ANSARI SUGAR MILLS LTD. VS COMMISSIONER OF INCOME TAX, KARACHI, 2010 PTD-KARACHI-HIGH-COURT-SINDH 755 (2010)

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

----S.12(9) & First Sched. Cls. (108), (118D)--S. R. O.1283(I)/90, dated 30-12-1990---Companies Ordinance' (XLVII of 1984), Ss.2(20) & 251(I)---Bonus shares declared on 30-1-1997 by company in Annual General Meeting (AGM)---Tax holiday being enjoyed by company under Cl. (118D) of First Schedule to Income Tax Ordinance, 1979 through S.R.O. 1283(I)/90, dated 30-12-1990---Charging of tax on such bonus shares as income of company---Scope---According to S.12(9) of Income Tax Ordinance, 1979 and S.251(1) of Companies Ordinance, 1984, amount of bonus sharesdeclared by a company on date of AGM be deemed to be its income during that year---Five years tax holiday being enjoyed by company under Cl. (118D) of First Schedule to Income Tax Ordinance, 1979 ended on 22-10-1996---Exemption from tax provided by Cl. (108) of First Schedule to the Ordinance was for the period from 1-7-1997 to 30-6-2001---No specific exemption was available during the period 1-7-1995 to 30-6-1997---Bonus shares fell under definition of `dividend' as given in S.2(20) of Companies Ordinance, 1984, thus, its approval in AGM held on 30-1-1997 would be considered as date of its declaration and income of that year---Clause (108) of First Schedule to Income Tax Ordinance, 1979 was not retrospective in operation, thus, assessee-company was entitled to its benefit---Year under consideration being first assessment year after expiry of tax holiday period, regarding which no exemption could be granted to the assessee-company---Principles.

PLD 1997 SC 582 = 1997 PTD 1555; 1993 SCMR 39 = 1992 PTD 1681 and 1993 SCMR 73 ref.

(b) Interpretation of statutes---

----Courts while interpreting any provision of law would neither add nor supply something, which has not been provided under law.

(c) Interpretation of statutes---

----Every statue would be read prospectively, until and unless expressed to be retrospective.

Commissioner of Income Tax v. Elli Lilly 2009 SCMR 1279 rel.

Muhammad Aleem for Applicant.

Javed Farooqi for Respondent.

ORDER

IRFAN SAADAT KHAN, J.---This Income Tax Reference Application has been filed against the order, dated 12-3-2007 passed by the learned Income Tax Appellate Tribunal (ITAT) in I.T.A. No.953/KB of 2005, by raising the following questions of law:--

(a) "Whether the learned ITAT has erred in law in giving findings on the taxability of bonus shares under section 12(9) of the repealed Income Tax Ordinance, 1979 on the basis of assessment year 1998-99 whereas the bonus shares were proposed and capitalized in assessment year 1997-98, which was time-barred for invoking section 221 of Income Tax Ordinance, 2001."

(b) "Whether the learned ITAT was justified to vacate the order of the C.I.T. (Appeals) who has held that the taxpayer/company has declared bonus shares during the assessment year 1997-98 when the income of the taxpayer was exempt under the Protection of Economic Reforms Act, 1992."

(c) Whether the learned ITAT was justified to hold that the bonus shares proposed to be issued as per balance sheet as on 30-9-1996 (assessment year 1997-98) and approved on 30-1-1997 (assessment year 1998-99) has rightly been taxed in assessment year 1998-99 ignoring the fact that the bonus shares issued under section 12(9) of the repealed Income Tax Ordinance, 1979 relates to the profits and reserves of assessment year 1997-98 and earlier years when the exemption under clause (118D) of Part-I of Second Schedule to the repealed Income Tax Ordinance, 1979 was available to the taxpayer."

