ALLIED ENGINEERING SERVICES LTD. VS COMMISSIONER OF INCOME TAX, 2015 PTD-KARACHI-HIGH-COURT-SINDH 2562 (2015)

Income Tax Ordinance (XLIX of 2001)---

----Ss. 122 (5A) & 133 (1)---Terms "Income year" and "assessment year"---Amendment, retrospective in nature---Scope---Plea raised by assessee was that amendment made in S. 122(5A) of Income Tax Ordinance, 2001, brought substantial change in concept of "income year" and "assessment year", and such amendment could not be retrospective in nature---Validity---Proceedings under S. 122(5A) of Income Tax Ordinance, 2001, were aimed towards enhancement of tax liability of an assessee or to create additional burden of a tax upon an assessee and such amendment could not be termed as a procedural amendment---Provisions of S. 122(5A) of Income Tax Ordinance, 2001, were substantive in nature, therefore, unless it had been specifically defined by legislature to apply the same retrospectively, the amendment was to be applied prospectively for tax year, in which, it had been introduced through Finance Act---Appellate Tribunal Inland Revenue was not justified to hold that enactment of S. 122(5A) of Income Tax Ordinance, 2001 vide Finance Act, 2003 was applicable to tax year, 2003, more particularly when the Appellate Tribunal Inland Revenue held that amendment introduced through Finance Act, 2003, by inserting S. 122(5A) of Income Tax Ordinance, 2001, was prospective in nature---High Court set aside order passed by Appellate Tribunal Inland Revenue---Reference was allowed in circumstances.

2009 PTD 1392; Kurdistan Trading Company's case 2014 PTD 339; Messrs Munir Associate's case; ITRA No.38/2010 ; Central Power Generation Company Guddo's case 2012 PTD (Trib.) 193 and Commissioner of Income Tax/Wealth Tax Companies, Peshawar v. Pakistan Refrigeration (Pvt.) Ltd., Peshawar 2012 PTD 240 ref.

Commissioner Income Tax v. Messrs Eli Lilay Pakistan (Pvt.) Ltd. 2009 SCMR 1279 = 2009 PTD 1392 and Messrs Kurdistan Trading Company v. Commissioner Inland Revenue 2014 PTD 339 rel.

Arif Muhammad Khan and Riazuddin for Applicant.

Jawaid Farooqui for Respondents.

Date of hearing: 27th May, 2015.

JUDGMENT

AQEEL AHMED ABBASI, J.---Being aggrieved and dissatisfied by the impugned order passed by the Appellate Tribunal Inland Revenue (Pakistan), Karachi in I.T.A. No.264/KB/2008 (Tax Year, 2003), whereby, the Appellate Tribunal Inland Revenue vide order dated 15-11-2010 has dismissed the appeal filed by the applicant, the applicant has proposed following questions, which according to learned counsel for the applicant, are questions of law arising from the impugned order passed by the Appellate Tribunal Inland Revenue in the instant case:--

"(1) That whether the Tribunal was right in holding that the enactment of Section 122(5) of the Income Tax Ordinance, 2001, vide Finance Act, 2003, was applicable to the tax year, 2003, when no retrospective effect had been given to it.

(2) That Whether the Order of the Tribunal is self-contradictory bad in law and of no legal consequence, when it holds that section 122(5) is "prospective" by following the Supreme Court Decision reported at (2009 PTD 1392 in Para 57), and then goes on to hold that the said provision is "procedural", which is again in clear contradiction to the Supreme Court's same decision given in Para 48 thereof"

