Huzaima Bukhari and Dr Ikramul Haq

The Income Tax Ordinance, 2001 is different in scheme from its predecessor Income Tax Ordinance, 1979 (hereinafter: “the repealed Ordinance”) in many ways, the most notable one is abandonment of the concepts of income year and assessment year, which were at the core of levying tax for a particular year under the repealed Ordinance. The Income Tax Ordinance, 2001 embodies a paradigm shift in this respect as it only contains tax year [defined in section 74] which is pari materia to income year [as elaborated in section 2(24) of the repealed Act] and has no parallel provision re assessment year [as defined in section 2(8) of the repealed Ordinance].

The concept of assessment year [a fixed period of twelve months starting from 1st July and ending on 30th June immediately following the end of income year] was the most pivotal concept under the repealed Ordinance as the charging section imposes tax liability for total income earned during the income year according to law prevailing in the relevant assessment year. It is a well-established law that for computing total income and tax payable thereon for a particular income year, the law as applicable on the first day of assessment year will apply. This makes sense as each year National Assembly passes Finance Act [presented as Money Bill] with effect from 1st July, which was the first day of the assessment year under the repealed Ordinance. But under the Income Tax Ordinance, 2001, though accounting year ends on the 30th June or earlier, Finance Act, passed every year with effect from 1st July, takes effect from the next tax year, except where retrospectivety is provided by Legislature explicitly.

Section 4(1) of the Income Tax Ordinance, 2001 provides, “Subject to this Ordinance, income tax shall be imposed for each tax year, at the rate or rates specified in Division I, IB or II of Part I of the First Schedule, as the case may be, on every person who has taxable income for the year”. The income tax payable under the Income Tax Ordinance, 2001 for a tax year is to be calculated in the light of provisions contained in sub sections (2) to (5) of Section 4. In contrast to this charging section, section 9 of the repealed Ordinance clearly provided that income earned during the income year will be taxed in the immediately following assessment year as per rates applicable for the said period or promulgation of relevant Finance Act/Ordinance.

Since chargeability under the Income Tax Ordinance, 2001 is confined to law prevailing during the tax year irrespective of any subsequent amendment made through the Finance Act before filing of returns unless a provision is inserted with retrospective effect, the following questions for a particular tax year vis-à-vis application of any Finance Act or any other amendment made during the tax year through Presidential Ordinance or Statutory Regulator Order (SRO) may arise:

1. Charging provisions: Will the law as prevailing on the first day or the last day of the tax year apply?

2. Procedural provisions: Will the amendments be applicable immediately or from the 1st day of tax year when no specific date is mentioned by the amending law?

3. Penal provisions: Will these provisions apply from the date of their promulgation or the time when the offence/commission is committed? Do they apply prospectively or retrospectively?

4. Beneficial amendments: Will these apply retrospectively, immediately or prospectively when no date is mentioned in the amending law?

Finding answers to above questions is not an easy task as the Income Tax Ordinance, 2001 is silent and judicial pronouncements available are not strictly applicable being given in view of the different provisions prevailing in the repealed Ordinance. The principles involved are difficult in their application as the facts and circumstances of each and every case have to be kept in mind. The following case law may, however, be helpful in finding answers to the questions posed above:

1. The law as on the date of the commencement of the assessment year may relate to (i) procedural; or (ii) substantive rights. The assessability, the method of computation, the exemptions or the reliefs permissible, the rates of taxes and the right of appeal or reference all confer substantive rights; they can be neither abridged nor enlarged by any change during the course of the assessment year, except by specific retrospective legislation—Sheikh Ata-ur-Rehman v. CIT (1934) 2 ITR 339 (Lah).

2. Procedural rights can be modified or changed at any time during the course of the assessment year, and any procedure as obtaining at the date of the assessment may be applied—Chatturam v CIT (1947) 15 ITR 302, 311(PC).

3. Amendments in machinery section being procedural are applicable to pending proceedings—Kohinoor Textile Mills Ltd v. CIT [1974] 30 Tax 138 (S.C. Pak.).

4. In Brij Mohan v CIT (1979) 120 ITR 1 (SC), the Supreme Court of India has held that when a penalty is imposed for the concealment of particulars of income, it is the law ruling at the date on which the act of concealment takes place which is relevant, and further that it is wholly immaterial that the income concealed was to be assessed in relation to an assessment year in the past.

5. A penal provision cannot operate retrospectively unless it is so provided by the statute itself—CIT Karachi v. Nisar Ahmed [1984] 50 Tax 187 (H.C Kar.).

6. Law applicable on the first day of assessment year will apply and not the one in existence—CIT v. Pakistan Tobacco Company Ltd. [1988] 57 Tax 118 (H.C. Kar.)=1988 PTD 66.

7. For the purposes of assessment of income the law applicable is that in force on the first day of the relevant assessment year—Rustam F. Cowasjee & 2 others v. CBR & 2 others [1985] 52 Tax 123 (H.C.Kar.).

8. The liability for charge arises not later than the close of the previous year, though the quantification of the tax payable is postponed, owing to the rates of tax having to be fixed by the Finance Act after the close of the previous year— Wallace Bros & Co Ltd v CIT (1948) 16 ITR 240, 244(PC).

