COMMISSIONER INLAND REVENUE (ZONE-I) LARGE TAX PAYER OFFICE, ISLAMABAD Versus SAUDI PAK INDUSTRIAL AGRICULTURAL INVESTMENT COMPANY PRIVATE LIMITED, ISLAMABAD

AQEEL AHMED ABBASI, J.--- The above civil petitions for leave to appeal arise out of a common judgment dated 19.09.2024 passed by a Division Bench of Islamabad High Court, Islamabad in connected references including I.T.R No.85 of 2015 titled Commissioner Inland Revenue v. Messrs Saudi Pak Industrial Agricultural Investment Company Pvt. Ltd . Through impugned combined judgment all the references have been disposed of while deciding two questions framed in above I.T.Rs which read as follows:-

(In I.T.Rs. Nos. 84 to 86 of 2015)

Whether in facts and in the circumstances of the case, the learned Tribunal was justified to hold that "Dividend Income" received by the Taxpayer is chargeable to normal tax at the rate of 35% in view of Section 8 of the Income Tax Ordinance, 2001 whereby tax deducted on dividend received by company is not final tax liability?

(In I.T.Rs. Nos. 190, 191 and 192 of 2015)

The above proposed question of law framed in I.T.R No. 84-86 of 2015 has been answered in affirmative by the Islamabad High Court through impugned judgment whereby the order of the Income Tax Appellate Tribunal ( ITAT ) on this issue has been confirmed, against the department and in favour of the assessee/ tax payer whereas the question proposed in I.T.R No. 190-192 of 2015 has been answered in negative in favour of the tax payer and against the department. Therefore, the department being aggrieved by such decision has approached this Court through instant Civil Petitions for Leave to Appeal with the prayer that the proposed question of law may be answered in favour of the department and against the tax payer while setting aside the judgment of the High Court as well as the Tribunal in this regard.

2.Learned Counsel for the petitioner has argued that the Tribunal and learned Division Bench of High Court have erred in law and fact while treating the dividend income received by the tax payer company to be assessable under Section 5 of Income Tax Ordinance 2001 ( ITO, 2001 ) chargeable to tax @10 % being final tax liability and not covered by Section 39 of the ITO, 2001 chargeable to normal tax @ 35%. The learned counsel has contended that the tax deducted on dividend received by the company is not final tax liability in terms of Section 169 of the ITO, 2001, therefore, the income received under this head has to be assessed under Section 39 of the ITO, 2001 which relates to income from other sources hence chargeable to normal tax @35%. Learned counsel for the petitioner has also referred to the proviso added to Section 8(1)(e)(ii) through Finance Act 2007, and argued that in view of such proviso, the provisions of Section 8 were not applicable to dividend received by a company. According to learned counsel, in view of such proviso, the application of Section 8 (a), whereby tax imposed under Section 5 is to be treated as separate block of income subject to final tax regime is excluded in respect of dividend income of a company. While concluding his submissions, the learned counsel has argued that reliance placed by the Division Bench of Islamabad High Court in the case of Fawad Ahmad Mukhtar and others v. Commissioner Inland Revenue (Zone II), Regional Tax Office, Multan (2022 SCMR 426) is misplaced as the facts of the instant case are different from the facts of the afore cited judgment. It has prayed that the impugned judgment of the High Court may be set aside while granting leave and the legal issues may be decided in favour of department and against the tax payer.

3.We have heard the learned counsel for the petitioner, perused the record and the impugned judgment passed by the Islamabad High Court, Islamabad and have also examined the provisions of Sections 5, 8, and 39 of ITO, 2001 with the assistance of learned counsel for the petitioner.

4.Since the facts are not in dispute between the parties, whereas, a legal issue relating to scope and application of Sections 5 and 39 of the ITO, 2001 is involved in the instant cases, we need not narrate the facts of the cases in these CPLAs for the sake of brevity, and would dilate upon the legal controversy involved in these petitions for leave to appeal. It will be advantageous to reproduce the relevant provisions of law i.e. Sections 5, 8, 39 of ITO, 2001, in order to ascertain the intent of the legislature regarding their application on the facts and circumstances of the cases in hand and further to determine as to whether the dividend received by the tax payer in the instant cases is assessable to tax under Section 5 or Section 39 of ITO,2001.

5.Tax on dividends. (1) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division III of Part I of the First Schedule, on every person who receives a dividend from a company [or treated as dividend under clause (19) of section 2].

8.General Provisions relating to taxes imposed under sections [5, 5A, 5AA, 6,7,7A,7B and 7E]. Subject to this Ordinance, the tax imposed under Sections 4 [5, 5A, 5AA, 6, 6A,] 7, 7A, 7B and 7E] shall be a final tax on the amount in respect of which the tax is imposed and--

or

Provided that the provisions of this section shall not apply to dividend received by a company."