2. It is inter alia contended by the learned counsel for the applicant that the learned Appellate Tribunal Inland Revenue has erred in law and fact while dismissing the appeal filed by the applicant and by further holding that the amendment made in Section 122(5A) of the Income Tax Ordinance, 2001 through Finance Act, 2003, is procedural in character, therefore, prospective in nature and would be applicable to the tax year, 2003 and onwards. Learned counsel for the applicant has vehemently opposed such finding of the Appellate Tribunal Inland Revenue in the instant case on the grounds that once the Appellate Tribunal Inland Revenue itself held that the amendment made in section 122(5A) through Finance Act, 2003 is prospective in nature, therefore, it would apply prospectively to the tax year, 2004, which is the relevant tax year for application of such amendment and not for the tax year, 2003. Per learned counsel, the whole concept of income year (previous year) and assessment year (current year) as available in the repealed Income Tax Ordinance, 1979, has been changed altogether and in view of the applicable provisions in terms of section 2(68) read with section 74(1) of the Income Tax Ordinance, 2001, according to which, the tax year shall be a period of twelve months ending on the 30th June and be denoted by the calendar year, in which, said date falls. Similarly, per learned counsel, in terms of Section 4 of the Income Tax Ordinance, 2001, a tax is charged on taxable income for each tax year, whereas, the income tax payable by Taxpayer for the Tax year shall be computed by applying rate or rates of tax applicable to the Taxpayer under the Ordinance to the taxable income of the Taxpayer for the year. Learned counsel further submits that in terms of Section 9 of the Income Tax Ordinance, 2001, the taxable income has been defined as total income of the person for the year reduced by the total of any deductible allowance under Part IX of this Chapter of the person for the year, whereas, in terms of section 10 the term total income has been defined as some of the persons income under each of the heads of the income of the year. Learned counsel for the applicant has also readout the extract of the Finance Act, 2003 relating to the amendment, which reads as follows:--

"Whereas it is expedient to make provisions to give effect to the financial proposal of the Federal Government for the year beginning on the first day of July 2003, and to amend certain laws for the purposes hereinafter appearing."

Learned counsel submitted that from plain reading of such extract, it is clear that the proposed amendment has been given effect for the year beginning on the first day of July 2003, hence applicable to tax year, 2004 and not to the tax year, 2003 as has been wrongly held by the Appellate Tribunal Inland Revenue in the instant case. Learned counsel further argued that it is trite principle of income tax law that income tax legislation, as applicable to a given tax year, is normally regarded as being the law and distance of a first day of next succeeding tax year. Per learned counsel, in terms of the definition of the tax year as given in the Income Tax Ordinance, 2001, it is clear that a tax year is a year of twelve months ending on the 30th June and shall be called by the calendar year in which 30th June falls, thus according to learned counsel, if the tax year ends on 30th June 2004, then it would be called tax year, 2004. Per learned counsel, if an amendment is made by the Finance Act for the year beginning on the first day of July 2003, it will naturally end on 30th June, 2004, hence the same may be denoted as the tax year, 2004, which means the following year. It is further contended by the learned counsel for the applicant that if the intention of the legislature would have been to apply the amendment introduced through Finance Act, 2003 immediately then a specific retrospective effect was to be given to such amendment and unless such retrospective effect given by the legislature, the amendment introduced through Finance Act, 2003 in the month of July 2003, which year will end by 30th June 2004, will be applicable to the tax year 2004 and not to the tax year, 2003. In support of his contention, learned counsel for the applicant has placed reliance in the following case-law:-

(i) Kurdistan Trading Company reported at 2014 PTD 339;

(ii) An unreported decision passed in ITRA No.38/2010 of Messrs Munir Associates; and

(iii) Central Power Generation, Company-Guddo (2012 PTD (Trib.) 193)

3. While concluding his arguments, learned counsel for the applicant has prayed that the impugned order passed by the Appellate Tribunal Inland Revenue may be set-aside and the questions proposed may be answered in negative in favour of the applicant.

4. Conversely, learned counsel for the respondent submits that the amendment introduced through Finance Act, 2003 is in the nature of a procedural amendment, which will be applicable to the tax year, 2003 and not to the subsequent tax year, 2004 as argued by the learned by the learned counsel for the applicant. Learned counsel for the respondent further submits that the impugned order does not suffer from any error or illegality as the correct legal position has been considered by the Appellate Tribunal Inland Revenue, whereas, reliance has been placed in the reported judgments of this Court as well as judgments of the Hon'ble Supreme Court on the subject controversy. It has been further contended by the learned counsel for the respondent that it is settled legal position that, if an amendment introduced through Finance Act is procedural in character, the same applies retrospectively to the year in which it is introduced. It has been prayed that the questions proposed through instant Reference Application may be answered in affirmative against the applicant and in favour of the respondent.

