1986 PLP (Trib (PTD)

FARHAT ALI KHAN (MEMBER).‑we propose to dispose of all the four appeals by a consolidated order as the common points of facts and law are involved in all of them.

2. The brief facts giving rise to these four appeals are that Mr. S

H

M and Mrs. Z

Y

M claiming themselves to be the Directors of Messrs M

M

E

L

filed their returns of income on 1st October, 1979, for the assessment year 1979‑

80. Both of them declared their taxable income of Rs. 12,000 from remuneration. Both of them also, in part 15 of the Return showed Rs. 1,78,080 as dividend received from M

E

L

out of capital gains obtained on sale of immovable property and claimed exemption for the amount. The Income tax Officer however, in view of section 151 of the Income‑tax Ordinance, hereafter referred to as the Ordinance, treated Rs. 1,78,080 as taxable income and included it in the total income and framed the assessment accordingly.

3. Having been aggrieved both Mrs. S

H

M

la and Mrs. Z

Y

M

went up in appeal. It appears from the perusal of the order of the learned Commissioner of Income‑tax (Appeals) recorded on 10th May, 1981, that in case of both appellants be treated Rs. 1,02,138 as dividend declared on 6th March, 1978 and Rs. 75,942 as dividend declared on 166 December 1978. It further appears from the perusal of his order that under section 12(11) of the Ordinance, he treated Rs. 75,942 as dividend income for the assessment year 1979‑80 and Rs. 1,02,138 falling within the assessment year 1978‑

79. He, therefore, allowed the appeal of both the' ladies as for as the dividend of Rs. 1,02,138 was concerned. He also gave consequential relief regarding the additional tax under sections 87 and

88. This tome both the assessee as well as the Department have come up in appeal. As is obvious the Department has challenged the exclusion of Rs. 1,02,138 from the purview of the total income and the assessee, hereinafter referred to as "the appellants" have challenged inclusion of Rs 75,942 in the total income. Appeals Nos. 1615 and 1616 have been tiled by the appellants and Appeals Nos. 38 and 39 have been filed by the. Department.

4. Mr. M

N

Advocate appeared for the appellants and of Mr. A

A

D

alongwith Mr. A

A

D

R. appeared for the Department. We have heard them at length.

5. Relying upon C. I‑T. v. E. Y. Miller (P L D 1959SC(Pak.) 219) Mr. M

N

learned Advocate for the appellant argued that since the dividend paid to the appellant was paid out of the sale proceeds obtained from the sale of immovable properties, it was not taxable. In other words, learned counsel contended that the sale‑proceeds in the hands of the company were capital gains, was as such, the dividend paid to the appellants out of such capital gains was exempt from Income‑tax. About section 151 of the Income‑tax Ordinance, the learned counsel vehemently argued that it was not applic able in. the case of the appellants. He contended that since entry No. 50 of Schedule 1V of the Constitution of Islamic Republic of Pakistan of 1973 hereinafter referred to as "entry 50" has not authorised the Federal Legislature to legislate regarding imposition of taxes on capital gains on immovable property, no law could be enacted to that effect. To be more precise, according to the learned counsel, the capital gains received on sale of immovable property could not be and were not liable to Income‑tax Developing his arguments further Mr. M

N

argued that the capital gains obtained by sale of immovable property were not liable to income‑tax. The opening part of section 151 of the Ordinance did not cover the case of the appellant inasmuch as it speaks about the income, which was exempt from tax.

6. Opposing the Departmental appeals Mr. M

N

the learned counsel for the appellant argued that as per dates of declaration of the dividend the learned Commissioner of income‑.tax (Appeals) was right to exclude Rs. 1,02,138, under section 12 (11) of the Income‑tax Ordinance. The learned counsel concluded that the learned Commis sioner of Income‑tax (Appeals) was wrong in including Rs. 75,942 in the total income of the appellant for the assessment year 1979‑80, as he could not have done so under the law, but at the' same time regarding the exclusion of Rs. 1,02,138 he submitted that the learned Commissioner of Income‑tax (Appeals) was right in view of section 12(11) of the Ordinance.

