2005 PLP (Trib (PTD)

536,614 6,078,031 5,036,614 From the above entries of balance sheet it is clear that the assessee company has declared Bonus Shares by adding reserves for issuance of Bonus Shares at Rs.1,500,000 in the balance sheet thus it is evident that Bonus Shares were declared by the assessee company for this year.

2. The contention of the Authorized Representative of the assessee company that it was merely a transfer entry from general reserve is incorrect since the general reserve for this year has remained same at Rs.3,500,000 as last year. The assessee company has declared reserve for issuance of Bonus Shares at Rs. 1,500,000 and has thus enhanced its share capital and reserves to this extent in the balance sheet as on 30‑6‑1997. Thus the assessee company has declared Bonus Shares to its shareholders. This amount of reserve for issuance of Bonus Shares was liable to be taxed under omitted subsection 9 of section 12 which is reproduced as under:‑‑ "Where any bonus or bonus share is declared, issued or paid by a Pakistani company to its shareholders 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 fact value of the bonus share, as the case maybe, shall be deemed to be income accruing to the company during the year. This provision treated the face‑value of bonus share issued by a Pakistani company as income in the hands of the company and was introduced in assessment year, 1958‑

59. Separate rates of tax were prescribed for such income. However, it was later exempted from tax vide Notification No. S.R.O. 856(I)/77, dated 13th September, 1977 as amended by S.R.O. 251(I)/79, dated 27th March, 1979, both issued under section 60(1) of the repealed Act. Such income continues to be exempt by virtue of clause (108) of Part I of the Second Schedule till 30th June, 2000, the exemption was ‑withdrawn for a brief period i.e. 1‑7‑1996 to 30‑6‑1997."

3. The Bonus Shares declared by the assessee company during this year, therefore, falls within the omitted section 12(9) of Income Tax Ordinance, 1979 and the DCIT had failed to take cognizance of this issue. He neither discussed this aspect in the body of order nor treated the face value of Bonus Shares as its income or subjected the same to tax.

4. The order ‑passed by the DCIT is both erroneous as well as prejudicial to the interest of Revenue as he had failed to tax reserve for issuance of Bonus Share as 10% under omitted subsection (9) of section 12 of Income Tax Ordinance, 1979 and the decisions cited by the Authorized Representative are distinguishable. The application of 66A of Income Tax' Ordinance, 1979 has been upheld in the following identical decisions of the superior Courts:‑‑ (1995) 72 Tax 63 (H.C. Lah.), (1995) 72 Tax 93 (Trib.), (1998) 977 Tax 280 (Trib.) and (1999) 79 Tax 273 (Trib.). In view of foregoing facts it is abundantly clear that the order passed by the DCIT under section 62 of the Income Tax Ordinance, 1979 is erroneous insofar as it is prejudicial to the interest of Revenue and assessment is enhanced/modified as under:‑ Income as per order under section 62, dated 16-5‑1999. Rs.4,493,900 Less: WWF @ 2% Rs. 88,900 Total Income Rs.4,405,784 Total tax levied as per original order under section 62 Dated 16-5‑1998. Rs.2,020,493 10% Tax on Bonus Shares of Rs.1,500,000 as discussed above. Rs. 1,50,000 Total Tax Payable

5. Mr. Jan‑e‑Alam. ITP, has appeared on behalf of the appellant and has contended that the learned IAC was not justified in modifying and enhancing the assessment already made under section 62 of the Ordinance. According to him the assessment made by the Assessing Officer was neither erroneous nor prejudicial to the interest of revenue. He has submitted that there yeas no justification for holding that the appellant was liable to pay tax on reserves for proposed issuance of bonus shares under the provision of section 12(9) of the Repealed Ordinance, 1979. According to him, the learned IAC has erred in holding that the appellant was not covered by an exemption granted in clause 108 of the Second Schedule. He has submitted that the balance sheet for the year ending 30‑6‑1997 clearly shows that the assessee in this case, has only transferred reserve for issue of bonus shares, from the general reserves account and it is merely a transfer entry and no bonus shares were declared, issued or paid by the assessee during the period relevant to the assessment year, 1997‑