5. We have heard the learned counsel for the parties. Perused the impugned order passed by the Appellate Tribunal Inland Revenue and also examined the relevant legal provisions and the case-law as relied by the learned counsel in support of their contentions. The precise controversy involved in the instant case is to examine as to whether assessment in respect of tax year, 2003 can be amended in terms of Section 122(5A) of the Income Tax Ordinance, which was enacted through Finance Act, 2003 in the month of July 2003. The precise contention of the learned counsel for the applicant is that there is substantial change in the concept of income year and assessment year as existed in the previous enactments i.e. the Income Tax Act, 1922 and the Income Tax Ordinance, 1979, whereby, there were two years relevant, one relating to income year or financial years, in which, an assessee may carry on his business/profession etc. and may earn some taxable income, and the other relating to assessment year, in which, such income was required to be assessed as per law prevalent in the assessment year. According to learned counsel, under the new Income Tax Ordinance, 2001, there is no concept of two separate years i.e. income year or assessment year, whereas, only tax year has been defined in terms of section 74 of the Income Tax Ordinance, 2001, according to which, ".... A period of twelve months ending on the 30th day of June .... and shall be denoted by the calendar year in which the said date falls". Through Finance Act, 2003, an amendment was introduced in the section 122 of the Income Tax Ordinance, 2001, whereby, subsection (5A) was inserted. While introducing such amendment, the legislature expressed the intention with regard to application of such amendment by using the following words i.e. "whereas it is expedient to make provisions to give effect to the financial proposal of the Federal Government for the year beginning on the first day of July 2003, and to amend certain laws for the purposes hereinafter appearing." It reflects that such amendments were meant for the tax year beginning w.e.f. July 2003 and ending on 30-6-2004 pertaining to tax year 2004.

6. Similarly, reference has also made to provision of Section 4 and section 74(1) of the Income Tax Ordinance, 2001, which are reproduced hereinabove for the sake of the relevance:--

"SECTION 4: TAX ON TAXABLE INCOME.--- (1) subject to this Ordinance income tax shall be imposed for each tax year, at the rate or rates specified in division I or II of part 1 of the Ist Schedule, as the case may be, on every person, who has taxable income for the year.

(2) The income tax payable by a tax payer for a tax-year shall be computed by applying the rate or rates of tax applicable to the tax payer under this Ordinance to the taxable income of the taxpayer for the year, and from the resulting amount shall be subtracted any tax credits allowed to the tax payer for the year.

(3) Where a taxpayer is allowed more than one tax credit for a tax year, the credits shall be applied in the following order-

(a) any foreign tax credit allowed under section 103; then

(b) any tax credit allowed under Part X of Chapter III; and then.

(c) any tax credit allowed under sections 147 and 168.

(4) Certain classes of income (including the income of certain classes of persons) may be subject to--

(a) separate taxation as provided in sections 5, 6 and 7: or

(b) collection of tax under Division II of Part-V of Chapter X or deduction of tax under Division III of Part-V of Chapter X as a final tax on the income of the person.

(5) Income referred to in subsection (4) shall be subject to tax as provided for in section 5, 5 or 7 or Part V of Chapter X as the case may be, and shall not be included in the computation of taxable income in accordance with section 8 or 169, as the case may be.

(6) Where, by virtue of any provision of this Ordinance income tax is to be deducted at source or collected or paid in advance, it shall, as the case may be, be so deducted, collected or paid, accordingly.

"SECTION 74(1): TAX YEAR:---(I) For the purpose of this Ordinance and subject to this section, the tax year shall be a period of twelve months ending on the 30th day of June (hereinafter referred to as 'normal tax year') and shall, subject to subsection (3), be denoted by the calendar year which the said date falls.

(2) Where a person's income year, under the repealed Ordinance, is different from the normal tax year, or where a person is allowed, by an order under subsection (3), to use a twelve months' period different from normal tax year, such income year or such period shall be that person's tax year (hereinafter referred to as 'special tax year') and shall, subject to sub-section (3), be denoted by the calendar year relevant to normal tax year in which the closing date of the special tax year fails.

(2A) The [Board], --

(1) In the case of a class of persons having a special tax year different from a normal tax year may permit by a notification in the official Gazette, to use a normal tax year: and

(ii) In the case of a class of persons having a normal tax year may permit, by a notification in the official Gazette, to use a special tax year.

