ASSOCIATED CEMENT (STATE CEMENT CORPORATION OF PAKISTAN (PVT.) LIMITED) Versus GOVERNMENT OF SINDH

1. SYED HAIDER ALI PIRZADA, J.‑‑‑ The petitioner through this petition has claimed the following reliefs:‑

2. "A. All property/goods imported by petitioner for its consumption/use is exempt from payment of octroi tax;

3. B. Sindh Government Notification 3‑6‑1980 is illegal, invalid and unenforceable;

4. C. Gazette Notification, dated 16‑7‑1987 by Respondent No.3 is mala fide, illegal and unenforceable;

5. D. Order respondent No.1 to direct respondents Nos.2 and 3 not to recover any octroi tax on the goods/properties imported by petitioner for its consumption/use;

6. E. Restrain respondents Nos. 2 and 3 from recovering any octroi tax on the property/goods imported by petitioners for its consumption/use;

7. F. Grant any other relief or reliefs which this Hon'ble Court may deem fit and proper in the circumstances of the case; and

8. G. Award compensatory costs."

9. The facts leading to the filing of the above petition are that Associated Cement Company Limited, a company incorporated under the Companies Act, 1913 and having its registered office in Bombay was the owner of two cement factories in Sukkur and Wah respectively. By agreement, dated 12‑3‑1962 the Government of West Pakistan purchased building structures, vehicles, machines, plants and tools etc. from Associated Cement Company Limited. On the dissolution of West Pakistan and creation of the four provinces, the President promulgated "the Associated Cement (Vesting) Order, 1970 whereby the undertaking known as "Associated Cement (Government of West Pakistan)" vested in the President for the purpose of the new Provinces. By Associated Cement (Vesting) Ordinance, 1974, dated 24‑10‑1974 the undertaking known as Associated Cement were vested in the State Cement Corporation of Pakistan Limited which has managed the same. State Cement Corporation of Pakistan (Private) is a private limited company wholly owned and controlled by the Government of Pakistan and its Chairman and Directors are appointed by the Government of Pakistan.

10. It is the case of the petitioner that Associated Cement is an industry owned and possessed by the Government since 1965 and is an undertaking and functionary of the Federal Government. It is situated within the limits of Union Council Ali Wahan, District Sukkur. Petitioner imports raw materials, machinery, spare parts and tools as well as eatables and other goads for consumption/use by the factory and its employees.

11. In August, 1988 petitioner received a letter, dated 30‑7‑1988 from respondent No: 2 informing that Baluch Traders have been leased the right of collection of octroi tax for the year 1988‑89 and asking the petitioner to pay octroi tax on all goods before entering the factory. By letter, dated 2‑8‑1988, petitioner informed respondent No.1 that petitioner is owned by the Government of Pakistan and asked him to supply inter alia.

(i) Gazette Notification authorizing the Union Council Ali Wahan to impose and collect octroi tax;

(ii) Letter from Deputy Commissioner approving rate of octroi.

12. It is the further case of the petitioner that respondent No.2 supplied some information/documents but did not supply letter from Deputy Commissioner approving octroi contract. Consequently, respondent No.2 was requested to supply the same. On 27‑8‑1988 petitioner wrote to respondent No.1 informing it that (i) petitioner is owned by the Federal Government and is managed/administered by the Agency of the Federal Government/President of Pakistan, (ii) petitioner imports machinery spares, tools, raw material and other goods which is the property of the Federal Government and (iii) under Article 165 of the Constitution, Federal Government shall not in respect of its property or income, be liable to taxation under any Act of Provincial Assembly and requested it to direct the respondents not to demand octroi tax on goods imported by the petitioner. Hence the present petition.

13. The respondents contested the petition. The respondent No.3 filed counter‑affidavit. The respondent No.3 contended that the petition is not maintainable in law and facts as it involves disputed question of fact which can be resolved after recording evidence. The respondent No.3 pleaded that the petitioner is a separate legal entity having its own Memorandum and Articles of Association. Therefore all its assets and properties vest in it and not Federal Government. Article 165 has no applicability to the facts of the case. In para. 5 of the counter‑affidavit, the respondent No.3 stated that notification dated 6‑7‑1987 is validly issued by the respondent No.3 in exercise of powers under section 60 of the Sindh Local Government Ordinance, 1979 and the rules framed thereunder.

14. In support of the above petition, Mr. SA. Sarwana, learned counsel appearing for the petitioner, raised the following contentions:‑

(1) The petitioner is not liable to pay octroi tax under Provincial Act under Article

15. 165 of the Constitution of Islamic Republic of Pakistan.

