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

‑‑‑‑S.

12(9‑A), proviso (ii)‑‑‑Income deemed to accrue or arise in Pakistan‑‑‑Departmental contention that in view of proviso (ii) to subsection (9A) of S.12 of the Income Tax Ordinance, 1979, any dividend distribution for assessment year 1999‑2000 made after 30‑6‑1999 i.e. close of the stipulated income year, would not be relevant to assessment year 1999‑2000 as assessment year 1999‑2000 closed on 30‑6‑1999 and all company operations having a bearing on the determination of this income also came to an end on this date was clearly not tenable.

(b) Income Tax Ordinance (XXXI of 1979)‑---

‑‑‑‑S. 12(9‑A), proviso (ii) & Second Sched., Part IV, Cls. 59, 66‑A‑‑ Finance Act (IV of 1999)‑‑‑Income deemed to accrue or arise in Pakistan‑‑‑ Exemption from specific provisions‑‑‑Assessment year 1999‑2000‑‑‑Dividend, declaration of‑‑‑Dividend declared as on 21‑8‑1998 and 23‑8‑1999 were found to be not relevant to assessment year 1999‑2000 as the dividend declarations had been allegedly made outside the time frame relevant to income year 1998‑99 as evident from the dates of dividend declaration made by the company‑‑‑Consequently, dividend distributions was found to be much less than 40% of the after tax profits declared by the company rendering the company subject to the mischief of S.12(9‑A) of the Income Tax Ordinance, 1979 and the deemed income was determined by the Inspecting Additional Commissioner‑‑‑Validity‑‑‑Both the dividends were placed within the time‑frame relevant to income year 1998‑99 i.e. assessment year 1999‑2000‑‑‑Departmental contention that such dividend did not relate to assessment year 1999‑2000 was misconceived‑‑‑Distribution of dividend could not be related to the current years profit only‑‑‑Dividend was always distributed out of the accumulated, brought forward profits i.e. the retained earnings of the company‑‑‑No provisions of law existed that could compel a company to distribute dividend out of the current years profits only‑‑‑Company may announce a dividend even when loss had been declared currently‑‑‑Section 12(9A) of the Income Tax Ordinance, 1979 came on the statute in July, 1999 while such dividend had already been announced in August, 1998 and May, 1999 and when making these dividend declarations the assessee‑company clearly had no knowledge that S.12(9A) of the Income Tax Ordinance, 1979 will be brought on the statute in July, 1999‑‑‑Company committed no offence to arrange its affairs as to minimize its tax liability under the law‑‑ Section 12(9A) of the Income Tax Ordinance, 1979 provided a specific opportunity to a company to declare dividend equal to 40% of its after tax profits or 50% or the paid‑up capital whichever was less, and so escape levy of tax on deemed income under S.12(9A) of the Income Tax Ordinance, 1979 that would be a necessary consequence in case dividend was not so declared and it would be foolhardy for a company to avoid dividend declaration within the stipulated parameters‑‑‑Dividend distributions made in income year 1998‑99 were properly related to assessment year 1999‑2000 and aggregate of such dividend distributions amount was well over 40% of the after tax profits of the company Company was fully protected from the mischief of S.12(9‑A) of the Income Tax Ordinance, 1979‑‑‑Order of the Inspecting Additional Commissioner passed under S.66‑A of the Income Tax Ordinance, 1979 was vacated and reinstated that of the Assessing Officer by the Appellate Tribunal.

(c) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Second Sched., Part IV, Cl. (59) & S.12(9A)‑‑‑Exemption‑‑‑Cash distribution‑‑‑Exemption from specific provisions‑‑‑Clause 59 of Part IV of the Second Sched. of the Income Tax Ordinance, 1979 made it easier for companies to qualify for exemption and made no express mention of "cash distribution" of dividend as done in S.12(19‑A) of the Income Tax Ordinance, 1979 and instead simply made mention of profit distribution only which appeared to be deliberate and to further facilitate companies in qualifying for exemption and resultantly, a company distributing dividend through a mix of cash distribution and issue of bonus shares be able to qualify for exemption.

