2009 P T D (Trib.) 2143
[Income-tax Appellate Tribunal Pakistan]
Before Jawaid Masood Tahir Bhatti; Judicial Member and Mazhar Farooq Sherazi, Accountant Member
I.T.A. No.404/LB of 2009, decided on 31/07/2009.
(a) Income Tax Ordinance (XLIX of 2001)---
----Ss.161, 150, 205 & 2(19)---Failure to pay tax collected or deducted---Expression "deduction" and "collection" connotation---Specie dividend--Distribution of dividend in specie to share holders through issuance of equity shares---Assessing Officer, after scrutiny of prescribed withholding tax statements and records noticed that no deduction of income tax en payment of specie dividend had been made which was obligatory upon the Company/assessee to deduct tax from gross amount of dividend paid in specie---Assessing Officer treated the Company/ assessee as taxpayer in default, for default of 5.150 of the Income Tax Ordinance, 2001 on the face value of shares distributed to members/ shareholders declared as dividend in specie---Validity---Provisions of S.150 of the Income Tax Ordinance, 2001 were not applicable in respect of specie dividend---Expression `deduction' had a limited scope under the provisions of law which was fortified from the fact that legislature had on numerous occasions used the expression `collection' in the Income. Tax Ordinance, 2001---If the legislator had intended that withholding was to be effected in case of specie dividend, expression `collection' would have been used in addition to `deduction' as such expression meant withholding a specified proportion while advancing something divisible that can only be cash or some other liquid monetary assets---Action of taxation officer was not in accordance with the statutory provisions which had been upheld by the First Appellate Authority without any justification---Order of First Appellate Authority was vacated and the order passed by the Taxation Officer under S.161 of the Income Tax Ordinance, 2001 was cancelled by the Appellate Tribunal.
1999 PTD (Trio.) 2152 rel.
Black's Law Dictionary ref.
AIR 1956 Bombay 381 held not relevant.
(b) Income Tax Ordinance (XLIX of 2001)---
----S.156(2)---Prizes and winning---Expression "deduction" and "collection"---Kind transactions---Provision of S.156(2) of the Income "Tax Ordinance, 2001 was quite well placed as legislature in kind transaction had laid down mechanism of withholding by prescribing that in such a situation instead of deduction, payer shall collect tax with reference to the fair market value of the articles being given.
(c) Income Tax Ordinance (XLIX of 2001)---
----S.150---Dividend---Expression "deduction" and "collection"---Bonus shares---Original provisions of S.150 of the Income Tax Ordinance, 2001 confirm such position as in such provisions withholding in case of bonus shares was prescribed and the expression `collection' was employed by the legislature making it completely obvious that legislature was well aware of the limited meaning of expression `deduction'.
(d) Income Tax Ordinance (XLIX of 2001)---
----S. 150---Dividend---Expressions "paid" and "payment"---Connota tion---Expression `paid'' carries a wider connotation only where a transaction is originally denominated in money and is settled otherwise than in cash---Transaction which had their origin in kind, it could not be said that these stand covered when expression `paid' is used---Expression `payment' had been interpreted to include, settlement in kind only to hold that withholding provisions were not played around with by arguing that eventual settlement did not entail any monetary outflow.
1999 PTD (Trib.) 2152 rel.
Black's Law Dictionary ref.
AIR 1956 Bombay 381 not relevant.
(e) Interpretation of statutes---
---Definition---Interpretation of---Principles---While interpreting legal provisions `definition' in a statute is always to be applied with reference to the context and. subject in which a particular expression is used and an indiscriminate application of a particular definition cannot be allowed.
(f) Income Tax Ordinance (XLIX of 2001)---
----Ss.150 & 2(19)---Dividend---Expression "dividend" and "deduction"---Connotation---If it is held that expression `dividend' as used in S.150 of the Income Tax Ordinance, 2001 is to be understood as defined in S.2(19) of the Income Tax Ordinance, 2001 use of expression, `deduction' in S.150 of the Income Tax Ordinance, 2001 becomes superfluous in many situations which could not be justified as per settled norms of statutes interpretation.
