Seventh Schedule of IT Ordinance 2001: FBR accused of amending law, abusing powers

SOHAIL SARFRAZ

ISLAMABAD: The Federal Board of Revenue (FBR) through SRO 561(I)/2012 is accused of amending Seventh Schedule (Banking Schedule) of the Income Tax Ordinance, 2001 without obtaining approval of the Parliament and abusing powers available under 7th Schedule.

Allied Bank Limited has filed a writ petition before the Lahore High Court (LHC) Lahore and a notice issued to the tax department on June 18 for hearing of the case on June 21, 2012, it was learnt.

Sources said the issue mainly involves whether a statutory law, imposing tax, can be amended by a notification issued by an executive authority in view of Article 77 read with Article 162 of the Constitution. The issue of illegal exercise of powers under Rule 10 of the Seventh Schedule to the Income Tax Ordinance, 2001by the FBR has been raised before the concerned tax authorities.

The FBR through SRO 561(I)/2012 dated May 24, 2012 abused powers available under Rule 10 of the Seventh Schedule to the Income Tax Ordinance, 2001 by snatching away from banks the right of lower estimates of advance tax, especially when officers make arbitrary assessments. It is also unfair to ask for more tax in case of higher liability before last installment due in December, last month of tax year. How can any bank in June determine liability for the next 6 months, sources queried.

The amendments made in Rule 5 of the Seventh Schedule with immediate effect, not presenting it for approval of Parliament through Finance Act 2012, is unconstitutional. It confirms FBR's mala fide intention of extorting extra funds in June 2012 from the banks. The matter should be contested under Article 199 of the Constitution by all the banks as there will be extraordinary cash flows not only on June 15, 2012 but in the coming months as well.  Further, if this abuse of power is not contested, FBR in future will make any amendment in the Seventh Schedule without the consent of Parliament, e.g., it may raise tax rates and curtail or disallow any expense etc on its own, sources said.

It appears that banks have not understood the possible ramifications of abuse of Rule 10 of the Seventh Schedule to the Income Tax Ordinance, 2001 by FBR. If this is accepted and remains uncontested, the FBR can do anything with the Seventh Schedule any time. As per Constitution, Parliament alone can impose the tax and amend the law within the framework of mandate given in the Constitution itself. FBR under delegated powers [section 237] can only make rules for facilitating the collection of taxes but has no authority to make any substantial changes in statutory provisions imposing charge or collection of any tax in advance or with return. Though the Federal Government can give relief/exemption/concession as envisaged in section 53(2) of the Income Tax Ordinance, 2001 by a notification, sources said.

Experts recommended that changes made by FBR should be contested through a writ petition by all the banks. The matter should also be taken up with the Finance Minister on an urgent basis, exposing the highhandedness of the tax machinery.

The petition filed by the bank revealed that in violation of all principles of law, the FBR has issued a notification SRO No.561(I)/2012 dated 24-05-2012 purporting to be under the powers conferred by the Rule 10 of the 7th Schedule of the Income Tax Ordinance, 2001 in which an amendment has been made in Rule 5(1) of the 7th Schedule whereby the words "except sub-section 4A and 6" have been inserted. Rule 5(1) of the 7th Schedule as amended, now reads as follows: - Rule 5- Advance Tax: (1) The banking company shall be required to pay advance tax for the year under Section 147 in 12 equal installments payable by 15th of every month. Other provisions of Section 147 except sub section (4A) and 6, shall apply as such."

In addition a new sub-rule (1A) has been added to Rule 5 of the 7th Schedule to the Ordinance with the aim of extorting extra funds from the scheduled banks, asking them to file futuristic estimates of advance tax liability even for a time period for which accounts cannot be made on the material date (15 June 2012).

The net effect is that through this notification (Impugned Notification) Federal Government has amended Section 147 for banks and has deleted applicability of Section 147(4A) and 147(6) and inserted Rule 5(1A) forcing enhanced higher advance liability and paying 50 percent of differential tax on 15th June and remaining in 6 equal installments.

The petition said that in pursuance to issuance of the notification, the Assistant Commissioner Inland Revenue Large Taxpayer Unit (LTU) Lahore has vide demand letter dated June 05, 2012 ("Impugned Demand") asked the bank to make monthly payment on the basis of previous assessment.

