(On appeal from the judgment dated 17-12-1980 of the High Court of Sindh, at Karachi, passed in Constitutional Petition Nos. 1043, 1044 and 1450 of 1980).

(a) Income Tax Ordinance (XXXI of 1979)---

----S. 8---Income-tax Act (XI of 1922), S.5(8)---Orders, instructions and directions of the Central Board of Revenue are binding on all the officers entrusted with the execution of the statute.

(b) Constitution of Pakistan (1973)---

----Art. 199---Constitutional jurisdiction can be exercised in appropriate cases, involving fiscal rights and on the allegation of misapplication of law or abuse of power stepped in to examine whether or not public functionary concerned acted in accordance with the powers conferred on him by the statute.

Messrs Usmania Glass Sheet Factory Ltd. Chittagong v. Sales Tax Officer, Chittagong PL D 1971 SC 205 ref.

(c) Income-tax---

----Company---Nature of transaction---Memorandum of Association was not the sole test of adjudging the commercial nature of the transactions carried on by a company and it merely specified the functions which could lawfully be undertaken by a company.

(d) Income Tax Ordinance (XXXI of 1979)---

---Ss. 27 & 28---Capital gain--Computation of---Immovable property is excluded from the `capital assets' on the transfer whereof capital gains might arise and further the compulsory acquisition of any `capital asset' is not treated as transfer for the purposes of computation of capital gains under S.28.

(e) Income Tax Act (XI of 1922)---

---Ss. 2(4-A) & 12-B, Proviso---Constitution of Pakistan (1973), Fourth Schedule, Part I, Federal Legislative List, item 50---Expression `capital gains' definition of---`Capital gains' does not include immovable property-- Compulsory acquisition of capital assets was not to be treated as transfer of capital assets---Exclusion of immovable property from the ambit of `capital gains' was in line with item 50 of the Federal Legislative List Part I, Fourth Schedule of the Constitution of Pakistan (1973).

(f) Income Tax Ordinance (XXXI of 1979)---

----Ss. 27 & 28---Constitution of Pakistan (1973), Fourth Schedule, Part I, Federal Legislative List, item No.50---Capital gains---Computation of-- Transfer of immovable property---Imposition of tax on the capital gains arising from the transfer of immovable property was beyond the taxing power of the Federation.

(g) Income Tax Ordinance (XXXI of 1979)---

----Ss. 27 & 28---Compulsory acquisition of company's land---Amount representing the proportionate share of compensation for compulsory acquisition of land according to the shareholdings of the assessee, distribution of which was made to the shareholders out of receipt of capital nature-- Amount in question would continue to bear its original character and retain the attributes of capital receipt and not taxable.

Commissioner of Income-tax v. Kamal Behari Lal Singha (1971) 82 I T R 464 ref.

(h) Income Tax Ordinance (XXXI of 1979)---

----S. 151---Limitation of exemption---Income which enjoyed immunity from payability of tax when received by another person cannot earn exemption for the second time---Where, however, the receipt was basically outside the purview of taxing statute and there was a Constitutional bar on its taxability S.151 of the Ordinance would have no applicability.

(i) Income Tax Ordinance (XXXI of 1979)--

----Ss. 27 & 28---Capital gains---Computation---Distribution by the company o the compensation for acquisition of land to the shareholders in the form o dividends would not alter the basic character of the receipt, and the immunity from taxability would continue to be available to such receipt, even in the hands of shareholders.

Khalid Anwar, Advocate Supreme Court instructed by S.M. Abbas Advocate-on-Record for Appellants (in all Appeals).

Nasrullah Awan, Advocate Supreme Court instructed by Muzaffa Hussain, Advocate-on-Record for Respondents (in all Appeals).

Date of hearing: 30th January, 1991.

JUDGMENT

MUHAMMAD AFZAL LONE, J: --This judgment shall dispose three Civil Appeal by leave to appeal bearing Nos.84-K, 85-K and 86-K o 1981, which arise out of the same judgment dated 17-12-1980, rendered by Division Bench of the high Court of Sindh, Karachi, whereby three Constitutional petitions filed by the appellants challenging the validity of the action of the Income-tax Officer, were dismissed.

