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Petitioner: COMMISSIONER OF INCOME-TAX, KARACHI (EAST) VS Respondent: YASIN ALI AKBAR H. JUDGMENT
Court Name: Sindh High Court Judge(s): Ajmal Mian, Ghulam Muhammad Kourejo Title:COMMISSIONER OF INCOME-TAX, KARACHI (EAST) vs YASIN ALI AKBAR H.
JUDGMENT
Reported As: PLD 1982 Karachi 847 Result: Reference answered accordingly Judgment JUDGMENT AJMAL MIAN, J.-By this common Judgment, we intend to dispose of 179 Income-tax References/Income-tax Cases, the detail of which is given hereinbelow as common questions of law is involved; "income-tax Cases Nos. 51, 55, 59, 104, 105, 134 to 146, 149 to 153, 156, 158, 159, 221 to 246, 249. 250, 275, 277 to 296, 298, 305, 306, 307, 315, 316, 324, 346, 348 to 352, 357, 359, 398, 400, 407 to 412, 422, 424 to 449, 451 to 457, 459 to 469, -483 to 493, 495 to 501, 637 to 642, 644, 650, 651, 653, 672, 673, 674, 704, 728, 733, 735 of 1972." The relevant facts for the disposal of the above references/cases are that the respondent in each case is an assessee and at the relevant time held certain shares in a company/companies exempted from payment of income---tax under section 15-BB of the Income-tax Act. The assessee received dividends from such companies. The Income-tax Officer concerned while computing the income of each of the assessee for the purpose of computing the income-tax for the relevant year included the above dividends as income subject to levy of income-tax. However, finally the Income-tax Appellate Tribunal on the basis of the decisions given by it inter alia in I. T. A. Nos. 670 and 688 of 1968-69 dated 20-10-1969, held that dividends received by the assessee from a company covered under section 15-BB are not subject to the levy of the income-tax. The Commissioner of Income-tax through the above references/cases has sought opinion of this Court under section 66(1) of the Income-tax Act, 1922, on the following question "Whether on the facts and in the circumstances of the case the Income--tax Appellate Tribunal was justified in holding that dividends received by the assessee on shares of Companies enjoying the benefit of section
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15-BB of the Income-tax Act are exempt from tax and not liable to be included in the total income of the shareholder?" 3. It seems that after filing of the above references/cases in this Court the President of Pakistan through the Finance Ordinance, 1972 (XXI of 1972) purported to make amendments, inter alia, in section 15-BB of the Income--tax Act by incorporating a new subsection (4-AA) to it providing retrospectively that nothing contained in this section shall be deemed to exempt tax any dividends, paid, credited or distributed by a Company to its shareholders out of the profits or gains exempt from tax under the aforesaid section. The above Ordinance was gazetted in the Gazette of Pakistan, Extraordinary, dated 17th June, 1972 and was enforced with effect from 1st July, 1972. It further seems that the above Ordinance was placed before the National Assembly on or about 16th August, 1972 for converting it into an Act by the National Assembly in view of Article 94 of the Interim Constitution of 1972: It also seems that the National Assembly did not enact the above Ordinance as an Act but the then President of Pakistan issued a Post---Constitution (President's Order 5 of 1972) on 26th September, 1972 in purported exercise of power under clause (1) of Article 279 of the Interim Cons-- titution (1972) providing that Finance (Supplementary) Ordinance, 1972 (XVII of 1972) and the Finance Ordinance (XXI of 1972) and any other Ordinance, which may be made by the President at any time before 31st day of December, 1972 for amending either of the Ordinances or giving effect to the financial provisions to the Federal Government shall continue in force until it is altered, repealed or amended by Ordinance made by the President or by an Act of the Federal Legislature and shall have the like force of law as such an Act. 4. When the above references/cases came up for hearing Mr. Ali Athar, learned counsel for the respondents in most of the above references/cases pointed out that he had raised certain contentions as to the validity of the Finance Ordinance (XXI of 1972) and the amendment brought about by it in the form of subsection (4-AA) in section 15-BB of the Income-tax Act, which were noted in the order dated 21-I1-1979 in I. T. C. No. 101/1972. It was also submitted by him that in pursuance of the above order, a notice was issued to the learned Attorney- General of Pakistan, in response to which the learned Deputy Attorney-General had appeared. We accordingly, ordered the issuance of notice to the learned Deputy Attorney-General. 