KURDISTAN TRADING COMPANY VS COMMISSIONER INLAND REVENUE, 2014 PTD-KARACHI-HIGH-COURT-SINDH 339 (2013)

(a) Income Tax Ordinance (XLIX of 2001)---

----Ss. 34(5)(5A), 70, 114, 118, 120(1), 122(9)&SecondSched.,Part-IV, Cl. (3A)---BPD Circular 29 of 2002 dated 15-10-2002---Income from mark-up declared in return---Exemption claimed on such income vide State Bank Banking Policy Department Circular No. 29 of 2002, dated 15-10-2002---Such exemption declined under S. 70 of Income Tax Ordinance, 2001 while treated and taxed mark-up as income from business---Pleaoftaxpayerwasthatreturnfiledon15-10-2004 was pending, when Cl. (3A) of Part-IV of Second Sched. of the Ordinance was inserted by Finance Act, 2004 from July, 2004 onwards, thus, he was entitled to benefit of Cl. (3A)---Validity---Taxpayer was required to file return of his total income for tax year 2004by30-9-2004,butafterseekingextention,hefiledsameon15-10-2004---Deemed assessment under of S. 120(1) of the Ordinance, would come into existence on date of filing of return of income in terms of S. 114 read with S. 118 thereof---Assessment for tax year 2004 in case of taxpayer was pending when Cl. (3A) was inserted in Part-IV of Second Sched. of the Ordinance, provisions whereof being remedial and beneficial giving relief to taxpayer by excluding benefit derived by way of waiver of profit and debt or debt itself from chargeability oftax---Legislature while inserting Cl. (3A) in Part-IV of Second Sched. of Income Tax Ordinance, 2001 had extended its benefit retrospectively by referring to BPD Circular No. 29 of 2002, dated 15-10-2002---Accounts for taxpayer for tax year 2004 were closed by 30-6-2004, but assessment, which included calculation, computation, application of tax rates and exemption etc., if any, was not finalized in terms of S.120(1) of the Ordinance---Taxpayer was, entitled to benefit of Cl. (3A), in circumstances.

CIT Karachi v. BRR Investment (Pvt.)Ltd., Karachi 2011 PTD 2148; Commissioner of Income Tax v. Shahnawaz and others 1993 SCMR 73 and Commissioner of Income Tax v. Humayun Elahi Shaikh 2011 PTD 145 ref.

(b) Interpretation of statutes---

----Fiscal statute, amendments in --- Applicability---Scope.

Normally amendments introduced in fiscal statute through Finance Act apply prospectively in the year in which it has been inserted, unless some retrospective effect has been given by the legislature.

In cases where the amendment introduced is remedial and beneficial in nature, it has to be given retrospective effect and also to apply to all pending cases on the date of amendment/enactment as well, unless some prospective effect is given by the legislature or it is made prospective by its implication.

Unless and until any amendment introduced by Finance Act, creating any charge or additional burden upon a taxpayer is given retrospective effect by express words by the legislature, it cannot be applied retrospectively to the disadvantage of the taxpayer.

Aminuddin Ansari for Applicant.

Amjad Jawaid Hashmi for Respondent.

Dates of hearing: 20th December, 2012, and 12th August,2013.

JUDGMENT

AQEEL AHMED ABBASI, J.---Being aggrieved and dissatisfied with the order dated 30-10-2009 passed by the Income Tax Appellate Tribunal in I.T.A. No.281/KB/2008 (Tax Year 2004), whereby the appeal filed by the applicant was dismissed. The applicant has filed instant Reference Application under section 133(1) of Income Tax Ordinance, 2001 and has proposed the following two questions of law, which according to learned counsel for the applicant arise from the impugned order passed by the Tribunal and require authoritative pronouncement by this Court:--

(a)Whether in terms of section 133(2A) of the Income Tax Ordinance, 2001 on the date of hearing of appeal on 10-10-2009 when more than six months had elapsed since the filing of appeal on 12-4-2008; the Appellate Tribunal ceased to have jurisdiction to hear and decide the appeal and the relief sought in the grounds of appeal by the appellant/tax payer shall be deemed to have been allowed to the tax payer?

(b)Whether clause 3A of Part IV of the Second Schedule to the Income Tax Ordinance, 2001 inserted through Finance Act, 2004, is in the nature of remedial/beneficial legislation and is applicable to tax year 2004 and the applicant/tax payer is entitled for exemption claimed?

