Section 235 of the Income Tax Ordinance 2001, which provides for the collection of advance tax (adjustable against tax liability determined under normal law) along with electricity bills also contains provision (235) (3) which lays down that exemption certificate against collection of advance tax U/S 235 can be issued by the commissioner only in such cases wherein the commissioner certified that their income was exempt from tax.
In other words, in the cases of those taxpayers who earned taxable income and had also fully discharged their advance tax liability were not eligible to obtain exemption certificate. This created undue hardship for the taxpayers as they were forced to continue to suffer payment of tax under the garb of withholding provisions even after they had discharged the entire advance tax liability in accordance with section 147(the provision dealing with the determination of advance tax)of the Income Tax Ordinance.
This anomaly was challenged by the affected taxpayers in the Lahore High Court Lahore which resolved the matter through its judgment reported as 2010 PTD 2502.Paras 33, 34, 47 and 48 of the judgment which are operative part of the judgment, are reproduced hereunder for the benefit and proper understanding of the verdict of the court: "33. On the face of it the constitutionality of section 235 of the Ordinance in the present situation when the tax payer has no further liability under section 147 of the Ordinance is seriously suspect.
It prima facie, appears that fundamental rights of the petitioners guaranteed under articles 10A, 18, 23 and 24 read with the concept of economic justice provided in the Objectives Resolution read with article 2A and article 4 of the Constitution are under threat.
However, instead of gauging the constitutionality of the aforesaid provision, there is another route available. Sections 147 and 235 of the Ordinance can be harmonized. This harmonization can be effectively achieved through purposive interpretation of the Ordinance.
34. It is settled law that where literal construction or plain meaning causes hardship, futility, absurdity or uncertainty, purposive or contextual construction is preferred to arrive at a more just, reasonable and sensible result.
"Every law is designed to further the ends of justice and not to frustrate it on mere technicalities. Though the function of the courts is only to expound the law and not to legislate, nonetheless the legislature cannot be asked to sit to resolve the difficulties in the implementation of its intention and the spirit of the law.
In such circumstances, it is the duty of the court to mould or creatively interpret the legislation by liberally interpreting the statute. The statutes must be interpreted to advance the cause of statute and not to defeat it." Reliance is placed on Introduction to Interpretation of Statues by Dr Avtar Singh (Reprint Edition 2007).
47. The said application clearly shows that nil tax certificate can be issued for the taxpayer, in case where advance tax under section 147 had already been paid. Once the nil tax certificate is issued under section 235, the chargeability of section remains intact but the rate of tax is reduced resulting in reading down section 235 and making it ineffective when the advance tax has been fully paid. Nil rate tax certificate does not offend section 235 (3) of the Ordinance and can easily co-exist with the same. This reconciles both the provisions and there is no need to declare section 235 unconstitutional. 48.
For the above reasons petitioners are directed to approach the concerned Commissioners under section 159(1) of the Ordinance and the concerned Commissioners are directed to decide the said application for the issuance of NIL RATE CERTIFICATES within a period of ONE MONTH from the date of receipt of application of the petitioner(s) after verification of the payment of advance tax under section 147 of the Ordinance.
The direction for expeditious disposal of the application of the taxpayer under section 159(1) of the Ordinance is because of the recurring and continuous nature of transitional advance tax under section 235 of the Ordinance. While deciding the application for nil tax rate certificate the concerned Commissioners will keep the ratio of this judgment in mind and will consider the chargeability of section 235 to be integrated and co extensive with the liability under section 147 of the Ordinance rather than a standalone liability in these circumstances."
FBR also accepted the judgment of the High Court referred to above and issued SRO 1053(1)/2010 dated 22-11-2010 whereby the commissioners were directed to issue Exemption Certificates U/S 159 against collection of withholding tax u/s 235 of the Income Tax Ordinance 2001 in cases where in advance tax U/S 147 of the Income Tax Ordinance had been fully paid.
It is pertinent to mention here that the provision of section 235 falls under Chapter (xii) of the Income Tax Ordinance 2001. This Chapter is captioned as "Transitional Advance Tax Provisions "and starts from section 231A and ends with section 236X. As title of the chapter suggests, it contains a number of withholding provisions pertaining to the collection of advance tax on various business transactions.