7. Mr. D

the learned Advocate appearing for the Department, submitted that section 151 was brought on the statute book specially in Income‑tax Ordinance, 1979. According to the learned counsel it was applicable with all force in the case of the appellants. The learned counsel submitted that Messrs M.

E

L

were a company having juristic personality and falling within the definition of an assessee under the Ordinance Similarly, the learned counsel went on, the appellants were also individual assessees covered by the provisions of the Ordinance. The learned counsel contended that provision of section 151 did not apply to income derived from capital gains only but to all incomes whatever its source. He further submitted that when the income was exempt from tax. such exemption was limited only to the original recipient of such income and was not admissible to any other person who received any payment out of such income. Mr. Dareshani, contended that the capital gains which came in the hands of Messrs M.

E

L

from sale of immovable property were exempt from tax. . However, the learned counsel added the moment these capital gains were given the nomen clature of dividend and came in the hands of the appellants they became taxable under section 151 of the Ordinance.

8. Regarding the departmental appeals Mr.

D

vehemently argued that the learned Commissioner of Income‑tax (Appeals) acted illegally in admitting additional evidence regarding dates of the declaration of the dividend etc., which was never produced before the income‑tax Officer. He further contended that the Income‑tax Officer was within his rights when he included the declared dividend in the total income of the appellants as both of them had declared the same not only in their returns for the relevant assessment years, but also in the Wealth‑statement of the same charge year. The learned counsel, therefore, concluded that the learned Commissioner of Income‑tax (Appeals) was in error in exclud ing Rs. 1,02,138 from the total income. Consequently the prayed that both the departmental appeals be allowed and both the appeals filed by the appellants be dismissed.

9. We have given our careful consideration to the submissions made at the Bar and have also perused the law cited at the Bar.

10. Undoubtedly before promulgation of the Ordinance the Miller's case (supra) reigned the field. In that case a joint Stock Company earning income from agriculture declared dividend and paid it to its shareholders which was claimed to be exempt from tax under section 4(3) (viii) of the repeated Income‑tax Act, hereinafter referred to as the Act. The question which was ultimately referred to the High Court under section 86 (1) of the Act was:‑ "Whether, in the circumstances of the case the sum of ..................(different amounts in each case) declared by the company out of its agricultural income and received by the assessee, a shareholder in the said company, is agricultural income in the hands of the assessee, so as to be exempt from the tax under section 4(3) (viii) of the Act." The learned Division Bench of the Lahore High Court answered the aforesaid question in the affirmative but the matter was taken up into the Supreme Court of Pakistan. Munir, C. J. speaking for The learned Bench of the Supreme Court dealt with the question very elaborately. The Supreme Court also answered the aforesaid question in the affirmative. Since the date the judgment vas announced by the Supreme Court, it has been followed in numerous cases, some of which were cited by Mr. M

N

the learned counsel for the appellant, which we need not discuss for the sake of brevity. Let us also mention at this juncture that the Central Board of Revenue, hereinafter called C. B. R., also issued a Circular to explain the Miller's case and the implications thereof. Mr. M

N

the learned counsel also invited our attention to it, but we shall revert to it later on.

11. However, at this juncture we would like to add that, as we understand it, the ratio of Miler's case (supra) is that Raison D Etre of a company being earning of profits for its shareholders, the income of a company is indeed income of its shareholders. Thus, the reasoning of their Lordships is that if it is agricultural income and exempted from tax in the hands of the company, it must, also be exempt in the hands of its shareholders notwithstanding the fact that it is called dividend. Never the less it is pertinent to note that their Lordships had accepted existence of two of separate entitles namely, a company having juristic personality and a shareholder made of bone, blood and flesh. At the same time it is also noteworthy that their Lordships have called the income in the hands of a company as its "notional income" which become "actual income", according to their Lordships, in the hands of the shareholders. But, with due respect to their Lordships, it appears that in any case, the original recipient of the income is a company which, on subsequent distribution, is received by the shareholders.

