I.T.As. Nos. 1195/LB and 1246/LB of 2005, decided on 3rd March, 2007. VS I.T.As. Nos. 1195/LB and 1246/LB of 2005, decided on 3rd March, 2007., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1929 (2007)

Income Tax Ordinance (XXXI of 1979)---

----Ss. 80-B, 30, 2(20), 27, 12(12) & 50(4)---Tax on income of certain persons from dividends and bank profits, etc.---Dividend---Dividend-in- specie---Income from other sources---Assessing Officer observed that dividend received by the assessee though in specie exceeded the accumulated profit of the distributing company it could not fall under the definition of dividend; further, shares transferred to the assessee could not be termed as dividend rather the market value of the shares as the income earned/received by the assessee from other sources taxable at the normal rate of tax, and had consequently assessed the amount as income from other sources under S.30 of the Income Tax Ordinance, 1979---Validity---First Appellate Authority observed that on the one hand it was being said that the department had never objected to~ the competency of the company so far as issuance of dividend-in-specie but on the other hand technical objections had been raised that company either could not issue the swine for want of accumulated profits or it never treated the same as dividend since the tax deducted under S.50(7A) of the Income Tax Ordinance, 1979 was shown as receivable from the concerned shareholders---If at all there was any fault in issuing the subject dividend-in-specie it was not a shareholder's headache to question the. legality of any dividend being distributable in whatever shape could be---Occasions might be there, where a particular issue dividend and bonus share etc. in some violation of piece of legislation, rules, instructions or accounting standards or even by Clouting the conditions laid down by the regulatory authority---Common sense required that the recipient shareholder was not to be held guilty for any commission or omission on the part of the company giving out some distribution---Shares were appearing in the balance sheet having the value of Re. 1; to dish it out as dividend-in-specie it was required to have in its kitty as its un appropriated profit whether capitalized or not was a sum of Re. 1 and that was not being denied---Action of Assessing Officer not treating the value of dividend-in-specie received by the assessee as his income from other sources was illegal, unsustainable---Dividend-in-specie received was dividend income in terms of S.80-B of the Income Tax Ordinance, 1979 since the required deduction .had already been made under the provision of S.50 of the Income Tax Ordinance, 1979---Such directions made by the First Appellate Authority were in accordance with law and the order of First Appellate Authority was upheld by the Appellate Tribunal in circumstances.

Messrs Nepak Marketing (Pvt.) Ltd.'s case I.T.A. No.6032/LB of 2004 ref.

Abdul Khalaiq, ITP for Appellant (in I.T.A. No.1195/LB of 2005).

S.A. Masood Raza Qazalbash, D.R. for Respondent (in I.T.A. No.1195/LB of 2005).

S.A. Masood Raza Qazalbash, D.R. for Appellant (in I.T. A. No.1246/LB of 2005).

Abdul Khalaiq, ITP for Respondent (in I.T.A. Nc.1246/LB of 2005).

ORDER

Through these two cross appeals the impugned order of the learned CIT(A), dated 14-1-2005 has been objected by both the parties. The assessee has objected the impugned order regarding upholding of the assumption of jurisdiction by the Taxation Officer consequent upon the selection of the case for total audit and not allowing in full the amount of Zakat paid by the assessee while the department in the cross appeal has objected the directions of the learned CIT(A) to treat the income from other sources as dividend.

Mr. Abdul Khaliq, ITP has appeared on behalf of the Assessee and has at the very outset submitted that he is not pressing the appeal filed by the assessee. The appeal filed by the assessee is, therefore, dismissed being not pressed by the learned counsel for the assessee.

