KHALID MANSOOR VS FEDERAL BOARD OF REVENUE, 2016 PTD-KARACHI-HIGH-COURT-SINDH 1813 (2016)

(a) Income Tax Ordinance (XLIX of 2001)----

----Ss. 37-A, 100-B, First Sched., Part I, Div. VII & Eighth Sched.---Capital gain on disposal of securities---'Holding period', absence of---Effect---Term 'security', as used in S. 37-A of Income Tax Ordinance, 2001, meant shares of a listed company (as defined under S. 2 (47) of the Ordinance)---Company in question was not a listed company on any Stock Exchange on the date on which the petitioner had acquired the shares of the company---For the charge in terms of S. 37-A of Income Tax Ordinance to be complete and for the tax levied in terms thereof to be payable, the instrument in question (shares of the company) must have been a 'security' for the entire 'holding period', which meant that the shares of the company ought to have been listed on a Stock Exchange on the date on which the petitioner has acquired the same and the date on which he had disposed of the same---In absence of 'holding period', there could be no levy of tax in terms of S. 37-A of the Ordinance---Petitioner was, therefore, not liable to the payment of any tax in terms of S. 37-A of the Ordinance on disposal of the shares---High Court, setting aside the deduction and collection of the amount of tax from the petitioner, directed the department to refund the same---Constitutional petition was allowed in circumstances.

(b) Income Tax Ordinance (XLIX of 2001)----

----S. 37-A----Capital gain on disposal of securities---Conditions---'Securities'---Definition and scope---'Holding period', absence of---Effect---Section 37-A(2) of Income Tax Ordinance, 2001 determines the 'holding period', which in turn determines the rate to be applied to the capital gain made on the disposal of a security'---Said 'holding period' is with reference to a 'security' and not otherwise---Term 'security' has been given a specific meaning for purposes of S. 37-A of Income Tax Ordinance, 2001; therefore, the term can only have, and be given, its defined meaning---Relevant instrument in question must be a 'security' both on the date on which the same are acquired and on the date the same are disposed of, and both of said conditions must be met and are applicable for there to be a 'holding period' within the meaning of S. 37-A(2) of Income Tax Ordinance, 2001.

(c) Income Tax Ordinance (XLIX of 2001)---

----S. 37-A(2)----Capital gain on disposal of securities---Literal interpretation, rule of---Applicability---'Holding period'---Determination---Section 37-A(2) of Income Tax Ordinance, 2001 has to be applied literally and the 'holding period' has to be determined accordingly---In case two interpretations are reasonably available while construing a charging provision, the one more favourable to the taxpayer is to be adopted.

(d) Income Tax Ordinance (XLIX of 2001)---

----Ss.37-A(1), 100-B, First Sched., Part I, Div. VII & Eighth Sched.---Capital gain on disposal of securities---Rate of tax on capital gain---Determination---Under S. 37-A(1) of Income Tax Ordinance, 2001, tax on any capital gain is to be levied at the rates specified in Division VII of Part I of the First Schedule of Income Tax Ordinance, 2001; however, reference to said rates is not necessary---Section 100-B of Income Tax Ordinance, 2001 provides a mechanism, whereby the tax levied and made payable in terms of S. 37-A of the Ordinance is to be computed and collected.

(e) Income Tax Ordinance (XLIX of 2001)---

----S. 37-A----Capital gain on disposal of securities---Principles---Section 37-A of Income Tax Ordinance, 2001 is a charging provision, as the same imposes tax on capital gain made on the disposal of securities---Charging provision is to be construed strictly and literally and in favour of the tax payer and against the Revenue.

Atir Ansari for Petitioner.

Amjad Javed Hashmi for Respondent No.1.

Haider Naqi for Respondent No.2.

Ashfaq Rafiq Janjua, Standing Counsel.

Date of hearing: 26th January, 2016.

ORDER

MUNIB AKHTAR, J.---This petition arises in relation to section 37A of the Income Tax Ordinance, 2001 ("2001 Ordinance"). The petition was heard along with two other petitions which also raised issues in respect of the said section. However, during the course of the hearing it became clear that the issue involved in this petition was different from the issues raised in the other petitions and it is for this reason that it is being disposed off by a separate judgment.

2.It will be convenient to set out section 37A at the outset. As presently relevant (up to the tax year 2015) it provided as follows:--

"37A. Capital gain on disposal of securities.---(1) The capital gain arising on or after the first day of July 2010, from disposal of securities held for a period of less than a year, other than a gain that is exempt from tax under this Ordinance, shall be chargeable to tax at the rates specified in Division VII of Part I of the First Schedule: ...

(1A) The gain arising on the disposal of a security by a person shall be computed in accordance with the following formula, namely: -

A - B

Where -

(i)'A' is the consideration received by the person on disposal of the security and

(ii)'B' is the cost of acquisition of the security.

(2)The holding period of a security, for the purposes of this section, shall be reckoned from the date of acquisition (whether before, on or after the thirtieth day of June, 2010) to the date of disposal of such security falling after the thirtieth day of June, 2010.

