' DOST MUHAMMAD KHAN, J.---This single judgment shall also decide the following connected C.Rs, because question of law to all these petitions are identical:
(1) C.R. No,593 of 1998.
Income Tax Officer v. Dr. Inayat Yar etc.
(2) C.R. No, 485 of 2000.
Income Tax Officer v. Member Staff Association etc.
(3) C.R. No,486 of 2000 Income Tax Officer v. Sarhad Lecturer Association etc.
(4) C.R. No,487 of 2000.
Income Tax Officer v. Dr. Hazrat Aleem etc.
(5) C.R. No,488 of 2000.
Income Tax Officer v. Behram Khan etc.
(6) C.R. No,387 of 2001.
Income Tax Officer v. C.B. Etc.
(7) C.R. No,389 of 2001.
Income Tax Officer v. C.B. Revenue etc.
2. In the instant petition, the petitioners (Employees Action Committee Chitral representing both the Federal and Provincial Governments Employees) have claimed exemption from payment of income tax, which is being deducted from their salaries under section 12 of the Income Tax Ordinance, 1979. They filed a declaratory suit in representative capacity but their plaint was rejected by the trial Court, which was upheld by the District Court of Appeal.
3. The respondents/plaintiffs in C.Rs, No,593/98, 387/2001, 485 to 489 of 2000 too had filed suits seeking decree of declaration and permanent injunctions against the levying and deduction of income tax from their monthly salaries, in the Court of Senior Civil Judge, Malakand at Batkhela which was allowed. Appeal filed there-against was also dismissed. The subordinate Courts of different districts thus have adopted mutually inconsistent view on point of law.
' Arguments heard in considerable detail, record and relevant law perused/examined.
4. Epitomestically, the claim of the petitioners (assessee) in the present case and respondents in the connected cases mentioned above, is that although they are Federal or Provincial Government employees serving in different Government Institutions within (PATA) and because the Income Tax Ordinance (No, XXXI of 1979) has not been extended to the area by the President of Pakistan under sub-Article (3) of Article 247 of the Constitution of the Islamic Republic of Pakistan 1973, therefore, the Income Tax/Revenue Department is not authorized to deduct income tax from their monthly salaries. In other words they claim exemption from payment of income tax on the ground that they are serving within a special area where, the Income Tax Laws, are not enforced.
5. To the contrary, the Income Tax Officers/Inspectors of the concerned Circles have held them assessees in default and have issued notices to the concerned quarters i,e, Disbursing Officers to deduct at source the income tax from the salaries of all such government employees under section 12 of the Income Tax, 1979.
6. All these civil suits seeking decree of declaration and permanent injunctions against the levying and deduction of income tax, were contested by the Income Tax Department, however, due to one reason or the other, the cases could not be decided within reasonable time rather disposal of the same was delayed to a shocking extent.
7. As mentioned above, the sole plea taken by Federal and Provincial Governments Employees has firmly been based on the ground that because at no occasion in the past or at present Income Tax Ordinance (No, XXXI of 1979) has been extended to PATA, therefore, they are exempt from payment of income tax and the same could not be deducted from their salaries. Considerable stress was laid on the plea that the Income Tax Ordinance has got no extra territorial operation/effects thus, none of its provision could be applied to PATA and on account of this legal aspect the government employees do not come within the tax net, therefore, the Court is not supposed to place a construction on the said provision to the contrary.
' For the proper understanding of legal status of government servant, it is essential to make reference to the provisions of Civil Servants Act and the rules framed thereunder.
8. The short title, application and commencement of the Federal Government Civil Servants Act, 1973 and that of the N.-W.F.P. Civil Servants Act, 1973 almost are couched in same and similar words and for convenience sake the same is reproduced below:--
(1) This Act may be called the North-West Frontier Province Civil Servants Act, 1973.
(2) This section and section 25, shall apply to person employed on contract, or on work-charged basis, or who are paid from contingencies, and the remaining provisions of this Act including this section, shall apply to all civil servants wherever they may be.
(9) "Civil Servant" has been defined by Clause-B of section 2 in the following words:--
(b) "Civil servant" means a person who is a member of a civil service of the Province---(Rest not relevant).
' Under section 17 of the Provincial Civil Servants Act, 1973, every civil servant appointed to a post shall be entitled, in accordance with the rules, to the pay sanctioned for such post.
' Under section 26 of the Act ibid, the Governor or any person authorized by the Governor in this behalf may make such rules as appear to him to be necessary or expedient for carrying out the purposes of this Act. These rules, inter alia, shall provide for the terms and conditions of service of a civil servant.
9. On 31st January, 1989 while exercising the powers under section 26, the Governor of N.-W.F.P.
Enacted and notified the N.-W.F.P. Civil Servants (Appointment, Promotion and Transfer) Rules, 1989.
