ZULFIQAR AHMAD KHAN, J. Petitioners engaged in the business of manufacturing of flour from wheat have impugned condition (v) of SRO No,717(I)/2014 dated 07.08.2014 ("the SRO ") alleging the same, being illegal, discriminatory and ultra vires. Learned counsel for the petitioners submits that after the 18th Amendment in the Constitution of Islamic Republic of Pakistan 1973, the subject of import of wheat and other food grains fell into the Provincial Government's domain. He states that while the petitioners, over the years, had been purchasing wheat from the local market for the manufacturing of flour, however , lately they ventured into the import of wheat directly .
Per counsel, Section 148 of the Income Tax Ordinance, 2001 provides for the collection of advance tax at the import stage, however , these imports have been granted exemption from such advance tax payment pursuant to Clause 72B of Part-IV of the Second Schedule of the Income Tax Ordinance for industrial undertakings, if their tax liability for the current tax year, on the basis of determined tax liability for any of the preceding two years (whichever is the higher) had been paid, and a certificate to that effect has been issued by the concerned Commissioner Inland Revenue. Per counsel, being encouraged by such a regime, the petitioners embarked on importing wheat directly from the international markets. Counsel next states that however when the wheat procured by the petitioners was in the pipeline, the respondents sudde nly issued the SRO 717(1)/2014 impo sing various conditions for the issuance of the exemption certificate. Per counsel, the petitioners though fulfilled all other conditions prescribed in the said SRO, however , fell short of condition (v), which restricted the concession to those importers who had carried out such imports during the last year too. Thus, squarely discriminating the petitioners, who otherwise were fully eligible for the concession made available under Clause 72B. Per counsel, the petitioners requested issuance of the required exemption certificate from the concerned Commissioner , but the same was refused by the Respondent No,3 by placing reliance on condition (v) of the SRO alleging that the petitioners did not qualify for the concession since they had not imported wheat during the previous year. Per counsel, such an arbitrary and discriminatory condition laid down by the SRO prejudiced the fundamental rights of the petitioners, who were called upon to pay an extra sum of Rs,162 per bag of 100 kg, as compared to those who were enjoying the said exemption under Section 148, being already in the business of importing wheat in the last years. Learned counsel, however , stated that in case of flour mills, only Minimum Tax under Section 113 of Income Tax Ordinance, 2001 on turnover at the rate of 20% was chargeable under Division IX of First Schedule of the Income Tax Ordinance. Per counsel, when the statutory provisions (i,e, clause 72B of Part-IV of the Second Schedule) placed no condition of prior imports, no such restriction could have been imposed through an SRO , which act is per se repugnant to the statute. In support of his arguments, the learned counsel placed reliance on 1999 SCMR 1442 [The Central Board of Revenue, Islamabad and others v. Sheikh Spinning Mills Limited, Lahore and others] and 2001 PTD 2383 [Additional Commissioner , Sales T ax, Lahore and another v . Rupafab Limited and others ].
2. Comments were filed by the Respondents Nos. 2, 3 and 4 where they challenge d the very maintainability of the instant petition by taking a stance that claim of exemption from withholding tax at import stage was not a right, but a concession and that too, was subject to conditions laid down by Section 148 and Clause 72B read with SRO 717(I)/20144 and mere denial of such a concession would not make the petitioners an "aggrieved person" under Article 199 of the Constitution of Islamic Republic of Pakistan. It is also stated that Section 53(1)(a) of Income Tax Ordinance, 2001 infact deals with exemptions, while Section 148 empowers the Customs authorities to collect advance tax from every importer of goods at the rate specified in Part-II of the First Schedule. It is also stated that Clause 72B is not to be read in isolation, but along with the relevant SROs, and while the said Clause provided exemption under Section 148 to raw materials, however , SRO No,717(I)/2014 provided a procedure for seeking such exemptions. It was lastly stated that even if other requirements had been complied with, denial of requisite exemption certificate on failure to meet condition (v), rightly disqualified the petitioners.