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

‑‑‑‑Second Sched., Part IV, Cl. (59) & S.12(9‑A)‑‑‑Exemption from specific provisions‑‑‑Qualification for exemption‑‑‑After enactment of Cl. (59) of Part IV of the Second Sched. of the Income Tax Ordinance, 1979 only one interpretation was possible as regards the qualification for exemption front the provisions of S.12(9A) of the Income Tax Ordinance, 1979 and that was that the company 'distribute dividend' equal to 40% of its after tax profits of 50% of the paid‑up capital, which ever was less‑‑‑No requirement was mentioned in Cl. (59) of Part IV of the Second Sched. of the Income Tax Ordinance, 1979 that company distribute dividend in cash only‑‑‑Clause 59 of Part IV of, the Second Sched. of the Income Tax Ordinance, 1979 had effectively reduced the scope of S.12(9‑A) of the Income Tax Ordinance, 1979 and such stipulation of simple dividend distribution and nor cash only dividend distribution was one of the ways in which Cl. (59) of Part IV of the Second Sched. of the Income Tax Ordinance, 1979 had reduced the scope of S.12(9A) of the Income Tax Ordinance, 1979.

(e) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 12(9A)‑‑‑Income deemed to accrue or arise in Pakistan‑‑ Dividend‑‑‑Non‑deposit of dividend warrants by shareholders‑‑‑Fact that some dividend warrants may not be deposited for encashment by shareholders could not be taken to mean that dividend had not been distributed.

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

‑‑‑‑S. 12(9A) & Second Sched., Part IV, Cl. (59)‑‑‑Section 12(9A) of the Income Tax Ordinance, 1979 and Cl. 59 of Part‑IV of the Second Sched. of the Income Tax Ordinance, 1979 were required to be read together in case of all such public limited listed‑companies that declared profits‑‑‑In case of public limited listed‑companies declaring losses, Cl. (59) of Part IV of the Second Sched. of the Income Tax Ordinance, 1979 did not come into play at all and such companies could escape the mischief of S.12(9A) of the Income Tax Ordinance, 1979 only by declaring `cash dividend' on a scale as to ensure that the reserves did not exceed 50 of the paid up capital, within the time‑frame laid down in provisos (i) & (ii) of S.12(9A) of the Income Tax Ordinance, 1979‑‑‑Built in bias thus existed in favour of companies declaring profits and against companies declaring losses.

(g) Precedent‑‑‑

‑‑‑‑ View of Courts‑‑‑Binding effect‑‑‑View expressed by the High Court was an authoritative pronouncement by the superior judiciary and was thus binding on the Department and all subordinate forums.

Naeem Aklitar Sh., F.C.A. for Appellant.

Abdul Rasheed, D.R. and Shahid Jamil, L.A. for Respondent.

Date of hearing: 23rd November, 2002.

ORDER

MUHAMMAD MUNIR QURESHI (ACCOUNTANT MEMBER).‑‑‑This appeal by a public limited (listed) company is directed against the order of the IAC Range II, Companies Zone II, Lahore, dated 17‑5‑2002.

2. It is the appellant's contention that exercise of revisionary jurisdiction under section 66A by the IAC is not tenable in law as the original assessment framed by the DCIT is neither erroneous nor prejudicial to the interest of Revenue and the provisions of sub section (9A) of section 12 of the Ordinance do not apply in assessee's case as the company qualifies fully for the concessions available in clause 59, Part‑IV of the Second Schedule to the Ordinance.

3. The facts in this case are that assessment for 1999‑2000 has been originally made by the DCIT on 11‑5‑2002 under section 156 of the Ordinance determining total income Rs.1186,164,488. As per accounts statements annexed with the income‑tax return of the company, total after tax profit has been declared at Rs.776,813,994. Three dividend declarations are claimed to have been made by the company in the period relevant to Assessment year 1999‑2000 and these aggregate Rs.463,704,000 which is 59.69% of the after tax profits.

4. Subsequent to finalization of assessment the IAC inspected the assessment record and found that of the three dividend distributions made by the company (No.25, Rs.83,400,000 on 21‑8‑1998, No.26, Rs.220,176,000 on 19‑5‑1999, and No. 27, Rs.160,128,000 on 23‑8‑1999) only dividend No. 26 qualified indisputably to be placed in income year 1998‑99 i.e. Assessment year 1999‑2000 as it has been declared on 19‑5‑1999 which is within the time‑frame relevant to income year 1998‑99 i.e. assessment year 1999‑2000. As for dividend Nos.25 and 27 these were found to be not relevant to assessment year 1999‑2000 as the dividend declarations had been allegedly made outside the time frame relevant to income year 1998‑99, as statedly evident from the dates of dividend declarations made by the company. Nevertheless the IAC ultimately did treat dividend No.25 as relevant to Income year 1998‑99 i.e. assessment year 1999‑2000 apparently as a concession to the so called, logic of the assessee that dividend. No.25 was "declared and issued for the year ending, 31‑12‑1998 relevant to the income year July, 1998 to June, 1999 and credit of the same may be given to the income year relevant to assessment year 1999‑2000." (pages 81‑82, para.7 of order under section 66A, dated 17‑5‑2002).

