1997 P T D 49
[Supreme Court of Pakistan]
Present: Muhammad Haleem, C. J., Zaffar Hussain Mirza,
Saad Saood Jan and Ali Hussain Qazilbash, JJ
COMMISSIONER OF INCOME TAX
Versus
PAKISTAN INSURANCE CORPORATION and others
Civil Appeals Nos. K-25 to K-29 of 1981 and 113-K of 1982, decided on /01/.
th
August, 1989. (From the judgment and order, dated 21-11-1979 and 24-3-19.82 of the Sindh High Court at Karachi in I.T.Rs. Nos. 46, 51, 52, 53, 54 of 1971 and I.T.C. No. 84 of 1972).
(a) Income-tax Act (XI of 1922)---
----Ss. 2(6-A)(d) & 66(1)---Constitution of Pakistan (1973), Art.185(3)-- "Dividend."Definition ---High Court taking view that definition of expression "dividend" itself envisaged returns of profits to shareholders in any form which was deemed to be "dividend" in law---Validity---Leave to appeal was granted to consider whether High Court had correctly interpreted S.2(6-A)(d), Income-tax Act, 1922.
(b) Income-tax Act (XI of 1922)---
----S.2(6-A)(d)---Expression "dividend"---Interpretation---High Court's finding that definition of word "dividend" as given in S.2(6-A) of the Act itself envisaged return of profits to shareholder in any form whatsoever which was declared to be "dividend" in law was correct---Where return to shareholders was no more than what they had invested such return did not fall within definition of "dividend".
Rashida Patel, Advocate Supreme Court/Advocate-on-Record for Appellant.
Ali Akbar, Advocate-on-Record for Respondent.
Date of hearing: 9th August, 1983.
JUDGMENT
SAAD SAOOD JAN, J.----These are six appeals by special leave from the judgment of the Sindh High Court, Karachi, deciding a question of law in a reference under section 66, Income Tax Act, against the revenue.
2. The assessees who are respondents in these appeals held preference shares in a public limited company, known as M/s. Colony Textile Mills Limited. The authorised capital of the company fell in three categories, namely, A class ordinary charges, B class ordinary charges and preference shares. In these appeals we are entirely concerned with the preference shares. These were of the face value of Rs.100 each and had been fully paid up. They carried a fixed cumulative preferential dividend at the rate of 6% without any further right to participate in the profits; in the event of winding up of the company they were to rank before the other two classes of shares. They were redeemable at the option of the (sic) exercised its option and redeemed the preference shares on their face value out of its accumulated profits. The money thus received by the respondents was subjected to tax in their hand under the Income Tax Act by the Income Tax Officer as dividend income. The respondents in C.As Nos. 25 to 29 preferred appeals before the Appellate Assistant Commissioner with the observations:
"The basic principle running through the entire scheme of income taxation as adumbrated in the Income-tax Act, 1922 is that the subject--matter of tax must possess in one form or another, the characteristic of income or profit. Consequently, what is sought to be taxed by this Act must satisfy this fundamental test. It is true that the Income Tax Act also provides for vicarious liabilities, for good reasons, in certain cases, but that principle cannot be stretched to the extent of covering the return of an investment, as in the present case. The basic function of the Income Tax Act is to tax income. Capital t1xation falls outside its scope and that is taken care of by the Wealth Tax, Gift Tax and Estate Tax Acts.
In this view of the matter the assessment made by the Income Tax Officer cannot be upheld and is, therefore, cancelled."
3. From the order of the Appellate Assistant Commissioner, the Department preferred appeals before the Income Tax Appellate Tribunal. The respondent in C.A. No. -113-K, too, filed an appeal before the Tribunal from the order of the Income Tax Officer. The learned Tribunal held that though the redemption money received by the respondents fell within the definition of the word 'dividend' as given in section 2(6-A)(d)., Income Tax Act it was not taxable in their hand. In this context it observed:
"However, we find force in the argument that even if the present, distribution can be termed as dividend within the meaning of section 2(6-A)(d), it is not taxable in the hands of the assessee respondent who has received nothing but only his capital invested. The so-called dividends or distributions have been retained by the company itself and, therefore, the same should be treated as dividend income of the distributing company."
4. Accordingly, it dismissed the appeals of the Department and accepted that of the respondent in C. A. No. 113. The Department applied to the Tribunal to make a reference under section 61(1) of the Income Tax Act to the High Court for its opinion on the ideal issue involved, the learned Tribunal allowed the prayer its the cases to which C.As Nos. 25 to 29 relate but disallowed the application in the case out of which C.A. No. 113 has arisen. The question framed for the opinion of the High Court was:---
"Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the redemption value of Rs.108,600 relating to preference shares of Messrs Colony Textile Mills Ltd., received by the assessees, who under Article 176 of the Corporation's Articles of Association was also entitled to participate in the surplus in the event of winding-up though covered by the definition of dividend in section 2(6) (d) of the Income Tax Act, was not taxable in the hand of assessees."
