2015 PLP (Trib (PTD)

NAZAR AHMAD, JUDICIAL MAMBER.

These four appeals, two each for tax years 2010 and 2011, have been preferred by a public limited listed company which is engaged in the business of manufacture and sale of cement. Out of these four appeals, two appeals, one each for tax years 2010 and 2011, relate to proceedings completed by the learned Deputy Commissioner Inland Revenue, Large Taxpayers Unit, Lahore (hereinafter `DCIR') under section 221 of the Income Tax Ordinance, 2001 (hereinafter 'Ordinance'). Likewise the other two appeals, one each for tax years 2010 and 2011, emanate from proceedings concluded by the learned Additional Commissioner Inland Revenue, Large Taxpayers Unit, Lahore (hereinafter `ACIR') under section 122(5A) of the Ordinance. In both these sets of, appeals, the, predominant issue relates to determination of tax liability with regard to section 113 of the Ordinance.

2. In connection with proceedings concluded under section 221 of the Ordinance, the rectification orders for tax years 2010 and 2011 were respectively passed on 29-6-2011 and 14-2-2012. The treatment of DCIR was upheld by the first appellate authority vide separate orders dated 30-11-2011 and 16-11-2012 respectively for tax years 2010 and 2011 which have been impugned before us by the taxpayer/appellant. So far as the proceedings under section 122(5A) of the Ordinance are concerned, these were completed for tax years 2010 and 2011 respectively vide orders dated 21-2-2012 and 15-5-2012 and were principally upheld by the first appellate authority vide consolidated appellate order dated 11-9-2012 which has been challenged before this forum by the taxpayer/ appellant.

3. Before proceeding with the matter agitated by the appellant in the subject four appeals, it would be appropriate if we briefly capture hereunder the treatment adopted by the taxpayer in declarations, including computation of taxable income and computation of tax liability, filed in respect of both the relevant tax years. In both the years, the taxpayer derived revenue from sale of cement through local as well as export sales. Besides, the taxpayer also derived dividend income and rental income from lease of immovable property. In the computations of income, taxpayer claimed set off of loss incurred under 'income from business' (comprising of local sale of cement) against 'dividend income' derived during the year and consequently reduced the amount of loss to be carried forward. In the computation of tax liability, however, the taxpayer admitted the liability at higher of (i) final tax liability determined in respect of exports and rental income; and (ii) minimum tax liability computed at applicable rate with regard to local sales of cement only. Against the liability so determined/offered, the taxpayer claimed credit/adjustment of aggregate amount of tax paid/deducted during the year including on account of 'dividend income' and that attributable to income covered by final tax regime, and claimed refund of differential. For a proper comprehension of the declarations filed by the taxpayer for subject tax years, a synopsis of the same are reproduced hereunder for a quick reference:-- Tax Year 2010 Tax Year 2011 (Rupees) (Rupees) Computation of Income Loss for the year excluding dividend income (9,472,395,858) (8,961,341,289) Dividend income for the year 766,397,659, 951,353,294 Total loss carried forward (8,705,998,199) (8,009,987,995) Computation of tax liability Tax liability under final tax regimes 37,028,487 67,882,529 Minimum tax liability under section 113 @ 0.5%/1% 64,142,999 123,648,375 Higher of the above two 64,142,999 123,648,375 Payments/credits (275,492,529) (493,751,728) Refund claimed (211,349,530) (370,103,353)

4. In the backdrop of aforesaid declarations, the learned DCIR issued notices to the appellant contending that the provisions of law did not support the claim of the appellant and required payment of final tax over and above minimum tax leviable under section 113 of the Ordinance. In this respect, the DCIR heavily relied on definition of expression 'turnover' provided for in section 113(3) of the Ordinance which excludes 'amount taken as deemed and assessed as final discharge of tax liability' from the taxpayer's aggregate revenues/receipts. Consequently, the rectification orders, as aforesaid, were passed in the case of the taxpayer after the DCIR observed the defense put forth by appellant to be not convincing. Subsequently, while the rectification orders were still holding the field, the learned ACIR assumed jurisdiction under section 122(5A) of the Ordinance and issued show-cause notices contending that set off of dividend income claimed by appellant against business loss was not lawful. Again, finding the response of the appellant as unsatisfactory the intended action was enforced as a result of which not only the set off was denied to appellant but also separate tax was imposed on the appellant in respect of dividend income under section 5 of the Ordinance. It is these proceedings by the taxation officers and their confirmation by the first appellate authority that has compelled the appellant/taxpayer to pursue further remedy before this Tribunal. These appeals are taken up and disposed of in the ensuing part of this order. Proceedings under section 221 of the Ordinance

