SARWAR AND COMPANY (PVT.) LTD. VS APPELLATE TRIBUNAL INLAND REVENUE, 2017 PTD-LAHORE-HIGH-COURT-LAHORE 558 (2016)

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

----Ss. 18(1)(a), 122, 133, 153(1)(c), 169 & Second Schedule, Part-I---Reference---Exemption from tax---Final Tax Regime---Taxpayers were aggrieved of notices issued under S. 122 of Income Tax Ordinance, 2001, specifying that they were not entitled to concession for being taxed under Final Tax Regime---Validity---For taxation under Final Tax Regime in view of S. 169 of Income Tax Ordinance, 2001, no question of "profits and gains" earned by taxpayer had arisen because tax withheld/deducted on certain transactions was taken as final discharge of tax liability without entering into an inquiry as to which expenditure was allowable under S. 20 of Income Tax Ordinance, 2001, or which was not under S. 21 of Income Tax Ordinance, 2001---High Court decided the matter in favour of authorities and against taxpayer by answering the question in negative---Reference was disposed of accordingly.

Dr. Muhammad Anwar Kurd and 2 others v. The State through Regional Accountability Bureau, Quetta 2011 SCMR 1560; Messrs Rashid and Co. v. Commissioner of Income Tax, Zone-A, Lahore 2005 PTD 1790; Messrs Elahi Cotton Mills Ltd. and others v. Federation of Pakistan, through Secretary M/o Finance, Islamabad and 6 others PLD 1997 SC 582; Commissioner of Income Tax/Wealth Tax v. Messrs Ellcot Spinning Mills Ltd. 2008 PTD 1401; Uch Power (Pvt.) Ltd. and others v. Income Tax Appellate Tribunal and others 2010 PTD 1809; Messrs Humayun Ltd. v. Pakistan and others PLD 1991 SC 963; Bank of Commerce v. Tennesse 161 US 134 and Karachi Development Authority v. Central Board of Revenue through Members Central Excise and Land Customs, Islamabad and others 2005 PTD 2131 ref.

(b) Interpretation of statutes---

----Fiscal statute---Exemption clause---Scope---While interpreting an exemption clause, plain language is to be considered and implications are not allowed---Conditions stipulated in exemption clause must be fulfilled---In case of any doubt or two possible interpretations, the one favouring chargeability of tax is to be employed---Exemption presupposes chargeability.

Collector of Customs and others v. Ravi Spinning Ltd. and others 1999 SCMR 412 rel.

Rana Muhammad Afzal for Applicants (in P.T.Rs. Nos. 69, 70 and 71 of 2014).

Ibrar Ahmad for Applicants (in P.T.Rs. Nos. 364, 365 and 366 of 2013).

Ch. Muhammad Yasin Zahid and Liaquat Ali Chaudhry for Applicants (in I.T.Rs. Nos. 477 to 482 of 2015).

Muhammad Iqbal Hashmi and M. M. Akram for Respondents (in P.T.Rs. Nos. 364, 365 and 366 of 2013).

Muhammad Ajmal Khan for Respondents (in I.T.Rs. Nos. 477, 478 and 479 of 2015).

Dr. Ishtiaq Ahmad Khan, Commissioner Inland Revenue, LTU, Lahore.

Muhammad Yasir Pirzada, Additional Commissioner Inland Revenue, Lahore.

Date of hearing: 28th April, 2016.

JUDGMENT

SHAHID JAMIL KHAN, J.---As common legal issues, under similar facts are involved, therefore, this judgment shall decide the instant Tax Reference, as well as, P.T.Rs. Nos. 69 and 70 of 2014, P.T.Rs. Nos. 364, 365 and 366 of 2013, I.T.Rs. Nos. 477, 478, 479, 480, 481 and 482 of 2015, arising out of four independent orders dated 28.02.2014, 27.08.2013 and 22.06.2015 passed, respectively, by Appellate Tribunal Inland Revenue ("Appellate Tribunal").

