PLJ 2024 Islamabad 135
Present: Aamer Farooq, C.J.
WAHEED
ASHRAF--Petitioner
versus
FEDERATION
OF PAKISTAN through Secretary Revenue Division, Islamabad and 3
others--Respondents
W.P. No.
213 of 2023, decided on 19.2.2024.
Income Tax Ordinance, 2001 (XLIX of 2001)--
----S. 7-E--Insertion of Section 7-E through Finance Act, 2002--Constitution
of Pakistan, 1973, Arts. 23, 25--Levy of tax on immovable
property--Confiscatory tax--Entry No. 47--Lack of classification--Intelligible
differentia--Discrimination--Violation of--Reasonable restrictions--Legal
obligation--Illegal derogation--Capital assets--Determination of fair market
value-- It is also a well settled principle that all taxes are confiscatory in
nature, however element of confiscation is to be justified by public purpose
for which a particular tax has been enforced--Examination of Entry No. 47 shows
that it provided for levy of tax on income other than agricultural income and
Entry No. 50 provides for taxes on capital value of assets, not including taxes
on immoveable property--The charging section imposed tax on immoveable
property, which was beyond legislative competence of Parliament and after
Eighteenth Amendment to Constitution, it was domain of Provincial
Legislature--The tax in question was, levied on deemed income and not on
immovable property--The question of competence of legislature was answered in
affirmative, and impugned provision is, well within legislative competence of
Parliament--The lack of classification in charging section, coupled with
absence of any intelligible differentia between said persons who were to be
taxed or exempted there from results in a confiscation which, in effect,
translated to inequality--Section 7E requires tax to be paid on income deemed
to be derived from capital assets as defined therein; it however does not
classify any categories of capital assets-- No mechanism for determination of fair
market value had been provided for, neither was there any clarity with regards
to different classes of properties--Imposition of tax arbitrary and elements of
inequality, discrimination and extent of confiscation were not justifiable by
any measure and were tantamount to an illegal derogation from constitutional
rights and provisions--On these basis, Court declared provisions to be ultra
vires--Furthermore, in light of paragraph-31 (xxxi) of Elahi Cotton Mills
case, if tax is levied in such a way that it operates in a discriminatory
manner against any person, it can be struck down--Neither machinery for
assuming fair market value has been provided, nor recovery mechanism, and on
touchstone of Messrs Elahi Cotton Mills (supra), such deficiencies may form
basis for striking down a statute. [Pp. 143,
149, 155, 161, 162, 163, 165 & 166] A, B, C,
E,
J, K, L, M, O & Q
PLD
1997 SC 582 & AIR 1961 SC 552 ref.
Sovereignty of State--
----State is sovereign and has competence to legislate on matters
specified under Legislative List within its domain--Further, State as a
sovereign is competent to impose tax in furtherance of economic activities and
to generate income in order to run affairs of government. [P. 154] D
Tax--
----Primary purpose--Tax is a revenue-raising exaction imposed through
generally applicable rates to defray public expenses--In elaboration it is
provided that primary purpose of a tax is to raise money, and not to regulate;
in other words, it represents legislature’s definition of measure of every
citizen’s duty in support of public burden--The purpose of theory of taxation
is essentially to support and fund functioning of government in return for
general advantages and protection which government affords to taxpayer citizens
and their properties. [P. 156] F
Constitution of Pakistan, 1973--
----Art. 23--Right to acquire
property--Every citizen has right to acquire, hold and dispose of property,
provided there are no reasonable restrictions imposed by law in public
interest.
[P.
159] G
Taxation Laws--
----Taxation laws are confiscatory per
se, but such confiscation is limited to specific purpose in pursuance of which
law in question has been enacted. [P.
159] H
Interpretation of Statutes--
---- Courts
must endeavor to save law rather than destroy it and as such, Courts must
interpret a statute in a manner which is harmonious to spirit and provisions of
Constitution.
[Pp.
160 & 161] I
Land Revenue--
----It
is a settled principle that ordinarily, a tax on land or on land revenue is
assessed on actual or potential productivity of land sought to be taxed--Similarly,
a tax on income deemed to be derived from land must be imposed according to
potential capacity of said land to yield income, deemed or otherwise. [P. 163] N
Legal
obligation--
----If
one High Court strikes down a law, judgment being in rem, legal obligation
thereunder disappears and it cannot be said that such disappearance is only to
extent of territorial area to which jurisdiction of said High Court extends. [P. 164] P
PLD 1987 SC 145 &
2015 PTD 1058 Isd. ref.
Hafiz Muhammad Idris, Syed Farid
Ahmed Bukhari, Mr. Usman Kiyani, Mian Haseeb Ali Bhatti, Mr. Muhammad Aslam
Hayat, Mr. Muhammad Naeem Siddique Bhatti, Mr. Asif Farid, Mr. Sajid Naseem,
Mr. Usman Ahmed Ranjha, Ms. Sabila Daraz Khan, Syed Ali Murtaza Abbas, Mirza
Saqib Siddique, Mr. Waqar Javed, Ms. Fatima, Ms. Aiema Asrar, Malik Nasir Abbas
Awan, Mr. Asif Saeed Mughal, Mr. Muhammad Musawar Gill, Mr. Khalil-ur-Rehman,
Mr. Faisal Rasheed Ghouri, Mr. Faisal Jaffar Khan, Mr. Imran Ul Haq, Ms. Shazia
Nadeem Malik and Mr. Hamid Jalal, Advocates for Petitioner(s).
Mr. Ejaz Hussain Rathore,
Petitioner in person.
Mr. Ghulam Qasim Bhatti, Syed
Ishfaq Hussain Naqvi, Barrister Atif Rahim Burki and Barrister Sohail Nawaz,
Advocates. Syed Ahsan Raza Kazmi, Deputy Attorney General for Respondents.
Assisted By: Ms. Maheen Zeeshan
Law Clerk.
Date of hearing: 15.1.2024.
Judgment
This judgment shall decide the
captioned writ petition as well as writ petitions mentioned in the schedule,
attached herewith, as common question of law is involved.
2. The Petitioners, in all the
petitions, have challenged the provision of Section 7E of the Income Tax
Ordinance, 2001 (“the
Ordinance”), inserted through the Finance Act, 2022, on the basis
that it is ultra vires the Constitution of Islamic Republic of Pakistan,
1973 (“the Constitution”)
for being beyond the competence of the Federal Legislature, and for being
discriminatory and confiscatory violating Constitutional rights, hence is
liable to be struck down.
3. In
order to avoid any overlap or conflict, and for the ease of reference, the
submissions made by all the Petitioners in the captioned petition, and the
scheduled connected petitions, are discussed jointly. Learned counsels for the
Petitioners[1]
submitted, inter alia, that through Section 7E of the Ordinance (“the impugned
provision”), tax has been levied on deemed income derived from
immovable assets, as specified therein, equal to 5% of the fair market value of
the assets at the rates specified in Division VIIIC of Part-I of the First
Schedule to the Ordinance. It was contended that the impugned provision is
tantamount to levy of tax on immovable property, which is beyond the competence
of the Parliament pursuant to the Eighteenth Amendment to the Constitution. In
this behalf, it was contended that with respect to Entries No. 47 & 50, as
provided in the Fourth Schedule to the Constitution, the Parliament does have
competence to impose income tax, however, it has no competence to levy any tax
on immoveable property, whereas, in essence, the impugned tax is on immoveable
property. Learned counsels further contended that while interpreting relevant
Schedule entries and the tax levied, the pith and substance of the levy is to
be examined and the same is not to be taken on its face value. It was further
argued that since levy in question is on immovable property, it is beyond the
competence of Federal Legislature, and it is, thus, ultra vires the
Constitution. Learned counsels for the Petitioners contended that the tax in
question is confiscatory in nature inasmuch as no income is actually generated
through the immoveable property specified therein, and payment of the same is
to be made from the personal resources of the taxpayer rather than from any
income generated from the assets. It was contended that, in light of the
judgment of the Supreme Court of Pakistan reported as M/s. Elahi Cotton Mills Ltd. versus Federation of
Pakistan (PLD 1997 SC 582), where tax is confiscatory in nature, it
violates the fundamental rights guaranteed under the Constitution, hence it is
liable to be struck down. It was added that under sub-Section 2 of the impugned
provision, certain exemptions have been granted for payment of tax and bare
reading of the same shows that those exemptions are discriminatory in nature,
and thus are in violation of Article 25 of the Constitution. It was also
contended that the method of payment of the tax is unreasonable and vague as
tax is to be paid on 5% of the fair market value of the capital assets as
deemed income. It was also submitted that “capital asset” has been defined and explained
in the impugned provision as immoveable property; and that the impugned
provision has been given retrospective effect. Learned counsels apprised the
Court that petitions challenging vires of Section 7E of the Ordinance
were also filed before the Sindh High Court as well as the Lahore High Court
and the Peshawar High Court. In this behalf, it may be noted that that the
Sindh High Court upheld the impugned provision, whereas the Lahore High Court
undertook the exercise of reading down and suggested certain modifications,
while the Peshawar High Court struck down the impugned provision as being ultra
vires the Constitution.