Asim Zulfiqar Ali, A.C.A. for Appellant.
Javed Iqbal, D.R. along with Shahid Jameel Khan, L.A. for Respondent.
ORDER
Through this appeal the appellant has objected to the impugned order of the learned CIT(A) dated 15-4-2009 on the following grounds:,-
(1) That the learned CIT(A) has erred in maintaining the action of the learned Assistant Commissioner of Income Tax, Enforcement and Collection Unit-07, Multan (`ACIT') that the provisions of section 150 of the Ordinance were attracted on distribution of `specie dividend' and thus invoking provisions of section 161 of the Ordinance to hold that appellant was liable to pay withholding tax aggregating to Rs.225 million.
(2) Without prejudice to ground of Appeal No.2 above, the learned CIT(A) has erred in maintaining the action of the learned ACIT of levying tax under section 161(1) of the Ordinance in complete ignorance of the fact that alleged defaulted withholding tax had been paid by certain recipients and thus under the provisions of section 161(IB), no recovery was mandated under section 161(1) of the Ordinance.
(3) Without prejudice to the grounds of Appeal Nos. 1 and 2 above, the learned' CIT(A) has erred in maintaining the action of learned ACIT of levying additional tax under section 205(3) of the Ordinance as the conditions laid down in the law for validity levying additional tax were not adequately met in the case of the appellant.
(4) Without prejudice to the grounds of Appeals Nos.1 to 3 above, the learned CIT(A) has erred in maintaining the action of the learned ACIT of levying additional tax under section 205(3) of the Ordinance when admittedly huge refunds are available to the credit of the appellant.
(5) Without prejudice to the grounds of Appeals Nos.1 to 4 above, the learned CIT(A) has erred in maintaining the action of the learned ACIT of levying additional tax under section 205(3) of the Ordinance as in this case the element of mens rea, on part of the appellant, is not established.''
The Taxpayer in this case is a Public Limited Company deriving income from manufacturing of fertilizer and sales thereof. The tax return for the year under review was filed on 7-11-2008. However, later on, the Taxation Officer while examining the audit accounts for the period ending on 31-12-2007 found that the Taxpayer Company has distributed dividend in specie to its shareholders through issuance of equity shares hold by the taxpayer company in Messrs Fatima Fertilizer Company Limited. The Taxation Officer after scrutiny of prescribed withholding tax statements and records notice that no deduction of Income Tax under section 150 of the Income Tax Ordinance, 2001 on payment of specie dividend had been made which according to the Taxation Officer was obligatory upon the Company to deduct tax from gross amount of dividend paid in specie @ 10%. He therefore issued show-cause notice under section 161/205 on 14-2-2009 and subsequently treated the Taxpayer Company as an Taxpayer in default under section 161 of the Ordinance, 2001 for default of section 150 on the face value of shares distributed to members/shareholders declared as dividend in specie. The Taxation Officer also charged additional tax @ 12% per annum on the amount unpaid computing for the period commencing on the date the amount was required to be deducted ending on the date of which it was paid. The additional tax @ 12% per annum was also charged by the Taxation Officer. The assessee filed appeal before the learned CIT(A) but the appeal of the assessee has also been dismissed.