5. The learned AR of the taxpayer, while arguing the subject appeals, vehemently objected to the action undertaken by the DCIR and termed the same to be wholly illegal, unjustified and misconceived. In this respect, the learned AR submitted that the Revenue has throughout been confused about scope of levy of minimum tax under the law. The Revenue somehow has been holding a view that minimum tax is a transaction based tax and since, transactions subject to final tax suffer taxation under respective final tax regimes, the provisions of section 113 of the Ordinance warrant imposition of transaction based tax on sales subject to normal tax independently. According to learned AR, this understanding is erroneous and these provisions, by nature, prescribe minimum tax for a year and that too for a particular taxpayer. This needs to be looked at collectively from the perspective of a complete year and a taxpayer. This is a minimum amount of tax that a taxpayer is legally obliged to pay for a year regardless of income or loss, in specified circumstances. The basis for computation of minimum tax was prescribed by legislature as a proportion of sales and thus assuming the same to be a stand-alone tax on local sales is not correct. It is a minimum amount of tax payable by a taxpayer in a taxpayer where otherwise tax payable under the Ordinance falls short of prescribed threshold. The basis for such minimum tax, according to learned AR, could have been otherwise e.g. as a proportion of Authorized or Paid-up Capital. Thus, imposition of this tax as a proportion of sales should not be considered as a ground to hold that it's a transaction based tax as it has been levied under a different philosophy.

6. Arguing the merits, learned AR took us to the historical development that has taken place in the statute with regard to imposition of minimum tax. It was submitted that at the time of promulgation of Income Tax Ordinance, 2001, the concept of minimum tax was fundamentally imported from the scheme contained in section 80D of the late Income Tax Ordinance, 1979. The language, features and scope of such levy were pari materia in two legislations. This position remained unchanged until Finance Act, 2008 when section 113 of the Ordinance, providing for minimum tax, was deleted/omitted from the statute book. It was then, the learned AR further submitted, reinstated vide Finance Act, 2009, with slight modification to the 'effect that in subsection (3), the scope of 'turnover' (on the basis whereof levy was computable) was prescribed to mean receipts "excluding any amount taken as deemed income and is assessed as the final discharge of the tax liability". The operative part of this section remained unchanged until Finance Act, 2012 when an `explanation' was inserted under subsection (1) setting out scope of "tax payable or paid" though in the intervening period i.e. from Finance Act, 2009 to Finance Act, 2011, applicable rate of levy was changed both ways and period of eligibility for carry forward was increased from three to five years.

7. In the aforesaid legislative background, the learned AR submitted that the position regarding interpretation and applicability of section 113 of the Ordinance prior to re-insertion thereof is already settled to an effect that minimum tax and final tax could not be concurrently imposed. It has been a consistent view of Courts, the learned AR submitted, that only the higher of two amounts could be lawfully imposed. In this regard, learned AR referred to judgment of Lahore High Court in 2009 PTD 1707 and various decisions of this Tribunal including those delivered in appellant's own case for tax years 2003 and 2004. While, the decisions in appellant's own case were delivered in I.T.A. No. 1809/LB/2006 dated 16-10-2009 for tax year 2003 and I.T.A. No. 224/LB/2009 dated 23-1-2010 for tax year 2004, the other decisions referred to were in I.T.A. No.212/LB of 2013 dated 27-8-2013, those reported as 2011 PTD (Trib.) 168, 2011 PTD (Trib.) 845 and decision in M.A. No.79/LB/79/LB/2012 etc. dated 26-3-2012.

8. It was the contention of the learned AR before us that the basic issue, with regard to matter on hand, that needs to be determined is whether or not there is any change in the scope and applicability of provisions of section 113 of the Ordinance as reinserted in the statute book vide Finance Act, 2009, particularly with regard to modification of definition of expression 'turnover' in subsection (3) thereof. In this respect, it was argued that matter needs to be examined in following three steps:-- (i) the determination of scope of section 113 of the Ordinance as re-enacted through Finance Act, 2009; (ii) the determination of scope of section 113 of the Ordinance in the light of 'explanation' inserted vide Finance Act, 2012; and (iii) Effect of 'explanation' to tax years preceding Finance Act, 2012 i.e. in respect of tax years 2010 to 2012.

