Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss. 80‑B(1), 2(20)(e) & 50(6A)‑‑‑Tax on income of certain persons from dividend and Bank profits etc.‑‑‑Dividend‑‑‑Loan‑‑ Deduction of tax at source ‑‑‑Assessee was Director as well as share holder of a private limited company ‑‑‑Assessee obtained loan from the company‑‑‑Assessing Officer invoked the provisions of S.2(20)(e) of the Income Tax Ordinance, 1979 and treated the same as "dividend" after deducting accumulated profit from such loan, which was added to the income of the assessee‑‑‑First Appellate Authority confirmed the application of S.2(20)(e) of the Income Tax Ordinance, 1979 but directed the Assessing Officer to treat this income as a separate block under S.80B of the Income Tax Ordinance, 1979‑‑ Validity‑‑‑Reading of the provisions of S.50(6A) of the Income Tax Ordinance, 1979 together with the meaning of word "dividend" given in S.2(20)(e) of the Income Tax Ordinance, 1979, showed that payment by a private company of a sum by way of advance or loan to a shareholder would fall within the definition of dividend and would thus attract the provisions of S.50(6A) of the Income Tax Ordinance, 1979‑‑‑Any payment by way of a loan or advance by a private company to its shareholders to the extent of its accumulated profit would be treated as dividend and liable to deduction of tax‑‑‑Dividend on which tax was deductible under S.50(6A) of the Income Tax Ordinance, 1979 would be taxable under the provisions of 80B(1) of the Income Tax Ordinance, 1979‑‑‑Order of the Appellate Authority was maintained by the Appellate Tribunal and appeal of the Department was dismissed.

Bakht Zaman, D.R. for Appellant.

Muhammad Siddiqui Ragadia for Respondent.

Date of hearing: 24th May, 2002.

ORDER

INAM ELLAHI SHEIKH (CHAIRMAN). ‑‑‑This departmental appeal is directed against an order dated 30‑12‑1996 recorded by the learned Commissioner of Income‑tax (Appeals), Zone‑II, Karachi against an Income‑tax assessee on the following ground:‑‑

"(i) The section 80‑B covers a situation where tax is deductible under section 50(6A).

(ii) In the matter where loan, is advanced for the directors, it is deemed as dividend which in actual is not, therefore, this situation is not covered by 80‑B. "

2. The relevant facts in brief are that the assessee earned income as a Director of private limited company and also as partner of a firm. The Assessing Officer found that the assessee had obtained a loan of Rs.11,00,000 from the company, in which he was Director as well as share‑holder. He, therefore, invoked the provisions of section 2(20)(e) of the Income Tax Ordinance, 1979 (hereinafter called the 1979 Ordinance) and treated a sum of Rs.280,683 as "dividend" which was added to the income of the assessee. This amount of Rs.280,683 was computed by deducting the accumulated profit of Rs.819,317 as on 30‑6‑1993, in the balance‑sheet of the company, from the loan of Rs.11,00,000. The learned Commissioner of Income‑tax (Appeals) confirmed the application of section 2(20)(e) of the 1979 Ordinance but directed the Assessing Officer to treat this income as a‑ separate block under section 80‑B of the 1979 Ordinance in the following manner:‑‑

"Although the Assessing Officer was fully justified in invoking the provisions of section 2(20)(e) of the Income Tax Ordinance, 1979 because the appellant being a share‑holder was liable to pay tax on a sum received by him as advance or loan as a share‑holder to the extent to which the company possesses accumulated profit but the mode of computation and rate applied are both incorrect as the amount of loan advance is deemed dividend income to the extent of Rs.819,313. The Assessing Officer is, therefore, directed to treat the amount of Rs.819,313 as deemed dividend income and subject the same to tax as a separate block under section 80B prescribed in the First Schedule to the Income Tax Ordinance, 1979."

3. Both the parties have been heard and the relevant orders perused. There is no dispute over the facts of the case as summed up above: The department, however, says that the provisions of section 80B of the 1979 Ordinance are not applicable because the income under consideration has been treated as "dividend" income under a deeming provision, which cannot be covered by section 80B of the 1979, Ordinance. The learned A.R. of the assessee, however, reiterated the same arguments as taken before the first appellate authority and we find the assessee has not filed any further appeal against the order of the learned Commissioner of Income‑tax Appeals). The only grievance of the department is that the learned Commissioner of Income‑tax (Appeals) was not justified in directing to tax such deemed dividend income under section 80B of the 1979 Ordinance. A perusal of the provisions of section 80B of the 1979 Ordinance shows that the same deals with the tax on income, of certain persons from dividend etc. Under the provisions of clause (a) of subsection (2) of section 80B of the 1979 Ordinance, dividend on which tax is deductible under subsection (6A) of section 50 of the 1979 Ordinance is to be treated as income of an individual etc. under subsection (1) of the same section. Under the provisions of subsection (6A) of section 50 of the 1979 Ordinance, the principal offices of a company is required, at the time of making payment to a share‑holder, not being a company, on account of dividend, deduct tax at the rate specified in the First Schedule. The term "dividend" leas been defined in clause (20) of section 2 of the 1979 Ordinance, which contains the definition of various terms. The relevant part of such clause (20) read as follows:‑‑

"(20) "dividend" includes

(a) .............................

(b) .............................

(c) .............................

(d) .............................

(e) Any payment by a private company of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to share‑holder or any payment by any such company on behalf, or for the individual benefit, of any such share‑holder, to the extent of which the company, in either case, possesses accumulated profits."

4. The other provisions of clause (20) of section 2 of the 1979 Ordinance were not agitated to be of any relevance before us nor were they discussed by either of the parties. Reading the provisions of subsection (6A) of section 50 of the 1979 Ordinance together with the meaning of dividend given in sub‑clause (e) of clause (20) of section 2 of the 1979 Ordinance it appears to us that a payment by a private company of a sum by way of advance or loan to a share holder would fall within the definition of dividend and would thus attract the provisions of subsection (6A) of section 50 of the 1979 Ordinance. In other words any payment by way of a loan or advance by a private company to its share‑holders to the extent of its accumulated profit would be treated as dividend and liable to deduction of tax. Under the provisions of section 80B of the 1979 Ordinance dividend on which tax is deductible under subsection (6A) of section 50 of the 1979 Ordinance would be taxable under the provisions of subsection (1) of section 80B of the 1979 Ordinance. In view of this discussion we do not find any infirmity in the order of the learned Commissioner of Income‑tax (Appeals), which is maintained. The appeal is dismissed.

C.M.A./539/Tax(Trib.) Appeal dismissed.