I.T.A. No.6032/LB of 2004, decided on 1st September, 2006. VS I.T.A. No.6032/LB of 2004, decided on 1st September, 2006.

2007 P T D (Trib.) 1107

[Income-tax Appellate Tribunal Pakistan]

Before Jawaid Masood Tahir Bhatti, Judicial Member and Ch. Nazir Ahmad, Accountant Member

I.T.A. No.6032/LB of 2004, decided on 01/09/2006.

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

----Ss. 27, 2(2)(20), 22, 29(5), & 30---Capital gain---Company---Distribution of shares were treated as transfer of capital assets to the shareholders and difference between market value of the share and their cost was treated as capital gain stating that it attracted the provisions of S.27 read with S.29(5) of the Income Tax Ordinance, 1979---Validity---Where a company distributes any assets owned by it by way of dividend- in-specie to its shareholders, it was actually distributing profits among the shareholders, company did not receive any thing from its shareholders and such transaction did not fall within the ambit of S.27 of the Income Tax Ordinance, 1979---If the company sold shares to the shareholders, it would have become liable to charge of income tax on the capital gain---Treating the distribution of dividend-in-specie as sale of shares to shareholders, was totally illegal and amounted to stretching the interpretation of the provisions of section 27 too far---If the interpretation placed by the Taxation Officer on the provisions of S.27 of the Income Tax Ordinance, 1979 is accepted, then the distribution of the bonus share, right shares or even cash dividends to the shareholders by company would also entail charging of capital gain in the hands of the company---No justification was available for setting aside the case for de novo consideration---Order of the First Appellate Authority was vacated and the assessment order was cancelled by the Appellate Tribunal and declared version was directed to be accepted.

Messrs Ashiq Ali and others v. Messrs Mst. Zamir Fatima and others PLD 2004 SC 10; Shah Wazir Khan v. Abdul Razzaq PLD 2004 (Pesh.) 109; (1983) 48 Tax 6 (Trib.); 2004 PTD (Trib.) 2300; Sampath Lyengar's Book, "Law of Income Tax", Volume-2, Page 2522 18th Edition); CIT v. R.M. Amin 82 ITR 191 203; CIT v. Madurai Mills Co. Ltd. 89 ITR 51; CIT v. Muhanpdhaibhai Pamabhai 91 ITR 393; Kantilal Majilal v. CIT 41 ITR 275; 278 (SC); Ujjan General Trading Society (P.) Ltd. v. CIT (1968) 67 ITR 315 (MP); CIT v. Central India Industries Ltd. (1971) 82 ITR 555 (SC); Kanga Palkhivala; Kishenchand Chellaram v. CIT 46 ITR 275; 1974 PTD (Trib.) 27 and Maxwell on Interpretation of Statutes (12th Ed. pp.208-210) ref.

(b) Income-tax---

----Nobody should be vexed twice for the same cause, specifically when the assessee had furnished the detailed explanation with case-law.

(c) Income-tax---

----Setting aside of assessment order should not be made as routine or for filling of the lacunas on the part of the Taxation Officer which amounts to sheer harassment to an assessee.

(d) Income-tax---

----Practice and procedure---When the assessee had furnished the explanation and the Taxation Officer had not rebutted the contentions, the presumption would be that the explanation furnished by the assessee had substance, and contention of the assessee should be accepted.

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

----S. 27---Capital gain---Distribution of dividend-in-specie was not of the nature of transactions envisaged by S.27 of the Income Tax Ordinance, 1979.

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

----S. 27---Capital gain---Receipts of consideration and the consequent arising of profit or gain (or loss) was a condition precedent for the invocation of S.27 of the Income Tax Ordinance, 1979.

(g) Interpretation of Statutes---

----Interpretation that leads to absured results must be discarded.

(h) Income-tax---

----Income---Assets distribution constitutes income in the hands of the shareholders; no income could arise to the distributing company.

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

----S.27---Capital gain, whether deeming provision---Provision of S.27 of the Income Tax Ordinance, 1979 was not a deeming provision.

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

----S. 27---Capital gain---Transfer---Term "transfer" was wide enough to include every kind of transfer of assets and relinquishment or extinguishment of right in the assets, but receipt of a consideration was a condition precedent for transfer of share to fall within the ambit of S.27 of the Income Tax Ordinance, 1979.

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

----Ss. 2(20) & 27---Dividend---Under S.2(20) of the Income Tax Ordinance, 1979, any amount distributed in excess of accumulated profits could be treated as dividend---Restriction of "to the extent of the accumulated profits" appearing in S.2(20 of the Income Tax Ordinance, 1979 relates to distributions which were not actually dividends but were deemed as dividends under various sub-clauses of sub-Cl. (20) of S.2 of the Income Tax Ordinance, 1979---Distribution of dividend-in-specie did not attract the provisions of S.27 of the Income Tax Ordinance, 1979.

Muhammad Farooq Shahid, ITP and Abdul Khaliq, ITP for Appellant.