2. The facts are that in the first two appeals the appellant M/s. Julia Hoshang Dinshaw Trust is a Trust created under a Trust Deed dated 17-3 1967. The third appeal has been filed by M/s. Nali Dinshaw Ltd., which is private company. This company as well as M/s. Julian Hoshang Dinshaw Trust, are the shareholders of another private limited company by the name of Edu1jee Dinshaw Limited (hereinafter called the company) which owned some agricultural land and other immovable properties, but by its Memorandum of Association is prohibited from carrying on business of buying and selling of immovable properties or other shares, debentures, stocks, bonds and securities Its sources of income are rent, income received from shares in other companies, and interest from money lending.

3. Some land owned by the Company was acquired under the provision of the Land Acquisition Act at the instance of Ministry of Defence Government of Pakistan and compensation there for paid to it. Out of the compensation so received, the Company, through a cheque dated 15-5-197 paid a sum of Rs.3,93,918 to the appellant in the first case (CA..84-K/81). The cheque was accompanied by a covering letter of the Company, that the amount, represented the appellant's share in the compensation received on account of agricultural land acquired by the Government. In the second case (C.A.85-K/81) the appellant received a sum of Rs.1,29,500 under a dividend warrant which contained a recital that the dividend was declared out of the capital gains on the sale of immovable property. These payments were relatable to the assessment years 1979-80 and 1978-79, respectively, for which the appellant filed income-returns, and along therewith in each case sent a letter to the Income-tax Officer that the payments received by it were compensation for acquisition of agricultural land and were of capital nature, as is share as beneficial owner, and that, therefore, were not liable to tax. The Income-tax Officer, however, asked the appellant to explain the nature of receipts, furnish the relevant documents, including the dividend warrant, failing which these payments would be included in the total income of the appellant and assessed to tax.

4. While the matter was still pending before the Income-tax Officer, the appellant brought two separate Constitutional petitions before the High Court, and sought declaration that the sums of Rs.3,93,918 and Rs.1,29,500 received by it from the Company, being in the nature of capital gains, on transfer of immovable property, were not liable to tax and in any case transfer of capital assets having taken place by reason of compulsory acquisition, the receipt was not chargeable to tax under the Taxing Statutes. In these circumstances, it was contended that the dividend in the hands of the appellant, out of the compensation received by the Company, could not be subjected to taxability. The appellant also prayed for a direction restraining the Income-tax Officer from assessing the receipts as income in the hands of the appellant. The reason which compelled the appellant not to pursue the remedy provided by the Statute, but invoke the writ jurisdiction of the High Court was, that a similar receipt in the hands of one Mr. Russie M. Dinshaw, another shareholder of the. Company, was treated as his dividend income and charged to tax by the Income-tax Officer. In this behalf, Assessing Officer relied upon section 151 of the Income Tax Ordinance, 1979, and maintained that the exemption was admissible to the original recipient i.e. the Company, but could not be granted to a person receiving payment from the original recipient. The appellant apprehended that same treatment would be meted out to it, and the receipts in question treated as its income chargeable to tax.

5. The appellant in C.A.86-K/81 received a sum of Rs.11,86,012 as its share, out of the compensation for acquisition of land paid to the Company. This receipt related to assessment year 1980-81, and the appellant raised similar objections to its taxability, but these were repelled by the Income Tax Officer, who relied on section 151 ibid, and by his order dated 7-9-1980 treated the receipt as income chargeable to tax. He further held that the appellant committed default in payment of tax in advance under section 53 of the Ordinance. In this view of the matter, the appellant was processed against under section 187 and a penalty of Rs.1,54,549 was imposed on it. The appellant assailed the validity of this order also through a Constitutional petition.