4.
Learned counsel for the Respondents[2]
contended, inter alia, that Entry No. 47 to the Fourth Schedule to the
Constitution empowers the Parliament to legislate and the Federal Government to
levy tax on any income other than agricultural income. It was submitted that
the basic definition of “income” is provided in clause 29 of Section 2 of the
Ordinance, which is inclusive, meaning it is not exhaustive. It was contended
that in the landmark judgment of the Supreme Court of Pakistan in M/s. Elahi Cotton Mills Ltd. versus Federation of
Pakistan (PLD 1997 SC 582), various principles have been laid down and tax
on the capacity of any company was held to be intra vires. It was contended
that in order to declare a statute ultra vires, the principles laid down
in Lahore Development Authority versus
Ms. Imrana Tiwana (2015 SCMR 1739) are to be followed, which provide that
the law is to be saved rather than destroyed and that the provision under
challenge ought to be retained in a way so as to save it rather than to destroy
by striking it down. It was also contended that the law cannot be struck down
simply for being confiscatory in nature as it does not amount to violation of
the Constitution or fundamental rights. It was also submitted that the law can
be made applicable retrospectively insofar as any vested rights are not taken
away which is not the case. Reference was made to the following case law qua
the submissions addressed: Army Welfare
Sugar Mills versus Federation of Pakistan (1992 SCMR 1652), Muhammad Husain and others versus Muhammad
and others (2000 SCMR 367), Annoor
Textile Mills Ltd. versus The Federation of Pakistan (PLD 1994 SC 568), Haji Dossa Limited, Karachi versus Province
of Punjab through Collector Sahiwal and others (1973 SCMR 124), Zaman Cement Company (Pvt) Limited versus
Central Board of Revenue and others (2002 SCMR 312), Zakaria H.A SattarBilwani versus Inspecting Additional Commissioner of
Wealth Tax (2003 SCMR 271),Sardar
Sher Bahadar Khan versus Election Commission of Pakistan (PLD 2018 SC 97), Mst. Sarwar Ja versus Mukhtar Ahmad (PLD
2012 SC 217), Zila Council Jehlum versus
Messrs Pakistan Tobacco Company Ltd. (PLD 2016 SC 398), Government of Pakistan versus MessrsMardan
Industries and another (1988 SCMR 410), Ashraf
Sugar Mills versus Federation of Pakistan (1996 PLC 145), Pakistan through Ministry of Finance versus
Fecto Belarus Tractors Ltd. (PLD 2002 SC 208), Molasse Trading & Export versus Federation of Pakistan (1993
SCMR 1905), Province of East Pakistan
versus Sharafatullah (PLD 1970 SC 514), Shell
Pakistan Ltd. versus Federation of Pakistan (2023 PTD 607 Sindh), Muhammad Khalid Qureshi versus Province of
Punjab (2017 PTD 805 Lahore), Province
of Punjab versus National Industries Cooperative Credit Corporation (2000
SCMR 567), Education Services (Pvt) Ltd. versus
Federation of Pakistan (PLD 2016 Islamabad 141), A.M. Khan Leghari versus Government of Pakistan (PLD 1967 Lahore
227), NihayatUllah versus Secretary Local
Government (PLD 2004 Peshawar 54), Federation
of Pakistan versus Haji Muhammad Sadiq (2007 PTD 67 (SC), Lahore Development Authority versus Ms.
ImranaTiwana (2015 SCMR 1739), Muhammad
Ramzan Katiar versus Pakistan Refinery Limited (2013 CLD 233 Sindh), Muzaffar Khan versus Evacuee Trust Property
(2002 CLC 1819 Lahore), M/s. Dewan
Textile Mills Ltd. versus Pakistan (1984 CLC 1740 Karachi), Amin Textile Mills versus Federation of
Pakistan (2002 CLC 1714 Karachi), Syed
Manzoor Hussain Bokhari versus SP City Lahore (1990 MLD 1807 Lahore), Call Tell versus Federation of Pakistan
(2005 PTD 833 Karachi), Human Rights
Commission of Pakistan versus Government of Pakistan (PLD 2009 SC 507), Shafique Ahmed versus Government of Pakistan
(PLD 2004 SC 168), M/s. Shappire
Textile Mills versus Federation of Pakistan (PLD 2006 Karachi 554), M/s.
Pioneer Traders versus Province of
Sindh (PLD 2006 Karachi 648), Imdad
Hussain versus Province of Sindh (2007 Karachi 116), Sarfraz Ahmad Tarar versus Province of Punjab (PLD 2007 Lahore 57),
District Magistrate Lahore Commissioner,
Lahore Division versus Syed Raza kazim (PLD 1961 SC 178), State of M.P versus Rakesh Kohli (2013
SCMR 34), Jibendra Kishore Achharyya
versus The Province of East Pakistan (Revenue Department) (PLD 1957 SC
(Pak) 9), Mr. FazlulQuaderChowdhry versus
Mr. Muhammad Abdul Haque (PLD 1963 SC 486), President Reference No. 2 of 2005 (PLD 2005 SC 873), M/s. Elahi Cotton Mills Ltd. versus
Federation of Pakistan (PLD 1997 SC 582).
5. Submissions of the parties have been heard and the documents placed
on record examined with their able assistance.
6. Before embarking upon appreciation of the submissions made by the
parties, it is apt to reproduce the impugned provision and dissect the same.
The impugned provision is as follows:
“7E.
Tax on deemed income.--(1) For
tax year 2022 and onwards, a tax shall be imposed at the rates specified in
Division VIIIC of Part-I of the First Schedule on the income specified in this
section.
(2) A resident person shall be treated to
have derived, as income chargeable to tax under this section, an amount equal
to five percent of the fair market value of capital assets situated in Pakistan
held on the last day of tax year excluding the following, namely:--
(a) one capital asset owned by the resident person;
(b) self-owned business premises from where the business is carried
out by the persons appearing on the active taxpayers’ list at any time during
the year;
(c) self-owned agriculture land where agriculture activity is
carried out by person excluding farmhouse and land annexed thereto;
(d) capital asset allotted to--
(i) a Shaheed or
dependents of a shaheed belonging to Pakistan Armed Forces;
(ii) a person or dependents of the person who
dies while in the service of Pakistan armed forces or Federal or provincial
government;
(iii) a war wounded person while in service of Pakistan armed forces
or Federal or provincial government; and
(iv) an ex-serviceman and serving personal of armed forces or
ex-employees or serving personnel of Federal and provincial governments, being
original allottees of the capital asset duly certified by the allotment
authority;
(e) any property from which income is
chargeable to tax under the Ordinance and tax leviable is paid thereon;
(f) capital asset in the first tax year of
acquisition where tax under Section 236K has been paid;
(g) where the fair market value of the capital
assets in aggregate excluding the capital assets mentioned in clauses (a), (b),
(c), (d), (e) and (f) does not exceed Rupees twenty-five million;
(h) capital assets owned by a provincial
government or a local government; or
(i) capital assets owned by a local
authority, a development authority, builders and developers for land
development and construction, subject to the condition that such persons are
registered with Directorate General of Designated Non-Financial Businesses and
Professions.
Provided
that the exclusions mentioned at clauses (a), (e), (f) and (g) of this
sub-section shall not apply in case of a person not appearing in the active
taxpayers’ list, other than persons covered in rule 2 of the Tenth Schedule.
(3) The
Federal Government may include or exclude any person or property for the
purpose of this section.
(4) In
this section--
(a) “capital asset” means property of any kind
held by a person, whether or not connected with a business, but does not
include--
(i) any stock-in-trade, consumable stores or raw materials held
for the purpose of business;
(ii) any shares, stocks or securities;
(iii) any property
with respect to which the person is entitled to a depreciation deduction under
Section 22 or amortization deduction under Section 24; or
(iv) any movable
asset not mentioned in clauses (i), (ii) or (iii);
(b) “farmhouse” means a house
constructed on a total minimum area of 2000 square yards with a minimum
covered area of 5000 square feet used as a single dwelling unit with or without
an annex:
Provided
that where there are more than one dwelling units in a compound and the average
area of the compound is more than 2000 square yards for a dwelling unit, each
one of such dwelling units shall be treated as a separate farmhouse.