Sabiha Mujahid, D.R. for Respondent.

ORDER

Through this appeal, the appellant has objected to the impugned order of the learned CIT(A), dated 2-0-2004 for the assessment year 2001-2002 on the following grounds:

(2) That the CIT has unjustifiably, wrongly and erroneously set aside the order of the Taxation Officer, which deserved to be vacated, thus enabling him to correct the deficiencies and infirmities in the assessment order;

(3) That the CIT instead deciding a simple question of law in favour of the Appellant has unjustifiably, wrongly and erroneously set aside the case, ignoring the arguments put forward and the case law cited by the Appellant;

(4) That the CIT has unjustifiably, wrongly and erroneously set aside the case, ignoring the arguments put forward and the case law cited by the Appellant.

2. Learned counsel representing the appellant have contended that the Taxation Officer was not justified in treating the distribution of dividend in specie to the shareholder as transfer of assts and computing capital gains thereon. It has been contended that there was no justification in invoking the provisions of section 27 of the repealed Income Tax Ordinance, 1979. Explaining the facts of the case, learned counsel have submitted that the appellant is a Private Limited Company engaged in processing and sale of allied dairy products and software consultancy services. However, these operations were discontinued on 30th November, 1997 and 30th June, 1998 respectively. The Company has earned no operational income since then. Quite a few years ago, the appellant acquired 8,838,324 share of Chaudhry Dairies (Pvt.) Ltd., a sister company of the appellant from a foreign shareholders, who wanted to dis-invest in CDL due to persistent losses. These shares were acquired at a nominal cost of Re.1 only. During the income year under appeal, the appellant distributed cash dividends and also dividends-in-specie in the form of shares of CDL among its shareholders. Though the face value of each share was Rs.10, yet for the purposes of valuation of the dividends, these share were valued at Rs.40 each. The Company realized the tax @ 10% on such dividends-in-specie from the share holders under section 50(6) of the repealed Income Tax Ordinance, 1979 and deposited the same as prescribed under the Ordinance. The Taxation Officer treated the distribution of the shares as a transfer of capital assets by the appellant to the shareholders and subjected the difference between the market value of the shares (i.e. Rs.353,532,960) and their cost price (Re.1) as capital gain in the hands of the appellant stating that it attracts the provisions of section 27 read with section 29(5) of the repealed Income Tax Ordinance, 1979. The appellant filed an appeal against this treatment made by the Taxation Officer before the CIT (Appeals). The main issue in appeal was whether where a company distributes dividend -in-specie, the difference between the cost of the assets so distributed and the market value of the assets on the date of distribution constitutes capital gains in the hands of the company under the provisions of section 27 of the repealed Income Tax Ordinance, 1979. The learned counsel for the appellant have pleaded that once the learned CIT (Appeals) has given his findings that "the learned AR has raised quite a few technical and legal issues which has not been sufficiently rebutted by the Assessing Officer", there was no justification to set aside it. When the Assessing Officer failed to rebut technical and legal issues, the learned CIT(A) should not have set aside the order rather he should have deleted the impugned addition being unwarranted under the law. He has, in this respect, referred the following case-law in support of his contention: --

(i) In the case of Messrs Ashiq Ali and others v. Messrs Mst. Zamir Fatima and others reported as PLD 2004 SC 10, it has been held that:--

"It is well-settled by now that where `the evidence on record is sufficient for the Court concerned to decide the matter itself, remand should not be ordered and moreso, a Court will not remand a case where the defect is due to the negligence and the fault of the party desiring remand".

(ii) The Hon'ble Peshawar High Court in the case of Shah Wazir Khan v. Abdul Razzaq reported as PLD 2004 (Peshawar) 109 has held that

"The remand of the case on technical reasons in view of the increasing tendency cannot be appreciated where the Appellate Court could itself dispose of the case, unless it feels that the evidence on, record was not sufficient. But this too is to be avoided particularly when, the parties have had full opportunities of presenting their evidence".

(iii) In the case reported as (1983) 48 Tax 6 (Trib.), it has been held by this Tribunal that:-

"If all facts and materials are substantially available on record, the CIT would not be justified in setting aside an order instead of disposing it on merits".

(iv) In another case reported as 2004 PTD (Trib.) 2300, it has been held by this Tribunal that:--

"Failure to comply with the mandatory provisions of statute entails annulment and the case could not be set aside by the First Appellate Authority".

According to the learned counsel, when the learned CIT(A) has given findings that the Taxation Officer failed to rebut the technical and legal issues, there was no justification in not deleting the addition.