6. The three Constitutional petitions were heard together by the High Court. The department challenged the maintainability of these petitions. The first two petitions were dubbed as premature. It was urged that the appellants had by-passed the remedy provided by the Statute, by way of appeal and then reference to the High Court. On behalf of the appellants objection to the maintainability of the first two writ petitions was, however, met by the argument, that the Income Tax Officer had already taken a decision and charged to tax, a similar receipt from the Company, in the hands of another assessee, and thus, was not expected to take a different view in the case of the appellants. In the course of the submissions, reference was also made to Circular No.8 of 1978 issued by the Central Board of Revenue, which laid down that receipt in the nature of capital gains arising from the sale of immovable property though in the hands of a Company did not constitute income yet the distribution of that fund was liable to tax in the hands of recipient. The argument was that the Income Tax Officer or for that matter other authorities in the hierarchy of the Income Tax Department could not have ignored the circular and exercised an independent judgment. It was also pointed out to the High Court, that Income Tax Appellate Tribunal had already expressed its view in another case and a receipt similar in character in the hands of a shareholder, was treated as dividend income. Such being the position, according to the appellants, recourse to the remedy under the Income Tax Act 1922 or Income Tax Ordinance, 1979 would prove to be a mere formality and the authorities thereunder were: not expected tee grant any relief to the assessee. Some case law was also cited before the High Court, to show that even in disputes not involving any jurisdictional issue, but arising out of application of Taxing Statutes, Superior Courts have been exercising power of judicial review.

7. The High Court did not accept the arguments advanced on behalf of the appellants to justify the invocation of the Constitutional jurisdiction. The learned Judges of the Division Bench made a reference to subsection (6) of section 5 of the Income Tax Ordinance which provides that every Income Tax Officer has all the powers conferred by or under the Ordinance on an Income Tax Officer, in respect of any income accruing or arising or received or deemed to accure or arise or be received under the provisions of the Ordinance. They observed that whether or not an amount received by an assessee was assessable as income and chargeable to tax, was a matter which fell within the jurisdiction of the Income Tax Officer, and the extraordinary remedy provided under Article 199 of the Constitution could not be treated as a substitute for appeal, revision and reference on a point of law to High Court. Upon this view of the matter, the High Court did not go into the merits of the case, and by judgment under challenge before us, upheld the department's preliminary objection, declared the writ petitions as premature and consequently dismissed the same as incompetent in law.

8.After hearing the learned Counsel for the parties we are unable to agree with the High Court. It is not disputed that Circular No.8 issued by the Central Board of Revenue was in force at the relevant time. Under section 5(8) of the Income Tax Act, 1922, and section 8 of the Income Tax Ordinance, 1979, the orders, instructions and directions of the Central Board of Revenue are binding on all the Officers entrusted with the execution of the Statute. In the circular a reference has also been made to the Commissioner of Income Tax, Punjab & N.W.F.P. and Bahawalpur v. Mrs. L.V. Miller (PLD 1959 SC (Pak) 219) in which this Court, while construing section 4(3) (viii) of the Act, laid down broad principle that agricultural income not chargeable to tax in the hands of a Company, is not divested of its character as agricultural income when transferred to the shareholder in the shape of dividends. However, under the Circular, the application of this rule to the distribution of capital gains by a Company to its shareholders, on the sale of immovable property, has been excluded, and such receipt in the hands of the receiver from the Company has been declared as taxable.

9. It is not understandable that in the presence of the directions embodied in the Circular, how an Income Tax Officer would lend any weight to the appellants' claim of immunity from taxability of the receipts in dispute. Indeed, it would be very difficult for the Assessing Officer to render an independent adjudication. To quote an instance of lack of objectivity, the attention of the High Court was invited to an order passed by the Income Tax Officer, imposing tax on similar receipt in the hands of another shareholder of the Company, namely Russie M. Dinshaw. It was in this context that the appellants instead of throwing themselves at the mercy of the Income Tax Officer, chose to approach the High Court under Article 199 of the Constitution. It is correct that the Income Tax Appellate Tribunal is not under any compulsion to follow the Circular, but there are indications on the record before us that in an identical case the chargeability of the receipt was endorsed by the Tribunal. The superior Courts have repeatedly exercised the writ jurisdiction in appropriate cases, involving fiscal rights and on the allegation of misapplication of law or abuse of power stepped in to examine whether or not public functionary concerned acted in accordance with the powers conferred on E him by the Statute. In M/s. Usmania Glass Sheet Factory Ltd., Chittagong v. Sales Tax Officer, Chittagong (PLD 1971 SC 205) this Court examined in detail whether the glass sheets manufactured by the assessee were covered by exemption from payability of tax granted through a notification issued under the the Sale Tax Act, and repelled the argument against the reviewability of the orders of the Sale Tax Authorities by the High Court. In a recent case Edu1jee Dinshaw v. Income Tax Officer 1990 PTD 155, this Court discussed at some length the case law on the subject and noticed that the High Court have made frequent interventions, in the fiscal disputes, in exercise of writ jurisdiction. Upon careful consideration of the facts of the case before us, we are of the view that it was not necessary for the appellants o have travelled through grooves of the procedure laid down in the Statutes to approach the High Court .In our opinion, the writ petitions were competent, and a decision on merit of the issue raised their in was fully warranted.

