P L D 1975 Karachi 128 (PLP)

NOORUL ARFIN, J.‑By order made in Court on 20th December 1973, this petition was accepted in terms of the reliefs claimed in paragraph 21(a), (b) and (c), that is to say, a declaration was granted in the petitioner's favour that the petitioner is not liable to be assessed to income‑tax or to pay arty income‑tax levied and demanded for any year, or period, and that the assess ments made by the Income‑tax Officer (Companies Circle III), Karachi were with at Jurisdiction and lawful authority, and, with this declaration, an injunction was given to restrain the respondents from taking any action or step to recover from the petitioner any income‑tax levied or assessed for any year or period, In coming to this conclusion, we were guided by a Lahore decision, The West Pakistan Road Transport Board v. The Commissioner of Income tax (P L D 1974 Note 9). This judgment contains the reasons for the order we made On 20th December 1973.

2. The main question at issue in this case, to which question alone we: will confine this judgment is whether the profits of the Sind Industrial Trading.. Estate Ltd. are the income of the Provincial Government and are thus exempt from tax under the provisions of the Constitution. This corporation. is a Company registered under the Companies Act, 1913, and is limited by guarantee. The Company was incorporated on 29th November 1947 under a resolution of the Government of Sind dated 16th May 1947, with a view to promote Industrial development of the Province of Sind, and, for this. purpose, to establish Industrial and trading estates at Karachi, Hyderabad and Sukkur. The resolution contained the following guidelines in accordance with which this Company was required to work, that is to say, (i) the Company would acquire land for the development of trading and Industrial Estates, to develop such lands by construction of roads and drainage, and by provision of light and to construct, whenever feasible, premises for purposes of renting them out to traders and Industrialists; (ii) the Company would have power to levy rent for the land and premises let out by it and water and electricity charges to enable it to defray its expenses; (iii) the Company would note issue any shares to the public and would not make any profits or declare any; dividends on its shares; (iv) the Company would be financed by the Govern ment of Sind, but would also be empowered to issue debentures to raise additional capital; (v) the Board of Directors of the Company would consist of (a) Secretaries to the Government of Sind in the Ministry of Finance,. Agriculture and Industries, and the Director of Industries, and (b) three representatives of the tenants of the Estate to be elected by them on the one firm one vote principle; (vi) the Managing Director would be appointed by the Government of Sind; (vii) any resolution of the Board of Directors may. be suspended pending a reference to the Government of Sind at the instance of the Managing Director or any of the Ex Officio Directors mentioned above, and, on such reference being made, the Government of Sind would Vie, empowered to decide that the resolution shall have no effect or shall have effect with such modifications as may be approved by the Government. Under this very same resolution of the Government of Sind, Lieut.‑Colonel A. J. A. Beck was appointed Industrial Development Officer to take the necessary steps. to form the Company, and, on the incorporation of the Company, be was to be appointed Managing Director of the Company. The resolution also made provision that the expenditure involved in the formation of this Company should provisionally be debited to the head "43 Industries", and that the 'expenditure for the current financial years (1947‑48) would be met by way of a supplementary demand, and, for the next financial year, the resolution, provided that necessary provision should be made in the budget estimates in consultation with the Director of Industries, Government of Sind. In con sequence of this resolution, Sind Industrial Trading Estate Ltd. was registered under the Companies Act, 1913, on 29th November 1947, as a Company limited by guarantee. The articles of association of the Company con tained the same provisions which were incorporated in the Sind Government's resolution, referred to above, with the additional provision that the Board of Directors of the Company was to be so constituted that the Directors nominat ed by the Government of Sind would always be in majority, and that the Managing Director would be a salaried officer of the Government of Sind. As regards the memorandum of Association, clauses 5 and 8 are relevant. Clause 5 provides that the income and property of the Company when so ever derived shall be applied solely towards the promotion of the objects of the Company as set forth in the Memorandum and no portion thereof shall be paid or transferred directly or indirectly by way of dividend, bonus or otherwise howsoever by way of profit to the members of the Company. Clause. 8 provides that if upon winding up or dissolution of the Company there remains, after satisfaction of all its debts and liabilities, any property whatsoever, the same shall not be paid or distributed among the members of the Company but shall be paid or transferred to the Provincial Government of Sind or to its nominee to be applied in such manner as it may direct. upon the incorporation of the Company, the Government of Sind, advanced, in the first instance, rupees twenty‑eight lakhs to the Company and made further advances from time to time, which ultimately stood at rupees one crore. The Government of Sind transferred an area of 4000 acres of land to the north of the city of Karachi free of cost to the Company to enable the Company to carry out its objects mentioned in the Sind Government's resolution referred to above.