9. In CIT v Isthmian Steamship Lines (1951) 20 ITR 572 (SC), the Indian Supreme Court pointed out that it is a cardinal principle of the tax law that the law to be applied is that in force in the assessment year unless otherwise provided expressly or by necessary implication.

10. As the Finance Acts come into force on the first day of April each year, therefore the law to apply is the law in force at the commencement of the year of assessment, that is, the 1st day of April each year—Rajeshwar Pershad (L) v CIT (1986) 159 ITR 920 (P&H).

11. In Karimtharuvi Tea Estates Ltd v State of Kerala (1966) 60 ITR 262 (SC), the Indian Supreme Court explained the legal position thus: “Any amendment in the Act which comes into force after the 1st day of April of a financial year, would not apply to the assessment for that year even if the assessment is actually made after the amendment comes into force.”

12. Charge is on income of previous year and not income of assessment—CIT v. Amarchand N. Shroff [1963]48 ITR 59 (SC)/Maharajah of Pithapuram v CIT [1945] 13 ITR 221 (PC)/Wallace Bros. & Co. Ltd v. CIT [1948] 16 ITR 240 (PC)

13. Object of the Act is to tax the assessee in the year of assessment upon the income received by him in the previous year—CIT v Tehri-Garhwal State [1934] 2 ITR 1 (PC)

14. Income-tax is tax on income of previous year and would not cover anything which is not income of previous year—CIT v. Khatau Makanji Spg. & Wvg. C. Ltd [1960] 40 ITR 189 (SC)

15. Previous accounts of liabilities/losses incurred before or after relevant previous year are immaterial in assessing profits of that year—Trinity Pharmaceuticals (India) (P.) Ltd v. CIT [1994] 206 ITR 431 (Ker.)

16. Total income of previous year needs to be computed, and different provisions relating to computation of income must be read and applied in context of facts and circumstances obtaining during that year, unless context suggests the contrary— Liquidator of Mahamudabad Properties (P.) Ltd. v CIT [1980]124 ITR 31 (SC)

17. As soon as the rates are prescribed by the appropriate legislation, the liability to any tax arises on the total income—Saurashtra Cement & Chemical Industries Ltd. V ITO [1992] 194 ITR 659 (Guj.)(FB)

18. Liability to tax arises at a point of time not later than the close of the year of account—Kalwa Devadattam v Union of India [1963] 49 ITR 165 (SC)

19. Liability to tax arises only under charging section, and that too after close of previous year, though its quantification is made later—Wallace Bros. & Co. Ltd CIT [1948] 16 ITR 240 (PC)

20. Income tax liability crystallizes on the last day of the previous year—CWT v. K.S.N. Bhatt [1984] 145 ITR 1 (SC)

21. Provisions of Act are attracted the moment income is received and there is nothing in substantive provisions of Act to the effect that income tax is to be charged only at end of the previous year and not before—Chowgule & Co. ltd. v CIT [1992] 195 ITR 810 (Bom.)

The concept of tax year is prevalent in the United Kingdom where it has become traditional to announce Annual Budget Statement at least four months before the close of tax year. There it is always mandatory that Parliament passes Finance Bill at least one month before the end of the tax year. The Royal Assent is obtained in March each year, at least a month before the start of the tax year for which the people are supposed to file their tax returns and discharge other tax liabilities. Thus Finance Bill becomes law for the tax year for which return is to be filed and not for coming tax year as is the case in Pakistan. The concept of assessment year has been abolished in Income Tax Ordinance, 2001 without realising its consequences as well as the necessary obligation(s) on the part of the Legislature to frame tax proposals before the start of tax year and not after its conclusion.

In UK law, the taxpayer is provided maximum facilitation from the Inland Revenue for calculation of tax liability, filing of tax returns and correction of any obvious error and mistake. The situation in Pakistan is quite the opposite. The Parliament does not pass the law for the tax year well before its closure while the tax machinery is oppressive and totally hostile towards the taxpayers, not to talk of providing any facilitation that is prevalent in all the civilized societies. Federal Board of Revenue (FBR) has become de facto legislator as Parliament is just a rubber stamp. FBR is not only corrupt and incompetent but also indifferent and least concerned in helping the people to discharge their tax obligations. It rather makes things complicated and burdensome. This year extensions are still going on for returns due in August and September 2015! Who are the culprits for loss to exchequer?

We adopted Income Tax Ordinance, 2001 on the dictates of the International Monetary Fund and it is undoubtedly the worst piece of legislation one can think of. The IMF’s Mission that left Pakistan in the first week of September 2001 asked the government to enforce the new Income Tax Ordinance before the decision regarding last tranche of the Stand-By Arrangement could be considered. It was a naked and crude blackmailing. The last tranche of the IMF Stand-By Arrangement of $ 131 million was to be withdrawn by end-September, 2001. On September 6, 2001, the then Central Board of Revenue (CBR) formally placed a request to the Cabinet Division to include the draft Income Tax Ordinance, 2001 in the agenda of the next Cabinet meeting. The Ordinance was going to be enforced in July 2002, but it was promulgated on 13th September 2001, two days after the New York tragedy [9/11]. Had the Government waited for some more days, it could have avoided its promulgation as after General Pervez Musharraf’s joining the Bush Camp to usurp resources of oil and gas in the name of ‘war on terror’ (sic), the IMF released the last tranche without any hassle.