10. We may now proceed to deal with the case on merits. There is no controversy on the factual plane. It is on the record that the Company does not deal in sale and purchase of immovable properties rather by its Memorandum of Association is prohibited from embarking upon such business. We are not' unaware that the Memorandum of Association is not the sole test of adjudging the commercial nature of the transactions carried on by a Company and it merely specifies the functions which can lawfully be undertaken by aCompanyBut, before us, it is accepted that the payment is not relatable to any trading activity of the Company. That the land owned by the Company was acquired compulsorily, compensation assessed by the Land Acquisition Officer and paid to it.

11. It will be seen that the Income Tax Ordinance is applicable to the fast and the third case, and the second one is governed by the old law Le. the Income Tax Act, 19r22. Under section 27 of the Ordinance, immovable property is excluded from the"capital assets" on the transfer whereof capital gains may arise and further the compulsory acquisition of any "capital asset" is not treated as "transfer" for the purposes of commutation of capital gains under section 28. Similar is the position under the Act. The expression "capital gains" is defined in section 2 (4-A) of the Act, which does not include immovable property. Likewise, the proviso to section 12-B of the Act ordains that compulsory acquisition of capital assets shall not be treated as transfer of capital assets. The exclusion of the immovable property from the ambit of "capital gains" is in line with item 50 of the Federal Legislative List Part-1, Fourth Schedule of the Constitution which provides:--

"Taxes on the capital value of the assets, not including taxes on capital gains on immovable property."

Thus, the imposition of tax on the capital gains arising from the transfer of immovable property is beyond the taxing power of the Federation. Capital gains have to be computed with reference to the cost of acquisition of the capital assets and the consideration for the transfer thereof. There is no indication on the record before us that such a computation was made by the Company. However, in the body of the writ petitions somewhat loosely the receipt of compensation by the Company on account of compulsory acquisition of land has been described as capital gains. But, m law, for the purposes of levy of income tax, there is no question of accrual of capital gains from the transfer of immovable property.

12. Before us, it has not been disputed on behalf of the department, that the amount of compensation in the hands of Company is not its income and thus not chargeable to tax, but according to them it partakes the character of income chargeable to tax when passed on to the sharesholders in the form of dividend. In fact the department's whole case is discolsed in the Circular which in so far as relevant for the purpose of these appeals is reproduced below:--

"A reference has been made to the Board whether dividends distributed by a company out of profits representing capital gains on sale of immovable property would be exempt in the hands of shareholders. Such capital gains are not liable to income-tax as these are not covered by the definition of `Income' as obtaining under section 2 (6-C) of the Income-tax Act. The definition includes only `capital gains chargeable according to the provision of section 12-B'. For the purpose of the said section 12-B of the Act, the definition of capital asset excludes immovable property vide clause (iv) of section 2(4-A) of the Act. Thos, capital gains or sale of immovable property do not constitute income for purposes of Income Tax Act. The question arises whether dividend distributed out of such capital gains would be liable to Income-tax Act or not on the ratio of E.V. Miller's case (PLD 1959 SC 219).

The dictum of the judgement in Miller s case is not applicable to dividends distributed out of capital gains on sale of immovable property. The var behind the said judgement is that the character of income does not change when it passes from the company to the hands of the shareholders. If an income is exempt by the hands of the company, dividends distributed out of capital gains shall be exempted in the hands of the shareholders. Thus, the judgment will apply only to those dividends which are distributed out of such income of the company as is exempt from the tax. Since in the instant case, capital gains arising from the sale of immovable property do not constitute income in the hands of company, the ratio of E.V. Millers case would not be applicable.

