1973 PLP 499 (PTD)

MUSHTAQ HUSSAIN, J.‑

The petitioner is a Corporation created under the Motor Vehicles Act, 1939. It claims to be functioning as an instrument of the Provincial Government and, therefore not a taxable entity. This contention was repelled by the I. T. O. who assessed the Board to tax for the year 1957‑58 to 1963‑

64. The matter went up in appeal to the Income‑tax Appellate Tribunal which by its order dated 3‑2‑71 dismissed the appeal and upheld the order of the Income‑tax Officer with the modification that the Board could not be assessed as a company or an individual but that it was liable to assessment as an "Association of Persons." The Board felt aggrieved by this finding and on Its applica tion the Tribunal referred the following questions of law for opinion to us:‑ (1) Whether the Road Transport Corporation is a taxable entity by section 3 of the Income‑tax Act. (2) Whether profits of the Corporation are the income of the Provincial Government and thus exempt from tax under Article 112 of the Constitution of 1956 (now Article 136(7) of the Constitution). We answer the first question in the negative and the second in the affirmative, that is to say, the Road Transport Corporation Is not a taxable entity and its profits are the income of the Provincial Government and thus exempt from tax. Our reasons for so saying follow:‑ By the Motor Vehicles (Amendment) Act, XVII of 1951, the Motor Vehicles Act IV of 1939 was amended and section 43‑A, which runs as follows, was introduced :‑ "43‑A. Road Transport Board.‑(1) Where a Provincial Government decides to operate transport services itself it shall constitute a Road Transport Board. (2) The Board shall consist of seven members, of whom four including the Chairman shall be appointed by the Provincial Government and three by the Central Government. (3) Members of the Board shall hold office for such period, as may be specified in the order appointing them, but notwithstanding the foregoing provisions any member may resign or may be removed at any time, or may bb re‑appointed, by the appointing authority. (4) The Provincial Government shall consult the Bond in all matters relating to the cc‑ordination of road end rail transport and in the fixation of fares and freights under this Chapter. (5) The Road Transport Board shall reserve for and allot to the Central Government, as represented by the railways not less than 25 % of its total share capital. (6) If a dispute arises between the Central Government and a Provincial Government, in respect of any matter concerning the fixation of fares and freights, and no settlement is arrived at by negotiation, the dispute shall be referred to the arbitration of the Chief Justice of the Federal Court or of a Judge of the Federal Court nominated by him, and the award of the Chief Justice or Judge aforesaid shall be final and binding on the parties and shall not be called in question in any Court of law nor shall anything in the Arbitration Act, 1940, apply to such arbitration. (7) The Provincial Government shall make rules, with the previous concurrence of the Central Government and not inconsistently with this Act, prescribing the powers and functions of the Board." The section permits the constitution of a Road Transport Board only when the Government decides to operate transport services itself. Under this section therefore, the Road Transport Board performs a function on behalf of the Provincial Government which has undertaken the operation of transport services itself. It also shows that four out of the seven members constituting the Board, including the Chairman, are to be appointed by the Provincial Government, and the remaining three by the Central Government. In other wards, the entire Board is constituted of Government nominees and there is no private member. It also indicates that 25% of its total share capital is to be allotted to the Central Government through its railways. The balance has consequently to be made good by the Provincial Government. It Is, therefore, manifest that no private contribu tion can be made to the capital required for the operation of the services run by the Board and that all its capital is subscribed either by the Provincial or the Central Government. In exercise of the powers conferred by this section the Governor of the Punjab issued Notification No. 5401‑E&T‑51/49908 on 15‑8‑1951 which runs as follows:‑ "Whereas the Government of the Punjab has decided to operate transport services itself: Now therefore in exercise of the powers conferred by section 43‑A added to by the Motor Vehicles (Amendment) Act, 1951, the Governor of the Punjab is pleased hereby to con stitute for the province of the Punjab a Road Transport Board consisting of the folio wing seven members to exercise and discharge the functions of the Board specified in the said act : (1) Mr. H. A. Majid, C.S.P., Chief Secretary to Government of the Punjab. (2) The Provincial Transport Controller, Punjab. (3) Mian Anwar Ali, P. S. P., D. I. G, C. I. D., Punjab. (4) Mr. Muhammad Inamullah Khan. Chief Engineer, Public Works Department, Buildings and Roads Branch, Punjab. (5) Mr. A. R. Soofi, Financial Advisor and Chief Accounts Officer, N. W. R., Lahore. (6). Mr. C. S. Khan, Chief Commercial Manager, N. W. R., Lahore. (7) Mr. Abdul Wahab Qureshi, Road Transport, N. W. R., Lahore. The Governor of the Punjab is further pleased to direct that Mr. H. Q, Majid, C. S. P., Chief Secretary to the Govern ment Punjab shall act as Chairman of the said Board. All Members of the Board shall hold office for a period of three years." The opening paragraph leaves no doubt that the Board has been set up because the Provincial Government had decided to operate transport services Itself. The Motor Vehicles (West Pakistan Amendment) Act, President's Act III of 1957, amended the Motor Vehicles Act, 