P.T.Rs. Nos. 69, 70, 71 of 2014 are filed by taxpayers, while P.T.Rs. Nos. 364, 365 and 366 of 2013 and I.T.Rs. Nos. 477 to 482 of 2015 are filed by the department.

2.Taxpayers, in the tax years 2010, 2011 and 2012, derived income from execution of construction contracts and other civil engineering projects. Head offices of taxpayers were at Lahore, however, the civil construction work was executed in affected areas of Khyber Pakhtunkhwa, FATA and PATA. The controversy, leading to the legal proposition under consideration, hinges upon interpretation of Clause (126F), which was introduced in Part I of Second Schedule of the Income Tax Ordinance, 2001 ("the Ordinance") through Finance Act, 2010. It provided exemption for three years (from tax year 2010) to those taxpayers who were located in the affected areas of Khyber Pakhtunkhwa, FATA and PATA.

3.Taxpayers revised their returns/statements to get benefit of exemption provided under this Clause, however learned counsel for the taxpayers have not denied that they were covered by the provisions of Section 153(1)(c) of the Ordinance, therefore, fell under Final Tax Regime ("FTR").

4.Notices under Section 122 of the Ordinance were issued, inter alia, for reason that the taxpayers were not entitled to concession under this Clause for being taxed under FTR. In Taxation Officer's opinion, provisions of the Clause contained the words "profits and gains", there-fore, the concession was meant only for Normal Tax Regime ("NTR").

5.In P.T.Rs. Nos. 69, 70 and 71 of 2014 seven questions are framed, out of which following questions, which directly relate to the controversy, are pressed for our opinion:--

"iii.Whether the explanatory letter of FBR vide C.No.4(4)ITP/2010 dated 07.06.2013 can be applied retrospectively.

v.Whether the learned Tribunal justified to declare that no refund is admissible on contract receipts when the appellant was not chargeable to tax in respect of those receipts being covered under Clause (126F).

vii.Whether, in view of exemption certificate issued by Commissioner, the Additional Commissioner was empowered to undo the effect of exemption certificate issued to the appellant."

In P.T.Rs. Nos. 364, 365 and 366 of 2013, out of seven questions framed, following questions, which directly related to the controversy, are pressed for our opinion:--

"1.Whether under the facts and circumstances of the case the learned ATIR was justified to delete minimum tax liability under section 113 on the ground that charging of minimum tax liability was not confronted to the taxpayer, whereas, payment/s of tax under section 113 was the statutory obligation of taxpayer? Furthermore findings on Section 113 are duly dilated upon?

2.Whether, the learned ATIR was justified to endorsed the order of CIR (Appeals) that the provisions of clause (126F) of Part 1 of Second Schedule also grant exemption from tax on contractual receipts under Section 153(1)(c) of the Income Tax Ordinance, 2001 which otherwise fall under final tax regime and were not exempted by the statute in expressed manner?

In I.T.Rs. Nos. 477 to 482 of 2015, following question is relevant to the proposition under consideration:--

"(i)Whether the contractual receipts of a contractor would fall under clause 126F who according to law is liable to be assessed under FTR/PTR and its receipts are taxable under clause (C) of subsection (1) of section 153 of the Income Tax Ordinance, 2001 subject to tax 6% as full and final tax?

6.Mr. Muhammad Yasir Pirzada, Additional Commissioner Inland Revenue, Lahore, assisted by learned counsel for the department, has argued the cases, with permission of the Court. He has read Section 18(1)(a) of the Ordinance, to submit that "profits and gains" of any business are taxable as business income under normal law; whereas under Section 169(2)(a), the income falling under FTR shall not chargeable to tax under any head of income in computing the taxable income of the person. Further submits that Appellate Tribunal, while holding that taxpayer was entitled to exemption under Clause (126F), has not given reasons. Also submits that even minimum tax under Section 113 is not paid, if at all, it is accepted without considering that applicant was entitled to the exemption.