9. Elaborating on first step, the learned AR explained that modification in definition of turnover in subsection (3), as aforesaid, did not result into scope of section 113 of the Ordinance as upheld by Courts in earlier decisions because the substantive part of the section remains unchanged. In this respect, the main thrust of the arguments of the learned AR remained that tax under these provisions was required to be computed in accordance with substantive part of the legislation. In this respect, the learned AR read out the following provisions as were re-enacted vide Finance Act, 2009:-- "

113. Minimum tax on the income of certain persons.

(1) This section shall apply to a resident company where, for any reason whatsoever allowed under this Ordinance, including any other law for the time being in force (a) loss for the year; (b) the setting off of a loss of an earlier year; (c) exemption from tax; (d) the application of credits or rebates; or (e) the claiming of allowances or deductions (including depreciation and amortization deductions) no tax is payable or paid by the person for a tax year or the tax payable or paid by the person for a tax year is less than one-half per cent of the amount representing the person's turnover from all sources for that year: Provided that this subsection shall not apply in the case of a company, which has declared gross loss before set off of depreciation and other inadmissible expenses under the Ordinance. If the loss is arrived at by setting off the aforesaid or changing accounting pattern, the Commissioner may ignore such claim and proceed to compute the tax as per historical accounting pattern and provision of this Ordinance and all other provisions of the Ordinance shall apply accordingly. (2) Where this section applies: (a) the aggregate of the person's turnover as defined in subsection (3) for the tax year shall be treated as the income of the person for the year chargeable to tax; (b) the person shall pay as income tax for the tax year (instead of the actual tax payable under this Ordinance), an amount equal to one-half per cent of the person's turnover for the year; (c) where tax paid under subsection (1) exceeds the actual tax payable under Part I, Division II of the First Schedule, the excess amount of tax paid shall be carried forward for adjustment against tax liability under the aforesaid Part of the subsequent tax year: Provided that the amount under this clause shall be carried forward and adjusted against tax liability for three tax years immediately succeeding the tax year for which the amount was paid. (3) "turnover" means,-- (a) the gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills, derived from the sale of goods, and also excluding any amount taken as deemed income and is assessed as final discharge of the tax liability for which tax is already paid or payable; (b) the gross fees for the rendering of services for giving benefits including commissions; except covered by final discharge of tax liability for which tax is separately paid or payable; (c) the gross receipts from the execution of contracts; except covered by final discharge of tax liability for which tax is separately paid or payable; and (d) the company's share of the amounts stated above of any association of persons of which the company is a member."

10. By reference to these provisions, the learned AR stated that subsection (1) thereof prescribes the scope as to on whom and in what circumstances and cases, these provisions, at the first place, become applicable. The subsection (2) thereof, prescribes as to how the tax liability is to be determined in cases falling within the scope laid down through subsection (1) of section

113. In this background, learned AR submitted that applicability of subsection (1) triggers where no tax is payable by a taxpayer or tax payable is less than half percent of the turnover, which after the modification in definition of expression 'turnover' vide Finance Act, 2009, was only receipts from local sales. Further, under subsection (2) of section 113, the taxpayer, in these circumstances, was required to pay prescribed proportion of the turnover (constituting only local sales) instead of actual tax payable under the Ordinance. According to learned AR, since 'tax', as defined in section 2(63) of the Ordinance, means all amounts levied under the Ordinance, including final tax levied under any provision, therefore, the eventual liability in cases falling within the scope of section 113 of the Ordinance, remained only the prescribed proportion of local sales exclusively.

11. Taking this line of argument, learned AR submitted that mere enlargement or curtailment of subsection (3) of section 113, specifying definitions, do not modify, the substantive provisions contained in subsection (1) and subsection (2) of section 113, which has been assumed to be the case by learned DCIR in appellant's case. Under these provisions, it was the assertion of learned AR that if component of final tax was otherwise greater than fixed proportion of local sales, section 113 of the Ordinance did not apply ab initio. In short, primary contention of the learned AR remained that by use of phraseology 'instead of the actual tax payable under this Ordinance' in section 113(2)(b), legislature made it clear that both final taxes and minimum tax could not be concurrently imposed and modification in definition of 'turnover' cannot be considered to have warranted a need to deviate from the interpretation already advanced by Courts on the issue.

