' SABIHUDDIN AHMED, J.--In December, 1972, the President promulgated the Pay As You Earn Ordinance, enabling the Federal Government to introduce a scheme for import of machinery and equipment for export oriented industries on credit, and to enable such industries to liquidate their liabilities towards foreign suppliers in foreign exchange through part of their export earnings without causing a drain on the limited foreign exchange reserves available with the Government.
The Ordinance also empowered the Government to frame rules including rules enabling the State Bank of Pakistan (respondent No,3) to impose penalties for failure to repatriate foreign exchange earned through export or generate sufficient export earnings to meet the foreign exchange liabilities according to the terms of the scheme. The extent of such penalties could not exceed 27% of the amount required to be repatriated or the short fall through export earnings as the case may be. This Ordinance acquired permanence on the Statute Book in the form of Pay As You Earn Act, 1973 (Act XXXI of 1973).
2. On 20-2-1973 a scheme under the aforesaid Act/Ordinance was notified laying down the categories of industries to which it was applied and various conditions under which it would operate. Para. 7 of the Scheme and its second proviso are relevant for the purpose of the present controversy and may be reproduced as under:- "7. Any person who has established an industrial unit or enterprise under this Scheme may utilise the annual foreign exchange earnings therefrom unto the maximum of fifty per cent of the F.O.B.
Value of such earnings for meeting the debt liability and other liabilities of the nature of royalty technical fee and incidental charges: ' Provided that ...
' Provided further that the Federal Government may, in special cases, allow the utilisation of more than fifty per cent. Of the annual foreign exchange earnings for the repayment of debt liability."
3. On the same day statutory rules under the aforesaid Act were also notified by the Federal Government and rule 4 which is relevant in the present context may be reproduced as under:-- "4. If, in any financial year, any industrial unit or enterprise is not in a position to meet any of its liabilities specified in clause (7) of the Scheme from within fifty per cent. Of the earnings specified in that clause, or from within such higher percentage of the said earnings as may have been allowed under the said clause, the Federal Government may allow payment, at the official rate of exchange, of the amount of foreign exchange required to meet the liabilities, subject to the condition of a penalty equal to twenty-seven per cent. Of the value in Pakistan rupees of the amount of such foreign exchange."
4. The admitted factual position appears to be that the petitioner who had set-up a textile mill and qualified for the benefits under the aforesaid scheme imported their plant from Chekoslovakia, whereby after making a down payment of 15% of the price of the plant, they were required to pay the balance amount in 9 six monthly instalments commencing from 1981. During the first year of the operation of the plant the amount actually repatriated by the petitioner through export earnings up to 30-6-1982 fell short of the required target in terms of para. 7 and thereupon, the respondent levied a penalty of Rs,8,80,305 upon the petitioner, apparently calculated on the basis of 27% of the difference between instalments payable to foreign suppliers and 50% of the export earnings actually received up to 30-6-1982. The petitioner approached the relevant agencies in the Government requesting that the penalty may not be imposed since the value of the goods exported during the relevant time through irrevocable letters of credit established in their favour by foreign buyers of their products exceeded four times the extent of their liabilities (though the amount actually received by that time was less) and even if a short fall had taken place, the same arose for reasons entirely beyond the control of the petitioner i,e, delay on the part of WAPDA to grant electric connection in time. The petitioners request was initially rejected by the Ministry of Finance but subsequently their case was also recommended by the Textile Commissioner, Government of Pakistan vide letter dated 8-10-1985. Nevertheless the request came to be finally rejected by the Ministry of Finance and the penalty was recovered by the respondent No,3.
Aggrieved by the same the petitioners have approached this Court, praying that the levy of penalty be declared as illegal and the alleged amount collected be directed to be refunded.
5. Khawaja Shamsul Islam, learned counsel for the petitioner in the first place contended, that in fact there had been no short-fall in foreign exchange earnings during the financial year 1981-82 so as to justify levy of penalty. He argued that the petitioner had, as contended in paras. 3 and 4 of the memo. Of petition, despite the delay caused in the commencement of production owing to inaction of a Government Agency, in fact exported goods worth US $1,011,946 which exceeded four times The extent of their foreign exchange liabilities for the relevant year. Learned counsel argued that irrevocable letters of credit had been received for the aforesaid amounts from foreign buyers and the goods had also been shipped during the period between 1-7-1981 and 30-6-1982. This fact had not been seriously controverted by the respondents but was acknowledged by the Textile Commissioner of the respondent No,1 . Indeed actual repatriation of a substantial part of the sale proceeds i,e, US $ 742,242.00 took place after the target date i,e, 30-6-1982 owing to late commencement of production during the year and credit facilities accorded to foreign buyers.