Examination of Section 7E ibid
shows that tax has been imposed for the tax year 2022 and onward at the rates
specified in Division VIIIC of Part-I of the First Schedule to the Constitution
on the income as specified therein. Sub-section (2) of the impugned provision
is the charging section and it levies income tax on an amount equal to 5% of
the fair market value of the capital assets (deemed income), situated in
Pakistan held on the last date of the tax year. In this behalf, sub-section (2)
ibid states that a resident person shall be treated to have derived as
income 5% of the fair market value of the capital assets, hence derivation of
the income is deemed and not actual. Certain exemptions have been created,
which are provided from sub-section (2) (a) to (i). Under sub-section (3) of
the impugned provision, the Federal Government has been empowered to include or
exclude any person or property for the purposes of Section 7E. Sub-section (4),
which the definition clause, defines “capital
asset” as property of any kind held by a person, whether or not
connected with a business but does not include any stock-in-trade, consumable
stores or raw materials held for the purpose of business; any shares, stocks or
securities;any property with respect to which the person is entitled to a
depreciation deduction under Section 22 or amortization deduction under Section
24; or any movable asset. The same also excludes farmhouses constructed on a
minimum area of 2000 square yards with a minimum covered area of 5000 square
feet used as a single dwelling unit with or without an annex.
7. Before delving into detailed
examination of the relevant precedents, it is pertinent to note a few key
characteristics of tax laws in general. The power of the State to impose tax
upon its citizens is inherent in the power to govern and such power is limited
only by constitutional provisions.[3]
It is also a well settled principle that all taxes are confiscatory in nature,
however the element of confiscation is to be justified by the public purpose
for which a particular tax has been enforced. Constitutional rights and
provisions act as the safeguard for citizens, and as a check on legislative authority,
while enacting tax law. Where the public purpose is such that is in line with
the spirit of the Constitution and the tax enacted is a proportional measure to
achieve such purpose, the element of confiscation shall not render the
particular tax to be illegal or ultra vires to the Constitution. Where,
however, the element of confiscation is not so justified, the tax may be
regarded as violating Constitutional rights and thus may be liable to be struck
down. Where the constitutionality of a tax law is in issue, the nature of the
tax, the measure of the tax and its incidence must be considered while
determining its validity.[4]
In the instant case, while deliberating on the constitutionality and vires
of the impugned provision, this Court is faced with the following key issues:
Legislative Competence, Confiscatory Nature, Discriminatory Nature.
Determination of
Constitutionality and Vires
8. Since vires or the
legality of the Federal Statute has been put to challenge, this Court, at this
stage, deems it essential to examine the case law developed over a period of
time for adjudicating vires of any statute and the principles evolving
from the referred case law. The most recent and authoritative judgment on the
question of principles for striking down the law or upholding the same is Lahore Development Authority versus Ms.
Imrana Tiwana (2015 SCMR 1739). In the referred judgment, the Supreme Court
of Pakistan, after examining the law on the subject laid down principles on the
touchstone of which vires of law can be examined. The principles are
summarized in paragraph 65 of the judgment and are as follow:-
“I. There is
a presumption in favour of constitutionality and a law must not be declared
unconstitutional unless the statute is placed next to the Constitution and no
way can be found in reconciling the two;
II. Where more than one interpretation is possible, one of which
would make the law valid and the other void, the Court must prefer the
interpretation which favours validity;
III. A statute must never be declared unconstitutional unless its
invalidity is beyond reasonable doubt. A reasonable doubt must be resolved in
favour of the statute being valid;
IV. If a case can
be decided on other or narrower grounds, the Court will abstain from deciding
the constitutional question;
V. The Court will
not decide a larger constitutional question than is necessary for the
determination of the case;
VI. The Court will
not declare a statute unconstitutional on the ground that it violates the
spirit of the Constitution unless it also violates the letter of the
Constitution;
VII. The Court is
not concerned with the wisdom or prudence of the legislation but only with its
constitutionality;
VIII. The Court will
not strike down statutes on principles of republican or democratic government
unless those principles are placed beyond legislative encroachment by the
Constitution;
IX. Mala fides will
not be attributed to the Legislature.
In Amin Textile Mills versus
Federation of Pakistan (2002 CLC 1714 Karachi), the Division Bench of the
Sindh High Court held that while looking from the standpoint of interpretation
of statutes or from the angle of interpretation of legislative entries in the
Constitution, the ordinary, plain and grammatical meaning of the words will
have to be seen. The Courts have to look at whether in pith and substance the
subject matter of levy in question comes within the ambit of the relevant entry
in the Constitution. It was also observed that the Courts have to give a very
liberal and stretched connotation to the Constitutional entries and in pith and
substance, the ordinary, grammatical and literal meaning of the terms will have
to be seen. In Shell Pakistan Ltd. versus
Federation of Pakistan (2023 PTD 607 Sindh), the Sindh High Court held that
scope of a provision cannot be extended by analogy or beneficent/equitable
construction in order to prevent an anomaly and if a section of a taxing
statute creates doubt or ambiguity then it should not to be construed to
extract a new added obligation, not formerly cast upon the taxpayer. It was
also observed that provision of Article 25 of the Constitution envisages
equality between citizens, however, it allows for differential treatment of
persons not similarly placed under a reasonable classification. In Province of Punjab versus National
Industries Cooperative Credit Corporation (2000 SCMR 567), it was held that
if it is found that the impugned legislation is in the nature of legislative
judgment impinging on judicial power of judiciary, it would prima facie
be ultra vires the Constitution. In Education
Services (Pvt) Ltd. versus Federation of Pakistan (PLD 2016 Islamabad 141),
this Court observed that a High Court under Article 199 of the Constitution has
jurisdiction to examine the validity of any Act of the Parliament and/or
delegated legislation including notification; in case any law/Act of the
Parliament violates any provision of the Constitution including fundamental
rights, the same can be struck down by a High Court in exercise of powers under
Article 199 of the Constitution; the law can also be struck down if it provides
unfettered powers/discretion to be exercised in a discriminatory manner. In A.M. Khan Leghari versus Government of
Pakistan (PLD 1967 Lahore 227), the Larger Bench of the Lahore High Court
observed that it is but a corollary to the general rule of literal construction
that nothing is to be added to or to be taken from a statute, unless there are
similar adequate grounds to justify the inference that the Legislature intended
something which it omitted to express. It was also observed that it is a strong
thing to read into an Act of Parliament words which are not there and in the
absence of clear necessity, it is a wrong thing to do. The Court is not
entitled to read the words into an Act of the Parliament unless clear reason
for it is to be found within the four corners of the Act itself. In Federation of Pakistan versus Haji Muhammad
Sadiq (2007 PTD 67 (SC), the Supreme Court of Pakistan held that language
used in fiscal statute would be interpreted in literal and ordinary meanings in
favour of the taxpayer and that the law should be interpreted in such a manner
that the same should be saved rather than destroyed. In Messrs Sui Southern Gas Company Ltd. versus Federation of Pakistan
(2018 SCMR 802), the Supreme Court of Pakistan laid down principles for
interpretation of entries in the legislative lists. It was observed as
follows:-
“(1) The
entries in the Legislative Lists of the Constitution are not powers of
legislation but only fields of legislative head.
(2) In
construing the words in an Entry conferring legislative power on a legislative
authority, the most liberal construction should be put upon the words.
(3) While
interpreting an Entry in a Legislative List, it should be given widest possible
meaning and should not be read in a narrow or restricted sense.
(4) Each general word in an Entry should be
considered to extend to all ancillary or subsidiary matters which can fairly
and reasonably be said to be comprehended in it.
(5) If there appears to be apparent
overlapping in respect of the subject-matter of a legislation, an effort has to
be made to reconcile the Entries to give proper and pertinent meaning to them.
(6) A general power ought not to be so
construed so as to make a particular power conferred by the same legislation
and operating in the same field a nullity.
(7) Legislation under attack must be
scrutinized in its entirety to determine its true character in pith and
substance.
(8) After considering the legislation as a
whole in pith and substance, it has to be seen as to with respect to which
topic or category of legislation in the various fields, it deals substantially
and directly and not whether it would in actual operation affect an item in the
forbidden field in an indirect way.”