5. Resultantly, the IAC found that as only dividend Nos.25 and 26 statedly constituted a valid distribution of dividend by the company in the period relevant to assessment year 1999‑2000, the aggregate of the two dividend distributions was found to be much less than 40% of the after tax profits declared by the company rendering the company subject to the mischief of subsection (9A) of section 12 of the Ordinance. Consequently the deemed income under section 12(9A) was determined by the IAC at Rs.2,233,960,373. and so included in the total income of the company.

6. The appellant‑company contested the findings of the JAC and filed Writ Petition No.9665 of 2001 under Article 199 of the Constitution before the Hon'ble Lahore High Court and the High Court through its judgment, dated 6‑12‑2001 set aside the IAC's order under section 66A and directed that the assessee‑company be given an opportunity to explain its points of view on all pertinent aspects. The High Court also recorded observations in its judgment affirming that section 12(9A) was designed to encourage distribution of dividend by public limit listed‑companies to its shareholders and it was not the intention of the legislature that the provision be put to use by the Department as a revenue generating instrument. However in re assessment made, the Department has repeated its earlier treatment.

7. The appellant disputes the validity of the findings as recorded by the IAC and hence the present appeal.

8. Arguments have been made at length by the learned AR of appellant and by the learned D.R. ably assisted by the learned Legal Advisor to the Department.

9. According to the AR of assessee‑company:

10. Accumulation of reserves by the company over the years has not been to the detriment of shareholders as is borne out by the company's excellent and unequalled record of dividend distribution, markedly superior to that of any other similar company, reserves have been built up purposefully for meaningful expansion, balancing and modernization and by way of abundant caution/financial prudence;

11. When the company declared dividends 25 & 26 in 1998 it had no idea that section 12(9A) was to be brought on the statute through the 1999 budget. It is therefore, patently unfair to allege as done by the learned AR before the Tribunal that the dividend distributions have been deliberately used as a device to escape the mischief of section 12(9A);

12. The provisions of section 12(9A) of the Ordinance and Clause 59(i) of Part IV of the Second Schedule are inextricably linked and are not to be read in isolation and a plain reading of the text in each case makes it abundantly clear that where 40% of the after tax profits or 50% of the paid‑up capital whichever is less has been distributed as claimed in assessee's case section 12(9A) does not even come into play;

13. The parameters of a valid dividend distribution period have been clearly laid down in section 12(A) within 7 months of the end of the income year and in proviso (ii) to section 12(9A) it has been further clarified that where the income year ends on the 30th day of June, 1999 as in assessee's case the dividend distribution is to be made within a period of 8 months, reckoned from the 1st day of July, 1999. Assessee company's three dividend distributions having been made in income year 1999 and fall well within the timeframe expressly stipulated by statute and no confusion whatsoever arises from the fact that audit accounts have been drawn up on calendar year basis and the accounts appended to the income tax return on financial year basis:

14. When the profits appropriation has been admittedly accepted by the Department and the dividend distribution takes place against such appropriated profit's well within the parameters laid down in the law, both with regard to timeframe of dividend distribution and quantum of dividend distribution there can be no question of rejection of the dividend distribution and any such rejection is bound to be seen as entirely arbitrary and whimsical;

15. No evidence has been brought on record by the Department to establish that the dividend distribution has been made in manner other than that stipulated as per statute i.e. through cash and/or issue of bonus shares. The Companies Ordinance does not mandate `cash only' distribution of dividend. In any case clause 59(1) speaks only of a company ...which distributes profit equal to...There is no requirement of `cash only' distribution of dividend.

16. The budget speech explains all legislation undertaken by Government pursuant to its policy framework; it is therefore, an important indicator of the purpose and intent of all statutory enactments and is a legitimate source material in this context, as explained in the budget speech of the Finance Minister it was Government policy to protect the interest of shareholders and section 12(9A) had been brought on the statute in this context as, a "facilitating provision" and it was never the intention, of the legislature to enact section 12(9A) as a revenue generating tool into which it has been illegally transformed by the Department. It is emphasized that the Hon'ble Lahore High Court has unequivocally supported the view that section 12(9A) was never meant to be used as a Revenue generating provision and the department has shown clear disregard for the High Court's findings recorded in its judgment, dated 6‑12‑2001, disposing of writ petition filed by the company against the (1st) order of the IAC under section 66A.

