1982 PLP 354 (PTD)

ALLAH BAKHSH KHAN, J.‑The question formulated in this Tax Reference is whether the return on capital paid by Telephone Industries of Pakistan Limited to Siemens A. G. on the holding of the latter in the share capital of the former was or was not dividend within the meaning of section 2(6‑A) of the Income‑tax Act, 1922.

2. It was on 26th day of May, 1952 that the G6wfment of Pakistan, Messrs Siemens & Halske A. G. of Munich, Germany and Farid Sons Limited of Karachi entered into an agreement for incorporation of a limited company under the title "Telephone Industries of Pakistan" and various terms and, conditions were embodied in the said agreement. It was inter alia provided by the agreement that a dividend of 4 %. was to be declared on the paid‑up share capital for the time being or proportionately lower sums in years of less production as the case may be, that net profits that may accrue shall first be used for declaring a dividend not exceeding 4 % on invested capital and for paying other charges and that dividends were contingent on sufficient profits being made and were not otherwise guaranteed. With the expansion of the project and requirement of more capital an amended agreement was entered into on 22nd day of July, 1966 whereby Siemens & Halske A. G. agreed to contribute additional capital towards investment subject to the condition that a fair return would be granted on such investment. It was, therefore, stipulated that their investment under the first expansion programme will bear a return of 4%. P. A. with effect from 1st April, 1964 and all subsequent investments will bear a return of 5 % P. A. and that the Govern ment guaranteed the performance by T. I. P. of its part to this Amendment. Siemens & Halske submitted their return of income for the assessment year 1968‑69 and showed in it a sum of Rs. 4,39,769 as income from dividend, The Income‑tax Officer, Peshawar per his order dated 30‑6‑1971 held that the amount was interest and not dividend. Siemens A. G. took an appeal to the Income‑tax Appellate Tribunal, Peshawar Bunch, Peshawar but the same was dismissed on 6‑6‑1972 and now Siemens A. G. has preferred the instant Tax Reference for the determination of the solitary question mentioned above.

3. The learned counsel for Messrs Siemens A. G. (hereinafter called the petitioner) strenuously contended that in pursuance of the terms and conditions of the agreement of 1952 as amended in 1966 the return on capital invested by the petitioner was dividend and was not tantamount to interest. The petitioner, according to him, had made investment as a shareholder in the share capital of the company, had not advanced the amount as a loan and the sharing of the profits was nothing but dividend. It would be profitable to consider what is meant by the words "dividend" and "interest". The word "interest" has not been defined in the Income‑tax Act but the word "dividend" has been defined in it. "Dividend" as defined in section 2(6‑A) Income‑tax Act includes‑ (a) any distribution or payment made by a company to its shareholders of accumulated profits, whether capitalised or not, if such distribution or payment entails the release or payment to its shareholders, or on their behalf, of all or any part of the assets or reserves of the company (b) . The word "includes" by us is significant and it is apparent that the word "means" has not been used in the section. The word "includes" denotes that the definition is inclusive and not exhaustive. The meaning of both these words has been given at page 197 of Craies on Statute Law (1952 Edn.) and it is remarked that "there are two forms of interpretation clause. In one, where the word defined is declared to "mean" so and so, the definition is explanatory and prima facie restrictive. In the other, where the word defined is declared to "include" so and so, the definition is extensive." Maxwell on the Interpretation of Statutes (12th Edition) at page 270 has observed that :‑ "Sometimes, it is provided that a word shall "mean" what the definition section says it shall mean; in this case, the word is restricted to the scope indicated in the definition section. Some times, however, the word "include" is used "in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include." In other words, the word in respect of which "includes" is used bears both its extended statutory meaning and its ordinary, popular and natural sense whenever that would be properly applicable." It would therefore be legitimate to look into the meaning of the word "dividend" in common parlance too. 4. "Dividend", according to Black's Law Dictionary, may denote fund set apart by a corporation out of its profit, to be apportioned among the shareholders, or the proportionate amount falling to each. Prima facie a "dividend", according to Stroud's Judicial Dictionary means a payment to shareholders when a company is a going concern. In Halsbury's Laws of England, Volume VII (4th Edition) the ordinary meaning of "dividend" is a share of profits, whether at a fixed rate or otherwise, allocated to the holders of shares in a company. The term is generally used with reference to trading or other companies, and to payments made to members of al company as such and not by way of remuneration for services. The meaning of the word "dividend" came up for consideration in Kantilal Mandal and others v. Commissioner of Income‑tax, Bombay North, Kutch and Saurashtra. Ahmedabad (A I R 1956 Bom.381) and it was remarked that the ordinary meaning of dividend is the receipt by the shareholder by reason of his being a shareholder of part of the profits of the company of which he is a shareholder.