Learned counsel representing the appellant has contended that it is" not disputed that specie dividend being covered within provision of, section 2(19) of the Ordinance, 2001 wherein expressions dividend has been defined is liable to be taxed in the hands of the recipient under section 5 of the Ordinance. According to learned counsel the sole issue before this Tribunal is to determine that whether law under the provisions of section 150 of the Ordinance, 2001 prescribed withholding of tax in respect of all forms of dividend or there scope is restricted to the extent of distribution of dividend in monitory form only. He has in this respect referred the word `deduction' used in section 150 of the Ordinance, 2001 and has argued that such phenomena becomes operative only in the cases where there is monitory transaction as no deduction is conceivable when the underlying transaction involves 'distribution in kind. He has in this regard referred to the expressions `Collection' used in various provisions of the Ordinance which according to the learned counsel signifies where a transaction does not allow for any deduction legislature has prescribed for collection of tax. He has in this respect referred the provisions of section 156(2) of the Ordinance wherein it has been prescribed that in case prize/lottery entails distribution in kind the person giving away the prize and lotteries would collect tax at a specified rate on the basis of fair market value of the article given as prize/lottery. He in this respect also referred section 233 of the Ordinance covering payments on account of commission wherein the similar situation has been conceived and withholding mechanism in respect thereof has been prescribed. The learned counsel has argued that since provisions para materia to such provisions are not there in section '150 of the Ordinance, it becomes patently obvious that legislature has not prescribed any withholding of tax when dividend is distributed in kind. Learned counsel has submitted that prior to amendment through Finance Act, 2002 the provisions of section 150 of the Ordinance provided for collection of tax from the recipient in case dividend is distributed in form of bonus shares. As according to the learned counsel on the basis of omitted provisions of law such a position confirms the facts that legislature by restricting itself to the use of expressions `Deduction' in the presently applicable provisions of section 150 of the Ordinance has required for withholding a tax only in cases where such distribution is monetary in nature or involves cash. In support of his contention learned counsel has placed reliance on the decision of this Tribunal reported as 1999 PTD (Trib.) 2152 wherein the similar situation was decided in the context of provisions of section 50(3) of the repealed Income Tax Ordinance, 1979 where under withholding of tax was prescribed in respect of payments to non-residents. He is of the view that through this decision the Tribunal has fundamentally decided that where a transaction i.e. basically monetary in nature is settled in kind, withholding provisions cannot be said to have become inapplicable merely on the -basis that eventual settlement thereof was effect in kind. However where it has been Properly conceived in law that underlying transaction can either be in cash or in kind, specific withholding provisions such as provisions of section 50(7C) (provisions para materia to the provisions of section 156(2) of the Ordinance) of the repealed Ordinance are essentially required to prescribe withholding of tax and that too covering all eventualities. On the basis of such ratio laid down by this Tribunal earlier it is contended that since under provisions of section 2(19) of the Ordinance, 2001 various modes of distribution of dividend has been conceived by the legislature, has it intended to prescribe withholding of tax in respect of specie dividend, specific provisions in this respect . would have been incorporated in section 150 of the Ordinance inline with Provisions of section 156(2) of the Ordinance. Learned counsel has argued that through this judgment the Tribunal has laid down the principle that withholding provisions cannot be circumvented by settling the transaction in kind where originally the transaction involved a monetary settlement. Learned counsel has contended that where distribution is made through a mode other than cash the provisions relating to withholding tax would not be applicable. Learned AR has argued that as per provisions of sections 2(19) and 150 the tax is required to be deducted on gross amount of payments. He also argued that legislature has wilfully used the words distribution and payment in section 2(19). He argued that deduction is only possible when any payment is made and distribution in specie is not covered under the provisions of section 150. He emphasized that legislature very precisely excluded the bonus share from the ambit of taxation by appropriate amendment in law. The AR also contended that the Taxation Officer has proceeded and raised the demand against the appellant in a hurry and without dilating upon the facts that the certain recipients of the dividend have discharged their obligation by paying tax on the said specie dividend. The learned AR also agitated the levy of additional tax and argued that legal provisions have deliberately not been followed to burden the appellant with heavy taxation. He also argued that mens rea on the part of the appellant is not established in this case by both the officers below.
