IN THE SUPREME COURT OF PAKISTAN

(Appellate Jurisdiction)

Present
Mr. Justice Umer Ata Bandial
Mr. Justice Munib Akhtar
Mr. Justice Sayyed Mazahar Ali Akhtar Naqvi

Civil Appeal No.647 of 2018

(On appeal from the judgment dated 16.6.2011
passed by the Peshawar High Court, Peshawar in
WP No.602 of 2011)

The Commissioner Inland Revenue

...Appellant(s)
vs
The Secretary Revenue Division and others

…Respondent(s)

For the Appellant(s) : Mr. Ghulam Shoaib Jally, ASC

(in both cases). Mr. Masud Akhtar, Chief Legal, FBR

Respondent No.3 : Ex-Parte

For respondent No.4 : Qazi Ghulam Dastegir, ASC

Date of hearing: 28.9.2020

JUDGMENT

Munib Akhtar, J.: This appeal arises out of the Income Tax
Ordinance, 2001 (“2001 Ordinance”). The question in issue is
whether, in the facts and circumstances of the case, the
respondent taxpayer was entitled, for the relevant tax years, to the
benefit of clause (126F) (since omitted) of Part I of the Second
Schedule to the said Ordinance (herein after referred to as the
“exemption clause”). The exemption clause had provided in
material part as follows:

“(126F) Profits and gains derived by a taxpayer located in the most

affected and moderately affected areas of Khyber Pakhtunkhwa,
FATA and PATA for a period of three years starting from the tax
year 2010….”

2. The respondent-taxpayer is a franchisee of a mobile

company, Mobilink, and has its business/outlet in District
Nowshera. It is not disputed that District Nowshera was declared
Ca 647 OF 2018 2

to be a “moderately affected area” for purposes of the exemption

clause during the relevant period. In respect of the business
activities carried out by the taxpayer as franchisee (sales/services
provided to customers), which were all at its business outlet, it was
entitled to payment of commission by Mobilink. Ordinarily, in
terms of s. 233 of the 2001 Ordinance, advance tax would be
deducted by Mobilink (i.e., the franchisor) on the commission
payments being made to the taxpayer (i.e. the franchisee).
However, on account of the exemption clause the respondent
contended that no such deduction ought to be made. It applied to
the concerned Commissioner under s. 159 for a certificate of
exemption in this regard. That was refused, which led to the
respondent filing a writ petition in the High Court. By means of the
impugned judgment the learned High Court concluded that the
respondent was entitled to the benefit of the exemption clause and,
allowing the petition, directed the concerned Commissioner to
issue the exemption certificate. Against this decision, the
department sought leave to appeal in this Court, which was
granted vide order dated 18.5.2018 to consider whether, in the
facts and circumstances of the case, the respondent was entitled in
terms as held by the learned High Court keeping in mind, in
particular, the judgment of the Court reported as Husnain Cotex
Limited v. Commissioner Inland Revenue 2017 SCMR 822, 2017
PTD 1561 (“Husnain Cotex”).

3. Learned counsel for the appellant-department submitted

that the learned High Court had failed to properly appreciate the
relevant provisions of the 2001 Ordinance. Referring to s. 233,
learned counsel submitted that as provided in subsection (3)
thereof, at the relevant time (i.e. for the tax years in question) the
tax to be deducted in advance was treated as a final tax. Learned
counsel then drew attention to, and relied on, s. 169, which sets
out the effects and consequences of tax being collected or deducted
as final tax. Referring to the various clauses of subsection (2)
learned counsel relied, in particular, on clause (e) to submit that
the result and effect of the impugned judgment would be that the
respondent taxpayer would become entitled to a refund of the tax
deducted by the franchisor. It was submitted that this would be
contrary to law. Relying on Husnain Cotex learned counsel further
Ca 647 OF 2018 3

submitted that the impugned judgment (though of course delivered

many years before the former) was inconsistent with the law as laid
down by this Court and hence was liable to be set aside. Learned
counsel for the respondent-taxpayer on the other hand fully
supported the impugned judgment and submitted that the
respondent came within the scope of the exemption clause and
that this entitlement could not be denied by reference to s. 169.
Learned counsel submitted that the exemption certificate had been
wrongly refused, which error had been corrected by the learned
High Court. It was prayed that the appeal be dismissed.

4. After hearing learned counsel for the parties, and

considering the relevant provisions and in particular the judgment
in Husnain Cotex, we concluded that the appeal could not succeed.
As noted, there is no dispute that the place of business of the
respondent was located in a “moderately affected area” within the
meaning of the exemption clause. No doubt the commission paid
by the franchisor was from, and in, an area outside the areas
identified in the exemption clause, but equally there can be no
doubt that the business activities were carried out within such an
area. It seemed to us that the profits and gains made by the
respondent therefore arose therein. Accordingly (and putting to one
side for the moment the effect, if any, of s. 169), it would appear to
be the case that the respondent was entitled to the benefit of the
exemption clause. However, we now need to consider whether
there is anything in Husnain Cotex that would lead to a different
conclusion.

