[The judgment of the Court was delivered by I. Mahmud, J.]-The following question of law has been referred to the High Court for opinion under Section 66(1) of the Income Tax Act, 1922, by the Income Tax Appellate Tribunal (Karachi Bench), Karachi, at the instance of the applicant-assessee, the Pakistan Industrial Development Corporation, in respect of the charge year 1953-54:- "Whether in the facts and circumstances of the case, the Tribunal is right in holding that income of Pakistan Industrial Development Corporation is not exempt from income tax?"
2. The Pakistan Industrial Development Corporation (hereinafter referred to as the Corporation) had been set up as statutory Corporation under the Pakistan Industrial Development Corporation Act, 1950 (Act XLV of 1950). At all material times, and, at the close of the account year ending 31st March, 1953, the entire share capital of the Corporation was held by the Central Government, which also controlled the business of the Corporation through a nominated Board of Directors. The Corporation earned interest income from Banks on its deposits of fund which were provided by the Central Government and advances for establishment of different industrial projects as also for acquiring fully paid-up shares of the Corporation. It also earned sundry income from other sources.
The Income Tax Officer served notices under Sections 22(2) and 22(4) of the Income tax Act requiring the Corporation to file return of income for the assessment year 1953-54. The Corporation did not file the return contending that it was not liable to pay income tax as the income earned by it really belonged to the Central Government, which had contributed the funds for fulfilling the objects for which the Corporation was established.
3. The Income Tax Officer rejected the claim of immunity from taxation of the Corporation on the short ground that the Corporation being a body corporate formed by or under an act of Parliament, was a 'company as defined' in Section 2(5-A) of the Act and fell within the mischief of the charging Section 3 as then worded. Accordingly, he assessed the Corporation under Section 23(4) of the Income Tax Act and brought to charge that portion of the interest income attributable to the share capital amount while exempting the portion of interest on the moneys advanced by the Central Government. The Corporation filed an appeal to the Appellate Assistant Commissioner of Income tax, but it was dismissed on the same ground and the order of the I.T.O, was upheld. The Corporation then took the matter up on appeal to the Income Tax Appellate Tribunal (Karachi Bench), Karachi. It was mainly contended before the Appellate Tribunal that the Corporation was establish- ed under the special Act with the object of carrying out constitutional functions of the Central Government for promoting certain industries in Pakistan and that now only the entire share capital was owned by the Central Government but also the Central Government retained control over the Management through the directors, all of whom were appointed by it. In the circumstances, it was contended that the Corporation was in reality functioning like any other Department or limb of the Government or at any rate as an agency or instrumentality of the Central Government, and that the interest income belonged to the Central Government, which itself was immune from tax. It was also contended that the Corporation was a local authority or a charitable institution. These contentions were rejected by the Appellate Tribunal. The Tribunal held that the Corporation was a distinct and separate legal entity and being a 'company' within the definition of Section 2 (5-A) of the Income-tax Act, it was chargeable to income-tax under Section 3 thereof, as then worded. In the absence of the specific provision exempting the Corporation from income-tax, as in the case of the State Bank of Pakistan, the Income- tax Act had to be strictly construed. Even otherwise, the Corporation was not functioning like a Government departments nor were the directors and officers of the Corporation Government servants. Therefore, the Tribunal held that there was no force in the argument that the Corporation was a limb of the Government or that it was an agency or instrumentality of the Central Government. In the result, it dismissed the appeal. On the application of the Corporation under Section 66(1) of the Income-tax Act, the question above-quoted has thus been referred to the High Court for opinion.
