MUMTAZ HUSSAIN KHAN VS ADDITIONAL COMMISSIONER INLAND REVENUE, 2016 PTD-KARACHI-HIGH-COURT-SINDH 1667 (2016)

(a) Interpretation of statutes---

----Fiscal statute---Scope---Interpretation that reduces or lessens burden on taxpayer is to be preferred.

(b) Income Tax Ordinance (XLIX of 2001)---

----Ss. 2(28A), 4-B & 236-M(7)---Super tax, levy of---Bonus shares---Petitioner was an assessee and aggrieved of imposition of super tax on his income from bonus shares---Full face value of bonus shares could not be included in 'Income' for purposes of 'super tax' by applying S.236-M(7)(ii) of Income Tax Ordinance, 2001 as tax levied on such value was a final tax and matter would fall within the scope of S.2(28A) of Income Tax Ordinance, 2001---'Imputable income' alone was to be included in 'income' for the purposes of 'super tax'---Petitioner's 'income' on such basis was well below threshold of Rs. 500 million and no 'super tax' was payable by petitioner---Petitioner was not liable to pay any 'super tax' in terms of S. 4-B of Income Tax Ordinance, 2001---High Court quashed all demands, notices and proceedings (including, but not limited to, by way of rectification) seeking to claim or enforce any such payment and restrained the authorities from initiating or continuing such proceedings---Constitutional petition was allowed accordingly.

Shirin Ayub Khan v. Commissioner of Income Tax, Lahore PLD 1976 Lah. 1028 ref.

Anwar Kashif Mumtaz and Ammar Athar Saeed for Petitioners.

Syed Irshad ur Rehman for Respondent.

Ashfaq Rafique Janjua, Standing Counsel.

Date of hearing: 1st April, 2016.

ORDER

MUNIB AKHTAR, J.---This petition is in relation to a demand sought to be created against the petitioner, who is assessed to income tax as an individual taxpayer, in terms of section 4B of the Income Tax Ordinance, 2001 ("2001 Ordinance"). This section was added by the Finance Act, 2015 and, stated shortly, imposes a "super tax" for the tax year 2015 on the "income" (as therein defined) of certain categories of taxpayers (being, inter alia, persons having "income" equal to or exceeding Rs.500 million). The stated purpose of the levy is the "rehabilitation of temporarily displaced persons". As will become clear below, the disputed levy on the petitioner is by reason of certain bonus shares issued to him by various listed companies during the course of the year. The petitioner's case is that notwithstanding the issuance of the said shares, on a proper application of, and computation under, the relevant provisions, his "income", for purposes of the "super tax", does not cross the threshold of Rs. 500 million. The Department on the other hand contends that it is the face value of the bonus shares that is relevant and on such basis the petitioner's "income" does exceed the threshold and hence the "super tax" is payable.

2.It will be convenient to state at the outset the relevant provisions of the 2001 Ordinance, as relied upon by learned counsel. These are as follows, to the extent presently material:--

"2. Definitions.---In this Ordinance, unless there is anything repugnant in the subject or context -

(19) "dividend" includes -

(a) any distribution by a company of accumulated profits to its are holders, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets including money of the company; ...

(28A) "imputable income" in relation to an amount subject to final tax means the income which would have resulted in the same tax, had this amount not been subject to final tax;...

4B. Super tax for rehabilitation of temporarily displaced persons.---(1) A super tax shall be imposed for rehabilitation of temporarily displaced persons, for tax year 2015, at the rates specified in Division IIA of Part I of the First Schedule, on income of every person specified in the said Division.

(2)For the purposes of this section, "income" shall be the sum of the following:-

(i)profit on debt, dividend, capital gains, brokerage and commission;

(ii)taxable income under section (9) of this Ordinance, if not included in clause (i);

(iii)imputable income as defined in clause (28A) of section 2 excluding amounts specified in clause (i); and

(iv)income computed under Fourth, Fifth, Seventh and Eighth Schedules.

(3)The super tax payable under subsection (1) shall be paid, collected and deposited on the date and in the manner as specified in subsection (1) of section 137 and all provisions of Chapter X of the Ordinance shall apply.

(4)Where the super tax is not paid by a person liable to pay it, the Commissioner shall by an order in writing, determine the super tax payable, and shall serve upon the person, a notice of demand specifying the super tax payable and within the time specified under section 137 of the Ordinance.

(5)Where the super tax is not paid by a person liable to pay it, the Commissioner shall recover the super tax payable under subsection (1) and the provisions of Parts IV, X, XI and XII of Chapter X and Part I of Chapter XI of the Ordinance shall, so far as may be, apply to the collection of super tax as these apply to the collection of tax under the Ordinance. ....