5. (a) Messrs Aziz Munshi and Haider Ali Pirzada in support of the above references/cases have made the following submissions :- (i) That under section 15-BB of the Income-tax Act, the income of companies covered by the above section in their hands was exempted from the payment of income-tax and not the dividends declared from such income in the hands of the shareholders of such companies. (ii) That in any case in view of the amendment in section I5-BB in the form of insertion of subsection (4-AA), by Ordinance No. XXI of 1972 no exemption from payment of the income-tax can be claimed by the shareholders on the dividends declared by the Companies covered under section I5-BB. (b) On the other hand Mr. Nasim Ahmed Khan learned counsel for some of the respondents in references Nos. 55, 104, 105 and 156 of 1972 has urged the following contentions (i) That under section 15-BB it is the income of the companies covered under the said section is exempted irrespective of the fact, whether it is in the hands of the companies or in the hands of the shareholders in the form of dividends. (ii) That the amendment brought about by the Finance Ordinance (XXI of 1972) in the form of subsection (4-AA) in section 15-BB does not affect the exemption expressly granted to the incomes of the companies covered by the above section. (c) Whereas Mr. Ali Athar has made the following submissions (which were adopted by Messrs Iqbal Naim .Pasha and Naim-ur-Rehman Advocates)
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(i) That it is the income of the companies covered by section 15-BB is exempted from the levy of the income-tax irrespective of the fact, whether it is in the hands of the companies or in the hands of the shareholders in the form of dividends. (ii) That the Finance Ordinance, 1972 (XXI of 1972) lapsed on the expiry of 6 weeks from the date of re-assembly of the National Assembly in the absence of approval by it in terms of Article 94 of the Interim Constitution, 1972. (iii) That the Post-Constitution (President's Order 5 of 1972) issued under Article 279 of the Interim Constitution of Pakistan (1972), purporting to extend the period of Finance Ordinance XXI of 1972 is beyond the ambit of the above Article of the Constitution. (iv) That in any case by virtue of sub-Article (4) of Article 279 of the Interim Constitution (1972), no amendment even in the Constitution could have been made retrospectively to any date earlier than 20th day of December, 1971 and that purported amendment in section 15-BB in the form of subsection (4-AA) with retrospective effect from the time of its enactment i.e. in the year 1959 is beyond the scope of the above Article 279 of the Interim Constitution. 6. (a) In order to appreciate the respective contentions of the learned counsel for the parties, it may be advantageous to reproduce hereinbelow subsection (1) of section 15-BB, subsection (4- AA) brought about by Finance Ordinance (XXI of 1972). Articles 94 and 279 of the Interim Constitution 1972 and the Post-Constitution (President's Order 5 of 1972). "Section 15-BB. Tax holiday for new industries.-(1) Subject to the provisions of this Act, the income, profits and gains of an industrial undertaking set up in Pakistan between the first day of April, 1959, and the thirtieth day of June, 1965 (both days inclusive) shall be exempt from the income-tax and super-tax payable under this Act for a period of four years beginning with the month in which the undertaking is set up or the commercial production is commenced, whichever is the later ; Provided that in the case of an Industrial undertaking set up in such areas as may be specified in this behalf by the Central Government, by notification in the official Gazette, this subsection shall have effect as if for the words "four years", the words "six and eight years", were substituted." (2) .;------------------------------.. Section 4-AA. Nothing contained in this section shall be deemed to exempt from tax any dividend paid, credited or distributed or deemed to have been paid, credited or distributed by a company to its share--holders out of the profits or gains exempt from tax under this section. Article 94.-(1) The President may, at a time when the National Assembly stands dissolved or is not in session, make and promulgate Ordinances for the peace and good Government of Pakistan or any part thereof, and any Ordinance so made shall have the like force of law as an Act of the Federal Legislature, but the power of making Ordinances under this Article is subject to the like restrictions as the power of the Federal Legislature to make laws, and any Ordinance made under this Article may be controlled or superseded by any such Act. (2) Notwithstanding any restrictions imposed by the preceding clause, an Ordinance made under this Article may authorize expenditure from the Federal Consolidated Fund. (3) An Ordinance promulgated under this Article- (a) shall be laid before the National Assembly and shall cease to operate at the expiration of six weeks from the re-assembly thereof, or if before the expiration of that period, a resolution disapproving it is passed by the Assembly, upon the passing of that resolution ; (b) may be withdrawn at any time by the President. (4) In clauses (1) and (3), references to the time when the National Assembly is not in session and to the re-assembly thereof shall be deemed to include references respectively - (a) to the time following immediately upon the dissolution of the Assembly ; and (b) to the first assembly of the next."
