ANWAR YAHYA VS FEDERATION OF PAKISTAN
2017 P T D 1069
[Sindh High Court]
Before Munib Akhktar and Muhammad Karim Khan Agha, JJ
ANWAR YAHYA and 3 others
Versus
FEDERATION OF PAKISTAN through Secretary and 4 others
C.Ps. Nos. D-6586 of 2014 and 4199 of 2015, decided on 09/08/2016.
(a) Interpretation of statutes---
---Fiscal statute---Two interpretations---Scope---If there are two interpretations reasonably possible of a charging section, the one favouring taxpayer prevails.
(b) Income Tax Ordinance (XLIX of 2001)---
---S. 37A & First Schedule [as amended by Finance Act (IX of 2014) & Finance Act (V of 2015)]---Capital gain tax on disposal of securities---Petitioner bought and sold shares of listed companies from time to time, and rates at which capital gains were to be taxed were defined---Petitioner was aggrieved of interpretation of Federal Board of Revenue namely that the section and Table applied as they stood on the date on which a given lot of shares was disposed of---Validity---Shares held for more than a year, as on and up to 30-6-2014, taxpayer acquired a vested right by reason of proviso to S.37A of Income Tax Ordinance, 2001, which did not apply at all to any capital gains on disposal of such shares, regardless of the date of disposal---During period 1-7-2014 till 30-6-2015, Table in Division VII as it stood during such period, was in law, inoperative and did not and could not apply, hence any capital gains made on disposal of shares at any time during such period could not be brought to tax, if such shares had been held for a period of 12 months or more as on the date of disposal---Any tax levied, paid or collected in any manner whatsoever, in respect of any capital gains to which either sub-paras (a) or (b) applied was unlawful and the same was set aside and quashed---High Court directed that taxpayer was entitled to a suitable refund/adjustment in respect of any such tax as was paid or collected---Constitutional petitions were disposed of in terms of declarations and orders by the High Court.
Following are the declarations and orders by the High Court:
(a)It is declared that in respect of shares held for more than a year, as on and up to 30.06.2014, the taxpayer acquired a vested right by reason of the proviso, such that section 37A did not apply at all to any capital gains on the disposal of such shares, regardless of the date of disposal.
(b)It is declared that (quite independently of, and without prejudice to, sub-para (a)) during the period 01.07.2014 till 30.06.2015; Sr. No. 4 of the Table 2014 (i.e., the table in Division VII as it stood during this period) was, in law, inoperative and did not and could not apply, and hence any capital gains made on the disposal of shares at any time during this period could not be brought to tax, if such shares had been held for a period of 12 months or more as on the date of disposal.
(c)It is declared that any tax levied, paid or collected in any manner whatsoever in respect of any capital gains to which either sub-paras (a) or (b) (above) apply was unlawful and is liable to be, and hereby is, declared to be such, quashed and set aside, with the result that the taxpayer shall be entitled to a suitable refund/adjustment in respect of any such tax as has been paid or collected.
(d)The department are restrained from levying or collecting in any manner whatsoever any tax on capital gains to which either sub-paras (a) or (b) (above) apply, under any applicable provision of the 2001 Ordinance (including but not limited to section 100B read with the Eighth Schedule).
Excise and Taxation Officer, Karachi and another v. Burmah Shell Storage and Distribution Company of Pakistan Ltd and others 1993 SCMR 338 ref.
Ms. Lubna Parvez for Petitioners.
Amjad Javed Hashmi and Irshad ur Rehman for FBR/Inland Revenue Department.
Ashfaq Rafiq Janjua, Standing Counsel.
Tariq Qureshi for KSE.
Haider Naqi for NCCPL.
Dates of hearing: 20th, 26th January and 16th May, 2016
ORDER
MUNIB AKHTAR, J.---These petitions raise issues in relation to section 37A of the Income Tax Ordinance, 2001 ("2001 Ordinance"). The section was inserted into the 2001 Ordinance by the Finance Act, 2010. It underwent certain changes in 2012 but the petitioners (who are the same in both petitions) are aggrieved by changes made by the Finance Acts of 2014 and 2015.