5. The facts of the petitioner-taxpayers (more than one case

being decided by a common decision) are set out in para 2 (pg.
825):

“[The petitioner-taxpayers]… have their business

establishments either in Lahore or Multan. As they derive
income from executing construction contracts, their
business activity, by virtue of sections 153(1)(c) and 153(3)
read with section 169(b) of the Ordinance falls within the
domain of ‘final tax regime’. Hence the amount deducted at
the rate specified in the First Schedule of the Ordinance
from the payments made to them towards fulfillment of
their contractual obligations are to be treated as their final
tax liability. Accordingly, the petitioners submitted their
income tax statements… disclosing the deductions made
from the payments received against their respective
Ca 647 OF 2018 4

contracts performed in the affected areas. Later it occurred

to the petitioners that they were entitled to claim exemption
on such payments in terms of Clause 126F, so they applied
to the Commissioner for refund of the amount deducted
towards their income tax liability. They initially succeeded
in obtaining refund, however, the Additional Commissioner,
Inland Revenue issued show cause notices to the
petitioners under section 122(5A) of the Ordinance,
proposing to disallow the exemption that was allowed
earlier…. After hearing the matter, the Additional
Commissioner held that as the petitioners fall within the
domain of ‘final tax regime’ and not under ‘normal tax
regime’, the exemption granted under Clause 126F was not
intended for them. This decision was challenged in
appeal…. After his decision in appeal, the aggrieved party
assailed the appellate order before the Appellate Tribunal,
Inland Revenue, which held that the petitioners were
entitled for exemption. The tax department then filed
References before the Lahore High Court which vide
impugned judgments reversed the findings of the Tribunal
after holding that the petitioners fall within the domain of
‘final tax regime’ whereas the term ‘profits and gains’
occurring in Clause 126F was relatable to such taxpayers
only who fall within the domain of ‘normal tax regime’,
hence not entitled to claim exemption. Feeling aggrieved by
such decision the petitioners have preferred these petitions
for leave to appeal.”

After referring to the relevant statutory provisions, as well as

Circular No.14 of 2011 dated 6.10.2011 (“Circular 14”) that had
been issued by the department to provide clarification with regard
to the exemption clause, it was held as follows (pg. 828; emphasis
supplied):

“7. A person who was carrying on business in the

affected areas but was unable to sell his goods or services
to the extent he used to in normal business environment is
the person who can only be described as an affectee of the
adverse business environment. It was thus the adverse
business environment which directly impacted his business
with the result that his profits and gains diminished. The
whole stimulus behind the tax exemption granted in 2010
under Clause 126F on the face of it was that sometime in
the past the businesses located in the affected areas could
not make profits on account of adverse business
environment that was being experienced there. So it was
purely an external factor that diminished the capacity of
the businesses to make profits and gains that was germane
in granting tax exemption under Clause 126F. Hence
exemption in question was intended for such taxpayers
only. These taxpayers could only be the ones who fall under
the ‘normal tax regime’. As to the taxpayers who fall under
the ‘final tax regime’, they face no such situation. Firstly,
they are not located in the affected areas. They only went to
the affected areas when they succeeded in securing
contracts, which in itself created business opportunity for
them, adverse business environment notwithstanding their
business activity starts only when they secure contracts. It
can very well be imagined that before he submits his bid, he
Ca 647 OF 2018 5

estimates the component of all costs that he is to incur

towards the fulfillment of his contractual obligation. To cost
he adds his margin of profit. He then adds the income tax
liability at the rate specified in the First Schedule to the
Ordinance. Where the contract is awarded to be performed
in the areas affected by adverse business environment, the
same has no impact on contractor’s margin of profit which
he has already incorporated in the contract price. The
contractor is thus not affected by any external factor that is
not conducive for doing good business. So the business
environment of the area where contract is to be performed
doesn’t have any correlation with contractor’s profit and
gains. They therefore, cannot equate themselves with those
taxpayers falling under the domain of ‘normal tax regime’,
whose businesses being located in affected areas suffered
financially on account of adverse business environment.
While determining the scope of exemption granted under
Clause 126F, one should not lose sight of the fact that the
precise reason for granting tax relief under Clause 126F was
to ameliorate the financial conditions of certain taxpayers
who were real affectees of business environment that had
affected their capacity to make profits and gains from their
businesses. To extend the benefit of this exemption to the
other category of taxpayers who did not even exist in the
affected areas before succeeding in obtaining contracts to
be performed there could never have been envisioned by the
Legislature while incorporating Clause 126F in the
Ordinance. We are, therefore, of the considered opinion that
in view of the distinction between the two categories of
taxpayers discussed above, the taxpayers such as
petitioners who fall under the domain of ‘final tax regime’
cannot claim exemption under Clause 126F. The case law
relied upon by petitioners’ counsel, therefore, has no
application to the case in hand.”