12. Now, when the Income‑tax Ordinance, 1979, was promulgated section 151 was included in it. The section reads:‑ "Section

151. Limitation of exemption. Where any income is exempt from tax, the exemption shall, in the absence of a specific provision to the contrary contained in this Ordinance, be limited to the original recipient of that income and shall not extend to any person receiving any payment wholly or in part out of that income."

13. It is pertinent to note that in the Act no provision like that of section 151 was available. Let us also mention that no material like parliamentary debates on Bills has been placed before us or even referred to which might have enlightened us regarding purpose or occasion for introducing the section in the Ordinance. Nevertheless, we have to give effect to the legislative intent as this section cannot be deemed to be Otiose. Since it specifically deals with any income which comes firstly in the hands of one recipient and then with the income of other persons who receive it after distribution from the hands of the first recipient, the irresistible inference which we are forced to draw keeping into consideration the historical background is that it has been enacted to change the law as it stood from the date of decision of Miller's case (supra). We are of the considered view that the purpose of enacting section 151 is to neutralise the effect of Miller's case. The legislature, no doubt, is competent to do it and, we think, that in its wisdom it has done so. We cannot, we are afraid, accept the contention of Mr. M

N

that Miller's case (supra) was still reigning the field. With due respect to Supreme Court we, think that Miler's case (supra) is no more good law. We, therefore, do not find any force in submission of Mr. Muhammad Naseem, the learned counsel for the appellants that it still comes to the rescue to the appellants.

14. Now turning to the other leg of the argument of Mr. M...N... the learned counsel for the appellants, it appears to be two‑fold. Firstly, the learned counsel has argued when the legislature is not competent to legislate regarding taxes on capital gains obtained from sale of immovable properties, there arises no question of its exemption. He built up this arguments on the basis of entry 50 which reads ‑ "

50. The taxes on the capital value of the assets, ‑not including taxes on capital gains on immovable property." The next argument of Mr. M

N

the learned counsel for the appellants, is that income as defined by section 2(24) of the Ordinance, means profits or gains, which are chargeable to tax. According to the learned counsel since capital gains, which are derived from sale of immovable property are not chargeable, to tax, as such, they cannot fall within the definition of income. The learned counsel argues that if capital gains cannot fall within the definition of income, they would not be covered by the opening part of section .151. The argument appears to be based on paragraph 2 of Circular No. 8 of 1978, issued by the Central Board of Revenue on 10th April, 1978 which we have mentioned earlier. It interpreted the law, in context of and with reference to Miller's case (supra), as it then stood. Section 151 was not on Statutes Book at that time. But now it is this section which is to be interpreted.

15. To start with we would like to analyse each and every word used in the opening part of section 151, namely, "Where any income is exempt from tax". The first word used is "Where". It does not necessarily refer to the Ordinance. It has been used at numerous places in the Ordinance and in sortie places it does refer to the provision of the Ordinance but in others it has been used without any such implication. For example sections 36, 27, 39(3), 72, 73, 74 and 81 etc., can be cited in which the word "Where" does not mean and imply or refer to the provisions of the Ordinance.

16. The next word is "income" Mr. M N ..the learned counsel for the appellant cited section 22(4) (a) of the Ordinance. I reads: ‑‑ "22(4). "income" includes‑ (a) any income, profits and gains, from whatever sources derived, chargeable to tax under any provisions of this Ordinance under any head specified in section 151." However, before relying on the definition it is important to read the opening part of section

2. It reads: ‑ (2) Definitions.‑In this Ordinance unless the context otherwise required ; ...... Thus, it is clear that the context in which a word defined under section 2 of the Ordinance has been used is of vital significance. We have discussed earlier that section 151 was brought on Statute Book by the Ordinance. Prior to it there was no parallel provision in the Act. We have also discussed in some details the historical background of the introduction of section 151 on Statute Book. This discussion actually provides the context in which the definition as contained in section 2(24)(a) is to be construed. Moreover, the definition, as is obvious, is "inclusive definition". Thus, it is to be ascribed wider meaning. On top of it the addition of word "any" to word "income" in section 151 has widened the scope of its definition further so as to include capital gains also within its folds.