3. Heard the counsel reviewed the material on record.
4. Admittedly , there is no dispute that the petitioners are industrial undertakings, as defined by Clause 29(c) of Section 2 of the Income Tax Ordinance, 2001. Also there is no denial that Section 148 of the Ordinance empowers Customs authorities to collect advance tax on imports. Since the impugned SRO has been issued clause 72B of Part-IV of the Second Schedule of the Income Tax Ordinance, 2001, we find it relevant to reproduce full text of the said Clause hereunder:- "72B- The provision of Section 148 shall not apply to an industrial undertaking if the tax liability for the current tax year on the basis of determined tax liability for any of the preceding two tax years, whichever is the higher , has been paid and a certificate to this ef fect is issued by the concerned Commissioner Inland Revenue."
5. While the aforementioned Clause was inserted by Finance Act, 2013. First proviso to the said Clause was added by the Finance Act, 2014 embodying the following text:- "Provided that the certificate shall only be issued by the Commissioner if an application for the said certificate is filed before the Commissioner , in the manner and after fulfilling the conditions as specified by the official Gazette, issued by the Board for the purpose of this clause."
6. While certain other provisions and amendments were also made in the said Clause, however , such having been made subsequent to the filing of these petitions and having no retrospective effect, clearly do not relate to the case of the petitioners.
7. Be that as it may, admittedly SRO No,717(I)/2014 was issued in exercise of the powers conferred by above quoted Proviso to Clause 72B of Part-IV of the Second Schedule to the Income Tax Ordinance, 2001, where Board was pleased to specify the manner and conditions for the issuance of the requisite exemption certificate needed to claim exemption from the payment of advance tax at the time of import of raw materials. The conditions and manner laid down by the said SRO are reproduced hereunder:?
(A) Conditions
(i) The material imported is to be used by the industrial undertaking as raw material for own use i,e, in-house production of the end-product;
(ii) the taxpayer shall identify the exact nature of raw material to be imported by mentioning its Pakistan Customs Tariff Code;
(iii) the taxpayer shall specify the quantity of raw material by units/numbers or weight as the case may be, subject to condition;
(iv) the tax liability for the current year on the basis of determined tax liability for any of the preceding two years, whichever is higher has been paid;
(v) the quantity of raw material to be imported which is sought to be exempted from tax under section 148 shall not exceed 110 percent of the quantity of raw material imported and consumed in the previous tax year. The taxpayer may import entire 110 percent in the first six months or partly in the first six months and partly in second six months. However , the taxpayer shall be liable to pay tax at the normal rate under section 148 for the quantity exceeding the said 1 10 percent;
(vi) raw material already imported before applying for exemption certificate on which tax under section 148 has been paid shall not be included or considered for the said 1 10 percent.
(vii) tax Year for which exemption certificate is required is not the first tax year of business;
(viii) tax has been paid during any of the preceding two tax years on the basis of taxable income;
(ix) no arrears of income tax, sales tax and federal excise duty are outstanding; and
(x) all income tax returns, sales tax returns and withholding statements due to be filed under the law have been filed.
(B) Manner
(i) exemption certificate shall be issued for six months only;
(ii) the Commissioner shall not issue exemption certificate, in any case, if the aforementioned conditions are not met;
(iii) the taxpayer shall file an application for the exemption certificate as per Annexure to this notification, which shall provide the following information:--
(a) quantitative and qualitative details of raw material consumed during the immediately preceding year and the raw material required during the current half year period;
(b) production capacity; and
(c) stock consumption and production report for the previous six months period, and since the closing date of last return filed;
(iv) after satisfying himself the eligibility of the taxpayer , the Commissioner shall issue the system generated certificate;
(v) the Commissioner shall furnish a certificate to the Chief Commissioner concerned in every case that the manner and the conditions as specified in the law have been fulfilled;
(vi) the Chief Commissioner shall inspect from time to time the exemption certificates issued by the Commissioner to ensure compliance to the Board's directions and furnish a half-yearly report to the Board within ten days after the end of every six months of the financial year; and
(vii) the Commissioner shall cause to conduct inspections of the manufacturing facility at any time to,-
(a) ensure that the raw material being imported is in line with the manufacturing activity or capacity and it is being used as raw material for self use only; and
(b) verify the production capacity and stock consumption as stated by the taxpayer .