17. While there is no denying that two different accounts statements have been drawn up relatable to the Companies Ordinance and the Income‑Tax Ordinance respectively, the accounting principles remain the same in eash case for drawing up the final accounts/balance‑sheet of the company the format of the accounts is different only with regard to the timeframe involved.

18. As for placement of the dividend distribution in a particular assessment year, so long as the distribution adheres with the timeframe stipulated in section 12(9A) and proviso (i) and (ii) thereof; its placement is required to be made in the assessment year pertinent to the income year in. which the distribution falls and as in the case of the assessee‑company, dividend No.27 has been distributed well within the eight month period stipulated in proviso (ii) to section 12(9A), it falls in assessment year 1999‑2000 as for dividend No.25, it statedly falls well within income year 1998‑99 and adverse comment regarding its placement in assessment year 1999‑2000 has been made wholly unjustifiably by the IAC.

19. Emphasis on mere terminology is quite unnecessary and of little consequence and a "dividend distribution" announced by the B.O.D. of the company is exactly what the words suggest in their ordinary parlance.

20. The SCEP and the CLA and also the Stock Exchanges are fully seized with the operations of the company in their totality and know well what `dividend distribution' entails and they are not going to be fooled by the fact that the accounts statements incorporated in the audited accounts drawn up on calendar year basis have a different timeframe from the accounts statements attached with the return of income.

21. The dividend distribution is not restricted to the current years profit appropriation only and the brought forward accumulated profits/retained earnings of the company may be tapped for purposes of dividend distribution; in fact dividend may be distributed even if losses have been declared currently, provided of course there are accumulated, brought forward profits from previous years;

22. It is the exclusive prerogative of the Board of Directors of the company to announce a dividend distribution an this may be done annually, bi annually or even quarterly depending on the accounts put up before the BOD;

23. The Department is wholly misconceived in its view as articulated by the learned LA before the Tribunal that the accounts attached with the income‑tax return of the company are benefit of SCEP/CLA oversight; the fact of the matter is that the accounts statements attached with the income‑tax return of the company are based on the six monthly accounts statements prepared by the company and these six monthly accounts are duly sent to the SEC. Thus the accounts attached with the income‑tax return are as reliable as the audited accounts sent to the SECP.

24. In the assessment year 2001‑2002 the Department has made a complete, about face to the treatment accorded in assessment year 1999‑2000 so far as placement of dividend declaration is concerned and has accepted that dividend declared after close of income year does relate to the assessment year 2001‑2002 and accordingly exemption as envisaged in clause 59 has been allowed to the assessee‑company despite the fact that the dividend declaration has been made after the close of the income year.

25. According to the DR/LA for the Department.

26. The assessee‑company has accumulated huge reserves over the years and was suddenly faced with section 12(9A) and to escape its mischief contrived to distribute dividend. The dividend distribution thus became a device to avoid liability under section 12(9A).

27. Clause 59(i) of Part‑IV to the Second Schedule has assumed the garb of refuge for the company from the liability otherwise arising under section 12(9A).

28. Clause 59(i) being an exemption clause is required to be construed strictly and where two different interpretations are available, the one favouring Revenue is required to be adopted.

29. As assessment of income is required to be made with reference to the provisions of the Income Tax Ordinance 1979, the income year ending 30‑6‑1999 is relevant for purposes of reckoning the assessment year pertinent to a dividend distribution, dividend No.27 having been announced after 30th June, 1999, it does not fall in assessment year 1999‑2000.

30. No doubt the accounts of the assessee have been audited but their acceptance by the Department is only to the extent of profits appropriation and the Department is under no compulsion to accept the dividend distribution also.

31. Section 12(9A) envisages cash distribution of dividend by a company only and it is not established that the company has distributed its dividends in cash:

32. The budget speech of the Finance Minister does not constitute interpretation of law and the comments/remarks/observations made by the Finance Minister in his budget speech for 1999 relating to enactment of the provisions of section 12(9A) of the Ordinance cannot be referred to for purposes of statutory interpretation; while Parliament legislates only the Courts interpret the law;

33. The adoption of `financial year' as `income year' by the company is of fundamental significance so far as the correct `placement' of a dividend distribution is concerned and any dividend distributed after close of the income year does not properly `relate' to the assessment year relevant to the income year:

34. The provisions of the Income‑tax Ordinance 1979 are not to be confused with the provisions of the Companies Ordinance and while the audited accounts of the company have been drawn up on calendar year basis keeping in mind the provisions of the Companies Ordinance, the accounts statements accompanying the income‑tax return filed by the company relate to the provisions of the Income‑tax Ordinance and are drawn up on financial year basis; thus two different accounts statements have been made out by the company and each statement is tailored to a particular enactment dividend distribution pertinent to annual accounts is thus not the same as dividend distribution pertinent to accounts drawn up on financial year basis.

