1972 PLP 587 (PTD)

7. Attention has also been adverted to section 14(3) (c) where it has been laid down that tax shall not be payable by a Co‑operative Society in respect of interest and dividends derived from its investments with any other Co‑operative Society.

8. Similarly, section 16 (2) has been pressed into service for it declares that for the purpose of inclusion in the total income of an assessee, any dividend paid by a Company shall be deemed to be income of the previous year in which it is paid to him.

9. Mr. Lone, Advocate, for the Commissioner of Income tax, Rawalpindi, interjected at this stage of the argument to submit that the purpose of section 16 is to enumerate the method of calculation of the total income for grant of relief under other sections, e.g., 9(2), Proviso (B), 15(3), 17(2), 55 and 56.

10. Sheikh Abdul Haq, Advocate also referred to the decision' of the Supreme Court in Miller's case (P L D 1959 S C (Pak.) 219) to demonstrate to us that the Income‑tax Appellate Tribunal was not acting correctly when it placed reliance upon the ratio of this case for granting relief to the assessee before us.

11. It is a decision of the Full Court presided over by Muhammad Munir, C. J. The question before their Lordships was :‑ "Whether in the circumstances of the case, the sum of Rs. (different amounts in each case) declared as dividend 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 iron the tax under section 4(3) (viii) of the Act." Section 4(3)(viii) excludes agricultural income from the total income of its recipient for the purpose of assessment to tax. The Supreme Court considered the various aspects of the case and after having quoted from section 2(15), section 4(1), section 16(2) 18(5), section 49 (B) observed :‑ "We are unable to hold that subsection (2) of section 16 makes it incumbent on a shareholder to include in the return of his total income dividends which have been received frog the agricultural income of a Company unless it be held the dividends are not themselves agricultural income."

12. Their Lordships went on to observe that: "We feel that the correct form in which the question arises is whether the agricultural income of a Company is divested o its character of agricultural income, when what happens is merely the distribution of that income by payment of dividend to the shareholders. Do the dividends so paid continue to be revenue from land or do they assume a different character and in the hands of the shareholders become exclusive returns on capital.

13. Their Lordships answered the question posed by then in the following way :‑ "What is of vital importance, however, is that a Company is brought into existence and exists for the sole purpose of earning profits and gains and it earns them not for itself but for the benefit of the shareholders. To earn profits for its shareholders being the raison d'etre of the Company, a Company would be defeating the object of its own existence if Croesus‑like it filled its coffers with gold ands did not distribute it as dividends to its shareholders. A Company cannot enjoy its own income, the ultimate benefi ciaries of the income being the shareholders themselves who, on the recommendation of the Directors, declare the dividends . True, a Company is person but it is only a juristic person having no mouth to feed or person to shelter and sustain any if it is taxed, it is taxed not on any general principle of law, but because such is the policy of the statute that taxes it. Its Own income is but notional and it is only on its distribution that it becomes the actual income of its shareholders."

14. Section 15-BB exempts the "incomes, profits and gains of an industrial undertaking" falling within the limits given in section 15‑BB. The question that we have to answer, therefore, is whether the incomes, profits and gains of such an industrial undertaking cease to be incomes, profits and gains of that industrial undertaking no sooner they are distributed to the share holders in the shape of dividend. If the answer be in the affirmative, the dividend in the hands of the shareholder shall be liable to tax. But, if It is in the negative, then, it continues to enjoy the exemption granted by section 15‑BB. In Miller's case the Supreme Court observed that:-- "Income which is agricultural income in the hands of a joint stock Company does not cease to be agricultural income when it is distributed to the shareholders by way of dividends. The extent of the shares held by each shareholder merely determines his share in the income, but the shares themselves are neither the source nor the producer of the income." In the context of the case before us therefore, it would be correct to say that the dividend received by the assessee from a company enjoying a tax‑holiday is merely his determinate share in the income of the undertaking. The whole matter is clinched by the observation of the Supreme Court that follows :‑ "To hold to the contrary would make the exemption of agricultural income of a Company entirely illusory." It is not denied by the Department that the purpose of section 15‑BB is to grant a tax holiday to new comers in the industries within a certain period with a view to attracting capital for industrial enterprise which has all along been shy in this country. The capital is contributed by the shareholders and the attraction in the shape of a tax‑holiday has also been offered to the shareholders because unless they get some benefit out of the tax‑holiday, how is the purpose of the grant of the tax‑holiday served. The mere fact that the Company is allowed a tax holiday would not confer any benefit upon the shareholders because the moment the dividend goes in their hands, they will find that they have to pay tax upon it. Reference in this connection may be made to Maxwell on the Interpretation of Statutes, Eleventh Edition, page 19, where the following observa tion occurs :‑ "To arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope, and object of the whole Act; .... The true meaning of any passage, it is said, is to be found not merely in the words of that passage, but in comparing it with other parts of the law, ascertaining also what were the circumstances with the reference to which the words were used, and what was the object appearing from those circumstances which the Legislature had in view. I now approach the construction of the Truck Act, bearing in mind that in the words of Lord Lindley, regard must be had not only to the words used, but to the history of the Act and the reasons which led to its being passed . . . . . . Even where the usual meaning of the Act falls short of the whole object of the Legislature, a more extended meaning may attributed to the words, if they are fairly susceptible of it (page 66) . . . . . Thus, the Legislature having intended when passing the Workmen's Compensation Act, 1897 (c. 37), that every workman in the prescribed rates should be entitled to compensation, it was held that the Act ought to be construed so far as possible to give effect to its primary provisions." There is, therefore, enough authority to support the observations made above that in construing the provisions of an Act, the object with which they were enacted should not only be not lost sight of, but should, as far as possible, consistently with the language used, be interpreted with a view to advancing the aforesaid object.

15. As for the argument that the Legislature specifically mentioned dividends when it wanted to exempt them from tax as it did in section 15‑B, one may just refer to Miller's case which has been adverted to above already. The law exempted agricultural income, but there is no specific provision exempt dividend from agricultural income. The Supreme Court however, held that the dividend was exempt for the reasons which have already been mentioned above.

16. It may also be taken note of that section 15‑BB ref only to profits derived from an undertaking. It does not say profits derived by any Company from an undertaking. The exemption is, therefore, in respect of profits whether they are the hands of the Company or, they have reached the ultimate beneficiary, that is, the shareholder as dividends.

17. The analogy of the partridge in the Game Reserve given by learned counsel for the petitioner does not apply because in the light of Miller's case the income continues to remain exempted even when it takes the shape of dividend. As far as a Game Reserve is concerned, the protection is available only those birds and animals which are inside the sanctuary, there no such inhibition in the present case.

18. We, therefore, do not see eye to eye with the petitioner and answer the question posed in the Reference in the affirmative. The assessees shall be entitled to recover their costs from the Department. Reference answered