7.Mr. Muhammad Iqbal Hashmi, Advocate appearing for respondents taxpayers has raised preliminary objection that six appeals were decided through impugned order dated 27.08.2013, whereas department has filed only three applications. He explains that cross-appeals were filed against order of Commissioner Appeals; taxpayer had challenged levy of minimum tax on the ground that it was not levied in the order under Section 122(5A), therefore, Commissioner Appeals could not have levied it. The department in P.T.Rs. Nos. 364, 365 and 366 of 2013 has challenged Commissioner Appeals' Order for allowing exemption under Clause (126F). Mr. Ibrar Ahmad, Advocate for the applicants department confronted with the situation, submits that though the impugned order as a whole is challenged, yet the emphasis is on the findings of Appellate Tribunal regarding exemption under Clause (126F).

Since, learned counsel for the applicants department in P.T.Rs. Nos. 364, 365 and 366 of 2013 has failed to establish that findings of Appellate Tribunal on levy of minimum tax under Section 113 is challenged, therefore, we decline to exercise our jurisdiction to the extent of Question No. (1) regarding levy of minimum tax in P.T.Rs. Nos. 364, 365 and 366 of 2013.

8.Replying to the arguments on remaining questions of law, Mr. Muhammad Iqbal Hashmi, Advocate submits that under proviso to Clause (126F), manufacturers and suppliers of Cement, Sugar, Beverages and Cigarettes are excluded specifically from purview of the Clause. He explains that some of the sectors mentioned in the proviso are covered under FTR. He concludes that such exclusion is made regarding the income covered under FTR. Placing reliance on Dr. Muhammad Anwar Kurd and 2 others v. The State through Regional Accountability Bureau, Quetta (2011 SCMR 1560) he submits; though business sector of the taxpayers, in this case, mentioned in the proviso, however, it encompasses their case on the analogy of being under FTR. He also submits that "profits and gains" are covered under FTR and has placed reliance on a judgment by Division Bench of this Court in Messrs Rashid and Co. v. Commissioner of Income Tax, Zone-A, Lahore (2005 PTD 1790), Dr. Muhammad Anwar Kurd and 2 others v. The State through Regional Accountability Bureau, Quetta (2011 SCMR 1560). Explains that income under Presumptive Tax Regime ("PTR") is also "profit and gains". For this, he has placed reliance on Messrs Rashid and Co., v. Commissioner of Income Tax, Zone-A, Lahore and others (2005 PTD 1790).

9.Mr. M. M. Akram, Advocate has also argued for the respondent taxpayers and submits that presumptive tax is charged in lieu of income tax, hence presumptive tax shall also be exempted from Clause (126F) if income under normal law is exempted. He has placed reliance on paragraph No.35 of the judgment in Messrs Elahi Cotton Mills Ltd. and others v. Federation of Pakistan, through Secretary M/o Finance, Islamabad and 6 others (PLD 1997 Supreme Court 582). Elaborating his arguments, he submits that as per judgment in Elahi Cotton Mills' case (supra), the presumptive tax is charged in lieu of income under Entry 52 of Fourth Schedule of the Constitution of the Islamic Republic of Pakistan, 1973 ("Constitution"). Explains; if income is exempted, then tax cannot be charged on a tax which is being charged in lieu of income. Reliance is placed on Commissioner of Income Tax/Wealth Tax v. Messrs Ellcot Spinning Mills Ltd. (2008 PTD 1401).

By referring to phrase "profit and gains" he disagree with the interpretation given by the Revenue. Explaining his argument; submits that this phrase has been used in number of places, other than Section 18, in the Ordinance. Concludes; that analogy drawn by the Revenue is misconceived. Also submits that only company is excluded from being taxed in FTR under subsection (3) of Section 153 of the Ordinance.

10.Mr. Muhammad Ajmal Khan, Advocate for the respondents taxpayers in I.T.Rs. Nos. 477, 478 and 479 of 2015 has adopted the arguments made by Mr. Muhammad Iqbal Hashmi, Advocate that specific exclusion under proviso to Clause 126F includes all remaining taxpayers. In support, he has placed reliance on recent judgment dated 05.04.2016 by Hon'ble Supreme Court of Pakistan in Civil Appeals Nos.1084 to 1098 of 2008.