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"Article 279.-(1) The President shall, by Order, make such provisions as appear to him to be necessary or expedient- (a) for bringing the provisions of this Constitution into effective operation ; (b) for removing difficulties arising in connection with the enforcement of this Constitution ; (c) for making omissions from, additions to, modifications of and amendments in this Constitution. (2) No Order shall be made under this Article after the thirty-first day of March, 1973. Amended by Constitution Amendment Act, 1973.-(2) The power to make an Order under this Article may be exercised at any time before a Constitution for Pakistan enacted under Chapter 4 of Part III has come into force. (3) Power to take any Order under this article includes power to revoke or vary any Order Previously made in the exercise of that power. (4) Any Order made under this Article may be made so as to be retrospective to any date not earlier than the twentieth day of December, 1971. "POST-CONSTITUTION PRESIDENT'S ORDER 5 OF 1972FINANCIAL LAWS ORDER, 1972 [Gazette of Pakistan, Extraordinary, 26th September, 19721 No. E-24(1),172-Pub.--The following Order made by the President on the 8th September, 1972, is hereby published for general information :- Whereas it is necessary to make provision for continuing in force Ordinances made for giving effect to the financial proposals of the Federal Government ; And whereas clause (1) of Article 279 of the Interim Constitution of the Islamic Republic of Pakistan, hereinafter referred to as the Constitu--tion, provides that, for making modifications of the Constitution the President shall make such provisions as appear to him to be necessary or expedient ; Now, therefore, in pursuance of the said clause (1) of Article 279 of the Constitution, the President is pleased to make the following Order :- 1. Short title and commencement.-(I) This Order may be called the Financial Laws Order, 1972. (2) It shall come into force at once. 2. Certain Ordinances to continue in force.-Notwithstanding anything contained in the Constitution the Finance (Supplementary) Ordinance, 1972 (XVII of 1972), and the Finance Ordinance, 1972 (XXI of 1972), and any other Ordinance which may be made by the President at any time before the 31st day of December, 1972, for amending either of the Ordinance or for giving effect to the financial proposals of the Federal Government, shall continue-in force until it is altered, repealed or amended by an Ordinance made by the President or by an Act of the Federal Legislature and shall have the like force of law as such an Act." (b) It may be noticed that under subsection (t) of section 15-BB, the income, profits and gains of an industrial undertaking set out in Pakistan between 1st day of April, 1959 and 30th day of June, 1965 were exempted from the payment of income-tax and super-tax payable under the Income-tax Act. Furthermore, the Federal Government was given the power by a notification to extend the period to 6 years or to 8 years. (c) It may further be noticed that newly enacted subsection (4-AA provided that nothing contained in section 15-BB shall be deemed to exempt from tax any dividend paid, credited or distributed by a Company to its shareholders out of the profits or gains exempt from tax under the above section. The above amendment was retrospective in effects reverting back to the date when section 15-BB was enacted i.e. in the year 1959 by Ordinance No. XV of 1959 (with effect from 1-4- 1959). (d) It may also be pointed out that under Article 94 of the Interim Constitution, 1972, the President of Pakistan was given the power when the National Assembly stood dissolved or was not in session to make and promulgate Ordinance for the peace and good Government of Pakistan or any part
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thereof. Whereas sub-Article (3) provided that an Ordinance promulgated under the said Article shall be laid before the National Assembly and shall cease to operate at the expiration of 6 weeks from the re-assembly thereof or before the expiration of that period, a resolution disapproving it was passed by the Assembly,, upon passing such resolution. Furthermore, sub-Article (4) provided that reference in clauses (1) and (3) to the time when the National Assembly was not in session and to the re-assembly thereof shall be deemed to include references respectively in the two situations mentioned in the said clause. (e) It may further be pointed out that Article 279 gave the President's power for bringing the provisions of the Constitution into effective operation or for removing difficulties arising in connection with the enforcement of the Constitution or for making omissions from, additions to, modifications of and amendments in the Constitution through a Presidential Order. Further--more, sub-Article (2) of the above Constitution provided that the power under this Article could be exercised at any time before