SHAMS MEHMOOD MIRZA, J.- This Intra Court Appeal calls into question the judgment rendered by the learned Single Judge in Chambers on 27.10.2023 by dismissing the constitutional petition filed by the appellant.
2. The appellant acquired certain securities as defined in section 37A of the Income Tax Ordinance, 2001 (the Ordinance) in the year 2011. Section 37A by its terms imposed capital gain tax on disposal of securities at the rates specified in Division VII of Part I of the First Schedule to the Ordinance (Division VII). At the time of acquisition of securities by the appellant, section 37A contained a proviso to the effect that the levy of tax shall not be applicable to securities that are held for a period of more than a year. The appellant disposed of the securities held by him on the Stock Exchange from 01.07.2022 till January 2023. Section 37A and Division VII at the time of disposal of securities by the appellant had undergone substantial changes which resulted in imposition of capital gain tax at the rate of 12.5% on the appellant on such disposal.
3. The appellant brought the constitutional petition for laying a challenge to the first proviso to Division VII which was introduced through Finance Act, 2022 under the terms of which he was burdened with capital gain tax. The learned Single Judge in Chambers dismissed the challenge of the appellant through the judgment which is impugned before us.
4. The predicate on which the appellant's argument is primarily based on is the principle of "vested right" which according to him has been negated by the impugned amendment brought about in Division VII through the proviso attached to it by Finance Act, 2022. This argument takes as its starting point the decision rendered by the learned Sindh High Court in the case of Anwar Yahya etc v. Federation of Pakistan etc 2017 PTD 1069 holding that by reason of the proviso contained in section 37A (as it existed on 01.07.2010) a right came to vest in the petitioner in such a way that the disposal of securities would not attract the levy of capital gain tax irrespective of the date of disposal. The appellant submits that the present case is on all fours with the decision of the learned Sindh High Court, and that the result of this case should be the same. The appellant also put forward the principle of discrimination on the contention that two different rates of capital gains tax shall apply depending on the acquisition of securities prior to and after 30.06.2022 which is not permissible.
5. Learned counsel for the respondents not only defended the judgment of the learned Single Judge in Chambers but also relied on the recent case of The Commissioner Inland Revenue v. Mekotex (Pvt.)
Limited etc PLD 2024 SC 1168 to contend that legislature can enact laws to take away accrued rights and even past and closed transactions.
6. Before proceeding to any appreciable extent, it would be relevant to give a snapshot of the legislative history of the provisions contained in section 37A and Division VII.
7. Finance Act, 2010 for the first time introduced section 37A in the Ordinance. This was the main charging provision holding that disposal of securities after the first day of July 2010 held for a period of less than a year shall attract tax at the rates specified in Division VII. The proviso attached to section 37A made capital gain on disposal of securities held for a period of more than one year inapplicable. The table in Division VII provided for 0% tax on securities held for a period of more than one year.
8. The first proviso to section 37A was omitted through Finance Act, 2014 but the table in Division VII maintained 0% tax for the tax year 2015 for securities held for a period more than twenty-four (24) months or more i.e. the period before 01.01.2013 was covered by that provision.
Finance Act, 2015 amended the main provision and the words "held for a period less than a year" were omitted.
With this omission, the period of disposal of securities and the rates of tax applicable thereto were regulated only by Division VII. Division VII for the tax year 2015 stipulated that capital gain shall be subjected to 0% tax on disposal of securities held for a period more than four years. In other words, the securities acquired in the year 2010 and which were continuously held were protected from application of capital gain tax.
9. The amendments made in Division VII through Finance Act, 2016 once again granted protection to securities acquired before 01.01.2012 from capital gain tax for the tax years 2015 to 2017.
10. This protection from payment of tax was maintained in Division VII up to tax year 2020 through the amendments brought about by Finance Act, 2017, Finance Act, 2018 and Finance Act, 2019 in cases where securities were acquired before 01.01.2013.
11. The same position was replicated in Finance Act, 2020 except that tax years 2018, 2019 and 2020 were substituted to tax years 2018, 2019, 2020 and onwards.
12. Finance Act, 2021 afforded similar benefit of 0% tax to securities acquired before 01.01.2013 up to tax years 2022 and onwards.
13. Under the amendments made in the Finance Act, 2022, Division VII specified 0% tax in the table on securities for the tax year 2023 and onwards where the holding exceeded six years but the following proviso having two parts was added:
(i) the reduced rates of tax on capital gain on disposal shall apply where the securities are acquired on or after the first day of July, 2022; and
(ii) The rate of 12.5% tax shall be charged on capital gain arising on disposal where the securities are acquired on or before the 30th day of June, 2022 irrespective of holding period of such securities;
14. The proviso in effect nullified the rates of capital gain tax mentioned at serial Nos.1 to 7 in the table and applied a uniform tax @12.5% on all the securities acquired on or before 30.06.2022 regardless of the period of holding of such securities.