35. Announcement of interim dividend after proposed dividend announcement is irregular as the proposed dividend is the final dividend.

36. SEC/CLA oversight is with reference, to the audited accounts of the company drawn up on calendar year basis the accounts attached with the income‑tax return are on financial year basis are not sent to these authorities and thus do not the benefit of their oversight and may therefore, be open to manipulation in a manner to suit the assessee.

37. We have heard both sides and have examined the available record and our findings are recorded as under:

38. The only dispute in this case is with regard to the `placement' of the three dividend declarations (Nos. 25, 26 & 27) in the period relevant to assessment year 1999‑2000 (i.e. Income year 1998‑99 w.e.f 1‑7‑1998 to 30‑6‑1999). According to the appellant‑company all three dividend declarations have been made in the period relevant to assessment year 1999‑2000 whereas the Department has taken the opposite view and accepts only one dividend declaration i.e. No.26 to be indisputably in assessment year 1999‑2000. Reluctantly, however, the IAC has eventually accepted dividend No.25 to also fall in income year 1998‑99 i.e. assessment year 1999‑2000.

39. It is the departmental view that dividend No.25 (Rs.83,400,000) announced through Board Meeting of 21‑8‑1998, though falling in, income year 1998‑99, does not relate to assessment year 1999‑2000 for the reason that the said dividend has been disbursed out of the profits generated by the company in the first six months of 1998. Dividend declaration No.26 (Rs. 220,176,000) announced through Board Meeting of 19‑5‑1999, is accepted by the Department as relevant to assessment year 1999‑2000 as the Board Meeting falls within income year 1998‑99. Dividend Declaration No.27 (160,128,000) announced through Board Meeting on 23‑8‑1999 is rejected by the Department for the reason that the Board Meeting took place on 23‑8‑1999 which is after the close of income year 1998‑99.

40. Prima facie, it is all too evident that the departmental logic is not consistent. If dividend No.25 is being rejected by the Department for the reason that it has been disbursed out of the company's profits generated in the first six months of 1998 then how' can dividend No.27 be rejected when it has been announced on 23‑8‑1999 because it too must then be seen as having been generated out of the company's profits of the preceding six months which of course is admittedly the period relevant to income year 1998‑99. Thus if this be the departmental logic

then dividend No.25 only should have been rejected and dividend Nos.26 & 27 should have been accepted. In the case of the assessee‑company the Department is employing one parameter for placement of dividend No.25 and another for dividend No.27. The Department is clearly blowing hot and cold in the same breath. While this may well serve the departmental purpose, it puts the assessee‑company in considerable financial discomfiture, to say the least!

41. With regard to dividend No.27 the departmental contention is that it has been announced on 23‑8‑1999 and distributed on 29‑9‑1999 which is after 30‑6‑1999 (close of income year) and falls in the second half on calendar year 1999 and hence:‑‑

"The perusal of the above dividend carry same characteristics and logic as discussed in the dividend No.25 Like dividend No.25 this dividend No.27 has also been declared on and issued on 29‑9‑1999 in the second half of calendar year 31‑12‑1999." (Page 11, para‑1 of order under section 66A).

43. The Assessing Officers attempt to find similarities between dividends Nos.25 & 27 is understandable given the fact that he has to justify his decision to not place dividend declarations Nos.25 and 27 in assessment year 1999‑2000 but he has clearly deliberately omitted ail mention of the fact that he has held that in the case of dividend No.25, notwithstanding the admitting fact that it has been announced on 21‑8‑1998 i.e. within income year 1998‑99, yet it cannot be placed to assessment year 1999‑2000 as it is relatable to the profits of the first six months of 1998. It is obvious that the Assessing Officer's omission here is deliberate because once he makes the argument as done in the case of dividend No.25, then he would be compelled to acknowledge that in the case of dividend No.27 the dividend relates to the dividend falls in the second half of calendar year 1999. It is thus fairly obvious that the IAC is choosing his arguments selectively in order to justify his decision to not place dividend declarations 25 and 27 in assessment year 1999‑2000. (Eventually of course the IAC has placed dividend No.25 in income year 1998‑99 but that has clearly been done reluctantly and through a process of convoluted logic).

