COMMISSIONER OF INCOMETAX, PESHAWAR ZONE, PESHAWAR vs Messrs SIEMEN A.G_

1. MUHAMMAD AFZAL ZULLAH, C.J.--This appeal through leave of the Court is directed against the decision of the Peshawar High Court in an Income Tax matter. Leave to appeal was granted for re- examination of the question dealt with in the impugned judgment: "whether, on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified iii finding that 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 not dividend within the meaning of the definition given in section 2 (6-A) of the Income Tax Act , 1922."

2. ' The High Court answered the question in the negative and it has been held that the disputed amount was "dividend" within the meaning of the term as defined in section 2(6-A) of the Income- tax Act .

3. ' The facts taken from the impugned judgment for the limited purpose of the present appeal and the short point involved therein are that in 1952 the Government of Pakistan, the respondent herein (M/s. Siemen A.G.) and Farid Sons Limited of Karachi; entered into an agreement for incorporation of a limited company under the title "Telephone Industries of Pakistan". It was, inter alia, provided by the agreement that 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 charge. The dividends were contingent on sufficient profits being made and were not otherwise guaranteed. With the expansion of the venture the need for capital was felt and the said parties amended the agreement in July, 1966. This time it was provided that the respondent assessee had agreed to contribute additional capital towards investment subject to the condition that a fair return would he granted on such investment. It was, therefore, stipulated that their investment under the first expansion programme will bear return of 4% per annum from 1st April, 1964 and all subsequent investments will bear a return of 5% per annum and further that the Government had guaranteed the performance by the Telephone Industries of Pakistan of its part of the agreement.

4. ' Accordingly, for the assessent year 1968-69 the respondent assessee company showed in its return a sum of Rs, 4,39,769 as income from the dividend. The Income Tax Officer held that this amount Was "interest" and not dividend. Assessee's appeal before the Income Tax Tribunal failed but on Income Tax Reference moved before the High Court the point of view of the assessee respondent having been upheld leave to appeal was granted; to examine the nature, meaning and connotation of the "return" which was guaranteed to the respondent/assessee through the aforementioned agreement.

5. ' Although the Income Tax Officer had treated the return as interest, the learned Deputy Attorney- General stated that he would stress the point that the return in this case, keeping in view its background, was in the nature of an "obligatory charge" and that being so it could not fall within the definition of "dividend".

6. ' Learned counsel has taken us through the history and the development of the venture and the pitfalls it suffered from time to time. It is absolutely clear that if the return in question had not been guaranteed in the manner provided in the agreement as profit to the respondent/assessee, the results might have been different. It is also an admitted position that the contracting parties were well aware of the terminology used in such like agreements. The argument of the learned counsel actually is based on this assumption. According to him there was nothing to prevent the use of the word "dividend", itself; instead of the word "return" being used. On our asking learned counsel took out the meaning of the word 'return' from Black's Law Dictionary, Ballentine's Law Dictionary and Income Tax Dictionary. He had to admit that return has generally been understood as profit in the nature of dividend and not in the nature of interest and/or obligatory charge. The learned counsel himself, representing the department, brought under consideration the intention of the parties; notwithstanding the hesitance on the part of the departmental authorities (when interpreting the fiscal statutes) to adopt underlying intention. We are of the view that even if he would not have relied on this aspect, in the peculiar circumstances and background of this case, the use of the word return in the agreement could have been interpreted and explained on the basis of the intention of the parties notwithstanding the afore stated legal position. It is not denied that there are exceptions to the said rule of interpretation. With this addition to the elaborate reasons and discussion by the High Court on the subject with reference to the then available case law, we agree with the conclusions reached in the impugned judgment by the High Court. This appeal is liable to be dismissed.

7. ' Learned counsel in the alternative repeated the same argument as was advanced in the High Court that the return having been guaranteed notwithstanding the Company running into losses, the return should be treated as interest. We do not agree with them. When questioned: what would be the source of the payment of so-called return which in reality, as already discussed, was dividend the learned counsel thought that the dividend put in reserve could always be utilised for payment of such return. Even if the reply is hypothetical, the fact remains that the decision of this case would not turn upon the source from which the payment of the return, which has been held to be dividend, would be made.

8. ' In this regard there is yet another important aspect which needs serious consideration. All the questions being examined in this case are relatable to interpretation of a Statute rather than admitted and direct statutory command. It was held in the case of Haji Nizam Khan by the Lahore High Court PLD 1976 10 Lah. 930; and subsequently affirmed in several legal fields, including criminal and fiscal, that so long as the existing statutes are not brought in conformity with Injunctions of Islam (Article 227 of the Constitution), their interpretation, application and enforcement wherein discretionary judicial elements are involved, only that course would be adopted which is in accord with the Islamic philosophy, its common law and jurisprudence. (See also the case of Muhammad Bashir PLD 1982 SC 139 and the case of Mian Aziz A. Shaikh PLD 1989 SC 613.

9. Coming to the specific Islamic Rule of interpretation as was briefly discussed in connection with another fiscal question in the case of Mian Aziz A. Shaikh a fundamenetal principle, is established that when two contracting parties agree to do something by a mutual valid contract or intend doing so, and it is not prohibited by Islam, a third party, like the Income Tax Department or for that matter the Court has no power to modify either the contract or with what they intended to do with it.

10. The most important relevant Injunctions of the Quran are contained amongst other in Chapter Maida Verse (1) and Chapter Alisra'a Verse (34)--- to the effect that the contracting parties are bound to fulfil their contracts. And that they would remain liable for any contraventions-- obviously both here and hereafter. There are very strong Commands and have been enforced in various legal fields. Recently a major contravention regarding the law of pre-emption was resolved by the Supreme Court and this principle was also applied -- See the case of Said Kamal Shah PLD 1986 Supreme Court 360 at 381 and 418 et seq. What was emphasized regarding prohibition against third party intervention in mutual contracts in the well-established Sunnah Injunction is that: People be left alone in their mutually agreed transactions; "so that they be blessed by Allah through free circulation of ( vii ) (wealth) amongst themselves: (Bokhari; Kitabul-BauaNo,3709; Abu Daud; Kitabul-Ajara No,3442). When parties by mutual free consent enter into a valid contract, then the third parties have no right to intervene either to frustrate the contract or to change its nature-- (Government of N.-W.F.P. v. Said Kamal Shah 360 at 442). The question relating to exceptions has been dealt with separately on the basis of Islamic principles of Zaroorat, Zarar, public interest as such, State policy, State necessity etc. In the case of Land Reforms (Qazilbash Waqf v. Chief Land Commissioner, PLD 1990 SC 99).

11. ' As a necessary conclusion drawn from the foregoing, it can be safely held in this case also that on the touchstone of Islamic Rules of interpretation, which unless excluded otherwise, under the present Constitutional set up the Courts are bound to apply in preference to the contrary so called accepted rules of interpretation under the other jurisprudential concepts (and the fiscal laws are no exception in this behalf), the income tax authorities cannot change the nature of the contract intended by the parties thereto, under the pretext that the rule of interpretation of a fiscal law in this behalf, is different.

12. ' For all these reasons and in the light of the foregoing discussion this appeal is dismissed. There shall be no order as to costs.