3. After its incorporation, the Company was to perform the following obligatory functions : (i) Construction and maintenance of roads and streets in the areas under the control of the petitioner. (ii) Street lighting. (iii) Maintenance of water supply. (iv) Provision of an adequate system of public drainage. (v) Proper arrangement for sanitation of the area under the control of the petitioner. (vi) Removal, recollection and disposal of refuse. (vii) Prevention of infectious diseases. (viii) Registration of Deaths and Births. This work was done by the petitioner up to September 1964. The petitioner used to prepare monthly statement of births and deaths which used to be conveyed to the Karachi Municipal Corporation. (ix) Control of buildings in the area. It may here be added that, for purposes of levy of property tax, the area of the Sind Industrial Estate situated at Karachi was incorporated within the limits of the Karachi Municipal Corporation on 5th June 1964, since when, according to the contention of the Company, all the Municipal services in the area forming the Industrial Estate, Karachi continued to he performed by the Company, except the fire fighting service.

4. The Company, after its incorporation, derived income from the rent of the lands allotted or leased out to Industrialists, fees on transfer of lands, premium received on allotment and leases of lands and water charges. The Company filed voluntary returns under the Income‑tax Act, 1922, as from the assessment year 1948‑

49. Up to the assessment year 1952‑53, the Company was assessed to net loss, but for the assessment year 1953‑54, made on 28th February 1958, the Company was assessed on net income. For the assessment year 1954‑55, the Company itself filed a return showing net income after adjusting losses brought forward from earlier years, upon which return the Company was assessed provisionally under section 23‑B of the Income‑tax Act on 20‑7‑1957. Thereafter a demand was made upon the Company for payment of income‑tax to which the Company was provisionally assessed. It was then that the Company came to realise that the payment of income tax would, in effect, restrict the Company's activities under its memorandum and articles of association and under the Sind Government's resolution referred to above. The Company, therefore, made representations to the Central Board of Revenue and to the President of Pakistan for exemption ‑from payment of income‑tax on various grounds including the ground that the Company was a local authority whose income is exempt from payment of income‑tax under section 4(3)(iii) of the Income‑tax Act, 1922, but these representations were rejected. In the meantime, the Income‑tax Officer attached the Company's bank accounts under the order issued under section 46(5‑A) of the Income‑tax Act, whereupon the Company filed a suit in the Court of the Second Civil Judge, First Class, Karachi, being Suit No. 929 of 1967 to restrain the Income‑tax Department from proceeding against the Company or its tenants and licensees for recovery of the income tax to which the Company had been assessed. However, this suit was dismissed on 30th August 1967 under Order VII, rule 11, C. P. C. on the ground that it was not maintainable by reason of the provisions of section 67 of the Income‑tax Act, 1922, against which dismissal, according to the aver ments made in paragraph 15 of the petition, an appeal is pending before the District Judge, Karachi. However, on 21st May 1968, the Company brought the present petition under Article 98 of the Constitution of 1962 to claim the reliefs mentioned above.

