Shahid Jamil Khan, J. The petitioners, in this and connected petitions (Schedule-A), have assailed the amendment in Section 236D of the Income Tax Ordinance, 2001 ("Ordinance of 2001"), brought through Finance Act, 2018, whereby minimum slab for collection of the advance tax was fixed at Rs.20,000/-, which was to be collected of a person receiving services of or holding/arranging function in a marriage hall, irrespective of the fact, whether the person was liable to file income tax return.
In one of the connected petitions (W.P. No.57197 of 2019), a widow has challenged tax under Section 236 of the Ordinance of 2001, against cellular phone services, being not liable to pay income tax or file return under the Section 114.
2. The petitioners' case, in first set of petitions, is that collection of tax under the amended provisions is confiscatory because there is no payable tax against which the withheld tax could be adjusted or credited. Some petitioners contended that it offends the fundamental rights guaranteed under Article 18 of the Constitution of the Islamic Republic of Pakistan, 1973 ("the Constitution") for causing an adverse effect on the business of marriage halls working at lower scale.
Mr. Shahbaz Butt, Advocate, arguing for petitioners' side, submitted that Section 236D of the Ordinance of 2001 is not executable in present form without specifying the manner and time, unambiguously, for collection of advance tax. He compared the impugned provisions with Sections 148, 149 and 153 of the Ordinance of 2001, to show the ambiguity caused for departing from the normal manner and time of withholding and deduction of advance tax by the payer, in ordinary business transactions. He also referred to following Item 2 of Circular No.10 of 2013 dated 17.09.2013 in support:- Sr.
No.Queries Clarification 2.At what time should the tax be withheld? i) At time of final payment Or ii) At each stage of payment.As tax is to be collected on the total amount of bill, tax is to be withheld at the time of issuance of bill on the day the function is held.
It is contended that use of word withheld changed complexion of the provision. Under the impugned provisions, the person receiving payment is obliged to collect an additional amount, independent of the amount due under bill for Marriage Hall Services. He reiterated that the manner of payment is not provided, therefore, this provision is not executable.
3. Learned Assistant Attorney General for Federation of Pakistan, in response to notice under Order XXVII-A of C.P.C. and representing Federal Government as well as FBR, apprised that procedure had been rationalized by inserting Tenth Schedule in the Ordinance of 2001 read with Section 100BA.
4. Heard, record perused.
5. The Tenth Schedule is examined, insertion of which is admission of legal position that a person not required to file return and pay tax, cannot be subjected to advance tax. The procedure in its Rule 2 is impracticable and unreasonable, whereby the person receiving the bill (withholding agent) or the person from whom the tax is to be collected, is burdened to issue notice to the Commissioner for knowing whether a person is liable to file return and wait for thirty days before finalizing the bill, with or without collection of advance tax. The Rule 2 is reproduced:- "2. Persons not required tofile return or statement. - (1) Where the withholding agent or the person from whom tax is required to be collected or deducted is satisfied that a person not appearing in the active taxpayers' list was not required to file a return of income under section 114, as the case may be, he shall before collecting or deducting tax under this Ordinance, furnish to the Commissioner a notice in writing electronically setting out -
(a) the name, CNIC or NTN and address of the person not appearing in the active taxpayers' list;
(b) the nature and amount of the transaction on which tax is required to be collected or deducted; and
(c) reason on the basis of which it is considered that the person was not required to file return or statement, as the case may be.
(2) The Commissioner, on receipt of a notice under sub-rule (1), shall within thirty days pass an order accepting the contention or making the order under sub-rule(3).
(3) Where the withholding agent or the person from whom tax is required to be collected or deducted has notified the Commissioner under sub-rule (1) and the Commissioner has reasonable grounds to believe that the person not appearing in the active taxpayers' list was required to file return or statement, as the case may be, the Commissioner may, by an order in writing, direct the withholding agent to deduct or collect tax under rule 1: Provided that in case the Commissioner does not pass any order within thirty days or receipt of notice under sub-rule (1), the Commissioner shall be deemed to have accepted the contention under sub-rule (2) and approval shall be treated to have been granted."
(emphasis supplied)
Absence of a person in active taxpayer list and a person not required to file income tax return cannot be equated, because a person filing return may be deleted from active taxpayer's list by any tax authority for a noncompliance under the Ordinance of 2001. How would a person, having marriage hall business at a lower level, would verify wether person booking or managing a function is on active taxpayer's list or would wait for thirty days for Commissioner's response and finalize bill thereafter. Imposition of statutory duty to withhold another person's tax and deposit in the exchequer may be justified on transaction in usual course of business. Under the impugned provisions, the burden is imposed, in an unusual manner upon a person, who is recipient of money against services or supply, therefore, is confiscatory for having adverse impact on the business.