(Note: Inserted through Finance Act, 2007 and omitted through Finance Act, 2013)

39. Income from other sources. (1) Income of every kind received by a person in a tax year, 1[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:

5. From perusal of the provisions of Section 5 it is clear that a charge has been created on every person who receives dividend from a company or treated as dividend under clause (19) of Section 2 of the ITO, 2001. It has been further noted that a separate rate of tax is specified in Division III of Part I of the first schedule to the ITO, 2001, hence such dividend income is not subject to be tax at normal rates as applicable in the case of different heads of income i.e. Income from salary, Income from property, Income from business, Capital gains, Capital gains on disposal of securities and Income from other sources, as provided under Sections 12, 15, 18, 37, 37 A and 39 of the ITO, 2001 respectively. Under the scheme of ITO, 2001 the provisions relating to charge of tax are contained in Section 4, Chapter II, whereas, Section 4 (1) creates a charge of tax on taxable income for each tax year, at the rate or rates specified in Division I or II of Part I of the First Schedule, as the case may be, on every person who has taxable income for a particular year. Section 4 (2) provides the mechanism for computing the taxable income of a tax payer by applying the rate or rates of tax applicable to the taxable income of the tax payer under this Ordinance. The above provisions show that tax has been imposed by creating a charge upon a tax payer on taxable income from different heads of income as referred to hereinabove, whereas, the rates of tax have been specified in Division I or II of Part I of the First Schedule of the ITO, 2001. The charge created under Section 4 is subject to assessment under normal tax regime and computation of tax thereon is subject to a normal tax rate in respect of income derived by a tax payer from different heads of income as referred to hereinabove. However, from perusal of the provisions of Section 5, it has been noted that a separate charge has been created whereby tax has been imposed on every person who receives a dividend from a company at the rate as specified in Division III of Part I of the First Schedule of ITO, 2001. A separate mechanism is provided for the purposes of computing the dividend by applying the relevant rate of tax to the gross amount of the dividend under Division III of the Part I of the First Schedule of ITO, 2001. We feel no hesitation to observe that the charge created under Section 4 in respect of taxable income derived from different heads of income as referred to hereinabove, and the mechanism of computing the taxable income is distinct from the charge created under Section 5 in respect of taxable income derived from dividends. Therefore, any overlapping in respect of charge or computation of income covered under Section 4 and Section 5 of the ITO, 2001 would create an anomaly. Any attempt to bring the separate charge and computation of income from dividend under Section 5 of ITO, 2001, under the domain of the provisions of Section 4 of ITO, 2001, while treating the dividend income as income from other sources in terms of Section 39 of ITO, 2001 would amount to reducing the provisions of Section 5 of ITO, 2001 as redundant. It is a well settled principle of construction of interpretation of statutes that redundancy cannot be attributed to any statutory provision of law and in case of any discrepancy, the rule of harmonious construction must be applied to reconcile the provisions rather than rendering any of them inoperative. Reliance in this regard can be placed on a recent judgment of this Court in the case of Directorate of Intelligence and Investigation-FBR, through its Director and others v. Taj International (Pvt) Ltd and others (2025 SCMR 67) . It will not be out of place to observe that under Section 39 of the ITO, 2001, only such kind of income received by a tax payer in a tax year is assessable as income from other sources, if it is not included in any other head. However, the legislature in its wisdom while treating the dividend as a separate block of income has created a separate charge on such dividend and has also provided a separate rate of tax, which is not the case in respect of income assessable under different heads of income under ITO, 2001 including the residuary head of income i.e. income of other sources covered under Section 39 of the ITO, 2001. The charging provisions in a taxing statute are regarded as substantive provisions, in contrast to machinery provisions whereby the mechanism is provided for assessment, computation and recovery of tax liability. By now it is well-established principle of construction of a taxing statute that the charging provisions are construed strictly and in case of any ambiguity the benefit is extended to the tax payer and the burden lies on the tax authorities to bring a particular income of a person within the domain of charging provisions. Reliance in this regard can be placed on judgments of this Court in the cases of (i) Commissioner of Income Tax v. Messrs Gilani Transport (2017 PTD 1540 SC) and (ii) Commissioner of Income Tax v. Messrs Eli Lilly Pakistan (Pvt.) Ltd (2009 SCMR 1279) . Similarly, in case a separate charging provision specifies any income to be charged at a particular rate of tax through a separate mechanism for its taxation while applying different rate of tax provided within the said charging provision for its computation, the said provisions are given strict construction and preference over other provisions of law. The provisions for taxation and computation of income not covered under such charging provision cannot be invoked for the purposes of charge or computation of income. In the erstwhile, law of Income Tax Ordinance, 1979 ( ITO, 1979 ) , Section 80C was introduced through Finance Act, 1991 whereby a separate charge was created in respect of gross receipts of an importer, supplier and contractor and a different tax rate was specified within the same charging provisions and the gross receipts of an assessee during a particular income year through such imports, supplies and contracts executed in a tax year. Such receipts were presumed to be income of the tax year of an Assessee and the same was treated as a separate block of income, whereas, the tax paid/deducted thereon was treated as final tax liability, and the other charging provisions as well as provisions relating to computation of income and the rates specified therein, were not attracted in the case of income covered under Section 80 C of the ITO, 1979. Reliance in this regard can be placed on a five-member Bench judgment of this Court in the case of Elahi Cotton Mills Limited v. Federation of Pakistan (PLD 1997 SC 582) wherein, it has been held that under Sections 80C and 80CC the imposition of presumptive tax is in substitution of the normal method of levy and recovery of the income-tax. While defining the scope and application of Section 80 C it was further held that the object of 80 C seems to eliminate the hassle of filing of returns by an assessee and going through the normal procedure and culminating in framing of an assessment order and to eliminate the involvement, to the minimum extent, of the income tax department. The concept of providing a separate charge and mechanism computation of income and tax thereon, in addition to the normal charging provision and its computation as well as rate of tax is not new, as evident from hereinabove provisions of repealed ITO, 1979. We are of the considered opinion that the provisions of Section 5 of the ITO, 2001 also provide for creation of separate charge as well as mechanism of computation of tax @10%, as a separate block of income covered under presumptive tax regime (PTR) distinct from the charge created under Section 4 of the ITO, 2001 and the income derived under various heads of income as referred to hereinabove which are covered under the normal tax regime (NTR),wherein the tax paid is not considered as final discharge of the liability of an Assessee, whereas, the tax paid/deducted on the gross receipts covered under Section 5 of the ITO, 2001 is final discharge of liability.