In Messrs Aisha Spinning Mills Ltd. versus
Federation of Pakistan (1995 PTD 493), the Division Bench of the Lahore
High Court also considered the principles for construction of entries in the
Legislative Lists as contained in the Schedule to the Constitution. It was
observed that the entries in the Schedules to the Constitution are not be given
any circumscribed pedantic construction; instead they are to be examined in
widest possible spectrum; entries are the fields in which the Legislature of
the State are empowered to act and frame laws. In Lahore Development Authority versus Ms. Imrana Tiwana (2015 SCMR
1739), the Supreme Court affirmed that Article 4 of the Constitution was not
accepted as criterion to test the vires of legislation. In celebrated
judgment of M/s. Elahi Cotton
Mills Ltd. versus Federation of Pakistan PLD 1997 SC 582 (the said judgment
will be discussed in detail subsequently), the Supreme Court of Pakistan
reiterated that the law is to be saved rather than to be destroyed and in case
of any anomaly or ambiguity, provisions of the Statute are to be read down to
save the law. In State of M.P versus
Rakesh Kohli (2013 SCMR 34), the Indian Supreme Court held that legislative
enactment could be struck down by Court only on two grounds, firstly where the
appropriate Legislature did not have competency to make the law and secondly,
where it (enactment) abridged any of the fundamental rights enumerated in the
Constitution or any other constitutional provisions. It was furthered that no
enactment can be struck down merely for the reason that it was arbitrary or
unreasonable or irrational but some constitutional infirmity had to be found
and specified.
9. The principles emerging from the above case law are as
follow:-
(i) This Court,
under Article 199 of the Constitution, has jurisdiction to examine the validity
of an Act of the Parliament or Rules framed thereunder.
(ii) The
constitutionality of any enactment can be examined on the touchstone of
fundamental rights and/or any provision of the Constitution and if an enactment
fails to pass the test of conformity or is derogatory to the fundamental rights
or provisions of the Constitution, without a legitimate purpose to justify such
derogation, it may be struck down.
(iii) Vires of an
enactment can also be examined on the basis of competence of the Legislature.
(iv) The
interpretation of the enactment under challenge should be done in such a way
that the law should be endeavored to be saved rather than to be struck down.
(v) While
interpreting an entry in the Legislative Lists of the Schedules to the
Constitution, pith and substance of the entry is to be examined and they are to
be given an expansive rather than narrow pedantic interpretation.
(vi) In order to save
the legislation, it should be read down in such a way so as to harmonize the
fundamental rights enshrined in the Constitution and/or other provisions of the
statutes.
10. From the above, it follows that the first and foremost
priority for the Court is to endeavor to save law instead of destroying it;
and, while the language of the provisions of Constitutional Rights may provide
for derogation from such rights, such derogation is not the general rule,
rather it is the exception to the general rule. Such derogation is allowed not
only on the basis of a public purpose, but where the measure taken to achieve
such purpose is proportional to the same. In light of the above enumerated
principles and parameters of determination of constitutionality and/or vires
of any legislation, this Court shall now adjudicate upon the aforementioned key
issues with regard to the impugned provision.
Legislative Competence
In the assault made on the impugned provision on the basis of
constitutionality and competence, much was said, on behalf of the Petitioners,
about the competence of the Legislature on the basis that the charging
provision or the provision levying tax on deemed income derived from capital
assets is in actuality a tax on immoveable property. In this regard, reference
was made to Entries No. 47 and 50in the Fourth Schedule to the Constitution.
Under Article 70 sub-Article 4 of the Constitution, the “Federal Legislative List‖ means the Federal Legislative
List in the Fourth Schedule. This List provides subjects on which the
Parliament/Majlis-e-Shoora can legislate on a particular subject within its
competence. The Entries relevant for the present purpose are Entries No. 47 and
50, as reproduced below:-
“47. Taxes on income other than agricultural income.
………….
50. Taxes on the
capital value of the assets, not including taxes on immoveable property.”
Examination of Entry No. 47 shows that
it provides for levy of tax on income other than agricultural income and Entry
No. 50 provides for taxes on capital value of assets, not including taxes on
immoveable property.
11. The crux of the submissions made by the learned counsels
for the Petitioners was that in essence, the charging section imposes tax on
the immoveable property, which is beyond the legislative competence of the
Parliament and after the Eighteenth Amendment to the Constitution, it is the
domain of the Provincial Legislature. In order to appreciate the said argument,
at this juncture, it is pertinent to take guidance from the principles
enunciated in a very authoritative pronouncement on various aspects of examining
the vires of a statute, an entry in the Legislative Lists, and levy of
tax on particular subject viz. Messrs
Elahi Cotton Mills Ltd. versus Federation of Pakistan (PLD 1997 SC 582)
supra. The Supreme Court of Pakistan in the said judgment after examining the
power of the State to levy tax and also the various aspects thereof, summarized
the principles in paragraphs-31 of the judgment, which are as follow:-
“(i) That in view of wide variety of diverse
economic criteria, which are to be considered for the formulation of a fiscal
policy, Legislature enjoys a wide latitude in the matter of selection of
persons, subject-matter, events, etc. for taxation. But with all this latitude
certain irreducible desiderata of equality shall govern classification for
differential treatment in taxation law as well.
(ii) That Courts while interpreting laws
relating to economic activities view the same with greater latitude than the
laws relating to civil rights such as freedom of speech, religion etc., keeping
in view the complexity of economic problems which do not admit of solution
through any doctrinaire or straitjacket formula as pointed out by Holmes, J. in
one of his judgments.
(iii) That Frankfurter J., in Morey v. Doud
(1957) U.S. 457 has remarked that “in the utilities, tax and economic
regulation cases, there are good reasons for judicial self-restraint if not
judicial deference to the legislative judgment”;
(iv) That the Legislature is competent to
classify persons or properties into different categories subject to different
rates of tax. But if the same class of property similarly situated is subject
to an incidence of taxation, which results in inequality amongst holders of the
same kind of property, it is liable to be struck down on account of
infringement of the fundamental right relating to equality.
(v) That “a State does not have to tax
everything in order to tax something. It is allowed to pick and choose
districts, objects, persons, methods and even rates for taxation if it does so
reasonably”. (Willi’s Constitutional Law).
(vi) That the tests of the vice of
discrimination in a taxing law are less rigorous. If there is equality and
uniformity within each group founded on intelligible differentia having a
rational nexus with the object sought to be achieved by the law, the
Constitutional mandate that a law should not be discriminatory is fulfilled.
(vii) That the policy of a tax, in its operation,
may result in hardships or advantages or disadvantages to individual assessees
which are accidental and inevitable. Simipliciter this fact will not constitute
violation of any of the fundamental rights.
(viii) That while interpreting Constitutional
provisions Court should keep in mind, social setting of the country, growing
requirements of the society/nation, burning problems of the day and the complex
issues facing the people, which the Legislature in its wisdom through
legislation seeks to solve. The judicial approach should be dynamic rather than
static, pragmatic and not pedantic and elastic rather, than rigid.
(ix) That the law should be saved rather than be
destroyed and the Court must lean in favour of upholding the constitutionality
of a legislation keeping in view that the rule of Constitutional interpretation
is that there is a presumption in favour of the constitutionality of the
legislative enactments unless ex facie it is `violative. of a Constitutional
provision.
(x) That
as per dictionary the word ‘income’ means “a thing that comes in”. Its natural
meaning embraces any profit or gain which is actually received. However, while
construing the above word used in an entry in a legislative list, the above
restricted meaning cannot be applied keeping in view that the allocation of the
subjects to the lists is not by way of scientific or logical definition but by
way of mere simplex enumeration of broad categories.
(xi) That
the expression “income” includes not merely what is received or what comes in
by exploiting the use of a property but also what one saves by using it
oneself. For example, use of a house by its owner.
(xii) That
what is not “income” under the Income Tax Act can be made “income” by a Finance
Act. An exemption granted by the Income Tax Act can be withdrawn by the Finance
Act or the efficacy of that exemption may be reduced by the imposition of a new
charge, of course, subject to Constitutional limitations.
(xiii) That the question, whether a particular kind
of receipt is income or not would depend for its answer on the peculiar facts
and circumstances of the case. If the nature of the receipt and its source are
not satisfactorily explained by an assessee, facts which are generally within
his peculiar knowledge, the Income Tax Officer may legitimately presume that
the amount in question is an income of the assessee from an undisclosed source.
(xiv) That the expression “clothes make the man”
would be more nearly right if it were “Income makes the man”. Knowledge about
the income of a person will reveal most about him. It is a barometer to
evaluate about his habits and views.
(xv) In Haig’s language income is “the increase
or accretion in one’s power to satisfy his wants in a given period in so far as
that power consists of (a) money itself or (b) anything susceptible of
valuation in terms of money, whereas Simons equates personal income with
algebraic sum of consumption and change is net worth”.