This procedure, being impracticable and casting an unreasonable irrational burden is, hence, declared void.
6. Advance Tax was meant, originally, to facilitate the taxpayer as well as department to pay tax in advance based on the tax determined and paid in last tax year, which facilitates the taxpayer for payment of tax in installments, besides timely recovery of tax. Later, withholding tax was introduced on transaction with the rational of collecting data of the transactions with minimal tax collection.
The tax so withheld was adjustable against final tax liability. Eventually, the tax withheld on business transactions was brought into Presumptive Tax Regime ("PTR") by treating the same as final liability. It is important to observe here that for collection of data of business transactions, at various stages of value addition, Sales Tax Act, 1990 ("Act of 1990") is serving the purpose. By introducing this concept in the Income Tax Law, and allowing it to be a final tax, under PTR, practically, it has become an indirect tax, burden of which passes on to end consumer.
For FBR, withholding tax is the easiest way of collecting tax, by avoiding the orthodox procedure of taxing a person's income, at the end of tax year, by allowing expenses, allowances, credits etc. for arriving at net taxable income. In this Court's opinion, the judgment in Messrs Elahi Cotton Mills Ltd. and others v. Federation Of Pakistan through Secretary M/o Finance, Islamabad and 6 others (PLD 1997 Supreme Court 582) is being misconstrued and its enunciations are being exploited, for easy tax collection, irrespective of the fact that the tax, under PTR, has changed its character from direct to indirect tax, which should not be levied and charged under the Ordinance of 2001, meant to levy and charge direct tax on a person's income.
7. Another alarming aspect is the increasing trend of indiscriminate withholding, ignoring whether a person being burdened with the tax is liable to pay income tax, which should necessarily be proportionate to earning capacity. A person, below the taxable slab or not earning being jobless, is already paying indirect taxes, even on items, essential for living, at same ratio, as is being paid by the richest person. In pursuit of collecting advance tax on transactions, if the essential aspect of its adjustment against a payable tax is not ensured, the tax so imposed is confiscatory and expropriatory.
8. In connected W. P. No.57197 of 2019, the petitioner is widow drawing pension of Rs.5000/-.
Admittedly, her income is not taxable and she is not liable to file return under Section 114 the Ordinance of 2001. It is argued that she does not fall in the definition of taxpayer under the Section 2(64) read with Section 168. Nevertheless, she is being subjected to tax under the Section 236 on payments made to cellular company against mobile phone services. Charging of tax in an indiscriminated way was examined by the august Supreme Court of Pakistan in Human Rights Case No.18877 of 2018 (PLD 2019 Supreme Court 645). The cellular companies were restrained from charging this tax initially, however, the restraining order was lifted through final judgment consisting of two different views. In one of the views, putting a person, not liable to pay tax, into the process of obtaining exemption certificate or claiming refund by filing return was held to be a cumbersome and unnecessary burden. The charging of such tax was held confiscatory, however, final verdict was left for decision by lower fora first.
9. Court's concern, in this and connected cases, is whether, unadjustable advance tax being recovered from a widow using mobile service and other similarly placed persons, not liable to pay tax or file return is justified and within the competence of the legislature. The income tax is meant to be charged on income proportionality but cannot allow to be charged in absence or without determining the income. A tax which diminishes the original property, moveable or immoveable, is expropriatory and a tax withhold/deducted and not adjusted against any income tax liability is confiscatory. Following judgments, from Indian jurisdiction, have declared the confiscatory and expropriatory taxation as without lawful authority and unconstitutional, relevant excerpts are reproduced:- Rai Ramkrishna and others, etc Versus State of Bihar (1963 AIR (SC) 1667): "Where for instance it appears that the taxing statute is plainly discriminatory, or provides no procedural machinery for assessm ent and levy of the tax, or that it is confiscatory, Courts would be justified in striking down the impugned statute as unconstitutional. In such cases, the character of the material provisions of the impugned statute is such that the Court would feel justified in taking the view that, in substance the taxing statute is a cloak adopted by the Legislature for achieving its confiscatory purposes."
[emphasis supplied] Manattillath Krishnan Thangal v. The State of Kerala (AIR 1971 Ker 65).
