DHA exempted from income tax as 'local authority': LHC judgement

[Lahore_Real_Estate]

The Lahore High Court (LHC) on Tuesday declared the Defence Housing Authority (DHA) as local authority and exempted it from income tax under section 49 of the Income Tax Ordinance 2001. However, the tax department had argued that such housing authorities do not fulfil the condition to qualify for exemption as a local authority.

It is learnt that the LHC has issued a landmark judgement on taxability of such housing authorities in case (No 6512) of 2008. According to detailed judgement of the case available to Business Recorder, Justice Syed Mansoor Ali Shah of LHC held that the DHA is a local authority.

He exempted it from tax under section 49 of the Ordinance 2001 (as the said section was prior to the Finance Act, 2008) for Tax Years 2003-2005. As a result, letter issued by the tax department as well as notices issued under section 122 (1) (5) (5-A) of the Income Tax Ordinance 2001 for Tax Year 2003-2005 were set aside, being illegal and without lawful authority.

The tax department when asked whether other development authorities in the province for example Lahore Development Authority (LDA), Faisalabad Development Authority (FDA), Multan Development Authority (MDA) enjoy exemption under section 49 of the Ordinance, the departmental counsel confirmed that they did enjoy exemption and were considered as local authorities" under section 49 of the Ordinance (as it was prior to the commencement of the year 2008).

The judgement further said that it is clear that the authority has a statutory status. It enjoys the powers of imposing fees and charges and is involved in developing and regulating housing in the area. The authority also maintains a separate Fund by the name of Defence Housing Authority Fund (Fund) and all the moneys received by the authority are credited to the said Fund. It also prepares its own budget which is placed before the Governing Body, it said.

Details show that the legal question arose whether the DHA was a "local authority" for the purposes of section 49 of the Ordinance, 2001 (as it stood before the amendment brought about through Finance Act, 2008) and therefore entitled to exemption of income tax for the period in question ie, Tax Years 2003 to 2005.

Brief facts of the case are that the DHA approached the department for exemption under section 49 of the Income Tax Ordinance, 2001 for tax years 2003-2005 on the ground that DHA is a "local authority" and hence its income be exempt from income tax.

The contention of the DHA was turned down by the department and thereafter notices under section 122(I), (5), (5-A) of the Ordinance 2001 were served on the petitioner (housing authority) for the said Tax Years. The letter and the said notices were challenged before the court. The petitioner argued that DHA is a "local authority" in terms of section 3 (28) of the General Clauses Act, 1897.

The "Local Authority" is defined in Section 3(28) of the General Clauses Act, 1897. According to the definition, "Local authority" shall mean a municipal committee, district board, body of port commissioners or other authority legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund:"

Local authority is also defined in Local Authority Loan Act, 1914, which says, that "Local authority" means any person legally entitled to the control or management of any local or municipal fund, or legally entitled to impose any cess, rate, duty or tax within any local area".

The court held that the main ingredient that determines whether an authority is a local authority is its power to manage and administer "local fund". The local fund is defined in Local Authorities Loan Act, 1914 as: Funds", used with reference to any local authority,. Includes any local or municipal fund to the control or management of which such authority is legally entitled, and any cess, rate, duty or tax which such authority is legally entitled to impose, and any property vested in such authority."

In the present case DHA has been constituted under Chief Executive's order No 26 of 2002 namely Defence Housing Authority Lahore Order, 2002 ("Order"). The management of the authority is vested in the Governing Body. The Authority is empowered to do all the acts that are necessary for planning and development of and for providing and regulating housing facilities in the area notified by the Authority. After hearing viewpoint of both the sides, the LHC ruled that the DHA is a local authority and exempted from tax under section 49 of the Ordinance 2001, the judgement added.