(2) Notification dated 3‑6‑1980 of Sindh Government delegating its power to levy taxes is illegal and ultra vires of the Constitution.

(3) No previous sanction of the Government to levy octroi tax has been obtained, therefore, no recovery can be made from the petitioner.

16. On the other hand, Mr. Khalid M. Ishaq, learned counsel appearing for the respondent 3 submitted that Government is competent to delegate its powers. The notification was validly issued by the Government of Sindh. The petitioner is a separate entity and is not department of the Government. Mr. A.A. Muhammad Ally, learned Additional Advocate‑General submitted that the Government of Sindh is competent to delegate its powers. He submitted that the petition is incompetent and liable to be dismissed.

17. Reverting to the first contention of Mr. Sarwana that the petitioner shall not be liable to octroi tax under any Act of the Provincial Assembly as provided by Article 165 of the Constitution of Islamic Republic of Pakistan, it is necessary to reproduce Article 165 of the Constitution which reads as under:‑

18. "165.‑‑‑(1) The Federal Government shall not, in respect of its property or income, be liable to taxation under any Act of Provincial Assembly and, subject to clause (2) a Provincial Government shall not, in respect of its property or income, be liable to taxation under Act of Mains‑e‑Shoora (Parliament;) or under Act of the Provincial Assembly of any other Province.

(2) If a trade or business of any kind is carried on by or on behalf of the Government of a Province outside that Province. that Government may, in respect of any property used in connection with that trade or business or any income arising from that trade or business, be taxed under Act of Majlis‑e‑Shoora (Parliament) or under Act of the Provincial Assembly of the Province in which that trade or business is carried on."

19. It is not in dispute that Associated Cement Company Ltd., a company incorporated under the Companies Act, 1913 and having its registered office in Bombay was the owner of two cement factories in Sukkur and Wah respectively. By agreement, dated 12‑3‑1965 the Government of West Pakistan purchased buildings, structures, vehicles, machines, plants and tools etc. from the owner. On the dissolution of West Pakistan and creation of the four provinces, the President promulgated the Associated Cement (Vesting) Order, 1970 (P.O. XIX of 1976) whereby the undertaking known as "Associated Cement (Government of West Pakistan)" which immediately before the appointed day, vested in the Government of West Pakistan together with all the lands, buildings, machinery, appliances, fixtures and funds appertaining thereto. Para 4(6) provides that all registered properties, assets, liabilities, debts and obligations of the Government of West Pakistan relating to the Associated Cement, shall be the rights, properties, assets, liabilities, debts and obligations of the President for the purposes of the need of provinces. By Associated Cement (Vesting) Ordinance, 1974 (Ordinance XX of 1974) the undertaking known as Associated Cement which ‑ immediately before the commencement day, vested in the Federal Government, together with all lands, buildings, machinery, appliances, fixtures and funds appertaining thereto, were vested in‑ the Corporation, that is, the State Cement Corporation of Pakistan Limited founded and registered under the Companies Act, 1913. By virtue of section 3(a) of the Ordinance, the Associated Cement shall vest in the Corporation and all powers which were exercisable by the Federal Government, shall be exercisable by the Corporation. By virtue of Section 3(6) all rights, properties, assets, liabilities, debts and obligations of the Federal Government relating to the Associated Cement shall be the rights, properties, assets, liabilities debts, and obligations of the Corporation. Section 8 of the Ordinance provides that the investment made by the Federal Government in the Associated Cement before the commencing day shall be deemed to be the Federal Government's equity in the Corporation. The State Cement Corporation of Pakistan Limited was incorporated on I1‑8‑1973. The Corporation acquired Associated Cement together with all lands, buildings, machines, plants, fixtures and parts appertaining thereto.

20. We have referred in detail to the various instruments or enactments which unequivocally establish that it is Corporation created by the Ordinance, the investment was made by the Federal Government.

21. In a case reported as (1916) A.C. 307, the veil of incorporation of an English Company was lifted by the House of Lords itself and it was held that the Daimler Company which though incorporated in England, was 'an associated body of Germans, because all its shareholders except one were of German nationality. In these circumstances, it was said, it became "material to consider what is this thing which is described as a corporation."

