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SHC strikes down section 5-A of Income Tax Ordinance 2001 on more than 50 petitions

SHC strikes down section 5-A of Income Tax Ordinance 2001 on more than 50 petitions

KARACHI: A two-member bench of the Sindh High Court (SHC) has set aside show cause notices/ demand notices seeking enforcement of section 5A of the income tax ordinance 2001 on more than 52 constitutional petitions filed by J.S. Global, Lucky Cement Ltd, Reliance Cotton Spinning Mills Ltd and others.

On 18 May 2021, court has released details verdict and also observes that “it is hereby 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, hence, the provision impugned is found to be ultra vires of the Constitution, and is hereby struck down”.

Court observes in its judgment that “the present petitions have assailed the vires of section 5A (“5A”) of the Income Tax Ordinance 2001 (“Ordinance”) and seek for the same to be declared unconstitutional. The respective petitions were heard and reserved conjunctively and shall be determined vide this common judgment.

Briefly stated, 5A was initially inserted in the Ordinance, vide the Finance Act 2015 (“FA 2015”) and amended, relevant to the present lis, vide the Finance Act 2017 (“FA 2017”), ostensibly in order to induce certain (not all) public companies to distribute dividends among their shareholders.

Petitioners’ learned counsel submitted that it was the duty of the Court to uphold the constitutionality of a statutory provision, within context, and for a tax to qualify under the Federal Legislative List it had to be covered between entries 43 to 53 therein, since the source and extent of the statutory taxing power had to be derived from a corresponding legislative entry.

Per petitioners’ counsel, the regulation of companies is undertaken inter alia vide the Companies Act 2017 (“Act”), being special in nature, and any attempt at such regulation by inserting penal provisions into the Ordinance, routed through a money bill, was prima facie unmerited.

Learned 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. It was concluded that the legislature had ample power to regulate economic behavior and 5A was merely one specie of exercise of such power

The learned 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. Specific reference was made to sections 240 and 243 of the Act to argue that distribution of dividends was a mandatory requirement of the law and 5A of the Ordinance was a supplemental provision thereto. It was submitted that the levy was analogous to super tax; hence, valid in respect of the same income.

The petitioners had inter alia contended that 5A amounted to impermissible double taxation on the same income. The learned Deputy Attorney General concurred to the extent that the levy being on the same income; however, articulated that it was permissible on the analogy of super tax. The departmental counsel11 disagreed with the petitioners’ counsel and the learned Deputy Attorney General and submitted that 5A did not amount to double taxation, as it envisaged a levy independent of income tax.

Learned Deputy Attorney General had submitted that the sections 240 and 243 of the Act mandated distribution of dividends and 5A was a supplemental provision thereto. A perusal of the referenced provisions demonstrates to the contrary as section 24015 places restrictions upon distribution of dividends and section 24316 requires that directors may not withhold a dividend once it is declared. Respondents’ learned counsel remained unable, despite repeated queries by us, to assist us with any provision of the Act whereby companies could be mandated to declare dividends.

It is hereby 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, hence, the provision impugned is found to be ultra vires of the Constitution, and is hereby struck down. ii. As a consequence, any show cause / demand notices 24 or constituents25 thereof, seeking enforcement of section 5A of the Income Tax Ordinance 2001, are hereby set aside.