44. The departmental contention that for assessment year 1999‑2000 any dividend distribution made after 30‑6‑1999 i.e. close of the stipulated income year, would not be relevant to assessment year 1999‑2000 as assessment year 1999‑2000 closes on 30‑6‑1999 and all company operations that have a bearing on the determination of its income also come to an end on this date is, clearly not tenable in the presence of proviso (ii) to subsection (9A) of section 12. This provision expressly, unambiguously and unequivocally stipulates that:‑‑

" In respect of assessment year commencing on the first day of July, 1999, the cash dividend distribution made within the following period shall be treated as distribution for the purposes of this subsection:‑‑

..where the income year ended on the 30th day of June, and the distribution is made within a period of eight months reckoned from the first day of July, 1999"

(Emphasis ours)

45. Admittedly, in the case of the present assessee, dividend No.27 has been distributed well within the timeframe stipulated in the above provisions and as explained supra, dividend Nos.25 and 26 are both placed within the timeframe relevant to income year 1998‑99 i.e. assessment year 1999‑2000. The Department contention that dividend Nos.25 and 27 do not relate to income year 1998‑99 i.e. assessment year 1999‑2000, is thus clearly misconceived.

46. We have absolutely no doubt in our minds that distribution of dividend cannot be uniquely related to the current years profit only. Rather, dividend is always distributed out, of the accumulated, brought forward profits i.e. the retained earnings of the company. There is no provision of law that can compel a company to distribute dividend out of the current years profits only. Indeed, we fully agree with the learned AR of the company in his contention that a company may announce a dividend even when loss has been declared currently, as per the final accounts. In the case of the present company however, there is no doubt that the company had adequate retained earnings to distribute dividend aggregating Rs.463,704,000 in assessment year 1999‑2000 and this is so reflected in the company's Balance‑Sheet.

47. It is correct that the assessee‑company has prepared two sets of accounts statements, one on Calendar Year basis which form part of the audited accounts of the company and a second set on financial year basis and these are annexed with the income‑tax return for assessment year 1999‑2000 filed before the Department. It is also correct that the company has published six monthly and annual accounts as per requirement of Companies Ordinance 1984, sections 233, 234 and 245. The six monthly accounts for the period 1‑1‑1998 to 30‑6‑1998 issued on 21‑8‑1998 show no appropriation of dividend from the retained earnings of the company. This may be seen to mean that dividend declaration No.25 does not relate exclusively to the six month period 1‑1‑1998 to 30‑6‑1998.

48. An important matter to be decided in this case is whether section 12(9A) of the Ordinance can be read in isolation and not in conjunction with clause 59 of Part‑IV of the Second Schedule to the Ordinance. The LA to the Department appears to be of the view that section 12(9A) is fully applicable in isolation and need not be read alongwith clause 59 while the learned AR of appellant asserts that the two provisions have to read together.

49. We have agonized over this issue and in our considered judgment clause 59 was deliberately placed on the statute (through Notification No. S.R.O. 969(I)/99, dated 27th August, 1999) after enactment of subsection 9A of section 12 of the Ordinance through Finance Act 1999. In our judgment this has been done purposely so as to expressly reduce the scope of section 12(9A). This is evident from the fact that in section 12(9A) the stipulated profit distribution requirement ensures that the available reserve, after distribution, do not exceed 50% of the paid‑up capital. Thus where a company has reserves well in excess of the paid‑up capital, then conceivably, such a company, in order to be able to escape the mischief of section 12(9A), may be required to distribute much more than 40% of years after tax profits so as to ensure that its reserves do not exceed 50% of the paid up capital clause 59(i) on the other hand clearly restricts the scope of section 12(9A) by expressly linking exemption from the mischief of 12(9A) to a dividend declaration equal to only 40% of the after tax profits OR 50% of the paid up capital. Whichever is less. This is clearly much less than what section 12(9A), read in isolation, envisages and is proof positive of the deliberate intention of the legislature to scale down the mischief that section 12(9A) can wreck. That being so, there can be no justification to read section 12(9A) in isolation as, because of the subsequent enactment of clause 59, the original section 12(9A) stands effectively reduced in scope and it has been made much easier for companies to be able to qualify for exemption from its provisions.

