1. These are two cross-appeals; one by the Taxpayer as well as one by the Department against the combined order dated 21-4-2010 passed by the learned CIR(A) for the tax year 2008 on the following grounds:-- Assessee's Appeals:
(1) The learned Commissioner Inland Revenue (A-I) has erred in not adjudicating on the Appellant's ground of appeal pertaining to the Taxation Officer/Additional Commissioner of Income Tax amending the Appellant's assessm ent under subsection (5A) of section 122 of the Income Tax Ordinance, 2001 without jurisdiction.
(2) The learned Commissioner Inland Revenue (A-I) has also erred in upholding disallowing the appellant's claim for exchange loss.
(3) The learned Commissioner Inland Revenue (A-1) has also erred in not adjudicating upon the appellant's additional ground of appeal given as under; "That prejudice the learned Taxation Officer/Additional Commissioner of Income Tax (Audit-I), LTU, Islamabad, was not justified in not prorating the total taxable income in the ratio of normal and presumptive income."
2. Departmental appeal
(1) That the learned CIR(A) was not justified in deleting the tax levied on dividend income as the same was rightly taxed @ 35% consequent to an amendment made in section 8 of the Income Tax Ordinance, 2001 through Finance Act, 2007
2. Brief facts leading to this appeal are that the taxpayer, a Public Limited Company is engaged in the manufacturing and sale of fertilizer in Pakistan. The taxpayer filed its return for the Tax Year, 2008, whereby, inter alia, dividend income was offered to tax @ 10% under section 5 of the Income Tax Ordinance, 2001 and exchange loss was claimed as allowable expenditure. The Additional Commissioner of Income Tax (Audit-I) LTU, Islamabad after confronting the taxpayer on the issue of taxation of dividend and exchange loss proceeded to amend the taxpayer's deemed assessm ent under section 122(5A) of the Income Tax Ordinance, 2001 considering the same erroneous insofar as prejudicial to the interest of Revenue. Consequently, a show-cause notice under section 122(9) read with section 122(5A) bearing No, 183/Audit dated 11-2-2009 was issued to the taxpayer company. In reply, the learned ARs of the taxpayer's company Messrs S. M. Masood and Co. Chartered Accountants vide their Letter No, IT/2008-2009/F-2(1)/642, IT/2008-2009/F- 2(1)/643 dated 23-2-2009, IT/2008-2009/F-2(1)/679 dated 28-2-2009 and IT/2008-2009/F- 2(1)/680 dated 2-3-2009 submitted the replies which were found to be unsatisfactory and amended order was passed taxing dividend income of Rs, 712,849,494 for the period July, 2007 to December, 2007 @ 35% and subjected to tax exchange loss of Rs, 35,556,823.
3. The taxpayer filed appeal before the First Appellate Authority whereby tax on dividend income was deleted. However, tax on exchange loss was upheld.
4. The department has filed appeal against the deletion of demand on account of dividend income whereas the taxpayer filed appeal against the taxation of exchange loss upheld by first appellate authority. The taxpayer has also agitated the order of learned CIR(A) on the issue of assumption of jurisdiction by Additional Commissioner and proration of income which was not adjudicated by the First Appellate Authority.
5. Learned AR has contended that appellate order of the CIR (Appeals) whereby the related demand was deleted, raised by the AC (Audit) by subjecting to tax @ 35% dividend income Rs, 712,849,494 instead of 10% for the period July, 2007 to December 2007 is in accordance with the provisions of law.
3. Learned AR has stated that through Finance Act, 2007 amendment was made in section 8, General provisions relating to taxes imposed under sections 5, 6 and 7 whereby a proviso was added with the words, "provided that the provision shall not apply to dividend received by a company". On the basis of said amendment, the AC (Audit) subjected to tax the dividend income received by the company at normal rate of taxation @ 35 % instead of 10 % declared by the company.
4. Learned AR states that as laid down in subsection (5) of section 4 which is the charging section, section 8 is related to the computation of taxable income and not with the charging of tax as contended by AC (Audit) in the amended order dated March 11, 2009. Therefore, after the amendment in section 8 through Finance Act, 2007, now the dividend income will also be subject to deduction of deductible allowances i,e, deduction on account of WorkersWelfare Fund.
5. Learned AR has contended that for the purpose of charge of tax, the legislature have used words "imposed" in definition of "tax" given in sub-clause (63) of section 2, charging sections 4, tax on taxable income, section 5, tax on dividends, and in Division III of Part-I of First Schedule, rate of dividend tax. In subsection (2) of section 5, it is laid down that tax imposed shall be computed by applying the rate of tax to the gross amount of the dividend income. Since the rate applicable to dividend income is 10% as per Division III of Part-I of First Schedule, the same has to be applied in conformity with charging section 5 to compute the tax liability on dividend income.