8. There is also no dispute that other than Condition (v), the petitioners possess all remaining requisite qualification to pass the conditional ties of the said SRO.
9. Analysis of Condition (v) reveals that, to be eligible for exemption, an applicant has to show that in the preceding year he had imported and consumed slightly over (i,e, 110%) of the same raw material's quantity in the preceding year.
10. Admittedly , the petitioners though were in the business of manufacturing flour and in the past years had only procured raw material (wheat) from the local market, for the first time they ventur ed into import of wheat directly , taking benefit of exemption offered by Clause 72B of Part-IV of the Second Schedule. The question before this Court is as to whether , incorporation of the impugned conditions of this nature, which on the face of it, create two classes of persons; one who were in the same business of importing wheat in the previous year, and the second, who were importing wheat for the first time, has resulted in creating unreasonable classification, and does this scheme infringe the constitutional rights of the petitioners as to equal and fair treatment?
11. Admittedly legislature has over the years come in terms with the concept of "grandfather clauses". Black's law dictionary defines such a clause to mean "provision in new law or regulation exempting those already in or part of the existing system which is being regulated", i,e, through such a clause, exemption to a restriction could be provided only to those who already were doing same thing. Notwithstanding that, such regulations may h t interests of a new entrant, however , legislature has never desired such a clause to impose any additional burden to the new entrants by raising the bar unjustly higher , as such, an act which on the face of it, would seem to violate the principle of equity , fair play and natural justice.
12. It is a fundamental principle of law that legislature has to adhere to rational based test, in particular , where it relates to economic regulations. In the case of Khawaja Saad Saleem v. Federation of Pakistan and others, reported as 2013 PTD 1895 , the Islamabad High Court emphasized that Article 25 provides for equality of citizens, explaining that equal protection of law contemplated that persons similarly situated or similarly placed have to be treated alike both in privileges conferred , and liabilities imposed. It is held in this case that while a law merely applying to one person or one class of persons might be constitutionally valid, but a classification which on the face of it was arbitrary and not founded on any rational basis, will be arrested by the provisions of Article 25 of the Constitution. In the case of Colony Sugar Mills Limited v. Province of Punjab , reported as 2017 PTD 406 Lahore, it was held that equal protection of law does not envisage that every citizen is treated alike in all circumstances, but contemplates that persons similarly situated or similarly placed are to be treated alike. In the case of Hafeez lqbal Oil and Ghee Industries (Pvt.) Limited v. Government of Pakistan through Secretary M/o, Commerce Islamabad , reported as 2012 PTD 1503 the Hon'ble Islamabad High Court required Government to formulate regulation solely in the interest of free competition, and any law disturbing free competition in the market and providing an edge to one person was held to be violative of Article 18 of the Constitution. In said case, where fiscal benefits were provided to one class of individuals against another through an. SRO, Court held that such a regulation, if allowed to continue, would create monopolies and petitioners would not be in a position to compete with the respondents.
Court held that where FBR bifurcated classes of individuals without showing any reasonable basis, and where, petitioners and respondents were similarly placed and engaged in the same business, edge provided to respondents through the SRO was aimed to disturb fair competition as petitioners and respondents were entitled to equal protection of law. Court held that the impugned SRO in the absence of reasonable classification was violative of Article 25 of the Constitution, whereunder one could not be given an edge over the other . In the judgment reported as PLD 1997 SC 342 [Shaukat Ali and others v. Government of Pakistan through Chairman Ministry of Railways and others ], the Hon'ble Supreme Court held that effort has to be made to bring about egalitarian society based on the fundamental concept of fair play, and state functionaries are expected to act fairly and justly in a manner which should not give to anyone any cause of complaint on account of discriminatory treatment, and while discharging official functions, efforts should be made to ensure that no one is denied the right to earn his livelihood because of unfair and discriminatory act on their part. In the case reported as 1999 SCMR 709 [Noor Muhammad v. Ghulam Rasool ], the Hon'ble Supreme Court held that while there is power in the legislature and other taxing authorities to classify persons or properties into categories and to subject them to different rights and taxes, however , there is none to target incidence of taxing in such a way that similarly placed persons are dealt with not only dissimilarly but discriminatory manner .