98. He has conceded that the said bonus shares were paid in assessment year, 1998‑99 in which year the exemption under clause 108 of Part‑I of the Second Schedule was reinserted by Finance Act, 1997 and the said provision of clause 108 have exempted bonus shares from tax which were between 1‑7‑1997 and 30‑6‑2000 and therefore, the bonus shares paid by the appellant are exempted from tax. Learned counsel in this respect has placed before us, the statement of accounts with Auditors report, for the year ended 30‑6‑1997 and for the year ended 30‑6‑1998. Learned counsel has submitted that this Tribunal vide order, dated 8‑3‑2000 in the case of Messrs Abbott Laboratories (Pvt.) Limited, Karachi in ITA No.573/KB of 1998‑99 (assessment year, 1997‑98) has already considered this issue and has decided in favour of the assessee. Learned counsel for the appellant has also placed before us apart from the Audited accounts of the appellant company referred above, the minutes of the Annual General Meeting (AGM) of the company held on 21st November, 1997 wherein, apart from other matters of the company, the issue of bonus shares has also been considered. In this respect following proceedings have been recorded in the minutes of the AGM:-‑ "Mr. Hasan Ali Khan proposed that as recommended by the Board the sum of Rs.1,500,000 (Rupees One million five hundred thousand only) out of the Capital Reserves of the company be capitalized and distributed as fully paid bonus shares @ 150 % i.e. in the .ratio of 3 shares for every 2 shares held by the shareholders as at the close of Business on 13 November, 1997. After the related matters were discussed and queries answered, the Proposal seconded by Mr. Ali Hasan was approved by the members and the following resolution was adopted. Resolved that a sum of Rs.1,500,000 (Rupees one million five hundred thousand only) out of the Capital Reserves of the Company be capitalized and applied to the issue of 150,000 fully paid ordinary shares of Rs.10 each as Bonus Shares to be allotted to those shareholders whose names appear in the Register of Members as at the close of Business on 13th November, 1997 in the proportion of three share of every two shares held, and that the shares when issued be treated for all purposes as in increase in the paid‑up capital of the Company. Resolved further that the Bonus Shares when issued shall rank pari passu in all respects with the existing shares of the Company. However, such Bonus Shares will not be considered for cash dividend announced for the period ended 30th June, 1997. Further resolved that Mr. Mohammad Junaid Pervez Company Secretary be and is hereby authorized to comply with all corporate formalities in this respect".

6. On the other hand, Mr. Inayatullah Kashani, learned represen tative of the department is supporting the impugned order of the learned IAC, on the ground that the learned IAC has discussed the issue in detailed and after rebutting all the arguments made on behalf of the appellant, has held that the appellant is liable to pay tax on the reserves for proposed issuance of bonus shares under the provision of section 12(9) of the Ordinance, 1979. He is however, unable to rebut the case law referred by the learned counsel for the assessee.

7. We have heard learned representatives of the two parties and have also perused the impugned order of the learned IAC, the assessment order, the case‑law referred and the documents referred by the learned counsel for the assessee. The issue before us to be decided is: "Whether creation of reserves for bonus shares amounts to declaration of bonus shares and whether the tax on bonus shares is to be levied on the basis of declaration or on the basis of their issue". Before proceedings further it would be proper if the provisions of section 12(9) of the Repealed Ordinance, 1979 are once again reproduced for the facility of the decision:‑‑ "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". (Under line is for emphasis by us). The plain reading of the above section shows that there is a comma after the word "declared" and the word "or" between "issued and paid". Meaning thereby that the bonus shares 'cannot be issued unless they are declared, therefore, we are of the view that declaration of bonus shares will always be a preceding step. As such dividends are to be paid as per section 251 of the Companies Ordinance, 1984 within 45 days in the case of listed companies. In view of the time limit of 45 days allowed after the approval of the proposal by the AGM for declaration of dividends there will always be a time lag between declaration and issuance of bonus shares. If the view of‑ the learned IAC is accepted that income is deemed to accrue on mere declaration then subsequent issuance is totally immaterial for taxation. The use of word "issued" or "paid" after declaration in the above referred section 12(9) of the Ordinance, 1979 are not meaningless. In our opinion in this section the word "issued" has been used for bonus shares and "paid" has been used for cash payment of bonus and the both these words are proceeded by word declaration as neither can be issued or paid without declaration. We may clarify here that mere appropriation in account is not same as declaration. Any provision in the accounts remains the provisions until approved legally. Bonus shares are dividend as defined in section 2(20)(a) of the Repealed Income Tax Ordinance, 1979 and the word mentioned there is "distribution" and not "declaration". The income on account of bonus shares arises when the same are distributed and distribution has the same meaning as the issuance. It would be useful that before deciding this issue reference is made to the relevant clauses of the Companies Ordinance of 1984 also. Under the said Ordinance, 1984 when the accounts have been prepared/audited the same are presented to the Board of Directors under the provision of section 235 and the directors are required to make report in respect of companies financial affairs and recommend the amount of dividend to be paid. The accounts in this respect are approved under section 241 and the approved account alongwith director's reports are submitted in AGM, which is held every year under section 158 of the Ordinance, 1984. Until the accounts and reports of the directors and the recommendation of directions are approved by the AGM it remains proposal only. This is evident from section 248 of the said Companies Ordinance, 1984, which is reproduced below:‑‑ "(248) Certain restrictions on declaration of dividends.‑‑‑(1) The company in general meeting may declare dividends; but no dividend shall exceed the amount recommended by the directors. (2) No dividend shall be declared or paid by a company for any financial year out of the profits of the company made from the sale or disposal of any immovable property or assets of a capital nature comprised in the undertaking or any of the undertakings of the company, unless the business of the company consists, whether wholly or partly, of selling and purchasing any such property of assets, except after such profit are set off or adjusted against losses arising from the sale of any such immovable property or assets of a capital nature". The above section shows that the declaration of the dividend is made in AGM, therefore, any appropriation made in the accounts and the recommendation by the Board of Directors are merely proposal until finally approved by AGM when it becomes the declaration, Dividends are to be paid as per section 251 of the Companies Ordinance, 1984 within 45 days of the approval by the AGM in case of a listed companies and within 30 days in the case of any other company. The relevant section 251 of the Companies Ordinance, 1984 is reproduced here under:‑‑ "