6. He has submitted that In section 5, tax on dividends, the legislature have used the word "person" which is defined in clause (42) of section 2 means a person as defined in section 80 whereas in section 80, person includes a company as well. Accordingly, the contention of the AC (Audit) that the company has been excluded from the provisions of section 5 has no legs to stand upon in the eyes of law. This contention also find support from the provisions of section 150, dividends, wherein for the words "resident company" the word "person" was substituted through Finance Act, 2009 which was explained by the F.B.R. Vide Circular No, 3 of 2009 dated July 17, 2009. In the said circular it is clarified by the F.B.R. That it includes both resident and non-resident company which are required to deduct tax at the time of making payment of dividends.
7. Learned AR's contention is that section 5, before amendment through Finance Act, 2003 dividends received from resident company was only subject to tax at the rate of 10% since at that time the legislature have used the words "a tax shall be imposed @ specified in Division III of Part-I of the First Schedule, on every person received a dividend from a resident Company". The word resident was omitted from section 5 through Finance Act, 2003 meaning thereby that from tax year commencing on or after July 1, 2003 the same rate of tax @ 10% to dividend received from a resident and a non-resident Company would be applicable. The same situation prevails after amendment in section 8 through Finance Act, 2007 since word "Company" is still appearing in that section.
8. He states that the section 4 is the main charging section of the Ordinance and subsection (4) thereof provides that certain classes of income may be subject to separate taxation which includes tax on dividends under section 5 whereas subsection (2) of section 94 provides the dividend paid by the resident company shall be taxable in accordance with section 5. Since in case of company the dividends were paid by the resident companies, therefore the company's dividend income is chargeable to tax in accordance with section 5 and not under section 39, income from other sources as held by the AC (Audit) in the amended order.
9. He has contended that under the provisions of section 94(3) only dividend paid by a non-resident company can be charged to tax under the head of "Income from Business or Income from Other Sources" as the case may be. However, after the amendment in section 5 through Finance Act, 2003 whereby from the words "resident company" in subsection (1) of section 5, the word "resident" was omitted, the dividend income paid by a non-resident company also became subject to tax under section 5 @ 10%. This contention is further fortified by amendment in subsection (1) of section 5 through Finance Act, 2009 whereby the words "or treated as dividend under clause (19) of section 2" were inserted in the section 5. After this amendment, there is no room left to contend by the Department that dividend received by a resident company will not be subject to tax under section 5 when there is specifically provided in subsection(2) of section 94 that the dividend paid by a resident company shall be taxable in accordance with section 5.
10. Learned AR has contended, that the F.B.R. Vide Circular No 5 of 2008 dated July 5th, 2008 confirmed that dividend received from a Company is subject to tax @ 10% while clarifying amendment in section 2(19)(f) through Finance Act, 2008 whereby remittance of after tax profit of a branch of a foreign company operating in Pakistan was included in the definition of dividend income under clause 19 of section 2. The F.B.R. Again vide Circular No,3 of 2009 dated July 17, 2009 while clarifying taxation of branch profit as dividend through Finance Act, 2009 again confirmed the dividend income is subject to tax @ 10% received by a Company. F.B.R. Vide circular letter C.No,1 (22) Tax- Base/2009-35860-R dated February 16, 2010 and circular letter C.No,1(22) Tax-Base/2009 April 16, 2010 confirmed that the dividend income received by the company from a resident company shall be taxable under section 5 @ 10%. Learned AR's contention is that the legislature in certain other cases has specifically provided reduced rate of taxation on dividend income received by companies in spite of that income was chargeable to tax under the head "Income from business".
11. Reference is made to section 100A of the Ordinance inserted through Finance Act, 2007. The said section read with the Seventh Schedule provides that income, profit and gains of a banking Company and tax payable thereon shall be chargeable to tax under the head "Income from business" and tax payable thereon shall be computed at the rate applicable in Division II of Part-I of First Schedule. However, in respect of income under the head inter alia "dividends" it is laid down that the same will be subject to tax at the rate of 10%. It is settled law that charging provisions which provide charge and manner of imposing tax is strictly construed in favor of the subject.
12. Reference is also made to a judgment of Supreme Court reported 1996 SCM R 1470 whereby this legal position is whereby this legal position is retreated in para 8 of the said judgment with the remarks "it is well-settled that when the language of a fiscal statute is ambiguous and several interpretations of the same provisions are possible, the doubt should be resolved in favour of the citizens".
13. He has contended that the dividend income even chargeable to tax under the head "income from other sources" subjected to tax at reduced rate of taxation in the past under the corresponding provisions of Income Tax Ordinance, 1979. Reference is made to the judgment of the High Court cited as 1996 PTD 276 whereby it was held that heads of income have relevancy only in regard to computation of total income and not to application of rates in the schedule.