2.Brief facts as recorded by the Appellate Tribunal and stated by the learned counsel for the applicant in the instant reference application are that the taxpayer filed return of income for tax year 2004 declaring income of Rs.814,064. The assessment was deemed to have been finalized under the provisions of section 120 of the Income Tax Ordinance, 2001. The Additional Commissioner of Income Tax found the deemed assessment erroneous in so far as prejudicial to the interest of revenue and he issued show-cause notice to the taxpayer as under:--

"On examination of your case record for the Tax Year 2004 revealed that you have declared income from mark-up amounting to Rs.42,766,374 and claimed its exemption under State Bank of Pakistan, Circular No.29 of 2002. The exemption claimed under State Bank of Pakistan, Circular is not allowable under Income Tax Ordinance and same is to be disallowed under section 70 of Income Tax Ordinance, 2001 and mark up is be treated and taxed as income from business."

Counsel for the taxpayer filed reply to the above stated show-cause notice which is responded as under.-

"Reference is made to your notice under section 122(9) of the Income Tax Ordinance, 2001 along with letter No. Addl. CIT/Audit/Div-I/Cos-III/2007-08/71 both dated August, 11,2007 showing your intention to tax reversal of unpaid mark up vide State Bank of Pakistan BPD Circular No.29 of 2002 dated October, 15, 2002 under section 70 of the Income Tax Ordinance, 2001. In this connection we draw your attention to Clause 3A of Part IV of Second Schedule to the Income Tax Ordinance, 2001 which specifically provide exemption of this income under section 70 of the Income Tax Ordinance, 2001.

In view of the above you would understand the notice issued based on the misunderstanding which may be withdraw with intimation to our client and oblige."

3.The explanation furnished was not found satisfactory by the taxpayer, who passed the order under section 122 (5A) of the Income Tax Ordinance, 2001, whereafter an appeal was preferred by the applicant before the Commissioner of Income Tax (Appeals), which was also dismissed by the Commissioner vide order dated 14-12-2007. The applicant preferred appeal before the Income Tax Appellate Tribunal against the order passed by the CIT (Appeals), who vide impugned order has also dismissed the appeal filed by the applicant.

4.Learned counsel for the applicant has pressed question No. 2 only which according to learned counsel is a substantial question of law which arises from the order passed by the learned tribunal in the instant case. While giving the brief history of the case, it has been contended by learned counsel that for the tax year 2004 the applicant could not file return of income within due date i.e. 30th September 2004 and sought extension of time, which was granted by the respondent and the return was filed on 15-10-2004. Per learned counsel, an amendment was introduced by Finance Act, 2004, whereby clause (3A) of Part IV of the Second Schedule to the Income Tax Ordinance, 2001 was inserted whereby certain benefit and exemption was extended to the tax payers. It is contended by the learned counsel for the applicant that from bare reading of clause (3A) of Part-IV of the Second Schedule to the Income Tax Ordinance, 2001, it is clear that the application of subsections (5) and (5A) of section 34 and section 70 were made not applicable to any benefit derived by way of waiver of profit on debt or the debt itself under the State Bank of Pakistan, Banking Policy Department's Circular No.29 of 2002 dated 15th October, 2002, therefore, the date of application of clause (3A) of Part-IV of the Second Schedule by the legislature itself has been made effective from the 15th October, 2002, which reflects that retrospective effect has been given by the legislature to such amendment. It is further contended by the learned counsel for the applicant that instant amendment is beneficial and curative in nature, hence will apply retrospectively and its effect is required to be given to the pending cases as well. Learned counsel states that the case of the applicant for the tax year 2004 was a pending case as the return was filed on 15-10-2004, whereas the amendment was introduced through Finance Act, 2004, applicable from July 2004 onwards. Per learned counsel, the case of the applicant was not past and closed transaction, therefore, the benefit of the amended provision was available to the applicant, which has wrongly been denied by the respondent. In support of his contention, learned counsel for the applicant has placed reliance in the following case-laws:--

(1)C.I.T Karachi v. BRR Investment (Pvt.) Ltd., Karachi 2011 PTD 2148.

(2)Commissioner of Income Tax v. Shahnawaz and others 1993 SCMR 73

(3)Commissioner of Income Tax v. Humayun Elahi Shaikh 2011 PTD 145.