4. Before discussing the submission of counsel for the parties, it will be necessary to state briefly the salient features of the Pakistan Industrial Development Corporation Act, 1950. The Corporation was established, as stated in its preamble, for the purpose of promoting certain industries specified in the Schedule. Section 3 provided that the Central Government shall establish a Corporation to be called the Pakistan Industrial Development Corporation, which shall be a body corporate by that name, having perpetual succession and a common seal with power, subject to the provisions of the Act, to acquire and hold property, both movable and immovable, and shall sue and be sued by the said name. Under Section 4, the authorised share capital of the Corporation was to be Rs. One crore divided into fully paid-up shares of Rs. One lac each, of which 25 shares were to be issued in the first instance and the remaining shares may be issued from time to time by the Corporation with the previous sanction of the Central Government. Section 5 provided that the general direction and administration of the Corporation and its affairs shall vest in the Board of Directors, which may exercise all powers and do all acts and things which may be exercised or done by the Corporation and that in discharging the function the Board shall act on commercial consideration and shall be guided on questions of policy involving the national interest (including commercial and industrial interests) by which directions as the Central Government, which shall be the sole Judge, may give it from time to time. If the Board failed to obey such directions, the Central Government may remove the directors including the Chairman and appoint others in their place. Under Section 6, the Board is to consist of five directors to be appointed by the Central Government each of whom shall be a whole-time officer of the Corporation receiving such salary and allowances as the Central Government may determine. Section 14 provided that the business of the Corporation shall be to submit for the approval of the Central Government, schemes for the establishment of the industries specified in the schedule and to give effect to the approved schemes by sponsoring public companies under the Companies Act, 1913 and independent of each other and having as their object manufacturing undertaking in the industries concerned. The accounts of the Corporation were to be audited by auditors appointed with the previous approval of the Central Government. Section 16 provided that a statement of its audited accounts shall be furnished to the Central Government after the end of every financial year and the Corporation shall submit an annual report on the conduct of its affairs for that year and on its proposals for the next ensuing financial year. Section 18 provided that the Central Government shall lay before the Central Legislature the audited statement of accounts and the annual report. Section 19 and 20 respectively, empowered the Central Government to make rules.and the Board to make regulations for the purpose of giving effect to the provisions of the Act, which were to be published in the official Gazette and were to be laid thereafter before the Central Legislatures.
5. Mr. Ali Athar, learned counsel for the Corporation, conceded that the Corporation was a 'company' within the definition of Section 2(5-A) of the Act and also that it was a 'person' as defined in Section 2(9) of the Act as it now presently stands after it was amended in 1963. But he submitted that the corporate personality of the Corporation will not detract from its real nature and character, for it is well-settled principal that for tax purposes, regard must be had to the substance and not the form of the transaction; also that if the veil of the Corporation is lifted, it will be seen that the Corporation was wholly-owned and controlled by the Central Government and was established only for the purpose of carrying out its constitutional functions for promoting and developing certain specified industries as provided under Federal Law under Entry No. 34 of List I to Schedule VII of the Government of India Act, 1935. Such Government functions are being performed in numerous cases nowadays through the agency or instrumentality of statutory corporations which are created specially for that purpose under effective Government Control. As observed in Salahuddin v. Frontier Sugar Mills and Distillary Limited PLD 1975 SC 244 despite the fact that a statutory Corporation is a separate entity, it will be regarded as performing functions in connection with the affairs of the Federation or Province, like a Government Department. Mr. Ali Athar, however, conceded that where a statutory Corporation is not wholly owned by the Government and in which there are minority shareholders from the public, it would be difficult to maintain that the corporation was functioning as a Department of Government. However, the position was different in the instant case as the Corporation was wholly owned by the Central Government. Not only that, but it was also wholly controlled as all the directors were appointed by the Central Government who were obliged to follow its directions on pain of removal. It was, therefore, contended by counsel that the Corporation was in substance functioning and operating as a Department of Government, just like the Post Office, the Railways, etc, and that the income earned by the Corporation belonged to the Central Government and as such was entitled to immunity from taxation. The constitutional position prevailing on the relevant date before the coming into force of the 1936 Constitution was that in theory the Federal Government was acting through the Governor General on behalf of the Crown. Counsel cited the Punjab Province v. Federation of Pakistan PLD 1956 FC 72 in which it was observed by the Federal Court that the Crown had the prerogative of immunity from taxation unless it was expressly taken away by statue. The position today is that the Federal Government is not amenable to Federal Income-tax, not being a 'person' as defined in Section 2(9) of the Income tax Act.
6. In support of his submission Mr. Ali Athar called on the decision in West Pakistan Road Transport Board v. Commissioner of Income- tax PLJ 1973 Lah. 503 and Sind Industrial Trading Estate Ltd,, Karachi v. Central Board of Revenue and others PLD 1975 Kar.
128. We have considered these cases, but, in our opinion, they are distinguishable on their special facts. In the former case, Section 43-A of the Motor Vehicles Act, 1939, permitted a Provincial Government to set up a Road Transport Board which was to be a body corporate when it decided to operate Road Transport Service in province itself. The Board was wholly financed and managed by the Provincial and Central Governments through their appointed directors. But on the facts, it was found that the Board was really performing the functions of operating road transport services on behalf of the Provincial Government which had decided to operate services itself and the Board was, therefore, equated as a Government Department or agency or instrumentality of the Government. In the second case, relying on the decision of the first case, similarly Government of Sind had decided by resolution to set up industrial and trading estate at Karachi and other cities in the Province and, for this purpose, employed the device of incorporating a company under? the Companies Act, 1913 without a share capital and limited by guarantee. The Government provided the entire working capital and the land. required for the trading estates and controlled the Management of the company through it departmental secretaries and Director of Industries and the resolutions of the Board of Directors of the company were liable to be suspended or modified by the Provincial Government. The functions left to the company were mainly municipal. In these circumstances the Court held that the company was functioning as a Department of the Provincial Government and, as such, its income was not liable to tax.