6. We have examined the case of Fawad Ahmad supra relied upon by the Division Bench of the Islamabad High Court, this Court in the afore mentioned case has already examined the scope and application of provisions of Sections 4, 5, 8 and 39 of the ITO, 2001 and has held that by virtue of subsections (4) and (5) of Section 4 of ITO, 2001, dividend income constitutes a separate block of income which is solely liable to be taxed under Section 5 of ITO, 2001. Consequently, the same cannot be taxed as income from other sources covered under Section 39 of the ITO, 2001, nor the same can be charged to tax at normal corporate rate @35%. In Paragraph 11 of the said judgment, this Court unequivocally clarified the harmonious interplay between Sections 5 and 39 of ITO, 2001, establishing that Section 5 of ITO, 2001 is the primary charging provision for all dividends, whereas Section 39 of ITO,2001 serves as a residual provision. This means that the Tax Authorities can only resort to Section 39 of ITO, 2001 if a dividend somehow, fails to fit within the scope of Section 5 of ITO, 2001. Applying this settled fundamental test, the corporate dividends received by the respondents in the instant case perfectly fit-in the description of dividends under the Ordinance. Consequently, the same must be charged under the specific provisions of Section 5, and the department cannot bypass this primary charging section to apply a higher rate of tax under Section 39 of ITO, 2001. Learned counsel for the petitioner has attempted to distinguish the case of Fawad Ahmad supra from instant case by arguing that the proviso to Section 8(e)(ii) of the ITO, 2001 introduced through Finance Act, 2007, excludes the dividend income from the ambit of final taxation in the corporate cases whereas, in the case of Fawad Ahmad supra the matter relates to non-corporate assessee. Such contention of the learned counsel for the petitioner is misconceived as the prime controversy in the case of Fawad Ahmad supra as well as the instant case relates to treatment/categorization of dividend income in respect of which a separate charge as well as the mechanism of computation and a different tax rate (@10%) has been provided under Section 5 of the ITO, 2001. Furthermore, the departments emphasis given on the proviso added to Section 8(e)(ii) of the ITO, 2001 introduced through Finance Act, 2007 whereby, according to learned counsel for the petitioner, dividend received by a company was excluded from the purview of Section 8 of the ITO, 2001, is equally misconceived for the reason that Section 8 is merely a machinery provision, and by settled principles of interpretation cannot replace or dilute the effect of a substantive charging provision. Section 5 of the ITO, 2001 not only provides for a separate charge in respect of dividend received from a company or treated as dividend under clause (19) of Section 2 but also provides a separate mechanism for computation of tax liability by applying the relevant rate of tax to the gross amount of the dividend @ 10% under Division III Part I of the First Schedule of ITO, 2001. Therefore, the machinery provisions cannot be engineered to deny the taxpayers benefit of separate/ specific tax charging regime under Section 5 of ITO, 2001.

7. In view of herein above-mentioned facts and circumstances of this case, we do not find any substance in the above Civil Petitions for Leave to Appeal, as the questions proposed are substantially covered by the ratio laid down by this Court in the case of Fawad Ahmad supra . Consequently, the question framed in I.T.R. Nos. 84 to 86 of 2015 regarding the applicability of Section 5 and the 10% tax rate is answered in the affirmative , while questions framed in I.T.R Nos. 190-192 of 2015 regarding applicability of 35% normal corporate tax is answered in negative . Both the questions proposed in the above petitions for leave to appeal are therefore, decided in the aforesaid terms against the petitioner-department and in favour of the respondents-tax payers. Accordingly, these Civil Petitions being devoid of any merits, are hereby dismissed, and leave refused.

MH/C-4/SC Petition dismissed.