On the other hand Mr. Javed Iqbal, D.R. has appeared along with Mr. Shahid Jameel Khan, L.A. and are defending the impugned orders of the officers below. It has been contended on behalf of the department that as per provisions of section 5 read with section 2(19) of the Ordinance, the appellant was under legal obligation to withheld tax on specie dividend in accordance with the provisions of section 150. In this respect the definition of word dividend, payment and distribution as given in Black's Law Dictionary has been referred. It has also been argued that by virtue of the facts that the Taxpayer company applies its accumulated profit for buying the shares of all the another companies and distribution the shares among its own shareholders as specie dividend was under legal obligation to collect withholding under section 150. It is argued that if the payment of dividend has come into existence the section 150 becomes operative. It is contended on behalf of the department that provisions of section 150 relates to withholding tax on prize bonds or winning from raffle, lottery, prize on winning quiz, prize offered by companies for promotion of sales or cross word puzzle covering all the situation arising therefrom. In case a prize is paid in kind the withholding tax would be made on the fair market value of the prize. The law has been framed accordingly to cover the situation that almost in 90% cases, prizes or rewards with respect to sales promotion schemes are paid in kind. However according to learned D.R:, in no way, the provisions of section 156(2) are applicable in the case of dividend in specie which category has been defined in section 2(19)(a) having taxability under section 5.withholding of tax under section 150 of the Tax Ordinance. He further argued that "section 156(2) has been enacted for peculiar circumstances when the Companies award prizes in the form of its products that in turn is a tool for its sales promotion itself and emphasized that the contention of the taxpayer is absolutely misconceived and based on illegal footings.
The learned D.R. has referred to a case-law reported as AIR 1956 Bombay 381 wherein the Honourable Court has held:--
"(9) There is only one final aspect of the matter that we might consider. Authorities have laid down that a dividend need not be declared in cash, it may be in specie, and therefore the fact that the Company decided to transfer the right which it had acquired from the Bank of India to its shareholders need not necessarily militate against the contention that the transfer of such right in specie was the payment of dividend to the shareholders.
In law there is no difference whatever between the Company cashing this right and declaring a dividend. In respect of the amount received by the Company, and the Company transferring this right itself which had a money value and which could have been cashed by the shareholders.
(10) The question that has been submitted to us does not really bring out the real controversy between the parties. As all the facts before us we propose to reframe the question which will read as follows:
"Whether on the facts and circumstances of the case the distribution of the right to apply for shares Of the Bank of India by Navijvan Mills Ltd. In favour of the assessee amounted to a distribution of `dividend'.
To the question so re-framed our answer will be in the affirmative. No order as to costs."
Learned D.R. along with learned L.A. has submitted extracts from various authenticated dictionaries and has also cited numerous Precedents available, on the subject in the support of departmental stance that the distribution in kind in the eyes of law constituted dividend. It has been stressed that the expressions `paid' used in section 150 of the Ordinance includes settlement as is substantiated from the meanings of such expressions contained in various dictionaries and has interpreted time and again by appellate authorities. It has been contended that the appellant cannot be held to be absolved of the responsibility to withholding tax while distributing dividend in kind and hence according to them the departmental action was legal and on all fours.
Rebutting the above referred arguments made on behalf of the department, the learned counsel of the appellant has clarified that since it is not disputed by the appellant that specie dividend constitutes dividend these meaning of such expressions provided for in the Ordinance, material relied upon by the department in this respect is not relevant. Regarding the word `paid' used in the section 150, learned counsel has submitted that such expressions cannot be interpreted in the isolation and the provisions of section 150 of the Ordinance are required to be understood and applied as a whole with specific attention to expression `deduction'. Learned Legal Advisor and the department during the course of arguments has contended that since expression dividend has been precisely defined in section 2(19) of the Ordinance which admittedly includes specie dividend therefore while interpreting provisions of section 150 of the .Ordinance due consideration has been given to the position that in such provisions of law expression dividend has been used without any qualification or exception thus implying that these provisions are applicable in respect of all forms of dividend. He has however clarified that since expression dividend has been defined in the Ordinance no room exists to borrow the meanings thereof from any dictionary or other statute. Learned counsel representing the appellant has in this respect drawn our attention towards the opening phrases of section 2 of the Ordinance which provides that expression defined therein should be construed as so while used anywhere. in the Ordinance except when there is anything repugnant in the subject or context. He is of the view on the basis of such provisions of section 2 of the Ordinance indiscriminate application of definition of expression dividend while interpreting section 150 of the Ordinance would be improper. He has argued that provisions of section 150 of the Ordinance are not being considered as a whole by the department and various expressions are being attempted to be incorporative in isolation while it has been repeatedly held by the appellate authorities that fiscal laws should be construed in a coherent manner with due consideration given to the substance of underlying transaction.
