1988 PLP (Trib (PTD)

MANZOOR-UL-HAQUE (MEMBER).--This is an appeal against the order of the learned C.I.T. (Appeals), Zone 2, Karachi. The only ground pressed for the year 1980-81 by Mr. Sirajul Haque, the learned counsel, is in respect of dividend income received at Rs.5,00,000 from Associated Constructors Limited. It is contended that the amount was received out of capital gain, which was claimed as exempt from tax but the Assessing Officer relying on section 151 of the Income Tax Ordinance, 1979, disallowed this amount and added it to the income of the assessee, in the following words: "A simple reading of this section shows that the exemption claimed by the assessee regarding dividend out of capital gains for an amount of Rs.5,00,000 is not permissible under the law. In the light of above discussion the exemption claimed by the assessee is rejected and this amount will be subjected to tax in the current year."

2. The appellant carried appeal before the learned Commissioner of Income-tax (Appeals) who again relying on provisions of section 151 of the Income-tax Ordinance, 1979, rejected the claim of the appellant, notwithstanding, the following cases cited before him e.g. (i) C.I.T. v. Mrs. E.V. Miller, P L D 1959 SC 219. (ii) C.I.T Lahore v. Mst. Gulzarina, Multan (1973) 28 Tax 61. (iii) C.I.T Karachi v. Yasin Ali Akbar 1982 P T D

250. The learned C.I.T. (A) quoting, at length, from all the three decisions cited above, came to the conclusion that provisions of section 151 do not support assessee's claim for exemption from tax.

3. The learned counsel argued his case before us from the following three premises: (i) that section 151 of the Income-tax Ordinance is governed by section 14 of the said Ordinance; (ii) that the schedules overrides the sections; (iii) that the 'words used in section 151 are "to any person receiving any payment wholly or in part out of that income

" The learned counsel relied on the following cases: (a) 1985 P T D 376; (b) 1982 P T D 130 and (c) 1981 P T D (Trib.) 49 ' In fact the case reported as 1986 P T D 58 has taken care of the arguments advanced by the learned counsel and has also discussed in detail the relevant cases on the issue including the case of C.I.T. v. Mrs. E.V. Miller, P L D 1959 S C C 219, yet we feel, it the interest of justice, to distinguish these cases as well which are now quoted at the, Bar. In the case cited as 1985 P T D 376 it was held: "But in any case, the existence of two separate legal entities, company and shareholder, was recognised. Subsequently section 151 of the Income Tax Ordinance hereinafter referred to as the Ordinance, was brought on Statute Book." A distinction was drawn "based on concept of corpus and usufruct of a property". In the case cited beneficiary is "the original recipient" though it is through the agency of the Waqf. The Tribunal, therefore, concluded: "We are, therefore, of the view that the benefit reserved for a beneficiary would not be subject to tax if it is exempt otherwise. We think that in case of Wakf of Alal Aulad neither the Hitler's case not section 151 of the Ordinance would be applicable. Latter would not be applicable because 'the original recipient' within the meaning of the expression for all intend and purposes, means recipient in his own right and not as an agent receiving for its principle to whom the benefit legally belongs." In the case cited as 1982 P T D 130 it was held: "In the instant case the assessees at the relevant time held certain shares in a company/ companies exempted from payment of income-tax under section 15-BB of the Income-tax Act. The assessee received dividends from such companies. The Income-tax Officer concerned while computing the income of each of the assessees for the purpose of computing the income-tax for the relevant year included the above dividend as income subject to levy of income-tax." Both the above cases are depending on Miller's case since distinguished in (1986) P T D 58.

4. Mr. Farid, the learned D.R., relied on the Full Bench decision of the Tribunal reported as 1986 P T D 58 and stated that case alone applies to this case. He further argued that the case cited as 1985 PT D 376 is not relevant. He further stated that it is always the later provision, which governs the earlier ones. Section '14' is therefore, subservient to 151 of the Income-tax Ordinance. He read out section 151 and laid emphasis on "in the absence of a specific provision to the contrary contained in this Ordinance", to show that the amount was clearly taxable in view of this provision and the case reported as 1985 P T 1) 376.

5. We have heard the arguments of the learned representatives and have also examined the cases cited at the Bar. In the case quoted as 1986 P T D 58 a very detailed discussion was held and the learned Members brought in its wake various decisions of the Superior Courts to settle the issue:-- "

17. The next words used are 'is exempt' which, in our view, mean 'exempt under any provision of law'. We do not think that these words mean "is exempted by the Ordinance" or hash been exempted by the 'Ordinance. The reasons are two-fold. Firstly, had it been the intention of legislature it might have said so particularly when in the second part of the same section reference has been made to the Ordinance. Secondly, when legislature has exempted any income in this Ordinance it has used such words. If we read the Ordinance we find the use of such expressions as "subject to the provisions of this Ordinance' by virtue of any provision of the Ordinance', and notwithstanding anything contained in this Ordinance'. Whenever the legislature wanted to use such expression, it has done so. The examples of such expressions used in various provision of the Ordinance can be cited from section 9(1), 10(2), 11(1), 9(2) and 14 etc., it is pertinent to note that in the opening part of section 151 no such expression has been used. Thus, the words 'where any income is exempt' jointly and. severally mean and imply any income, which is exempt under Piny law.