39. Income from other sources.---(1) Income of every kind received by a person in a tax year, if it is not included in any other head, other than income exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head "Income from Other Sources", including the following namely:--

(m) income arising to the shareholder of a company, from the issuance of bonus sliares.

236M. Bonus shares issued by companies quoted on stock exchange.---(1) Notwithstanding anything contained in any law for the time being in force, every company, quoted on stock exchange, issuing bonus shares to the shareholders of the company, shall withhold five percent of the bonus shares to be issued.

(2) Bonus shares withheld under subsection (1) shall only be issued to a shareholder, if the company collects from the shareholder, tax equal to five percent of the value of the bonus shares issued to the shareholder including bonus share withheld, determined on the basis of day-end price on the first day of closure of books.

(6) Issuance of bonus shares shall be deemed to be the income of the shareholder and the tax collected by a company under subsection (2) or proceeds of the bonus shares disposed of and paid under subsection (5) shall be treated to have been paid on behalf of shareholder.

(7) Tax paid under this section shall be final tax on the income of the shareholder of the company arising from issuing of bonus shares."

3.It is pertinent to note that section 2(28) (the definition of "imputable income") was added by the Finance Act, 2015, i.e., along with section 4B, in which it is used in subsection (2)(iii). Other than section 4B, this definition is not used anywhere else in the 2001 Ordinance. Section 236M was added by the Finance Act, 2014, as was clause (m) to subsection (1) of section 39. (We may note that in this judgment, references to "income" (i.e., this term in quotes) are to the term as defined in section 4B(2), for purposes of the said section.)

4.Learned counsel for the petitioner submitted that the petitioner filed his tax return in the normal course and since, according to him, his case did not come within the scope of the "super tax", he did not pay any tax in terms of section 4B. Explaining his case, learned counsel submitted that for purposes of section 4B, "income" was defined in a special manner, as set out in subsection (2). Referring to clause (iii), learned counsel submitted that what had to be included in "income" so defined was "imputable income" as defined in section 2(28A). Learned counsel submitted that the petitioner had been issued bonus shares by various listed companies during the course of the year, and the total face value of all such shares came to Rs. 414,834,785/-. In terms of subsection (1) of section 236M the tax payable on this amount came to Rs. 2,0641,734/-. (There is no dispute, for present purposes, with regard to this payment.) Referring to subsection (7), learned counsel submitted that this was a "final tax" on the income of the petitioner arising from the issuance of the bonus shares. This thus engaged section 2(28) and the "imputed" income in respect of the bonus shares came to Rs. 68,805,863/-. This was the amount that had to be added to the various other amounts specified in subsection (2) of section 4B. When all of these amounts were added, the petitioner's total "income" for purposes of section 4B came to Rs.255,496,786/-, which was well below the threshold of Rs.500 million. Thus, the petitioner was not liable to the "super tax".

5.Continuing with his submissions, learned counsel submitted that contrary to the foregoing, and in flagrant breach of the law, the Department's contention was that the full face value of the bonus shares (i.e., Rs.414,834,785/-) had to be included in the determination of "income" under section 4B. That took the petitioner over the threshold of Rs. 500 million, and on this basis, the petitioner had been issued with a notice/demand for the allegedly unpaid amount of "super tax". The petitioner had responded by stating what he regarded to be the correct legal position, as set out above, but this was not accepted by the concerned officer, and now relevant proceedings had been initiated and/or were threatened. Learned counsel submitted that a conjoint reading of section 236M, subsections (1) and (7), section 2(28A) and section 4B(2)(iii) made clear that the petitioner had no liability as claimed by the Department and it was entitled to suitable relief accordingly.