5. The word "interest", as remarked above, has not been defined in the Income‑tax Act. Various meanings of "interest" have been given in Stroud's Judicial Dictionary and at serial No. 42 it is shown to mean com pensation paid by the borrower to the lender for deprivation of the use of his money. Interest, according to Black's Law Dictionary, means the compensa tion allowed by law or fixed by the parties for the use or forbearance or detention of money. According to Wharton's Law Lexicon, "interest" means money paid at a fixed rate per cent for the loan or Use of some other sum, called the principal. In Paget's Law of Banking (8th Edition) at page 276 "interest" is shown to mean a periodical payment of money at a fired rate in consideration of a loan or forbearance to enforce payment of a debt. I may be pointed out that in Whiteman and Wheatcroft, on Income‑tax Second Edition) the word "interest" has been dealt with and it as observed at page 379 that Rowlatt, J. called interest "payment by time for the use of money," whereas Farewell, J. stated, "interest is compensation for delay in payment." It has also been judicially stated that the definition of interest of money as "the creditor's share of the profit which the borrower or the debtor is presumed to make from the use of the money" is a very good working definition of that term." It can, therefore, be said that in its narrow sense interest is understood to mean the amount which one has contracted to pay for use of borrowed money. It is said to be a compensation allowed by law or fixed by parties, or permitted by custom or usage, for the use of money belonging to another, or for the delay in paying money after it has become payable.

6. It is manifest from the meanings of the word "dividend" and "'interest" enumerated above that both stand on distinguishable pedestals. It is pertinent to note that in the instant case neither the word "dividend" nor "interest" has been used by the T. I. P. in its accounts with regard Rs. 4,39,769, an amount which has been described as return on investments There is no denying the fact that the petitioner had invested a particular amount as a shareholder and had not advanced the amount as loan. The relationship between the parties to the agreements was obviously that of shareholders and trot that of borrower and creditor. It is worth mentioning that a company's share capital is not "capital borrowed" and is not a debt payable by the company, to the shareholders. It follows that a shareholder is in the eye of law not a creditor of the company for the share capital of the latter and the payment to him out of the profits earned by the company on his investment cannot be termed as interest.

7. Article 6 of the agreement of 1952 pertains to Return on Capital and inter alia provides that a dividend of 4 % is to be declared on the paid up share capital for the time being or proportionately lower sums in years of less production as the case ma' be. Production commenced in the factory but sufficient profits were not earned and no dividend was aid to the petitioner. More investment was required but the petitioner hesitated whereupon minimum dividend was guaranteed to it. An amended agreement was executed in 1966 and the petitioner was guaranteed a fair return on the fresh investment to be made by it. The Government guaranteed the performance by T. I. P. of its part to the amendment. Article (1) of its is as follows :‑ Article (1).‑All capital, invested or to be invested by S & H in T. I. P. shall at the expense of T. I. P. have a guaranteed fixed minimum return independent of capital ratio, turnover, profits, efficiency, performance of any other criteria of T. I. P. It appears that both the forums below were greatly influenced by Article (1) reproduced above, took notice of the word "profits" and opined that fixed minimum return was guaranteed independent of profits and, as such the return could be nothing but interest. It escaped their notice that the disputed amount was paid out of the profits and not out of any other source. It would, therefore, be erroneous to proceed on hypothetical premises thaq had there been no profits the petitioner was still to be paid the guaranteed return on investment. Had it been the case before them that the disputed amount was not paid out of the profits their view would have been relevant. Article (1). should have been read with the other Articles of the agreement and one word only torn from its context should not have been used as a key for the solution of the point at issue before them. Keeping in view the terms and conditions of both the agreements there is no mane: r of doubt in our mind that the disputed amount was paid out of the profits earned by the T. I. P.