18. Now looking at the problem from an other angle, if it is accepted that the word "where income is exempt" mean and imply exemption under the Ordinance, even then the position would not change. If agricultural income has been exempted by the Ordinance under section 14 read with item 1 of the Second Schedule of the Ordinance, then the capital gains on immovable property have also been exempted under section 27 of the Ordinance, section 14 reads:-- 14 Exemptions.--(1) Notwithstanding anything contained in this Ordinance, the incomes or classes of income or persons or classes of persons specified in the Second Schedule shall be exempt from the tax chargeable under this Ordinance, subject to the conditions and to the extent specified therein. (2) ............................................................. (a) .............................................................. (b) .............................................................. (c) ............................................................. 27.(i) ............................................................ (i) ............................................................ (ii) ............................................................ "

19. From its perusal it appears that the legislature has been given the power to impose taxes on income excluding agriculture income. Let us mention here that this entry has come down to us passing through various constitutions. In the Government of India Act, 1935 entry 54 list-1 of Schedule VII was exactly same. Then, in late Constitutions of 1956 it was contained in entry 26 of Schedule V. In the late constitution of 3.962 it was laid down in clause (e) of entry 43 of Third Schedule. We may usefully mention here that word 'Income' as used in entry 54 of the Government of India Act was given wider meaning assigned to it by the Income-Tax Act in Navinchandra Mafat Lal v. C. I. T. (A) by Indian Supreme Court. This case has been followed subsequently in numerous decision. However, if we read section of clause (1) of the Second Schedule of the Ordinance. We find that the agricultural income has been exempted from charge of income-tax surely under the provision of the Ordinance. If the argument of Mr. N

is accepted then the legislature would not be competent to exempt agricultural income because it is not chargeable to income tax. But we have to keep into consideration the fact that it has been exempt under the Act despite the entries of the Government of India Act, 1935 and late Constitutions of 1956 and 1962. We may also mention here that in Indian Constitutions the entry 82 of list-1 of Seventh Schedule is exactly same yet agricultural income has also been exempt under the Indian Income--tax Acts of 1922 and 1961." In view of the above, we do not find any merit in learned counsel's objections. Supporting the second leg of his argument the learned A.R. relied on 1981 P T D (Trib.) 49 in which the Tribunal held: "Relying on this observation of the learned Judges, we must agree with the contention of the learned counsel that once the respondent's case falls within the purview of section 3-C, the department is bound to follow the entire procedure laid down therein. More specifically, if the declaration is not found to he correct, it does not lie with the department to proceed tinder the general law but they are, under the law, bound to prosecute the tax-payer before the Special Judge as provided in clause (51 of the Fifth Schedule." A plain reading of the above observation shows that much emphasis has been laid on the procedure to be followed by the I.T.O. while executing a particular enactment. If he deviates from that procedure the entire proceeding is vitiated. This view is supported by the findings of the learned Judges reported in P L D 1978 Kar. 723. "

It is well-known and settled proposition of law that where a power is given to do a certain thing in a certain manner, the thing must be done in that manner or not at all. Other method of performance of that act are necessarily forbidden." It is true that schedule is as much a part of the Act as any other provision thereof. It is also true that it does not contradict any provision of law. The Second Schedule, dealing with the exclusions from total income, is riot at variance with the provisions of section