1939, in its application to the Province of West Pakistan by substituting the following new subsection (1) for the existing sub‑section quoted above: "(1) When the Provincial Government decided so to do, it may establish a Road Transport Board for the purpose of operating road transport services in the Province, and the Board so established shall be a body corporate by the name of the West Pakistan Road Transport Board having perpetual succes sion and a common seal, and shall by that name sue and be issued," The Board to be so constituted has thus been given the status of a body corporate with perpetual succession and a common seal. The following section 6‑A was also added:‑ "6 (a) All persons at any time employed for the purpose of the Board shall be deemed during the period of such employ ment, to be public servants within the meaning of section 21 of the Pakistan Penal Code." It is worthy of note that the constitution of the Board remained as it was and no change was brought about in it by this amendment. We have before us the estimates of receipts of the Govern ment of West Pakistan as well as the Government of the Punjab and under the heading "Debt Service‑II‑D‑Misc." item No. 3 relating to interest on share capital of the Government towards the West Pakistan Road Transport Corporation. Item No. 12 relates to Dividend on the share‑capital of the Provincial Government towards Road Transport Corporation. Similarly under beading 20‑B of the estimate of receipts of the Punjab Government the same Items are repeated. The following letter dated 17‑5‑72 from the Government of the Punjab in the Finance Department, Lahore has also, been placed on the record: "The Deputy Director Finance, R. T. C., has asked the Finance Department to clarify the position regarding the investment in the R. T. C. A major part of the total invest ment in the R. T. C. is that of the Provincial Government, while the rest is that of the Central Government through the P. W. R. It follows that the total investment In the R. T. C. is that of the Government. As far as the Punjab Government is concerned the receipts from the R. T. C. are received under the following heads of account:‑ "(i) Interest ... XX‑A‑‑Interest on loans to Municipalities, Port Funds etc. IV‑Interest on share capital of the Govern ment towards West Pakistan Road Transport Corporation‑Consolidated Fund. (ii) Dividend ... XX‑A‑Interest on loans to Municipalities, Port Funds etc.‑VI Dividend on the share capital of the Provincial Government to‑wards T. R. C.‑Consolidated Fund. (iii) 50% Residual P‑ Deposits &Advances‑Deposits not profit contribu‑ bearing Interest‑B‑Reserve Fund‑ tion ... Provincial Road Fund‑Other monies. (Sd.) : Nazeer Ahmad Kazi, Section Officer (Loans)." . This Is the constitution and character of the person known as the Road Transport Board the income of . . . . . which is sought to be taxed by the Income‑tax Department as an Association of Persons as found by the Income‑tax Appellate Tribunal. Section 3 of the Income‑tax Act which is the charging section provides that when a Central Act requires that income‑tax shall be charged for any year then it shall be charged for that year in accordance with the Provisions of the Income‑tax Act In respect of the total income of every person. (The underlining" is ours). Section 2(9) defines "person" as‑ "Include an individual, a Hindu undivided family, a firm, B an association of persons or a body of individuals, whether incorporated or not, a company, Government of a Province, a local authority and every other artificial juridical person." According to this definition, the Government of a Province is a "person" and would be covered by the charging section 3, its income would be taxable under this Section. A corporation is also a person under this section. Section 155 of the Government of India Act, 1935, laid down that the Government of a Province shall not be liable to federal taxation in respect of lands or buildings situated in Pakistan or Income accruing, arising or received In Pakistan. The proviso to subsection (i) of this section runs as follows:‑-- "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 portion connected therewith or any income arising in connection therewith or any property occupied for the purpose thereof." If we find that the business in dispute was being carried on by the Government of the Province, according to this section, its income shall not be liable to income‑tax the latter being Federal in nature. The proviso would not be applicable as it has been stated before us on both sides that the business was being operated within the boundaries of the Province. The period for which the petitioner is sought to be taxed, however, does not fall during the time that this Constitution was in force. This Constitution was succeeded by the Constitution of 1956 and corresponding provisions are contained in its Article 112 which runs as follows:‑ "112.‑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." These provisions, therefore, do exempt the Government of a Province from liability to taxation in respect of income accruing, arising or received in Pakistan, as proviso similar to that con sidered above qualifies this article ; also. If the income of the Road Transport Board was income accruing to the Government of a Province it would be exempt from income‑tax under this Article as well. It need not be reiterated that the income of the Federal Government is in any case not taxable because the definition of a "person" given in the Income‑tax Act by specifically including the Government of a Province and not mentioning the Central Government excludes the latter from its purview thus making it not taxable. Part of the assessment In this case relates to the period when the Constitution of 1956 had been abrogated and the Constitution of 1962 had been enforced. Article 