This Reference Application is directed against order dated 03.02.2011, of Appellate Tribunal Inland Revenue, Lahore Bench, Lahore (Appellate Tribunal), whereby taxpayer's appeal was allowed.
Matter pertains to the Tax Year 2007.
2. Following questions of law, arising out of the order under reference, are proposed for determination.
"1. Whether on the facts and in the circumstances of the case, the learned ATIR was justified to hold that Clause (5) of Part-III of the Second Schedule to the Income Tax Ordinance, 2001 enacted through SRO No. 171(1)/2008 dated 21.02.2008 is remedial and curative in nature and to have retrospective operation?
2. Whether on the facts and circumstances of the case, Clause (5) of Part-III of the Second Schedule to the Income Tax Ordinance, 2001 inserted through SRO No.171(1)/2008 dated 21.02.2008 is not exemption in nature and it should not be construed strictly and prospectively only?
3. Whether on the facts and circumstances of the case, the learned ATIR had correctly applied the rules of interpretation and was justified in giving the retrospective effect to Clause (5) of Part-III of the Second Schedule which was inserted through amendment vide SRO No.171(1)/2008 dated 21.02.2008?"
3. Pivotal issue is whether "clause (5)" of the Part-III of the Second Schedule to the Income Tax Ordinance, 2001 (Ordinance, 2001), brought into being by virtue of SRO No.171(1)/2008 dated 21.02.2008, could be construed to apply prospectively or has had retrospective effect?
4. Learned counsel for the applicant department submits that "Clause (5)" came into effect on 21.02.2008 and was not applicable to Tax year 2007 - from 01.07.2006 to 30.06.2007. Adds that exemption allowed had to be construed strictly.
5. Learned counsel for taxpayer contends that sub-clause (xvi) of clause (11) of Part-IV of Second Schedule to the Ordinance, 2001 extended exemption to corporatized entities - taxpayer one of the distribution companies - from the provision of minimum tax, relating to receipts of sales of electricity, from date of their creation to the date of completion of the process of corporatization, being the date of notification of Tariff. Adds that Tariff was notified on 24.02.2007. Further submits that SRO No.171(1)/2008 dated 21.02.2008 was introduced to alleviate hardships encountered by the corporatized entities, which had the effect to extend exemption till the year 2013. Learned counsel supported decision of the Appellate Tribunal.
6. Submissions heard. It is expedient to reproduce clause (5) and sub-clause (xvi) clause (11) hereunder, "Clause (5). Where the corporatized entities of Pakistan Water and Power Development Authority (DISCOs) and National Transmission and Dispatch Company (NTDC), are required to pay minimum tax under section 113, the purchase price of electricity shall be excluded from the turnover liable to minimum tax up to the tax year, 2013.
Clause (11)
(xvi) The corporatized entities of Pakistan Water and Power Development Authority, so far as they relate to their receipts on account of sales of electricity, from the date of their creation upto the date of completion of the process of corporatization i.e., till the tariff is notified."
7. Appellate Tribunal approved retrospective operation of clause (5) and extended its benefit for Tax year 2007, findings to that effect are reproduced for convenience, "4. We have heard the rival arguments. We find that SRO 171(1)/2008 dated 21st February, 2008 does not specify the crucial date of its effectiveness. Whereas crucial date for excluding purchase price of electricity from the turnover liable to minimum tax is given upto the tax year 2013. SRO 171(1)/2008 dated 21.02.2008 is reproduced as under: GOVERNMENT OF PAKISTAN REVENUE DIVISION FEDERAL BOARD OF REVENUE *** Islamabad, the 21st February, 2008 NOTIFICATION (INCOME TAX)
SRO 171(1)/2008. In exercise of the powers conferred by sub-section (2) of section 53 of the Income Tax Ordinance, 2001 (XLIX of 2001), the Federal Government is pleased to direct that the following further amendment shall be made in the Second Schedule to the said Ordinance, namely:- In the aforesaid Schedule, in Part-III, after clause (4), following new clause (5) shall be inserted, namely:- "(5) Whether the corporatized entities of Pakistan Water and power Development Authority (DISCOs) and National Transmission and Dispatch Company (NTDC), are required to pay minimum tax under section 113, the purchase price of electricity shall be excluded from the turnover liable to minimum tax upto the tax year 2013.