Regarding the appeal filed by the department, we have round that according to the facts as mentioned in impugned order of the learned CIT(A) and in the assessment order Messrs Nepak Marketing (Pvt.) Limited and the appellant company were shareholders of Messrs Chaudhry Dairies Limited. The foreign company in view of persistent losses of the said Chaudhry Dairies Limited disinvested its holding and transferred its shareholding to Messrs Nepak at the nominal price of Re.1 Messrs Nepak decided in its extraordinary meeting to distribute the said shares of Chaudhry Dairies Ltd. as dividend-in-specie along with cash dividend. Later on, the assessee in the present case also purchased certain shares of Chaudhry Dairies Limited received by another share-holder as dividend-in-specie @ Rs.40 per share and declared total value of shares as its dividend income' as Messrs Nepak hid deducted tax @ 1090 under section 50(4A) of the repealed Ordinance, 1979. The Taxation Officer allegedly discovered that Messrs Nepak had as on 1-7-2000 brought forward un-appropriated profit amounting to Rs.5,02,58,083. According to the Taxation officer after adjusting loss after taxation for the year the profit available for appropriation was Rs.4,83,28,145 out of which dividend-in-specie and cash dividend had been paid at Rs.1,15,00,0001. Thus, leaving behind total un appropriated profit at Rs.3,68,28,144 as on 30-6-2001. According to the Taxation Officer any distribution by Messrs Nepak beyond the limit of its accumulated profit, i.e. Rs.3,86,28,144 could not be treated as dividend. For this he has relied upon the definition of "dividend" as appearing in section 2(2) of the repealed Ordinance, 1979. The Taxation Officer has further noted that Messrs Nepak had reduced its accumulated profit in this context by Re.1 only. He concluded that since the dividend received by the assessee though in specie exceeded the accumulated profit of the distributing company it could not fall under the definition of dividend and the Taxation Officer has finally observed that the shares transferred by the company to the assessee cannot be termed as dividend rather the market value of the shares as the income earned/received by the assessee from other sources taxable at the normal rate of tax and has consequently assessed that amount as income from other sources under section 30 of the Income Tax Ordinance, 1979.

We have found that the learned CIT(A) has discussed the matter at length and after referring the relevant provisions of section 2(20) regarding the definition of dividend, section 27 regarding capital gains, section 30 regarding .income from other sources, section 12(12) of the repealed Ordinance, 1979 and discussing various decisions has finally come to conclusion that the Taxation Officer objection hi not treating the subject dividend-in-specie as dividend income of the assessee is that Messrs Nepak's accumulated profits were not sufficient enough to match the market value of the subject dividend and whatever accumulated profit the said company had, these were appearing as such as on the relevant closing date. The Taxation Officer has, therefore, brought into play the restraints imposed or the conditions suggested for issuance of dividend has refused to treat the subject .dividend-in-specie as dividend income of the assessee. The learned CIT(A) discussing the matter has observed that on the one hand it. is being said by the Taxation Officer that the department has never objected as to the competency of Messrs Nepak so far as issuance of dividend-in-specie but on the .other hand, technical objections have been raised that Messrs Nepak either could not issue the same for want of accumulated profits or it never Treated the same as dividend since the tax deducted under section 50(7A) was shown as receivable from the concerned shareholders. The learned CIT(A) has further observed that if at all there is any fault in issuing the subject dividend-in-specie it is not a shareholder's headache to question the legality of any dividend being distributable in whatever shape could be. There may be occasions where a particular issue dividend and bonus share etc. in some violation of piece of legislation, rules, instructions or accounting standards or even by flouting the conditions laid down in this regard by the regulatory authority. According to the learned CIT(A) the common sense requires that the recipient shareholder is not to be held guilty for any commission or omission on the part of the company giving out some distribution. He has, therefore, held that subject assets i.e. shares of CDL was appearing in the balance sheet of Messrs Nepak as having the value of Re.1. To dish it out as dividend-in-specie it was required to .have in its kitty as its unappropriated profit whether capitalized or not was a sum of Re.1 and that is not being denied. In view of these discussions he has finally come to conclusion that the action of the Assessing Officer not treating the value of dividend-in specie received by the assessee as his income from other sources is found to be illegal, unsustainable and has allowed the appeal filed by the assessee on this ground with the observation that "this .finding warrants assessments of the value of the dividend-in-specie received by the appellant as dividend income in terms of section 80B of the repealed Ordinance since the required deduction had already been made under the relevant, provisions of section 50 of the repealed Ordinance."

The learned counsel representing the assessee in this respect has also placed before us the order of this Tribunal, dated 1-9-2006 in the case of Messrs Nepak Marketing Pvt. Ltd. In I.T.A. No.6032/LB of 2004 (Assessment year 2001-2002) wherein it has been held that the view of the Taxation Officer that under section 2(2) 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 accumulated profits, appearing in section 2(2) relates to distribution which are not actually dividends but are deemed as dividends in various sub-clauses of section 2(2). It is, therefore, held that distribution of dividend-in-specie does not attract the provisions of section 27.

After considering all these facts and legal position, we are of the view that the directions as made by the learned CIT(A) are in accordance with law as incorporated by this Tribunal in the decision referred supra. We, therefore, find no warrant for interference in the order of the learned CIT(A) which is upheld and the appeal filed by the department is also dismissed.

Both the cross appeals are dismissed for the reasons referred above.

C.M.A./51/Tax (Trib.)Appeals dismissed.