137 of this latter Constitution a ‑ relates to the same problem. It runs as follows:‑ "137(1) . . . . , 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." This Article has a similar proviso as we have considered above. Under this Article also, therefore, the income of the Provincial Government is exempt from such taxation. We may at this stage refer to the Punjab Province v, The Federation of Pakistan (P L D 1956 F C 72). This case arose out of a dispute between the Punjab Province and the Federation of Pakistan over the liability of the former to income‑tax on account of income derived from a factory known as the Jallo Rosin and Turpentine Factory, where it carried on, though officers and men employed by it the business of processing, preparing, manufacture and sale of turpentine and rosin. This case was disposed of under the Government of India Act, 1935, but we have already seen that the provisions thereof are pari materia with the provisions with which we are concerned. The following observations made by their Lordships attract attention: "It is obvious that the principle recognised by this section is that the Government of a Province is not liable to taxation in respect of income accruing, arising of received in Pakistan. The principle, however, is qualified by the proviso that if 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, subsection (1) of section 155 in that case shall not have the effect of exempting 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. The proviso is merely an exempting provision arid recognises the liability of a Provincial Govern ment to be taxed in respect of the profits of a trade or business which is carried on outside the Province. But the proviso does not itself create any liability to any particular Federal taxation; it merely recognises such liability provided it is created by some other Act. In saying that "nothing in this subsection shall exempt" the proviso assumes that a liability exists a liability created by some Act. If, therefore, the Act itself does not make an income liable to tax there can be no question of its exemption from tax." This brings us to the question whether the business transacted by the Road Transport Corporation is being, in fact, run by the Government of the Province. The Railway have from time immemorial been run by the Central Government. They were and are still one of the most important means of transport in the country. The Air services are being run by a Corporation known as the Pakistan Inter‑ 1 national Airlines Corporation which is also being controlled and run under the direction and aegis of the Government. In this province, the Road Transport is divided into the private and public sectors. In tie public sector it is being run by the Road Transport Board with which we are concerned. The transport is therefore, one of if not the main responsibility of the Govern ment. In this connection, the following observation from Wall Muhammad v. General Manager, Electricity WAPDA, Lahore, and others (P L D 1964 Pesh. 167) be perused with advantage: "It is thus clear to us that the Authority is a person perform ing functions in connection with the affairs of the Province of West Pakistan. It was contended by Mr. Habibullah that these functions are confined to the economic development of the Province and have nothing to do with the administration of the Province as such. This argument, however, has no relevance in the present day context of the functions of the Government are no longer confined to the mere maintenance of the law and order but extend and vary appropriately to the development of economic resources of the country. The part played by transport in such development can hardly be underestimated. Similarly, one of us held in Abdul Razzak Malik v. The Water and Power Development Authority etc. (P L D 1973 Lah. 188):‑ "It can hardly be denied that the West Pakistan WAPDA is a statutory public corporation performing functions in connection with the affairs of the province as well as the Centre. It has been created by the West Pakistan WAPDA Act, 1958, (b) all its functions are related to the provision, of a public utility service, (c) the members of the Authority are appointed and removed exclusively by the Government, and (d) the capital employed by the authority is provided either from Government funds or from aid received through the Govern ment of Pakistan from Foreign countries. It can, therefore, not be urged with any amount of success that it is a private corporation or that it is not performing functions of the Government." We may be pardoned for traversing the domain of International law when we are dealing with a case of Municipal Law as the observations made in the case, we are going to refer, have their roots in both the laws, we have no doubt that it would not be attributed to impertinence on our part. We have in mince Bacus S. R. L. v. Servicio Nacional Del Trigo ((1957) 1 Q B 438), in which at page 466, one finds the following observations:‑ "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 these 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 these 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‑opposed of a navy to put the affairs of the navy in the bands 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 Rutitanian Navy, it seems to me impossible to suppose that an action brought against the Ruritanian Navy Beard could be held not to infringe the sovereign immunity of Ruritania because, simply as a matter of convenience and administrative 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 corporation 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 fey the departmental body concerned. Each case must no doubt depend on its own facts, and it is not to be taken as following from what I have so far said that every corporation in which a foreign Sovereign State