2. Mr. Muhammad Aleem, learned counsel appeared on behalf of the applicant had submitted that he wishes to press question (c) only which in his opinion is the question of law arising out of the order passed by the learned ITAT. The learned counsel submitted that the bonus shares amounting to Rs.31835475 were declared by the company which pertains to the period when the company was enjoying tax exemption under clause 118D of Part-I of the Second Schedule to the Income Tax Ordinance, 1979 (the Schedule). According to the learned counsel as per Economic Reforms Act, 1992 all industrial undertakings falling under clause 118D of the Schedule are exempt from payment of tax and as the Economic Reforms Act has an overriding effect on the Income Tax Ordinance, hence whatever income' is earned by the company the same will be exempt from tax. He submitted that the department was not justified in charging tax under the deeming provision of section 12(9) of the Income Tax Ordinance, 1979 (the Ordinance) in respect of the bonus shares issued by the company. The learned counsel further submitted that the department was not justified in misinterpreting the provisions of the said section 12(9) of the Ordinance as according to him the bonus shares paid by the company pertains to the period during which the company was enjoying tax exemption. In support of his arguments lie relied upon the decisions reported as PLD 1997 SC 582 = 1997 PTD 1555; 1993 SCMR 39 = 1992 PTD 1681 and 1993 SCMR 73.

3. Mr. Javed Farooqui Advocate, appeared on behalf of the department and submitted that the bonus shares were declared in the Annual General Meeting (AGM) of the company held on 30-1-1997. As per the learned counsel the company has declared the bonus shares in the period when the bonus shares were taxable under the provisions of section 12(9) of the Ordinance. The learned counsel supported the order of the Tribunal and submitted that the ITAT was fully justified in taxing the amount after reaching to the conclusion that the bonus shares were rightly taxed in the assessment year 1998-99. The learned counsel further submitted that the relevant clause .regarding grant of exemption, so far as the case of the present applicant is concerned, is not clause (118D) of the Schedule but Clause 108 of the Schedule according to which the companies declaring bonus shares are specifically taxed for the period 1-7-1995 to 30-6-1996. According to the learned counsel as the applicant had issued the bonus shares during the period under which they were not having the tax exemption hence these were rightly taxed by the department. According to the learned counsel when the provision of clause (118D) of the Schedule are not available to the applicant there is no question of either protection of Economic Reforms Act or the decision given by the Hon'ble Supreme Court of Pakistan reported as PLD 1997 SC 582 = 1997 PTD 1555 would be of any benefit of the applicant. In the end of the learned counsel submitted that the order passed by the ITAT does not suffer from any legal infirmity and the same may be upheld.

4. Briefly stated the applicant is a public limited company quoted at Stock Exchanges of Pakistan. The principal business of the company is to manufacture aid sale of sugar. The company was enjoying tax holiday under clause 118D of Schedule. This tax holiday was inserted through Notification No.S.R.O. 1283(I)/90, dated December, 30, 1990.

5. In the 7th Annual General Meeting of the shareholders of the company held on January 30, 1997 it was approved that the company will issue bonus shares at the rate of 15% to the holder of every 100 ordinary shares. The Taxation Officer (T.O.) wile examining the case observed that at the rate of 10% on these bonus shares have not been charged at the time of making the original assessment. The T.O. then confronted the applicant that as an inadvertent mistake has taken place by not charging tax on the bonus shares issued by the company and as the mistake is apparent on the record he therefore wishes to rectify the same under the garb of the provisions' of section 221 of the Income Tax Ordinance, 2001 (The New Ordinance). Though a reply was made in this regard by the assessee but only to the extent that the bonus shares had been issued out of the profits earned during the tax exemption period hence no charge could b e levied on the company, however, no objection with regard to the very initiation of proceeding under section 221 of the New Ordinance was made by the applicant. The T.O. thereafter by rejecting the contention of the applicant framed the assessment on 1-4-2005 by observing that the bonus shares were issued during the period under which the benefit of clause 108 of the Schedule was not available to the applicant. An appeal thereafter was filed by the applicant before the Commissioner of Income Tax (Appeals) who vide his order, dated 25-5-2005 allowed the same by observing that as the assessee has earned the income under tax exemption period hence the umbrella of the Protection of the Economic Reforms Act is available to the applicant therefore, the provision of section 12(9) of the Ordinance is not applicable and deleted the addition made by the T.O. An appeal thereafter was filed by the department before the ITAT which was decided in favour of the department by observing as under:-

"(14) We have heard both the parties and perused the available record. As regards the contention of bonus shares being property of the share-holder and not taxable in the hands of the company we are not inclined to agree with this view because bonus shares did not fall under the definition of dividends as per section 2(20) of the repealed Income Tax Ordinance. According to the scheme of law during the period under consideration, bonus shares were not treated as income of the share-holders. Rather, the same were treated as income of the company under section 12(9) of the said Ordinance. Secondly, after careful examination of the facts and circumstances of the case we agree with the departmental position as expressed at para. 4 on page 2 of the order under section 221, dated 10-4-2005. The bonus shares declared and approved in the AGM held on 30-1-1997 were rightly taxed in the assessment year 1998-99. As a result, the departmental appeal on the issue succeeds. The' impugned order is therefore vacated."