(3) A person may apply, in writing, to the Commissioner to allow him to use a twelve months' period, other than normal tax year, as special tax year and the Commissioner may, subject to subsection (5), by an order, allow him to use such special tax year.

(4) A person using a special tax year, under subsection (2), may apply in writing, to the Commissioner to allow him to use normal tax year and the Commissioner may, subject to subsection (5), by an order, allow him to use normal tax year.

(5) The Commissioner shall grant permission under subsection (3) or (4) only if the person has shown a compelling need to use special tax year or normal tax year, as the case may be, and the permission shall be subject to such conditions, if any, as the Commissioner may impose.

(6) An order under subsection (3) or (4) shall be made after providing to the applicant an opportunity of being heard and where his application is rejected the Commissioner shall record in the order the reasons for rejection.

(7) The Commissioner may, after providing to the person concerned an opportunity of being heard, by an order, withdraw the permission granted under subsection (3) or (4)

(8) An order under subsection (3) or (4) shall take effect from such date, being the first day of the special tax year or the normal tax year, as the case may be, as may be specified in the order.

(9) Where the tax year of a person changes as a result of an order under subsection (3) or subsection (4), the period between the end of the last tax year prior to change and the date on which the changed tax year commences shall be treated as a separate tax year, to be known as the "transitional tax year".

(10) In this Ordinance a reference to a particular financial year shall, unless the context otherwise requires include a special tax year or a transitional tax year commencing during the financial year.

(11) A person dissatisfied with an order under subsection (3), (4) or (7) may file a review application to the [Board], and the decision by the [Board] on such application shall be final.

7. From perusal of above definitions, it is clear that under the new Income Tax Ordinance, 2001, there is one year known as tax year relevant for the purposes of assessment of the income of an assessee on the basis of law as prevalent on the date when such amendment was introduced ending on the 30th June of the next year in the instant case. The assessment for the tax year, 2003, which ended on 30th June 2003 has been amended by the respondent by invoking the provisions of Section 122(5A), which was introduced through Finance Act, 2003 in the month of July, whereas, the year starting with effect from first July 2003, in view of the definition of the tax year, as defined under section 74 of the Income Tax Ordinance, 2001, ending on the 30th day of June 2004, is called tax year, 2004. In an unreported judgment in the case of Defence Housing Authority v. Deputy Commissioner Income Tax, etc., learned Single Judge of the Lahore High Court, while examining the scope of amendment brought about through Finance Act, 2008 in Section 49 of the Income Tax Ordinance, 2001 has held that the notice issued by the Income Tax Department was illegal in respect of the petitioner for the tax years 2003 to 2005 i.e. prior to amendment introduced in the year, 2008. In another reported judgment of Peshawar High Court in the case of Commissioner of Income Tax/Wealth Tax Companies, Peshawar v. Pakistan Refrigeration (Pvt.) Ltd., Peshawar 2012 PTD 240 while examining the identical question as raised through instant Reference Application relating to application of amendment introduced through Finance Act, 2003 in Section 122(5A) of the Income Tax Ordinance, 2001, has held as under:--

"8. As a general rule, every statute shall be deemed to be applicable from the date of its coming into being unless with express provision retrospectively is given to it. Section 122(5A) of the Income Tax Ordinance, 2001 was added by the Finance Act, 2003 w.e.f. 1-7-2003. The same addition has not specifically been made applicable with retrospective effect, thus, section 122(5A) of the Ordinance (ibid) inserted in the year, 2003 would not be made applicable to the assessment finalized before it.

9. The Question of interpretation and applicability of section 122 of the Income Tax Ordinance, 2001 with prospective or retrospective effects came before the Hon'ble Supreme Court of Pakistan in various appeals, decided vide judgment reported in 2009 SCMR 1279 wherein it was held that:-

"Provision of S. 122, Income Tax Ordinance, 2001 is impregnated with an essential attribute, which affects an accrued right of an assessee or a taxpayer that after efflux of a certain period of time, his assessment will not be opened or amended Section 122 of the Income Tax Ordinance, 2001, therefore, cannot be applied retrospectively unless the Legislature intended to give it retrospective effect---Section 122 having the potential of adding to the liability of the taxpayer, the same was not a mere matter of procedure and taxpayers/assessee have a right that their assessments will not be opened after the expiry of the statutory period of five years.'