5. As stated above, the only question which requires determination is if the profits of the Company are the income of the Provincial Government and thus exempt from income‑tax under the relevant provision of the Constitution. We have stated above that the Sind Industrial Trading Estate Ltd. is a Company limited by guarantee. Now, a Company limited by guarantee is generally a non‑profit making association and such a Company is an alternative to a Company limited by shares. Under the scheme of the Companies Act, 1913, a Company cannot be created in which the members are free from any liability whatsoever. Therefore, ordinarily a Company created under the Companies Act is limited by shares, that is, the members of the Company are made liable as contributories to the extent of the shares! they have taken or they have agreed to take in the Company. But such a Company is not suitable for non‑profit making association, and therefore as an alternative to such a Company, the Companies Act permits the incorpora tion of a Company limited by guarantee, that is, a Company in which the members agree that, in the event of liquidation of the Company, they will subscribe an agreed amount. In effect, such members are guarantors of the ' Company's debts up to the agreed amount. As regards the working capital of such a Company, it generally comes from other sources, that is,l endowments, grants, fees, subscriptions, etc.

6. It is the admitted position that the Sind Industrial Trading Estate Ltd. is a Company limited by guarantee and a non‑profit making association. From what we have stated above, the following further points should be taken note of :‑ (i) The Company was formed and incorporated under the Sind Govern ment's resolution dated 16th May 1947. (ii) The whole of the working capital of the Company came from Sind Government grants, as also the area of land on which the Trading Estate has been developed by this Company. (iii) The Managing Director as well as the majority of Directors of the Company are nominees of the Provincial Government. (iv) Any resolution of the Board of Directors of the Company is liable to be suspended on a reference to the Provincial Government by the Managing Director or any of the other Ex Officio. Directors, and, on such reference, the Provincial Government may order that the resolution shall have effect with such modifications as; the Provincial Government may approve of. (v) Under the memorandum of association of the Company, the income and property of the Company is required to be applied solely towards the promotion of the objects of the Company, and no portion thereof can be paid or transferred directly or indirectly by way of dividend, or bonus or otherwise by way of profits to the members, of the Company, and, upon winding up or dissolution of the Company, any property which remains after satisfaction of debts and liabilities is transferable to the Provincial Government or its nominee only, or is to be applied in such manner as the Provincial Government may direct. It may here be added that the Sind Government's resolution, referred to above, in pursuance of which the Sind Industrial Trading Estate Ltd., was registered under the Companies Act, 1913, was passed under Entry No. 29 of List 11 (Legislative List)‑ of the Government of India Act, 1935, read with Articles 49(2) and 100 (3) of the Government of India Act, 1935. Under Article 100(3) a Province was empowered to make laws with respect to any of the matters enumerated in List 11, that is, the Provincial Legislative List. Under Article 49(2), the executive authority of each Province extended to the matters with respect to which the Legislature of the Province had power to make laws. Entry 29 empowered the Provincial Legislature (List 11) to make laws with regard to the production, supply and distribution of goods ; development of industries, subject to the provisions in List I (Federal Legislative List) with respect to the development of certain industries under Federal Control. It may here be added that the provisions in the Constitu tion of 1956, which corresponded with these provisions of the Government of India Act, 1935, were Article 77 and Entry No. 39 of the Provincial Legislative List contained in the Fifth Schedule to the 1956 Constitution. A corresponding provision of the 1962 Constitution are Articles 132 and

