COMMISSIONER OF INCOME-TAX, PESHAWAR ZONE, PESHAWAR VS MESSRS SIEMEN A.G.
1991 P T D 488
[Supreme Court of Pakistan)
Present: Muhammad Afzal Zullah, C.J., Abdul Qadeer Chaudhry and Muhammad
Rafiq Tarar, JJ
COMMISSIONER OF INCOME-TAX, PESHAWAR ZONE, PESHAWAR
versus
Messrs SIEMEN A.G.
Civil Appeal No.87-P of 1983, decided on 21/01/1991.
(On appeal from the judgment dated 7-9-1982 of the Peshawar High Court, Peshawar in Tax Reference No.136 of 1972).
(a) Income-tax Act (XI of 1922)--
----S. 2(6-A)---Constitution of Pakistan (1973), Art.185(3)---Leave to appeal was granted for' re-examination of the question dealt with by the High Court as to whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was justified in finding that the return on capital paid by a company to assessee on the holding of the latter in the share capital of the former was not `dividend' within the meaning of the definition given in S.2(6-A) of the Act.
(b) Words and phrases---
----`Return on capital paid'---Word `return' is generally understood as profit in the nature of dividend and not in the nature of interest and/or obligatory charge.
(c) Income-tax Act (XI of 1922)---
----S. 2(6-A)---`Dividend'---`Return on capital paid' was guaranteed in the manner provided in the agreement as return to the party raising the capital--Return on capital paid' by the company thus was `dividend' within the meaning of the term as defined in S.2(6-A) of the Act.
(d) Constitution of Pakistan (1973)--
----Art. 227---Interpretation of statutes---So long as the existing statutes were not brought in conformity with Injunctions of Islam, their interpretation, application and enforcement, wherein discretionary judicial elements were involved, only that course would be adopted which was in accord with the Islamic philosophy, its common law and jurisprudence.
Haji Nizam Khan's case P L D 1976 Lah. 930; Muhammad Bashir's case PLD 1982 SC 139 and Mian Aziz Shaikh's case P L D 1989 SC 613 ref.
(e) Interpretation of statutes ---
---- So long as the existing statutes were not brought in conformity with the Injunctions of Islam (Art. 227 of the Constitution of Pakistan (1973)] their interpretation, application and enforcement, wherein discretionary judicial elements were involved, only that course would be adopted which was in accord with the Islamic philosophy, its common law and jurisprudence.
Haji Nizam Khan's case PLD 1976 Lah. 930; Muhammad Bashir's case 4 PLD 1982 SC 139 and Mian Aziz A. Shaikh's case PLD 1989 SC 613 ref.
(f) Islamic Jurisprudence--
---- Contract---Prohibition against third party intervention in mutual contract-- When two contracting parties agreed to do something by a mutual valid contract, or intended to do so, and it was not prohibited by Islam, a third party, like the Income-tax Department or for that matter the Court had no power to modify either the contract or interfere with what they intended to do with it.---[Contract).
(g) Islamic Jurisprudence--
---- Contract---Contracting parties were bound to fulfil their contracts and they would remain liable for any contraventions both here and hereafter.---[Contract].
AI-Our'an Maida, Verse I and Sura Alisra's, Verse 34 and Said Kamal Shah's case P L D 1986 SC 360 ref.
(h) Islamic Jurisprudence--
--- Contract---Prohibition against third party intervention in mutual contract-- People be left alone in their mutually agreed transactions, so that they be blessed by Allah through free circulation of wealth amongst themselves---When panics by mutual free consent enter into a valid contract, then the third party would have no right to intervene either to frustrate the contract or to 'change its nature-- Exemptions to the rule.
Bokhari: Kitabul-Baua: No. 3709; Abu Daud: Kitabul Ajara No.3442; Government of N.-W.F.P. v. Said Kama] Shah 360 and Qazalbash Waqf v. Chief Land Commissioner PLD 1990 SC 99 ref.
(i) Interpretation of statutes---
---- Fiscal statutes---Courts are bound to apply Islamic Rules of Interpretation, unless excluded otherwise in preference to the contrary so-called accepted rules of interpretation under the other jurisprudential concepts and the fiscal laws were no exception in that behalf.
