I.T.As. Nos. 529/KB to 531/KB and 408/KB to 411/KB of 1997-98, decided on 16th October, 2002. Versus I.T.As. Nos. 529/KB to 531/KB and 408/KB to 411/KB of 1997-98, decided on 16th October, 2002.
ORDER
INAM ELLAHI SHEIKH (CHAIRMAN). ‑ ‑‑These are seven further appeals of a Swiss company deriving income from dividend from a Pakistani company in which it holds 49% shares.
2. The relevant facts in brief are that the original assessments in this case were made under section 62 of the Income Tax Ordinance, 1979 (hereinafter referred to as 1979 Ordinance) by charging tax on dividend at 10% as provided in the Double Taxation Treaty with Switzerland. However, subsequently, the Assessing Officer rectified the assessment orders under section 156 of the 1979 Ordinance for the assessment years 1988‑89, 1989‑90 and 1990‑91 to levy surcharge in these three years. The learned CIT(A), Zone‑VI, Karachi vide an order dated 31‑5‑1997, set aside these three orders on the question of limitation holding that the limitation starts from the date of service of the order rectified and not from the date of framing of the order. The Assessing Officer was directed to reconsider the issue and the assessee claims before us that the orders should have been annulled in the circumstances, of the case.
3. In the assessment years 1991‑92 to 1994‑95, provisions of section 66‑A of the 1979 Ordinance were invoked as the I.A.C. was of the view that the original assessments made were erroneous insofar as prejudicial to the interests of Revenue because part of the dividend derived by the assessee from the Pakistani company could be attributed to the other income which attracted higher rate of tax. Thus, the I.A.C. revised the assessments so as to bifurcate the dividend income in the ratio of business income and other income. Dividend allocable to business income was charged to tax at 10% whereas dividend allocated to other income was charged to tax at 20%. The assessee has challenged the orders of the I.A.C. for the assessment years 1991‑92 and. 1992‑93 again on the question of limitation whereas in the assessment years 1993‑94 and 1994‑95, the orders have been challenged on merits of the case.
4. It has been elaborated by the learned counsel that the original assessment for the assessment year 1988‑89 was framed on 11‑9‑1989 under section 62 of the 1979 Ordinance. It was also elaborated that the assessment for the assessment year 1989‑90 was made on 18‑6‑1990 whereas the assessment for the assessment year 1990‑91 was made on 27‑4‑1991. As against these dates of assessments, it was submitted, the rectification orders in all the three years have been passed on 27‑11‑1997, which is far beyond the limitation prescribed under section 156(4) of the 1979 Ordinance. The learned counsel has strongly disputed the observation of the learned C.I.T.(A) that the limitation has to be considered from the date of service of the order. The learned counsel has read out the provision of section 156(4) of the 1979 Ordinance, which clearly lays that no rectification order could be made after expiry period of four years from the date of the order sought to be amended.
5. In the assessment years 1991‑92 and 1992‑93, again the question of limitation has been agitated by the learned counsel. According to the learned counsel, the original assessment for the assessment year 1991‑92 was made on 29‑2‑1992 and for the assessment year 1992‑93, on 11‑4‑1993 whereas the orders under section 66‑A of the 1979 Ordinance have been passed on 28‑6‑1997 in both the years which is beyond the limitation prescribed under the provision of subsection (2) of section 66A of the 1979 Ordinance. The learned counsel has read the provision of subsection (2) of section 66‑A of the 1979 Ordinance, which again clearly stipulates that no order could be passed under section 66‑A of the 1979 Ordinance after expiry of four years from the date of order sought to be revised. The learned D.R. is unable to displace such submissions of the learned counsel.