136. Under Article 132 a Provincial Legislature was empowered to make laws for the Province or any part of the Province with respect to any matter other than a matter enumerated ‑in the Third Schedule to the Constitu tion of 1962, this Third Schedule enumerating matters with respect to which the Central Legislature had exclusive powers to make laws. Under Article 136(1), the executive authority of a Province extended to all matters with respect to which the Legislature of the Province had power to make laws. The corresponding provision in the Constitution of the Islamic Republic of Pakistan, 1973, is Article 142 (b) and (c). Under clause (c) a Provincial Assembly is empowered to make laws with respect to any matters not enumerated in either the Federal Legislative List or the Concurrent Legislative List. Under clause (b) both the Parliament and a Provincial Assembly have powers to make laws with respect to any matter in the Concurrent Legislative List. The Federal Legislative List and the, Concurrent Legislative List are contained in the Fourth Schedule to the Constitution of 1973. Under Article 137, the executive authority of a Province extends to the matters with respect to which the Provincial Assembly has powers to make law. It will thus be noted that the Sind Government's resolution referred to above. was passed under the Constitutional powers conferred on the Province by the Government of India Act, 1935, with regard to the development of industries and trade, which powers the Province continued or continue to have under the Constitutions of 1956, 1962 and 1973. The Sind Government, instead of discharging its Constitutional functions for the development of Industries in the Province, resorted to the device of formation of a Corporation or a Company under the Companies Act, 1913, instead of discharging these functions directly through a department of the Government.

7. Thus, the Government of Sind clothed the activities entrusted to it under the Constitution for the development of trade and industries in the Province with a corporated personality, or, to use the expression which has found favour with their Lordships of the Supreme Court, threw a veil of corporate personality over its functions as the Government of the Province of Sind. Nevertheless, it is the substance of these governmental activities which should be looked at, and not the veil of juristic personality thrown over it. The rule that it is permissible for the Courts to lift the veil of juristic personality finds support in the decision of their Lordships of the Supreme Court in Reference No. 3 of 1970 (The President v. Mr. Justice Shaukat Ali (P L D 1 71 S C 585) from which we shall reproduce the following passages "The trend of decisions since the above enunciation of the law in Sak On's case appears, however, to show that in a number of important respects both the Courts and the Legislatures have lifted the veil which was recognised in the above‑mentioned decision to he almost inviolable. The growing tendency appears to be rather to look at the substance and not to allow the vision to be clouded by the shadow of the corporate personality. Thus where the corporate personality is being used merely as a cloak for fraud or improper conduct or where it can be established that the corporate personality is merely acting as an agent or trustee for someone else, be he an individual or another subsidiary Company, or where it is necessary to determine the true character of the corporate personality for other purposes, such as to determine its tax liability or its quasi‑criminal liability or as to whether the corporate body is an enemy concern or not, or a mere trustee for certain purposes, the Courts have not hesitated to look behind the veil of incorporation (vide Gower's Modern Company Law, 2nd Edn., pp. 183‑209). Whatever might be the position of third parties viz‑a‑viz the Company and the liabilities of its shareholders it does appear that there is no bar to the Courts lifting the veil of incorporation to determine the true relationship of the shareholders with regard to their dealings with the Company or to ascertain the true nature of the Company itself in matters which are governed by other statutes or where other con siderations necessitate the taking of such a step. For this purpose we think we are entitled to go behind the shadow of incorporation in order to ascertain as to what the real nature of the association of the respondent was with these concerns." In the same context, we would refer to another decision of the Supreme Court, Miller's case (P L D 1959 S C (Pak.) 219) in which their Lordships observed as follows :‑ " . ....True, a Company is person but it is only a juristic person, having no mouth to feed or person to shelter and sustain, and if it is taxed, it is taxed not on any general principle of law but because such is the policy of the statute that takes it. Its own income is but notional and it is only on its distribution that it becomes the actual income of its shareholders."

8. The Government may discharge its functions through a corporation, but the Corporation may ill, in substance, operate as a department of C Government. In this connection, we would reproduce the following passage from an English decision, Bacus S. R. L. v. Servicio Nacional Del Trigo ((1953) 1 Q B 438) to which reference has been made by their Lordships of the High Court of Lahore in The West Pakistan Road Transport Board v. The Commissioner of Income‑tax "P.

