Governments are supposed to provide to the public: food, health, education, infrastructure, security - financial and otherwise as also policies for reducing inequalities and creating harmony between different segments of the populace. Since resources to undertake these activities are drawn from money generated through taxes, governmental taxation is now an instrument of steering the economy. This has culminated into development of complex laws and regulations. Although, many general principles of interpretation of statutes apply to taxing statutes, principles specific to taxation statutes rein.
Strict construction Fiscal statutes or tax laws impose a burden or restrict enjoyment of property. These are neither remedial laws, nor with a foundation on any permanent public policy. These are shaped in the backdrop of ideology and economic policy of the ruling junta.
The fundamental principle for interpretation of tax laws is the principle of strict construction. Tax laws have to be strictly construed. What is written is to be acted upon. This is in contrast with beneficial or remedial legislations eg civil, criminal and labour laws, service matters or the constitution where liberal interpretation is a virtue. The plea that liberal construction advances cause of justice is not adopted in relation to tax laws.
Tax and equity are strangers. One can not go by the notion as to what is just and expedient, notwithstanding the extravagant consequences which flow from giving the words their natural meaning: "If an assessee gets an advantage which the legislature may not have intended, but which he is entitled to on the construction of the statute, the Court should not deprive him of that advantage." - 'Interpretation of Statutes (Eighth Edition) by N. S. Bindra.
Charging section Charging event is the point that immediately attracts a tax. Charging section pinpoints the tax event and states basis of tax and the rate. Charging section of a taxing statute has to be construed very strictly. One could not be taxed if he could not be brought within the ambit of charging section of the statute by clear words. Rowalt J. in Cape Brady Syndicate vs. IRC (1921) 1KB64 ruled:
"In a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing to be implied. One can only look fairly at the language used." - Markandey Katju in Interpretation of Taxing Statutes One is to be let free if the mischief of the words in law does not get him. In Avari Hotel Ltd vs. Collector of Sales Tax and Others, (2001) 83 TAX 124 (H.C. Lah.), Writ Petition No 8154 of 1999, Justice Nasim Sikandar of the Lahore High Court, ruled:
"The rules of interpretation of fiscal statute are by now very well known. These are that only words of the statute should be looked into 1977 SCMR 371 re: Collector of Customs (Appraisement), Karachi and others v. Messrs Abdul Majeed Khan and others; that a levy can only be made by express and exact words 1971 SCMR 128 re: Hijvari & Co v. Commissioner of Sales that a person must be taxed only if he comes within the letter of law otherwise he is free even though his case falls within the spirit of law. AIR 1931 Lahore 572 re: Hira Chand v. Emperor that in fiscal statutes only the letter of law is to be looked into and that there is no room for any intendment, equity or presumption 1989 PTD 909 re: Commissioner of Agricultural Income-tax, East Bengal v. B.W.M. Abdul Rehman; that such like statutes should be strictly construed as for liability to tax is concerned (PLD 1961 SC 119) re: Nawabzada M. Amir Khan v. Controller of Estate Duty; that the language of a taxing statute should not be stretched to hold subject liable to tax (AIR 1940 PC 183) re: Bank of Chettinad Ltd v. CIT, Madras; that where two equally reasonable interpretations are possible strict and other liberal then the one favourable to the subject should be adopted (PLD 1961 SC 375) re: CIT, East Pakistan v. Hussain Qassim Dada. To epitomise all of them, in fiscal statute every word must be construed in the perspective it has been used, that nothing should be considered as superfluous, or surplusage. Also that subject should be allowed to escape the incidence of taxation if he cannot be brought within the four corners of words of law."
It has been reiteration of the principle narrated by Lord Caims: "Lord Caims in Partington v. Attorney General ruled: "As I understand the principle of all fiscal legislation, it is this: if the person sought to be taxed comes within the letter of the law, he must be taxed, however, great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however, apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute, what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute."
"In construing a taxing statute one has to look merely at what is clearly said. There is no equity about a tax. There is no room for any intendment. There is no presumption as to a tax. Nothing is to be read in and nothing is to be implied. One can only look fairly at the language used. In a case of reasonable doubt, that construction which is more beneficial to the subject should be adopted. There is no equity about a tax." - N. S. Bindra's 'Interpretation of Statutes (Eighth Edition).
Liability to pay a tax arises by virtue of the charging section alone. There is no cavil with the proposition that the charging provision of a fiscal law is to be strictly construed and applied. It is also settled law that no tax can be imposed, levied and recovered beyond the scope, ambit and the parameters of the charging provision of a fiscal statute. While interpreting a taxing statute to be looked at would be words of the statute and their interpretation in the light of what is clearly expressed. It can not imply anything, which is not expressed. It cannot import provisions in the statute to support deficiency.