5.Conversely, learned counsel for the respondent has controverted the submissions made by the learned counsel for the applicant and has supported the impugned order passed by the Income Tax Appellate Tribunal in the instant case. It has been contended by the learned counsel for the respondent that on the expiry of last date for filing of return for the tax year 2004 i.e. 30th September 2004, the matter became past and closed transaction for the tax year 2004, whereas the applicant was required to furnish the return of total income keeping in view the provision of law as existed on the closing date of the tax year i.e. 30th June 2004. Per learned counsel, since the amendment was introduced by Finance Act, 2004 in July 2004 the same was applicable for the tax year 2005 onwards and not for the earlier years as suggested by the counsel for the applicant. It is contended that a taxpayer is required to furnish return of total income for the relevant tax year keeping in view the law as existed during that year and cannot be allowed to take benefit of any amendment introduced after the cutoff date meant for closing of the tax year and on expiry of the last date for filing return for the tax year. It has been contended by the learned counsel that no question of law arises from the order of learned Tribunal, therefore, instant reference application may be dismissed.

6.We have heard both the learned counsel and perused the record. Since the learned counsel for the applicant has pressed question No.2 only which relates to prospective or retrospective application of Clause (3A) of Part-IV of the Second Schedule, therefore, will be advantageous to reproduce the provision ofClause (3A) of Part IV of the Second Schedule, section 34 and section 70 of the Income Tax Ordinance, 2001, which read as follows:--

"(3A) The provisions of subsections (5) and (5A) of section 34 and section 70 shall not apply to any benefit derived by way of waiver of profit on debt or the debt itself under the State Bank of Pakistan, Banking Policy Department's Circular No.29 of 2002, dated the 15th October, 2002, to the extent not set off against the losses under Part VIII of Chapter III."

"34. Accrual-basis accounting.

(5)Where a person has been allowed a deduction for any expenditure incurred in deriving income chargeable to tax under the head-Income from Business and the person has not paid the liability or a part of the liability to which the deduction relates within three years of the end of the tax year in which the deduction was allowed, the unpaid amount of the liability shall be chargeable to tax under the head-Income from Business in the first tax year following the end of the three years.

2[(5A) Where a person has been allowed a deduction in respect of a trading liability and such person has derived any benefit in respect of such trading liability, the value of such benefit shall be chargeable to tax under 3[the] head-Income from Business for the tax year in which such benefit is received.]"

"70. Recouped expenditure.---Where a person has been allowed a deduction for any expenditure or loss incurred in a tax year in the computation of the person's income chargeable to tax under a head of income and, subsequently, the person has received, in cash or in kind, any amount in respect of such expenditure or loss, the amount so received shall be included in the income chargeable under that head for the tax year in which it is received."

7.From perusal of the provision of Clause (3A) of Part IV of the Second Schedule inserted by Finance Act, 2004, it is seen that provisions of subsections (5)(5A) of sections 34 and 70 of the Income Tax Ordinance, 2001 are made inapplicable in the case, where any benefit derived by way of waiver of profit on debt or the debt itself under the State Bank of Pakistan, Banking Policy Department Circular No. 29 of 2002 dated 15th October 2002, to the extent not setoff against the losses under Part VIII of Chapter-3 of the Income Tax Ordinance, 2001 is excluded from the charge of tax. The precise controversy which has been raised through instant reference application by the counsel for the applicant is to determine as to whether Clause (3A) of Part IV of the Second Schedule to the Income Tax Ordinance, 2001 inserted through Finance Act, 2004, is remedial and beneficial in nature, hence, applicable retrospectively to tax year 2004. Admittedly, the financial year in the case of applicant for the tax year 2004 was closed on 30th June 2004, whereas, the applicant was required to furnish return of his total income for the tax year 2004 by 30th September 2004. The applicant in the instant case, could not furnish the return of his total income by 30th September 2004 and sought extension of time for filing of return, which was granted by the respondent, and the return of income in the instant case was filed by 15th October 2004. The aforesaid facts reflect that when the return of tax year 2004 was filed by the applicant, the amendment in Part IV of the Second Schedule by inserting Clause (3A) therein by Finance Act, 2004 was in existence, whereas assessment for the tax year 2004 was pending as in terms of section 120(1) a deem assessment by the Commissioner, Inland Revenue could come into existence only on the filing of return of income in terms of section 114 read with section 118 of Income Tax Ordinance, 2001. In view of hereinabove fact, it can be safely concluded that when Clause 3A of Part IV of the Second Schedule was inserted through Finance Act, 2004, the assessment for tax year 2004 in the case of applicant was still pending.