466. In my view of the evidence, it is reasonably plain that while the defendants undoubtedly were constituted a juristic personality with powers resembling those of a natural person, they were only accorded that status for the purposes for which they were formed; and ,the purposes for which they were formed were, briefly, the importing .and exporting of grain for the Spanish Government in accordance with the directions of the Spanish Ministry of Agriculture and the policy from time to time laid down by the Spanish Government. Thus it seems to me that although their status was a corporate status their functions were wholly those of a department of State. Are we then to hold that the State of Spain is deprived of sovereign immunity with respect to this activity of importing and exporting grain by reason .of the fact that the defendants are a corporate body? In my view that would be plainly wrong. In these days the Government of a sovereign State is not as a rule reposed in one personal sovereign. It is necessarily carried out through a complicated organization which ordinarily consists of many different ministries and departments. Whether a particular ministry or department or instrument, call it what you will, is to be a corporate body or an unincorporated body seems to me to be purely a matter of governmental machinery. If it seemed good to a foreign State‑let us say Ruritania‑‑composed of a navy to put the affairs of the navy in the hands of a navy board‑let us ‑say, the Ruritanian Navy Board‑and to enact that the members for the time being of this board should constitute a juridical person or corporation for the purposes of doing all things necessary for the maintenance and efficiency of the Ruritanian Navy, it seems to me impossible to suppose that an action brought against the Ruritanian Navy Board could be held not to infringe the sovereign immunity of Ruritania because, simply as a matter of convenience and administra tive machinery, the duties appertaining to the affairs of the Ruritanian Navy had been put in the hands of an incorporated board. I appreciate that the immunity here claimed is an immunity against direct impleading, so that there is, at first sight, force in the argument that the immunity has no application whatever because the party being sued is not the Sovereign State, but is a separate legal entity or cor poration which cannot in its own person claim any immunity at all. The answer to that I think, is this, that once it is found on the .evidence that the party sued is in truth a department of a Sovereign State, Albeit itself a corporate body, then the suit becomes, or it 'becomes apparent that the suit in truth is one between the plaintiff and the foreign Sovereign State or the part of the foreign Sovereign State represented by the departmental body concerned. Each case must no doubt depend on its own facts, and it is not to be taken as follow ing from what I have so far said that every corporation in which & foreign Sovereign State may be interested, whatever the nature of the activities of the corporation and whatever the nature or extent of the interest taken by the foreign Sovereign State, becomes itself a depart ment of State. Accordingly, for the reasons I have endeavoured to state, my view on the., first question is that the defendants are a department of the Sovereign State of Spain, and nonetheless so because they have been invested with corporate powers for the purpose of enabling them to carry out their statutory functions under the supervision of the appropriate Ministry. Accordingly, in the view I take, the claim of immunity is made good subject to the question of waiver."

9. We have above referred to the various constitutional provisions to show that the Government of each Province was entrusted with the function. of development of trade and industries within its territory. In the case: before us, the Government of Sind decided to discharge this function through a corporation registered under the Companies Act, 1913. Though the Sin& Industrial Trading Estate Ltd. has a corporate status, its functions are: wholly those of a department of the Government of Sind. This being so,. the question arises whether the profits accruing to the Sind Industrial Trading Estate Ltd. are income assessable to tax under the Income‑tax Act,. 1922. In the Lahore decision, The West Pakistan Road Transport Board v. The Commissioner of Income‑tax the profits of the West Pakistan Road Transport Board were held not to be liable to assessment to tax under the Income‑tax Act, 1922, as these profits were held to be income of the Provin cial Government of West Pakistan, even though the Board was invested with juristic personality under the provisions of the Motor Vehicles (Amendment Act, 1951 of Punjab and the Motor Vehicles (West Pakistan Amendment) Act (President's Act III of 1957), which Acts introduced provisions in the Motor Vehicles Act. 1939 to enable the Provincial Government to set up a Road Transport Board to operate as a body corporate. In coming to this. conclusion, their Lordships of the Lahore High Court took note of the provisions of the Government of India Act, 1935, and the Constitutions of 1956 and 1962. Subsection (1) of section 155 of the Government of India. Act, 1935, with its proviso was to the following effect:‑ "