Explaining the relevant provisions of law, the learned counsel has contended that section 27 is not deeming provisions. Its language is exactly the same as those of section 22 or 30 of the repealed Income Tax Ordinance, 1979. The section seeks to assess the real income arising on transfer of capital assets. According to, the learned counsel, the Taxation Officer has laid the entire emphasis on the word "transfer" appearing in section 27(1) of the repealed Income Tax Ordinance, 1979 and has conveniently ignored the words "profits or gains arising" from the transfer of capital asset. He argues that profit or gains can only arise if a consideration is received by the transferor for the transfer of the assets. He has contended that the necessity of receipt of consideration is proved by the heading of section 29 of the repealed Income Tax Ordinance, 1979 namely, "Cost of acquisition, and consideration for transfer, how determined". According to him, the wording of section 29(2) of the late Ordinance, 1979 in situations, where due to close relationship between the transferor and the transferee, the consideration if under-stated, the subsection authorizes the Taxation Officer to adopt the market value of the assets transferred instead of the declared amount, as "the consideration received". According to the learned counsel, plain reading of the section reveals that what this section seeks to assess is the real income arising to a person on transfer of capital asset. He has argued that the wrong of this section is the same as that of section 22, which seeks to assess "profit and gains of any business or profession" or section 30, which seeks to assess "income of every kind" as does not fall "under any other head". The only head of income that does not assess real income is section 19, which treats the annual value of property as "Income from house property". Thus, it is not correct to say that section 27 is a deeming provision. He has contended that perhaps the Taxation Officer was swayed by the words "shall be deemed to be income" appearing in subsection (1) of section 27. But according to the learned counsel, these words refer to the year in which capital gains are to be assessed. The part of the provisions in which these words appear reads: "and shall be deemed to be income of the income year in which the transfer took place". Thus, these words qualify the income year in which the capital gains are to be charged to tax. Thus, the fiction created in this subsection is a fiction of time and not the fiction of income. He is of the view that this section seeks to assess real income arising to a person on sale, transfer, disposition etc. of an asset. The learned AR accepts the wide scope of the definition of the term "transfer", but he has contended that unless there is receipt of consideration for such a transfer, it does not fall within purview of this section. In this respect, he has cited a quotation from Sampath Lyengar's Book, "Law of Income Tax", Volume-2, Page 2522 (8th Edition) discussing the scope of this section, the author sums up as under:--

"Thus, this section brings to charge capital gains, and its ingredients are:

(i) the existence of a capital assets; owned by the assessee;

(ii) a transfer of such asset during the previous year;

(iii) arisal of profits and gains from the transfer of such assets; and

(iv) such profit or gains must accrue or arise to the assessee."

In view of the author, arising of profit (or loss) is one of the necessary ingredients of the section. But then the arising of profit or loss is dependent upon the receipt of consideration for the transfer. Thus, the real condition precedent for the invocation of this section is the receipt of consideration. As argued by the learned AR, this view is supported by the heading of section 29 which reads: "Cost of acquisition and consideration of transfer how determined." Learned counsel in this respect has referred to subsection (2) of this section which read as under:---

"(2) Where the person who acquires a capital asset from an assessee is directly or indirectly connected with him and the Deputy Commissioner has reason to believe that the transfer was effected with the object of avoiding or reduction the liability of the assessee, the fair market value of the capital assets, as on the date of the transfer, shall be deemed to be the consideration received by the assessee for its transfer."

The words "shall be deemed to be the consideration received by the assessee for its transfer", according to the AR clearly indicate that the essential ingredient of the section is the consideration received and if the declared consideration is under-stated, the fair market value of the asset is to be adopted and is to be treated as "consideration received". He has argued that this view is further strengthened by the provisions of section 3(1) of the repealed Ordinance, 1979 which reads as under:

"Computation of capital gains.--(1) In computing the income under the head "Capital gains", the cost of acquisition of the capital asset and any expenditure incurred wholly and exclu sively in connection with the transfer thereof shall be deducted."

Accordingly to the learned counsel, the word "deducted" clearly means that the cost of acquisition is to be deducted from something received by the transferor. It is the amount of consideration received by the transferor. Thus, receipt of consideration is a must for the invocation of section 27 of the Ordinance, 1979.

In this regard, the learned counsel has cited a number of reported cases. The first case cited is CIT v. R.M. Amin 82 ITR 191 203, In this case, a shareholder received an amount in excess of his investment on the liquidation of the company. The Gujarat High Court (India) held that:---

"The transfer that is contemplated by section 15 as read with section 2(47) is therefore, a transfer as a result of which consideration is received by the assessee or accrued to the assessee is a result of the extinguishment of rights in the capital assets. Substituting the words: extinguishment of rights in the capital asset: for the words "transfer of capital asset", the transaction in order to attract the charge as capital gain, must therefore be such that consideration is received by the assessee or accrues to the assessee as a result of the extinguishment of the rights in the capital asset."

In the case CIT v. Madurai Mills Co. Ltd. 89 ITR 51, the Indian Supreme Court analyzing the provisions of the corresponding section of the Income tax Act, 1922 (i.e. section 12B), whose language was the same as that of section 27 has held that:

"Perusal of the provisions of subsection (1) of section 12B reproduced above shows that the liability to pay tax on account of capital gains can arise only if the assessee makes profit or gains arising from the sale, exchange, relinquishment or transfer of a capital asset."