a Constitution for Pakistan was enacted under Chapter 4 of Part III and came into force. Whereas sub-clause (4) of Article 279 provided that any order made under the said Article might be made so as to be retrospective to any date not earlier 'than 20th day of December, 1971. (f ) It may also be noticed that the Post-Constitution President's Order (5 of 1972) quoted hereinabove provided that notwithstanding anything contained in the Constitution, the Finance (Supplementary) Order, 1972 (XXI of 1972) or any other Ordinance which may be made by the President at any time before the 31st December, 1972 for amending either of. The above two Ordinances or for giving effect to the financial. Proposals of the Federal Government shall continue in force unless it was altered, repealed or amended by an Ordinance made by the President or by an act of the Federal Legislature. The above order was purported to have been passed under clause (1) of Article 279 of the Interim Constitution: 7. (a) Reverting back to. The contention of the learned. Counsel for the parties, namely, as to whether the income in the hands of the companies covered under section 15-BB of the Income-tax Act was exempted or whether the above exemption was to apply even in respect of the dividends declared from such income in the hands of the shareholders, it may be observed that it has been vehemently contended by Messrs Aziz Munshi and H. A. Pirzada that the income of a company convered under section 15-BB is exempted and not dividends declared from such income in the hands of the shareholders. On the other hand converse has been urged by Messrs Ali Athar and Naseem Ahmed. Mr. Azia Munshi in support of his above contention has referred to the case of Mrs. Bacha F. Gazdar, Bombay v. Commissioner of Income-tax Bombay (AIR 1955 SC 74whereas Messrs Ali Athar and Naseem Ahmed, Advocates have referred to the case of Commissioner of Income- tax, Punjab, N: W. F. P: & Bahawalpur v. Mrs. E. V. Miller (represented by heirs) (PLD 1959 SC, 219) and the case of Com--missioner of Income-tax, Lahore Zone, Lahore v: Mst. Gulzarinu Multan- ((1973) 28 Taxation 61 (i) With reference to AIR 1955 SC 74, it may be observed that the question for consideration before the Supreme Court of India was .As follows; "Whether 60-Y. Of the dividend amounting to Rs. 2,750 received by the assessee from the two companies is agricultural income and as such exempted under section 4(3)(viii) of the Act?" The Bombay High Court from the judgment of which the above appeal had arisen answered the above question in the negative. Upon an appeal, the Supreme Court concurred with the judgment of the High Court. It was held by the Supreme Court that agricultural income as defined in section 2(l)(a) is intended to refer to the revenue received by direct assessment with the land which is used for agricultural purposes and not by indirectly extending it to cases where the revenue or part thereof changes hands either by way of distribution of dividend or otherwise. It was further held that dividend is derived from the investment made in the shares of the company, the foundation of
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which rests on the contractual relations between the company and the shareholder. It was also held that the dividend is not derived by a shareholder by his contractual relationship. With . The land. It may be pertinent to mention that under the above provision 40 % of the income of a company was subject to levy of income-tax on account of manufacturing and sale of tea but 60 - -/ of such income was exempted from tax as agricultural income by virtue of rule 40 of the Income-tax Rules. On the above basis the assessee had claimed exemption from the payment of income-tax to the extent of 60 % on dividend received from the company, covered under the above provision of the Income-tax Act, which was not allowed. (ii) As regards PLD 1959 SC 219, it may be stated that the Supreme Court of Pakistan was considering the following question ; "Whether, in the circumstances of the case, the sum of (different amounts in each case) declared as dividend by the company out of its agri--cultural income and received by the assesses, a shareholder in the said company, is agricultural income in the hands of the assessee, so as to be exempt from the tax under section 4(3)(viii) of the Act." It was held by the Supreme Court that agricultural income received by a shareholder in the form of dividend was exempted by virtue of section 16(2) read with section 4(3)(viii) of the Income-tax Act. It may be advantageous to quote hereinbelow the relevant observations of the Supreme Court; "We may now turn to the question whether dividends received by a share-holder out of the agricultural income of a company are themselves agricultural income and thus not liable to inclusion in his own total income. On this point the learned counsel for the Revenue has referred to two Indian cases in which the question has been answered in the