Where the legislature could have expressly specified as regards the charging of tax but has chosen not to specify must not be read into text of the statute by way of intendment so as to expand or circumvent scope of the charging provisions.
In Partington v. Attorney General Lord Caims also observed: "A taxing statute, if it provides to impose a charge, its intention must be expressed in clear, unequivocal and unambiguous language. The Court has to look at the language couched. Hunt into intention to find a charge is impermissible." - N. S. Bindra's 'Interpretation of Statutes (Eighth Edition).
The general rule of interpretation that words can be supplied where there are adequate grounds to justify the interference, when the legislation intended something which it omitted to express, do not stick to tax laws. It is corollary to the literal rule of interpretation that omissions in tax laws are not to be inferred. Should there be any defect or omission in the language employed by the legislature, to make good the deficiency is not for the Court or any one else, other than the lawmakers. Because it would be taking on the role of the legislature.
"To read into the section words limiting its operation would be to usurp the functions of the legislature which is not within the competence of the high court or any other court to do. Courts cannot read into the statutes' provisions which are not there, even if they think that anomalies are not to be avoided otherwise." - 'N S Bindra's Interpretation of Statutes' (10th Edition).
Legal fiction Fiction or a legal fiction is an assumption or supposition made by express words of law that something, which is or may be false, is true or that a state of facts exists which has never been there. It is an assumption of a fact that does not or may not exist. It is a rule of law which assumes true something which is false, but not impossible. Fictions arise from the law and not law from fictions.
Fictions are those things that have no real existence, in their own body. These are inserted in law for a special purpose, each fiction for a specified purpose. "An assumption or supposition of law that something which is or may be false is true, or that a state of facts exists which has never really taken place. An assumption, for purposes of justice, of a fact that does not or may not exist. A rule of law which assumes as true, and will not allow to be disproved, something which is false, but not impossible. Ryan v. Motor Credit Co, 30 N.J.Eq. 531, 23 A.2d 607, 621.
These assumptions are of an innocent or even beneficial character, and are made for the advancement of the ends of justice. They secure this end chiefly by the extension of procedure from cases to which it is applicable to other cases to which it is not strictly applicable, the ground of inapplicability being some difference of an immaterial character.
Estoppels distinguished. Fictions are to be distinguished from estoppels; an estoppel being the rule by which a person is precluded from asserting a fact by previous conduct inconsistent therewith on his own part or the part of those under whom he claims, or by an adjudication upon his rights which he cannot be allowed to question.
Presumptions distinguished. Fictions are to be distinguished from presumptions of law. By the former, something known to be false or unreal is assumed as true; by the latter, an inference is set-up, which may be and probably is true, but which, at any rate, the law will not permit to be controverted. It may also be said that a presumption is a rule of law prescribed for the purpose of getting at a certain conclusion, though arbitrary, where the subject is intrinsically liable to doubt from the remoteness, discrepancy, or actual defect of proofs." - Black's Law Dictionary (Sixth Edition).
Legislature can introduce a statutory fiction and Courts have to proceed on the assumption that such state of affairs existed on the relevant date. Because one is bidden to treat an imaginary state of affairs as real. He has to also imagine as real the consequences which shall flow from it unless prohibited by some other statutory provision. Although in the fold of 'fiction', for the sake of present discussion, not being considered fictions are 'provisos' and 'deems' in tax statutes. These are being dealt with in this paper independently.
Fictions are there as independent wholesome laws, normally created through insertion of a section or sub-section in the relevant Act or Ordinance. These are strangers, even opposed, to the concept and otherwise scheming of the statutes they get into. Proviso and deeming provisions are by way of parenthesis, adjuncts, auxiliaries etc to sections and sub-sections to which these are appended. The relevant sections and sub-sections are in keeping or harmonious with other provisions of the statute.
Limited role of legal fiction Fiction in the realm of law has a defined role to play. It cannot be stretched to a point where it loses the very purpose for which it is created. In no case it is allowed to perpetrate injustice. This view is supported by the weighty words expressed in United States v. Bags of Coffee, (1814) 8 Cranch (US) 398 at 415: 3 Law Ed 602, wherein Story, J. observes:
"Legal fiction" seems to be a rule founded in common sense, as well as strict justice that 'fiction of law' shall not be permitted to work any wrong, but shall be used ut res magis quam parent." Brijnandan Sindh v. Jamuna Prasad. AIR 1958 Pat 589 at 595: ILR 37 (1958) Pat 339: 1958 BLJ 122."
Legal fiction signifies any assumption, which conceals or affects to conceal the fact that a rule of law has undergone alteration. "A legal fiction has to be strictly confined to the area in which it operates. The legal fiction must be limited to the purposes indicated by the context and can not be given a larger effect. The context is vital. It should be carried to its logical conclusion". (Rahas Bihari Das vs. State AIR 1995. Ori 23 at 30). "A legal fiction presupposes the correctness of the state of facts on which it is based.