15. The crucial question posed by the appellant is whether 0% tax applied since the time of acquisition of securities and immediately prior to 30.06.2022 inhered in the appellant a right such that he is entitled to 0% tax regardless of changes brought about by the legislature in Division VII through Finance Act, 2022 for imposing a rate of 12.5% on disposal of securities notwithstanding the period of holding of such securities.
16. The learned Sindh High Court in its reasons in the case of Anwar Yahya while answering in affirmative the question posed by the appellant explained the position as follows.
9. For the reasons just stated, in our view it was the proviso that could, and did, create vested rights. As soon as any given lot of shares had been held for more than a year, the proviso created a right in the taxpayer that vested, the right being that section 37A did not apply in respect of those shares. And since this was a vested right, the usual rules of interpretation applicable to such rights would apply. (Those rules, being well known and established, require no elaboration and in particular the case law cited by learned counsel for the petitioners need not be considered in any detail.) In particular, the omission of the proviso could not affect the rights that had become vested in a taxpayer in respect of a lot of shares that had been held for more than one year. The omission of the proviso by the Finance Act, 2014 did not therefore affect rights that had vested by the time of the omission. It is to be noted that the omission did not even purport to be retrospective. Since the omission took effect from 01.07.2014, this meant that it was a vested right that section 37A would not apply in respect of any shares held for more than a year by a taxpayer, as on or before 30.06.2014. Any capital gains made on such shares, even if the disposal took place on or after 01.07.2014, could not therefore be brought to tax. Applying the foregoing analysis to the illustrative case (see para 4 above), as on 30.06.2014 the petitioner No. 3 had held the 430,000 shares in PTCL for more than a year (since the same were acquired on 28.06.2013). By reason of the proviso the petitioner had acquired a vested right in section 37A not applying to the said shares on 29.06.2014. The subsequent omission of the proviso was therefore irrelevant and any capital gains made by the petitioner on the disposal of the said shares could not be taxed in terms of section 37A regardless of the date on which they were disposed off.
17. It is a cardinal principle that where an amendment is brought about in fiscal statutes it shall not be given a retrospective construction by applying to past transactions unless the intention is expressed with irresistible clearness. The permissive basis for such legislative action is the fact that taxation is neither a penalty imposed on the taxpayer nor a liability which he assumes by contract. It is but a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens.
No citizen enjoys immunity from that burden [Welch v. Henry, 305 U.S. 134 (1938)]. It is nonetheless a clear position of law and one that is supported by a long chain of respectable authority that clear and unambiguous words are required before a statutory provision will be construed as displaying a legislative intent to abolish or modify rights.
18. The Supreme Court in its latest judgment in the case of The Commissioner Inland Revenue and others v.
Mekotex (Pvt.) Limited and others PLD 2024 SC 1168 has held that .....when a law regulating certain affairs is introduced for the first time, it is presumed to apply future affairs, not to alter the character of past transactions made under the law as it then existed. This principle is encapsulated in the maxim lex prospicit non respicit-the law looks forward, not backward. A retrospective law is an exception to this general principle; therefore, courts approach the interpretation of law with a presumption in favour of the general principle that laws are intended to regulate future affairs, not affect past transactions. Exceptions of retrospective effect are interpreted strictly, as are other exceptions to general principles. This presumption is rooted in the rule of fairness, as altering accrued rights and obligations retrospectively is often considered unfair.
Since the legislature is not expected to act in an unfair manner, it becomes essential to closely scrutinize a law that appears to have such an effect, ensuring that this was indeed the legislature's intent. Thus, the legislature is presumed not have intended to alter the law applicable to accrued rights and obligations or past events and transactions unless a clear contrary intention is expressed. The strength of this presumption varies with the degree of potential unfairness-the greater the unfairness, the more explicit the legislature's intent must be.
(Footnotes Omitted)
19. Section 4 of the Ordinance stipulates that income tax shall be imposed for each tax year, at the rate or rates specified in Division I or II of Part I of the First Schedule, as the case may be, on every person who has taxable income for the year. Along the same lines, section 37A states that the capital gain arising on or after the first day of July 2010 from disposal of securities shall be chargeable to tax at the rates specified in Division VII of Part I of the First Schedule. Division VII itself states that "The rate of tax to be paid under section 37A shall be as follows". These provisions make it evident that Division VII has no independent existence outside the scope and ambit of section 37A and that its entire purpose is to specify the rate of tax. It is thus self-evident that Division VII must contain only the rate of tax and there is no scope for inclusion of a substantive provision in it. That is why in our jurisprudence, a distinction is drawn between the main statute and the schedule attached thereto such that if there is an irreconcilable difference between the charging provision and the schedule the former is to prevail (see Excise and Taxation Officer, Karachi v. Burmah Shell Storage and Distribution Company of Pakistan Ltd etc 1993 SCMR 338). Put differently, the schedules are an aid to the charging sections and cannot be applied in derogation of the main section. In the case of Collector of Customs and another v.
