Justice Mansoor Ali Shah and Justice Munib Akhtar of the Supreme Court, both, have an established, longstanding judicial record to speak for their acumen and understanding of the law. Despite their respective chief justiceships having fallen victim to politics, strangled by the passage of the Twenty-Sixth Amendment to the Constitution of the Islamic Republic of Pakistan, 1973, their widespread contributions to the jurisprudence in Pakistan are hard to ignore.

In fact, when the perverse noise of the chest-thumping of those who celebrated the passing over of these two highly capable, influential and original jurists dies down, the legal community may have to do some soul-searching regarding its treatment of them. Not only on constitutional matters, but in any realm of law that Justice Shah and Justice Akhtar have found occasion to apply themselves to, their elaborations on the law have been illuminating. This writer has previously attempted to grapple with their judgments in the realm of Federalism: “Post 18th Amendment Federalism: ‘Pith and Substance’ Doctrine and Cooperative Federalism”.

This article, meanwhile, attempts to understand the jurisprudential bent of these two esteemed justices when it comes to their interpretation of fiscal statutes and resolving issues related to tax. A few judgments have been picked out, where Justice Shah and Justice Akhtar have found themselves to be on the opposite sides of the legal question, disagreeing with each other. Even when they broadly reach the same conclusions on the question of law, they have done so for different reasons in these judgments.

There are three legal issues that this article refers to. The first deals with the question of the difference between an exemption and a tax credit, particularly as provided in section 159 of the Income Tax Ordinance, 2001 (“Income Ordinance”). The second deals with the issue of whether the non-provision of limitation period in section 161 of the Income Ordinance, which imposes liability on a person who fails to make deductions, means that the limitation period provided in section 174(3) applies for the purposes of initiating action under section 161. Section 174(3) mentions the time period that a taxpayer is required to maintain record for. The third deals with the question of whether a notification issued under section 181 of the Customs Act, 1969 (“Customs Act”), specifying the amount of fine to be imposed on the confiscated goods, unlawfully curtails the discretion of a customs officer. This officer, while passing the order of confiscation of goods, under section 181, also has the discretion to allow the owner of the goods an option of paying such redemption fine as the officer “thinks fit”, instead of confiscating the goods. This grant of discretion, however, has been curtailed by allowing the FBR, under the provisos of section 181 to specify the goods for which this option is not available, and (2) to specify the redemption fine for particular goods. Such curtailment of discretion was contended to be unlawful by virtue of section 223 of the Customs Act, where it has been provided that the Federal Board of Revenue (FBR) shall not interfere with the discretion of the customs officer “in exercise of their quasi-judicial functions”.

This article does not seek to fully enunciate each of these issues but focuses on the tension points, that is, where the two respective justices diverged on the points of law.

• EXEMPTION AND TAX CREDIT: TWO SIDES OF THE SAME COIN?

The question of the difference between exemption and tax credit for the purposes of Income Ordinance, particularly section 159, arose before Justice Shah in Nishat Dairy (Pvt.) Ltd. v. Commissioner Inland Revenue and others, 2013 PTD 1883 (Lahore).

Before Justice Shah was the taxpayer, Nishat Dairy, a company in the business of corporate dairy farming. Under section 65D of the Income Ordinance, since omitted by Finance Act, 2021, Nishat Dairy was entitled to a 100% tax credit on its income for five (05) years. There was no dispute on this question since, the company, Nishat Dairy, squarely fell within the ambit of section 65D of the Income Ordinance.

The issue for the tax payer, however, was that it had to pay advance tax under section 148(1) of the Income Ordinance, on its imports, since it was importing livestock from Australia, and also other supplies such as cattle feed and calf milk replacer, from outside of Pakistan. This, essentially, meant that the money got out of Nishat Dairy’s pockets at the time of its imports, and went to the FBR’s coffers. Nishat Dairy, though, by virtue of being entitled to 100% tax credit on its income became entitled for a refund, at the time of the filing of its return.

Those familiar with the FBR, or any regulatory body set up under a fiscal statute in Pakistan, can zealously attest that getting a refund in Pakistan is almost an impossibility. Therefore, Nishat Dairy sought to convince the court that it was entitled to an exemption certificate under section 159(1) of the Income Ordinance. Getting an exemption certificate would mean that for the income subject to 100% tax credit, the money would not get out of its pockets, for the purposes of paying the advance tax at the time of imports, as it would be able to rely on the exemption certificate. Hence, the money, in turn, would not reach the FBR, which would mean that there would be no need to apply for a refund on the basis of a 100% tax credit on income.

Except that section 159(1) of the Income Ordinance did not mention anything about tax credits, but only about the certificate being issued if there were an exemption, or if a lower rate of tax applied.

Justice Shah in Nishat Dairy did not say that an exemption and a tax credit are identical. He appreciated the difference. Tax exemption, Justice Shah held, reduces the amount of taxable income, whereas tax credit reduces the amount of tax to be paid. For instance, if the income of a taxpayer is, say, Rs. 100, which is taxable at 20%, then an exemption, as held by Justice Shah, reduces the amount of income liable to tax, that is, it reduces the amount of Rs. 100. Whereas, a tax credit would mean that once the amount of tax levied has been determined, that is, 20% of Rs. 100, which is Rs. 20, then a tax credit reduces this amount of Rs. 20. In case the entire income is exempt from tax, then that means there is no tax on Rs. 100. Similarly, if the tax credit is 100%, then that means nothing of the Rs. 20 needs to be paid to the FBR.

Justice Shah, however, held that whatever the difference between an exemption and a tax credit, it was not material for the purposes section 159 of the Income Ordinance. He mentioned that, perhaps, “tax credit and tax exemption work on opposite sides of the same equation”.[1] Further, expressing the same notion, Justice Shah concluded that the “tax exemption and tax credit are two sides of the same coin”,[2] since “[a]t the end of day, both the incentives/methodologies reduce and ‘exempt’ the tax liability of the taxpayer”.[3] Moreover, Justice Shah held that there was no point in seeing the two terms distinctly, as “[t]he nuance between the two terms (discussed above) is immaterial because the taxpayer stands exempt from the payment of tax at the end of the day in both the cases”.[4]

In reaching such a conclusion, however, there were other considerations in play. There was the practicality of it all: “In the present case the exercise of charging advance tax at the import stage appears to be unnecessary as the petitioner enjoys 100% tax credit against its tax liability arising from industrial undertaking”.[5] And then there was the purposive interpretation doing some work, since the “wisdom”, Justice Shah held, behind section 159 was “to avoid burdening the taxpayer and the tax administration with the calculations, refunds and adjustment of amounts, which in the end are not required to be credited to the State exchequer”.[6] Further, Justice Shah, asserted that the provisions of sections 65D and 159 of the Income Ordinance, “extend fiscal incentives for boosting our economy and must receive progressive interpretation advancing the legislature intent”.[7]

Not so fast, held Justice Akhtar in his famous H.M. Extraction Ghee and Oil Industries (Pvt.) Limited and another v. Federal Board of Revenue and another, 2019 SCMR 1081. As the issue made its way to the Supreme Court, Justice Akhtar undertook a granular legal analysis, something he is known for, bifurcating the differences between an exemption and a tax credit, with the meticulousness of an academic. The purposiveness and........

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