251. Period for payment of dividend.‑‑‑(1) When a dividend has been declared, it shall not be lawful for the directors or the company to withhold, or defer its payment and the chief executive of the company shall be responsible to make the payment in the manner provided in section 250 within forty‑five days of the declaration in the case of a listed company and within thirty days in the case of any other company. 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 and on the date of commencement of closing of share transfer for purposes of determination of entitlement of dividend in the case of an interim dividend and where register of members is not closed for such purpose, of the date on which such dividend is approved by the directors. (2) Where a dividend has been declared by a company but is not paid within the period specified in subsection (1), the chief executive of the company shall be punishable with imprisonment for a term which may extend to two years and with fine which may extend to one million rupees: Provided that no offence shall be deemed to have been committed within the meaning of the foregoing provisions in the following cases, namely:‑‑ (a) where the dividend could not be paid by reason of the operation of any law; (b) where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with; (c) where there is a dispute regarding the right to receive the dividend; (d) where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or, (e) where, for any other reason, the failure to pay the dividend or to post the warrant within the period of aforesaid was not due to any default on the part of the company; and the Authority has, on an application of the company on the prescribed form made within forty‑five days from the date of declaration of the dividend, and after providing an opportunity to the shareholder or person who may seem to be entitled to receive the dividend of making representation against the proposed action, permitted the company to withhold or defer payment as may be ordered by the Authority. (3) A chief executive convicted under subsection (2) shall from the day of the conviction cease to hold the office of chief executive of the company and shall not, for a period of five years from that day, be eligible to be the chief executive or a director of that, company or any other company". Now if we refer to section 50(7) of the Repealed Income Tax Ordinance, 1979, (which has now been omitted from the statute by Finance Ordinance, 2001), we find that the deduction of tax on the bonus shares is to be made before the issue to the share‑holders. The deduction of tax is not linked with the declaration. The upshot of these discussions after considering all the provisions discussed supra is that in the present case the declaration of the bonus shares took place on 21‑11‑1997 when the AGM approved the issue of bonus shares at the rate of three shares for every two shares held by the shareholders as at the close of business on 13-11‑1997. These bonus shares were issued to the shareholders after 21‑11‑1997. The learned representative of the appellant has submitted before us that the bonus shares were issued within period of 30 days provided under section 251 of the Companies Ordinance, 1984. Now we refer to clause 108 of Part‑I of the Second Schedule of the Income Tax Ordinance, 1979. We find that the bonus shares issued between 1st day of December, 1997 to 30th June, 1995 were exempt. This exemption was withdrawn vide Finance Act, 1995 but the exemption was again granted to bonus shares issued between 1st day of July, 1997 and 30th June, 2002 vide Finance Act, 1997. It would be useful if clause 108 of Part‑I of the Second Schedule of the Income Tax Ordinance, 1979 is reproduced hereunder, as it stands after its reinsertion by Finance Act, 1997:‑‑ "(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." In the present case, as the bonus shares were issued by the appellant during the period of exemption, we are of the view that these have wrongly been subjected to tax under section 66A of the Repealed Ordinance, 1979 by the learned IAC. Actually in this case declaration of the bonus shares as discussed supra is also within period of exemption Le. 21‑11‑1997. This view taken by us is in conformity with the view already taken by this Tribunal vide order, dated 8‑3‑2000 in a case of Messrs Abbott Laboratories (Pvt.) Limited, Karachi referred supra on which learned representative of the appellant has placed reliance. In view of the above discussions the order passed under section 66A is hereby vacated and the tax levied under section 12(9) of the Repealed Income Tax Ordinance, 1979 is deleted.

8. The appeal filed by the assessee is allowed. C.M.A./277/Tax (Trib.) Appeal allowed.