We have heard the learned representative from both the sides and have also perused the impugned order of the learned CIT(A), the order passed by the Taxation Officer and the other relevant record of the case and the provisions of law involved in the matter.
We found that in this case the whole controversy revolves around section 2(19), sections 5 and 150 of the Income Tax Ordinance, 2001. For the sake of clarity the said sections are reproduced. below:--
2(19) "dividend" includes---
(a) any distribution by a Company of accumulated profits to its shareholders, whether capitalized or not, if such distinction entails the release by the Company to its shareholders of all or any part of the assets including money of the Company;
(b) any distribution by a Company, to its shareholders of debenture-stock or deposit certificate in any form, whether with or without profit, to the extent to which the Company possesses accumulated profits whether capitalized or not;
(c) Any distribution made to the shareholders 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 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; or
(e) Any payment by a private Company [as defined in. the Companies Ordinance, 1984 (XLVII of 1984) or trust of any sum (whether as representing a part of the assets of the Company or trust, or otherwise) by way of advance or loan to a shareholder or any payment by any such Company or trust on. behalf, or for the individual benefit, of any such shareholder, to the extent to which the Company or trust, in either case, possesses accumulated profits;
But does not include
(i) a distribution made in accordance with [sulk-clause] (c) or (d) in respect of any share for full cash consideration, or redemption of debentures or debenture stock, where the holder of the share 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 leading of money is a substantial part of the business of the Company; and
(iii) Any advance 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] (e) to the extent to which it is so set off.
Section 5. Tax on dividends.-- Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division III of Part I of the First Schedule on every person who receives a dividend from a Company.
(2) The tax imposed under subsection (1) on a person who receives a dividend shall be computed by applying the relevant rate of tax to the gross amount of the dividend.
(3) The section shall not apply to a dividend that is exempt from tax the gross amount of the dividend paid at the rate specified in Division III Part I of the First Schedule.
We have also consulted the Black's Law Dictionary referred by the learned D.R. and L.A. of the department wherein words dividend payment and distribution have been defined in the following manner:
'Dividend'
`the distribution current or accumulated earning to the shareholders of corporation pro rata based on the number of shares owned. Dividend are usually issued in cash. However, they may be issued. in the form of stock or property. The dividend on preferred shares is generally a fixed amount; however, on common shares the dividend varies depending on such things as the earning and available cash of the corporation, as well as future plans for the acquisition of property and equipment by the corporation"
`Payment'
"the fulfilment of a promise, or, the performance of an agreement. A discharge of any obligation or debt,, and part payment, if accepted, is a discharge pro tanto. In -a more restricted legal sense payment is the performance of a duty, promise,. or obligation, or discharge of a debtor liability, by the delivery of money or other value by a debtor to a' creditor, where the money or other valuable thing is tendered and accepted as extinguishing debit or obligation in whole or in part"
`Distribution'
"is giving out or division amount a number, sharing or parceling out, allotting, dispensing, apportioning in a Corporate the terms is used with reference to a direct or indirect transfer of money or other property or incurrence of indebtedness by a corporation to or for the benefit of its shareholders in respect of an of its shares. A distribution may be in the form of a declaration or payment of a dividend; a purchase redemption, or other acquisi tion of shares; a distribution of indebtedness or otherwise."