may be interested, whatever the nature of the activities of the corpora tion and whatever the nature or extent of the interest taken by the foreign Sovereign State, becomes itself a Department of State. . . . . . . . . . . Accordingly, for the reasons I have endeavoured to state, my view on the first question is that the defendants are a depart ment 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." It would, therefore, be safe to conclude that the Road Transport Board is a statutory corporation performing functions of the Government and under its direct control. It would not be out of place even to equate it with the Government itself as one of its Departments, its income would, therefore, be immune from taxation under the Federal law. There is another angle from which the problem can be viewed. For the purposes of taxation, Courts have found it necessary to evolve the doctrine of lifting "the veil of incorpora tion". The problem was taken note of by the Supreme Court in Special Reference No. 3 of 1970 (P L D 1971‑S C 585) at p. 616:‑ "The trend of decision since the above enunciation of the law in Salmon's case appears, however, to show that in a number of important respects both the Courts and the Legislatures have rent the veil which was recognised in the above mentioned decision to be 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)." Their Lordships relied on the decision of the House of Lords in the case of Dailmer Company Limited v. Continental Tyre & Rubber Company (Great Britain) Limited ((1916) 2 A C 307 41), as well as William Cory & Sons Limited v. Dolman Long & Company Limited ((1936) 2 All E R 396), and came to the conclusion that;

"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 share holders 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 considerations 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." The Road Transport Board is in fact nothing other than a Government Department or Agency performing one of its essential functions having been given the cloak or garb of incorporation p for facility of working. Let us now advert to the famous decision of the Supreme Court in Miller's case (PLD 1959SC(Pak.)219) at page 231:‑ "What is of vital importance, however, is that a company is brought into existence and exists for the sole purposes of earning profits and gains and it earns them not for itself but for the benefit of the shareholders. To earn profits for its shareholders being the raison d'etre of the company a company would be defeating the object of its own existence if Croesues like it filled its coffers with gold and did not distribute it as dividends to its shareholders. A company cannot enjoy its own income, the ultimate beneficiaries of the income being the shareholders themselves who, on the recommendation of the directors, declare the dividends. If a company went on taking its profits to reserve every year and did not distribute it among shareholders, it would be acting contrary, to all business principles and the shareholders would be compelled either to change its management or to dissolve it because they invest their capital for the purpose of enjoying the income and not for the purpose of the company accumulating such income. 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 much Is the policy of the Statute that taxes it. Its own income is but notional and it is only on its distribution that it becomes the actual income of its shareholders. Rowlatt, J., a great authority on income‑tax law who has euphemistically been described by Kayani, J., as knowing "some income‑tax law," said in Hamilton v. Commissioner of Inland Revenue 16 T C 221 : . . . . a dividend is not a taxable subject‑matter in itself. The operation declaring a dividend is not an operation which gives birth to a profit or gain; It is only the division of profits or gains earned by the trading operation, which is the only source of profits or gain and the declaration of the dividend is merely the division without any income accruing of the profits and gains realised." In the case before us, the profits are divided between the Pro vincial Government and the Central Government and It is those that are proposed to be taxed. We have already seen that the Federal and the Provincial Governments are exempt from income tax and, therefore, even according to this analysis the Road Transport Corporation is not a taxable entity. Is the Board au Association of Persons is another question. The answer is furnished by the following observation of the Federal Court in P L D 1956 F C 72 :‑ "The view that the Government of a Province could be taxed as an association of persons was taken for the first time by this particular Income‑tax Officer because though the Jallo Rosin and Turpentine Factory had been carrying on regular business since 1921 and earning profits none of the Income‑tax Officers ever thought that the Punjab Government could be taxed in respect of those profits. Nor in the course of arguments was any reference made by the learned counsel for the Federation to any similar precedent. Thus the impugned assessment was an unprecedented step. We do not know what led the Income‑tax Officer to bestow his special attention to this Factory, though several Provincial Governments had been engaging themselves in activities which were in the nature of trade or business. In this very Province the business of generating electrical energy is being carried on by the Provincial Government for over ten years, but no Income‑tax Officer ever thought of assessing the profits from that business." We may in passing observe that even if it were to be assumed for the sake of argument, without conceding, that the Corporation is an Association of Persons even then it cannot be taxed because G the persons of whom it is constituted are themselves exempt from tax. Reference answered.