2000 PLP (Trib (PTD)

46 percent. 1997-98 58 percent. 33 percent. 43 percent. 1998-99 55 percent. 30 percent. 40 percent. The above mentioned table has categorised companies as follows: (a) Banking companies. (b) Public companies other than banking companies. (c) Other companies. It would, appear from the above that a banking company could be a private company as well as a public company. However, since the legislature intended that business income of a banking company should be assessed at a higher rate as compared to business income of other such companies; concessional rates were laid down for public companies but at the same time banking companies which would otherwise be public companies were excluded from this concession. For the purposes of levy of income tax in respect of business income other than dividends, therefore, enhanced tax rates were prescribed in respect of banking companies. In this view of the matter, therefore, we are firmly of the view that the assessee, though a banking company, was also at the same time a public company although it was not entitled to the concessional rates in respect of income from business operations in the same way that other public companies were entitled to. The question is, therefore, answered in favour of the assessee. Whether the assessee's income was of composite nature and whether all income was assessable at the same rate. We have considered in the body of the order that even though a company's income may be of composite nature, part of it may yet be assessable at concessional rats Le income from dividends. The Assessing Officer does admit that dividend income of companies other than banking companies may be assessable at less than the normal rates. As regards, banking companies, however, she holds that since no specific mention of banking companies has been made in para, D of Part-V of the First Schedule, dividend income of such companies shall not be assessable at reduced rates. We are, however, of the view that this notion is based on a misconception of the law. Para. D referred to above reads as follows: "D. The rates of income tax in respect of the amount representing income from dividends declared or distributed by a Pakistan company or a modaraba shall be as under: (a) Where such dividends are received by 5 per cent of such a public company amount (b) Where such dividends are received by 15 per cent of such a body corporate referred to in sub- amount clause (c) of clause (16) of section 2 or a foreign association declared to be a company under sub-clause(e) of clause (16) of section 2. (c). in other cases 20 per cent of such amount Provided that

Perusal of the abovementioned provisions would show that three separate rates of tax have been laid down -in respect of companies which are (a) received by a public company, (b) received by a body cooperate referred to in sub-clauses (c) and (e) of clause (16) of section 2, and (c) received in other cases. We have already held that a public company also includes a banking company provided the required conditions are met. Since the assessee company although being a banking company, is also a public company the dividend income if any shall be assessable at 5 % as laid down in the abovementioned para. The Assessing Officer's contention that a banking company has not been mentioned specifically in para. D above, and is, therefore, excluded from the rate is not acceptable for the reason that no such specific mention was required. In fact, it would only be in the case of exclusion of a banking company from this concession that a specific mention thereof would be required. Unlike para. A of Part V of the First Schedule, since for purposes of taxability of dividends at concessional rates, a banking public company has not been excluded, it would follow that even banking public companies are assessable to tax at the concessional rate. The abovementioned question is also, therefore, answered in favour of the assessee. Whether NIT is a company and whether income derived from units of the NIT is dividend income. Detailed written arguments have been advanced before us on this issue. We propose to reproduce the same here verbatim as follows: "Income from NIT units-Dividends.

(I) The statement that special law prevails over the general law is correct, but the assertion that the term dividend as defined in section 2(20) of the Income Tax Ordinance, 1979 (hereinafter called "the Ordinance") overrules other laws is totally misconceived." The definition of dividend as contained in section 2(20) of the Ordinance is Inclusive and not Exhaustive. Thus, the generally accepted meaning of the expression are to be given the due consideration as held by the Honourable Court vide. case-law at 1963 ITP-XLIX at 280 p.284) "(a) Learned counsel for the assessee does not deny that the definition of "dividend" as it appears in the Act is an inclusive one and that it does not exclude the ordinary notion of a dividend. The definition as it appears extends the connotation of dividend to include items of distribution by a company of amounts which may not be strictly comprehended in the expression "dividend". (b) The above is also confirmed by the Supreme Court of India at (1971) 82 ITP 44: The relevant portion is reproduced as below: Now it is well-settled that where the definition of a word has not been given, it must be construed in its popular sense if it is a word of everyday use. Popular sense means "that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it." In the present case, section 10(5) enlarges the Eno definition of the word "plant" by including in it the words which have already been mentioned before. The very fact that even books have been included shows that the meaning intended to be given to "plant" is wide. The word "includes" is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. When it is so used, these words and phrases must be construed as comprehending not only such things as they signify according to their nature and import, but also those things which the interpretation clause declares that they shall include. "(c) Interpretation clause