2.In order to better appreciate the rival submissions, it will be convenient to first set out section 37A and the relevant division of the First Schedule. Section 37A, as it stood before the Finance Act, 2014, and to the extent presently relevant, is set out below. The portions especially relevant have been emphasized:
"37A. Capital gain on disposal of securities.---(1) The capital gain arising on or after the first day of July 2010, from disposal of securities held for a period of less than a year, other than a gain that is exempt from tax under this Ordinance, shall be chargeable to tax at the rates specified in Division VII of Part I of the First Schedule:
Provided that this section shall not apply if the securities are held for a period of more than a year ....
(2) The holding period of a security, for the purposes of this section, shall be reckoned from the date of acquisition (whether before, on or after the thirtieth day of June, 2010) to the date of disposal of such security falling after the thirtieth day of June, 2010...."
Put briefly, section 37A, brings to tax capital gains on securities, subject to the terms of the section and at the rates set out in Division VII of Part I of the First Schedule (herein after referred to as "Division VII"). We may note that the term "security" is defined in subsection (3) for the purposes of the section, and as presently relevant means shares of listed companies. By the Finance Act, 2014, the proviso to subsection (1), as set out above, was omitted. (The subsection has another proviso but that is not relevant for present purposes.) By the Finance Act, 2015 the words highlighted in the main part of the subsection ("held for a period of less than a year") were omitted. It is these omissions, along with the changes made to Division VII by the Finance Acts that led to the filing of these petitions. Division VII, as it stood prior to the Finance Act, 2014 and to the extent as presently relevant, was as follows:
Division VII
Capital Gains on disposal of Securities
The rate of tax to be paid under section 37A shall be as follows---
TABLE
| S.No. | Period | Tax Year | Rate of tax |
| 1 | 2 | 3 | 4 |
| 1. | Where holding period of a security is less than six months. | 2011 2012 2013 2014 2015 | 10% 10% 10% 10% 17.5% |
| 2. | Where holding period of a security is more than six months but less than twelve months. | 2011 2012 2013 2014 2015 2016 | 7.5% 8% 8% 8% 9.5% 10% |
| 3. | Where holding period of a security is twelve months or more. | --- | 0% |
As substituted by the Finance Act, 2014, the table in Division VII was in the following terms:--
TABLE
| S.No. | Period | Tax Year | Rate of tax |
| 1 | 2 | 3 | 4 |
| 1. | Where holding period of a security is less than six months. | 2011 2012 2013 2014 | 10% 10% 10% 10% |
| 2. | Where holding period of a security is more than six months but less than twelve months. | 2011 2012 2013 2014 | 7.5% 8% 8% 8% |
| | Tax Year 2015 | | |
| 3. | Where holding period of a security is less than twelve months. | | 12.5% |
| 4. | Where holding period of a security is twelve months or more but less than twenty-four months. | | 10% |
| 5. | Where holding period of a security is twenty-four months or more. | | 0% |
Finally, as substituted by the Finance Act, 2015 the table in Division VII took the following shape:--
TABLE
| S.No. | Period | Tax Year 2015 | Rate of tax 2016 |
| (1) | (2) | (3) | (4) |
| 1. | Where holding period of a security is less than twelve months. | 12.5% | 15% |
| 2. | Where holding period of a security is twelve months or more but less than twenty four months. | 10% | 12.5% |
| 3. | Where holding period of a security is twenty four months or more but less than four years. | 0% | 7.5% |
| 4. | Where holding period of a security is more than four years | 0% | 0% |
Since the table in its various manifestations will be referred to frequently, for ease of reference the three forms that it took as noted above are herein after referred to as "Table Pre-2014", "Table 2014" and "Table 2015" respectively. (When referred to generally, it is simply called the "Table")