10. The provision of section 10 of the Act ibid, provides that every civil servant shall be liable to serve anywhere within or outside the Province, in any post under the Federal Government, or any Provincial Government or local authority, or a Corporation or body set up or established by any such Government. The only beneficial condition and safeguard provided therein, is that on transfer to the post outside the Province shall not be prejudicial or unfavourable to the terms and conditions of service of an employee/civil servant.
11. The combined study of the above provisions of the Act and the rules which correspond to the provisions contained in the Pakistan (Federal Civil Servants Act, 1973 and the rules framed thereunder) in unequivocal terms convey the intention of the legislature that such employees constitute one composite body/organization/set up whether serving as member of a civil service of Province or that of the Federal Government (Federation) irrespective of the place of their posting and the territory where they are serving on posts either in the department set up by the Provincial or Federal Government. Judged and seen from this aspect, all Provincial or Federal Government Employees on transfer to an area/territory where the legislative authority of the Parliament or the Provincial Assembly do not extend in view of Article 247(3) would not "ipso facto" take them out of the umbrella of the Civil Servants Actenacted by the Provincial or Federal Government because their terms and conditions of service like promotion, seniority, removal, termination, dismissal and, retirement from service would still be governed and regulated by the Acts and the rules framed thereunder. To explain in simple and ordinary words, they derive the same benefits and have to face disciplinary actions for misconduct like others serving elsewhere excluding (PATA). The terms and conditions of their service do not undergo a change on their transfer to (PATA). A careful study of the phrases, terms and words employed in the statutory law would show that civil service is one composite body/a single set up albeit the same consists of distinct and different cadres and posts.
The application of the provisions of Civil Service Law are not affected by territorial limits and borders barriers as these have direct nexus and link with the civil servants employed under it.
12. Keeping in view the above legal position, the fundamental point in contest i,e, the deduction of income tax from the salaries of government employees serving in PATA now requires determination. True that the Income Tax Ordinance, 1979 has not been extended to the area within the meaning of Clause (3) of Article 247 of the Constitution of Islamic Republic of Pakistan, 1973 but as all government servants within the Province or serving under the Federation constitute one body/set-up, the unescapable conclusion would be that they are liable to pay income tax on the income derived from salaries. For the correct/ proper construction of the provision of section 12 of the Income Tax Ordinance, 1979 the same is reproduced below:-- S.
12. Income deemed to accrue or arise in Pakistan: (1) Income which would be chargeable under the head "Salary" shall be deemed to accrue or arise in Pakistan, wherever paid, if it is earned in Pakistan, or if it is paid by, or on behalf of the Government or a local authority in Pakistan to a person in the service of such Government or authority as the case may be.
' Subsection 2------------ Not relevant.
13. The taxing Statute invariably contains three different types of provisions. The first part is called charging provision, which relates to the levy or charge of tax. It also provides the manner of imposing tax and the method of levying the same. The second one is assessment part, which controls and regulates the assessm ent, calculation and quantification of tax which becomes due and can be levied and recovered. It may be a new taxing provision or an old one providing for discovering and calculation of escaped tax, which has either been not assessed or under- assessed or over-assessed where refund is permissible. The third limb relates to the recovery of tax assessed and determined, which is a machinery provision providing various means and methods for its recovery.
14. The provision of section 12 of the Income Tax Ordinance, 1979 is a combination of all the three essential features, the same contains a deeming clause. It has provided for the charging of income tax on an income accrued in Pakistan to the residents and non-residents. The provisions of subsection (1) of section 12 of the Ordinance may be divided into three parts and for convenience sake it is arranged in the following pattern:--
(i) Income which would be chargeable under the head "Salary" shall be deemed to accrue or arise in Pakistan.
(ii) If it is earned in Pakistan, or
(iii) If it is paid by, or on behalf of, the government or a local authority in Pakistan to a person in the service of such government or authority as the case may be.
15. Two very important and plainly understandable terms used in the above provision of law are "which would be charged under the head "salary" shall be deemed to accrue or arise in Pakistan, wherever paid.
' And or if it is paid by, or on behalf of the Government or a local authority in Pakistan to a person in the service of such government or authority".
' The fundamental aspect of the matter is that every income derived through salary is chargeable to tax if it is paid by the government or a local authority controlled by the government or if it has accrued in Pakistan irrespective of the place of payment thereof. The Statute, therefore, professes in unambiguous terms to 'impose and charge tax on D the income derived through salaries paid to government servant whether he is posted within the taxable area to which the Ordinance ibid is extended or he is serving beyond the frontiers of that area.
' The charging provision chases/follows the income of the government servant, which he receives from the government as a salary and it has no relevancy with the place of his posting. In other words the territorial barriers have no impact or effect on it.
