This is the second article on the subject. A concept of tax on deemed rent has been introduced by the Finance Act, 2022. For the reasons laid down in the earlier article and some of which are given in this article this is a bad law. This tax is a wealth tax and therefore cannot be levied under the Income Tax Ordinance 2001 in any manner.
This piece has been written for the reason that the scope of writ petitions that are being filed on this matter is restricted to Entry 50 of the Federal Legislative List of the Constitution of Pakistan. As stated earlier, the imposition is also not tenable under Article 47 of that list, as this does not represent ‘income’ taxable under the Ordinance. This subject is briefly discussed in the following paragraphs.
The problem arises because we were British Indians (before 1947) and are now Pakistani and subjected to almost all the laws that are derived from Britain’s long history of jurisprudence. We generally borrow the wordings from British legislations that are in an alien language and we lack proper appreciation of the long history and rationale behind it. The law in Britain is based on sound equitable principles that have been repeatedly tested.
The second problem is that when people like ours, who have been trained under adopted British methods of taxation, suggest an amendment and if the suggestion is accepted, then for many people the link between the British legislation and the present law is an unknown. This has happened in the case of income from property, where under the new Income Tax Ordinance, 2001 the concept of ‘Annual Letting Value’ has been omitted. The whole concept is explained in summary as under:
Under the British legal and tax system which has been decided in case law way back in 1920 [Governors of Rotunda Hospital vs Commissioner 7 TC 517 (HL) and Salisbury vs Fry 15 TC 266) it has been decided that tax on property is not on rent ‘received or receivable’. It is on Annual Letting Value (ALV). This matter has been very well laid down by Mr Justice Kania of the Supreme Court of India in the case of Vakil vs CIT.
Bombay High Court: D. M. Vakil vs Commissioner of Income-Tax. on 17 September, 1945: Equivalent citations: 1946 14 ITR 298 Bom
On behalf of the Commissioner it was urged that this line of reasoning is incorrect. The only question to be considered under the Income-tax Act is: what is the income under the charging Section 3 and 4? The expression there used is “total income” which is defined in Section 2 (15) of the Indian Income-tax Act in these terms:-
“Total income means total amount of income, profits and gains referred to in sub-section (1) of Section 4 computed in the manner laid down in this Act.”
Therefore to ascertain what is the total income, the Court must look at Sections 6 and 9 which contain the heads of income and how computation was to be made in respect of the head “income from property.” It was argued that the scheme of the Income-tax Act was that once a party was shown to be the owner of a property, he must be taxed under the head “income from property” and the computation of the income must be in accordance with Section 9 of the Indian Income-tax Act. It was contended that the actual receipt of the rent in the hands of the owner is quite immaterial for the purposes of assessment. The law has laid down a particular method of computation in respect of income from property and that must be applied to arrive at the figure to be inserted against the head “income from property” in the individual assessees assessment.
In my opinion, the contention of the trustees is not correct. The word “income” has not been defined in the Act, but for the purposes of the Indian Income-tax Act the expression “total income” is defined in Section 2(15). The legislature has used the words “computed in the manner laid down in this Act.” Therefore in order to ascertain the total income of an assessee his income must be computed in the manner laid down in the Act and particularly Chapter III. In this connection the words used in Section 9 may be particularly noted. The section provides as follows:-
“The tax shall be payable by an assessee under the head Income from property in respect of the bona fide annual value of property consisting of any buildings…”
The legislature has therefore expressly provided that the tax shall be payable by the assessee in respect of the bona fide annual value irrespective of the question whether he receives that value or not. Section 9(2) provides that for the purposes of this section, the expression “annual value” shall be deemed to mean the sum for which the property might reasonably be expected to let from year to year. It is again significant to note that the word used is “might” and not “can” or “is.” Reading these two paragraphs of Section 9 together, it is clear that the income from property is thus an artificially defined income and the liability arises from the fact that the assessee is the owner of the property. It is further provided in the section that if the owner occupies the property he has to pay tax calculated in the manner provided therein. Therefore, by reason of the fact that the property is not let out, the assessee does not escape taxation.
As can be seen it is an artificial income which is the ALV. The position is clear. If so the provisions of law as introduced under 7E are correct. But it is not so. A lot of water has flown under the bridge since then.
The Income Tax Ordinance 1979 stated as under:
- Income from house property.- (1) The annual value of property shall be chargeable under the head “Income from house property”.
(2) For the purposes of sub-section (1),-
(a) “house property” means any property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, but does not include any such property (or any portion thereof) which is occupied by the assessee for purposes of any business or profession carried on by him the profits whereof are chargeable to tax under this Ordinance; and
(b) “annual value” of any property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year.