In the said case, the Supreme Court approved the ruling of the Gujarat High Court in R.M. Amin's case mentioned above.

Again in CIT v. Muhanpdhaibhai Pamabhai 91 ITR 393, the Indian Supreme Court held as under:

"Section 15 which is the charging section undoubtedly, provides that any profits or gains arising from the transfer of a capital asset shall be chargeable under the head "capital gains". But section 48 shows that the transfer that is contemplated by section 45 is a transfer as a result of which consideration is received by the assessee or accrues to the assessee."

The learned counsel has pointed out that section 48 of the Indian Income Tax Act, 1960 is the same as section 28 of the Income Tax Ordinance, 1979. The learned counsel have contended that the Taxation Officer has completely misunderstood the facts. The facts are that the appellant distributed dividend in the form of assets, whose book value was Re.1. Thus, in the hands of the appellant, the amount of dividends distributed is Re. 1. However, in the hands of the shareholders, the assets received shall be valued at the market price in light of the principle laid down in the cases of Kantilal Majilal v. CIT reported as 41 ITR 275, 278 (SC), Ujjan General Trading Society (P.) Ltd. v. CIT reported as (1968) 67 ITR 315 (MP) and CIT v. Central India Industries Ltd. reported as (1971) 82 ITR 555 (SC). According to the learned counsel, assumption that the appellant distributed dividends of Rs.353,532,960 is incorrect, as the appellant distributed dividend of Re. 1 (in the form of the assets whose book value was Re.1). However, for the purpose of valuation of dividends, the assets received by the shareholders are to be valued at market price. Learned counsel for the appellant has argued that the Taxation Officer was not justified in holding that dividends can only be distributed "to the extent of accumulated profits". He is of the view that the provisions of section 2(20) of the repealed Income Tax Ordinance, 1979 have been misunderstood by the Taxation Officer. In this respect, he has referred a passage from Kanga Pakhivala, which reads as under:

"The definition of "dividend" is inclusive and not exhaustive; and since it creates an artificial liability to tax, it should be strictly construed. It merely extends the connotation of the word "dividend" so as to compromise items of distribution by a company, which normally may not be regarded as "dividend". The five instances enumerated in this clause are all of them cases of distribution or payment out of or to the extent of, accumulated profits. Any receipt by a shareholder which is dividend under the general law would be taxable as such under this Act, even if it is not attributable to the company's "accumulated profits" within the meaning of this clause, or for any other reason falls outside this definition."

The learned counsel has pointed out that in the five inclusions contained in section 2(2) of the repealed Income Tax Ordinance, 1979, care has been taken of cases where a company has profits, but instead of distributing dividends, either issue debentures or deposit certificates, or goes into liquidation before distributing such accumulated profits or reduces it capital or makes loans to the shareholders thus saving the shareholders from paying income tax on dividends. The definition contained in section 2(2) treats all such payments as dividends. It is quite logical that the deeming of such payments is confirmed to the extent of the accumulated profits. If a company does not have any accumulated profits and makes any of these five payments, it cannot be accused of distributing dividends in a different from and such payment shall not be deemed as dividend. He has argued that where the dividend has been actually paid by a company whether in cash or kind, it is immaterial whether it has come out of the accumulated profits or not. He has cited the case of Kishenchand Chellaram v. CIT reported as 46 ITR 275, wherein the Indian Supreme Court held as under:--

"By virtue of section 16(2), the liability to pay tax attaches as soon as dividend is paid, credited or distributed or deemed to have been paid, credited or distributed to the shareholders and the Income-tax Act contains no provision for altering the incidence of liability to pay tax on the dividend, merely because it is found that in declaring dividend and paying it the company violated a prohibition relating to payment of dividend in the Indian Companies Act.'

According to the learned counsel, it is an accepted principle of construction of law that an interpretation that leads to absured results is to be discarded. He has contended that there are two persons involved in the transaction under review the company who pays the dividend-in- specie (the payer) and the shareholder who received it (the payee). According to them, it has been repeatedly held by the Courts that in the hands of the recipient (the payee), the receipt constitutes dividend income. Holding that such distribution also gives rise to income in the hands of the payer is absurd. Logically, there cannot be a transaction, in which there are two persons, and income arises to the payee as well as the payer. Income can arise to only one person and in this case, it the payee or the recipient. Income cannot arise at both ends of the transaction.