151. Income from capital gain, as provided in the Second Schedule, in spite of the introduction of section 151 still remains exempt in the hands of the recipient. What legislature had in mind while bringing in the new section of 151 was to reduce the chances of misuse of exemption when it trickles down to subsequent receivers in whose hands it has been made taxable. This aspect has been fully examined in the case cited as 1386 P T D (Trib.) 58. "Now, turning to the facts of the present case it is true that the money received by Messrs M..E..L...D.. is capital gains in its hands obtained from immovable property. But when it came in the hands of the appellants, it was given the name of dividend and the consideration was shareholdings of the appellants. Again when appellants pay it say to their Manager or domestic servant. It called salary or wages respectively, and the consideration is services rendered by the Manager or domestic servant. Now, Manager may spend it on buying commodities and making payment to the school of his children. In the first case, it would be called price and consideration would be supply of commodities. Similarly, in the second case, it would be called tuition fees and consideration would be education imparted to his children. The examples can be multiplied. Now, can it be said that the dividend, salary or wages, price or tuition fees are capital gains obtained from immovable property? Can it be said that entry 50 has barred legislature from taxing such dividend salary, wages, price, tuition fees etc.? The answer to the above question now in view of section 151 of the Ordinance, is in emphatic 'no'." Mr. Muhammad Farid, the learned Departmental Representative, drew our attention to Craises 7th Edition page 224-225. The relevant portion reads:-- "As a general rule, 'forms in Schedules are inserted merely as examples, and are only to be followed implicity so far as the circumstances of each case may admit (per cur. in Bartlett v. Gibbs (1843) 5 M. & G. 81, 96) consequently it may sometimes happen that there is a contradiction between the enactment and the form in the Schedule. In such a case 'it would be quite contrary to the recognised principles upon which courts of law construe Acts of Parliament to........restrain the operation of an enactment by any reference to the words of a mere form given for convenience' sake in schedule'. (Per Lord Penzance in Dean v. Green (1882) 8 P.D. 79, 80: Shore v. Cunningham (1917) 2 1 R 360). This was well put by Lord Denman C.J. in R.V. Baines. (1840) 12-A & E 210, 226)". It was argued, said he, 'that the form of the significant itself, as given in the schedule, proves that the Judge, i.e. the bishop, is the only person who ought to certify, as 'by divine providence' is a form that can only apply to a bishop ...Such form although embodies in the Act, cannot be deemed conclusive of a question of this nature; we have also to consider the language of the section to which the schedule is appended, and if there be any contradiction between the two ....upon ordinary principles the form which is made to suit rather the generality of cases than all cases, must give way. (In construing a private Act it was held in Scotland that the Schedule could not be construed to enlarge the Act; Laird v. Clyde Navigation Trustees (1879) 6 R (Sc) 785: and see Gemmill v. Garland (1886) 12 Ont. Rep. 139: referring to Earl Mountcashell v. Viscount O'Neil (1854) 5.H.L.C. 937)." In view of the above discussion we again do not find any merit in the learned counsel's argument. As regards third argument of the learned counsel that the word used in section 151 "to any person receiving any payment" does not mean expenditure on the part of the payer. It referred to the amount distributed out of the profit made by the payer. This aspect has been fully discussed in the decision given by the Full Bench of the Tribunal in the following words: "

21. The question involved in these appeals can be looked from yet another angle. The Constitution has put embargo on the legislature regarding capital gains obtained from immovable property but this embargo does not lay down the principle that once capital gains always capital gains. Apparently it means embargo on the capital gains in the hands of first recipient. The reason is obvious. When the amount, which is capital gains in the hands of first recipient is further disbursed, it adopts different nomenclature and is for various considerations. This principle has been followed by the legislature in enacting section 49 of the State Bank of Pakistan Act, 1956. (Please see proviso to 49(2) which has been produced above). Now, turning to the facts of the present case it is true that the money received by Messrs M

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is capital gains in its hands obtained from immovable property. But when it came in the hands of the appellants, it was given the name of dividend and the consideration was shareholdings of the appellants. Again when appellants pay it say to their manager or domestic servant, it is, called salary or wages respectively, and the consideration is services rendered by the Manager or domestic servant. Now, Manager may spend it on buying commodities and making payments to the school of his children. In the first case, it would be called price and consideration would be supply of commodities. Similarly, in the second case, it would be called tuition fees and consideration would be education imparted to his children. The examples can be multiplied. Now, can it be said that the dividend, salary or wages, price or tuition fees ace capital gains obtained from immovable property? Can it be said that entry 50 has barred legislature from taxing such dividend salary, wages, price, tuition fees etc.? The answer to the above question now in view of section 151 of the Ordinance, is in emphatic 'no'." This argument too falls through and we do not find ourselves in agreement with the learned A.R. in the interpretation of word "payment" used in section 151 of the Income-tax Ordinance. 1981-82 The only ground pressed for the year 1981-82 by the learned counsel is in respect of notional income worked out at Rs.1,12,696 as deemed income under section 12(7) of the Income-Tax Ordinance, 1979. The appellant, the learned counsel argued, were the Promoters of Cherat Cement. Before incorporation of the said company they incurred expenditure amounting to Rs.9,39,137 and debited to their account which appeared in the balance sheet The company, Cherat Cement, was incorporated on 25-5-1981. The expenses were incurred during the accounting period ending on 31-12-1980. He, therefore, argued that section 12(7) of the Income Tax Ordinance is quite clear on the issue when it says: "where an assessee has made any loan or advance to any person on which no interest has been charged

" He argued that there was no existence of the "person" at the time when the expenses were incurred and shown in the balance sheet of the company. The "person" surfaced only on 25-5-1981 after being incorporated. The provision of section 12(7) therefore do not apply. Mr. Farid, the learned D.R. however, supported the findings of the two officers below. We have heard the arguments of the learned representatives and have also gone through the provision of section 12(7) and we agree with the learned counsel that since incorporation of Cherat Cement took place on 25-5-1981 there was no "person" in existence during the year under consideration. Working of notional income was, therefore, uncalled for. The amount so added is, therefore, deleted. Appeal succeeds to the extent and in the manner indicated above. M.B.A./460/T Order accordingly.