The 7th Schedule is part of the Income Tax Ordinance, 2001 and therefore can only be amended by an Act of Parliament as provided in Article 77 of the Constitution or Presidential Ordinance in extraordinary circumstances as envisaged in Article 89 of the Constitution. The Schedule 7 does provide in Rule 10 that the Federal Government may from time to time by notification in the official gazette amend the schedule so as to add any entry therein or modify or omit any entry therein. This Rule 10 is either void ab initio on the principles of 'excessive' and 'unstructured delegation' or is to be interpreted in a manner that it only gives power to the Federal Government to make Rules in furtherance of the provisions and objects of the Ordinance and not in derogation thereof.  

The petition stated that the section 237 of the Ordinance also gives power to the Federal Board of Revenue that may, by notification in the official gazette, make rules for carrying out the purposes of Ordinance 2001. Sub-section 2 of Section 237 provides for the matters on which the Rules may be made. The Income Tax Ordinance 2001 in accordance with the provisions of Section 147(4A) read with 147(6), Section 100A, 7th Schedule and Rule 5, a banking company is entitled to estimate its advance tax and pay more advance tax or less advance tax in an installment according to taxpayers estimation. It is also relevant to mention here that under Section 205 (1B) in case the estimation of the taxpayer is so wrong that there is difference of more than 10% in the estimation of the taxpayer and what advance is actually due, then the default surcharge is levied on the taxpayer.

This provision which allows the taxpayer to pay an installment according to its estimation is a substantive provision of law and cannot be amended through any rules or notifications by an executive authority.

The legislature may delegate its authority to make law to the executive. However, it is equally trite law that the delegation of this authority to make law through rules has to be only for the furtherance of the objectives of the law and cannot be excessive or unstructured. There are numerous judgments of the Superior Court of Pakistan that in case the delegation of law making power by a statute is excessive or unstructured then the law giving the right of delegation itself is contrary to the Constitution and therefore unlawful. Rule 10 of 7th Schedule in so far as it allows the Federal Government to amend the 7th Schedule is excessive and unstructured delegation of power and hence void. 

The petition stated that no power can be given by the legislature to the Federal Government to amend the law itself. In fact it is also equally trite law that no rule can amend a statute. It is also equally established law that a rule made by the Federal Government or an executive cannot override a statute and in case of conflict between the two statutory law will prevail. Accordingly, insofar as, under Rule 10 any power has been given by the Ordinance to the Federal Government to amend the statute, that delegated power is itself void ab initio and insofar as the Federal Government has used this power to amend the Ordinance, the exercise of the power is equally unlawful. On the same principle the notification and Demand, insofar as, they are in conflict with the Ordinance, are void and cannot override the Ordinance.

The rule-making power contained in Section 237 of the Ordinance is also to be exercised by the Board only and not by the Federal Government and that too for the limited matters mentioned in sub-rule 2 of Section 237. However, since in any case the notification has not been issued in exercise of the powers under Section 237, accordingly section 237 is not relevant to the case in hand. In view of the established legal principle that Parliament cannot delegate to the Federal Government under the garb of rule making power, its authority to amend statutory provision and that rule making power cannot take away substantive right conferred on the taxpayer by the statute, therefore, Rule 10 itself and the amendment purportedly made by the notification is void. In the past whenever amendments have been made in the Income Tax Ordinance, 2001 or in the 7th Schedule it has been done by the Parliament through Finance Acts, petitioner said.

In the Finance Bill 2012, tabled before the National Parliament on June 1, 2012, the amendment was proposed in the Seventh Schedule. The amendment through notification was made six days prior to tabling of the Finance Bill 2012 which shows not only its illegality but also constitutional invalidity. In case it is accepted for the sake of argument that the notification is valid and that the Ordinance can be amended through the exercise of rule making power under Rule 10, which is deemed for the sake of argument to be a valid law, the deletion of Section 147(6) would mean that even though in the estimation of a taxpayer his ultimate tax liability at the end of the year would be less, he will have to part with millions of rupees at an initial stage under the garb of 'advance tax'.  This would make the provision of advance tax confiscatory and in violation of Article 24 of the Constitution. It is by virtue of the applicability of Section 147(6) that the payment of advance tax remains constitutional. Since this is available to all other taxpayers except to the Petitioner, it also offends Article 25 of the Constitution, the petitioner said.

The petition prayed that the notification dated May 24, 2012 issued by the FBR and Demand Letter dated June 5, 2012 issued by the LTU Lahore may be declared as illegal, unlawful, without lawful authority, unconstitutional and void ab initio, in access of power conferred by the law upon the respondents and in violation of the fundamental rights of the petitioner as enshrined in the Constitution and "thus should be struck down as such by this Honourable Court".

The petitioner further pleaded that the operation of the notification and demand may be suspended and stayed.