13. In the case at hand from a review of aforementioned principles, it is abundantly clear that the test of reasonable basis is clearly missing in condition (v) of the SRO. Petitioners are though new entrant into market, however , being similarly placed and being of the same class of persons have been treated discriminatorily against those who have been in the business for the last one year. Also in the present case, we do not see any reasonable classification, as both type of importers are importing the same product (wheat), intended for the same purpose (manufacturer of flour), chargeable with equal excise and sales tax, but discriminatory treatment has been meted out to the petitioners on their import of the same raw material, as against the benefit given to those who were importing it in the past, has placed them in a disadvantageous position, which is clearly arbitrary , unreasonable and is also violative of equal protection of law as guaranteed by Articles 4, 18 and 25 of the Constitution, thus refusing to grant a certificate under Section 148 (supra) solely for the reasons that condition (v) of the said SRO was not satisfied by the petitioners is illegal, thus condition (v) of impugned SRO 717(1)/2014 dated 07.08.2014 is declared to be illegal and ultra vires to the provisions of Clause 72B of Part IV of 2" Schedule with Section 148 of the Income Tax Ordinance, 2001, and also to the above referred Articles of the Constitution of the Islamic Republic of Pakistan.
14. Equally important is the contention of the learned counsel for the Petitioner that no subordinate legislation could take away powers granted by the substantive legislation or impose conditions, not so envisaged by the later. Cases referred by the learned counsel of the Petitioner being 1999 SCMR 1442 [The Central Board of Revenue, Islamabad and others v. Sheikh Spinning Mills Limited, Lahore and others] and 2001 PTD 2383 [Additional Commissioner , Sales Tax, Lahore and another v. Rupafab Limited and others ] fully support this contention.
Admittedly Clause 72B exempts application of Section 148 to an industrial undertaking, if the tax liability for the current tax year on the basis of determin ed tax liability for any of the preceding two tax years, whichever was the higher , has been paid by it and a certificate to this effect is issued by the concerned Commissioner . Proviso added through Finance Act, 2014 to this Clause makes such exemption certificate susceptible to further conditions to be specified by the official Gazette, which were specified by the said SRO. While Conditions (i) to (iv) and (vi) to (x) are enabling provisions, however condition (v) clearly looks into past imports of the applicants of the similar material. Since no such restrictive covenant has been placed by the principal Clause, but through condition (v) the reference made to previous year's import of the similar goods, in our humble view, poses direct and substantial hindrance in the applicability of the Clause 72B itself. The mere fact that the authority was been given to set criteria for obtaining exemption certificate though Gazette notification, however such power does not include the power to make the entire scheme repugnant. Any changes thus made through Gazette notification could not in any way affect the substantive provision of Clause 72B. It could thus rightly be held that imposition of Condition (v) through SRO is clearly in conflict with the provisio ns of Clause 72B, and looking into the object and scheme of Clause 72B and legislative intendment thereof, placing such a condition could only give absurdity to the overall scheme of the said Clause, which cannot be permitted.
15. These were the reasons for allowing the petitions through our short order dated 20.11.2018 and holding that the Condition (v) of impugned S.R.O. No,717(I)/2014 dated 07.08.2014 was illegal and ultra vires , as the said condition is violative to the general provisions of clause 72B of Part-IV of Second Schedule read with section 14B of the Income Tax Ordinance, 2001.