The next argument advanced by the learned AR is that if instead of distributing the impugned shares as dividend-in-specie, the Company had sold these shares to the shareholders @ Rs.40 per share, the amount of capital gain would have been exactly the same as computed by the Department. Equating the distribution of these shares to the shareholders as dividend-in-specie with sale of such shares to them is patently absurd. Learned AR has cited the ruling of this Tribunal in I.T.A. No.2346 of 1973-74 reported as 1974 PTD (Trib.) 27. In that case, a company held shares of another company, as investment. It sold these shares of its shareholders in the ratio of the number of shares held by them in the capital of the selling company and paid tax on the capital gain made on the said sale. At the material time (assessment years 1967-68 to 1969-70), the rate of taxation capital gains made by a company was 25%, while the maximum rate of tax on individuals was 70%. However, if a company had paid tax on capital gains, any dividends issued out of such capital gains was exempt in the hands of the shareholders. The Income Tax Officer, accusing the assessee of manipulating the transactions to evade tax, treated the sale of shares as distribution of dividend-in-specie so that he could tax the value of shares purchased by a shareholder as dividend in this hands. The Tribunal held as under:

"Everybody has a right to arrange its matters in whatever manner the same are beneficial to it. Since law permitted the appellant to dispose of its shares in the above manner, even though the intention may be ulterior, no cognizance thereof can be taken by an outsider".

"We must finally conclude that we cannot permit the Income Tax Officer to arrogate to himself the power to design the appellant's affairs in a manner that the incidence of taxes, may be as high as it possibly, can be. It is not the Income Tax Officer's concern how the shares should be disposed of, on what price these should be disposed of and how should the proceeds be ultimately utilized. The Income Tax Officer cannot convert the capital gains into revenue gain or direct the appellant to distribute these shares in specie, to the shareholders so that the distribution might fall within the definition of dividends in the hands of the shareholders within the meaning of section 2(6A)".

Learned counsel has submitted that in the instant case, the reverse has taken place. The appellant has distributed dividend-in-specie and tax Taxation Officer has treated this distribution as sale of shares to the shareholders. In view of the principles laid .down in this ruling, argues the learned AR, the action of the Department is as illegal as it was in the case cited above.

3. On the other hand, on behalf of the Department, learned DR is upholding the impugned order of the learned CIT(A). She has contended that the assessment has already been set aside by the learned CIT(A) for fresh consideration and the assessee may explain the position before the Taxation Officer. According to the learned DR, if it is assumed that the appellant has distributed Re.1 as dividends, then it has transferred shares worth Rs.,353,532,960, to the shareholders. Out of this amount, Re. 1 shall be treated as dividend and the balance as transfer of asset attracting the provisions of section 27. On the other hand, if it is taken that the appellant has distributed dividend of Rs.353,532,960, then this amount was far in excess of the accumulated profits available with the appellant and under the definition of dividend contained in section 2(20), dividend can be declared "to the extent of accumulated profits". She has submitted that the Taxation Officer has cited number of cases in support of the contention that dividend can only be declared "to the extent of accumulated profit". According to the learned DR, as the matter has already been set aside, the assessee has further opportunity to explain his position before the Taxation Officer.

4. We have heard the learned representatives from both sides and have also perused the impugned order of the learned CIT(A), the assessment order, the relevant provisions of law and the case-law referred by the parties from both the sides.

The assessee, in this case, is a Private Limited Company, deriving dividend income as well as income through providing services to the Chaudhry Dairies Limited. Return for the assessment year under review i.e. 2001-2002 was filed on 31-12-2001 declaring net income of Rs.652,591. The return was accompanied by Tax Computation Chart, Balance Sheet, Profit and Loss Account and evidence regarding payment of tax. Above stated income has been computed and arrived in the following manner:--

Interest on Bank Deposits

Rs.894,560

Exchange fluctuation gain

Rs. 1,803 Unclaimed balances

Written back

Rs.3,251

Total

Rs.899,614

Less: Administrative Expenses

Rs .243,001

Financial Expenses

Rs.4,022

Rs.247,023

Profit before Taxation

Rs.652,591

Thereafter, case had been fixed for number of times, but only partial compliance was made. However, the assessee in response to various notices has only filed Notes to the accounts. As per the assessment order, on the examination of Balance Sheet, Profit and Loss Account and Notes thereto revealed that the assessee-Company has transferred certain capital assets to its shareholders which were to be taxed as deemed income under section 27 of the repealed Income Tax Ordinance, 1979, but failed to declare the same. Certain other shortcomings were also noted and therefore a detailed notice under section 62 of the repealed Income Tax Ordinance, 1979 was issued. In that notice, the assessee was required to attend along with other issues the following queries:

"As per Balance Sheet as on June 30, 2000, your company had un-appropriated profit amounting to Rs.50,258,083. However, during the year under consideration, after adjusting loss after taxation, Profit available for appropriation was Rs.48,328,145. Out of the above un-appropriate profit, you have paid Rs.11,500,001 as Dividend and the remaining un-appropriated Profit of Rs.36,328,144 has been carried to the Balance Sheet as at June 30, 2001. Details of Dividend paid amounting to Rs.11,500,001 to the shareholders reveal that Rs.11,500,000 was paid in cash and Re. 1 was paid in specie as shares of Chaudhry Dairies Limited at nominal value of Re.1 recorded in the Company's Books of Accounts were paid to the shareholders. As per Note 7.2 of the Notes to the accounts, it has been stated as under:--

"An Extraordinary General Meeting of the Company was held during October, 2000 and it sanctioned to pay Rs.8,838,324 shares of CDL as "Dividend in Specie" to the Company's Shareholders at the nominal value at which this investment was recorded in the Company's Books of Account".