During the hearing of the reference the High Court modified the question so as to read as follows:
"Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the redemption value relating to the preference shares of M/s. Colony Textile Mills Ltd. received by the assessees was dividend within the meaning of expression defined in section 2(6-A)(d) or that it is taxable in the hands of the respondents-assessees."
A Division Bench in the High Court took the view that the definition of the expression 'dividend' itself envisaged return of profits to the shareholders in any form whatsoever which was deemed to be dividend in law and since in the present case the return was no more than what the respondents had invested in the company it did not fall within the said definition. Accordingly, it considered it as necessary to examine whether or not the respondents' case fell within the proviso to clause (d) of subsection (2)(6-A), defining dividend. In this view of the matter, it answered the question in the negative.
5. In C.A. No.113, the Department moved an application before the High Court under section. 66(2), income Tax Act, for directing the Tribunal to refer the question involved to it for opinion. After counsel for the parties agreed that the question that required decision was the same as had arisen in the other cases in which a reference had already. been made, a Division-Bench of the High Court allowed the application, and then, after formulating the same question answered in the negative on the basis of its earlier judgment referred to above.
6. From the two judgments of the High Court, the Department has come in appeal to this Court.
7. Leave to appeal was granted in these cases to consider whether the High Court had correctly interpreted section 2(6-A)(d), Income Tax Act.
8. Admittedly in exercising its option to redeem the preference shares, and that the company had paid to the respondents was the face value of their shares. It was thus a case of returning to the respondents only what they had invested in the company even though the company had while redeeming the share utilized its 4ccumulated profits. The respondents on their part received only the face value of the shares without any element of profit or gain or return thereon. Thus, in essence the question for consideration is whether under the provisions of the Income Tax Act, a person can be asked to pay tax on receiving back his own capital. According to the Department, the answer is in the affirmative.
9. In support of its case the department has referred to the definitions of the words 'income' and "dividend" as given in the Income Tax Act. The word "income" has been defined in section 2(6-C) to include "dividend" as defined in clause (6-A) of the said section. The relevant part of subsection (6-A) upon which the Department relies, reads as follows: .
"Dividend" includes---
(d) any distribution by a company on the reduction of its capital to the extent to which the company possesses accumulated profits, ...... whether such accumulated profits have been capitalised or not:
Provided that 'dividend' does not include a distribution in respect of any share issued for full cash consideration which is not entitled in the event of liquidation to participate in the surplus assets when such distribution is made in accordance with sub-clause (d)."
It may be mentioned that the proviso was amended by section 6(1), Finance Act (No. XI, of 1968) and the following words were added thereto:
"or a distribution in respect of any preference share issued for full cash consideration which is entitled to so participate when such distribution is made in accordance with clause (d).
By this amendment the Legislation has itself resolved the controversy raised by the Department in these appeals in favour of the preference shareholders. But that is for the future for the amendment has not been given retrospective effect. In these appeals we re concerned with an assessment year prior to 1968 and, therefore., we have to interpret the proviso as it stood before its amendment.
10. It is contended on behalf of the Department that the redemption money received by the respondents fell within the ambit of clause (d) and as, for the reason, to be treated as 'income' for the purposes of the Income Tax Act.
11. It is difficult to subscribe to the contention of the Department. There is a finding by the Tribunal that on redemption bf the preference shares the respondents have paid only the face value of their fully paid up shares. The words 'capital' and 'dividend' though related have entirely different considerations. In the context of the Income-tax law, very broadly speaking 'capital' would signify investment whereas 'dividend' would denote gain or return on the investment. However, in clause (d) of section 2 (6-A) of the Act, an extended meaning has been given to the word 'dividend' so to bring to tax such payment also that a company may make by manipulating its share capital as are in evidence a return or gain on the original investment of the shareholders. The scope of this clause cannot be extended when the company merely returns to the shareholders only their original investment. The intention had been otherwise; express words to that effect would have been used in the clause. We are, therefore, in agreement with the High Court that the definition of the word 'dividend' as given in the Act itself envisages return of profit to the shareholders in any form whatsoever which is declared to be dividend in law and since in the present cases the return is no more than What the respondents had invested in the company, it does not fall within the definition of 'dividend'. We would, therefore, dismiss these appeals with no order as to costs.
A.A. /C.164/SAppeals dismissed