According to learned counsel, under the scheme, debt liabilities had to be met from 50% of the foreign exchange earnings of the petitioner and once the petitioner had "earned" such amount upon establishment of an irrevocable letter of credit in their favour by the foreign buyer and shipment of goods against such document during the relevant year, delay in actual repatriation of the amount was inconsequential and could not be made a ground for imposing penalty. He pointed out that the expression "earning" or "foreign exchange earning" had not been defined in the Act, the Rules or the scheme, and it would be unfair to apply this only to the amount actually repatriated, and thereby enlarge the scope of the rule entailing penalty.
6. Alternatively Mr. Khawaja Shamsul Islam, argued that even if it be assumed that a short-fall in the foreign exchange earning for the purpose of para. 7 of the Scheme had taken place no penalty could be imposed in the absence of a finding as to mens rea on the part of the petitioner. In other words even if legal power to impose penalty was available the same could be exercised only upon a finding recorded after conscious application of mind as to contumacious failure or at least wilful negligence in causing repatriation of foreign exchange earning. Imposition of penalty to the extent of maximum amount permissible by law, according to learned counsel, without taking into consideration the reasons for the so-called short-fall in the first year of manufacture as well as overall performance of the petitioner was unlawful. In this context Khawaja Shamsul Islam referred to a chart in para. 3 of the memo. Of petition indicating that as against the total debt liability of U.S. $ 832,597.75 during the first four years of production the petitioner had effected exports through irrevocable letters of credits to the extent of 6,556,044 and the statement in the chart had not been expressly rebutted by the respondents.
7. Finally Mr. Shamsul Islam contended that the petitioner had been subjected to hostile discrimination by the respondents inasmuch as certain other importers similarly situated were not subjected to the levy of penalty. In this context it was, inter alia, pointed out that M/s Ibrahim Taxtile Mill had incurred a debt liability to the extent of US $ 608,493.74 during 1980-81 financial year under the Scheme and had been able to generate export to the extent of $ 231,298.76 only. The respondent No,1 allowed them to cover the short-fall from their export earnings for the subsequent year i,e, 1981-82. It was further pointed out that in the case of Gulshan Spinning the importers were not able to repatriate foreign exchange earnings of the requisite amount though export of goods of the required value had taken effect during the relevant period. Penalty of Rs,1,293,839.73 had been levied but was subsequently refunded by the respondent No,3 after rendering the following advice:-- "We have to advise you that the date of export/shipment is taken into account towards export achievement under PAYEE SCHEME"
8. In the counter-affidavit filed on behalf of the respondent the amount of foreign exchange earnings actually realised by the petitioner up to 30-6-1982 have been shown to be U.S. $ 214,942 (and not 269,704 as claimed by the petitioner). Likewise their debt liability has been stated to be U.S. $348,756.18 (and not $ 243,638.90). Nevertheless these discrepancies in figures appear to be of little significance. The admitted position is that if foreign exchange earnings are calculated on the basis of actually repatriated amount, petitioners earnings fall short of the target contemplated by the scheme. At the same time the contention that irrevocable letters of credit covering an amount far more than that required by the scheme had in fact been established in favour of the petitioner during the relevant period has not been expressly repudiated by either of the respondents and in fact appears to have been acknowledged in the Memorandum of the Textile Commissioner dated 8-10-1985 filed as Annexure 'F' to the memo. Of petition. The respondents have, however, contended that such figures are irrelevant for the purposes of resolving the controversy.
9. Mr. H.A. Rehmani, learned counsel for the respondent No,3, however, contended that foreign exchange earnings of the petitioner in terms of the requirements of para. 7 of the Scheme for the year 1981-82 could only mean those amounts that the petitioner had actually realised from his foreign buyers up to 30-6-1982 and the amounts recovered after the aforesaid date could only be treated as earnings for the subsequent financial year irrespective of the date of contract establishment of letters of credit or shipment of goods. He referred to two bank guarantees, dated 5th July, 1981 and 24th November, 1981, from Union Bank of Middle East, furnished by the petitioner, guaranteeing that the petitioner will repatriate sufficient foreign exchange by 30th June, 1982 on account of export of their product to cover the amount of remittance in terms of the Scheme.
