COMMISSIONER OF INCOME TAX, KARACHI VS EBRAHIM D. AHMAD, 1992 PTD-SUPREME-COURT 1353 (1991)

(On appeal from the judgments/orders passed by the High Court of Sindh, Karachi, dated 25-1-1982 in ITC No. 51 -of 1972, dated 12-4-1983 in ITA No. 344 of 1972, dated 31-8-1983 in ITR No. 421 of 1972, dated 7-11-1983 in ITCs. Nos. 18, 19, 21, 24 of 1974, dated 28-i1-1983 in ITR No. 52 of 1974, dated 5-10-1983 in ITC No.11 of 1973, dated 18-10-1983 in ITCs. Nos. 141 and 142 of 1973, dated 30-1-1984 in ITC No.61 of 1974, dated 12-9-1983 in ITR No. 636 and 647 of 1972, dated 20-2-1984 in ITR No.82 of 1974, dated 12-9-1983 in ITR No.646 of 1972, dated 27-10-1983 in ITR No.224 of 1973, dated 13-3-1985 in ITC No.60 of 1974, dated 3-2-1986 in ITCs Nos. 6 & 7 of 1978, dated 14-12 1988 in ITR No.9 of 1980 and dated 18-5-1989 in ITR No.22 of 1982.

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

----S.15-BB (4AA) & (1)---Constitution of Pakistan (1973), Art. 185 (3)-- Leave to appeal was granted to consider question as to whether High Court had correctly interpreted S.15-BB(4AA) & (1) of the Act.

Commissioner of Income-tax, Punjab, N.-W.F.P. and Bahawalpur v. Mrs. E.V. Miller (deceased) represented by Mrs. Brickwood and another PLD 1959 SC (Pak.) 219 ref.

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

----S.15-BB (4AA) & 7(1)---Finance Act (XXI of 1972), Preamble---Financial Laws Order, 1972 [Post-Constitution President's Order 5 of 1972]-- Amendment introduced by Finance Ordinance, 1972 by adding subsection (4AA) to S:15-BB of the Income Tax Act, 1922 stood effaced and could not be utilized for adjudicating on the rights of parties on account of the lapse of Finance Ordinance, 1972---Financial Laws Order, 1972 did not satisfy the requirement of any of the purposes for which powers under Art.279 of the Interim Constitution of Pakistan (1962); were conferred thus Financial Laws Order, 1972 was of no avail so far as revival of subsection (4AA) of S.15-BB of the Income Tax Act, 1922 was concerned.

The amendment introduced by Finance Ordinance No. XXI of 1972 by adding subsection (4AA) to section 15BB had indeed the curative effect of making the law as modified from its very inception i.e. 1-4-1959. However, the Ordinance was itself a temporary statute, did not receive the approval of the National Assembly, lapsed on account of the Constitutional provision and being temporary in nature could leave no permanent consequences. The previous position got restored. The amendment stood effaced and it could not be utilised for adjudicating on the rights of the parties.

The addition of subsection (4AA) to section 15BB of the Income Tax Act and the need for it by a Post-Proclamation Order does not satisfy the requirement of any of the purposes for which this power was conferred. Additionally, clause (4) of this Article 279 of the Interim Constitution of Pakistan (1962), provided that "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". In the effort to revive and revitalize the Finance Ordinance XXI of 1972 in fact subsection (4AA) of section 15BB was made effective from 1-4-1959, a date far more in retrospect than was the limiting date prescribed in the Constitution. All these defects made the Post-Constitution President's Order No.5 of 1972 of no avail so far as revival of subsection (4AA) was concerned.

Nasrullah Awan and Shaikh Haider, Advocates Supreme Court with S.M. Abbasi, Advocate-on-Record for Appellant.

Iqbal Naeem Pasha, Usman Ghani Rashid and Naseem Farooqui, Advocates Supreme Court with Nizam Ahmad and Faizanul Haq, Advocates- on-Record for Respondents.

Date of hearing: 18th November, 1991.

JUDGMENT

SHAFIUR RAHMAN, J.---Leave to appeal was granted in all these connected appeals raising a common question of law, whether the High Court has by the impugned judgments/orders correctly interpreted subsections (1) and (4AA) of section 15BB of the Income Tax Act.

2. The facts of the cases necessary for the disposal of these appeals show that section 15BB of the Income Tax Act was enacted in the year 1959 in the following words:---

"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."

3. A similar question of law had arisen in the case of the Commissioner of Income-tax, Punjab and N.-W.F.P. and Bahawalpur v. Mrs. E.V. Miller (deceased) represented by Mrs. Brickwood and another PLD 1959 SC (Pak.) 219, that is whether income which was exempt from income-tax for some reason could be taxed when it was distributed in the form of the dividend by the Company enjoying exemption- This question was answered by the Supreme Court after exhaustively discussing the law on the subject and the various aspects of it as hereunder:--

"We are unable to see any fundamental distinction between the income of a firm or farming society exclusively engaged in agriculture or that of a landowner who manages his tracts and tracts of land by employing agents and who himself has not even seen the lands which exclusively engages itself in agriculture and whose shareholders instead of directly cultivating or managing the land entrust its management to the company whose action they ran in law control. And as put by Kayani, J., if two brothers can claim exemption from tax for their agricultural income, it is difficult to discover on what principle their income becomes liable to tax if for better management of the land they both constitute themselves into a private limited company and convert their land into shares, retaining its actual possession and use.