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 has 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 pare of the same section reference has been made to the Ordinance. Secondly, when legislature has exempted any income in this Ordinance it has use such words. If we read the Ordinance we find the use of such expression: 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 sections 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 any law. Let us mention here that income, profits and gains of tit State Bank of Pakistan have been exempted under section 49(1) of the State Bank of Pakistan Act, 1950 and not under the Act or Ordinance. It reads:‑‑ "49.‑(1) Notwithstanding anything contained in the Income‑tax Act, 1922, or the Business Profits Tax Act, 1947, or any other law for the time being in force in Pakistan relating to income‑tax, super tax or business profits tax, the Bank stall not be liable to pay any income- tax, or business profits tax on any of its income, profits or gains. (2) For the purposes of section 18 of the Income‑tax Act, 1922., or of any other relevant provision of that Act relating to the levy and refund of income‑tax any dividend paid under section 42 shall be deemed to be interest on securities Provided that nothing in this section shall affect the liability of tray shareholders, ether than the Central Government, in respect of income‑tax, super tax or business profits tax. Moreover, if the legislature is not competent to impose a tax on any income as is contended by learned counsel, it is necessarily exempt. Similarly not mean that the income should be Similarly, this expression dogs chargeable before it is exempted.

18. Now looking at the problem from an other angle, if it is accepted that the word "where income is exempt" mean and imply exemp tion under the Ordinance, even then the position would not change. If agricultural income has been exempted by the Ordinance under sec tion 14 read with item 1 of the Second Schedule of tile 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 ;.lasses 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) The Federal Government may, from time to time, by notification in the official Gazette, make such amendment in the Second Schedule by ‑‑ (a) adding any entry of condition governing the grant of such exemption. (b) deleting any entry of condition ; or (c) making any change any entry if condition under which, or the extent to which, exemption is admissible. Whereas section 27 is as follows:‑ "

27. Capital gains.‑‑(1) Any profits or' gains arising front the transfer of capital asset shall be chargeable under the head "Capital Gains" and shall be deemed to be income of the income year in which the transfer took place. (2) For the purposes of subsection (1) and sections 28 and 29:‑ (a) "capital asset" does not include‑ (i) any asset or class of assets in respect of which the assesssee is entitled to an allowance from depreciation under the Third Schedule ; (ii) any immovable property ; and At this juncture let us also reproduce entry 47 of the Constitution of 1973, hereinafter called "entry 47". It reads:‑ "

47. Taxes on income other than agricultural income."

19. From its perusal it appears that the legislature has been given the power to impose taxes on income excluding agricultural 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-I of Schedule Vii was exactly same. Then, in late Constitution of 1956 it was contained in entry 26 of Schedule V. In the late Constitution of 1962 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 ((1954) 26 I T R 758) by Indian Supreme Court. This case has been followed subsequently in numerous decisions. 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 tot 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 Constitution of 1956 and 1962. We may also mention here that in Indian Constitutions the entry 82 of list‑I of Seventy Schedule is exactly same yet agricultural income has also been exempt under the Indian Income‑tax Acts of 1922 and 1961.

20. It is true that entry 47 has used the words "other than" whereas entry 50 has used the words "not including". But in our view, the words "other than" mean "excluding" or negatively speaking "nor including Let us point out here that in the Government of India Act, 1935 there was not such entry like entry