However, the consideration received of the share as declared by the Shareholders/Directors of the company is Rs.40 per share i.e. your company has transferred capital assets worth Rs.40 x 8,838,324 = 353,532,960 to its Shareholders.

Out of this amount, one rupee has been paid as Dividend, whereas the remaining amount is simply the transfer of capital assets of your company to the shareholders. Therefore, the transfer of these capital assets amounting to Rs.353,532,959 (353,532,960-1) to shareholders are to be taxed under the head "Capital Gains". Now as per subsection (1) of section 27;

"Any profits or gains arising from the "transfer" of a capital asset shall be chargeable under the head "Capital Gains" and...."

Now, clause (b) of subsection (2) of section 27 defines transfer as;

"(b)" 'Transfer" includes the sale, disposition, exchange or relinquishment of the asset, or extinguishment of rights therein-----".

Section 28 allows cost of acquisition as deduction in computing income under the head "Capital Gains".

The above provisions of law clearly, precisely and un ambiguously state that on transfer of a capital asset through sale, disposition, exchange or relinquishment of the asset, the gain arising out of the transfer shall be chargeable to tax under the head "Capital Gains". Now, as you have transferred capital assets worth Rs.353,532,560 and Dividend to the extent of one Rupee has been paid the remaining amount i.e. Rs.353,532,959 (353,532,660-1) is the transfer of capital assets to the shareholders and the capital gain arising out of the transfer of capital assets worth Rs.353,532,559 (the consideration declared by the shareholders themselves) as per provisions of law comes out to be;

353,532,559

Cost of Acquisition

= 353,532,559-1

= 353,532,558

Please explain as to why the above referred amount of Rs.353,532,958 may not be taxed in your hands under the head "Capital Gains" under section 27 of the Income Tax Ordinance, 1979 read with section 28 of the said Ordinance".

On behalf of the assessee, detailed reply was submitted, which was treated by the Taxation Officer as irrelevant and unstaifactory and has treated the distribution of shares as a transfer of capital assets by the assessee to the shareholders and subjected the difference between the market value of the shares i.e. Rs.353,532,960 and their cost price Re.1 as capital gain in the hands of the assessee/appellant stating that it attracts the provisions of section 27 read with section 29(5) of the repealed Income Tax Ordinance, 1979 and has computed the income as under:

"Capital assets transferred 8838324 x 40

= 353,532,960

Less: Dividend-in-Specie

= 1

Balance

= 353,532,959

Less: Cost of acquisition

= 1

Balance taxable under section 27 of the Ordinance (as discussed above)

= 353,532,958

Tax @ 25%

= 88,383,240

Business Income declared

= 652,591

Add: Depreciation disallowed (as discussed above)

= 221,363

873,974

Tax @ 43%

= 375,809

Surcharge @ 5%

= 18,790

394,599

Observation regarding intention to impose penalty and additional tax has also been made in the assessment order in the following manner:

"The assessee company was required to declare the income under section 27 of the Income Tax Ordinance, 1979 in its return to offer the same for taxation. However, it has failed to offer the same and therefore, penalty proceedings are also being initiated for furnishing of inaccurate particulars. Also additional tax under section 88 of Income Tax Ordinance, 1979 read with section 205 of Income Tax Ordinance, 2001 is also being charged separately".

Against the above said treatment of the Taxation Officer the assessee filed first appeal before the learned CIT(A) who has set aside the assessment for de novo consideration without giving any observation. In the impugned order he has reproduced the arguments advanced by the representative of the assessee and the contents of the assessment order and has finally concluded the order as under:--

"The arguments put forth by the appellant's AR as well as counter-comments filed by the Assessing Officer have been dispassionately considered. The learned AR has raised quite a few technical and legal issues, which has not been sufficiently rebutted by the Assessing Officer. The case needed a more detailed examination which is missing from the order passed. The order is, therefore, set aside for de novo consideration."

5. This Tribunal as well as the superior Courts has already held in so many cases that nobody should be vexed' twice for the same cause, specifically when the detailed explanation with case-law has been furnished by the assessee which as per the impugned order of the learned CIT(A) has not been rebutted by the Taxation Officer. We are, therefore, of the view that this asking the assessee by the learned CIT(A) to appear again before the Taxation Officer amounts to harassment to the assessee. The setting aside of assessment order should not be made as routine or for filling of the lacunas on the part of the Taxation Officer which amounts to sheer harassment to an assessee. When the assessee has furnished the explanation and the Taxation Officer has not rebutted the contentions the presumption would be that the explanation furnished by the assessee had substance and therefore, the contention of the assessee should be accepted.

6. We have found that the Taxation Officer has treated the distribution of the shares as a transfer of capital assets for the reason that the dividend can be paid out of the accumulated profits and in the instant case the amount distributed is par in excess of the accumulated profits, therefore, it cannot be treated as dividends under the provisions of section 2(2) of the repealed Income Tax Ordinance, 1979. The section 27 of the Ordinance, 1979 is deeming provisions as is evident from the provisions of section 29(5) and term "transfer" includes sale, disposition, exchange or relinquishment of asset or extinguishments of rights therein.