11.Rana Muhammad Afzal, Advocate appearing for applicants taxpayers in P.T.Rs. Nos. 69, 70 and 71 of 2014 has assailed order dated 28.02.2014 by Appellate Tribunal, whereby the applicants taxpayers were denied exemption under Clause (126F). He submits that the show cause notice under Section 122, the cases represented by him were defective, as the Taxation Officer had relied on a circular by Federal Board of Revenue ("FBR") instead of issuing it on its own opinion. Argues; that FBR is not competent to interpret any provision of law, hence very initiation of the proceedings are liable to be declared unlawful. Further argues that in presence of an exemption certificate, in favour of the taxpayers, order under Section 122(5A) could not have been passed. He has, however, adopted the arguments made by Messrs Muhammad Iqbal Hashmi and M. M. Akram, Advocates.

12.Replying to the arguments; Mr. Muhammad Yasir Pirzada, Additional Commissioner Inland Revenue, Lahore has read proviso to Clause (126F) and has placed emphasis on the phrase "manufacturers and suppliers" used in the proviso to submit that business sectors mentioned in the proviso are not covered under FTR. Further submits that Part IV of Second Schedule is meant for exemption from provisions; had legislature intended to exempt income under FTR, Section 53 read with Section 169 could have been notified under Part IV.

He has placed reliance on Uch Power (Pvt.) Ltd. and others v. Income Tax Appellate Tribunal and others (2010 PTD 1809) to submit that words "profit and gains" have already been defined conclusively by Hon'ble Supreme Court and declared that phrase "profit and gains" refers to business income only. Concludes; if arguments advanced by Mr. M. M. Akram, Advocate are accepted, then whole scheme of the Ordinance, as well as, FTR shall collapse because taxpayers would also claim allowances and exemptions under this regime. Responding to the arguments on 'exemption certificate', he submits that the certificate is issued on tentative assessment, which does preclude quasi-judicial authorities under the Ordinance, from a different opinion in exercise of power under Section 122 of the Ordinance, at a later stage. In response to the arguments by Rana Muhammad Afzal, Advocate, he submits that same cannot be entertained in advisory jurisdiction because this issue has neither being dilated upon by Appellate Tribunal nor any question is framed on it. In support he has referred to the findings by Appellate Tribunal in paragraph No.25 and has supported the reasons given.

13.Heard, record perused.

14.After perusal of impugned orders and record in light of the arguments, we shall examine, first, the pivotal controversy revolving around interpretation of the Clause (126F). The exemption clause was introduced in Part I of Second Schedule of the Ordinance through Finance Act, 2010. It exempted those taxpayers who were located in the affected areas of Khyber Pakhtunkhwa, FATA and PATA. The Clause is reproduced for facility:--

"(126F) Profits and gains derived by a taxpayer located in the most affected and moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA for a period of three years starting from the tax year 2010:

Provided that this concession shall not be available to the manufacturers and suppliers of cement, sugar, beverages and cigarettes."

A cursory reading of the Clause shows that a concession from payment of tax, for three years, is provided to those taxpayers, who are located in the affected areas of Khyber Pakhtunkwa, FATA and PATA. There is an obvious intent of encouraging the taxpayers for carrying out their business activities in the affected areas. Case of the taxpayers is that they are also located in the affected areas, therefore, the exemption could not be denied by a restricted interpretation of the phrase 'profits and gains'.

15.It is an undisputed fact that taxpayers, in case under consideration, were being subjected to tax on their contractual receipts under Section 153(1)(c) of the Ordinance i.e., FTR. Department has not controverted the fact that the taxpayers are located in affected areas of FATA and PATA. Department by laying emphasis on the phrase "profit and gains" has interpreted the exemption clause by excluding taxpayers falling in PTR.

