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It is a cardinal principle that what is not "income" cannot be taxed under the income tax law (presently in operation is Income Tax Ordinance, 200I]. In Pakistan, a misconception prevails that National Assembly can declare anything "income" through the Finance Act, passed as Money Bill every year, in terms of Articles 73(2), 77 and 142(a) read with Entry 47 or 52, Part I, Fourth Schedule to the Constitution of Islamic Republic of Pakistan ["the Constitution"]. In support of this contention, Federal Board of Revenue (de facto legislature as finance bills, annual or supplementary, whenever presented, members of National Assembly and Senators as well as standing committees on revenue never bother to read these carefully, do proper homework or take input from experts) places reliance on the Elahi Cotton Mills Ltd. and others v. Federation of Pakistan through Secretary Finance, Islamabad [(1997) 76 TAX 5 (S.C.Pak)], which, in fact, holds the contrary. This point has never noted by legislators.

A Money Bill only originates in the National Assembly and a copy of the same is transmitted to the Senate which may within 14 days make recommendations thereon to the National Assembly. After the Bill has been passed by the Assembly with or without incorporating the recommendations of the Senate, it is presented to the President, who shall give assent in 10 days.

Even majority of experts in the fields of taxation and constitution justify it on the basis of the wrong notion that through legal fiction, the National Assembly can deem anything as "income".

The gist of judgement of Supreme Court of Pakistan in the Elahi Cotton case (supra) is:

  • Legal fictions are limited for a definite purpose that cannot be extended beyond the purpose for which they are created.

  • Taxing power is unlimited as long as it does not amount to confiscation.

  • A direct tax is one which is demanded from the very person, who it is intended or desired should pay it, whereas indirect taxes are those, which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, like custom duties, excise taxes and sales tax, which are borne by the consumers.

  • There is a clear distinction between the subject-matter of a tax and the standard by which the amount of 'tax is measured keeping in view the practical difficulties, which are encountered by the Revenue to locate the persons and to collect the tax due in certain trades. If the Legislature in its wisdom thinks that it would facilitate the collection of tax due from specified traders on a presumptive basis, the same is not violative of the fundamental right relating to equality.

  • Legislature has the prerogative to decide the questions of quantum of tax, the conditions subject to which it is levied, the manner in which it is sought to be recovered. If, however, a taxing statute is plainly discriminatory or provides no procedural machinery for assessment and levy of the tax or that is confiscatory, the Court may strike down the impugned statute as unconstitutional.

  • There is a marked distinction between a tax on gross revenue and a tax on income, which for taxation purposes, means gains and profits. There may be considerable gross revenues, but no income taxable.

  • Sections 80C (imports, contracts and supplies) and 80CC (exports) of the repealed Income Tax Ordinance, 1979 fall within the category of presumptive tax as under the same the persons covered by them pay a pre-determined amount of "presumptive tax in full and final discharge of their liability" in respect of the transactions on which the above tax is levied. Section 80D (turnover tax) is founded on the theory of minimum tax. These sections of the repealed Income Tax Ordinance, 1979 are pari materia in pith and substance to section 148, 153, 154 and 113 of the prevalent Income Tax Ordinance, 2001, though year after since their inception these are made more burdensome by enhancing rates and creating numerous distortions and dichotomies.

  • If one is to read Entry 47, Part I of the Fourth Schedule to the Constitution of Pakistan (1973) in isolation without referring to Entry 52, it can be argued that Entry 47 does not admit the imposition of presumptive tax as the expression "taxes on income" employed therein should be understood as to mean the working out of the same on the basis of computation as provided in the various provisions of the Ordinance.

  • Presumptive tax is in fact akin to capacity tax i.e., capacity to earn. In this view of the matter, one will have to read Entry 47 in conjunction with Entry 52 which provides tax and duties on production capacity of any plant, machinery, undertaking, establishment or installation in lieu of the taxes or duties specified in Entries 44, 47, 48 and 49 or in lieu of any one or more of them. "If we were to construe Entry 52 of the Legislative List keeping in view the expression "in lieu of", it becomes evident that the Legislature has the option whereby instead of invoking Entry 47 for imposing taxes on income, it can impose the same under Entry 52 on the basis of capacity to earn in lieu of Entry 47, but it cannot adopt both the methods in respect of one particular tax. Since under sections 80C and 80CC the imposition of presumptive tax is in substitution of the normal method of levy and recovery of the income-tax, the same is in consonance with Entry 52'.

  • "While computing the annual turnover of an assessee, the amounts of sales tax and excise duty charged in terms of paras. 3 & 4 of C.B.R. Circular No. 3 of 1996, dated 18-3-1996 would be excluded".

  • It is true that the power to tax cannot be used to destroy businesses/occupations, which are sine qua non for the prosperity of the people and the country. The object of the levy and recovery of taxes is to run the State and to make efforts for creation of an egalitarian society. If the rates of taxes are too high and disproportionate to the actual earnings or earning capacities that they destroy the taxpayers, the very object of their levy and recovery is defeated.

  • While interpreting an entry in a Legislative List it should be given widest possible meaning, "does not mean that Parliament can choose to tax as income which, in no rational sense, can be regarded as a citizen's income".

[Above is not verbatim reproduction of parts of the judgement, except where quotation marks are provided]

In para 31 (xii) of the Elahi Cotton case, the Supreme Court held: "That what is not "income" under the Income Tax Act can be made "income" by a Finance Act. An exemption granted by the Income Tax Act can be withdrawn by the Finance Act or the efficacy of that exemption may be reduced by the imposition of a new charge, of course, subject to Constitutional limitations". This is the binding command of Supreme Court under Article 189 of the Constitution and no court or authority, except Supreme Court can revisit it.

(To be continued on Sunday)

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

Copyright Business Recorder, 2020

Huzaima Bukhari

The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS), member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). She can be reached at [email protected]


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