3.Learned counsel for the petitioners submitted that the petitioners held shares in listed companies, which they bought and sold from time to time. Since section 37A had been inserted in 2010 and the rates at which capital gains were to be taxed were laid out in the Table Pre-2014 for the next several tax years, up to 2016, the petitioners carefully managed their share portfolios in order to minimize the tax burden on any capital gains on the disposal of shares. Referring to the section, learned counsel drew attention to the main part of subsection (1), whereby capital gains were to be taxed on shares held for less than a year, and the proviso, whereby the section was not to apply in respect of shares held for a period exceeding one year. Learned counsel submitted that sometime in and from July, 2014 onwards (i.e., after the changes made by the Finance Act, 2014 had come into effect) the petitioners disposed off some of their shares and, for illustrative purposes, reference can be made to one transaction, carried out by the petitioner No. 3. This petitioner held 430,000 shares in Pakistan Telecommunication Company Ltd. (PTCL), which had been acquired on 28.06.2013. The petitioner sold these shares on or after 01.07.2014. On this sale he was brought to tax in terms of Table 2014. It will be remembered that (generally speaking) in the context of the 2001 Ordinance any day from July 1st onwards is part of the tax year identified by the next calendar year. Thus, 01.07.2014 (and onwards) were part of the Tax Year 2015. On this basis, the respondents applied the tax rate of 10%, as given at Sr. No. 4 of the Table 2014, in respect of the Tax Year 2015, i.e., the rate applicable to shares held for more than 12 months but less than 24 months.
4.Learned counsel submitted that there was no such liability. It was submitted, and this constituted the crux of the petitioners' case, that a person acquired vested rights in respect of the position of section 37A and the Table, as both stood on the day on which any shares were acquired, Thus, when the shares were disposed off, the section and the Table did not apply as they stood on the date of the sale. Applying this principle to the illustrative case, it was submitted that section 37A and the Table applied in respect of petitioner No. 3's 430,000 shares in PTCL as they stood on 28.06.2013, the day on which the shares were acquired. This was a vested right, and the position on the day on which the shares were sold was irrelevant. Thus, according to learned counsel, in the illustrative case it was the Table Pre-2014 that was applicable. On that basis there was no tax liability since Sr. No. 3 of the Table Pre-2014 would have applied because the shares had been held for more than 12 months. It will be noted that on the basis of the petitioners' case, the changes made by the Finance Act, 2014 would apply only in respect of shares acquired on or after 01.07.2014 (and so on, in respect of subsequent changes). Learned counsel submitted, putting her case in another way that the position of the section and the Table "crystallized" in respect of any given lot of shares on the date on which the shares were acquired, and this right vested in the taxpayer up to the date of disposal.
5.Learned counsel submitted that since the respondents refused to accept the petitioners' stance, a legal notice dated 15.09.2014 was served on them, which was replied on 30.09.2014 by FBR. The interpretation and application of section 37A and the Table, as put forward by learned counsel, were denied. It will be instructive to reproduce paragraphs 2 and 3 of FBR's reply, since in effect they set out the position adopted by the respondents before us:--
"2. The contention that the amendments made vide Finance Act, 2014 would be applicable in respect of those shares/securities which are purchased on or after the first July 2014 is not based on correct legal premise. If this contention is accepted it would mean that in respect of any investment, no change in taxation including the rate of tax would ever be possible and the rates of tax and other provisions applicable in the year of investment would remain applicable throughout the life of investment. As an illustration, for tax year 2015 (current financial year) the rate of capital gains tax for securities disposed of within 6 months was 17.5% which was reduced to 12.5% through Finance Act, 2014. If the argument put forth by you was correct, then during current financial year where investment in securities was made prior to 01-07-2014, the rate should have been 17.5%. On the contrary, the rate being applied is 12.5% since the gain accrues after 01-07-2014.
3. In view of the above, the contention that the application of the amendment to section 37A is retrospective in nature is not correct. The effect of the said amendment is prospective as the income which is being taxed as a result of the amendment has accrued after July 1, 2014. Therefore your request not to compute capital gain tax on securities purchased before 1-7-2014 cannot be acceded to for the reason mentioned above."