12. Commenting upon the second step, the learned AR submitted that though there was no change in the phraseology "instead of the actual tax payable under the Ordinance', used in section 113(2)(b) of the Ordinance, the substantive portion of the provision, which could be construed to mean that the situation remained unchanged, however, the 'explanation' when considered in a complete perspective suggests that minimum tax remains a regime concurrent and in addition to those of other applicable final taxes. Explaining this aspect, the learned AR submitted that if the provision is read and applied otherwise, it would mean that the taxpayer would be eligible to claim refund of final taxes in cases where prescribed proportion of local sales remains less than final tax and to the extent final taxes exceeded the same. The learned AR thus was of the view that post Finance Act, 2012, giving effect to 'explanation', lawful mandate exists for collecting minimum tax in addition to final taxes.

13. Addressing the third step, the learned AR vociferously argued that this 'explanation', at the first place, being in the nature of making amendment in the substantive part of the section could not operate retrospectively and alternatively in case this is considered to be applicable retrospectively, this shall not apply to proceedings already completed before the insertion of such 'explanation'. With regard to submission that this explanation does not carry retrospective effect, the learned AR relied on judgment of Sindh High Court in 2004 PTD 921 wherein their lordships, after lucidly debating upon the effect of insertion of an 'explanation', opined that not all 'explanations' carry retrospective effect. The learned AR referred to following findings recorded on the matter in such judgment: "..... The ordinary object of an explanation to a statutory provision is to, explain the meaning and intendment or the Act. Where there is any obscurity, ambiguity or vagueness in the main enactment, the explanation clarifies the same so as to make it consistent with the dominant object, which it seems to be subservient. The explanation is a note of caution by the Legislature to rectify the judicial error and give guideline for future clarifying the intention of the Legislature. Normally the explanation does not enlarge or limit the provision already enacted. Sometimes the Legislature steps in to convey its real intention, if not fully conveyed by the earlier enactment or there has been a misconception about the scope of a provision. Sometimes, a definition or a deeming clause is inserted by an explanation. Sometimes, on account of inaptness or lack of dexterity on the part of draftsman, substantive provisions are also enacted with the heading 'explanation'. If an explanation is merely declaratory or clarificatory in nature or is meant to fill in certain obvious gaps or to convey the real intention of the Legislature by explaining the meaning and intendment of the Act or by clarifying an obscurity or vagueness in the main enactment, it is always retrospective in effect and is operative since the very inception of the enactment and shall be held to as be existing all along. However, where a substantive/a new enactment has been made or a new definition is added or a deeming provision is inserted or the scope of a provision particularly a substantive/charging provision is enlarged or extended, it shall not have the retrospective effect, until and unless specifically specified so by the Legislature...." (emphasis is ours)

14. By reference to aforesaid excerpts, it was the contention of the learned AR that insertion of explanation since enacts a new definition and that too in the substantive part of the provision, it cannot be considered to be applicable retrospectively. With regard to alternate argument, the learned AR relied upon decision in 2001 PTD (Trib.) 755 wherein this Tribunal, by reference to insertion of explanation in section 52 of the late Income Tax Ordinance, 1979, specifying lawful jurisdiction of assessing officer, held that a defect of a fatal nature could not be cured through insertion of explanation unless so expressly provided for in the legislation. In that case proceedings under section 52 were concluded vide order dated 19-4-1999 by assessing officer holding jurisdiction over the case of deducting authority whereas such jurisdiction was made part of the statute trough insertion of an explanation which took effect on 1-7-1999. Earlier the courts held that lawful jurisdiction vested with the assessing officer holding jurisdiction over the case of the recipient. In its decision, this Tribunal held that through the explanation would operate retrospectively, it would not cure or give life to orders already passed without lawful authority. The insertion of explanation would permit undertaking of proceedings of earlier years but only after the insertion of explanation. To strengthen this line of argument, the learned AR also relied upon decision of Sindh High Court in 2011 PTD 1558 wherein Sindh High Court disapproved the selection of cases by Federal Board of Revenue for total audit prior to insertion of 214C in Ordinance which otherwise had retrospective effect. It was again the finding of the Sindh High Court that selection could be done for earlier years but only after insertion of section 214C in the Ordinance and any wrong act already committed could not be extended a legal umbrella through subsequent legislation with retrospective effect. On the strength of these judgments, learned AR argued that since rectification proceedings were concluded by DCIR prior to insertion of explanation, these could not be given protection by such explanation.