All the consequences which flow from that state of facts have to be worked out to their logical extent. If the purpose of legal fiction is for a specified purpose, one can not travel beyond the scope of that purpose". (Bengal Immunity Co vs. State of Bihar AIR 1955 SC 661, 709.
The fiction is created for a limited purpose. It is woven in texts of the tax laws to tax something which would be untaxed in the absence of the relevant fiction. Fiction arises from the law - not law from fiction. It is not allowed to travel beyond the purpose for which it is created. It cannot be extended by importing another fiction. Thus delegated legislation emanating from such fiction in a section of the statute is not to be seen. Albeit there are instances in tax laws of putting in place subordinate legislations on the basis of legal fictions. The principle is well-established that when the law creates a legal fiction, such fiction should be carried to its logical end. There should not be any hesitation in giving full effect to that principle. If the power to tax a sale in an ordinary sense is subject to certain legal conditions and restrictions, the power to tax a transaction, which is deemed to be a sale, should also be subject to the same conditions and restrictions.
A legal fiction can not be widened through rules made under such fiction." a legal fiction created in a State Act by borrowing definition from a Central Act in the concurrent list will be restricted for purposes of the State Act and will not have the effect of widening the definition in the Central Act unless that definition is properly amended with due compliance with Article-254 of the Constitution", so held the Indian Supreme Court in State of Maharashtra vs. Laljit Rajshi Shah (AIR 2000 SC 937). (Referred by Justice G.P. Singh in "Principles of Statutory Interpretation"(12th Edition). The Supreme Court of Pakistan, in Elahi Cotton Mils Ltd vs. Federation of Pakistan (PLD 1997 SC 582), held: "Legal fictions are limited for definite purpose, they can not be extended beyond the purpose for which they are created." What follows are some examples of fiction in certain tax laws. This is not a list of fictions in these legislations.
Examples of fiction in tax laws
1. Federal Excise Act-2005 (Act)
Section 7 of the Act provides that excise duty shall be payable in sales tax mode and proceeds to provide details of applicability of sales tax laws to cases covered by section 7. This would mean taking out issues with reference to goods covered by section 7, including levy of excise duty, outside the fold of Excise Act. Because this seeks to invoke covenants of some other law, it is a departure from well laid-down norms of applicability or functioning of the statutes. However, this may not be invalid as the law provision would be taken as a fiction in a tax law. The above would hold true also in case of section 15 of the Act titled: 'Application of the Customs Act, 1969 (IV of 1969) to Federal Excise Duties'.
2. Sales Tax Act-1990 (Act)
(1). Definition of 'supply' given in the Act also covers "purposes other than those of making a taxable supply" and "possession of taxable goods", with powers vesting in the Federal Government to specify other transactions which shall constitute supply. Leaving the controversy whether this can stand the test of judicial scrutiny, it can be surmised that what is cited herein regarding extension of the scope of tax is fiction provided in the Act.
The Sindh High Court, Karachi, in the case of Usmani Associates Sub-proprietary Firm vs. Central Board of Revenue and Others, (2001) 84 Tax 348 (H.C. Kar.), decided on 22-03-2001, has held:
"Although, expression "taxable supplies" instead of "sales" has been employed in the charging section, which seems to have wider connotation than term "sales" used in the preamble and in item No 49 of the Federal Legislative List but in my humble opinion, the scope of the expression shall have to be restricted only to such transactions as may amount to sale. Any extended meaning would render the provision extra-constitutional."
(2). Section 8 cites following cases in which input tax adjustment on goods and services for purposes of taxable supplies made or to be made is denied:
(i). Any goods or services which the Federal Government may specify, by a notification in the official gazette.
(ii). The goods under sub-section (5) of section 3 of the Act.
(iii). The goods or services in respect of which sales tax has not been deposited in the Government treasury by the respective supplier;
(iv). Fake invoices.
(v). Purchases made by a registered person in case he fails to furnish the information required by the FBR through a notification issued under sub-section (5) of section 26.
But for the denial of adjustment of input tax as such in keeping with the scheming of the things, input tax adjustment would be admissible. This scribe would accordingly include the above (i) to (v) into legal fiction.
Since the jurists hold that a fiction can not be extended eg it can not be the basis of further legislation, question would remain whether denial of input tax adjustment, by virtue of power acquired through an SRO viz. SRO No 490(I)/2004 dated 12-06-2001 or any such delegated legislation would be in order.