Learned counsel submitted that the interpretation adopted by FBR, namely that the section and Table applied as they stood on the date on which a given lot of shares was disposed off, was incorrect. This was contrary to the plain language of the section. It may be noted that during the course of submissions, we specifically queried learned counsel as to the point taken in FBR's reply, namely what would be the position if the rate applicable on the date of disposal of the shares (which was irrelevant according to learned counsel) was more favorable than the rate applicable on the date on which the shares were acquired (in respect of which the taxpayer had, as asserted, acquired a vested right)? Learned counsel fairly conceded that such a situation could work to the disadvantage of the taxpayer, but submitted that the section had to be applied as properly interpreted regardless of the consequences. Learned counsel prayed that the petitions be allowed and appropriate relief be granted to the petitioners. Learned counsel also filed a written synopsis, in which she referred to a number of cases in relation to vested rights and retrospectivity.
6.Learned counsel for FBR/Inland Revenue contested the case put forward by the petitioners. It was submitted that there was no question of any vested rights and certainly not with reference to the date on which the shares were acquired. Section 37A and Division VII were clear and applied as they stood when the shares were disposed off. The listing of multiple tax years in the Table at any given time was non-binding and did not bar the legislature from amending the same from time to time. The position as set out in the Table could be altered at any time. It was submitted that the position at law had been correctly stated by FBR in its aforementioned reply. It was prayed that the petitions be dismissed. Learned Standing Counsel adopted the submissions by learned counsel for FBR/Inland Revenue. In exercise of right of reply, learned counsel for the petitioners submitted that section 37A was a charging provision in a fiscal statute and changes made therein could not be given retrospective effect unless the language used led to such a result in the clearest possible terms, which was not the case at hand. In any case, the changes made certainly could not defeat vested rights.
7.We have heard learned counsel as above, examined the record and considered the case law. Having considered the point, we are, with respect; unable to accept the core submission made by learned counsel for the petitioners. In our view, a person does not acquire any right, let alone one that vests, in respect of the position of the section and the Table as on the date on which a given lot of shares is acquired. The reason is that section 37A taxes capital gains and it is impossible to say on the date that a given lot of shares is acquired whether there will be any capital gains on the disposal of the same. This is the most crucial point. The "right" that the petitioners claim is in fact not a right at all. This is because what is being asserted is the "right" to be taxed on a known basis over a range of possibilities. (The range of possibilities is of course the various rates set out in the Table as in force on any given date, in respect of (a) different tax years, and (b) periods for which the shares are held.) However, for there to be such a "right" would mean that there will, of a certainty and necessarily, be something to tax at some point over the given range. But whether this will indeed be the case is completely unknown (and unknowable) on the date that the shares are acquired: it cannot be known whether there will be any capital gains at all. (The fact that the Table in all its different manifestations reduced the rate to zero after a given period of time does not affect the analysis.) Additionally, even if a person has taken some decision as to the date of disposal keeping in mind the state of the Table on the date of acquisition of the shares, such decision is purely subjective and unascertainable on any objective third-party basis. Furthermore, that decision, even if made each time and in every case (itself a somewhat doubtful prospect) would be subject to change at any moment entirely at the taxpayer's subjective and undisclosed whim. In our view therefore, the correct position is as asserted by the respondents, namely that the Table applies in relation to any given lot of shares as it stands (or stood) on the date of the disposal thereof.