6.Learned counsel for the Department opposed the grant of any relief. Learned counsel did not dispute the figures as computed or relied upon by learned counsel for the petitioner but submitted that on a correct reading of the law, the fill face value of the bonus shares had to be included in determining "income" for purposes of the "super tax". With regard to section 2(28A), learned counsel submitted that it did not at all apply to the facts and circumstances of the present case. The "amount" referred to in the definition was limited only to such amounts as would in the ordinary course go towards determining the income of a taxpayer in the normal way. By way of example, learned counsel referred to export proceeds, or the payment of income tax on the value of imports. If payment of tax on any such amount was a "final tax", then it could be regarded as an "amount" within the scope of section 2(28A) and not otherwise. Since the treatment of the issuance of bonus shares as income could not be so characterized, the petitioner's case did not come within the scope of "imputable income". Learned counsel further contended that in any case bonus shares were "dividend" within the meaning of section 2(19) and relied on clause (a) of the definition. Thus, the bonus shares issued to the petitioner came within the scope of clause (i) of section 4B(2) and not, as erroneously contended on behalf of the petitioner, clause (iii) thereof. In this context, learned counsel relied on Shirin Ayub Khan v. Commissioner of Income Tax, Lahore PLD 1976 Lah. 1028. Finally, and in the alternative, learned counsel submitted that clause (ii) of section 4B(2) brought within the scope of "income" the taxable income of the taxpayer in terms of section 9, other than what was already included by virtue of clause (i). Learned counsel submitted that clause (m) of section 39(1) expressly included bonus shares as income under the head "Income from Other Sources", and the bonus shares issued to the petitioner were liable to tax under this provision. The face value of the shares was therefore within the scope of "income" for purposes of the "super tax" in terms of clause (ii). Learned counsel also relied on certain other provisions of the 2001 Ordinance in this regard. It was prayed that the petition be dismissed. Learned standing counsel adopted the submissions made by learned counsel for the Department. Learned counsel for the petitioner exercised his right of reply.

7.We have heard learned counsel as above, examined the record and considered the statutory provisions and the case relied upon. For convenience, we will first take up the submission by learned counsel for the Department that the issuance of bonus shares is income by way of dividend in terms of section 2(19)(a). With respect, we are unable to agree. Clause (a) applies only if (i) there is a "distribution" by a company, and (ii) such distribution entails release to the shareholders of any assets of the company. The issuance of bonus shares does not in any manner constitute such release. Hence clause (a) is patently inapplicable. There is another aspect of section 2(19) that should be kept in mind. When the 2001 Ordinance was promulgated, clause (b) of section 2(19), which relates to the distribution (under certain specified conditions) of any "debentures, debenture-stock or deposit certificate[s]" by a company to its shareholders, had also included "any distribution to [the] shareholders of shares by way of bonus or bonus shares". Thus, originally the definition of dividend had expressly included bonus shares, but under clause (b). However, this reference (i.e., the words last quoted) was omitted almost immediately by the Finance Ordinance, 2002. The latter statute also substituted the definition of "income" given in section 2(29), and as so substituted, it was provided that income did "not include, in case of a shareholder of a company, the amount representing the face value of any bonus share or the amount of any bonus declared, issued or paid by the company to the shareholders with a view to increasing its paid up share capital". Now, these words have been omitted by the Finance Act, 2014 but that is only to take into account the inclusion of bonus shares in terms of clause (m) of section 39(1) and section 236M (and also section 236N, which however is not presently relevant). For present purposes, what is clear is that the omission of the relevant words quoted above from clause (b) of the definition of "dividend" means that bonus shares cannot be regarded as income by way of dividend. The reference to the decision of the Lahore High Court is also, with respect, inapt. Learned counsel for the Department relied on certain observations at p. 1033 (para 5) but as is clear from a perusal of the judgment, by virtue of an explanation to section 4 of the Income Tax Act, 1922 (the statute applicable at that time), bonus shares were deemed to be income accruing to the company, while section 2(6-C), which defined income, expressly included bonus shares in the ambit thereof. The effect, according to the Lahore High Court, was that the same amount would be taxed thrice over (see at pp. 1033-4). Be that as it may, as is obvious, the statutory provisions with which the Lahore High Court was concerned were quite different from the definition of dividend at hand, and hence the judgment relied upon does not advance the Department's case. The issuance of bonus shares to the petitioner did not constitute dividend and hence did not come within the scope of clause (i) of section 4B(2).

8.Turning now to the definition of "imputable income" as given in section 2(28A), we are, with respect, unable to agree with the submission by learned counsel for the Department that the "amount" referred to therein should be construed in the limited manner as suggested. We do not find any such limitation in the definition and such a restricted reading would be contrary to well established principles. The language of the definition is clear on the face of it and ought to apply accordingly. It applies to any amount that is subject to final tax. Thus, all that is required is for an amount to be referred to in the 2001 Ordinance, and for the statute to provide that the tax payable in respect thereof is a final tax. As correctly submitted by learned counsel for the petitioner, these requirements are fulfilled in the present case. The "amount" is the face value of bonus shares (per subsection (1) of section 236M) and the deduction of 5% thereof is the final tax (per subsection (7)) on the deemed income that (per subsection (6)) the face value represents. As also correctly submitted by learned counsel for the petitioner, once it is determined that section 2(28A) is engaged, then one has to work "backwards" (or in "reverse") from the amount of the final tax to determine the income that would, in the ordinary course, have resulted in a tax liability in the said sum. Since the taxpayer is an individual, in his case it is Division I of Part I of the First Schedule that applies, which sets out the relevant rates for individuals. An application thereof resulted in the figure of Rs. 68,805,863/- that, according to the petitioner, would result in a tax liability of Rs. 2,0641,734/-. As noted above the Department has not, as such, challenged the correctness of the petitioner's computation. Thus, we are of the view (subject to consideration of the Department's final point) that in the petitioner's case, it was the "imputable income" under section 2(28A) that had to be included in terms of clause (iii) of section 4B(2). The contrary submission by learned counsel for the Department cannot, with respect, be accepted.