(3)For the purposes of this section "security" means share of a public company, voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, an instrument of redeemable capital, debt securities and derivative products."

3.It will be seen that the section (which was inserted in the 2001 Ordinance in 2010) imposes a tax on capital gains made on the disposal of securities. It is, therefore, a charging provision. As provided in subsection (1), the tax to be charged on any capital gains is levied at the rates specified in Division VII of Part I of the First Schedule (herein "Division VII"). It is not, however, necessary to refer to those rates. As will subsequently become clear, it is crucial for present purposes to keep in mind the meaning to be ascribed to "security", which has been defined for purposes of section 37A in subsection (3). In this petition we are only concerned with the first part of the definition, which provides that "security" means the shares of a "public company". The term "public company" is defined in section 2(47) which, as presently relevant, provides as follows:--

"'public company' means -

(b)a company whose shares were traded on a registered stock exchange in Pakistan at any time in the tax year and which remained listed on that exchange at the end of that year; ...."

Thus, for present purposes the term "security" as used in section 37A means the shares of a listed company.

4.Another provision that requires attention is section 100B, which was inserted into the 2001 Ordinance in 2012. This provides for a mechanism whereby the tax levied and made payable in terms of section 37A is to be computed and collected. The mechanism itself is laid down in rules contained in the Eighth Schedule. As presently relevant, it suffices to note that the tax payable is to be calculated and deposited on behalf of taxpayers by the National Clearing Company of Pakistan Ltd, which is impleaded herein as Respondent No.2. This respondent of course maintains and operates the electronic system on which shares in listed companies are traded, cleared and settled. With the foregoing statutory framework in mind we turn to the facts of the case.

5.Learned counsel for the petitioner submitted that the petitioner owned a number of shares in Engro Powergen Qadirpur Ltd., (herein after referred to as the "Company"). The said shares were acquired some time in 2011. At that time the Company was not listed but subsequently it obtained a listing on the Karachi Stock Exchange. This was sometime in October, 2014. Since the shares had been listed, they were held by the petitioner in the relevant account maintained on the electronic system that is used for such purposes. The petitioner disposed off his shares through a broker (pro forma respondent No.4) in January 2015. Learned counsel for the petitioner emphasized that the petitioner had held the shares continuously from 2011 till disposal. It was submitted that much to the petitioner's surprise the respondent No.2, applying section 37A read with section 100B and the Eighth Schedule to the petitioner's transaction, deducted an amount of Rs.1,617,977/- from the sale proceeds received on the disposal of the shares. This was the tax payable in terms of section 37A at the relevant rate set out in Division VII. Learned counsel submitted that in the facts and circumstances of the petitioner's case, the disposal was not liable to the payment of any tax in terms of section 37A and that the deduction was contrary to law. Suitable relief was prayed for accordingly.

6.Learned counsel for respondent No.2, arguing first at the request of learned counsel for respondent No.1 (FBR) with the permission of the Court, explained the mechanism whereby this respondent, through whose system shares of listed companies are bought and sold, deducts and collects tax in terms of the provisions referred to above. On a query from the Court, learned counsel explained that where the shares of a company are listed for the first time on a stock exchange, for purposes of determining whether any capital gains have been made on the subsequent (first) disposal of the shares in terms of section 37A, the date of acquisition (for purposes of subsection (2) thereof) is taken to be the date on which the shares are listed on the Stock Exchange. Thus, in the present case, in respect of those persons who were members of the Company at the time that it obtained listing on the Karachi Stock Exchange, the date of acquisition was treated to be the date on which its shares were so listed (in October 2014), and the "holding period" was the period from this date till the date of subsequent (first) disposal of shares by the concerned member. It was to this period to which the respondent No.2 applied the relevant rate as given in Division VII. The amount deducted by way of tax on capital gains from the sale proceeds obtained by the Petitioner on the disposal of his shares in January 2015 had been calculated on such basis. Learned counsel emphasized that the respondent No.2 had to fulfill its statutory obligations in terms, inter alia, as laid down in the Eighth Schedule, and had to make deductions on and collections from sale transactions accordingly.

7.Learned counsel for FBR took a preliminary objection, namely that it was not apparent from the record as to exactly when the petitioner had acquired shares in the Company. Thus, there was to this extent a factual controversy and the petition was liable to be dismissed on this ground alone. Insofar as the merits of the case were concerned, learned counsel submitted that the petitioner was correctly held liable to the payment of tax on the capital gains made by him and that the requisite "holding period" in terms of section 37A(2) had been correctly computed by the respondent No.2 and the relevant amount properly deducted from the sale proceeds. It was prayed that the petition be dismissed.

8.We have heard learned counsel as above, considered the record and examined the statutory provisions. Insofar as the preliminary objection, that the petition involves a disputed question of fact, we are, with respect, unable to agree. Firstly, it is to be noted that no para-wise comments/counter affidavit responsive to the merits of the petitioner's case in this regard has been filed. But secondly, in any case, for the reasons stated below, as a matter of law the objection is without substance since it is not disputed that, regardless of whenever the shares were acquired by the petitioner, they were acquired prior to the date on which the Company got listed on the stock exchange. As we explain, this aspect of the matter is conclusive.