(xvi) That the process of income determination is
often expressed as one of the matching costs and revenues. It involves the
process of working out costs used in connection with the earning of the revenue
in a particular accounting period.
(xvii) That
generally the effect of a deeming provision in a taxing statute is that it
brings within the tax net an amount which ordinarily would not have been
treated as an income. In other words, it brings within the net of chargeability
income not actually accrued but which supposedly to have accrued notionally.
(xviii) That
when a statute enacts that something shall be deemed to have been done which in
fact and in truth was not done,the Court is entitled and bound to ascertain for
what purposes and between what persons the statutory fiction is to be resorted
to.
(xix) That
where a person is deemed to be something the only meaning possible is that
whereas he is not in reality that something, the Act required him to be treated
as he were with all inevitable corollaries of that state of affairs.
(xx) That
the legal fictions are limited for a definite purpose, they cannot be extended
beyond the purpose for which they are created.
(xxi) That income-tax is a tax on a person in relation
to his income. It is a tax imposed upon a person (natural or artificial) in
relation to his income.
(xxii) That any legislation whereby either the prices
of marketable commodities are fixed in such a way as to bring them below the
cost of production and thereby make it impossible for a citizen to carry on his
business or tax is imposed to such a way so as to result in acquiring property
of those on whom the incidence of taxation fell, then such legislation would be
violative of the fundamental rights to carry on business and to hold property
as guaranteed in the Constitution.
(xxiii) That the taxing power is unlimited as long as
it does not amount to confiscation and that the Legislature does not have the
power to tax to the point of confiscation.
(xxiv) That the word ‘reasonable’ is a relative
generic term ‘difficult of adequate definition. It inter alia connotes agreeable to reason; conformable to reason;
having the faculty of reason; rational; thinking, speaking, or acting
rationally; or according to the dictates of reason; of sensible; just; proper
and equitable or to act within the Constitutional bounds.
(xxv) That a direct tax is one which “is demanded
front the very person, who it is intended or desired should pay it, whereas
indirect taxes are those, which are demanded from tine person in the
expectation and intention that lie shall indemnify himself at the expense of
another, like custom duties, excise taxes and sales tax, which are borne by the
consumers.
(xxvi) That levy of building tax on the basis of the
covered area without taking into consideration, the class to which a particular
building belongs, the nature of construction, the purpose for which it is used,
its situation and its capacity for profitable use and other relevant
circumstances bearing on the matters of taxation is not sustainable in law for
want of reasonable classification.
(xxvii) That there is a
clear distinction between the subject-matter of a tax and the standard by which
the amount of tax is measured keeping iii view the practical difficulties,
which are encountered by the Revenue to locate the persons and to collect the
tax due in certain trades, if the Legislature in its wisdom thought that it
would facilitate the collection of tax due from specified traders on a presumptive
basis, the same is not violative of the Fundamental Right relating to equality.
(xxviii) That denial of
reliefs provided by Sections 28 to 43-C of the Indian Income Tax Act to the
particular business or trades covered by Section 44-AC thereof without showing
some basis fair and rational and without having nexus to the object sought to
be achieved by the Legislature, held unfair, arbitrary, disproportionate to the
prevalent evil and constitutes denial of equal treatment. Consequently, the
Indian Supreme Court did not press into service non obstante clause of Section
44-AC by applying theory of reading down as a rule of interpretation.
(xxix) That it is an accepted canon of taxation to
levy tax-on the basis of ability to pay. The Section 115-J and 115-JA incorporated
in Indian Income Tax Act, 1961, were intended and designed to bring within the
tax net the companies, which though making huge profits and also declaring
substantial dividends, but have been managing their affairs in such a. way by
availing of tax concessions etc., as to avoid payment of income-tax.
(xxx) That the theory of reading down is a rule of
interpretation which is resorted to by the Courts when they find a provision
read literally seems to offend a fundamental right or falls outside the
competence of the particular Legislature.
(xxxi) That though the Legislature has the prerogative
to decide the questions of quantum of tax, the conditions subject to which it
is levied, the manner in which it is sought to be recovered, but if a taxing
statute is plainly discriminatory or provides no procedural machinery for
assessment and levy of the tax or that is confiscatory, the Court may strike
down the impugned statute as unconstitutional.
(xxxii) That the rule of
interpretation that while interpreting an entry in a Legislative List it should
be given widest possible meaning does not mean that Parliament can choose to
tax as income as item which in no rational sense can be regarded as a citizen’s
income. The item taxed should rationally be capable of being considered as the
income of a citizen.
(xxxiii) That before charging tax, an
assessee must be shown to have received income or the same has arisen and
accrued or deemed to be sounder the statute. Any amount which cannot be treated
as above is not an income and; therefore, cannot be subject to tax.
(xxxiv) That there is a marked distinction
between a tax on gross revenue and a tax on income, which for taxation
purposes, means gains and profits: There may be considerable gross revenues,
but no income taxable by an income-tax in the accepted sense.”
The upshot of the above principles is that the State is the sovereign
and has competence to legislate on matters specified under the Legislative List
within its domain. Further, the State as a sovereign is competent to impose tax
in furtherance of economic activities and to generate the income in order to
run the affairs of the government.
12. In
light of this discussion, if the charging section of the impugned provision i.e.
sub-section (2) is re-read, which provides for deemed income derived from the
capital value of assets, defined as essentially immoveable property, it shows
that the same is not really a tax on the immovable property as by virtue of
fiction, i.e. deeming clause, it is deemed that a capital asset is
deriving income which it might not actually derive. In light of Elahi Cotton
Mills Ltd (supra) there is no prohibition on the Legislature from creating
legal fiction so long as the same is within the purpose of the basic
legislation; likewise, there is no prohibition against taxation on such deemed
income, which in actuality may not be earned but is to be taxed. In view of the
said interpretation, it cannot be said that this imposition of tax by fiction
of law falls within Entry No. 50 of the Fourth Schedule to the Constitution,
rather falls within Entry No. 47, which provides for imposition of tax on
income other than agricultural income. In reaching this conclusion, this Court
is fortified by all the principles on the subject which have been reiterated,
and a deeming effect can be given to generation of income. In order to further
elaborate the concept of a deeming provision in the context of a presumptive
tax regime, it must be understood that such a deeming enactment is something
which the Legislature taxes on presumption, regardless of whether it exists in
reality, as is the case in the instant provision, and that any capital asset
owned by a resident person which may not actually be generating any income but
it has been presumed by Legislature that it is deriving income equal to 5% of
the fair market value of the said asset. Such deeming provisions are never
regarded as alien to the concept of the legislation provided that it falls
within
the basic purpose of that enactment. It is only when it fails the
basic purpose that the Court shall presume to deem them or would declare such
assumption to be repugnant or beyond the scope of Legislature.
13. I,
therefore, do not agree with the Petitioners’ submissions regarding sub-section
(2) of the impugned provision being a tax on
the immoveable property of a resident person taking it beyond
the legislative competence of the Parliament. Furthermore, it is
re-capitulated that it is, in fact, a fiction of law which presumes generation
of income from the capital asset which is then taxed. The tax in question is,
therefore, levied on the deemed income and not on the immovable property. The
question of competence of the legislature is therefore answered in the
affirmative, and the impugned provision is, therefore, well within legislative
competence of the Parliament.
Elements of Discrimination
14. The concept of income is defined in the Ordinance in Section 2(29)
and is as follow:
“Income
includes any amount chargeable to tax under this Ordinance, any amount
subject to collection [or deduction] of tax under Section 148, [150, 152(1),
153, 154, 156, 156A, 233, sub-section (5) of Section 234, [Section 236Z] [and]
[any amount treated as income under any provision of this Ordinance] and any
loss of income.”