For these reasons, we hold that income which is agricultural income in the hands of a joint stock 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 hold to the contrary would make the exemption of agricultural income of a company entirely illusory. On that finding these appeals must be dismissed with costs."

4. A similar question arose subsequently in a number of other income tax cases in which Companies enjoyed the benefit of section 15BB of the Income Tax Act. The law laid down by the Supreme Court in E.V. Miller's case PLD 1959 SC 219 was applied to those cases also and dividends were held to be exempt notwithstanding a decision of the Indian Supreme Court to the contrary in Mrs. Bacha F. Gazdar Bombay v. Commissioner of Income Tax Bombay AIR 1955 SC 74. In order to overcome any such interpretation Finance Ordinance (XXXI of 1972) was enacted on 17th of June, 1972 and enforced from 1st of July, 1972. It added a curative subsection (4AA) to section 15BB in the Income Tax Act, in the following words:---

"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 shareholders out of the profits or gains exempt from tax under this section."

5. This amendment by subsection (4AA) of section 15BB was given effect to from the first of April, 1959, the date section 15BB had come into effect. This Ordinance of 1972 was laid before the Assembly but this provision subsection (4AA) was not approved by the Assembly and hence it lapsed.

6. The President, thereafter invoked his reserved power under Article 297(1) of the Interim Constitution, 1972, on 8th of September, 1972, to promulgate the Post-Constitution President's Order 5 of 1972, Financial Laws order, 1972. The operative part of it reads as hereunder:--

"Where it is necessary to make provision or continuing in force Ordinance 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 Constitution 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.--(1) 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 Ordinances or for giving effect to the financial proposal 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."

7. In this background of laws, when the cases of taxation of dividends of Companies exempt from income-tax came up for consideration, the Income tax Appellate Tribunal held in eight cases that such a dividend was equally exempt from income-tax but in fourteen cases on the strength of subsection (4AA) denied the exemption. The Commissioner Income-tax felt aggrieved in cases in which exemption was allowed and the companies felt aggrieved in cases in which exemption was denied, and referred the matter under section 66(1) of the Income Tax Act to the High Court for reference. The question framed was as hereunder:---

"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 15BB of the Income Tax Act are exempt from tax and not liable to be included in the total income of the share-holder?"

8. By the impugned judgments/orders the High. Court held that section 15BB of the Income Tax Act by itself had not the effect, in any manner, of disturbing the law laid down in E.V. Miller's case PLD 1959 SC 219 and the dividend income enjoyed an equal protection in -the hands of its recipients.

As regards the curative provision [subsection (4AA) of section 15BB of the Income Tax Act], the Court held that it lapsed on not getting the approval of the National Assembly and being a temporary enactment could not accomplish a permanent change in the law on its expiry.

As regards the President's Post-Constitution Order attempting to revive and revitalize subsection (4AA), it was held that the attempt was futile because the powers invoked did not permit such a proclamation and secondly in promulgating such a Post-Proclamation Order the President had reached retrospectively to a date to which he could not even in exercise of powers under section 297(1) of the Interim Constitution reach. The limitation on the power under Article 279(1) was that it could not go in retrospect beyond 20th day of December, 1971. The Post-Proclamation Order had the effect of taking the retrospectivity of subsection (4AA) to 1-4-1959.

9. In arguing these appeals the -learned counsel appearing for the appellant have taken up the same grounds as were noted and have been dealt with in the High Court judgment. No fresh point was urged or made out.

10. The effect of the decision in E.V. Miller's case PLD, 1959, SC 219 is that an income which enjoys statutory and Constitutional exempt from tax continues to do so on-its receipt and in the hands of the share-holders of the company which has been exempted from tax. In the case of the dividend income now under examination in these cases a similar unqualified exemption was enjoyed by the companies and the principle of law got, attracted fully to it.

11. The amendment introduced by Finance Ordinance .No. XXI of 1972 by adding subsection (4AA) to section 15BB had indeed the curative effect of making the law as modified from its very inception i.e. 1-4-1959. However, the Ordinance was itself a temporary statute, did not receive the approval of the National Assembly, lapsed on account of the Constitutional. provision,, and being temporary in nature could leave no permanent .consequences. The previous position got restored. The amendment stood effaced and it could not be utilised for adjudicating on the rights of the parties.

12. Article 279 of the Interim Constitution conferred 'on the President an exceptional power which could be exercised for any :of the three, purposes mentioned therein and these were as hereunder:---

(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.

13. The addition of subsection (4AA) to section 15BB of the Income Tax Act and the need for it by a Post-Proclamation Order does not satisfy the requirement of any of the purposes for which this power was conferred. Additionally, clause (4) of this very Article provided that "any order made under this Article may be made so as to be retrospect to any date, not earlier than the twentieth day of December, 1971". In the effort to revive and revitalize the Finance Ordinance XXI of 1972 in fact subsection (4AA) of section 15BB was made effective from 1-4-1959, a date far more in retrospect than was the limiting date prescribed in the Constitution. All these defects made the post Constitution President's Order No.5 of 1972 of no avail so far as revival of subsection (4AA) is concerned.

14. On none of the grounds, it appears; the appeals suffers from no legal infirmity. The appeals are, therefore, dismissed with no order as to costs.

M.B.A./C-106/S Appeals dismissed.