Reliance on dictionary instead of law surprises tax experts

ISLAMABAD: Tax experts are surprised that while disqualifying the prime minister, the Supreme Court (SC) judges relied on dictionary definitions instead of relevant law regarding definition of ‘salary’ and all other relevant terms, the Income Tax Ordinance 2001 (ITO).

It was not required under the ITO 2001 that former prime minister Nawaz Sharif would have declared the “receivable” salary in his nomination papers or any other declaration or had shown it as ‘asset’.

In case of salaried individuals, whether ‘receivable’ is income or only ‘received’ is the income, the only relevant law is the ITO 2001 and its Section 12 clearly explains this point. This explanation in Section 12 has finality as far as any declarations are concerned. Contrary to this, Section 15 of ITO 2001, which deals with “income from properties” clearly defines income ‘received’ and the income ‘receivable’ as the income. Therefore, Section 15 plainly differentiates between income ‘received’ and the income ‘receivable’. In its July 28, 2017 judgment, while disqualifying the prime minister, the SC bench said that there was no definition of ‘asset’ in Representation of People Act 1976 (ROPA) and thus the bench looked into the definition of this term in law and business dictionaries. Whatever, the definitions were given in those dictionaries, the citizens of Pakistan are bound to follow the law of the land and not the terms defined in any dictionaries. The only relevant law to interpret these terms relating to declaration of income is the ITO 2001.

The Section 12 of the ITO 2001 reads;

“12. Salary.— (1) Any salary received by an employee in a tax year, other than salary that is exempted from tax under this Ordinance, shall be chargeable to tax in that year under the head ‘Salary.’

(2) Salary means any amount received by an employee from any employment, whether of a revenue or capital nature, including —

(a) any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave, overtime payment, bonus, commission, fees, gratuity or work condition supplements (such as for unpleasant or dangerous working conditions).

Section 12 of ITO 2001, the only relevant law of the land, clearly declares that only “received” amounts will be “salary” income. Hence, only “received” consideration of salary can be considered as “asset”. And only “received” money under the head ‘salary’ is required to be declared. What is difference between “received” and “receivable” in case of a salaried person and in case of ‘business’ can be well understood by comparing this section 12 with the section 15 of the same ordinance.

Section 15 of ITO 2001 reads;

“15. Income from property.— (1) The rent received or receivable by a person [for] a tax year, other than rent exempted from tax under this Ordinance, shall be chargeable to tax in that year under the head of Income from Property.”

Clearly in case of income from property, the ITO 2001 declares that both “received” and “receivable” will be the income and thus a person having income from his property will also declare the ‘receivable’ income. However, comparing it with Section 12 of the same ordinance clarifies that the scenario is entirely different in case of salaried person and salary is required to be declared if it is “received” and not required to be declared if it is “receivable” and hence the question of “receivable” to be considered as an “asset” in any way does not arise. It was not required and former prime minister Nawaz Sharif was not under obligation under the only law of the land on this subject, the ITO 2001, to declare the “receivable” salary in his nomination forms or any other declaration. It would have been against the spirit of the ITO 2001 had the former PM Nawaz declared the “receivable” salary in his nomination forms or declare it as an “asset”.

Most interestingly, along with filing annual returns, one has to submit his wealth statement as well as has to reconcile his income and expenses with his closing wealth. Had former prime minister Nawaz Sharif mentioned ‘receivable’ salary in his annual returns or had shown it in nomination papers under section 12(2)(f) of ROPA, he would have to declare the same un-withdrawn ‘receivable’ salary in his wealth statement. As he never received the salary and did not declare the same in his income in accordance with section 12 of ITO therefore declaration of salary “receivable” as an “asset” in his wealth statement would result that wealth statement would not remain reconciled. So in case of salary declaration, considering “receivable” as “asset” and requiring its declaration in nomination papers is simply misconception and is against all concepts present in the only relevant law the ITO 2001.

For any person it can be further understood by the fact that no person can be responsible for paying tax on salary which he has not received. If it is not considered income, how it can be considered “receivable” or an “asset”. Similarly even if a person receives, three years of salary in advance it is considered income and he is liable to tax in the same year and not the next three years. For “receivable” to be recognised, income has to be recognised and salary income can only be recognised if it is received. Further the judgment has failed to state that income was not recognised. If there was no income, how there was a receivable.

The SC judgment seems to have misunderstood the tax law of individual salary by comparing it with corporate liability and receivables. Further such an interpretation will completely redefine individual taxation to be liable to pay income on salary whether received or not. Is it an error or is the tax law now changed? The Supreme Court may rectify the situation.