15. The learned DR supported the orders of authorities below and argued that this 'explanation' only removes ambiguity in earlier prevailing provisions of section 113 and as such only aims at clarifying the intention of the legislature as has been there from day one. The judgment of Sindh High Court in 2004 PTD 921, the DR submitted, in fact supported Revenue's stance. With regard to other judgment of the Tribunal in 2001 PTD (Trib.) 755 the learned DR submitted that it was distinguishable as, the same involved the matter of jurisdiction which is altogether absent in the present case. The learned DR concluded the arguments stating that the DCIR lawfully determined the tax liability and as such the orders of the authorities below do not warrant any interference or disturbance.

16. We have heard the opposing counsel at length, examined the record, perused the judgments cited at bar and have given earnest consideration to the issue raised before us. We agree with the assertions of the learned AR that there is no controversy with regard to application and scope of section 113 of the Ordinance for the period up to 30-6-2008 i.e. the date when section 113 of the Ordinance was omitted vide Finance Act, 2008. We also find considerable force in the arguments of the learned AR that prior to insertion of explanation, mere enlargement or elaboration of definition of expression 'turnover' in subsection (3) of section 113 do not alter the situation earlier applicable as interpreted by Courts. After the re-enactment and prior to insertion of explanation, the provisions of law clearly warranted imposition of higher of minimum tax or final taxes as was offered for tax by the appellant in its declarations. Thus, at the time, when DCIR imposed final tax and minimum tax concurrently, this was clearly not lawful. However, since in the intervening period 'explanation' has been inserted in these provisions and learned DR has also attempted to defend the impugned orders by relying upon the same, it is imperative for us to examine the issue that as to whether or not 'explanation' (reproduced below for ease of reference and a better comprehension) inserted vide Finance Act, 2012 would affect the periods from 1-7-2009 to 30-6-2012 which of course also cover the tax years in present appeals:-- "Explanation.

For the purpose of this subsection, the expression "tax payable or paid" does not include tax already paid or payable in respect of deemed income which is assessed as final discharge of the tax liability under section 169 or under any other provision of this Ordinance."

17. The proposition is straight forward when analyzed in the perspective of ratio settled by Sindh High Court in 2004 PTD 921, referred supra. The observation of their lordships of Sindh High Court that "where a substantive a new enactment has been made or a new definition is added or a deeming provision is inserted or the scope of a provision particularly a substantive/charging provision is enlarged or extended, it shall not have the retrospective effect, until and unless specifically specified so by the Legislature" is fully applicable in this case. Since, through insertion of 'explanation', a new restrictive definition of 'tax paid or payable' has been provided by legislature which has altered and clearly enlarged the scope of substantive part of section 113 of the Ordinance and since the legislature has not expressly made it retrospective, therefore, we have no hesitation to conclude that this 'explanation' could not be considered to be applicable on a retrospective basis. Resultantly, the orders of the authorities below are vacated and it is held that minimum tax and final taxes cannot be concurrently imposed in appellant's case. The DCIR, in the case of the appellant clearly erred in imposing final tax and minimum tax concurrently. Under the law only the higher of two amounts was payable. Proceedings under section 122(5A) of the Ordinance

18. Briefly, the ACIR objected to claim of set off of dividend income against business loss and thereafter imposed tax in respect of dividend income over and above minimum tax and final taxes. The first appellate authority principally upheld the stance of the ACIR regarding non-eligibility of set off of dividend income against business loss. The taxpayer, in the subject appeals has not challenged the refusal of set off. Similarly, the taxpayer opted not to press the ground challenging imposition of surcharge under section 4A of the Ordinance in respect of dividend income for tax year 2011. Through the subject appeals the taxpayer/appellant has only impugned the imposition of tax under section 5 of the Ordinance.