50. But Indian Supreme Court in Mafat Lal s case (supra) held that capital gains were included within the folds of 'Income' as used in entry 54 of Government of India Act, 1935. However, when late Constitution of 1956 was framed by its entry 26 of Schedule‑V the legislature was permitted to impose, "taxes on capital value of assets exclusive of agricultural land" But in clause (c) of entry 43 of the late Constitution of 1962 a change was introduced. Now it read:‑ "Taxes on capital value of assets, not including taxes on capital gains on immovable property." In view of this discussion we do not think that for our purposes the use of word "other than" in entry 47 and "not including" in entry 50 has any significance. They mean and imply same thing, namely, the legislature was not permitted to impose tax either on agricultural income o capital gains on immovable property. But the tact is that both are exempt from tax. It being so we have to interpret the law keeping in mind two cardinal principles of interpretation of statutes. The first is that the legislature cannot be imputed 'wish the ignorance of law of the land. The second is that no superfluity can be assigned to it vis‑a‑vis the laws it enacts. Thus, our conclusion would be that entries 47 and 50 have laid down restriction on imposition of tax of agricultural income and capital gains on immovable property but they have not, it is important to note prohibited the legislature from exempting them from chargeability of tax itself. It is our view that by exempting them formally from chargeability of the tax under the provision of the Ordinance the" legislature has complied with entries Nos. 47 and 50 instead of violating them. In other words, we can say that since legislature was allowed to levy tax on "income" which meant all types of income an "Capital Gains" which included capital gains on immovable property, it therefore firstly imposed taxes on all incomes and all capital gains but' thereafter, in view of the bar imposed by entries 47 and 50, exempted agricultural income and capital gains on immovable property. In this way the legislature has avoided the possibility of imposition of tax on agricul tural income and capital gains on immovable property without reference to the relevant entries. The Income‑tax Ordinance is now self‑contained in this respect for general public as well as for all those who are concerned with the administration of tax law. Nobody needs to find out exemption from study oh the Constitution.

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 doe 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 reproduc ed above). 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 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 the supply of com modities. 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". It is true that in view of Miller's case (supra), the position would have been somewhat different as far as dividend was concerned. But in any case, it did not provide cover to other cases cited by us. In other words it shielded only the dividend income in the hands of share holders. However, when legislature in its wisdom has enacted law to neutralise Miller's case (supra). We have no other alternative but to apply it as it stands. Mr. Naseem, the learned counsel for the appellants was very much anxious to see that section 151 when interpreted to neutralise Miller's case (supra) should not become ultra vires entry

50. We hope that the above discussion would be enough to allay his fears. We, therefore, conclude that the dividend, which came in the hands of the appellants was open to be included in their total income and then Income‑tax Officer acted rightly.

22. Now we turn to departmental appeals. Here again, we find much force in submission of Mr. D

If the learned Commissioner of Income‑tax (Appeals) felt that tie should have admitted any evidence before him he was required to comply with the provisions of subsection (4) of section 131 of the Ordinance. It reads;‑ "The Appellate Assistant Commissioner shall not admit any docu mentary material or evidence which was not produced before the Income‑tax Officer unless tie is satisfied that appellant was prevented by sufficient cause from producing such material or evidence before the Income‑tax Officer." As is obvious, before the Appellate Assistant Commissioner admits any documentary material or evidence, he should satisfy himself that the appellant was prevented by sufficient cause from producing such material or evidence before the Income‑tax Officer. From perusal of the order of the learned Commissioner of Income‑tax (Appeals) neither we find any finding about his satisfaction that the appellant was prevented by sufficient Cause from producing additional evidence before the Income‑tax Officer, nor there is any indication to that effect. Under the facts and circumstances of the case, the contention of the appellant that the dividend of Rs. 1,02,138 was declared on 6th March, 1978 appears to be an after thought Mr. D

pointed out that the Income‑tax Officer had asked the learned counsel for the appellant to establish his claim of exemption of dividend but no evidence way produced before him in support of the claim. An assessee who deliberately withholds any evidence cannot be said to have been prevented by sufficient cause from producing it before the Income‑tax Officer. As such, we thinly that the plea has been taken before the learned Commissioner of Income‑tax (Appeals) in desperate attempt to save the tax liability at least to the extent of Rs. 1,02,1.38.

23. The upshot of this discussion is that we hold that the entire amount of Rs. 1,78,080 was rightly included in the respective total income of the appellants as being taxable under section 151 of the Ordinance. We, therefore, allow both the departmental appeals and dismiss both the appeals filed by the appellants.

24. All the four appeal, thus stand disposed of. M. B. .A. Order accordingly