8.However, this does not end the matter. In our view, on a proper interpretation of section 37A the question of any rights, vested or otherwise, turns not on the state of the Table as on the date of acquisition of the shares but rather on the substantive provisions of the section itself. Here, the most crucial provision is the proviso that was omitted by the Finance Act, 2014. It will be recalled that this was in the following terms: "Provided that this section shall not apply if the securities are held for a period of more than a year". Thus, the proviso disapplied the section in its entirety in respect of shares held for more than one year. As learned counsel for the petitioners rightly submitted, section 37A is a charging provision in a fiscal statute. The proviso had therefore to be read and applied literally. In other words, it meant precisely what it said: if a given lot of shares were held for more than a year, the section simply did not apply. The question of whether there was anything to tax (i.e., whether there were any capital gains) became moot and, in effect, disappeared. It must be kept in mind that this situation is materially different from reading and applying the relevant rate from the Table. To apply the Table necessarily means (and meant) that there is something to tax and the rate of "zero" percent means only that the capital gains are being so taxed. The practical effect would of course be the same, but this should not obscure the fact that, on the legal plane, the proviso operated differently. It operated on its own footing, completely detached from and independently of the Table and, inasmuch as it disapplied the section itself, irrespective of whether there were any capital gains or not. Furthermore, the proviso had effect on a basis that could be ascertained objectively.
9.For the reasons just stated, in our view it was the proviso that could, and did, create vested rights. As soon as any given lot of shares had been held for more than a year, the proviso created a right in the taxpayer that vested, the right being that section 37A did not apply in respect of those shares. And since this was a vested right, the usual rules of interpretation applicable to such rights would apply. (Those rules, being well known and established, require no elaboration and in particular the case law cited by learned counsel for the petitioners need not be considered in any detail.) In particular, the omission of the proviso could not affect the rights that had become vested in a taxpayer in respect of a lot of shares that had been held for more than one year. The omission of the proviso by the Finance Act, 2014 did not therefore affect rights that had vested by the time of the omission. It is to be noted that the omission did not even purport to be retrospective. Since the omission took effect from 01.07.2014, this meant that it was a vested right that section 37A would not apply in respect of any shares held for more than a year by a taxpayer, as on or before 30.06.2014. Any capital gains made on such shares, even if the disposal took place on or after 01.07.2014, could not therefore be brought to tax. Applying the foregoing analysis to the illustrative case (see para 4 above), as on 30.06.2014 the petitioner No. 3 had held the 430,000 shares in PTCL for more than a year (since the same were acquired on 28.06.2013). By reason of the proviso the petitioner had acquired a vested right in section 37A not applying to the said shares on 29.06.2014. The subsequent omission of the proviso was therefore irrelevant and any capital gains made by the petitioner on the disposal of the said shares could not be taxed in terms of section 37A regardless of the date on which they were disposed off.
10.What however of shares that had not been held for more than a year up to 30.06.2014? Obviously, there could be no vested right in respect thereof by reason of the proviso. And, since the proviso was omitted with effect from 01.07.2014, there was no possibility of a vested right being acquired thereafter in terms thereof. However, the position of such shares does require consideration. The reason is the substantive part of subsection (1). It will be recalled that notwithstanding the omission of the proviso, it continued to contain the words "held for a period of less than a year", which were not omitted till the Finance Act, 2015, i.e., with effect from 01.07.2015. Now, when subsection (1) is read inclusive of these words, and compared with the Table 2014, an obvious anomaly becomes apparent. The subsection, which is of course the substantive provision, provided for capital gains being taxed on the disposal of shares held for less than a year. The Table 2014 however, in respect of the Tax Year 2015, at Sr. No. 4 purported to tax shares held for 12 months or more but less than 24 months. The substantive provision appeared to limit the scope of the levy to capital gains on shares held for less than a year; the aforementioned entry purported to expand it to one year and beyond. This was a clear contradiction, which existed during the period from 01.07.2014 till 30.06.2015. During this period, it could be that shares were disposed off by a taxpayer that had been held by him for a period of less than one year as on 30.06.2014 but for 12 months or more by the date of the disposal. The substantive provision, subsection (1), appeared to provide that the capital gains on such shares could not be taxed at all. However, Sr. No. 4 of the Table 2014 appeared to tax the capital gains at 10%. How is the contradiction and anomaly to be resolved? In our view, there can be no doubt that it is to be resolved in favour of the taxpayer. This is so for two reasons. Firstly, as is well known, the Supreme Court has held in Excise and Taxation Officer, Karachi and another v. Burmah Shell Storage and Distribution Company of Pakistan Ltd and others 1993 SCMR 338 that if there is an "irreconcilable inconsistency between a charging section and the Schedule thereof, the former is to prevail and the Schedule is to yield to the Act". In our view, there was an inconsistency of this sort in the case at hand. During the period from 01.07.2014 till 30.06.2015, sub-section (1) of section 37A limited the scope of the levy to capital gains made on shares held for less than a year. The rates set out in Division VII had to be consistent with this condition and limitation. However, the Table 2014, in its Sr. No. 4 went beyond this limit in a manner that was irreconcilably inconsistent. Since Division VII was in a Schedule, the main provision contained in section 37A had to prevail. Secondly, it is fundamental to the interpretation of fiscal statutes that if there are two interpretations reasonably possible of a charging section, the one favoring the taxpayer will prevail. On this basis also, the limitation contained in subsection (1) would apply and override Sr. No. 4 of the Table 2014.