155. Exemption of Provincial Governments and Rulers of Federated States in‑ Respect of Federal Taxation.‑(1) Subject as hereinafter provided, the Government of a Province shall not be liable to Federal taxation in respect of lands or buildings situate in Pakistan or income accruing, arising or received in Pakistan: Provided that‑ (a) where a trade or business of any kind is carried on by or on behalf of the Government of a Province in any part of Pakistan outside that Province nothing in this subsection shall exempt that Government from any Federal taxation in respect of that trade or business, or any operations connected therewith, or any income arising in connection therewith, or any property occupied for the purposes thereof." The relevant provision of the Constitution of 1956 was Article 112, which provided that "the Government of a Province shall not be liable to taxation under any Act of Parliament in respect of lands or buildings situated in, Pakistan, or income accruing, arising or received in Pakistan." The corres ponding provision in the Constitution of 1962 was Article 137(1), which also provided that a Provincial Government shall not, in respect of its property or income, be liable to taxation under a Central Law or under a Provincial Law of the other province. A similar provision is contained in section 165 of the Constitution of the Islamic Republic of Pakistan, 1973, which reads as under:‑ "165.‑(1) The Federal Government shall not, in respect of its property or income, be liable to taxation under any Act of Provincial Assembly and, subject to clause (2), a Provincial Government shall not, in respect of its property or income, be liable to taxation under Act of Parliament or under Act of the Provincial Assembly of any other Province. (2) If a trade or business of any kind is carried on by or on behalf of the Government of a Province outside that Province, that Government may, in respect of any property used in connection with that trade or business or any income arising from that trade or business, be taxed under Act of Parliament or under Act of the Provincial Assembly of the Province in which that trade or business is carried on."

10. Thus, the Sind Industrial Trading Estate Ltd., being nothing more, than a department of the Provincial Government, though clothed with juristic personality, performs the essential functions entrusted to the Province with regard to the development of trade and industries. Of necessity, therefore, the income of this body corporate is the income of the Provincial Government, and, under the various constitutional provisions referred to above, this income is not assessable to tax under the Income‑tax Act, 1922.

11. Mr. S. A. Nusrat, the learned counsel for the Income‑tax Depart ment, contended that the petitioners should, in the first instance, have exhausted the remedies available to them by way of appeal and reference under the Income‑tax Act, 1922. Mr. S. A. Nusrat stated that, in fact, some appeals filed by the petitioners are still pending for adjudication. But. in our opinion, the act of the Income‑tax Department in assessing, or in l proposing to assess, the petitioners to income‑tax is without jurisdiction altogether, and it is, therefore, not incumbent upon the petitioners to avail themselves of the remedies provided to them under the Income‑tax Act or even to wait for adjudication of their appeals or references, if any. We are supported in this view by the judgments of their Lordships of the Supreme Court in Muhammad Tufail v. Abdul Ghafoor and others (P L D 1958 S C (Pak.) 201), Lt.‑Col. Nawabzada Muhammad Amir Khan v. The Controller of Estate Duty and others (P L D 1961 S C 119) and Nagina Silk Mill, Lyallpur v. The Income‑tax Officer, A‑Ward, Lyallpur and another (P L D 1963 S C 322).

12. The result of the aforesaid discussion is that this petition is allowed in terms of the reliefs claimed in paragraph 21(a), (b) and (c), that is to say,, a declaration is granted in the petitioner's favour that the petitioner is not liable to be assessed to income‑tax or to pay any income‑tax levied and demanded for any year, or period, and that the assessments made by the Income‑tax Officer (Companies Circle III), Karachi are without jurisdiction and lawful authority, and, with this declaration, an injunction is given to restrain the respondents from taking any action or step to recover from the ;petitioner any income‑tax levied or assessed for any year or period. KHUDA BAKHSH MARRI, J.‑I agree. S. A. H. Petition allowed.