Bare reading of the definition shows that any
amount may be treated as income under any provisions of the Ordinance. To
fortify my understanding, I have referred to the detailed examination of all
the various aspects of the concept of tax, more specifically tax on income and
its nature, as provided in the Corpus Juris Secundum.[5]
Tax is a revenue-raising exaction imposed through generally applicable rates to
defray public expenses.[6]
In the elaboration it is provided that the primary purpose of a tax is to raise
money, and not to regulate; in other words, it represents the legislature’s
definition of the measure of every citizen’s duty in support of public burden.[7]
The purpose of the theory of taxation is essentially to support and fund the
functioning of the government in return for the general advantages and
protection which the government affords to the taxpayer citizens and their
properties. Taxes can be classified as being either direct or indirect[8]
and the character of a tax depends on the legislative intent as expressed in
the statute imposing it.[9]
The power of the State to levy taxes is inherent in the power to govern and,
except as limited by constitutional provisions, is practically without limit,
extending to all persons, property and business over which the sovereign power
of the State extends.[10]
In this behalf, elements of neither equality nor reasonableness are regarded in
the exercise of the State’s power to tax as unjust or oppressive. However, the
constitutional provisions regarding equality and uniformity in terms of
taxation are mandatory and constitute a limitation on the legislative power to
tax, so that statute relating to taxation must comply therewith, and a tax law
which violates the prescribed rule of equality and uniformity is invalid. These
mandatory requirements cannot be frittered away by judicial construction.[11]
A tax law which violates the prescribed rule of equality and uniformity is,
therefore, invalid. Any unreasonable discrimination between taxpayers on whom
taxes have been levied and who are assessed on the same class of subjects
constitutes a lack of equality and uniformity in violation of the
constitutional provisions. Inequality will materialize where a taxing provision
imposes upon one taxpayer payment of a heavier exaction than another merely
because the former is assumed to be financially able to bear the exaction with
less distress than the latter, and such inequality offends the constitutional
principles of uniformity and equality.[12]
Keeping
in view the above principles and also those enunciated in the Elahi Cotton
Mills Ltd case (supra), I am fortified in my view that the Legislature has the
prerogative to decide the questions of quantum of tax, the conditions subject
to which it is levied, and the manner in which it is sought to be recovered.
But if a taxing statute is plainly discriminatory or provides no procedural
machinery for assessment and levy of the tax or where it is confiscatory, the
Court may strike down the impugned statute as being unconstitutional.[13]
Elements of Confiscation and Inequality
In a certain way, every tax is
confiscatory inasmuch as through sanction of the Parliament/government, part of
an income derived by persons is taken away. This concept of the confiscation or
confiscatory nature, as defined in Oxford Dictionary, is ‘to take or seize by the authority’. Words and Phrases
defines the term ‘confiscatory’ with regards to
taxation as a tax which not reasonably related to a substantial public purpose.[14]
If the taxing statute is confiscatory per se, it might not be in grave
violation of constitutional provisions, especially the fundamental rights,
since derogation therefrom is provided for to a certain extent within the same
provisions. However, where confiscation is to such an extent that it is not
reasonable, or it is beyond the extent of derogation as provided for within the
same constitutional provisions, the statute in question will then be a grave
violation of the fundamental rights of a person, thus, its validity cannot be
upheld.
In order to
elaborate this observation further, it is essential to reproduce Articles 23
& 24 of the Constitution. Article 23 of the Constitution provides right for
every citizen to acquire, hold and dispose of property in any part of Pakistan,
subject to the Constitution and any reasonable restrictions imposed by law and
Article 24 provides for protection of property rights. The referred Articles
are reproduced below:
“23.
Every citizen shall have the right to acquire, hold and dispose of property in
any part of Pakistan, subject to the Constitution and any reasonable
restrictions imposed by law in the public interest.
24.
(1) No person shall be deprived of his property save in accordance with law.
(2)
No property shall be compulsorily acquired or taken possession of save for a
public purpose, and save by the authority of law which provides for
compensation therefore and either fixes the amount of compensation or specifies
the principles on and the manner in which compensation is to be determined and
given.
(3) Nothing in this Article shall affect
the validity of—
(a) any law permitting the compulsory acquisition or taking
possession of any property for preventing danger to life, property or public
health; or
(b) any law permitting the taking over of any property which has
been acquired by, or come into the possession of, any person by any unfair
means, or in any manner, contrary to law; or
(c) any law relating to the acquisition, administration or disposal
of any property which is or is deemed to be enemy property or evacuee property under
any law (not being property which has ceased to be evacuee property under any
law); or
(d) any law providing for the taking over of the management of any
property by the State for a limited period, either in the public interest or in
order to secure the proper management of the property, or for the benefit of
its owner; or
(e) any law providing for the acquisition of any class of property
for the purpose of—
(i) providing education and medical aid to all or any specified
class of citizens; or
(ii) providing
housing and public facilities and services such as roads, water supply,
sewerage, gas and electric power to all or any specified class of citizens; or
(iii) providing
maintenance to those who, on account of unemployment, sickness, infirmity or
old age, are unable to maintain themselves; or
(f) any existing
law or any law made in pursuance of Article 253.
(4) The adequacy or
otherwise of any compensation provided for by any such law as is referred to in
this Article, or determined in pursuance thereof, shall not be called in
question in any Court.”
Bare reading of Article 23 shows that every citizen has the right to
acquire, hold and dispose of the property, provided there are no reasonable
restrictions imposed by law in the public interest. As discussed above,
taxation laws are confiscatory per se, but such confiscation is limited to the
specific purpose in pursuance of which the law in question has been enacted.
Where a certain portion of a resident person’s earning is being taken away as
payment of tax, such exaction made as to certain percentage of a larger amount
earned or derived might not be as such harmful to any statute since the tax is
being paid, or the exaction is being made out of an amount actually earned and
only a portion of such actual earning is being taken away, however, where no
income is actually earned and nothing is coming in yet a resident taxpayer is
asked to pay something out of nothing, it may be regarded as confiscatory in
the very sense of the concept and such confiscation would be unreasonable. As
discussed above, the legislature can create a legal fiction by way of a deeming
provision, and as such income which is not actually earned may be deemed to be
earned, however, where to a certain extent a tax liability is to be imposed
which is to be paid from a capital asset not generating any income may be
considered as derogatory to Article 23 of the Constitution. Inasmuch as the
referred Article does provide for reasonable restriction to be imposed on
holding of the property, however, if a resident person who is a taxpayer is not
generating any income which would fall within the definition of income as
provided in Section 2(29) of the Ordinance, but only by virtue of the fact that
said person owns a capital asset which may as well have been gifted to him/her
is being asked to pay liability on the same by treating the said assets as
generating income is unreasonably confiscatory because eventually the taxpayer
might have to dispose of the assets in order to pay such liability.
14. In civilized society, the purpose of fundamental rights, as
are provided in every legal system, is to provide basic protection to persons
and though they are not absolute and do not exist in a vacuum, such rights can
only be taken away or restricted in accordance with law. Fundamental rights are
to be given broader interpretation and also are to be interpreted in such a way
that they fulfill the requirements of modern society. The Constitution is an
organic document and stagnancy cannot be attributed, and expansive
interpretation is to be given to the same. In stating the said principles, I
derive the wisdom of the Supreme Court of Pakistan as laid down Mian Muhammad Nawaz Sharif versus President
of Pakistan (PLD 1993 SC 473); any curb on the fundamental rights is to be
given a strictly restrictive interpretation. In the referred backdrop, the
imposition of tax on 5% of the fair market value of the capital asset on the
basis that any capital asset which a resident person might hold is treated to
be deriving income is confiscatory in nature, hence is in violation or
derogation of Article 23 of the Constitution. The Lahore High Court in D.G. Khan Cement Company Ltd. versus Federation of
Pakistan (PLD 2013 Lah 693), while striking down Section 8(1)(ca) of the
Sales Tax Act, 1990, founded its reasoning on the basis of the relevant
provision being in derogation of Article 23 of the Constitution. The referred
judgment was authored by the Hon’ble Mr. Justice Syed Mansoor Ali Shah, who,
after referring to the said principle of reasonableness and while relying on
the concept of the fundamental rights as contained in the United Nations
Charter, held that the referred law was in violation of the Article 23 of the
Constitution.
This
brings us to the next aspect of the impugned provision, i.e. how the
elements of discrimination and confiscation unjustifiably infringe
constitutional rights, and examination of the same in light of the principles
laid down in Elahi Cotton Mills case, where the taxing statute is
discriminatory and/or does not provide adequate machinery for recovery and/or
otherwise is vague or unreasonable may be struck down. Reading of the impugned
provision reveals that the tax is levied on 5% of the fair market value of a
capital asset as defined therein, however there is no provision as to who shall
determine the fair market value and the criteria thereof. Such determination of
fair market value has been left upon the whims of the tax-master. Additionally,
the language of the impugned provision is vague and does not provide for the
machinery for recovery and, as already noted above, a resident person who is a
taxpayer and is not generating income eventually might be forced to dispose of
the property if the person is unable to pay such tax. This makes the provision not
only simply confiscatory but also, since no machinery for recovery of the
assessment and is provided, makes it vague.
