COMMISSIONER OF INCOME-TAX (CENTRAL), KARACHI Versus MESSRS PAKISTAN INSURANCE CORPORATION
ORDER
FAKHRUDDIN G. EBRAHIM, J . -- The facts giving rise to these applications under section 66 (1) of the Income‑tax Act, 1922 are that in each case respon dent held specified number of preference shares in the Colony Textile Mills Ltd which the company redeemed in terms of its Articles and paid to the respondent its face value, which amount was sought to be excluded from the respondent's taxable income but was included by the Income‑tax Officer on the ground that such receipt was "dividend" within the meaning of the expression defined under section 2 (6‑A) of the Income‑tax Act. In appeal the Assistant Appellate Commissioner reversed this order holding that it was a case of return of the share‑holder's investment which could not be termed as income in his hand.
2. The matter went up before the Income‑tax Appellate Tribunal, Karachi. The Tribunal dismissed the appeal, in view of its earlier decision in I. T. A. No. 1933 of 1967‑68, holding as follows: ‑
"Although these receipts were covered by the definition of the word `dividends' contained in section 2 (6‑A) (d) yet the same are not taxable in the hands of the respondent as the fictional dividends had been retained by the company itself and the respondent was in receipt of the return of its original capital."
In the case relied upon the Tribunal after coming to the conclusion that the assessee s case was not covered by the exemption contained in proviso to section 2 (6-A)(d) went on to‑observe as follows: ‑
"The question that now engages our attention is the nature of these receipts so far as the assessee respondent is concerned. It is clearly a fictional liability and therefore, there is no escape from payment of tax. We are, fortified in this view by a decision reported in (1963) 48 I T R 288. However, we find force in the argument that even if the present distribution can be termed as dividend within the meaning of section 2 (6‑A) (d) it is not taxable in the hands of the assessee respon dent who has received nothing but only his capital invested. The so -called dividends, on distribution have been retained by the Company itself and, therefore, the same should be taxed as the dividend income of the distributed company."
3. By the present application the Department submits that the following question of law arises out of the Tribunal's order for the consideration of this Court which this Court may consider and answer: ‑
"Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the redemption value of Rs. 105,600 relating to preference shares of Messrs Colony Textile Mites Ltd, received by the assessee, who under Article 176 of the Corporation's Articles of Association was also entitled to participate in the surplus it the event of winding up though covered by the definition of dividend in section 1 (6‑A) (d) of the Income‑tax Act, was not taxable in the hand of the assessee?"
4. Mr. Mansoor Ahmed Khan, the learned counsel for the Department argued that the Tribunal having come to the conclusion that the receipts by the assessee were dividends within the meaning of the expression defined in the Income‑tax Act ought to have allowed the appeal and not gone into the extraneous question of liability, if any, of the Colony Textile Mills Ltd.
5. Mr. Ali Athar for respondents in I. T. C. Nos. 46/1971, 53 to 54 of 1971 and Mr. Iqbal Naim Pasha for respondents in I. T. C. No. 52 of 1971 strongly urged that the view taken by the Tribunal that the said receipts were dividends was wholly erroneous. Section 2 (6‑A) (d) reads as follows: ‑
"Section 2.
(6‑A) `dividend' includes‑
(d) any distribution by a company on the reduction of its capital to the extent to which the Company possesses accumulated profits, whether such accumulated profits have been capitalised or not : and
Provided that `dividend' does not include a distribution in respect of any share issued for full cash consideration which is not entitled in the event of liquidation to participate in the surplus assets when such distri bution is made in accordance with sub‑clause (c) or (d).
6. The two‑fold contention raised on behalf of the assessees is firstly that it was not a case of distribution of profits at all and, therefore, the receipt was not dividend and in the alternative the assessee's case was covered by the proviso, for the respondents as preference share‑holders were, in the event of liquidation under the Articles of the Company, not entitled to participate in its surplus assets.
7. Mr. Ali Athar and Mr. Iqbal Naim Pasha, the learned counsel for the respondents contended that the preference shares are redeemable under the Articles at the option of the Company and by redeeming the shares in question all that the company has done is to repay to the preference share holders their respective capital and there is no question of these share‑holders having received any profits, while to be dividend in terms of the definition reproduced hereinabove there has to be distribution by the company of its accumulative profits whether or not such profits, may have been capitalised by the company. The learned counsel argued that the aforesaid definition of dividend is in fact consonant with the recognised principle in Income‑tax Law that income is taxable and that which is not income is outside the purview of taxation. It was argued that nothing has "come in" and, therefore, no income, for all that has happened is that an advance made by the preference share‑holders to the company on specified conditions has beer, returned to them. The definition itself envisages return of profits to the shareholders in any form whatsoever which is deemed to be dividend in law and since in the present case the return is no more than what the respondent had invested in the company it does not fall within the definition of dividend. In this view of the matter it is unnecessary to examine the question whether or not the respondents case fails within the proviso to clause (d) of subsection 2 (6‑A) defining dividend. We will, therefore, reframe the question as follows and answer it in the negative: ‑
"Whether in the facts and circumstances of the case the Tribunal was justified in holding that the redemption value relating to the preference shares of Messrs Colony Textile Mills Ltd., received by the assessee was dividend within the meaning of the expression defined in section 2 (6‑A) (d) or that it is taxable in the hands of the respondent assessee?"
Question answered in negative.