As regards the aforementioned Circular 14 (reproduced at

pp. 826-7) it was held as follows (pg. 830):

“8. As to the legal effect of the Circular No.14 of 2011,

suffice is to state that it was issued with the intention to
interpret Clause 126F in a manner so that the benefit of
exemption is extended even to such taxpayers also who
were located outside the affected areas but they partly did
business in the affected areas. In our view this explanatory
Circular does not depict the correct interpretation of the
scope of Clause 126F as it traveled into altogether a
different direction from what we have discussed
hereinabove. It appears that ultimately better sense
prevailed with the Federal Board of Revenue as we were
informed by learned counsel for the department that
Circular No.14 of 2011 was subsequently withdrawn vide
letter dated 07.06.2013.”

6. A perusal of Husnain Cotex shows, in our view, that rather

than supporting the case of the department in the facts and
circumstances of the present case, it is rather the case of the
respondent-taxpayer that is made out. This position clearly
emerges, in particular, from the portion that has been emphasized
Ca 647 OF 2018 6

in the extracts taken above. We may note that the term “located”
as used in the exemption clause was considered in the context of
various scenarios in para 3 of Circular 14, which was as follows:

“3. The word “located” as used in Clause (126F) can

possibly have more than one dimension. The relevant
scenario[s] along with the corresponding exemption/taxable
status are outlined below:-

Sr. Situation Exemption/Taxability

No.

(i) The taxpayer is located Exempt

inside the affected and
moderately affected areas
(hereinafter ‘the specified
areas’) and his business is
also carried on inside the
specified areas.

(ii) The taxpayer is located Exempt

outside the specified areas
but his business is carried
on within the specified
areas.

(iii) The taxpayer is located Taxable

inside the specified areas,
but his business is carried
on outside the specified
areas.

(iv) The taxpayer is located Exempt to the extent

outside the specified of the income
areas, but his business is attributable to the
partly carried on inside business operations
the specified areas. carried on inside the
specified areas.

It is clear that the facts and circumstances of the taxpayers

in Husnain Cotex came within the scope of situations (ii) and/or (iv)
and this was the basis on which they claimed exemption. However,
this Court took a contrary view and held that the interpretation
put by the department on the exemption clause was not correct.
We fully agree. On the other hand, the case of the present
respondent falls squarely within situation (i) of the aforementioned
table. It is clear that the department itself regarded the income of
such taxpayers as entitled to the benefit of the exemption clause.
This scenario has been clearly confirmed in para 7 of the judgment
in Husnain Cotex, where such persons have been described as the
Ca 647 OF 2018 7

“affectees” of the “adverse business environment” for whom the

exemption clause was intended. In our view, the facts and
circumstances of the respondent’s case come within the scope of
the exemption clause. We come to this view independently of what
was said in Circular 14, and regardless of whether or not the
department subsequently took a contrary view. We may also note
that the sentence appearing in para 7, i.e., that “These taxpayers
could only be the ones who fall under the ‘normal tax regime’” was
not, in our view, germane to the analysis and conclusions arrived
at by the Court. In particular, it cannot be taken to mean that even
those taxpayers who otherwise came squarely within the scope of
situation (i) (i.e., the “affectees” of the “adverse business
environment”) had also (and only) to be those from whom tax was
not being deducted as a final tax. That would create an anomalous
situation by creating two classes both falling within the scope of
the exemption clause in the facts and circumstances of their case,
and yet the benefit thereof being extended only to the one and not
the other. In our view, such a conclusion would not merely defeat
the exemption clause but would also run against the tenor of
Husnain Cotex when read as a whole. We may also note, with
respect, that the decision in Husnain Cotex was a leave refusing
order. It is now the jurisprudence of this Court that such orders do
not constitute binding authority. Thus, on any view of the matter,
the reliance placed by learned counsel for the department on
certain portions of the judgment is, with respect, not correct.

7. Insofar as s. 169 is concerned, in our view, with respect, the

reliance placed on the same by learned counsel for the appellant
was also misconceived. In particular, clause (e) of subsection (2)
thereof, which disallows the refund of any tax deducted unless it
comes within the condition laid down therein, cannot obviously
stand in the way of the respondent taxpayer in the facts and
circumstances of the present case. This is so because the question
of any “refund” payable to it arose entirely, and only, because of
the failure and refusal of the Commissioner to grant the exemption
certificate applied for and to which the respondent was entitled as
a matter of law. Clearly, the department cannot take the benefit of
its own failure to correctly apply and follow the law. It appears
from the record that the respondent applied for the certificate in a
Ca 647 OF 2018 8

timely manner. The return of any money (incorrectly) deducted as

advance tax would merely restore the position that, in law, existed
all along. It would not be tantamount to a “refund” within the
meaning of s. 169(2)(e). Furthermore, as already noted, to hold that
the respondent was affected by s. 169 in the facts and
circumstances of its case would be to entirely deny it the benefit of
the exemption clause, which is clearly not warranted in law.
Therefore, in our view s. 169 did not, and could not, stand in the
way of the respondent enjoying the benefit of the exemption.

8. For all of the foregoing reasons, it was announced in Court

at the conclusion of the hearing that the appeal stood dismissed.

Judge

Judge

Judge
Islamabad, the
28th September, 2020
Nisar/*

Approved for reporting