Learned counsel argued that the terms of these guarantees unmistakably showed that the petitioner were aware that the requisite amount was required to be actually repatriated before the target date and mere receipt of a letter of credit was inconsequential.
10. Responding to Mr. Khawaja Shamsul Islam's second contention Mr.Rehmani argued that the penalty in question has been imposed in terms of Rule 4 of the statutory rules framed under the Act (quoted in para. 3 above), which required that the moment it was found that 50% of the export earnings of the petitioner dtiring a year were not sufficient to meet his debt liabilities, the Federal Government could allow payment at the official rate of exchange but only upon the condition of collecting 27% of the value of such foreign exchange by way of penalty. As such according to learned counsel there was no discre tion left in the respondents to waive the amount of penalty, which was required to be paid by way of a legal duty. With regard to the plea of discrimination, Mr. Rehmani only contended that the facilities accorded to other importers were illegal and the petitioner could not as of right claim benefits not warranted by law, merely because through some misunderstanding or otherwise certain unlawful benefits had been obtained by some other persons.
11. We have given our anxious consideration to the respective contentions of learned counsel for the patties, both of whom displayed a great deal of persuasive ability in articulating their points of view. We do not think it is necessary to decide the question whether the annual foreign exchange earnings of an industrial unit ought to be calculated on the basis of foreign exchange actually repatriated during a particular year or whether irrevocable commitments on the part of foreign buyers through establishment of letters of credit could also be taken into account. We leave this question open to be decided in an appropriate case as we are of the view that this petition can be disposed of on the basis of other grounds before us.
12. Prima facie, a plain reading of rule 4 of the Pay As You Earn Scheme Rule, 1973 (reproduced in para. 3 above) does appear to lend support to Mr. Rehmani's contention to the effect that levy of 27% penalty is a condition precedent upon which the Federal Government may allow payment in foreign exchange to meet the -foreign debt liabilities of an importer of machinery qualified to be imported under the Act and there is no rule for waiving or reducing the quantum of penalty.
Nevertheless according to all established cannons of interpretation the rule cannot be read in isolation, divorced from the parent statute or the scheme prepared thereunder. It may, therefore, be pertinent to consider the source of the Rule making power stated in section 4 of the Pay As You Earn Scheme Act, which reads as under:-- "4. Power to make rules.--(1) The Federal Government may, by notification in the official Gazette make rules for the administration of the Scheme.
(2) Any rules made under subsection (1) may provide that an industrial unit or enterprise shall-
(a) if it fails to repatriate to Pakistan any foreign exchange which it is required by the Scheme to repatriate; or
(b) if the prescribed percentage of its export earnings is not sufficient to meet the cost of the machinery and equipment and the other prescribed charges in foreign exchange; be liable to pay the State Bank of Pakistan by way of penalty a sum not exceeding twenty seven per cent. Of the value in Pakistan rupees of the amount of foreign exchange it fails to repatriate or, as the case may be, of the amount by which its export earnings fall short of the aggregate of the cost and charges referred to in clause (b);
(3) Any amount payable by industrial unit or enterprise as a penalty under the rules made under subsection (1) shall be recoverable as an arrears of land revenue."
13. It may be seen that the legislature conferred upon the rule making body the power to make a rule which may provide that Industrial Unit or Enterprise may be liable to pay, by way, of penalty, the sum not exceeding a maximum limit under two situations i,e, (i) failure to repatriate foreign exchange earnings and (ii) failure to generate adequate export earnings to meet debt liabilities in terms of the Scheme. In the first place the expression "penalty" itself denotes that the person required to defray the same has through some wilful act of commission or omission incurred some financial burden which the legislature considers expedient to impose. Khawaja Shamsul Islam appears quite right in asserting that the expression "penalty" does not apply when a financial obligation is incurred without any fault of the persons required to bear such burden. Secondly the expression "liable to pay" indicates that the legislature intended to confer a certain amount of discretion upon the concerned authorities to levy or not to levy a penalty or levy penalties in different amounts depending upon the gravity of the offending act. In the case of Shamroz Khan v.
Muhammad Amin (PLD 1978 SC 89), the Honourable Supreme Court observed as under:-- "If a person is liable to suffer a penalty he is potentially subjected to that penalty and this means that the penalty may be enforced against him at the discretion of the authority entitled to enforce a penalty."
14. Moreover, the two situations under which a penalty contemplated by section 4 of the Act can be levied are so dissimilar that it would be very difficult to conceive that the legislature intended to provide for an automatic levy irrespective of the causes of failure to comply with the requirements of law. In other words, it would be difficult to assume that the Act required a person consciously involved in flight of capital and depleting foreign exchange reserves of the country by failing to remit earnings made abroad, should be treated at par with another, who may, for reasons entirely beyond his control be unable to achieve a productivity charge within a given time.