9.As noted at the outset, section 37A is a charging provision since it imposes a tax on capital gains made on the disposal of securities. The rules of interpretation applicable to charging provisions in fiscal statutes are well established and no reference to earlier case law is necessary. It is fundamental to this branch of the law that the charging provision is to be construed strictly and literally, and in favour of the taxpayer and against the Revenue. Furthermore, if two interpretations are reasonably available when construing a charging provision, the one more favorable to the taxpayer is to be adopted. All this is trite law, and during the course of the hearing learned counsel for FBR, quite properly, did not either dispute these principles or challenge their applicability to section 37A. When the section is examined, for present purposes the crucial part is subsection (2). This determines the "holding period" which in turn determines the rate to be applied to the capital gains made on the disposal of the security. What is of crucial importance is to note that, as is clear from the subsection, the "holding period" is with reference to a "security" and not otherwise. Now, the latter term has been given a specific meaning for purposes of section 37A. This is contained in subsection (3) and has already been alluded to above. Having considered the matter, in our view, for the charge in section 37A to be complete, and thus the tax levied in terms thereof to be payable, the instrument in question (here shares of the Company) must be a "security" for the entire "holding period". In other words, the relevant instrument must be (i) a "security" on the date on which it was acquired, and (ii) a "security" on the date on which it is disposed off. Both of these conditions must be met and applicable for the charge to be complete. Since "security" has a specific meaning for purposes of section 37A, this means that the instrument in question must be a "security", as defined, on both the dates. As presently relevant, this meant that the shares of the company ought to have been listed on a stock exchange on the date on which the petitioner acquired the same and the date on which he disposed them off. Both of these conditions had to be met for there to be a "holding period" within the meaning of subsection (2) and, therefore, a valid levy in terms of section 37A. In our view, this conclusion follows necessarily from the relevant principles of interpretation. Subsection (2) has to be read and applied literally, and the "holding period" determined accordingly. The term "security" as used therein can only have, and be given, its defined meaning. Furthermore, and in any case, even if section 37A were susceptible to any other (reasonable) interpretation as might bring the petitioner within the four corners thereof, any such interpretation would have to give way to the interpretation more favorable to the taxpayer, again on the basis of the principles noted above.

10.Now, it is not in dispute that on the date on which the petitioner acquired the shares of the Company, it was not listed on any stock exchange. This fact is also confirmed by the undisputed position of the petitioner as a member of the Company on the date on which its shares first got listed on the Karachi Stock Exchange. Quite obviously, all such persons had to have become members of the Company on a date prior to the date of the listing, and it is irrelevant for present purposes what that date was for any particular member. Thus, one of the necessary conditions for there to be a "holding period" within the meaning of subsection (2) was missing. If there was, in law, no "holding period", there could be no levy of tax in terms of section 37A. Therefore, as a matter of law, the petitioner was not liable to the payment of any tax in terms of the section on the disposal of the shares in question. It follows that the deduction made by respondent No.2, acting in terms of the provisions noted above, was contrary to law and is liable to be set aside. The petitioner is entitled to relief accordingly.

11.Before parting with this judgment we may note that the conclusions arrived at above are of general application and it will be appropriate to clarify the law insofar as the statutory obligations of respondent No.2 are concerned. In our view, since no tax in terms of section 37A can be levied on any gains made by a person who holds shares in a company on the date that it is first listed on a stock exchange on the subsequent (first) disposal thereof, the respondent No.2 is not at all empowered to deduct or collect any amount in terms of section 100B read with Eighth Schedule (and/or any other applicable provision) on such a transaction. Therefore, should the respondent No.2 not make any deduction or collection from any sale proceeds in respect of any such transaction, it shall be under no liability on account of any purported or alleged failure to comply with its statutory obligations under the 2001 Ordinance.

12.In view of the foregoing this petition is allowed and it is declared that since the petitioner was not liable to the levy of tax in terms of section 37A on the transaction noted above, the deduction and collection of the aforementioned amount of Rs.1,617,977/- is liable to be, and hereby is, quashed and set aside. We understand that this amount has been remitted to the Revenue by the respondent No.2. Accordingly, FBR/the Department shall refund the said amount to the petitioner within 90 days from today. If they fail to do so, the petitioner may make an application to the respondent No.2 which shall seek a suitable clarification from FBR. If no clarification is given within a period of 30 days (and that includes a failure of FBR to timely respond to the query), then the respondent No.2 is hereby directed to credit the petitioner's relevant account with the aforementioned sum from any amount(s) that may be held or collected by it by way of any deduction/collection in terms of section 37A read with section 100B and the Eighth Schedule from any person in respect of any transaction. Such payment being made under the order of the High Court, it shall constitute a valid discharge by the respondent No.2 of any relevant obligations in terms of the 2001 Ordinance.

SL/K-6/SindhPetition allowed.