We therefore, find it reasonable at this stage to reproduce the above referred relevant sections:--

"Section 2(20) "dividend includes--

(a) Any distribution by a company of accumulated profits to its shareholders for modaraba certificates holders, whether capitalized or not, if the company to its shareholders of all or any part of the assets of the company;

(b) any distribution by a company, to its shareholders or modaraba certificate holders, of debentures, debenture-stock or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits whether capitalized or not;

(c) any distribution made to the shareholders or modaraba certificate holders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not;

(d) any distribution by a company to its shareholders or modaraba certificate holders on the reduction of its capital, to the extent to which the company possesses accumulated profits, whether such accumulated profits have been capitalized or not; and

(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 a shareholder or any payment by any such company on behalf, or for the individual benefit, of any such shareholders, to the extent to which the company, in either case, possesses accumulated profit; but does not include--

(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share for full cash consideration, or redemption of debentures or debenture-stock, where the holder of the shares or debenture is not entitled in the event of liquidation to participate in the surplus assets;

(ii) any advance or loan made to a shareholder by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;

(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (c), to the extent to which it is so set off.

Explanation-- The expression "accumulated profits",-

(a) where it occurs in this clause, includes any reserve made up wholly or partly of any allowance, deduction or exemption admissible under this Ordinance or the repealed Act, but does not include capital gains arising before the first day of April, 1946 or after the thirty-first day of March, 1949 and before the eighth day of June, 1963;

(b) as used in sub-clauses (a), (b), (d) and (e), includes all profits of the company up to the date of such distribution or such payment, as the case may be; and

(c) as used in sub-clause (c), includes all profits of the company up to the date of its liquidation".

"Section 27. Capital gains.---(1) Any profits or gains arising from the transfer of a capital asset shall be chargeable under the head "Capital gains" and shall be deemed to be income of the income year in which the transfer took place.

(2) For the purposes of subsection (1) and sections 28 and 29,--

(a) "capital assets" does not include--

(i) any asset or class of assets in respect of which the assessee is entitled to an allowance for depreciation under the Third Schedule; and

(ii) any immovable property; and

(b) "transfer" includes the sale, disposition, exchange or relinquishment of the asset, or the extinguishments of any rights therein, but does not include-,

(i) any transfer by reason of the compulsory acquisition of any capital asset under any law for the time being in force;

(ii) any transfer of a capital asset under a gift, bequest or will or an irrevocable trust;

(iii) any distribution of the assets of a company to its shareholders on its liquidation; and

(iv) any distribution of capital assets on the dissolution of a firm or other association of' persons or the partition of a Hindu undivided family".

"Section 28. Computation of Capital gains.---(1) In computing the income under the head "Capital gains", the cost of acquisition of the capital asset and any expenditure incurred wholly and exclusively in connection with the transfer thereof shall be deducted.

(2) The provisions of section 24 shall, so far as may be, apply to the allowance and deductions under this section as they apply to the allowances and deduction in respect of income chargeable under the head "Income from business or profession".

"Section 29. Cost of acquisition, and consideration for transfer, how determined.---(1) where, the capital asset became the property of the assessee--

(a) under a gift, bequest or will; or

(b) by succession, inheritance or devolution; or

(c) on any distribution of assets on the dissolution of a firm or other association of persons or the partition of a Hindu undivided family; or

(d) on any distribution of assets no the liquidation of a company; or

(e) under a transfer to a revocable or an irrevocable trust, the fair market value of the asset, as on the date on which it became the property of the assessee, shall, for the purposes of subsection (1) of section 28, be deemed to be the cost of acquisition.

(2) Where the person who acquires a capital asset from an assessee is directly or indirectly connected with him and the Deputy Commissioner has reason to believe that the transfer was effected with the object of avoiding or reducing the liability of the assessee, the fair market value of the capital asset, as on the date of the transfer, shall be deemed to be the consideration received by the assessed for its transfer.

(3) For the purposes of subsections (1) and (2) and subsection (12) of section 12, "fair market value" means--

(a) the price which the capital asset would ordinarily fetch on sale in the open market on the relevant date; and

(b) where the price referred to in clause (a) is not ascertainable, such price as may be determined by the Deputy Commissioner after obtaining the approval of the Inspecting Additional Commissioner in writing".

7. It has been contended by the appellant that section 27 is not the deeming provision. He has in this respect referred sections 22 and 30 of the Ordinance, 1979 which are also reproduced hereunder:--

"Section 22. Income from business or profession.---The following incomes shall be chargeable under the head "Income from business or profession", namely:

(a) profits and gains of any business or profession carried on, or deemed to be carried on , by the assessee at any time during the income year;

(b) income derived by any trade, professional and similar association from specific services performed from specific services performed for its members; and

(c) value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.