50. The amendment made in clause 59(i) through Finance Ordinance, 2001 also indicates the clear intention of Government to further facilities public listed‑companies in qualifying for exemption. In the original clause 59(1) profit distribution was stipulated to the extent of 40% of its after tax profits only. In amended sub‑clause (i) the paid‑up capital of the company also finds specific mention and the required profit distribution for purposes of exemption is the LESSER of either 40% of the after tax profits or 50% of the paid up capital. This is certainly a facilitating amendment as it makes it even easier for companies to qualify for exemption where the after tax profits are high but the paid‑up capital is relatively low.

51. In another way also clause 59 makes it easier for companies to qualify for exemption. Thus clause 59 makes no express mention of "cash distribution" of dividend as done in section 12(9A) and instead, simply makes mention of profit distribution only. This too appears to deliberate and further facilitates companies is qualifying for exemption and resultantly, a company distribution dividend through a mix of cash distribution and issue of bonus shares will now be able to qualify for exemption.

52. We have no quarrel with the Legal Advisor's statement that clause 59 being an exemption clause is required to be interpreted strictly as the interpretation of statute allowing exemption is indeed required to be made in this manner. However the LA has gone on to say that where two different interpretations are possible in the reading of an exemption clause, the one favouring Revenue should be adopted. According to the LA the assessee‑company not having distributed dividend on a "cash only" basis does not meet the stipulation laid in this regard in section 12(9A) and when the AR of assessee pointed out that clause 59(i) makes no stipulation in this regard and simply speaks of dividend distribution the LA opined that there was a dispute here with regard to the requirement of dividend distribution and as the cash only distribution of dividend favours Revenue the same should be adopted.

53. We have looked into this aspect of the matter and we find that after enactment of clause 59 only one interpretation is possible as regards the qualification for exemption from the provisions of section 12(9A) and that is that the company "distribute dividend" equal to 40% of its after tax profits or 50% of the paid up, capital, whichever is less. There is definitely no requirement in clause 59 that the company distribute dividend in cash only. As explained supra, clause 59 has effectively reduced the scope of clause 12(9A) and this stipulation of simple divi dend distribution and not cash only dividend distribution is one of the ways in which clause 59 has reduced the scope of section 12(9A). Thus there is no dispute in clause 59 regarding the mode of dividend distribu tion and the departmental view in this regard is clearly misconceived.

54. We would further like to point out here that authoritative opinion* on the matter pertaining to manner of dividend distribution envisaged under the statute supports the view that once dividend is declared and its distribution approved it shall not be lawful for the directors or the company to defer or withhold its payment and the Companies Ordinance prescribes severe penalties to be levied on the company C.E.O. where a dividend is approved by shareholders but not paid‑up within the specified period of 45 days. The fact that some dividend warrants may not be deposited for encashment by shareholders cannot be taken to mean, that dividend has not been distributed. Requisition of counterfoils of dividend warrants by some Assessing Officers, purportedly to verify dividend distribution, is not justified as these counterfoils are for shareholders records only and the standard audit report does not contain any certification specific to the dispatch of dividend. To this end there is therefore hardly any utility in any exercise carried out by some Assessing Officers to verify whether the dividend cited in the final accounts has been actually paid by the company and in case there is any delay in the disbursement of dividend declared/approved. It is for regulatory authorities like the SECP and the Stock Exchanges to take cognizance of the same. Furthermore, dividend payment cannot be tied to finalization of tax assessment as that would deprive the shareholders of timely dividends and prevent compliance with the stipulation obtaining in the Companies Ordinance (section 248 and others) which mandates dividend distribution by a company within 45 days of its approval in the annual general meeting by the share holders. As the finalization of assessment** of income of a company is an uncertain event that may take months or even years after filing of the return of income, if dividend distribution is tied to finalize tax assessment it may not be possible to hold the AGM within 6 months of the close of accounts as required under the Companies Ordinance.

*See "Taxing rerves the right way' by M. Iqbal Patel, FCA in the Pakistan Accountant July‑August, 2002.

**So held by the Tribunal in I.T.A. No. 51/LB of 2000 (AY 1999‑2000), dated 14‑5‑2002.

In view of the comment made supra; we hold that there is no ambiguity or dispute in clause 59 regarding the mode of dividend distribution and the departmental view in this regard as articulated by the Legal Advisor before the Tribunal is clearly misconceived.