On the touchstone of Islamic Rules of Interpretation, which unless excluded otherwise, under the present Constitutional set-up the Courts are bound to apply in preference to the contrary so-called accepted rules of interpretation under the other jurisprudential concepts (and the fiscal laws are no exception in this behalf).
(j) Income-tax---
----Income-tax Authorities cannot change the nature of the contract intended by the parties thereto, under the pretext that the rule of interpretation of a fiscal law in this behalf is different.
(k) Islamic Jurisprudence---
---- Contract---Rule of interpretation---Income-tax Authorities could not change the nature of the contract intended by the parties thereto, under tile pretext that tile rule of interpretation of a fiscal law in this behalf, is different.
Mian M. Ajmal, Deputy Attorney-General and Mian Shakirullah Jan, Advocate-on-Record (absent) for Appellant.
S. Safdar Hussain, Advocate-on-Record (absent) for Respondent.
Date of hearing: 21st January, 1991.
JUDGMENT
MUHAMMAD AFZAL ZULLAH, C.J.---This appeal through leave of the Court is directed against the decision of the Peshawar High Court in an Income Tax matter. Leave to appeal was granted for re-examination of the question dealt with in the impugned judgment: "whether, on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in finding that the return on capital paid by Telephone Industries of Pakistan, Limited to Siemens A.G. on the holding of the latter in the share capital of the former was not dividend within the meaning of the definition given in section 2(6-A) of the Income Tax Act, 1922".
The High Court answered the question in the. negative and it has been held- that the disputed amount was "dividend" within the meaning of the term as defined in section 2(6-A) of the Income-tax Act.
The facts taken from the impugned judgment for the limited purpose of the present appeal and the short point involved therein are that in 1952 the Government of Pakistan, the respondent herein (M/s. Siemens A.G.) and Farid Sons Limited of Karachi; entered into an agreement for incorporation of a limited company under the title "Telephone Industries of Pakistan". It was, inter alia, provided by the agreement that dividend of 4% was to be declared on the paid-up share capital for the time being or proportionately lower sums in years of less production as the case may be, that net profits that may accrue shall first be used for declaring a dividend not exceeding 4% on invested capital and for paying other charge. The dividends were contingent on sufficient profits being made and were not otherwise guaranteed. With the expansion of the venture the need for capital was felt and the said parties amended the agreement in July, 1966. This time it was provided that the respondent-assessee had agreed to contribute additional capital towards investment subject to the condition that a fair return would be granted on such investment. It was, therefore, stipulated that their investment under the first expansion programme will bear return of 4% per annum from 1st April, 19<r4 and all subsequent investments will bear a return of 5% per annum and further that the Government had guaranteed the performance by the Telephone Industries of Pakistan of its part of the agreement.
Accordingly, for the assessment year 19(h8-G9 the respondent-assessee company showed in its return a sum of Rs. 4,39,769 as income from the dividend The Income Tax Officer held that this amount was "interest" and not dividend. Assessee's appeal before the Income Tax Tribunal failed but on Income Tax Reference moved before the High Court the point of view of the assessee respondent having been upheld leave to appeal was granted; to examine the nature, meaning and connotation of the "return" which was guaranteed to the respondent/assessee through the aforementioned agreement.
Although the Income Tax Officer had treated the return as interest, the learned Deputy Attorney-General stated that he would stress the point that the return in this case, keeping in view its background, was in the nature of an "obligatory charge" and that Icing so it could not fall within the d4finition of "dividend".
Learned counsel has taken us through the history and the development of the venture and the pitfalls it suffered from time to time. It is absolutely clear that if the return in question had not been guaranteed in the manner provided in the agreement as profit to the respondent /assessee, the results might have been different. It is also an admitted position that the contracting parties were well aware of the terminology used in such like agreements. The argument of the learned counsel actually is based on this assumption. According to him there was nothing to prevent the use of the word "dividend", itself; instead of the word "return" being used. On our asking learned counsel took out the meaning of the word `return' from Black's Law Dictionary, Ballentine's Law Dictionary and Income Tax Dictionary. He had to admit that return has generally been understood as profit in the nature of dividend and not in the nature of interest and/or obligatory charge.
