It is therefore imperative that this notional income should not be taxed. In case the government (in fact CBR) is bent upon promoting riba despite tall claims of eliminating exploitation from the economy, then the following amendments should be made making the law equitable:--
1. Benchmark rate as defined in section 13(14) should not be more than the rate on which loan is obtained by an employee.
2. In case rate is lower than the average borrowing rate for such kind of loans in the market, the Federal Government or State Bank should be asked to notify an average rate for the relevant tax year.
3. Addition under section 13(7) should not be part of "taxable income" to determine the threshold of Rs 600,000 for the purpose of rule 9 of the Income Tax Rules, 2002.
4. Such a notional income should be taxed as a separate block at a concessional rate not exceeding 5%.
It is hoped that the policymakers at the helm of affairs will take due notice of this unjust and confiscatory provision of law that has disastrous financial ramifications for the salaried persons, who are already facing a tough challenge to survive in their paltry resources. The tall claims of the government to promote riba-free economy, housing industry and to provide housing facilities to all the citizens are in direct conflict with such erratic and confiscatory fiscal provisions which are against the basic principles of Constitution of Pakistan.
TAXATION OF CAPITAL GAIN ON DISPOSAL OF IMMOVABLE PROPERTY:
Under the scheme of the Income Tax Ordinance, 2001 [hereinafter: "the Ordinance"], on the disposal of depreciable assets resultant gain or loss is to be taken into account for computing taxable income under the head Business Income for the relevant tax year. Section 22(8) of the Ordinance reads as under:
Where, in any tax year, a person disposes of a depreciable asset, no depreciation deduction shall be allowed under this section for that year and -
(a) if the consideration received exceeds the written down value of the asset at the time of disposal, the excess shall be chargeable to tax in that year under the head "Income from Business"; or
(b) if the consideration received is less than the written down value of the asset at the time of disposal, the difference shall be allowed as a deduction in computing the person's income chargeable under the head "Income from Business" for that year.
If a building is disposed of and consideration received exceeds both the written down value and actual cost as per new Ordinance not only the terminal profit will be taxed but also the capital gain that is difference between the sale price and original cost as mentioned in section 22(13)(d) of the Ordinance, which reads as under:
"where the consideration received on the disposal of immovable property exceeds the cost of the property, the consideration received shall be treated as the cost of the property".
Plain reading of the above provision shows that where consideration received exceeds the cost of immovable property then such consideration shall be treated as cost of the property. In other words capital gain on disposal of immovable property will be charged to tax in utter violation of Entry 50 of Federal Legislative List contained in Part I, Fourth Schedule to the Constitution which says that Federation can levy "taxes on the capital value of the assets, not including taxes on capital gains on immovable property".
In the repealed Income Tax Ordinance 1979, this constitutional command was respected and reflected while defining the term "sale proceed" in the case of a building.
THE RELEVANT PART OF RULE 8(5) OF THE THIRD SCHEDULE TO THE REPEALED ORDINANCE READS AS UNDER: "Provided that in the case of a building the term "sale proceeds" shall mean an amount equal to the lower of the following, namely:-
(a) original cost, and
(b) sale price or fair market value, whichever is higher
The calculation of terminal profit on sale of a building under the new Ordinance and the repealed law is worked out as under:
UNDER THE NEW ORDINANCE:
COST OF BUILDING: Rs 800,000 in tax year 2003.
Depreciation @5%= Rs 40,000
Sold in tax year 2004 for Rs 1,600,000. WDV= Rs 760,000
PROFIT TO BE TAXED IN TAX YEAR 2004: Rs 16,00,000-760,000= 8,40,000. It includes capital gain of Rs 800,000 which cannot be taxed by the Federal Government under the Constitution of Pakistan.
UNDER THE REPEALED ORDINANCE: Cost of building: Rs 800,000. Depreciation @5%= Rs 40,000
Sold in next year for Rs 1,600,000 (FMV is same). WDV= Rs 760,000
PROFIT TO BE INCLUDED IN TOTAL INCOME: Rs 800,000-760,000= 40,000. It is obvious from the above that due to wrong language employed in section 22(13)(d) of the Ordinance, a blatant violation of Constitution is committed. The correct language of this provision should have been:
"where the consideration received on the disposal of immovable property exceeds the cost of the property, the consideration received shall be restricted to the original cost of the property".