negative and the arguments addressed to us are largely based on the ratio decidendi of those cases. The first of these is the Bombay case in Bacha F. Guzdar v. Commissioner of Income-tax, Bombay City decided by Chagla, C. J., and Tendolkar, J. And affirmed by the Supreme Court of India in the case of the same name reported in 1955 SCMR 876. The second is from Patna, reported as Vishweshwar Singh v. Commissioner of Income-tax. The reasoning underlying these decisions is that a company is an entirely different entity from its shareholders ; that a shareholder though entitled to share in the profits of the company has no interest in the property of the company that his right to receive his share in the profits of the company is derived from the declaration of dividends by the company. ; that the income of. The company is not the income of its shareholders that the position of the partner of a firm materially differs from that of a shareholder ; that the dividend which a shareholder receives is a return on his investment and not revenue from land and that his position is similar to that of a person who receives interest on a loan advanced by him to an agriculturist. Dividends are not specifically mentioned in any of the categories of income enumerated in section 6, and whether they fall under clause (iv) or clause (v) of that section, and whether they are governed by section 10 or by section 12, the essential question that presents itself for decision is whether, when they are received by a share-holder, irrespective of whether the shareholder is an individual, a company, a firm, a Hindu undivided family or an association of persons, out of the agricultural income of a company, they retain the character of agricultural income. Under the repealed subsection l(a) of section 14 tax was not payable on any sum which a shareholder received as dividend from a company whose profits and gains had been assessed to income-tax, but this provision was not applicable to a company whose profits had not been assessed to income-tax and the contention that the Act intended to tax the dividends even where the company had not been assessed` was emphatically repelled by the Privy Council, with the observation that on that construction dividends paid by a company which had derived profits from agricultural income or earned income from interest on tax-free securities would be liable to tax. Subsection (2) has now been repealed, but' the provision that has taken its place, namely, subsection (2) of section 16, does not in any way alter the position because as we have already
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pointed out it does not have the effect of declaring that all dividends, irrespective of the income out of which they are declared, have got to be included by an assessee in the return of his total income. Thus there being no specific provision in the Act, the question is whether a shareholder of a company whose business is exclusively agriculture is bound to include in his total income the dividends received by him from the company. In India the question has been approached from a standpoint which we say with respect, is different from what we consider to be . The right approach. Put in a nutshell, the ratio decidendi in the Indian. Decisions is that since the receiver of a dividend, 'be it a company,. An individual, a partner in a firm, a member of an undivided Hindu family or other association of persons receives it as a return on capital and since the receiver is itself or himself an assessable entity different- from the dividend-paying company, the payment of dividends does not amount to receipt by him of "agricultural income" within the meaning of clause (viii) of subsection (3) of section 4 and that such receipt is in the nature of an interest paid by a borrowing agriculturist out of his income from agriculture. We feel that the correct form in which the question arises is whether the agricultural income of a company is divested of its character of agricultural income, when what happens is merely the distribution of that income by payment of dividends to the shareholder. Do the dividends so paid continue to be revenue from land or do they assume a different character and to the hands of the shareholders become exclusively returns on capital? Of course, the income-earning company is a different assessable entity from the receiver of the dividend, but does the character of the income change merely by that circumstance ? To this question we proceed to address ourselves now." (iii) With reference to (1973) 28 Taxation 61, it may be observed that a D. B. Of the Lahore High Court while considering the question in issue held that the income declared out of the companies profit covered under section 1S.*BB in the hands of shareholders is also exempted. It may be advantageous to reproduce the relevant passage from the above judgment; "14. Section 15-BB exempts the "incomes, profits…
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