Word 'include' employed while defining a term in the interpretation clause is generally used in order to enlarge the meaning of words and phrases occurring in the body of statute; intention being that while the term defined should retain is ordinary meaning its scope should be widened by specific enumeration of certain matter which in its ordinary meaning might or might not apply so as to make the definition enumerative and not exhaustive and when so used such words and phrases must be construed a comprehending not only such things as they signify according to their natural import but also those things which the interpretation clause declares that they should include." As per case law at PLD 1994 Lah.207 (d) The Honourable Supreme Court of Pakistan in CIT v. Pakistan Insurance Corporations and others (1997) 75 SC Pak made the following observations: "In the context of Income Tax Law, very broadly speaking 'capital' would signify investment, whereas dividend would denote gain or return on the investment. " The term 'dividend' as defined in section 2(20) of the Ordinance corresponding to section 2(6A) of the repealed Act is not restrictive and generally accepted meanings of the expression dividend have not been overruled. This is confirmed by the Honourable Supreme Court of Pakistan in CIT, Peshawar Zone, Peshawar v. Siemens A.G. (1991) 63 Tax 130 (S.C. Pak) as under: "The word 'return' is generally understood as profit in the nature of divided and not in the nature of interest and or obligatory charge." As, evident from the above the dividend is not essentially distribution of profits by companies to shareholders but broadly speaking, it denotes gain, return of profit on investment. The Ordinance nowhere mentions that the word dividend only means distribution of profits to shareholders of a company. The following definitions of the term 'dividend' from authentic legal dictionaries and books will support the above contention: Osborn's Concise Law Dictionary by John Burke (sixth Edition), Page 123. "Dividend. The interest payable on the public funds; the payment made out of the profits to the shareholders in a company; or the amount payable upon each pound of a bankrupt's liabilities. " Note. This definition confirms that 'dividend' does not mean only payment to shareholders out of company's profits, it also means payment on investment representing funds, which is what NIT units are. This is precisely due to this reason that NIT says that income distribution to unit-holders is 'dividend' (see Annexures 1, 2, 3, 4, 5,). Black's Law Dictionary. Dividend according to Black' Law Dictionary may denote Distribution of Profits set apart by the Corporation out of its profits to investors, shareholders or otherwise. Note: This definition is clear that the condition of 'shareholder' alone for receiving of dividend is not essential. Stroud's Judicial Dictionary. Dividend means payment to investors out of profits of the concern. Halsbury's Law of England, Volume VII (4th Edition) The ordinary meaning of 'dividend' is a share of profit, whether at a fixed rate or otherwise. Oxford English Dictionary. A sum of money to be divided among a number of persons especially the total sum payable as interest on a loan or as the profit of a joint stock company, received by an individual holder as his share. Copy enclosed. Manual of Law Terms and Phrases (As judicially expounded by Mulla) Dividend-A Periodical Payment of interest on an investment. A share in the profits. Law Terms & Phrases by Sardar Muhammad Iqbal Khan Mokal Dividend-A periodical payment of interest on a investment; a share in the profits.

1. National Investment Trust Limited (hereinafter: 'NIT Limited') was incorporated under the Companies Act VII of 1913 on 23rd October, 1962. The NIT Limited was established to "promote, organize, manage Unit Trusts or Mutual Funds of any type or character or to acquire, hold, sell or deal in Unit Certificates or securities of such Trust of Funds". In pursuance of this objective, National Investment (Unit) Trust was established vide Trust Deed, dated 12th November, 1962.

2. At the time of assessment for Assessment Year 1995-96, the learned DCIT due to some oversight intermingled the NIT Limited with NIT (Unit). This misunderstanding resulted into wrong inferences by the learned DCIT that: (a) Since Unit-holders are not shareholders of the NIT Limited, therefore, any distribution of profit to them cannot be dividend. (b) Certificate/Unit Holders having no voting rights, therefore, profit distributed to them is not dividend.

3. The correct position is that the National Investment Trust (Unit) Ltd. is a separate entity (Pakistani company in terms of section 2(31) of the Income Tax Ordinance) and the role of the NIT Limited is that of a Management Company. Clause 1(f) of the NIT (Unit) Trust Deed clearly defines 'Unit' as 'one undivided share in Trust.' The number of units held by a person actually represent total number of shares owned by him in the NIT (Unit), and he has nothing to do with NIT Limited.