The learned counsel himself, representing the department, brought under consideration the intention of the parties; notwithstanding the hesitance on the part of the departmental authorities (when interpreting the fiscal statutes) to adopt underlying intention.
We are of they, view that even if he would not have relied on this aspect, in the peculiar circumstances and background of this case, the use of the word `return' in the agreement could have been interpreted and explained on the basis of the intention of the parties notwithstanding the aforestated legal position. It is not denied that there are exceptions to the said rule of interpretation. With this addition to the elaborate reasons and discussion by the High Court on the subject with reference to the then available case-law. We agree with the conclusions reached in the impugned judgment by the High Court. This appeal is liable to be dismissed.
Learned counsel in the alternative repeated the same argument as was advanced in the High Court that the return having been guaranteed notwithstanding the Company running into losses, the return should be treated as interest. We do not agree with them. When questioned: what would be the source of the payment of so-called return which in reality, as already discussed, was dividend the learned counsel thought that the dividend put in reserve could always be utilised for payment of such return. Even if the reply is hypothetical, the fact remains that the decision of this case would not turn upon the source from which the payment of the return, which has been held to be dividend would be made.
In this regard there is yet another important aspect which needs serious consideration. All the questions being examined in this case are relatable to interpretation of a Statute rather titan admitted and direct statutory command. It was held in the case of Haji Nizam Khan by the Lahore High Court PLD 1976 Lah. 93R and subsequently affirmed in several legal fields, including criminal and fiscal, that so long as the existing Statutes are not brought in conformity wish Injunctions of Islam (Article 227 of the Constitution), their interpretation,' application and enforcement wherein discretionary judicial elements are involved, only that course would `be adopted which is in accord with the Islamic philosophy, its common law and jurisprudence. (See also the case of Muhammad Bashir PLD 1982 SC 139 and the case of Mian Aziz A. Shaikh PLD 1989 SC 613).
Coming to the specific Islamic Rule of Interpretation as was briefly discussed in connection with another fiscal question in the case of Mian Aziz A. Shaikh a fundamental principle, is established that when two contracting parties agree to do something by a mutual valid contract or intend doing so, and it is not prohibited by Islam, a third party, like the Income Tax Department or for that matter the Court has no power to modify either the contract or with what they intended to do with it.
The most important relevant Injunctions of the Qur'an are contained amongst others in Chapter Maida Verse (1) and Chapter Alisra's Verse (34) -- to the effect that the contracting parties arc bound to fulfil their contracts. And that they would remain liable for any contraventions --- obviously both here and hereafter. There are very strong Commands and have been enforced in various legal fields. Recently a major contravention regarding the law of pre-emption was resolved by the Supreme Court and this principle was also applied -- Sec the case of Said Kamal Shah P L D 1986 Supreme Court 360 at 381 and 418 et seq. What was emphasized regarding prohibition against third party intervention in mutual contracts in the well-established Sunnah Injunction is that: People be left alone in. their mutually agreed transactions; "so that they be blessed by Allah through free circulation of (Rizziq) (wealth) amongst themselves" -- (Bokhari: Kitabul Baua No.3709; Abu Daud; Kitabul-Ajara No.34'I2). When parties by mutual free G consent enter into a valid contract, then the third parties have no right to intervene either to frustrate the contract or to change its nature -- (Government of N.-W.F.P. v. Said Kamal Shah MA) at 442). The question relating to exceptions has been dealt with separately on the basis of Islamic principles of Zaroorat, Zarar, public interest as such, State policy, State necessity etc. in the case of Land Reforms Qazilbash Waqf v. Chief Land Commissioner P L D 1990 SC 99.
As a necessary conclusion drawn from the foregoing, it can be safely held in this case also that on the touchstone of Islamic Rules of Interpretation, which unless excluded otherwise, under the present Constitutional set-up the Courts are bound to apply in preference to the contrary so-called accepted rules of interpretation under the other jurisprudential concepts and the fiscal laws arc no exception in this behalf), the income-tax authorities cannot change the nature of the contract intended by the parties thereto, under the pretext that the rule of interpretation of fiscal law in this behalf, is different.
For all these reasons and in the light of the foregoing discussion this appeal is dismissed. There shall be no order as to costs.
M.B.A./C-77/S. Appeal dismissed.