Explanation.--Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other business carried on by the assessee".

"Section 30. Income from other sources.--(1) Income of every kind which may be included in the total income of an assessee under this Ordinance shall be chargeable under the head "Income from other sources", if it is not included in his total income under any other head.

(2) In particular, and without prejudice to the generality of the provisions of subsection (1), the following incomes shall, save as otherwise provided in this Ordinance, be chargeable under the head "Income from other sources", namely:--

(a) dividend;

(b) interest, royalties and fees for technical services;

(c) ground rent;

(d) income from the hire of machinery, plant or furniture belonging to the assessee and also of buildings belonging to him of the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture; and

(e) any income to which subsection (12) of section 13 applies".

8. After going through the above said provisions of law we are of the view that the Taxation Officer has not properly interpreted the above mentioned provisions of law as if this view of the Taxation Officer is accepted the situation where a company grants an asset free of cost to the employee in appreciation of the services rendered by him, it constitutes a perquisite in the hands of the employee and the cost of the asset is an expense in the hands of the employer, if the view of the Department is accepted the market value of the asset shall also constitute capital gain in the hands of the company. Likewise where a company sell a capital to any person at a price less than the market price, the difference between the price paid and the fair market price is treated as income of the purchaser under section 12(2). If the Assessing Officer's view is accepted, the same amount shall also constitute capital gain in the hand" of the company. In another situation where a company the market value of whose share of Rs.10 is Rs.15, issues right shares to its shareholder at face value according to view of the Assessing Officer, the amount of Rs.5 shall constitute capital gain in the hands of the company. Likewise where a company issues bonus shares to its shareholder, according to the view of Assessing Officer, the market value of the bonus shares shall constitute capital gain in the hands of the company. It is an established phenomenon that the cash held by a Company is one of its assets. If the view of the Assessing Officer is accepted, even distribution of dividends in cash shall also attract the provisions of section 27 as it entails transfer of asset.

9. After considering all the facts and the case-law we are of the view that the distribution of dividend-in-specie is not of the nature of transactions envisaged in section 27. Receipts of consideration and the consequent arisal of profit or gain (or loss) is a condition precedent for the invocation of section 27. Where a company distributes any assets owned by it by way of dividend-in-specie to its shareholders, it is actually distributing profits among the shareholders. It does not receive anything from its shareholders. Thus, the impugned transaction does not fall within the ambit of section 27. In case the appellant has sold these shares to the shareholders, it would have become liable to charge of income tax on the capital gains. Treating the distribution of dividend -in-specie as sale of these shares to shareholders is totally illegal. It amounts to stretching the interpretation of the provisions of section too far.

We are of the view that if the interpretation placed by the Taxation Officer on the provisions of section 27 is accepted, then the distribution of the bonus share, right shares or even cash dividends to the shareholders by a company would also entail charging of capital gains in the hands of the company. Maxwell in his book "Maxwell on Interpretation of Statute (12th lid. pp.208-210) writes as under:--

"Whenever the language of the legislature admits of two constructions and, if construed in one way, would lead to obvious injustice, the Courts act upon the view that such a result could not have been intended, unless the intention to bring it about has been manifested in plain words ..The same general rule applies where the result of one of two interpretations would be to lead to an absurdity."

It has been repeatedly held by the Hon'ble Superior Courts that an interpretation that leads to absurd results must be discarded. The interpretation placed by the Taxation Officer patently lead to absurd results and must, therefore, be discarded.

10. We also agree with the contention of the appellant that in a two-end transaction, income can not arise at both ends. In the instant transaction, the assets distributed constitutes income in the hands of then shareholders, no income can rise to the distributing company. The view of the Taxation Officer that section 27 is a deeming provision is incorrect. He has, however, rightly held that the term "transaction" is, wide enough to include every kind of 'transfer of assets and relinquishment or extinguishment of right in the assets, but as repeatedly held by the Superior Courts, receipt of a consideration is a condition precedent for such transfer to fall within the ambit of section 27 of the repealed Income Tax Ordinance, 1979. The view of the Taxation Officer that under section 2(20) of the repealed Income Tax Ordinance, 1979, any amount distributed in excess of accumulated profits cannot be treated as dividend, is not correct. The restriction of "to the extent of the accumulated profits" appearing in section 2(20) relates to distributions which are not actually dividends but are deemed as dividends under various sub-clauses of the sub-clause (20) of section 2. It is, therefore, held that distribution of dividend-in-specie does not attract the provisions of section 27. The treatment meted out in regard and further invoked the provisions of section 116 read with section 111 and section 88 of the repealed Income Tax Ordinance, 1979 by the Taxation Officer are, therefore, held to be without any justification. It is held that there was no justification for setting aside the case for de novo consideration. The m impugned order in this respect is, therefore, vacated and the assessment order in this regard is cancelled. The declared version is directed to be accepted.

The appeal filed by the assessee is allowed.

C.M.A./225/Tax (Trib.)Appeal accepted.