6. Before advancing any further it would be advantageous if the relevant provisions of law are first illustrated.

Section 12(9) of the Ordinance--read as follows:--

"(9) Where any bonus or bonus share is declared, issued or paid by a Pakistani Company to its share-holders in any year wholly or partly out of reserves or profits of the company of that year or accumulated profits of earlier years, whether capitalized or not, or out of the share premium or other account, the amount of the bonus or the face value of the bonus share, as the case may be, shall be deemed to be income accruing to the company during that year."

Clause (108)---Before omission by Finance Ordinance, 2001 it read as follows:--

(108) Any income of a company registered under the Companies Ordinance, 1984, (XLVII of 1984) or a body corporate formed by or under any law for the time being in force, as represents the face value of any bonus shares issued between the first day of July, 1997 and the thirtieth day of June, (2001) (both days inclusive), by the company or the body corporate."

Clause (108)--The clause before omission by Finance Act, 1995, read as follows:-

(108) Any income of a company, registered under the Companies Act, 1913 (VII of 1913) or a body corporate formed by or under any law for the time being in force as represents the face value of any bonus shares issued by the company or body corporate, as the case may be, to the share-holders, between the first day of September, 1977 and the thirtieth day of June, (1995), both days inclusive."

Clause (118D)--reads as follows:

"(118D) (1) Profits and gains derived by an assessee from an industrial undertaking set up between the first day of December, 1990, and the thirtieth day of June, 1995, both days inclusive, for a period of five years beginning with the month in which the undertaking is set up or commercial production is commenced, whichever is the later.

(2) The exemption under this clause shall apply to an industrial undertaking which fulfils the following conditions, namely:--

(a) that it is set up in an area, not covered by clause (118C), outside the limits of any municipal corporation or municipal committee or any Cantonment Board and Islamabad Capital Territory and in no case within the following areas namely:-

(i) industrial estates of Hub, Nooriabad, Chunian, Hattar and Gadoon and areas up to ten kilometers outside the limits of such estate;

(ii) up to forty kilometers from the municipal or Cantonment limits of Karachi;

(iii) up to thirty kilometers from the municipal or Cantonment limits of Lahore; and

(iv) up to ten kilometers from the existing limits of municipal corporations or Cantonment Boards;

(b) that it is owned and managed by a company formed exclusively for operating the said industrial undertaking and registered under the Company Ordinance, 1984 (XLVII of 1984), and having its registered office in Pakistan;

(c) that it is not formed by the splitting up or the re-construction for re-constitution of business already in existence or by transfer to a new business of any machinery or plant used in a business which was being carried on in Pakistan at any time before the commencement of the new business; and

(d) that is an undertaking engaged in the manufacture of goods or materials, or the subject of goods or materials to a manufacturing process or mining (excluding petroleum and gas) or extraction of timber."

Clause-3 of the Economic Reforms Act.

(3) Act to override other laws.---The provisions of this Act shall have effect notwithstanding anything contained in the Foreign Exchange Regulation Act, 1947 (VII of 1947), the Customs Act, 1969 (IV of 1969), the Income Tax Ordinance, 1979 (XXXI of 1979) or any other law for the time being in force.