Messrs Young Tech (Pvt.) Limited etc 2024 PTD 306, the Supreme Court held that the right to recover tax is predicated on the charging section and not on the table that specifies the rates at which such charge is to be recovered. It was furthermore held that the power to recover the levy is anchored in the charging section and the table is meant to prescribe the rates and that the schedule and/or table is an adjunct to the charging provision and cannot go beyond it and create a new and altogether different levy.
20. In the case of Finance Act, 2022, the draftsman curiously placed the proviso in Division VII instead of attaching it to section 37A which was the main charging provision creating the liability to pay capital gain tax.
There are a number of problems in inserting this proviso to the table contained in Division VII and the consequential effect it sought to achieve.
21. A proviso is a legislative technique by the draftsman to qualify the generality of the main provision by adding an exception to and for taking out from the main clause, a part of it which, but for the proviso would fall within the main clause.
The table in Division VII as amended by Finance Act, 2022 lay down rates of tax for the tax year 2023 and onwards in respect of securities the holding period of which ranged from under one year to more than six years. In other words, the rates of tax stipulated in the table were applicable to securities that were acquired prior to 01.07.2022. Contrary to what was contained in the table with reference to the holding period, the first part of the proviso made the rates of tax mentioned in the table applicable to securities that would be acquired on or after 01.07.2022. The second part of the proviso, on the other hand, made the rates of tax mentioned in the table inapplicable to the securities that were acquired on or before 30.06.2022 and instead applied a uniform rate of 12.5% tax on such securities.
22. The question on consideration of evolution of Division VII and understanding of what function the proviso performs is whether the amendments made in Division VII through the proviso validly achieved the purpose of making 12.5% rate of tax applicable on disposal of securities acquired before 30.06.2022 irrespective to their holding period.
23. For present purposes, the point to be made is that proviso as it is understood as a legislative technique must find its relevant content in the text and structure of the provision to which it is a proviso. The very concept of proviso makes it a part and parcel of the main provision and thus it cannot exist independently of the main provision by overriding it and must be read and interpreted in the context of the main provision. In the first place, the insertion of the proviso in Division VII violated the terms of section 37A of the Ordinance which stipulates that Division VII shall only contain the rates of tax. The proviso must always be placed with substantive provision and as such it had no place in Division VII. Secondly, the tax at the rate of 12.5% and the holding period for which it was applied (on or before 30.06.2022) through the proviso was completely inconsistent with and contradictory to the table. Suffice it to state that the table contained variable rates of tax for the year 2023 and onwards in terms of section 37A depending upon the holding period of the securities. The holding period of securities, as noted above, ranged from under a year and more than six years which itself implied that these securities were held prior to 01.07.2022. The second part of the proviso, as is evident, did not in terms carve out an exception to the table or except anything from the rates of tax contained therein and instead introduced a new tax for a period that was materially different from the period of holding of securities provided in the table.
The placement of proviso in Division VII was thus wholly irrelevant for the purpose of achieving the purported aim of bringing to tax the disposal of securities acquired on or before 30.06.2022.
24. It is settled law that a proviso may be an exception to the main provision, but it cannot be inconsistent to such an extent that it nullifies with what is intended by the main provision. And if it does so, it would be ultra vires to the main provision (see Haji Muhammad Idrees and 17 others v. Inayat and 2 others PLD 2006 Lahore 240). The Supreme Court in the case of Enmay Zed Publications (Pvt.) Limited v. Sindh Labour Appellate Tribunal etc 2001 SCMR 564 laid down the law that the proviso, which operates as an exception, cannot render redundant or ineffective the substantial provision of the main section. A similar conclusion was drawn by the Supreme Court in its holding in the case of Dr. Muhammad Anwar Kurd etc v. The State through Regional Accountability Bureau, Quetta 2011 SCMR 1560 in which it was stated that "...to say that proviso shall normally be construed not merely to limit or control, but nullifying the enactment and taking away completely a right conferred by the enactment, is incorrect." Subject to what has been stated in the preceding paragraph, even if the proviso to Division VII is deemed valid, the effect it sought to achieve was to make superfluous the rates of taxes mentioned in the table for the securities that were acquired on or before 30th June 2022 particularly the 0% tax for securities held for more than six years. In as much as the function of a proviso is to carve out something from the scope of the main provision that would otherwise fall in it, the inclusion of uniform rate of tax (12.5%) on disposal of all securities acquired on or before 30.06.2022 as envisaged by second part of the offending proviso was wholly incompatible with the table if it were to include in it and in fact nullified in entirety the rates of tax mentioned therein. That could not be the function of the proviso on the ratio of the abovementioned judgments and thus in our considered opinion it was inoperative on the right that had come to vest in the appellant.