4. Every certificate (registered or bearer) issued by the NIT (Unit) represents certain number of units. Shares in terms of clause 1 (f) of the Trust Deed. The definition of the expressions 'Certificates' and 'Certificate Holder' or 'Holder' are provided in clauses I(g) and 1(i) of the Trust Deed of NIT (Unit). These are as under: "(g) 'Certificates' means the participation certificates whether Registered in the name of the holder or Bearer to be issued by the Trustees Pursuant to the Provisions of this Deed." "(f) 'Certificate Holder' or 'Holder' means as regards Registered Certificates the registered holder for the time being of a Certificate including persons jointly so registered, and as regards Bearer Certificates the bearer for the time being of a Certificate or Coupon . as the case may be."

5. The First Schedule to the Trust Deed is titled 'Meeting of Certificate Holders.' The said Schedule gives voting powers to Certificate Holders which are equal to that of shareholders. It is ' only a matter of nomenclature, otherwise as evident from above, Certificate Holder are in fact shareholders of NIT (Unit). It is worthwhile to mention that even in the Companies Ordinance, 1984 the expression "shareholder" is not defined and the correct expression is, in fact, "member." as defined in section 2(21) of the said Ordinance. The observations of the learned DCIT are, therefore, incorrect and based on mere opinion without studying the Trust Deed of the NIT (Unit).

6. The NIT (Unit) managed by the NIT distributes profits, if any, available for distribution at the end of its Accounting Period. This distribution of profit is dividend as envisaged under the Company Y" Ordinance, 1984 and in accordance with its generally accepted meanings. The relevant provisions of the Companies Ordinance, 1984 (hereinafter called "the Company Law") are reproduced below: (a) Section 2(21) 'member' means, in relation to a company having share capital, a subscriber to the memorandum of the company and every person to whom is allotted or who becomes the holder of, any share, scrip or other security which gives him a voting right in the company and whose name is entered in the register of members, and, in relation to a company not having a share capital, any person who has agreed to become a member of the company and whose name is so entered. (b) Section 89-Nature of shares and certificate of Shares.

(l) The shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company. (c) Section 249-Dividend to be paid only out of profits.

No dividend shall be paid by a company otherwise than out of profits of the company.

7. Section 2(21) of the Companies Ordinance, 1984 clearly says that "member" in relation to a company not having a share capital will be a person who agreed to become a member of the company and whose name is so entered, The name of a NIT (Unit) Certificate Holder is entered as per provisions of clause 4 of the Trust Deed which provides how names and other particulars will be entered into Register of the Certificate Holders. By purchasing certificates containing units a person becomes a member (shareholder in general terminology) of the NIT (Unit). Section 89 of the Companies Ordinance, 1984 also uses the term "shares" or other interest of any member in a company. This proves beyond any doubt that Certificate Holders of NIT (Unit) axe entitled to dividend out of the profit of the company. Section 249 of the Companies Law says that no dividend shall be paid by a company otherwise than out of profits of the company and clause 12 of the Trust. Deed says: "The Management Company shall decide as soon as possible after the Accounting date to distribute among holders of Registered Certificate and Bearer Certificates profits, if any, available for distribution at the end of the Accounting Period, and shall advise the Trustee of the rate of distribution r Unit." The above clause confirms that the N T (Unit) distributes dividend out of its profit and there is no pre-fixed rate per unit. The rate of distribution per unit is determined after ascertaining the net amount available for distribution to certificate holders. These facts establish beyond any doubt that the distribution of profit by the NIT (Unit) as per clause 13 (a) of the Trust Deed.

8. The NIT (Unit) has been declaring dividend out of its annual profits as evidenced from the following: (i) Annual Reports (copy enclosed). (ii) Instructions to deducting authorities that on distribution of profits tax under section 50(6A) of the Income Tax Ordinance should be deducted in case of all the recipients other than a company (copy enclosed). (iii) Different advertisement in news media (copies enclosed) (iv) Correspondence with the Bank (copies enclosed).

9. The accumulative reading of all the -above provisions and material placed before your Honour testify beyond any doubt that distribution of profit by the NIT (Unit) is Dividend.