8.If we may examine the provision of Clause 3A of Part IV of the Second Schedule to the Income Tax Ordinance, 2001, it can be seen that the said provisions are remedial and beneficial in nature as certain relief has been given to the tax payers by excluding its benefit derived by way of waiver of profit and debt or the debt itself, from the chargeability to tax. It can be further seen that legislature, while inserting Clause (3A) Part IV of the Second Schedule has extended this benefit retrospectively by referring to Circular No. 29 of 2002 dated 15th October 2002 issued by the State Bank of Pakistan. There is no cavil to the legal proposition that normally amendments introduced in fiscal statutes through Finance Act apply prospectively in the year in which it has been inserted, unless, some retrospective effect has been given by the legislature. On the other hand, in cases where the amendment introduced is remedial and beneficial in nature, it has to be given retrospective effect and also to apply to all pending cases on the date of amendment/enactment as well, unless some prospective effect is given by the legislature or it is made prospective by its implication. It is trite principle of construction of a fiscal statute that unless and until any amendment introduced by Finance Act, creating any charge or additional burden upon a taxpayer, is given retrospective effect by express words by the legislature, it cannot be applied retrospectively to the disadvantage of the taxpayer. In the instant case, though the accounts of the tax payer for the tax year 2004 were closed by 30th June 2004, however, the assessment, which includes calculation, computation and application of tax rates and exemption etc., if any, was not finalized, even, a deemed assessment in terms of section 120(1) of the Income Tax Ordinance, 2001 was not made.

9.The scope and its application of an amendment made in subsection (6) of Section 18-A of the Income Tax Act, 1922 by the Finance Act, 1973, whereby the additional amount of tax under subsection (6)(18-A) could only be charged for a period not exceeding 15 months, was extended also to the cases of assesses who had submitted their returns before the coming into force of the said amendment, but their assessment had not yet been finalized and were still pending, came up for consideration before the Hon'ble Supreme Court in the case of CommissionerofIncomeTax v. Shahnawaz Ltd.andothersreportedas 1993 SCMR 73, wherein the Hon'ble Supreme Court has held as under:--

"As explained in Crawford's Statutory Construction" a statute relating to remedial law may properly, in several instances, be given retrospective operation and we are of the opinion that as the amendment in the instant case was introduced to redress an injury which in the words of Circular No. 6 of 1973 (Income Tax) issued on 7th July, 1973 by the Central Board of Revenue itself was "designed to soften the law in favour of tax-payers who could previously be charged to additional tax up to the date of assessment even though the finalization of assessment was delayed due to no fault of theirs." This was a proper case in which retrospective operation, to the extent the High Court gave to it, could be given to the amending law."

10.In the case of Commissioner of Income Tax, Karachi v. Messrs B.R.R. Investment (Pvt.) Ltd., Karachi reported as 2011( PTD 2148, a Division Bench of this Court was pleased to hold as under:--

"It is trite proposition of law that beneficial provisions of law are always retrospective in nature until and unless they have been made prospective by their implication."

11.In view of hereinabove facts and by applying the ratio of afore cited judgments, we are of the opinion that the Provision of Clause (3A) of Part IV of the Second Schedule of Income Tax Ordinance, 2001 inserted through Finance Act, 2004 are remedial and beneficial in nature, hence will apply retrospectively, whereas its benefit may also be extended to the case of the present applicant for the tax year 2004, which was pending and not finalized in terms of section 120(1) of the Income Tax Ordinance, 2001. Accordingly, instant reference application is allowed and the question No.2 as proposed hereinabove through instant reference application is answered in affirmative in favour of the applicant. Since the learned counsel for the applicant has not pressed question No.1 nor advanced any arguments in this regard, therefore, we would not answer such question, which otherwise, appears to be a question of law.

12.Let copy of this judgment under the seal of this Court may be sent to the Appellate Tribunal, Inland Revenue, Karachi, for passing the appropriate order accordingly.

SAK/K-24/K Answer in affirmative.