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KARACHI: The Sindh High Court (SHC) has struck down Section 5A of the Income Tax Ordinance 2001 by declaring it ultra vires to the Constitution. A division bench of the SHC comprising Justice Junaid Ghaffar and Justice Agha Faisal in a detailed judgment ruled that it has been established that Section 5A of the Ordinance amounts to legislation not contemplated in the Constitution to be undertaken vide a money bill.

The bench gave the verdict in the petitions of Sapphire Textile Mills Limited and others, which challenged Section 5A of the Income Tax Ordinance 2001 and sought for the same to be declared unconstitutional.

According to a written order of the bench, Section 5A was initially inserted in the Ordinance vide the Finance Act 2015 (“FA 2015”) and amended vide the Finance Act 2017 (“FA 2017”), ostensibly in order to induce certain (not all) public companies to distribute dividends among their shareholders.

The petitioners had inter alia contended that 5A amounted to impermissible double taxation on the same income.

The counsel for the respondents submitted that 5A did not amount to double taxation as it contemplated an independent levy.

It was argued that 5A identified a class to be taxed, hence, could not be considered discriminatory and concluded that the legislature had ample power to regulate economic behavior, and 5A was merely one specie of exercise of such power.

The deputy attorney-general unequivocally stated that the purpose of inserting 5A into the Ordinance was to incentivize the distribution of profits by companies and to keep companies compliant with the requirements of company law.

The bench observed that no rationale has been articulated before it to justify the regulation of companies’ behavior pertaining to dividends to be effected vide a money bill within the mandate of Article 73 of the Constitution, while abjuring the regular legislative process.

Therefore, the court declared that Section 5A of the Income Tax Ordinance 2001 cannot be sustained on the constitutional anvil; hence, could not be construed to have legal effect.

In view of the reasoning and rationale the court ruled that the petitions are allowed and declared that insertion of Section 5A in the Income Tax Ordinance 2001, including amendments thereto from time to time, does not fall within the parameters delineated per Article 73 of the Constitution of Pakistan, 1973. The court set aside any show-cause/demand notices or constituents seeking enforcement of Section 5A of the Income Tax Ordinance 2001.

Copyright Business Recorder, 2021

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