Provided that where the property is let on rent, the annual value shall not be less than the rent payable by the tenant.
(3) Nothing contained in this section shall apply in the case of any such property which is in the occupation of the owner for purposes of his own residence.
Explanation.- For the purpose of this section, any property, the owner of which is in receipt of any rent, whether in cash or otherwise, whether from employer or otherwise, shall not be taken to be in the occupation of such owner for the purpose of his own residence.”;
This means that there was a notional taxation on ALV of properties which can be rented but the same has been made non-taxable under (3) above. There is no concept of ALV for property that cannot be rented. If this is understood the question of open plot is totally out of context.
In the Income Tax Ordinance, 2001, a completely different concept has been adopted and the concept of ALV, which is archaic, has been abolished. Now there is no concept of ‘notional’ or ‘deemed’ rent, so to speak. The amount taxable under the Ordinance is:
(2) Subject to sub-section (3), “rent” means any amount received or receivable by the owner of land or a building as consideration for the use or occupation of, or the right to use or occupy, the land or building, and includes any forfeited deposit paid under a contract for the sale of land or a building.
This is very simple and straightforward. Only actual rent is taxable, and rent has been defined exclusively under the said law. This therefore means that income from house property can only be taxed if it is rented out. No other incidence under the law can be created. The law is based on commercial sense and only ‘income’ is supposed to be taxed. The question of property from which no rent is received or open plot from where rent cannot be received cannot be taxed under the Ordinance.
Pakistan’s law is faced with another menace in the name of presumptive and deemed income where anything can be treated as ‘income’. This assumption is also incorrect. The Supreme Court of Pakistan’s decision in the case of Elahi Cotton Mills Limited written by Justice Ajmal Mian may be criticised by some for its conclusion, however, it is absolutely clear about the concept of deemed income as laid down above. Paragraph 31 clause (xi) of that judgement states:
- From the above case-law and the treatises, inter alia the following principles of law are deducible:—
(xi) That the expression “income” includes not merely what is received or what comes in by exploiting the use of a property but also what one saves by using it oneself. For example, the use of a house by its owner.
What Justice Mian has stated, that exactly had been the law; unfortunately, however, it is no longer the law. Even if for argument’s sake, there can be a view that unoccupied houses can generate income, there cannot be any iota of doubt on the deemed income of open plots. This means that the legislature is not aware of jurisprudence behind this provision of income from house property.
In the same judgement of the Elahi Cotton Mills Limited, the Supreme Court has observed that:
In our view, sections 80-C and 80-CC of the Ordinance fall within the category of presumptive tax as under the same the persons covered by them pay a predetermined amount of presumptive tax in full and final discharge of their liability in respect of the transactions on which the above tax is levied. Whereas section 80-D of the Ordinance is founded on the theory of minimum tax which has been elaborately dealt with in the treatises, the relevant portions of which have been quoted in extenso hereinabove. If we were to read Entry 47 in isolation without referring to Entry 52, one can urge 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. We are inclined to hold that presumptive tax is in fact akin to capacity tax i.e., capacity to earn. In this view of the matter, we will have to read Entry 47 in conjunction with Entry 52 which provides taxes 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. Since under Entry 52, tax on capacity in lieu of taxes mentioned in Entry 47 can be imposed, the presumptive tax levied under sections 80-C and 80-CC of the Ordinance is in consonance with the above two entries if read in conjunction. However, we may point out that in Entry 52, the key words used are “in lieu of taxes and duties specified in entries 44, 47, 48 and 49 or in lieu of any one or more of them”. In order to understand, the real import of the above portion of Entry 52, we will have to refer to the meaning of the words “in lieu of” In this regard, reference may be made to Black’s Law Dictionary, Sixth Edition, Ballentine’s Law Dictionary, Third Edition; and the Legal Thesaurus by Steven C. De Costa, which read as follows:—
- A perusal of the above-quoted meanings of the above expression “in lieu of” indicates that the same connote, instead of, in place of, in substitution of, but it does not mean, in addition to. If we were to construe Entry 52 of the Legislative List keeping in’ view the above meanings of the expression “in lieu of”, it becomes evident that the Legislature has the option 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 80-C and 80-CC 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.
As can be seen from the above citation, the Supreme Court of Pakistan despite its apparently earnest effort to approve presumptive tax, found itself unable to justify such presumption under Entry 47 of the Federal Legislative List and had to take recourse to Entry 52 of that list. It is abundantly clear that entry 52 does not apply to immovable property.
In the light of the above comments it is suggested that this tax be withdrawn. If the government intends to charge such tax then the relevant entry is Entry 50. However, in that case the taxing rights lie with the provinces. It is absolutely clear that deemed rent on open plots is not a correct law.
Copyright Business Recorder, 2022
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