In view of the wording of SRO we are in agreement with the findings of the judgment of the Tribunal referred to above that clause 5 of Part-III of the Second Schedule to the Ordinance being a remedial and curative nature is to have retrospectives operation. The case law quoted by the respondent's counsel in support of his contention is not applicable in the instant case. Through SRO 171(1)/2008 dated 21st February, 2008, Federal Board of Revenue resolved the problems of distribution companies and keeping in view the language used we can safely say that it has retrospective operation."
8. Clause (11) (xvi) of Part-IV of the Second Schedule to the Ordinance, 2001 extended exemption to corporatized entities - including taxpayer - from the provisions of minimum tax, relating to receipts of sales of electricity, from date of their creation to the date of completion of the process of corporatization, which corporatization would be deemed completed till the Tariff was notified.
Clause (11) (xvi) was omitted through Finance Act 2008. Clause (5) of Part-III of the Second Schedule to the Ordinance, 2001 was added through SRO No.171(1)/2008 dated 21.02.2008. Taxpayer e-filed return of income for Tax year 2007 on 12.01.2008, wherein turnover was computed from 24.02.2007 - date of notification of tariff - to 30.06.2007 and purchase price / cost was excluded for the purposes of computing minimum tax, which became deemed assessment order. Later, notice was issued under section 122 (5A) of the Ordinance, 2001 and in response thereto, Taxpayer defended exclusion of the purchase price by pleading retrospective application of clause (5) - SRO No.171(1)/2008 dated 21.02.2008, which defence was rejected and assessment was amended.
Amended assessm ent was upheld by the first appellate forum, before being annulled by the Appellate Tribunal.
9. Clause (5) was added in Part-III of the Second Schedule - earlier clause (11) was part of Part-IV of the Second Schedule to the Ordinance. It is pertinent to mention that Clause (11A) was added to Part-IV of the Second Schedule through Finance Act 2009, wherein sub-clause (xv) was pari materia to sub-clause (xvi) of erstwhile Clause (11). To comprehend the intent to add clause (5) of Part-III a perusal of sub-sections (1) and (2) of section 53 of the Ordinance is imperative, which are reproduced hereunder, "53. Exemptions and tax concessions in the Second Schedule. - (1) the income or classes of income, or persons or classes of persons specified in the Second Schedule shall be -
(a) Exempt from tax under this Ordinance, subject to any conditions and to the extent specified therein:
(b) Subject to tax under this Ordinance at such rates, which are less than the rates specified in the First Schedule, as are specified therein:
(c) Allowed a reduction in tax liability under this Ordinance, subject to any conditions and to the extent specified therein; or
(d) Exempted from the operation of any provision of this Ordinance, subject to any conditions and to the extent specified therein.
53(1A) Where any income which is exempt from tax under any provision of the Second Schedule, such income, as may be specified in the said Schedule and subject to such conditions as may be specified therein, shall be included in the total income, however the tax shall not be payable in respect of such income.
(2) The Federal Government may, whenever circumstances exist to take immediate action for the purposes of national security, natural disaster, national food security in emergency situations, protection of national economic interest in situations arising out of abnormal fluctuation in international commodity prices, removal of anomalies in taxes, development of backward areas, implementation of bilateral and multilateral agreements [or granting an exemption from any tax imposed under this Ordinance including a reduction in the rate of tax imposed under this Ordinance or a reduction in tax liability under this Ordinance or an exemption from the operation of any provision of this Ordinance to any international financial institution or foreign Government owned financial institution operating under an agreement, memorandum of understanding or any other arrangement with the Government of Pakistan]], by notification in the official Gazette, make such amendment in the Second Schedule by -
(a) adding any clause or condition therein;
(b) omitting any clause or condition therein; or
(c) making any change in any clause or condition therein, as the Government may think fit, and all such amendments shall have effect in respect of any tax year beginning on any date before or after the commencement of the financial year in which the notification is issued.