9.We turn to the alternate submission, that the full face value of the bonus shares had to be included in terms of clause (ii) of section 4B(2), since it was included in taxable income under section 9 by reason of being income from other sources in terms of section 39(1)(m). In the present context, it was submitted by learned counsel for the Department that sections 8 and 169 dealt with the treatment of those amounts or incomes on which tax was paid as a final tax. Learned counsel submitted that these sections referred expressly to various sections of the 2001 Ordinance that provided for final tax, but section 236M was not referred to in either of the two sections. The two sections provide that such amount(s) or income(s) on which tax has been paid as final tax "shall not be chargeable to tax under any head of income in computing the taxable income of the person". As we understood it, learned counsel for the Department sought to argue that section 2(28A) applied only to that "amount" on which tax had to be paid as a "final tax" and which amount or income was specified in any of the sections mentioned in either section 8 or section 169. Since such amount or income was not to be brought to tax under any head of income, it stood excluded from section 9 and hence from clause (ii) of section 4B(2). It was therefore brought within the definition of "income" by way of clause (iii). Any other amount or income (i.e., mentioned in a section not specifically listed in either of the two sections) was not excluded from the ambit of section 9 even if tax was paid on the same as a final tax. It therefore came into the definition of "income" by way of clause (ii), and clause (iii) was not applicable thereto. With respect, we are unable to agree. As before, this submission requires reading words of limitation or restriction into section 2(28A) and we can find no warrant for this. As already noted the language of the definition is clear. It refers simply to an amount "subject to final tax", and draws no distinction (even if otherwise valid, as to which we express no opinion) between those amounts which are not, per section 8 or section 169, to be brought to tax under any head of income on the one hand, and those amounts not included, listed or mentioned in either of these sections. Being "subject to final tax" means what it says. We therefore reaffirm the conclusion already arrived at above, namely that the petitioner's case comes within the scope of "imputable income" and hence the amount determined in terms of section 2(28A) is to be included in "income" by reason of clause (iii).

10.Now, it is quite rightly not the Department's case that the same amount or transaction is to be included twice while computing "income" for purposes of the "super tax". However, if the full face value of the bonus shares were also to be included by reason of clause (ii), as contended by learned counsel for the Department, this would have the effect of doubly counting the bonus shares for determining "income" under section 4B(2). This would be so because both sums, of Rs.68,805,863/- (in terms of clause (iii)) and Rs.414,834,785/- (in terms of clause (ii)), would have to be added. There are thus two interpretations of section 4B available. The section is a charging provision and as is well established, that interpretation is to be preferred as lessens the burden on the taxpayer or even (as would here be the case) takes the taxpayer altogether out of the net of the charge. Even if the alternate submission by learned counsel for the Department is correct (and we would like to expressly note that we record no finding in this regard) that would still not take the petitioner's case out of "imputable income" and clause (iii). Since that would undoubtedly increase the burden on the taxpayer, the interpretation that reduces or lessens the burden is to be preferred. Therefore, in our view, the correct interpreta-tion and application of section 4B is that if there is an amount to which clause (iii) of subsection (2) is applicable, then that is to be applied exclusively. Any amount, or any transaction, receipt or income to which the amount relates, which comes within the ambit of section 2(28A) cannot be (additionally) brought within the ambit of "income" by applying clause (ii). The alternate submission made by learned counsel for the Department cannot therefore, with respect, be accepted.

11.It follows from the foregoing that the full face value of the bonus shares could not be included in "income" for purposes of the "super tax" by applying clause (ii) since the tax levied on such value was a final tax (per section 236M(7)) and hence the matter came within the scope of section 2(28A). It is this "imputable income" alone that is to be included in "income" for purposes of "super tax". On such basis, the petitioner's "income" was well below the threshold of Rs. 500 million and hence no "super tax" was payable by him.

12.Accordingly, this petition is allowed. It is declared that the petitioner is not liable to pay any "super tax" in terms of section 4B. All demands, notices and proceedings (including, but not limited to, by way of rectification) seeking to claim or enforce any such payment are quashed and the respondents are restrained from initiating or continuing the same. There will be no order as to costs.

MH/M-77/SindhPetition allowed.