15. Thirdly, it may be observed that section 4 of the Act (reproduced in para. 12 above) enables Federal Government to make rules for the administration of a Scheme and the contents of the Scheme prepared by the Government cannot be overlooked while interpreting the rules. It may be observed that para. 6 of the Scheme which enables the Federal Government to allow any eligible person to make advance payment in foreign exchange for import of machinery up to 15% of its value requires that in case such machinery is not imported within given time such person may either repatriate the foreign exchange to Pakistan and only when he fails to do so; he would pay a penalty equal to 27% of such foreign exchange together with interest. On the other hand rule 7 which is applicable in the present case does not speak of any penalty, but on the contrary provides that in a special case the Government may allow utilisation of more than 50% of the annual foreign exchange earnings for repayment of debt liability. Rule 10(2) also enables the Government to extend time for repayment of debt liabilities. It is, therefore, evident that framers were conscious of the fact that at times it might not be possible for an importer of machinery to generate sufficient foreign exchange earnings for reason beyond his control, and therefore, ample discretion was conferred upon the Government to provide appropriate relaxation in a fit case. We, therefore, find considerable force in Khawaja Shamsul Islam's contention to the effect that penalty could not be imposed in the absence of a definite finding of wilful default on the part of C the petitioner and in any event it could only be imposed after taking into consideration all the facts and circumstances of a particular case. It would be highly incongruous to assume that while a person obtaining foreign exchange in advance and yet failing to import machinery will escape penalty if he repatriates the amount after expiry of the time allowed for import, but one who generates foreign exchange through export earnings and repatriates all such earnings would be mechanically liable to penalty merely because the amount was repatriated after a particular date. We are, therefore, of the view that if rule 4 is construed in the manner suggested by Mr. Rehmani the same would be liable to be struck down as being repugnant to the parent Act and ultra vires the rule making power.
16. Faced with the aforesaid situation Mr. Rehmani attempted to argue that the penalty in question may not be treated as penalty in the strict legal sense imposed by law, but could be considered as contractual ''ability of the petitioner by way of consideration for providing foreign exchange to meet debt liability. From the aforesaid point of view the question of mens rea according to learned counsel became irrelevant and the moment the petitioner availed of a particular facility he was liable to incur its cost laid down in rules. We are not impressed by this argument either inasmuch as once the matter is held to fall within the domain of contract law the provisions of sections 73 and 74 of the Contract Act would get attracted. Even if the petitioner is found to be in breach of contractual obligations no penalty in terrorem would be permissible and the respondents would only be entitled to reasonable compensation as held by the Honourable Supreme Court in Government of West Pakistan v. Mistri Patel (PLD 1969 SC 80). In the absence of any material on record showing the quantum of loss sustained by the respondents owing to late repatriation penalty of 27% of the amount involved could not be treated as reasonable.
17. We may further observe that it is by now settled law that all public power and administrative discretion ought to be exercised fairly and reasonably and a burden imposed must bear a reasonable nexus with the harm caused. The concept of proportionality in the exercise of public power has been recognised and approved by our Courts and in the case of Independent Newspaper Corporation v. Chairman Fourth Wage Board (1993 SCM R 1533) the Honourable Supreme Court observed the principle is well-settled that when express statutory power is conferred on a public functionary, it could not be pushed too far, for such conferment implies a restraint in operating that power, so as to exercise it justly and reasonably. In the words of Scarman, L.J" excessive use of lawful powers is itself unlawful".
18. Keeping in view the admitted facts and circumstances we are inclined to hold that imposition of such a heavy penalty on the petitioner is even otherwiseunconscionable and liable to be struck down on the ground of being outside the well-recognised dimensions of exercise of public power.
19. Finally we may observe that the respondents have been unable to satisfy us that the impugned action did not suffer from hostile discrimination and was not liable to be declared violative of the fundamental rights of the petitioners guaranteed by Article 25 of the Constitution. Both in terms of grant of privileges as well as imposition of liabilities the State is required to treat everybody alike and no rational basis for treating owners of different industrial units differently has been disclosed.
In view of the above we would allow the petition and hold that the levy of penalty of Rs,8,80,305 was without lawful authority and of no legal effect. The respondent No,3 is directed to refund the amount to the petitioner within 3 months from today.