The Supreme Court held that income tax liability is to be determined on the basis of taxable income that is derived or legally presumed to have been derived in a whole tax year and not any part of it.
The judgment authored by Justice Faisal Arab, a member of three-judge bench said: "Even for the purpose of computing surcharge under Section 4A of the Ordinance, the entire income tax liability of the Tax Year 2011 was to be taken into consideration, which was then to be proportionately allocated to the 31/2 month period and on that figure of proportionate tax liability surcharge was to be calculated."
The bench, headed by Justice Umar Ata Bandial, on March 9, 2020, after hearing the arguments of counsels had reserved the judgment on the FBR appeal against the Sindh High Court (SHC) verdict.
The SHC gave the findings that Section 4A of the 2001 Ordinance does not envisage proportionate determination of the tax liability of the entire tax year 2011 for the purposes of calculating surcharge for the 31/2 month period, and only that income was to be taken into consideration, which pertained to such period only.
The apex court, dismissing the SHC findings, said there is no provision in 2001 Ordinance, which allows splitting of a tax year into two periods for the purposes of determining two separate taxable incomes of the same tax year, and then on the income of one such period, tax liability is to be computed.
The judgment said Section 4(1) of the 2001 Ordinance, clearly provides that income tax liability is to be determined for the entire period of a tax year not any part of it.
The judgment further said that tax year is specifically defined in Section 74 of the 2001 Ordinance, which means a period of 12 months.
This period normally ends on 30th June and may also end on any other date in case the same is allowed by the competent authority to be adopted.
M/s Wazir Ali and Company (respondent) imports goods and sell them in the local markets.
It had paid advance income tax at the import stage on the value of goods, which tax in terms of Section 148 of Income Tax Ordinance had become its final tax liability for tax year 2011.
The same tax year Section 4A was inserted in 2001 Ordinance though Income Tax (Amendment) Ordinance, 2011, dated 16-03-2011.
The FBR on 12.09.2011, issued Circular No 11 of 2011, relevant portion of which reads, "However, it has been decided that the tax liability for the entire T/Y (Tax Year) 2011 may not be subjected to imposition of surcharge and the same be levied on the proportionate liability for a period of three and a half months."
Thus, in terms of the circular, the liability of surcharge was confined to a period of 31/2 months (16.03.2011 to 30.06.2011) and the tax liability of the tax year 2011 was to be proportionately allocated to the 31/2 month period.
The federal government on 19-10-2011 issued notification SRO 977 (1) 2011 dated 19.10.2011, whereby in exercise of the power conferred by Sub-Section (2) of Section 53 of the 2001 Ordinance, Clause (11) was added in Part III of the Second Schedule.
According to it, "The amount of surcharge payable on the income tax liability for the tax year 2011 under Section 4A shall be computed on the proportionate amount of income tax liability for three and a half months."
Before the period for the filing of tax returns under Section 114 and the statement of income under Section 115 of the 2001 Ordinance for the tax year 2011 expired, the respondent challenged the FBR's circular dated 12.09.2011 in the Sindh High Court (SHC).
It said that the surcharge can only be computed on that tax liability that exclusively pertained to the income derived in the 31/2 months period.
The SHC had passed judgment in respondent's favour, which the FBR challenged in the Supreme Court.