There is an urgent need to amend section 22(13)(d) with retrospective effect that is from the inception of the new Ordinance so that it conforms to the constitutional command as discussed above.
TIME LIMITATION FOR ORDERS U/S 122(5A)
The new Ordinance has turned out to be a complex document susceptible to increased litigation. Section 122 alone provides unbridled, unfettered and uncontrolled powers to the tax department which are violative of Article 4 and 25 of the Constitution. The power to amend and further amend any order passed is a classic piece of legislation showing how a faulty tax system increases tax burden of the existing taxpayers and leaves unaffected those who are non-filers.
There is no saving provision in section 239 of the new Ordinance for issuance of fresh notices u/s 65 or 66A in respect of any order passed under the repealed Ordinance. Pending proceedings are, however, covered under section 239(4) of the new Ordinance. Hence any notice u/s 122(5) or 122(5A) for any assessments already completed or other orders made that attained finality prior to 1st July 2002 under the repealed Ordinance is void ab initio.
The CBR has misinterpreted the law that assessment completed under the repealed law can be reopened/unsettled under section 122(5) or (5A) as a result of amendments made in section 122 vide Finance Ordinance 2002 and 2003. This cannot be done without first saving the retroactive application of section 65 and 66A in the saving clause itself.
The interpretation resorted to by the CBR in Circular Letter No F.4(75)/ITP/2002 dated 28-06-2003 is violative of law
Section 122(5A) [pari materia to section 66A of the repealed Ordinance] inserted vide Finance Act 2003 has not been extended to orders passed under the repealed Ordinance as is the case under section 122(1) read with 122(5). Article 264(a) of Constitution and section 6 of the General Clause Act, 1897 clearly provide that a repealing statute cannot revive any provision of the repealed law "unless a different intention appears".
In the absence of any explicit intention in the saving provision ie section 239 of the new Ordinance to retain sections 65 and 66A any action u/s 122(5) or (5A) for assessments completed under the repealed Ordinance prior to 1st July 2002 is unlawful.
In section 239 there is no mention that the Legislature wants to revive section 65 or 66A for assessments/orders passed under the repealed Ordinance, hence subsequent amendments in section 122 to this effect by the Finance Ordinance 2002 are to be read and interpreted accordingly. In the light of above, it can be concluded that proceedings initiated u/s 122(5) or (5A) by the Taxation Officers for earlier orders passed before 1st July 2002 and 1st July 2003 respectively are unlawful, coram non-judice and violative of Article 4 of the Constitution of Pakistan.
Section 122(5B) of the Ordinance reads as under:
Any amended assessment order under sub-section (5A) may be passed within the time-limit specified in sub-section (2) or sub-section (4), as the case may be.
Sub-sections (4) and (4A) of section 122 which are relevant for the purpose of section 122(5A) read with 122(5B) read as under:
(4) Where an assessment order (hereinafter referred to as the "original assessment") has been amended under sub-section (1) or (3), the Commissioner may further amend, as many times as may be necessary, the original assessment within the later of;
(a) five years after the Commissioner has issued or is treated as having issued the original assessment order to the taxpayer; or
(b) one year after the Commissioner has issued or is treated as having issued the amended assessment order to the taxpayer.
(4A) In respect of an assessment made under the repealed Ordinance, nothing contained in sub-section (2) or, as the case may be, sub-section (4) shall be so construed as to have extended or curtailed the time limit specified in section 65 of the aforesaid Ordinance in respect of an assessment order passed under that section and the time-limit specified in that section shall apply accordingly.
Sub-section (4A) does not take into consideration time limitation provided in section 66A(2) of the repealed Ordinance which is four years from the date of the order sought to be revised. It only mentions section 65 whereas sub-section (5B) of section 122 clearly mentions action under sub-section (5A) which is equivalent to section 66A. The correct wording of section 122(4A) should have been:
(4A) In respect of an assessment or revision made under the repealed Ordinance, nothing contained in sub-section (2) or sub-section (4), as the case may be, shall be so construed as to have extended or curtailed the time limit specified in section 65 or section 66A of the aforesaid Ordinance in respect of an assessment order passed under that section and the time-limit specified in that section shall apply accordingly.
The underlined portion shows the omission that needs to be inserted by way of a declaratory amendment in the law, which being clarificatory in nature, will be construed retrospective in nature. We hope that anomalies mentioned above will be removed by the concerned quarters in public interest.
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