55. In view of what is stated above, we hold that section 12(9A) of the Ordinance and clause (59), Part IV of the second Sched. to the Ordinance are required to be read together in the case of all such public limited listed companies that declare profits. However in the case of public limited listed companies declaring losses, (other than a leasing company, a trust or a company in which not less than 50% shares are held by Government), clause 59 does not come into play at all and such companies can escape the mischief of section 12(9A) only by declaring `cash dividend' on a scale as to ensure that the reserves do not exceed 50% of the paid up capital, within the timeframe laid down in provisos (i) and (ii) of subsection (9A) of section 12 of the Ordinance. Thus, it appears that there is a built in bias here in favour of companies declaring profits and against companies declaring losses.

56. In our judgment what appears to be really bothering the Department is the underlying belief that the assessee‑company deliberately managed the three dividend distributions simply to escape the mischief of section 12(9A) and had it not been for section 12(9A) the dividends would not have been so distributed. However it need not take us long to see that the departmental apprehension is misplaced as section 12(9A) came on the statute in July, 1999 while dividend Nos. 25 & 26 had already been announced in August, 1998 and May, 1999 and when making these dividend declarations the assessee‑company clearly had no knowledge that section 12(9A) will be brought on the statute in July, 1999.

57. In any case it is no offence for a company to so arrange its affairs as to minimize its tax liability under the law. Section 12(9A) provides a specific opportunity to a company to declare dividend equal to 40% of it's after tax profits or 50% of the paid‑up capital whichever is, less, and so escape levy of tax on deemed income under section 12(9A) that would be necessary consequence in case dividend is not so declared and it would be foolhardy for a company to avoid dividend declaration within the stipulated parameters. If, therefore, the assessee‑company has declared dividend to the extent that it has, that, cannot be given a negative slant as has been done by the Department. Indeed, even if it be accepted, for the sake of argument that the assessee‑company has only declared dividend to the extent that it has in order to escape the mischief of section 12(9A), that is only proof of the success of Government policy to encourage companies to declare reasonable dividend and the assessee company should be applauded for its compliance with Government policy. The fact that the assessee‑company has in effect has `punished' rather than applauded for declaring good dividend is bound to send the wrong signals to the corporate sector in particular and investors in general and will have serious ramifications to the detriment of investment activity which would be negation of Government efforts to encourage corporate investment.

56. We are constrained to note that the Department has shown scant regard for the observations recorded by the Hon'ble Lahore High Court in their judgment, dated 6th December, 2001, when disposing of writ petition filed by the assessee‑company. Relevant extracts from the judgment are reproduced below:

After hearing the learned counsel for the parties I will agree that the issue of the three dividends doled out by the petitioner company during the relevant period satisfied the statutory requirements needs to be reconsidered by the Revenue. Therefore, the impugned order, dated is set aside.

..

Before ending, I would like to record that provisions of section 12(9A) like rest of them, should be invoked only where such invocation is absolutely free of any doubt. Such‑like deeming provisions in any taxation statute should be invoked as rarely as possible. The reason simply being that these are penal in nature and an extra burden on a subject after payment of normal tax, it will be unjustified on the part of the State to extract more money from a subject by enlarging its arm and unnecessarily retching the deeming clauses of a taxing statute. The purpose of section 12(9A) is only to persuade corporate assessees to distribute dividends to the shareholders. The provision is certainly not meant to generate more revenue for the State. An overzealous tax collector is as undesirable as a meek conniver." Emphasis ours. (sic)

59. This is strong language indeed but it appears to have had no effect on the Department in interpreting section 12(9A) in a manner as to make it a revenue generating tool which is quite the opposite of the view expressed by the Hon'ble High Court. Needless to say the view expressed by the High Court is an authoritative pronouncement by the superior judiciary and is thus binding on the Department and all subordinate appellate fora.

60. After due consideration all pertinent aspects relating to placement of the three dividend distributions made by the company, and taking into account the fact that in assessment year 2001‑2002 the Department has itself accepted dividend distribution declared by the company after close of accounts at end of income year to properly relate to the relevant assessment year 2001‑2002, we are satisfied that the three dividend distribution made by the company in income year 1998‑99 relate properly to assessment year 1999‑2000 and as the aggregate of these dividend distributions amount to well over 40% of the after tax profits of the company, the company is resultantly fully protected from the mischief of subsection (9A) of section 12 of the Ordinance. We therefore, hereby vacate the order of the IAC passed under section 66A and reinstate the order of the DCIT.

61. The appeal succeeds.

C.M.A./785/Tax (Trib.)Appeal accepted