR by pleading the case of the department tried to argue that such exemption was never provided in law and subsection (4) was added to section 49 through Finance Act, 2007 for the purpose of removal of doubt and clarification in respect of already existing law. He pleaded that provisions of subsection (4) of section 49 are of clarificatory nature. The exemption was never given to such entities either before or after the introduction of aforesaid provisions of subsection (4) of section 49. Learned AR contended that provisions of subsection (4) supra being of substantive character, are applicable prospectively whereas learned DR contended that these provisions being of clarificatory nature are applicable prospectively.
57. We have drawn guidance and strength from cases relied upon by both the rival parties. The superior Courts have settled the issue about retrospectivity of application of provisions of law and have unequivocally held that unless the statue itself so provides; the provision creating a charge or otherwise dealing with substantive right cannot be made retrospectively. It is a settled principle of law that .in the absence of clear intention of the legislature a provision of statute cannot apply retrospectively and has always prospective application. We are not inclined to subscribe to learned DR's viewpoint that amendment made under section 49(4) through Finance Act, 2007 is clarificatory in nature. In our opinion this amendment is of substantive character' because it creates a tax burden against certain entities which did not figure anywhere in the taxable regime. The provision of law inserted now without stating effective date of operation, certainly takes effect prospectively and not retrospectively. The very fact that it has been added now means that it will come into force from the date of incorporation in law. Had the intention of law makes been different and had they intended to make it effective from the past, the amendment would/could/should have been made by way of "explanation" as held in a judgment reported as 2008 PTD 1715. The legislature has been empowered through Article 165A of the 1973 Constitution to give retrospective effect to any piece of legislation, if so intended. In case of present amendment under section 49(4) inserted through Finance Act, 2007 no such intention was expressed by the legislature. Therefore, it clearly means that the said amendment had to take prospective effect from 1-7-2007. A substantive/new 'enactment has been made through subsection (4) of section 49. The charging provisions of substantive nature have been enlarged through this amendment and exemption from tax has been denied to certain entities. It has not been specifically provided in these amendment provisions of law that it will have retrospective effect. The said amendment is not explanatory, declaratory or clarificatory in nature. It has the effect of enlarging and extending the substantive provisions of law creating new liabilities in respect of certain entities. It is not clearly provided in this amendment that it will apply retrospectively. In the absence of any such clear provision it will prospectively apply from the date of its insertion in law.
58. Wherever legislature has intended to give retrospective effect to any provision of law it has specifically stated so. The scope of legal provisions cannot be stretched in any manner which is not clearly intended. Whenever a new or substantive law is made, the legislature has to clearly specify that it will apply retrospectively, if so intended. If no such intention is clearly shown, it will automatically mean that such law will have prospective effect. The fate of past transactions will remain scaled in these circumstances and no tax authority has the powers to open or reopen such closed transactions/issues. It is an established principle of interpretation of statutes that role, intent and purpose of a provision has to be inferred in accordance with letter of law and no guess work has any role to play. The amendment in question does not explain the meaning of any existing provision of law. It creates a new provision through which exemption from tax has been withdrawn from certain entities who were previously provided with such exemption. We are not inclined in agree with the arguments of learned DR that the amendment in question simply explains statutory provisions which were already in existence. Whenever there is any ambiguity or vagueness in the main enactment, it is always clarified through an "explanation" and clear intention of law is conveyed to the stakeholders. Section 49 was added creating a charge of tax against certain entities. If such charge was intended retrospectively, a clear intention should have been reflected in the enactment itself. In the absence of any such clarification it cannot be presumed that it is of explanatory character and has retrospective application.
59. The substantive provisions of law is only applied prospectively. Honourable Supreme Court of Pakistan in judgment reported as 2002 SCMR 39 lucidly held that unless the statutes itself so provides, the substantive provisions of law shall not have any retrospective application. Every statute by general rule, is deemed to be prospective unless by express provisions or necessary implication it is given retrospective effect. Acid test for ascertaining whether the statute or an amendment operates prospectively or retrospectively is the legislative intent. The learned DR has unsuccessfully tried to establish that amendment under section 49(4) introduced through Finance Act, 2007 simply clarified the existing position of law and removed the doubt about tax exemption of certain entities. We do not feel any hesitation to hold that the amendment in question brought out in section 49 is substantive in nature and does not have any retrospective application.
60. There cannot be any second opinion about golden principle of interpretation of statutes that where two interpretations of law are possible, one favourable to the taxpayer should be adopted. Similarly, there cannot be any other opinion about the principle relating to exemptions which envisage that provisions of law relating to exemptions should not be interpreted liberally. But in our opinion these rules of interpretation of statutes do not come into play in this case because the law itself is very clear and candid. There is no doubt or ambiguity in it. It was not specifically provided in section 49 that the amendment in question shall have retrospective application. In the absence of any clear provision, it cannot be deemed that it was retrospective in nature.
61. Exemption from tax upto assessment year, 2007: We have considered arguments of both the sides in the light of relevant material. When notices under section 122(9) were issued for amendment of assessment under section 122(5A) it was claimed by OGRA that it is a "local authority" whose income was exempt from tax. It was OGRA's claim that "company" and "local authority" are two of species of the corporate bodies. They do have these feature common to both but at the same time they are distinct from each other. It was claimed that OGRA is a local authority and income of the local authority distinct from the company is exempt from payment of income tax. It was claimed by OGRA that "local authority" itself is a unit of assessment quite distinct and separate from a company, firm or other association of persons. Local authority occupies unique position under the Income Tax Ordinance and is taxable only in respect of that part of its income which arises from any business carried on by it. It was claimed that OGRA, for all practical purposes is a local authority as it fulfills all the pre-requisites to qualify as a local authority. The local authorities were/are exempt from tax in the light of provisions contained in section 49(2). We have separately held in this order that OGRA is not a "local authority". Therefore, it is not covered under section 49(2) for the purposes of exemption from tax. We fully enforce the findings of learned Additional Commissioner that under the provisions of section 3(2) of OGRA Ordinance, 2002 it is a "body corporate". It has been rightly treated as a "public company" for the purposes of taxation in the light of provisions contained in section 80(2)(b) of the Income Tax Ordinance, 2001. We do not find any reason to differ, with the views of the Additional Commissioner that although OGRA is not registered under the Companies Ordinance, 1984 yet it falls within the definition of a "company" as contained in section 80 of the Income Tax Ordinance, 2001. It has been conclusively held by us that OGRA is not a local authority. In the light of these facts of this case we do not feel any hesitation to hold that OGRA is a body corporate having the status of public company". It was rightly treated as taxable in the status of "public company". OGRA's claim of exemption from tax is therefore not maintained.
62. Conclusion: Assessee's appeal for assessment year, 2003 is accepted in the manner as indicated above. However, assessments for tax year, 2004, 2005, 2006 and 2007 are remanded back to die Assessing Officer with the directions that OGRA's income from consultancy receipts should be assessed as income from business and claim of expenses against business income should be considered on merits accordingly.
C.M.A./116/Tax (Trib.)Order accordingly.