16.Under Presumptive Tax Regime the tax deducted/withheld on certain transactions is taken, by fiction of law, as final discharge of tax liability. Subsection (2) of Section 169 of the Ordinance specifically provides that such income shall not be chargeable under any head of income for the purpose of computing taxable income. Allowances of expenditures incurred in deriving income are specifically excluded; set of deductible allowances, losses and tax credits are also not permissible under Section 169 of the Ordinance. Refund of tax collected or deducted is specifically prohibited in Clause (e) of Section 169(2), which is reproduced hereunder for ready reference:--

"(e) there shall be no refund of the tax collected or deducted unless the tax so collected or deducted is in excess of the amount for which the taxpayer is chargeable under this Ordinance."

Undeniably, the taxpayers in these cases were subject to final tax under Section 169(1)(b), being relevant is also reproduced hereunder:-

"(b) the tax required to be deducted is a final tax under subsection (3) of section 151, subsection (1B) or subsection (1BB) of section 152, subsection (3) of section 153, subsection (1AAA) of section 152, subsection (4) of section 154, subsection (3) of section 156, subsections (1) and (2) of section 156A or sub-section (3) of section 233 on the income from which is was deductible."

17.Conversely, for normal taxation, taxable income is classified under different heads of Section 11 of the Ordinance. This classification, as per subsection (1), is for the purposes of imposition of tax and computation of other income. Profits and gains from any business are chargeable to tax under the head "Income from Business" under Section 18(1)(a) of the Ordinance. Section 20 deals with the deductions allowable for calculating the 'profits and gains' and computation of income chargeable under head "Income from Business"; whereas Section 21 deals with the deductions which are not allowed under the Statute for the same purpose.

Collective reading of the provisions, discussed supra, would lead to conclusion that for taxation under FTR in view of Section 169 of the Ordinance, no question of "profit and gains" earned by a taxpayer arises because the tax withheld/deducted on certain transactions is taken as final discharge of tax liability without entering into an inquiry that which expenditure was allowable, under Section 20, or which was not, under Section 21. In our opinion, the interpretation given by department to the words "profit and gains" is plausible and convincing. We are in agreement with the arguments by Mr. Muhammad Yasir Pirzada, Additional Commissioner Inland Revenue, Lahore that a specific exemption, from tax under Section 169, could have been given to the taxpayers if legislature had so intended.

18.We have also examined few judgments by the Apex Court of this country, wherein principles for interpreting an exemption clause are enshrined. In Elahi Cotton Mills' Case (supra), it was ruled:--

"Under subsection (1) of section 14 of the Income Tax Ordinance, 1979 the Central Board of Revenue has been given the power to grant exemption in respect of the income or class of income or person or classes of persons specified in the Second Schedule including exemption from tax under the Ordinance subject to the conditions and to the extent specified therein or to exempt from the operation of any provision of the Ordinance subject to the conditions and to the extent specified therein. The Federal Government has also been given power under subsection (2) of section 40 to make amendment in the Second Schedule subject to the proviso that such amendment shall be placed before the National Assembly."

[emphasis supplied]

In Messrs Humayun Ltd. v. Pakistan and others (PLD 1991 Supreme Court 963), the basic principles and rational of exemption clause is emphasis by reproducing an excerpt from the case Bank of Commerce v. Tennesse (161 US 134), which is as under:--

"Taxes being the sole means by which sovereignties can maintain their existence, any claim on the part of anyone to be exempt from the full payment of his share of taxes on any portion of his property must on that account be clearly defined and founded on plain language. There must be no doubt or ambiguity in the language used upon which the claim to the exemption is founded. It has been said that a well-founded doubt is fatal to the claim; no implication will be indulged in for the purpose of construing the language used as giving the claim for the exemption, where such claim is not founded upon the plain and clearly expressed intention of the taxing power".

In Karachi Development Authority v. Central Board of Revenue through Members Central Excise and Land Customs, Islamabad and others (2005 PTD 2131), the Hon'ble Apex Court held,

"Taxing statutes were construed strictly in favour of subjects whereas the provisions relating to exemptions were construed in favour of Government as Taxing authority and the Government, while exercising the power of exemption of duty on a particular article, might impose such condition, limitation and restriction as it deemed fit."

