It is about time our legislators understood that even a wrong decision of the Supreme Court of Pakistan in the Elahi Cotton Mills Limited does not empower the legislature to treat every credit item in the balance sheet as income.

The decision of the Supreme Court in the Elahi Cotton Mills reported stated in paragraph 32 and 33 as under: 34. Keeping in view the above case law and the treatises and the aforesaid legal inferences drawn there form, we may now revert to the question of vires of impugned sections. It may again be observed that the power to levy taxes is a sine qua non for a State. In fact it is an attribute of sovereignty of a State.

Tax on undistributed reserves is ultra vires–I

It is a mandatory requirement of a State as it generates financial resources which are needed for running a State and for achieving the cherished goal, namely, to establish a welfare State. In this view of the matter, the Legislature enjoys plenary power to impose taxes within the framework of the Constitution.

It has prima facie power to tax whom it chooses, power to exempt whom it chooses, power to impose such conditions as to liability or as to exemption as it chooses, so long as they do not exceed the mandate of the Constitution. It is also apparent that the entries in the Legislative List of the Constitution are not powers of legislation but only fields of legislative heads.

The allocation of the subjects to the lists is not by way of scientific or logical definition but by way of mere simple enumeration of a broad catalogue. A single tax may derive its sanction from one or more entries and many taxes may emanate from one single entry. It is needless to reiterate that it is a well settled proposition of law that an entry in the Legislative List must be given a very wide and liberal interpretation.

The word “income” is susceptible as to include not only what is in ordinary parlance it conveys or it is understood, but what is deemed to have arisen or accrued. It is also manifest that income tax is not only levied in the conventional manner, i.e., by working out the net income after adjusting admissible expenses and other items, but the same may also be levied on the basis of gross receipts, expenditure etc.

There are new species of income tax, namely, presumptive tax and minimum tax. In our view, Section 80C and 80CC 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 80D 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 herein above.

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 80C and 80CC 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, 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: “In Lieu of” Instead of; in place of; in substitution of.

It does not mean “in addition to.” “in lieu of” In substitution for or in place of. Ordinarily implying the existence of something to be replaced” “IN LIEU OR”, preposition as a substitute for, as an alternative, by proxy, for, in place of, instead of, on behalf of, rather than, representing.” 35. 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 if 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 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 inconsistent with Entry 52.

As can be seen above, even the extended meaning of the word ‘income’, that Justice Ajmal Mian has described in this case, cannot be applied in the case of reserves. It is the author’s view that such a proposal is constitutionally invalid and will be struck down by the courts if implemented. A time has come for the judiciary to decide, once and for all, whether or not Pakistan will be ruled according to civilised norms.

There are many defects in the Elahi Cotton Mills Limited judgment, the worst of these flaws is the discussion on the matter of collection of taxes whilst debating whether a provision is constitutionality valid or otherwise. This is not the function of the court; it is an executive function. You cannot employ the ‘doctrine of necessity’ whilst deciding a constitutional levy. The Elahi Cotton Mills Limited verdict on taxation matters and the Federal Court’s judgement in the Maulvi Tamizuddin Khan are identical. It is not the function or domain of the court to discuss whether or not revenue is being collected.

It has to interpret and declare what the constitution says. It is therefore hoped that better sense will prevail and this proposed measure would not be implemented.

If it is, then perhaps the courts would be revisiting the Elahi Cotton Mills Limited judgment and ridding this country of the ‘doctrine of necessity’, which is operative in the fiscal domain, forever.

(Concluded)

Copyright Business Recorder, 2023