We are of the ,view that in this ease the learned counsel of the appellant is, justified in narrowing down the issues by stating that the subject matter of this appeal is not the taxation of specie dividend from the perspective of recipient and the only issue that requires to be adjudicated is that whether the appellant was liable to withholding any tax while distributing dividends to its shareholders that was admittedly in the form of assets held by it that is equity shares of subsidiary Company. We are inclined to agree with the submissions made by the learned counsel for the appellant regarding the interpretation of provisions of section 150 of the Ordinance as these are not applicable in respect of specie dividend. No doubt the expression deduction has a limited scope under the provisions of law which is fortified from the fact that legislature has on numerous occasions used the expression `collection' in the Ordinance. Obviously, if the legislature has intended that a withholding gas to be effected in case of specie dividend, expression `collection' would have been used in addition to "deduction"- as such expression, in our views means withholding a specified proportion while advancing something divisible that can only be cash or some other liquid monetary assets. Such position is also evident from other withholding provisions contained in the Ordinance. In this respect the provisions of section 156(2) of the Ordinance is quite well placed as legislature in kind transaction has laid down mechanism of withholding by prescribing that in such a situation instead of deduction, Payer shall collect tax' with reference to the fair market value of the articles being given. Had the intention of the Legislature been same in case of specie dividend, provisions para materia to section 156(2) of the Ordinance would have been there in section 150 of the Ordinance and in absence of these we find ourselves unable to agree with the proposition of the revenue. We are of the view that the original provisions of section 150 of the Ordinance also confirm such position as in such provisions withholding in the case of bonus shares" was prescribed and the expression `collection' was employed by the legislature making it completely obvious that legislature was well aware of the limited meaning of expression `deduction'. Regarding reliance placed by the department on the expression `paid' we are of the view that it carries a wider connotation only where a transaction is originally denominated in money and is settled otherwise than in cash. As regards the transaction which have their origin in kind, it cannot be said that these stand covered when expression `paid' is used. In our view word payment has been interpreted to include settlement in kind only to hold that withholding provisions are not played around with by arguing that eventual settlement did not entail any monetary outflow. This was the ratio laid down by our learned brother in the decision reported as 1999 PTD (Trib.) 2125. Facts of such case involved in kind settlement of a transaction that was originally denominated in money. We find no force in the view taken by the department as the precedents relied upon by the representative of the department are not relevant in the present case. The issue in that case was in the context of concept of `constructive payment' and are not applicable where transaction in substance does not involve any cash and has been conceived by the legislature to be possibly executable as so. We are of the view that while interpreting legal provisions definition in a statute is always to be applied with reference to the context and subject in which a particular expression is used and an indiscriminate application of a particular definition cannot be allowed as has already been held by this Tribunal as well as by the higher Courts. The context or subject of a provision of law may warrant the need to interpret an expression independent of its definition if any provided for in the statute. Such position stands legally authenticated by the opening phrases of section 2 of the Ordinance as has been pointed out by the learned counsel for the appellant. If it is held that expression `dividend' as used in section 150 of the Ordinance is to be understood as defined in section 2(19) of the Ordinance use of expression `deduction' in section 150'of the Ordinance becomes superfluous in many situations which cannot be justified as power settled norms of statutes interpretation. In view of the above legal as well as factual position we are of the view that the action of the Taxation Officer was not in accordance with the statutory provisions which has been upheld by the learned CIT(A) without any justification. The impugned order of the learned CIT(A) in this respect is therefore vacated and the order passed by the Taxation Officer under section 161 of the Ordinance, 2001 is cancelled.
The appeal filed by the taxpayer is allowed in view of the above findings and the remaining grounds of appeal do not need to be adjudicated being steaming out of the fundamental question that stands decided in favour of the appellant.
C.M.A./107/Tax(Trib.)Appeal accepted.