19.Necessary corollary is that while interpreting an exemption clause, plain language is to be considered; implications are not allowed; conditions stipulated in the exemption clause must be fulfilled; and in case of any doubt or two possible interpretations, the one favouring chargeability of tax is to be employed. It is also principle that exemption presupposes the chargeability, the judgment in Collector of Customs and others v. Ravi Spinning Ltd. and others (1999 SCMR 412) can be referred.

20.We have also examined judgment in Uch Power's Case relied upon by the Revenue. In that case interpretation of Clause 176 of Part-I of Second Schedule to Repealed Income Tax Ordinance, 1979 ("Repealed Ordinance") was involved. Interpretation of the phrase "profit and gains", derived by an assessee (now taxpayer) from Electric Power Generation Project was involved. The taxpayer, in that case, claimed exemption on interest earned from the funds lying with the bank. Since the interest falling under Section 30 of the Repealed Ordinance was liable to be taxed under the head "Income from other Sources", hence "profit and gains" were interpreted and it was held that income taxable under Section 30 was not exempted and only business income from project under Section 18 of the Ordinance was exempted.

21.We do not agree with the submission from taxpayer's side that this case is distinguishable. In our opinion Uch Power's Case is not only relevant but is binding on us, in view of Article 189 of the Constitution. For this opinion, we fortified by following words of wisdom as couched in paragraph No.16 of the judgment, which is reproduced hereunder:--

"16. Reverting to the other set of twenty two petitions placed in categories (b) to (e); keeping in view the submissions of the learned counsel in this regard, we have carefully perused the case record and the relevant provisions of the Ordinance, which goes to show that by virtue of section 15 of the Ordinance, for computation of total income, law makers have bifurcated all incomes into six heads, which are covered by sections 16 (salary), 17 (interest on securities), 19 (house property), 22 (income from business or profession), 27 (capital gains) and 30 (from other sources) of the Ordinance. From the plain reading of these sections, it is evident that it is only the language of section 22, which carries the words "profits and gains" and for the purpose of allowable deductions, income generated under this head is regulated by section 23, while inadmissible deductions have been categorized in section 24. Relating to the controversy in hand, the other relevant section is section 30, which is the residuary section and covers income from all other sources, which are not covered by sections 16, 17, 19, 22 and 27. Thus a combined reading of these provisions of the Ordinance makes it abundantly clear that use of words "profits and gains" under clause 176 is only with reference to the income generated by the companies, which is covered by section 22 of the Ordinance. Admittedly, interest earned by the petitioner companies on their bank investments/savings accounts was an income covered by section 30 of the Ordinance and thus not covered by exemption under clause 176 ibid. Similarly, the use of word "project" in clause 176 (ibid) has brought no significant change in this clear legal position. Thus, the arguments based on such premises are also devoid of force. Not only the Division Bench of Islamabad High Court has rightly examined this aspect of the case and decided the same against the petitioners/appellants/assessees but the findings of the Income Tax Appellate Tribunal in its judgments in the case of petitioner/appellant companies, following the same view, are unexceptionable."

22.To crystalize the opinion arrived at, supra, we intend to resettle the question of law, before answering the proposition of law, in following words:--

"Whether under the facts and circumstances of the case, taxpayers falling under Presumptive Tax Regime are entitled to exemption under Section 126F?"

Our answer to the resettled question is in Negative. The petitions filed by the department are decided in its favour, whereas petitions filed by the taxpayers are decided against them.

23.After the opinion, ibid, most of the arguments need not to be attended. However, if any ancillary issue remains unattended, the same can be agitated by the concerned party before the Appellate Tribunal, through an application under Section 221 of the Ordinance. If so approached, the Appellate Tribunal shall decide the same, keeping in view the opinion in this case.

24.Office shall send a copy of this order under seal of the Court to the Appellate Tribunal Inland Revenue as per section 133(5) of the Income Tax Ordinance, 2001.

MH/S-68/L Order accordingly.