The same view was followed by this Court in a case reported in 2009 PTD 16.

10. Respectfully following the dictum laid down by the Hon'ble Supreme Court of Pakistan in case titled "Commissioner Income Tax v. Messrs Eli Lilay Pakistan (Pvt.) Ltd. (2009 SCMR 1279) = 2009 PTD 1392 on the proposition, we find this Tax Reference devoid of merits which is hereby dismissed.

8. From perusal of the provisions of Section 122(5A) of the Income Tax Ordinance, 2001, it may be seen that Tax Authorities have been empowered to make an amended assessment with a view to enhance the income or tax liability of an assessee whose assessment had already been finalized under Section 120 or 122 of the Income Tax Ordinance, 2001. The very nature of the proceedings under section 122(5A) are aimed towards enhancement of tax liability of an assessee or to create additional burden of a tax upon an assessee, therefore, such amendment cannot be termed as a procedural amendment, therefore, we are also of the considered opinion that the provisions of section 122(5A) of the Income Tax Ordinance, 2001 are substantive in nature, therefore, unless it has been specifically defined by the legislature to apply the same retrospectively, the said amendment is to be applied prospectively for the tax year in which, it has been introduced through Finance Act. In the famous case of Commissioner Income Tax v. Messrs Eli Lily Pakistan (Pvt.) Ltd. 2009 SCMR 1279 = 2009 PTD 1392, the Hon'ble Supreme Court while examining the scope and application of the amendment introduced through Finance Act, 2003 i.e. 122(5A) has held that the Section 122 had the potentiality to increase the liability of an assessee, therefore, it cannot be treated as procedural. It has been further held that the provision of Section 122(5A) will not apply retrospectively in respect of tax year ending on 30th June 2003 and will be applicable prospectively to the tax year beginning with effect from July 2003 and ending on 30-6-2004 i.e. tax year 2004. In another reported judgment of this Court in the case of Messrs Kurdistan Trading Company v. Commissioner Inland Revenue reported as 2014 PTD 339, a Division Bench of this Court after having placed reliance on various decisions of this Court as well as Hon'ble Supreme Court on a controversy relating to application of an amendment introduced through Finance Act, has held that normally amendment introduced in a fiscal Statute through Finance Act, apply prospectively in the year in which it is inserted, unless some retrospective effect is given by the legislature through express words. In the instant case, admittedly the amendment i.e. insertion of subsection (5A) in section 122 of the Income Tax Ordinance, 2001 was made through Finance Act, 2003 in the month of July, 2003, which ends on 30th June, 2004, whereas, there is no retrospective effect given by the legislature either expressly or through intendment, therefore, the said amendment i.e. 122(5A) in the Income Tax Ordinance, 2001 through Finance Act, 2003 is to apply prospectively for tax year 2004 and onwards and cannot be invoked for a tax years prior to the year ending on 30th June 2003.

7. In view of hereinabove facts and circumstances of the case and by respectfully following the decisions of the Hon'ble Supreme Court, particularly, in the case of Commissioner Income Tax v. Messrs Eli Lily Pakistan (Pvt.) Ltd. (2009 SCMR 1279) = 2009 PTD 1392, as well as the decision in above cited cases, we are of the opinion that the Appellate Tribunal Inland Revenue was not justified to hold that the enactment of Section 122(5A) of the Income Tax Ordinance, 2001 vide Finance Act, 2003 was applicable to tax year 2003, more particularly when the Appellate Tribunal Inland Revenue itself has held that the amendment introduced through Finance Act, 2003 by inserting section 122(5A) is prospective in the nature.

8. Accordingly, the impugned order passed by the Appellate Tribunal Inland Revenue in the instant Reference Application is hereby set-aside and the Question No.1 as proposed hereinabove, is answered in "Negative" in favour of the applicant and against the respondent, whereas, in view of reply to Question No.1 in the above terms, the Question No.2 as proposed by the applicant in the instant Reference Application is answered in "Affirmative" in favour of the applicant and against the respondent.

9. Instant Reference Application stands allowed in the aforesaid terms. Let copy of this judgment be sent under the seal of the Court to the Appellate Tribunal Inland Revenue.

MH/A-61/SindhOrder accordingly.