Thanks to the judgment of the Lahore High Court Lahore 2010 PTD 2502 operation of these withholding provisions has been restricted to the collection advance tax as determined u/s 147 of the Income Tax Ordinance 2001 and after payment of entire advance tax liability u/s 147 a taxpayer would be eligible to approach the commissioner to obtain exemption/zero rated certificate from the commissioner to forestall further collection of advance tax under the Transitional Advance Tax Provisions.
Through Finance Act 2015 sub-section O was added to section 236 which laid down that advance tax under Chapter (xii) shall not be collected from a person who produces a certificate from the commissioner that his income during tax year is exempt from tax. Since language of section 236O is the same as section 235(3) which was interpreted by the High Court Lahore in its judgment 2010 PTD 2502, there was no problem for the taxpayers to obtain exemption certificate from the Commissioner after paying entire advance tax liability.
It will not be out of place to mention here that the Lahore High Court in two subsequent judgments ref.2011 PTD I and writ petition No.26397 of 2016. Above depicted settled position was, however, disturbed by the DG (WHT) through issuance of letter C. No3(2)SA to DG(WHT)2017 dated 23rd August 2017, addressed to all Chief Commissioners (copy enclosed) whereby field formations were directed as under: "The undersigned is directed to refer to the above noted subject and to state that as per section 236O of the Income Tax Ordinance 2001, advance tax under Chapter XII shall not be collected from a person who produces a certificate from the commissioner that his income during the year is exempt.
Instances have been reported that where exemption certificates from collection of tax under Section 236A have been issued on the basis that the taxpayer has discharged his advance tax liability under Section 147. As per clause (c) of section 236O read with clause (a) of sub section (1) of section 159, exemption certificate can only be issued if the income of the taxpayer is exempt from tax. Discharge of advance tax liability does not mean that the taxpayer's income is exempt from tax and therefore exemption certificate cannot be issued if the income of the taxpayer is not exempt from tax"
In consequence of the above directions, Chief Commissioners took action U/S 122B and cancelled exemption certificates issued by the commissioners U/S 159/236A of the Income Tax Ordinance 2001 in utter disregard of the judgments of the Lahore High Court Lahore and existing instructions of the FBR, thus unnecessarily adding to the problems of the taxpayers who had already discharged their legitimate advance tax liability U/S 147 of the Ordinance.
Ironically no such action was, however, taken in respect of exemption certificates issued U/S 159/235 although, as per DG's version, the said action was also necessary as section 236O(c) was applicable to the entire Chapter (XII) and section 235 was part of it.
From the contents of the letter of the DG (WHT) it appears that his office was totally oblivious not only of the judgments of the Lahore High Court quoted supra but also of the fact that the FBR had itself accepted and adopted the ratio of these judgments and issued instructions to the Commissioners to issue exemption certificates u/s 159 to stop further withholding of advance tax in cases where in advance tax under Section 147 of the Income Tax Ordinance 2001 had been fully paid.
DG (WHT) also did not appreciate that application of 236O(c) in the manner that he directed would also nullify the authority of the Commissioner to issue exemption certificate even under Section 159/235 of the Income Tax Ordinance 2001, because section 236O(c) covers the entire Chapter XII of the Income Tax Ordinance 2001, which includes section 235 as well. Consequently judgments of the Lahore High Court Lahore and SRO1053 (1)/2010 dated 22-11-2010 would also be rendered ineffective and redundant paving the way for unbridled collection of tax without any regard to the ceiling of lawful tax liability. Such cannot be the intention of the legislature in a modern egalitarian state because, if the Judgments of the High Court and legislation done through SROs is allowed to be nullified through such circular letters, repercussions for the establishment of a credible tax system in which taxpayers can repose confidence would be drastically detrimental.
Will the high-ups in the FBR take notice of the chaotic situation unleashed by the circular letter C. No3 (2) SA to DG (WHT) 2017 dated 23rd August 2017, withdraw the said letter and issue instructions to the field formations to issue exemption certificates to the taxpayers in respect of transitional withholding provisions (chapter xii) as per policy already in force in the form of SRO1053 (1)/2010 dated 22-11-2010?
(The writer is a retired IRS officer. He can be reached at email "[email protected]").
Copyright Business Recorder, 2017