16. For the payment of salaries, remuneration, grants, pensionery and other benefits to government servants, both the Federal and Provincial Governments allocate fund in the annual budget for this purpose which is then transferred to the Finance Division in the Federal Government and Finance Department in the Provincial Government and are placed in separate heads of accounts maintained for this purpose. Both the Federal and Provincial Govermnents have established exchequers/main treasuries at the Provincial headquarters. It has created local treasuries and sub-treasuries at the District and Tehsil level with the view to facilitate timely disbursement/payment of salaries and other emoluments to the government servants but all the fund received by such local treasuries and sub-treasuries flow from the main treasury situated/established at the Provincial or Federal capital, the main source of feeding, thus the necessary corollary is that the employees of the Federal and Provincial Governments for all intents and purposes derive and receive salaries from the Government Treasury which fact admits of no doubt. The.Fundamental Rules of 1922 amended up to date and the General Financial Rules on the subject are clearer than crystal hence the petitioners herein and the respondents government servants in the connected C. Rs, mentioned above cannot claim exemption from payment of income tax on the ground that they are being paid their salaries in PATA to which Income Tax Ordinance, 1979 has not been extended within the meaning of sub-Clause (3) of Article 247 of the Constitution of Islamic Republic of Pakistan, 1973. They clearly come within the tax net provided by the provision of section 12 of the Ordinance ibid hence deduction of income tax at source from their salaries is lawful and fully justified.
17. The Hon'ble Supreme Court in the case of Dr. Hafeez Sher Badshah, v. ITO Circle-II Mardan and 2 others (sic) have held the following view:--
(2) "After hearing the petitioner in person, we find no force in the contention because under section 12(2) of the Income Tax Ordinance salary paid to a Government servant would be deemed to accrue or arise in Pakistan."
18. Almost similar view was held by the Hon'ble High Court of Quetta in the case of Sanaullah Khan v. Province of Balochistan through Secretary, Finance Department, Quetta and 3 others (1995 PTD 350). The relevant phragraph is reproduced below:-- "Perusal of above provision manifestly discloses that every Government employee, receiving salary from Federal Government; Provincial Government or any local authority of Pakistan is bound to pay income tax at prescribed rate irrespective of his status of residence, place of posting or nature of work. The question about applicability of Income Tax Ordinance, 1979 in the tribal areas has absolutely no relevancy because, income tax deductions are based upon entitlement of persons for receiving salaries from State exchequer. Therefore, we are inclined to respectfully observe that reference to above-quoted judgment or bar under Article 247 of the Constitution while considering liability of Government Employees regarding payment of Income Tax has no nexus with the proposition under consideration. We, therefore, feel no difficulty in concluding that once Government employee is receiving his salary from State exchequer, he automatically becomes liable to pay tax on his income without any barrier of locality, place of service or nature of duties unless specially exempted".
19. The Delhi High Court of India in the case of CIT v. Air France Ltd. (2001 PTCL 3701) was confronted with almost similar proposition of law. The assessee therein was a Company having Head Office in France but paid salaries to some of its foreign employees posted in India which include the amount payable in France as "part of Franchaise". However, the assessee did not deduct or deposit income tax amount under section 192 of the Act, which was detected by the Revenue Department during search of the premises of the assessee thus a penal interest under section 201 (i)(A) of the Indian Income Tax Act, 1961 was imposed. Appeal of the assessee was dismissed by the CIT, however, the Tribunal of Taxes deleted the penal interest so levied by the Assessing Officer and confirmed by the CIT(Appeals). It was held by the High Court that the Tribunal has committed no illegality and no question of law has been raised to be determined. The language of the judgment suggests that even offshore Companies paying salaries to its servants in India were under obligation to pay income tax at source.
20. The case-law (CIT Peshawar v. Messrs Gul Cooking Oil and Vegetable Pvt. Ltd. (PLD 2003 SC 614) cited at the bar is of no help to the assessees because the view held by the Hon'ble Supreme Court in the said case operates and it is based on different proposition of law and facts having no relevancy to the cases under consideration.
' For what has been discussed above, all the Government servants whether serving in the Federal or Provincial Government or under the local authorities which are funded by the government exchequer are liable to pay income tax within the meaning of section 12 on account of income derived through salaries, therefore, the assessment order/notices issued by the Income Tax Inspector/Officer of the Circle concerned for charging and levying income tax on their salaries is held to be lawful and valid. Resultantly this petition is dismissed but for different reasons as discussed abave along with the C.M. while C.R. 593/98, C.R. 387/2001, C.Rs, 485 to 489 of 2000 are allowed and the impugned judgments of the two Courts below decreeing suit of the respondents are set aside with no order as to costs. As intricate questions of law of debatable nature were involved and the default committed does not appear to be contumacious or deliberate one, therefore, the Income Tax Authority is expected to judge the cases of the assessees in default in a considerate manner in the matter of imposing penal interest.