22. In The President v. Mr. Justice Shaukat Ali (PLD 1971 SC 585) it was held at page 616 as follows:

23. "The trend of decisions since the above enunciation of the law is Salomon's case appears, however,. to show that in a number of important respects both the Courts and the Legislatures have rent the veil which was recognised in (he above‑mentioned decision to be almost inviolable. The growing tendency appears to be rather to look at the substance and not to allow the vision to be clouded by the shadow of the corporate personality. Thus where the: corporate personality is being used merely as a cloak for fraud or improper conduct or where it can be established that the corporate personality is merely acting as an agent or trustee for someone else, be he an individual or another subsidiary company, or where it is necessary to determine the true character of the corporate personality for other purposes, such as to determine its tax liability or its quasi‑criminal liability or as to whether the corporate body is an enemy concern or not, or a mere trustee for certain purposes, the Courts have not hesitated to look behind the veil of incorporation."

24. At page 617 it was further held as under:‑

25. "Whatever might be the position of third parties, vis‑a‑vis the company and the liabilities of its shareholders, it does appear that there is no bar to the Courts lifting the veil of incorporation to determine the true relationship of the shareholders with regard to their dealings with the company or to ascertain the true nature of the company itself in matters which are governed by other statutes or where other considerations necessitate the taking of such a step. In the present case too, we are not concerned with the liability of the respondent as a member of the companies but we are concerned, in terms of a Code of Conduct drawn up under the Constitution, with determining as a matter of public policy as to whether the association of a Judge of a superior Court with such concern constitutes involvement in activities of trade, business or industry. For this purpose we think we are entitled to go behind the shadow of incorporation in order to ascertain as to what the real nature of the association of the respondent was with these concerns."

26. The power of the Court to lift the veil as held in the above case (PLD 1971 SC 585), was not disputed in another case reported in PLD 1985 SC at page 97 but it was argued by the learned counsel for the appellant that this exercise will not make any difference in the facts and circumstances of the case. This contention was not accepted. It was held that "the respondent‑Company was carrying on the function of Industrial Development and the trade and business connected therewith for and on behalf of the Government. The trade is that the lifting of veil, has revealed that for the relevant purposes in this case, it was doing so just like a department of the Government notwithstanding the incorporation, which as explained earlier will not make any difference regarding the relevant constitutional provision on exemption from Federal Taxation."

27. In a case reported in PLD 1990 Karachi at page 186, a Division Bench of this Court, it was held that the veil of incorporation can be lifted to confront the realities. ,

28. In a matter of this description, it is well established that the Courts are entitled to pierce the veil of corporate entity and look at the reality of the transactions. It is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are enjoying rights as those enjoyed or borne by the members. But in certain exceptional cases, the Court is entitled to life the veil of corporate entity and to pay regard to the economic realities behind the legal facade. We have already reproduced hereinabove the relevant part of the Associated Cement (Vesting) Order, 1970, Associated Cement (Vesting) Ordinance, 1974 and the Memorandum and Articles of Association of State Cement Corporation of Pakistan (Private) Limited. It is clear to us that Associated Cement vests in the Federal Government and the petitioner Corporation is essentially performing functions covered by the wide field of activity permissible to the Federal Government under the Constitution of Pakistan. The petitioner Corporation is clearly entitled to the exemption germane to the property of the Federal Government as provided by Article 165 of the Constitution and all property/goods imported by the petitioner for its consumption/use is exempt from payment of octroi tax.

29. The second contention of Mr. Sarwana is that Notification dated 3‑6‑1980 of Sindh Government delegating its power to levy taxes is illegal and ultra vires of the Constitution. This contention is devoid of force. Section 106 subsection (I) of the Sindh Local Government Ordinance, 1979 provides that Government may, by notification, delegate any of its powers to a council or to any officer under Government or the council, as the case may be.

30. The last contention of Mr. Sarwana is that no previous sanction of the Government to levy octroi has been obtained therefore no recovery can be claimed from the petitioner. Section 60 of the Ordinance reads as follows:‑

31. "60. (1) Subject to subsection (2) a council may levy, in the prescribed manner, all or any of the taxes, rates, tolls and fees mentioned in . Schedule V."

32. The word "with the previous sanction of Government" were omitted by Sindh Ordinance VII of 1982. In this view of the matter, the contention is overruled.

33. For the reasons stated above, this petition is accepted. We hold that all the property/goods imported by petitioner for its consumption/use is exempt from payment of octroi tax. The respondents are restrained from recovering any octroi tax on the property/goods imported by the petitioner for its consumption/use. In the circumstances of the case, the parties are directed to bear their own costs.

34. A.A./A‑1194/K Petition accepted.