19. In this regard, the learned AR submitted that consequent to amendments made in sections 8 and 169(3) of the Ordinance vide Finance Act, 2007, dividend income for corporate recipients was brought out of 'final tax regime'. It remained so until amendments recently introduced vide Finance Act, 2013 when position was reinstated as was applicable prior to Finance Act, 2007. In the backdrop of this legislative scheme, the learned AR submitted that clearly dividend on tax was not a final tax for tax years 2008 through 2013 and was thus a tax liability under normal tax regime for which a reduced rate of tax of 10% was prescribed. It is the contention of the AR that once it was held that dividend could not be set off and remained chargeable to tax in the year in which the income was derived, the tax could not be imposed in addition to minimum tax rather the applicability and imposition of minimum tax remained dependent upon quantum of tax on dividend. It was the assertion of AR that under the law either tax could have been imposed on dividend or alternatively minimum tax could have been imposed if the tax on dividend remained less than specified proportion of sales subject to tax under normal tax regime.

20. Commenting on the findings of the first appellate authority on the matter, the learned AR vehemently objected to these and termed the same to be totally confused and misconceived. It was submitted that though the first appellate authority categorically observed in the impugned order that (i) tax on dividend income was not a final tax; and (ii) that minimum tax is imposed on turnover excluding receipts that are subject to final tax regime; yet he proceeded to confirm the imposition of tax on dividend in the manner discussed above. This action of the first appellate authority depicts the position that he was simply confused and could not properly appreciate the scheme of law.

21. Explaining the facts of the appellant's case, the AR submitted that:-- (i) for tax year 2010 since, tax on dividend remained 76.638 million as against minimum tax at 64.143 million, the learned ACIR erred in imposing both the taxes because under the law since imposition of dividend tax at Rs.76.638 million alone exceeded minimum tax, therefore, minimum tax was not leviable; and (ii) for tax year 2011 the tax on dividend income amounted Rs.95.135 million, which, when clubbed together with taxes under final tax regime at Rs.67.882 million the tax liability under the Ordinance aggregated to at Rs.163.014 million as against minimum tax determined at 1% of local sales was at Rs.123.648 million

therefore, in both the years, after it was held that dividend income could not be set off and remained chargeable to tax, no minimum tax was legally payable by the appellant because in such a situation 'tax otherwise payable' exceeded the minimum tax thus making the provisions of section 113 ab initio inapplicable. Concluding the arguments the learned AR submitted that the authorities below clearly erred in imposing and approving tax on dividend in addition to minimum tax. On the other hand learned DR has fully supported the impugned order by retreating the basis evolved therein.

22. We have considered the averments of the taxpayer appellant and find ourselves convinced with the submissions made at bar by the learned AR. Undoubtedly, the learned ACIR has erred in law by imposing dividend tax in addition to taxes imposed by the learned DCIR in rectification orders, dealt with supra. There is no ambiguity in law that during the period 1 7-2007 to 30-6-2013, dividend income remained outside the purview of final tax regime. The learned DR frankly conceded to this position during the course of arguments. When viewed in this perspective, it is noted that learned ACIR's action was grossly misdirected and misconceived.

23. The correct legal position remained that for the purposes of determining the applicability of minimum tax, it had to be seen whether final taxes and tax on dividend income remained less than minimum tax i.e. proportion of local sales. In case, these two taxes exceeded the minimum tax, the provisions of section 113 of the Ordinance, in fact, became inapplicable ab initio. In the case of the present appellant, after refusal of set off of dividend income against business losses by ACIR and subjection of the same to charge of tax, the position changed altogether as appellant had not admitted such liability in its declarations. In fact, after the aforesaid position was taken by ACIR, the tax on dividend income together with final taxes far exceeded the amount of minimum tax and thus appellant did not remain liable to levy of minimum tax rather it remained liable to tax on dividends as well as final taxes, these being the taxes otherwise payable under the Ordinance. Accordingly, for what have been discussed above, the orders of authorities below are modified and it is held that for both the years under consideration, appellant remains liable to final taxes and dividend tax as aggregate thereof is in excess of minimum tax. No amount is payable by the appellant under section 113 of the Ordinance. The subject appeals stand decided in the manner and to the extent indicated above. CMA/82/Tax(Trib.) Order accordingly.