(3). The substantive law leaves a supplier free to sell his goods - at his price - even at a loss, if that be so. Thus, in keeping with genes and general scheming of the Act, sub-section (46) of section 2 provides that 'value of a taxable supply means the consideration in money which a supplier receives from the recipient for that supply', with the rider that the Inland Revenue can probe into the declared value of supply.
The subject intrusion allowed to the Inland Revenue, being foreign to genius of the statute, is a fiction under the Act.
(4). Under section 7A of the Act titled: "Levy and collection of tax on specified goods on value addition", the government has assumed powers to 'specify the minimum value addition required to be declared by a registered person in relation to the identified supplies' and supplies by certain registered persons. This provision is in repugnance or negation to the philosophy and entire scheme of the sales tax law which relies 'transaction value' for operation of the statute.
It stays on the book of the statute because of the leeway the legislature enjoys in the matter of framing taxation laws. Although with unidentified genes, section 7A of the Act is taken for a valid law because of its advent on the fiscal statute's book by way of a legal fiction.
(5). To comply with section 3(2)(a) of the Act, retail prices, which form basis for computation of tax liability in relation to goods detailed in Third Schedule of the Act, are to be taken as transaction values in disregard of ground realities. Winking at transaction values is fiction played.
Compounding play of fiction on this counter is that value addition by wholesalers, retailers and other persons in the supply chain of goods listed in the Third Schedule is ignored because total amount of tax applicable (on the basis of retail price) had been paid at the earlier stage of supply of the goods. Totally lost sight of is the fact that sales tax is transaction-specific, not goods-specific. When we say that the maximum amount of tax that could accrue ie tax applicable at the retail stage was paid at an earlier stage, we negate the foundation of the sales tax laws philosophy, according to which sales tax levy has to be transaction-oriented and every supplier is liable to tax, minus or plus - whatever. He is entitled to refund of tax if his tax liability is negative.
The fundamental principle of levy of sales tax on "value of taxable supplies and goods imported" enshrined in the charging section can not be dethroned. Acceding over-ruling of the cardinal principle that attraction of sales tax on taxable supplies at each stage of supply is on the basis of treating section 3(2)(a) as a legal fiction. To treat goods identified by the Third Schedule as goods attracting a one-time tax levy could be the other fiction in this chain.
3. Customs Act, 1969 (Act)Section 25 of the Customs Act is titled: "Transaction Value". Clause (c) of sub-section (2) whereof reads: "there shall also be added to such price the value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the importer or his related person free of charge or at reduced cost, for use in connection with the production and sale or for export of the imported goods, to the extent that such value has not been included in the price actually paid or payable:
(i). materials, components, parts and similar items incorporated in the imported goods;
(ii). tools, dies, moulds and similar items used in the production of the imported goods;
(iii). materials consumed in the production of the imported goods; and
(iv). engineering, development, artwork, designwork, and plans and sketches undertaken elsewhere than in Pakistan and necessary for the production of the imported goods."
"Price actually payable for the goods by the buyer" is sought to be added to price to find out the value. Whereas according to normal rules of the game it is only the cost actually incurred which can be added. Inclusion of no cost in the value or padding value of supplies for the purpose of generating additional duty is not in the ball game. The above words in section 25 are by way of a legal fiction.
Fiction imbibed in the sub-section is also in terms of the strong words "apportioned as appropriate" and "where supplied directly or indirectly by the importer or his related person free of charge or at reduced cost".
4. Income Tax Ordinance - 2001 (Ordinance)
(1). Sub-section (1) of section 16 of the Income Tax Ordinance, 2001, reads:
"Where the owner of a building receives from a tenant an amount which is not adjustable against the rent payable by the tenant, the amount shall be treated as rent chargeable to tax under the head 'Income from Property' in the tax year in which it was received and the following nine tax years in equal proportion."
This is a fiction created by law which makes a liability of the property owner subject to payment of income tax. To provide for deposit of a given number of months' rent or a block amount otherwise is a normal feature of rent agreements. Lessee deposits the amount with the lessor. Money deposited stays with lessor during subsistence of the rental agreement. On termination of lease etc, the amount is repaid to the depositor ie to he lessee. Of course parties to a rental lease are free to strike any other arrangement they deem fit eg the lessor may choose to divest the deposit during running of the lease. Real position is that so long as the amount remains with the lessor it is the landlord or lessor's liability and asset of lessee - by way of his claim against the landlord.
(2). Money received by an employee: "on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments;" is treated as income under the head salary. The law so provides, despite the fact that the subject amount is compensation, in lieu of cessation of employment. It is not income in normal parlance. This fiction is created by virtue of sub-section (6) of section 12 of the Income tax Ordinance. N.B. Fictions created through the words 'proviso' and 'deem' are proposed to dealt with through a different write-up.
(The writer is a counsel practicing corporate law and former Chairman of ICAP and ICMAP Joint Committee)