There is no cavil to the position that the Courts must endeavor
to save the law rather than destroy it and as such, Courts must interpret a
statute in a manner which is harmonious to the spirit and provisions of the
Constitution. Where the vires of a law has been challenged on the
touchstone of its constitutionality, while engaging in the interpretive
exercise, Courts may read down the statute in an attempt to harmonize it with
the constitutional principles and provisions. Albeit that such an exercise is
undertaken for the purpose of saving the law instead of striking it down, where
the interpretive exercise of reading down either yields an absurd conclusion,
or does not bring the law under challenge within the constitutional parameters,
in such cases there is no other option but to strike it down. This approach,
though avoided by the Courts, becomes essential in cases where the law cannot
be interpreted or read down to achieve harmony, for the reason that the
Constitution is supreme and shall always prevail.
15. The charging provision may also be regarded as
discriminatory on the basis that there exists no criterion for the required
exaction to be made. The Legislature has provided certain inclusion and
exclusion from the impugned charging provision but there does not seem to be
any basis thereof. Though sub-Section 4 does provide for inclusion and
exclusion of the categories of persons who are to be taxed, there does not seem
to be any cogent reason thereof. Article 25 of the Constitution prohibits
discrimination and provides for equality of all citizens. It says that all
citizens are equal before the law and are entitled to equal protection of law.
By imposition of tax on the resident person, who only holds a capital asset and
does not fall within the exemptions can be said to be discriminatory against
such person. The interpretation rendered to Article 25 of the Constitution in
the authoritative pronouncement reported as I.A
Sherwani and others versus Government of Pakistan (1991 SCMR 1041) is that
there can be reasonable classification and where intelligible differentia
exists between the said classifications, there shall be no instance of
discrimination. The term “intelligible” connotes that it must be intelligible, or
understandable, to a person of ordinary intelligence.[15] If
the principles enunciated in I.A. Sherwani case and the concept of a criteria
being intelligible are applied to the exemptions provided under the impugned
provision, there seems to be neither any basis for classification, nor is there
an intelligible differentia to form the basis of such classification, and the
Legislature has deemed it on its whims. The lack of classification in the
charging section, coupled with the absence of any intelligible differentia
between the said persons who are to be taxed or exempted there from results in
a confiscation which, in effect, translates to inequality. A similar question
was decided by the Supreme Court of India in a case,[16]
which has also been relied upon by the Supreme Court of Pakistan in its
judgment in the case of Elahi Cotton Mills (supra), wherein a tax had been
imposed requiring every person holding land to pay such tax at a prescribed
flat rate, regardless of whether or not any income was being derived the said
property or whether the said property was capable of yielding any income at
all. The Court in this case explored the effect of such tax through a
hypothetical scenario as follows:
“… Under the Act in question we
shall take a hypothetical case of a number of persons owning and
possessing the same area of land. One makes nothing out of the land, because it
is arid desert. The one does not make any income, but could raise some crop
after a disproportionately large investment of a labour and capital. A third
one, in due course of husbandry, is making the land yield just enough to pay
for the incidental expenses and labour charges besides land tax or revenue. The
fourth is making large profits, because the land is very fertile and capable of
yielding good crops. Under the Act, it is manifest that the fourth category, in
our illustration, would easily be able to bear the burden of the tax. The third
one may be able to bear the tax. The first and the second one will have to pay
from their own pockets, if they could afford the tax. If they cannot afford the
tax, the property is liable to be sold, in due process of law, for realization
of the public demand. It is clear, therefore, that inequality is writ large on
the Act and is inherent in the very provisions of the taxing section. It is
also clear that there is no attempt at classification in the provisions of the
Act. Hence, no more need be said as to what could have been the basis for a
valid classification. It is one of those cases where the lack of classification
creates inequality. It is, therefore, clearly hit by the prohibition to deny
equality before the law contained in Article 14 of the Constitution.
Furthermore, Section 7 of the Act, quoted above, particularly the latter part,
which vests the Government with the power wholly or partially to exempt any
land from the provisions of the Act, is clearly discriminatory in its effect
and, therefore, infringes Article 14 of the Constitution. The Act does not lay
down any principle or policy for the guidance of the exercise of the discretion
by the Government in respect of the selection contemplated by Section 7.”
On
these basis, the Court declared the provisions to be ultra vires.
Furthermore, in light of paragraph-31 (xxxi) of Elahi Cotton Mills case, if tax
is levied in such a way that it operates in a discriminatory manner against any
person, it can be struck down.
16. In lieu of the detailed discussion above regarding the different
elements of a taxing provision, I will now deliberate upon the nature and
purpose of Section 7E and whether the same, in pith and substance, is in
violation of the constitutional rights and provisions. At the cost of
repetition, it is understood that tax laws are by nature confiscatory, and as
such, do infringe constitutional rights. This confiscation is supposed to be
justified by a reasonable purpose which is in the public interest, and the
proportionality of the measure of tax in context of said purpose. Section 7E
requires tax to be paid on income deemed to be derived from capital assets as
defined therein; it however does not classify any categories of the capital
assets. The tax is to be imposed, at the rates specified in the relevant
Schedule to the Ordinance, on 5% of the fair market value of the capital asset.
No mechanism for determination of such fair market value has been provided for,
neither is there any clarity with regards to different classes of properties. A
person owning a large commercial plot, for instance, may be in a better
position to pay such tax, however an owner of a small residential plot, or
otherwise a plot which may not even have the capacity to yield any income
whatsoever, may not have the ability to fulfill this burden. Although hardship
is not ground enough for declaring a taxing statute unconstitutional, but the
tax under challenge would force the taxpayer who cannot pay the same to dispose
of the capital asset. It is a settled principle that ordinarily, a tax on land or
on land revenue is assessed on the actual or the potential productivity of the
land sought to be taxed.[17]
Similarly, a tax on income deemed to be derived from land must be imposed
according to the potential capacity of the said land to yield income, deemed or
otherwise. Though the presumptive tax regime has been upheld by the Supreme
Court through numerous judgments, including that of Elahi Cotton Mills case,
such presumptive taxation must be based on a comprehensive structure and must
fall within the parameters of the Act itself, as well as constitutional
provisions. The impugned provision lacks any such comprehensive structure,
parameters or guidelines, it does not specify any method of computation of the
fair market value of the asset in question, neither does it provide any
classification of assets nor any machinery for recovery. Furthermore, the
exemptions provided within the impugned provisions create classification which
is not justified by any intelligible differentia; and in its effect, the impugned
tax would force a taxpayer to dispose of property upon failure to pay such tax.
This imposition of tax is, therefore, arbitrary and the elements of inequality,
discrimination and the extent of confiscation are not justifiable by any
measure and are thus tantamount to an illegal derogation from constitutional
rights and provisions.
17. It is pertinent to state that vires of the impugned
provision was under challenge before the three other High Courts i.e.
the Sindh High Court, the Lahore High Court and Peshawar High Court. The
Hon’ble Sindh High Court upheld the vires of Section 7E, whereas the
learned Single Bench of the Lahore High Court, in its judgment, suggested
changes and endeavored to read down the provision; this judgment was however
set aside by the learned Division Bench. The Peshawar High Court has struck
down the law for being ultra vires. The judgments of the referred High
Courts are not binding on this Court, but I do have the benefit of their
wisdoms, however, I fail to bring myself in agreement with their respective
views and reasoning, even with that of the Hon’ble Peshawar High Court which
has struck down the law, however, at this juncture, it is only appropriate to
observe that every High Court has territorial jurisdiction and the matter falling
within the territorial jurisdiction is brought to the Court and is accordingly
decided and if any particular issue is decided by any of the High Courts, the
judgment is in personam and the principles laid down therein are of general
obligation and the same are not binding but a judgment handed down in a case
such as this, where vires of the statute is under challenge and if
declared to be ultra vires, the judgment cannot be said to be in
personam but is in rem and the effect thereof is ultimately to be examined by
the Supreme Court of Pakistan in an appropriate case. I am of the view that if
one High Court strikes down a law, the judgment being in rem, the legal
obligation thereunder disappears and it cannot be said that such disappearance
is only to the extent of territorial area to which the jurisdiction of the said
High Court extends. The concept of a judgment in rem was discussed in detail by
the Supreme Court of Pakistan in Pir
Bakhsh and The Chairman, Allotment Committee and others (PLD 1987 SC 145).
The concept was explained as follows:
“The terms “in rem” and “in
personam” are of Roman Law used in connection with actio, that is, actio in rem
and actio in personam to denote the nature of actions, and with the
disappearance of the Roman forms of procedure, each of the two terms “in rem”
and “in personam” got tagged with the word judgments to denote the end-products
of actions in rem and actions in personam.
Thus, according to the civil law an
actio in which a claim of ownership was made against all other persons was an
action in rem and the judgment pronounced in such action was a judgment in rem
and binding upon all persons whom the Court was competent to bind, but if the
claim was made against a particular person or persons, it was an action in personam
and the decree was a decree in personam and binding only upon the particular
person or persons against whom the claim was preferred or persons who were
privies to them.