25. There is yet another aspect of the matter which inhibits the conclusion about the validity of the application of second part of the proviso to disposal of securities acquired prior to 01.07.2013. The table contained in Division VII was modified through Finance Act, 2021 when, inter alia, 0% tax was applied to securities acquired before 01.07.2013. This benefit was to accrue on disposal of securities for tax year 2022 and onwards. Section 37A read with the table thus vested in the appellant a right for application of 0% rate of tax on disposal of securities for year 2022 and onwards. The second part of the proviso introduced through Finance Act, 2022 through retrospective application of 12.5% tax on securities acquired on or prior to 30.06.2022 took away that benefit even though the substantive provision (section 37A) did not contain anything to that effect. As noted above, section 37A is the main charging provision which in its initial incarnation stipulated that the capital gain arising on or after the first day of July 2010 from disposal of securities shall be chargeable to tax at the rates specified in Division VII. The legislature up till 2021 continued to grant benefit of 0% tax on disposal of securities that were acquired before 1st of July 2013. Even the table contained in Division VII as amended by Finance Act, 2022 granted a similar benefit to securities held for a period exceeding six years which included the securities held by the appellant. From the various modifications made in Division VII, it seems obvious that the date 01.07.2013 occupies a central position in that the securities acquired before that date were continuously applied 0% rate of tax. It is thus evident that legislature consciously protected the right that had come to vest in a person who had acquired securities before 01.07.2013. This right that had come to vest in the appellant could only be taken away by a substantive provision with clear and unambiguous words displaying a legislative intent to abolish or modify rights and not by adding proviso to Division VII. It is well settled that tax laws are to be construed strictly particularly the provisions which levy tax to avoid imposing any liabilities that are not explicitly outlined by law. We are of the considered opinion that the legislative technique of adding a proviso in Division VII for taking away established vested rights was not valid and that the appellant could not be burdened with capital gain tax on the basis of adding proviso through the amendments made in Division VII through Finance Act, 2022.
26. Notwithstanding the above changes brought about in Division VII, the legislature through Finance Act, 2024 again revived 0% rate of tax on disposal of securities acquired between 01.07.2022 and 30.06.2024 where the holding period exceeded six years. Even more significantly, the disposal of securities acquired before 01.07.2013 were again held liable to 0% tax as per the second proviso to the table of Division VII. These amendments completely nullified the effect of the offending proviso added through Finance Act, 2022. This lends credence to the allegation of discrimination by the appellant. Keeping in view the amendments made in Division VII up to the year 2021 and in the year 2024, there does not appear to be any rational basis for giving a different treatment to the disposal of securities acquired before 01.07.2013 through the amendments made in Division VII through Finance Act, 2022. The policy for imposition of a tax ought not to concern the Courts.
Similarly, the classification of persons who are made liable to pay different rates of tax cannot be impugned on account of the fact that the tax burden from such classification is unequal. There must, however, be some rational criteria for such classification and if a similar property in the hands of similar persons is imposed different rates of tax at different periods, the law may be struck down on the ground of discrimination. The reintroduction of 0% tax on disposal of securities acquired prior to 01.07.2013 makes the imposition of capital gain tax on the appellant discriminatory.
27. The above analysis of the function the proviso performs did not enter the discourse in the judgment of the learned Single Judge in Chambers. Be that as it may, we have come to the conclusion that the offending proviso, which had the effect of nullifying the table and which on textual plane could only be construed as an independent provision stipulating a new tax, could not be inserted in Division VII for burdening the appellant with 12.5% tax on capital gain on disposal of securities and that the right that had come to vest in the appellant for application of 0% tax could not be taken away by the proviso.
28. Before parting with this judgment, we may point out that the Federal Board of Revenue ought to constitute a Policy Board consisting of experts to render advise on future legislation keeping in view the legal and constitutional principles interpreted and settled by the Courts in order to avoid such legislation being struck down.
29. In conclusion, we allow this Intra Court Appeal and set aside the judgment rendered by the Single Judge in Chambers. The constitutional petition filed by the appellant is allowed on the terms that the proviso added to the table in Division VII through Finance Act, 2022 is inoperative on the right of the appellant to be applied 0% tax on capital gain arising on the disposal of securities from 01.07.2022 till January 2023.