11.In our view therefore, Sr. No. 4 of the Table 2014 was, in law, inoperative during the period 01.07.2014 till 30.06.2015 on account of its inconsistency with the words "held for a period of less than a year" that continued to appear in subsection (1) during that time. It follows that no tax in terms of section 37A could be levied on capital gains made on shares that were disposed off during the aforesaid period and had been held for 12 months or more. It is emphasized that this conclusion is quite independent of the earlier point, in relation to vested lights. Capital gains on shares in respect of which a vested right had accrued by reason of the proviso were put beyond and outside the very scope of section 37A. The conclusion now arrived at was on account of a contradiction and anomaly in the statute. The anomaly was removed by the Finance Act, 2015 when the aforesaid words were omitted. So, something needs to be said of the Table 2015, since it does refer, in its third column, to the Tax Year 2015. Now, the Table 2015 applied (as did the omission of the words from subsection (1)) with effect from 01.07.2015, i.e., for the Tax Year 2016. As has been noted above, the respondents' stance is that section 37A and the Table apply as on the date of the disposal of shares, and not otherwise. It will be recalled that, subject to what has been concluded in the foregoing paras, we agree with this conclusion. It necessarily follows from this that the Table 2015 applied only in relation to the Tax Year 2016, i.e., in respect of its fourth column. This was so because it applied to disposals on or after 01.07.2015. This meant that the reference to the Tax Year 2015 in its third column did not have substantive effect. In particular, this column could not be given any retrospective effect especially in terms of Sr. No. 2 (which was otherwise the same as Sr. No. 4 of the Table 2014).
12.In light of the foregoing analysis and discussion, these petitions are disposed off in terms of the following declarations and orders:--
a.It is declared that in respect of shares held for more than a year, as on and up to 30.06.2014, the taxpayer acquired a vested right by reason of the proviso, such that section 37A did not apply at all to any capital gains on the disposal of such shares, regardless of the date of disposal.
b.It is declared that (quite independently of, and without prejudice to, sub-para (a)) during the period 01.07.2014 till 30.06.2015; Sr. No. 4 of the Table 2014 (i.e., the table in Division VII as it stood during this period) was, in law, inoperative and did not and could not apply, and hence any capital gains made on the disposal of shares at any time during this period could not be brought to tax, if such shares had been held for a period of 12 months or more as on the date of disposal.
c.It is declared that any tax levied, paid or collected in any manlier whatsoever in respect of any capital gains to which either sub-paras (a) or (b) apply was unlawful and is liable to be, and hereby is, declared to be such, quashed and set aside, with the result that the taxpayer shall be entitled to a suitable refund/adjustment in respect of any such tax as has been paid or collected.
d.The respondents are restrained from levying or collecting in any manner whatsoever any tax on capital gains to which either sub-paras (a) or (b) apply, under any applicable provision of the 2001 Ordinance (including but not limited to section 100B read with the Eighth Schedule).
13.The petitions are disposed off in terms of para 12. There will be no order as to costs.
MH/A-9/Sindh Order accordingly.