8. Section 107 of the Companies Act restricts the powers of the Company with regard to payment of interest out of the capital under certain circum stances. It is contemplated by Regulation 97 of Table A of the Companies Act that no dividend shall be paid otherwise than out of the profits or any other undistributed profits. The minimum dividend was guaranteed by the Government and it .acquiesced in not sharing the profits for a certain period. This fact would not cast a cloud of doubt on the disbursement of the disputed amount as dividend to the petitioner. It is observed in Pennington's Com pany Law (3rd Edition) at page 362 that although guarantees of minimum dividends are legitimate, they may not be used age a device to enable a company to pay dividends out of its profits. The T: I. P. was not a party to the matter before the forums below and in its absence they declined to rely on the accounts maintained by it. A look at the statement of accounts for the years 1966‑67 shows that a sum of Rs. 1,77,885,00 was payable to the petitioner as return on investment out of the net profits. In the statement of account for the year 1965‑66 a sum of Rs. 2 61,884,00 was payable to the petitioner as return on investment and the amount was payable out of the profits earned by the T. I. P. Moreover, the amount was not debited to the P & L account of the T. I. P, and was to be paid out of the appropriation account. It is now well settled that interest could not be paid out of appropriation account. It cannot, therefore, by any stretch of imagination be said that the amount was paid as interest on the investment made by the petitioner. Moreover, the aforesaid amount represented more than the guaranteed return on investment and this fact goes a long way to negative the claim that the amount was interest.

9. Both the forums below observed that certain provisions of the Companies Act had been violated with regard to declaration of dividend by the T. I. P. and, as such,. the amount did not fall within the mischief of dividend. It is true that Regulations 95, 98, 99 and 101 prescribed the procedure with regard to declaration of dividend but we could not persuade ourselves to subscribe to the view of the forms below. The T. I. P. might not have followed the aforesaid provisions of law but this omission pre se would not change the characteristics of the dividend. A similar point was agitated in Kantilal Manilal and others v. Commissioner of Income‑tax Bombay North Kutch arid Saurashtra Ahmedubad but it was repelled with the following observation at page 383; The ordinary meaning of dividend is, as we have already suggested earlier in the judgment, the receipt by the shareholder by reason of his being a shareholder of part of the profits of the company of which he is a shareholder. The formalities and technicalities attached to the declara tion of a divided cannot detract from the ordinary and normal meaning to be attached to that expression. It may be said in a particular case that the dividend received by the shareholder was not properly declared or that the necessary procedure was not followed, but in its plain natural meaning the receipt by the shareholder under the circumstances just referred to, must be described as dividend and must have the characteristics of a dividend.

10. The appellate Tribunal was of the view that "the payment was a charge. which should have been cleared before determining the net profits a wrongly appropriated now through appropriation account." It opined that the amount was either receipt of interest in the bands of the petitioner or as income from other sources. Its opinion was based on mere surmises and conjectures. No material was placed before us to indicate that the amount could be income from other sources. We are of the view that it is neither interest nor an income from other sources which have not been disclosed by the opposite party: In view of what has been observed above, we hold that disputed amounts was dividend within the meaning of the term as defined in section 2(6‑A) of the Income‑tax Act and answer the question accordingly. The parties are, however, left to bear their own costs of the Reference. Answered accordingly.