(3) .......
(4) ......"
[Emphasis Supplied]
10. Section 53 of the Ordinance provides exemptions and tax concessions. Clause (c) of sub- section (1) of section 53, ibid, envisages reduction in the tax liability, subject to the conditions and extent thereof specified. Preamble of Part-III replicates spirit of clause (c) of sub-section (1) of section 53, ibid. Intention was to reduce the tax liability of corporatized entities, including the taxpayer. SRO No.171(1)/2008 dated 21.02.2008 was promulgated in exercise of powers under sub- section (2) of section 53 of the Ordinance, which per se depicts the object / purpose of Clause (5).
11. Omission of Clause (11), alongwith sub-clause (xvi), of Part-IV of Second Schedule through Finance Act 2008 had to be reconciled with the concurrent omission of Section 113 of the Ordinance, also through the Finance Act 2008. And re-enactment of Clause (11A) of Part-IV of Second Schedule coincided with the re-admission of Section 113 of the Ordinance, 2001, both through Finance Act 2009. Clause (11) of Part-IV of Second Schedule and Clause (5) of Part-III of Second Schedule intended to reduce the liability by excluding the component of purchase price of electricity from the turnover, liable to minimum tax. Clause (5) of Part-IV of Second Schedule assumed accumulation / build-up of liability with respect to corporatized entities, which upon notification of tariff were not entitled to claim exemption, for the purposes of turnover, subject to minimum tax.
There is no rational justification to treat Clause (5) of Part-III of Second Schedule having prospective effect, when the intention was to reduce liability - accrued at the time of promulgation of SRO under reference. Reduction in the tax liability, as the object of Part-III suggests existence of liability, in the same manner as exemption inherently acknowledges chargeability and liability of tax. Retrospectivity of Clause (5) is inherently inbuilt, and any contrary construction would nullify the object / purposes thereof.
12. In terms of Clause (5) exclusion of component of purchase price of electricity from the turnover, liable to minimum tax, was granted till the year 2013, we find no rational basis to exclude the period, for the purposes of exemption, from notification of the tariff till 21.02.2008. The exclusion was beneficial, intended to remedy the effect of inclusion of purchase price of electricity as component of turnover, liable to minimum tax. Significance of including Clause (5) to Part-III has its own significance, which cannot be ignored. We do not find any justification to construe Clause (5) in a manner that benefit thereof was denied to those corporatized entities, in respect whereof tariff was notified before 21.02.2008, this segregation amongst similar class of persons - corporatized entities - is another factor contributing to the retrospective operation of Clause (5). Superior Courts, through numerous judicial pronouncements, had upheld the retrospective application / implementation of such legislative instrument, which exhibited curative and remedial character - intended to address the mischief of accrued liabilities, in the case at hand. Reference is made to the cases of "Messrs ARMY WELFARE SUGAR MILLS LTD. and others. Versus FEDERATION OF PAKISTAN and others" (1992 SCMR 1652), "COMMISSIONER OF INCOME TAX. VERSUS SHAHNAWAZ LTD. and others" (1993 SCMR 73), and "ANOUD POWER GENERATION LIMITED and others. VERSUS FEDERATION OF PAKISTAN and others" (PLD 2001 SC 340).
13. Appellate Tribunal has not committed any illegality, while passing the order under reference. In view of the aforesaid, Question (i) is answered in the affirmative.
Question (ii) is answered in the negative - Clause (5) was inherently retrospective, extending benefit and curing mischief of accumulated liabilities.
Question (iii) is answered in the affirmative.
14. Office shall send a copy of this order, under seal of the Court, to learned Appellate Tribunal, in terms of sub-section (5) of section 133 of the Ordinance.