7. A perusal of the above provisions of law would reveal that the companies which declare bonus shares under the provisions of section 12(9) of the Ordinance are deemed to be the income of that company and the tax as per the provisions of First Schedule to the Ordinance is applicable. The only question which requires our consideration is that when it could be said that the bonus shares have been declared by the company to make these bonus shares liable for taxation. Admittedly the company was enjoying exemption under clause (118D) of the Schedule which expired on 22-10-1996 relevant to the assessment year 1998-99: The current year being the first assessment year after the expiration of the tax holiday period. A perusal of the section 12(9) of the Ordinance would reveal that it has clearly been stated in that section that where any bonus or bonus share is `declared' followed by a comma after which issued or paid by a Pakistani Company to its share-holder is stated meanings thereby the Lawmaker are emphasizing on the declaration of these bonus shares. In the later part of this section it has categorically been mentioned that in any year wholly or partly out of reserves or profits of the company of that year or accumulated profits of earlier years, whether capitalized or not, or out of the share premium or other account, the amount of the bonus or the face value of the bonus share, as the case may be, shall be deemed to be income accruing to the company during `that year'. Meaning thereby that whatever amount of bonus share is declared shall be deemed to be the income of the company during that year. The words `declared' and `that year' used in the said section are very significant which laid emphasis on declaration. as well as deemed of this declaration to be the income of the company of that particular year. In the present case admittedly the bonus shares were declared on 30-1-1997 which period pertains to the assessment year 1998-99 and as per clause (108) of the Schedule introduced vide Finance Ordinance, 2001 the exemption of bonus shares is for the period first day of July, 1997 to thirtieth day of June, 2001 (both days inclusive). It has specifically been mentioned in the C.B.R. Circular No.6 of 1997, dated 15-7-1997 that the bonus shares were exempted from tax from day of July, 1997 till thirtieth day of June, 2001. Hence in our opinion any bonus share declared prior to this period is taxable notwithstanding the exemption period in erstwhile clause 108 of the Schedule which stood expired on 30-6-1995. It would not be out of place to mention that originally clause 108 of the Schedule granting exemption to the bonus shares was part of the statute according to which the companies declaring bonus shares were not liable to tax between the period first day of September, 1977 to thirtieth day of June, 1995 (both days inclusive). However, for the reasons best known to the Lawmakers the exemption provided in this clause was not extended after 1-7-1995. However subsequently exemption was again introduced from the period of 1-7-1997 to 30-6-2001; meaning thereby that there was no exemption between the period 1-7-1995 to 30-6-1997. It is a trite law that the Courts while interpreting any provision of law would neither add nor supply something which has not been provided under the law. In the instant case also there was no specific exemption available during the period 1-7-1995 to 30-6-1997, hence to exemption in respect of this intermediary period could be granted to the applicant.

8. The decision relied upon by the applicant in the case of Shahnawaz Ltd. 1993 SCMR 73 is not available to them as it is a trite law that every statute has to be read prospectively until an4 unless expressed to be retrospective. Reference in this regard may be made to the decision given by the Hon'ble Supreme Court of Pakistan in the case of Commissioner of Income Tax v. Elli Lilly reported as 2009 SCMR 1279, wherein the Hon'ble Supreme Court of Pakistan has held that all the laws are prospective in nature until and unless they' are specifically made retrospective by express words or by a necessary implication intending to give its retrospective effect.

9. We further would like to refer to the explanation of section 251(1) of the Companies Ordinance, 1984 which reads as under:--

"Explanation.--Dividend shall be deemed to have been declared on the date of the general meeting in case of a dividend declared or approved in the general meeting."

10. Reading of the above clause would lead to the irresistible conclusion that dividend are deemed to have been declared by the Company on the date of the AGM when these are declared or approved. In the instant case also admittedly in the AGM was held on 30-1-1997. Needless to state that bonus shares fall under the definition of dividend as given in section, 2(20) of the Ordinance (as it then was). Hence the same analogy will apply to the bonus shares which applies to the dividend as the approval in AGM has to be considered as the date of the declaration. Hence in our opinion the declaration of the bonus in AGM held on 30-1-1997 for all practical purposes is to be considered as the date of declaration of the bonus shares and as per the provisions of section 12(9) of the Ordinance is to be considered to be income of that year.

11. Moreover as the Lawmakers have not expressed a single word about the, retrospective operation of the newly-introduced Clause (108) of the Schedule vide Finance Act, 1997, hence no benefit of the said clause could be granted to the assessees is this regard prior to this period. Furthermore in our opinion no benefit of either clause (118D) of the Schedule or that of Economic Reforms Act, as claimed by the applicant, could be granted to them as admittedly the 5 years tax exemption availed by the applicant expired on 22-10-1996 and the year under consideration being the first year after the expiry of the tax holiday period.

12. We, therefore, in the light of the observations made supra, do not find any merit in the present Income Tax Reference Application and answer the question in affirmative.

S.A.K./A-12/KReference answered in affirmative.