"11. We are of the opinion that the provisions of a taxing statute can be referred to a confiscatory or expropriatory only if it offends Article 19(1) (f) or Article 31(1) and perhaps also Article 14. Kochunni's case, AIR 1960 SC 1080 affords an instance of an Act the Madras Marumakkathayam Removal of Doubts Act 32/1955 having been condemned as expropriatory as it violated Article 19(1)(f). The Court expressed itself thus: "The impugned Act is only a legislative device to take the property of one and vest it in another without compensation, and, therefore, on its face stamped with un-reasonableness. In short, the impugned Act is expropriatory in character and is directly hit by Article 19(1)(f) and is not saved by Clause (5) of Article 10"
[emphasis supplied] Devkumarsinghji Kasturchandji V. State of M.P. and others (1967 AIR (M.P.) 268).
"14. There are no doubt limits to taxation. If those limits are crossed, then apart from the evils flowing in the field of economics and public finance, a tax may become invalid in law because of its confiscatory character and effect. If the magnitude of the tax is such as to eliminate the owner or to compel him to part with the taxed property for the payment of the tax assessed on him, or if it destroys the businesses of the persons taxed, then such a tax would be confiscatory in character and invalid - see A.G. Of Alberta v. A.G. of Canada, A.I.R. 1939 PC 53; Srinivasamurthy v. State of Mysore. A.I.R. 1959 Supreme Court 894, and Kunnathat Thathunni Moopil Nair. State of Kerala, A.I.R. 1961 Supreme Court 552."
[emphasis supplied] It is globally settled principle of taxation law that a tax cannot be expropriatory or confiscatory, which takes away a citizen's property without compensation or destroys the business of a taxpayer. The State is meant to serve the citizen and for running its affairs, attribute of charging tax is bestowed by Article 7 of the Constitution but a tax can be levied by or under the authority of Parliament under Article 77. The act of the Parliament, levying a tax, should not offend any of the fundamental rights guaranteed by the Constitution. An unreasonable taxing procedure, if destroys business, offends the right under Article 18 and an income tax taking away property without compensation offends Article 23 and 24.
Income tax is meant to be charged from citizens, who are earning income and citizen, who are not earning any income, deserves to be compensated by the State to meet their basic and essential requirement for living. Unfortunately, the later class of citizens is being already subjected to indirect taxes, is now taxed through unadjustable advance income tax, which can only be termed as expropriatory and confiscatory. The Constitutional Courts have been observing judicial restraint from declaring such laws as ultra vires, for avoiding an impediment against the State's tax collection system. Nevertheless, as it appears from the representation from respondents' side, Government is adamant to charge advance tax, ignoring its expropriatory and confiscatory character from the persons not liable to pay tax. Imposing an obligation of tax collection on private persons ignoring reasonability and prejudice to their business, cannot be ignored by Courts, in judicial review. The citizens in tax net, who are burdened with the obligation to withhold tax by declaring them an agent, are also required to be treated rationally and equitably. Putting an extra burden of compliance which is not in normal course of business and that too without remuneration or concession in tax liability, needs to be revisited by the Government as well as tax administrators.
It is, therefore, held that collection of an unadjustable advance income tax from a person not liable to pay income tax or file income tax return, is without lawful authority and unconstitutional.
Nevertheless, observing restraint again, the matter is referred to the Attorney General and FBR for suitable amendments within 90-days.
10. For addressing the grievances of the petitioners, this and connected petitions are converted into representations under Section 7 of the Federal Board of Revenue Act, 2007 ("Act of 2007") and sent to the Chairman, FBR, who shall forthwith consult, the Attorney General of Pakistan on the concerns and legal position. On so consulting, the Attorney General shall advise FBR through its Chairman on the legality of procedure and manner impugned in these petitions with an advice for suitable amendment in the Ordinance of 2001.
Needful be done within 90-days from the date of judgment. Compliance report shall be submitted before the Deputy Registrar (Judl.) of this Court.
Till decision, as directed, interim relief already granted, in this and connected petitions, shall continue.
This and connected petitions are allowed to the extent and in the manner noted above.
SCHEDULE-A Sr. No.Case No.
1. W.P. 39835 of 2016.
2. W.P. 228304 of 2018.
3. W.P. 229383 of 2018.
4. W.P. 229614 of 2018.
5. W.P. 229648 of 2018.
6. W.P. 236177 of 2018.
7. W.P. 237390 of 2018.
8. W.P. 244925 of 2018.
9. W.P. 244934 of 2018.
10. W.P. 245413 of 2018.
11. W.P. 248485 of 2018.
12. W.P. 251403 of 2018.
13. W.P. 1129 of 2019.
14. W.P. 24530 of 2019.
15. W.P. 53926 of 2019.
16. W.P. 55966 of 2019.
17. W.P. 57197 of 2019.
18. W.P. 64408 of 2019.