6. In the assessment years 1993‑94 and 1994‑95, the learned counsel has strongly objected to the treatment of dividend income by the I.A.C. in view of the provisions of Article (VI) of the Agreement for Avoidance of Double Taxation with respect of taxes on income between the Government of Pakistan and Swiss Federal Council. As already said above, the assessee is holding 49% shares in Pakistani company. This company is engaged in the manufacture of Gaur Gum. The I.A.C. has reproduced the following extract of the Article of the said Convention in the impugned orders:‑‑‑
"ACCORDING TO ARTICLE VI
OF
AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION WITH RESPECT OF TAXES ON INCOME BETWEEN THE GOVERNMENT OF PAKISTAN AND THE SWISS FEDERAL COUNCIL
The Dividend paid by Pakistani Company to Swiss Company shall be taxed at the‑rate of Pakistan tax as:‑‑‑
(a) (i) 10 percent. when such dividends are derived from other income.
(ii) 20 percent. in the case of dividend from other income.
(b) The provisions of Article 59 of the Swiss Federal Defence Tax Act as in force on the 1st January, 1959, shall apply to the Swiss Company mentioned in sub‑paragraph (a) of this paragraph)."
7. The I.A.C. has formed a view that in view of said provision of the Article (VI), the dividend income could be bifurcated into two; categories; one out of the income from business and the other out of the other income. On this basis, he bifurcated the dividend and levied tax at 10% to the amount of part of the dividend allocable to business income and 20% to the part of the income allocated to the other income. The learned counsel has strongly disputed this treatment with the submission that such treatment could not be made for the purpose of taxation of dividend as the payer company of dividend is undisputedly an industrial undertaking. The learned counsel has submitted that the I.A.C. is not justified to apply a rate of 20% to the portion allocated by him to other income as, according to him, this was not the intention of the law. The learned counsel has relied on two decisions of the Tribunal to support his contention. One of these has been reported as 1998 PTD (Trib.) 1971 and the other has been recorded in I.T.A. No.536/KB of 1998‑99. In the case reported as 1998 PTD (Trib.) 1971 (supra), the learned Bench of the Tribunal has given its finding in the following manner:
"5. As it has rightly been pointed out by the learned C.I.T.(A) that there is no dispute about the fact that Messrs T... P... L... is an `Industrial undertaking in terms of definition given in clause (6) of the convention the only dispute by the Department is that income in the form of return on deposits and sources other than manufacturing activities should be categorized apart from income occurring to the company from manufacturing activity for the purpose of determining the nature of dividend income attributable thereto. This interpretation by the Department is in our view not correct. The income of `Industrial Undertaking' has to be taken as composite whole as there is no provision in clause (a)(i) of Article (VI) of the convention denoting any bifurcation of income from manufacturing/industrial and non‑industrial activity. The expression used is `dividend derived from the income of an Industries Undertaking in Pakistan.' In our view the only interpretation to be given to this expression is that the entire amount of dividend declared has to be treated as arising out of income from such 'Industrial Undertaking' and for these reasons we confirm the findings of the learned C.I.T.(A) that' while activities of the applicability of clause (6) of Article (VI) of the Treaty it will be activities of the assessee in its entirety (with regard to it being an Industrial Undertaking'. The taxation of the entire dividend income from T... P...I... @ 10% is accordingly confirmed."
8. The learned Bench has given a clear finding against the Revenue on the same issue and the learned D.R. is unable to distinguish the facts of the case. This case has also been followed in the other decision dated 10‑4‑1999 recorded in I.T.A. No.536/KB of 1998‑99 in the case of the other assessee.
9. We have considered the facts and submissions in this case. In the assessment years 1988‑89, 1989‑90 and 1990‑91, we find that the rectification orders have been passed by the Assessing Officer beyond the limitation prescribed in section 156(4) of the 1979 Ordinance. Hence, C such orders of the Assessing Officer are cancelled being barred by limitation. In assessment years 1991‑92 and 1992‑93, again we find that the I.A.C. has passed the orders after the expiry of limitation prescribed under section 66‑A(2) of the 1979 Ordinance. Hence, these two orders are also cancelled.
10. In the assessment years 1993‑94 and 1994‑95, we find that the Tribunal has already decided this issue in favour of the assessee. Hence, respectfully following such order of .the tribunal, we accept the assessee's appeals for the assessment years 1993‑94 and 1994‑95 as well end we cancel the orders of the I.A.C.
11. All the seven appeals of the assessee succeed accordingly.
M.A./547/Tax(Trib.) Appeals Accepted.