10. The argument of the learned DCIT that for the purpose of omitted clause (80), Part 1 of the Second Schedule to the Ordinance, item (ii) of Explanation deemed "any distribution of profits made by the National Investment (Unit) Trust of Pakistan to the Unit-Holders 'as dividend is self-defeating. In fact the very first item of; explanation to the said clause says that for the purpose of this clause' dividend income means (i) dividend declared by a Pakistani company, or .. .. If the purpose was to create fiction in respect of distribution of profit by NIT (Unit) as dividend then the same rule would be applicable to dividend income declared by a Pakistani company. The distribution of profit to shareholders by a company constitutes dividend and there was no need to create fiction in this regard. This renders the logic of the learned DCIT meaningless. The Legislature knowing that the word "dividend" is of a very wide import inserted by way of Explanation a complete list of the incomes (being dividend in nature) which alone could enjoy exemption under the said clause.

11. It is an established position under the Pakistani Income Tax Law that whatever a member in terms of section 2(21) of the Companies Ordinance, 1984 gets out of the profit of a company in relation to his investment in share capital or property of a company is Dividend. This proposition is upheld by the Honourable Supreme Court of Pakistan in the following cases: (i) PLD 1991 SC 368 = 1991 PTD 488. (ii) 1989 SCC 740.

12. The Honourable Apex Court held that the definition of the word dividend as given in the Pakistani Income Tax Law envisages return of profit to the members in any form whatsoever. These judgments needless to emphasis are binding on all the adjudication/appellate authorities in Pakistan in terms of Article 189 of the Constitution of Pakistan.

13. These authentic judgments, material cited above and pronouncements of the NIT (Unit) establish beyond any semblance of doubt that the profit distribution to Certificate/Unit Holders by the NIT (Unit) is Dividend as envisaged in para. D, part V of the First Schedule to the Ordinance. " We need not go into discussion of the matter any further. We are convinced to hold that not only is NIT a company, income derived there from by unit holders also constitutes dividend income. Consequently, the dividend income derived from the National Investment Trust Limited shall be charged to tax at the concessional rate of 5 % as already discussed above. Miscellaneous expenses.

11. We find that the learned CIT(A) correctly curtailed the add back in miscellaneous expenses for the Assessment Year 1994-95 from Rs.3,00,000 to Rs.2,31,

667. Tax chargeable under section 52 of the Income Tax Ordinance.

12. The learned CIT(A) has deleted both the tax charged under section 52 of the Income Tax Ordinance as well as the additional tax levied under section 86 on the ground that certain of the purchases did not fall within the prescribed limit while in still others tax was not deductable at source. We are, however, of the view this aspect of the case should be considered once again after allowing the assessee a reasonable opportunity of hearing and after considering both the factual and legal position in the matter. This will take care of the objection raised on behalf of the Department.

13. The assessee's contention for the Assessment Year 1994-95 is regarding the disallowance out of Honorarium, telephone and miscellaneous expanses. It is contended that no add back was called for out of honorarium expenses as the expenditure had been paid in full and was also entirely verifiable. The issue on this account, is set aside for fresh determination. The' assessee, however, did not press the add back out of the telephone account. As regards miscellaneous expenses, it is contended that the expenditure is fully vouched as also verifiable. We find that in the past we had set aside the matter for fresh consideration and we accordingly do so for the assessment year under appeal as well. The matter shall be considered and decided on merits.

14. For the Assessment Year 1995-96, an addition to miscellaneous expenses and telephone, objections have been raised by the assessee in respect of confirmation of the add back out of provisions for doubtful debts and excess perquisites and regarding setting aside of the disallowance out of vehicle running expenses. Since the disallowance out of telephone expenses was not pressed, the appeal order stands confirmed on this issue. Regarding add back out of vehicles running expenses, as the matter has been already set aside for fresh consideration, the appeal order does not call for interference. We find that the add back out of provisions for doubtful debts was properly made and confirmed and is, therefore, upheld. Regarding disallowance out of miscellaneous expenses and excess perquisites the issues are remitted back to the Assessing Officer for fresh consideration on merits.

15. An additional ground has been filed to the effect that the dividend income has been subjected to tax in full as per the profit and loss account in spite of the fact that this included notional dividend income for at least 6 months which was not taxable as it did not meet the requirements of section 12(11) of the Income Tax Ordinance. We believe that this being a legal issue, the Assessing Officer should have a fresh look on the matter and decide the same in view of the factual and Legal position of the case.

16. The Department as well as the assessee's appeals are disposed of in the manner mentioned above. C.M.A./M.A.K./108/Tax(Trib.) Order accordingly.