7. The main question, which is one of fact, is whether the business of the Corporation was being carried on by or on behalf of the Central Government as a Department or as its agent or instrumentality. Now, it is well-settled that in certain exceptional case, including for tax purposes, the Court is entitled to lift the veil of incorporation and pay regard to the substance and reality behind the legal fiction. This principle was recently applied by the erstwhile High Court of West Pakistan, Karachi Bench in Commissioner of Income-tax v. Gammon (Pak.) Ltd., Karachi 1968 PTD 622 cited Mr. Ali Athar. The Supreme Court also in the President v. Mr. Justice Shoukat Ali PLD 1971 SC 585 approved of the principle and observed that "there is no bar to the Courts lifting the veil of incorporation to determine the true relationship of the shareholders with regard to their dealings with the company or to ascertain the true nature of the company itself in matters which are governed by other statutes........ ". The veil of incorporation has been pearced in several cases by the Courts for purposes of taxation, despite the doctrine laid down by the House of Lords in A. Salomon v. A. Salomon and Company Ltd. 1897 A C 22 that a company is a legal person distinct from its shareholders. Therefore, there is no force in the submission of Mr. Mansoor Ahmed Khan that the veil of incorporation cannot be lifted unless special provision is made in the taxing statute.
8. On an examination of the provisions of the Pakistan Industrial Development Corporation Act, under which the Corporation was set up, we have reached the conclusion that there is no force in the contention that the Corporation was functioning as a Department of Government or as its agent or instrumentality. Despite the fact that the capital was wholly owned by the Government and its management controlled through its appointed directors, the Corporation retained on appreciable decree of independence and freedom of action within the controlled sphere. Section 5 of the P.l.T.C. Act vests in the Board of Directors wide discretionary power of management and is required to act on commercial considerations. Section 14 of the Act gives to the Corporation wide discretion in the matter of framing schemes for establishment of industries. The property which the Corporation acquires is its own property. Its directors and officers are paid out of the Corporation's revenues and are not Government servants as held in a number of cases. It sued and is sued by its own name. It has power to borrow moneys required for development of industries under Section 49 of the said Act. The absence of a specific provision in the P. I. D( C. Act exempting it from income- tax and other taxes is significant, as in the cases of the State Bank of Pakistan, which has been granted specific exemption from income-tax and other taxes by Section 49 of the State Bank Act, 1936, and in the case of the Agricultural Development Bank of Pakistan, by Section 27-A of the Agriculture Development Bank Ordinance, 1961 as amended by Ordinance No. 45 of 1978. Mr. Mansoor Ahmad Khan also referred to Tamlin v. Hannaford 1950 K B 18 in which in similar circumstances, the British Transport Commission, although controlled by a Minister of the Government, was yet held to be acting on its own behalf and not as a servant or agent of the Crown. Lord Denning observed: "These are great powers but still we cannot regard the corporation as being his agent, any more than a company is the agent of the shares holders, or even of a sole shareholder. In the eye of the law, the Corporation is its own master and is answerable as fully as any other person or Corporation is not Crown property. It is not the Crown and has none of the immunities or privileges of the Crown. Its servants are not civil servants, and its property. It is as much bound by Act of Parliament as any other subject of the King. It is, of course, a public authority and its purposes, no doubt, are public purposes, but it is not a Government Department nor do its powers fall within the province of Government."
Counsel also referred to Andhra Pradesh State Road Transport Corporation v. The Income-tax Officer, Hyderabad and others (1964) 52 I T R 524 in which it was observed that merely because the majority of shares of the Andhra Pradesh State Road Transport Corporation was owned by the Provincial Government and its activities controlled by the State, the Corporation had a separate personality of its own and it could not be said that the state as a share-holder owned the property of the Corporation of its income. To treat the Corporation as if it were a Department of Government, would defeat the real object or incorporating statutory corporations for undertaking government functions relating to industrial and commercial development, by freeing it from the red-tapism or inflexibility for which Government department are notorious.
9. For the foregoing reasons, we would answer the question in the affirmative and hold that the Pakistan Industrial Development Corporation is not exempt from Income-tax. Parties are left to bear their own cost.