The point adjudicated upon in a
judgment in rem is always as to the status of the res and is conclusive against
the world as to that status, whereas in a judgment in personam the point,
whatever it may be, which is adjudicated upon, it not being as to the status of
the res, is conclusive only between parties or privies. A decision in rem not
merely declares the status of the person or thing, but ipso facto renders it
such as it is declared.
Section 41 of the Evidence Act, 1872
does not use the term “judgment in rem”, but it incorporates the law on the
subject of “judgments in rem” and makes them relevant not only against
strangers but also conclusive of certain matters such as whether a person was
entitled to a legal character or to any specific thing not as against any
specified person but absolutely.
Judgments in rem are an exception to
the rule of law that no man should be bound by the decision of a Court of
justice unless he or those under whom he claims were parties to the proceeding
in which it was given. This rule of law is referable to the maxims of Roman Law
namely, “Res inter alios judicata nullun inter aliosprejudicium facit,” or “Res
inter aliosactaalteri nocere non dibet” Such exception of the judgment in rem
in the Roman Law was the foundation of the exception in English Law. Section 41
of the Evidence Act is the foundation for the exception of judgment in rem in
our corpus juris. The reason why a judgment should not be used to the prejudice
of a stranger is that he is denied the funda mental right to make a defence, or
to examine or cross-examine witnesses or to appeal from a judgment which
aggrieves him. This is the requirement of most manifest justice and good sense.”
This view was
followed by this Court in Bannu Woolen
Mills Ltd. versus Federation of Pakistan (2015 PTD 1058 Islamabad).
17. Summing up the reasoning as stated
hereinabove, sub-Section 2 of the impugned provision is confiscatory in nature
and also discriminatory in its effect, and thus constitutes a violation of
Article 25 of the Constitution. It also violates Article 23 of the Constitution
and goes beyond the ambit of reasonable restrictions as provided thereunder,
hence, is liable to be struck down. Moreover, the classes or exemptions
provided from payment of the tax does not seem to have any proper basis and has
been created at whims of the Legislature which cannot be regarded as reasonable
classification or classification based on intelligible differentia, hence
violates Article 25 of the Constitution. Neither the machinery for assuming the
fair market value has been provided, nor the recovery mechanism, and on the
touchstone of Messrs Elahi Cotton Mills (supra), such deficiencies may form the
basis for striking down a statute.
18. For the above reasons, the
instant petition as well as petitions mentioned in the schedule are allowed and sub-Section 2 of the
impugned provision i.e. Section 7E of the Ordinance, is declared to be ultra
vires the Constitution, hence it is struck down and is declared to be void
ab initio. Consequently, the notices issued by the department under Section 7E ibid
are also set aside for being without lawful authority.
Before parting, I would like to
acknowledge the hard work put in by Ms. Maheen Zeeshan, Advocate (my law
clerk). It was only her ceaseless efforts to research the material with respect
to legal issues involved that made the above reasoning possible.
SCHEDULE
LIST OF PETITIONS CONNECTED WITH W.P No.213/2023
|
S.No. |
Case No. |
Title |
|
1. |
W.P.
No. 4880/2022 |
Ejaz
Hussain Rathore Versus Federation of Pakistan, etc. |
|
2. |
W.P.
No. 191/2023 |
Waseem
ur Rehman Versus Federation of Pakistan, etc. |
|
3. |
W.P.
No. 192/2023 |
Sami
ur Rehman Versus Federation of Pakistan, etc. |
|
4. |
W.P.
No. 247/2023 |
Muhammad
Naeem Versus Federation of Pakistan, etc. |
|
5. |
W.P.
No. 343/2023 |
Mrs.
Beena Riaz Malik Versus Federation of Pakistan, etc. |
|
6. |
W.P.
No. 344/2023 |
Syed
Waqar Ali Bokhari Versus Federation of Pakistan, etc. |
|
7. |
W.P.
No. 345/2023 |
Syed
Zulfiqar Ali Bokhari Versus Federation of Pakistan, etc. |
|
8. |
W.P.
No. 397/2023 |
Shah
Khalid Versus Federation of Pakistan, etc. |
|
9. |
W.P.
No. 440/2023 |
Irfan
ul Wahab Khan Versus Federation of Pakistan, etc. |
|
10. |
W.P.
No. 442/2023 |
Saeed
Ashraf Versus Federation of Pakistan, etc. |
|
11. |
W.P.
No. 443/2023 |
Muzaffar
Ahmad Virk Versus Federation of Pakistan, etc. |
|
12. |
W.P.
No. 478/2023 |
M/s
Imex Associates Versus Federation of Pakistan, etc. |
|
13. |
W.P.
No. 541/2023 |
Muhammad
Sabeeh Khawaja Versus Federation of Pakistan, etc. |
|
14. |
W.P.
No. 544/2023 |
Mrs.
Razia Saeed Versus Federation of Pakistan, etc. |
|
15. |
W.P.
No. 545/2023 |
Naseer
Ahmed Malik Versus Federation of Pakistan, etc. |
|
16. |
W.P.
No. 548/2023 |
Chaudhry
Muhammad Tahir Versus Federation of Pakistan, etc. |
|
17. |
W.P.
No. 549/2023 |
Muhammad
Kaleem Ullah Versus Federation of Pakistan, etc. |
|
18. |
W.P.
No. 579/2023 |
Muhammad
Usman Rafi Versus Federation of Pakistan, etc. |
|
19. |
W.P.
No. 629/2023 |
Chaudhary
Farrukh Raza Versus Federation of Pakistan, etc. |
|
20. |
W.P.
No. 680/2023 |
Dr.
Kamran Masud Versus Federation of Pakistan, etc. |
|
21. |
W.P.
No. 695/2023 |
Chaudhry
Tariq Mehmood Toor Versus Federation of Pakistan, etc. |
|
22. |
W.P.
No. 771/2023 |
Muhammad
Tariq Versus Federation of Pakistan, etc. |
|
23. |
W.P.
No. 918/2023 |
Hashmat
Iqbal Versus Federation of Pakistan, etc. |
|
24. |
W.P.
No. 958/2023 |
Tahir
Idris Versus Federation of Pakistan, etc. |
|
25. |
W.P.
No. 1042/2023 |
Mst.
Zill e Huma Versus Pakistan through Federal Secretary, M/o Finance, etc. |
|
26. |
W.P.
No. 1043/2023 |
Atif
Ikram Versus Pakistan through Federal Secretary, M/o Finance, etc. |
|
27. |
W.P.
No. 1155/2023 |
Ch.
Amir Mumtaz Versus Federation of Pakistan, etc. |
|
28. |
W.P.
No. 1248/2023 |
Mrs.
Mona Akbar, etc. Versus Federation of Pakistan, etc. |
|
29. |
W.P.
No. 1520/2023 |
Muhammad
Ali Versus Federation of Pakistan, etc. |
|
30. |
W.P.
No. 2106/2023 |
Chaudhary
Mukhtar Ahmed Versus Federation of Pakistan, etc. |
|
31. |
W.P.
No. 2353/2023 |
Naveed
Yousaf Versus Federation of Pakistan, etc. |
|
32. |
W.P.
No. 2361/2023 |
Zulfiqar
Ali Versus Federation of Pakistan, etc. |
|
33. |
W.P.
No. 2521/2023 |
Muhammad
Abid Versus Federation of Pakistan, etc. |
|
34. |
W.P.
No. 2522/2023 |
Muhammad
Asad Versus Federation of Pakistan, etc. |
|
35. |
W.P.
No. 2563/2023 |
Muhammad
Saeed Versus Finance Division, through Secretary, M/o Finance, etc. |
|
36. |
W.P.
No. 2588/2023 |
Muhammad
Mudassar Versus Federation of Pakistan, etc. |
|
37. |
W.P.
No. 2589/2023 |
Noor-ul-Amin
Versus Finance Division, through Secretary, M/o Finance, etc. |
|
38. |
W.P.
No. 2652/2023 |
Misbah
ul Hassan Versus Finance Division, through Secretary, M/o Finance, etc. |
|
39. |
W.P.
No. 2675/2023 |
Hamayun
Naseer, etc. Versus Federation of Pakistan, etc. |
|
40. |
W.P.
No. 3009/2023 |
Hafiz
Mohsin Akhtar Versus Federation of Pakistan, etc. |
|
41. |
W.P.
No. 3011/2023 |
Shabbir
Ahmad Versus Federation of Pakistan, etc. |
|
42. |
W.P.
No. 3083/2023 |
Daud
Abid Versus Federation of Pakistan, etc. |