The Income Tax Ordinance, 2001 embodies many anti-business provisions that constitute departures from the established principles of law and international accounting practices. These departures have created undue and unnecessary problems for the taxpayers. The purpose behind the introduction of new law was to facilitate the taxpayers, whereas it contains unfair provisions that make mockery of well-recognised principles of tax jurisprudence and established accounting norms. In the last 13 years, this law has produced disastrous consequences for our economic growth and industrial development. Today it has 58 withholding provisions, the plethora of exemptions and it has nothing to justify the abrogation of Income Tax Ordinance, 1979 a law that had a well-tested 23 years’ existence. People were familiar with the concepts and provisions of the Income Tax Ordinance, 1979; they could understand and appreciate it with ease and without much hassle on the basis of case law evolved during the last two decades.

It is tragic that even after nearly seven decades of independence, our elected members could not undo the legacy of military dictators by enacting income tax law as an Act of Parliament after thorough debate and democratic consensus. The Income Tax Ordinance, 2001, enacted with tall claims of being “simple”, in practice proved to be complicated and unworkable. It still contains a number of typographical errors, drafting blunders, legal lacunae, inconsistencies, conceptual fallacies and dichotomies—see decision on these aspects in the judgment of Supreme Court in CIT v Eli Lily (Pvt) Ltd (2009) 100 Tax 81 (S.C. Pak)=2009 PTR 23 (S.C. Pak).

Even after 13 years of enforcement of Income Tax Ordinance, 2001, FBR has no idea how to implement it vis-à-vis tax obligations for a particular tax year. Its classic example was letter No.F.4(43)ITP/2002 issued on 26.6.2003 by FBR which opined that the benefit of enhanced rebate under section 64 of Income Tax Ordinance, 2001 could not be taken by the employees in tax year 2003 because amendment made through the Finance Act, 2003 was applicable for tax year 2004. This misinterpretation of the Finance Act, 2003 by the FBR showed that it neither understood the law nor had it the inclination to provide any relief to tax-payers. Tradition of announcing Budget Statement before the start of a tax year in UK by the Chancellor of Exchequer is always aimed at helping the taxpayers to take any action, if needed, to reduce tax payable by them. On the contrary, in Pakistan the FBR even denies a benefit that is explicitly provided by the Finance Act!!

The FBR is still working in the old mind set. It role is that of a troublemaker and not a facilitator. The self-acclaimed experts sitting in FBR have neither competence nor inclination to understand the inter-linkage between tax year and Finance Act. So it is not surprising that they interpret a beneficial amendment as prospective which by all established rules of interpretation of statute is construed as retrospective. It is a cardinal principle of law that any amendment imposing new obligation or burden is to be construed prospectively unless otherwise specified by the Legislature but any beneficial change is to be taken into account immediately even in respect of pending matters. Such amendments being remedial and curative are always to be construed retrospectively unless contrary intention is explicitly expressed by the Legislature or is discernible by clear implication. Supreme Court in CIT v. Shahnawaz Ltd. & Others [1992] 66 Tax 125 (S.C.Pak) held as under:

“The amendment in relevant section was a remedial and curative legislation designed to soften the harsh, unjust and unreasonable law, as was then obtaining, not restricting the maximum period for levy of additional tax. There is no reason why the remedial law should not be applied to pending proceedings. Although the amendment was made by the Finance Act, 1973 but it could not be restricted to assessment year 1973-74. The retrospective remedy would be available to all `cases which were pending at the time the amending law was enacted i.e. cases which had not been finally determined or proceedings which had not attained finality. The retrospective effect of the amending law, would, therefore, apply only to those cases where assessment had not been made by the Income Tax Officers or where an appeal was pending before the Tribunal or a reference was sub-judice before the High Court, at the time the amending law was enacted. The cases which had finally determined or had attained finality i.e. which were past and closed, transaction, could not be reopened under amending legislation there are no express words to that effect employed in the amending law.”

One needs not to further dilate upon the issue as the command of Supreme Court of Pakistan has a binding force under Article 189 of the Constitution of Pakistan. It can only be suggested to FBR that it should act fairly, reasonably and within the framework of law and should not issue clarifications that are against law. Will our Parliament ever follow democratic tradition of passing Finance Bill at least one month before the end of the tax year as is the case in UK? It appears doubtful as they are helpless before tax bureaucracy. In all democratic societies Parliaments share tax proposal with people and then finalise amendments well before the start of the tax year for which the people are to file their tax returns and discharge other tax liabilities. Their tax machineries help people and not create hurdles for them to discharge tax obligation. In Pakistan the image of FBR is as bad as that of thana (police station) and it is thus not surprising that number of filers dropped from 2.3 million in 1995 to just 840,000 in 2014. People are scared of tax force and our Finance Minister praises them.

(The writers, lawyers and partners in law firm, Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)