The question is whether a receipt which is not at all income and completely outside the purview of Income Tax Act, changes its character in the hands of shareholders. Our answer is in the negative. We are of the view that ratio of E:'V Miller's case is squarely applicable to the appeals before us. The issue which fell for consideration in that case was whether the agricultural income of a Company stood divested of its character of agricultural income on its distribution to the shareholders as dividends. After an exhaustive discussion of the case law, this Court came to the conclusion:-

"that income which is agricultural income in the hands of a joint stook company does not cease to be agricultural income when it is distributed to the shareholders by way of dividends. The extent of the shares held by each shareholder merely determines his share in the income but the shares themselves are neither the source nor the producer of the income. To held to the contrary would make the exemption of agricultural income of a company entirely illusory."

Section 4(3) (viii) of the Act expressly prohibits inclusion of agricultural income in the total income of an asessee for the purpose of imposition of income tax. In the instant case, as well, the receipt in the hands of the Company is completely outside the ambit of the changeability and is not at all income as defined in the Act and the Ordinance. On the parity of reasoning given in Miller's case it is difficult to label the receipt as income in the hands of the shareholders.

13. The true nature of this receipt is that it represents the proportionate share of compensation for compulsory acquisition of land, shareholdings of the appellants. The distribution was made to the shareholders out of receipt of capital nature, which would continue to bear its original character and retain the attributes of capital receipt. Some what similar situation arose before the supreme court of India in the case of Commissioner of income tax v. Kamal Behari Lal Singh (1971)82 I.T.R. 464, and its was held:--

Let us now turn to the facts of this case. The assessees were share holders in the Company. They were beneficially entitled to the capital of the company. The amount with which we are concerned in these appeals was received by the company as salamis and as compensation for the acquisition of the lands of the company. It was not something earned by the company in the course of its business. Undoubtedly, it was a capital receipt in the hands of the company but that by it self is not sufficient. We have next to see whether it was a capital receipt in the hands of the assessee. As mentioned earlier, the assessee had a beneficial interest in that sum when it was in the hands of the company. Therefore, when that sum was distributed amongst the shareholders of the company, each of the shareholders took a share of the capital asset in which they were beneficially entitled. That being so the receipt with which we are concerned in these appeals must also be considered as capital receipt. The fact that those sums were distributed as `dividends' does not change the true nature of the receipt. A receipt is what it is and not what it is called."

14. In the course of the proceedings before the Income Tax Officer, in order to bring the receipts in the hands of the appellants, under charge reliance was also placed on section 151 of the Ordinance, which is reproduced below:--

"Limitation of exemption.--Whereby any income is exempt from tax, the exemption shall, in the absence of a specific provision to the contrary contained in this Ordinance, be limited to the original recipient of that income and shall not extend to any person receiving any payment wholly or in part out of that income."

This section confines grant of exemption to an original recipient of the income and eliminates the award of double exemption on such income when passed on to another person. Thus, the income which has suffered immunity from payability of tax when received by another person cannot earn exemption for the second time. But, this section has absolutely no applicability to cases before us. The reason being that the concept of exemption postulates chargeability under the charging provisions of the Statute. Here the receipt is basically outside the purview of taxing statute and rather there is a Constitutional bar on its taxability. According to the definition of the term income, as given in the Income Tax Act/Ordinance, the receipt cannot in any manner be categorized' as income ofthe Company. It is therefore, wholly wrong to give tile colour of income, to the receipt in the hands of the company and then treat it exempt from the income tax. Thus, the department's reliance on section 151 is entirely misconceived.

For all these reasons, we are of the view that the distribution by the company of the compensation for acquisition of land, to the appellants, in the form of dividends did not alter the basic character of the receipt, and the immunity from taxability continues to be available to such receipt, even in the hands of the appellants. These appeals are, therefore, accepted, impugned judgment set aside, and it is declared that the receipts in dispute cannot be brought under charge. Consequently, any action taken by the assessing authorities and orders passed in this behalf are without lawful authority, and of no legal effect. The parties are left to bear their own costs.

M.B.A./J-87/S Appeals accepted.