14. Tax on dividends income remained as separate block of income under Income Tax Ordinance 1979 and subject to tax at reduced rates. Reference is made to Part-V of First Schedule to the Income Tax Ordinance 1979. Taxation of dividends at reduced rate is a beneficial provision of law which is to be interpreted liberally in favour of taxpayer unless the legislature specifically provides that such benefit will not be available to them as done by the legislature in case of insurance companies in Part-V of First Schedule of 1979 Ordinance. Reliance was placed to a judgment of Supreme Court of Pakistan reported as PLD 1997 SC 700 = 1997 PTD 1693 whereby honourable Supreme Court held that if any benefit in rate of tax is provided on any kind of income, general insurance companies cannot be deprived of such benefit in the absence of any Provision that such benefit will not be extended to such companies.
15. Learned AR states that the AC (Audit) vide amended order disallowed exchange of Rs, 35,556,823 on the plea that the same is notional loss which in no way can be allowed as deduction form its income. It is submitted that appellate order of the CIR (Appeals) whereby the disallowance of exchange loss of Rs, 35,556,823 made by the AC (Audit) was upheld is not in accordance with the provisions of law specially in the context that the said exchange loss was not claimed by the Company in the tax year 2009 wherein the said exchange loss was realized and the AC (Audit) disallowed the same in Tax Year 2009 in the subsequent order dated March 29, 2010.
16. The learned AR contends that accounts of the Company are prepared on mercantile system, therefore any expenditure incurred in regular exercise of business though not paid is an allowable expenditure. It is further submitted that the Company in the past claimed, exchange losses and exchange gains on the basis of mercantile system of accounting and this treatment was accepted by the Department. This method of accounting also accepted by the Courts if consistently followed. Reference is made to judgment of the Tribunal reported as 2008 PTD (Trib.) 1040. In accounts based on mercantile system of accounting, the Company has not claimed the unrealized exchange loss of Rs, 35,556,823 for tax year, 2008 in the tax year, 2009 in spite of the fact that the same was realized in the tax year, 2009 as is apparent from the following:-- Rupees Exchange loss realized during the year ended December 31, 2008 relevant to tax year, 2009103,626,833 Amount booked in the accounts for year ended December 31, 2007 being unrealized loss35,556,823 Exchange loss claimed in the return of income for68,070,010 the tax year, 2009 Since the company has not claimed exchange loss of Rs,35,556,823 pertaining to tax year, 2008 in the year, 2009 in spite of the fact that same was realized in tax year, 2009 and the judgment of Honourable Tribunal reported 2008 PTD (Trib.) 1040. The same may be allowed in the tax year, 2008.
17. It is submitted that the CIR (Appeals) has not decided the contention of the company that AC (Audit) has no jurisdiction to invoke the provisions of section 122 (5A) of Ordinance in Company's case in present facts and circumstances. It was also submitted before CIR (Appeals) by placing reliance on the judgment of the honourable Income Tax Appellate Tribunal (Tribunal) reported as [2001 PTD (Trib.) 2919] that where two interpretations of a provision of law are possible and the Assessing Officer has taken a view with which the Commissioner does not agree, the assessment order cannot be treated as an erroneous and prejudicial to the interest of Revenue. If for the sake of arguments it is admitted that dividend income is subject to tax @ 35 % instead of 10 % as held by the AC (Audit) in the order dated March 11, 2009, the same cannot be treated the erroneous and prejudicial to the interest of revenue keeping in view the fact that F.B.R. Vide Circular letter dated February 16, 2010 has already expressed the opinion that the dividend income paid by a resident company will be chargeable to tax a 10 %.
18. Similarly in case of exchange loss disallowed by the AC (Audit), in view of the judgment of honourable Tribunal reported as (2008) 97 Tax 417 (Trib), the tribunal upheld the claim of exchange loss on the basis of mercantile system of accounting, it cannot be said that there are not two opinions on this issue. In this way on this as well the assessment order cannot be held erroneous and prejudicial to the interest of Revenue.
19. In connection with ground of appeal that the learned Commissioner Inland Revenue (Appeals-I) has further erred in not adjudicating upon the Appellant's following additional ground of appeal.
20. Learned AR submits that in the appellate order, the CIR (Appeals) has not decided the additional ground of appeal of the company on issue of prorating total tax income in the ratio of normal and presumptive income. Which is against the provisions of law.
21. The DR contends that the learned ARs are misinterpreting the contents of F.B.R's Circular as aforesaid. In fact, apart from ousting the dividend income of the companies from the presumptive tax regime (PTR) the rate of withholding tax on the dividend income after 1-7-2007 has been enhanced from 5% to 10%. This Circular in no way says that after 1-7-2007, the dividend income and "chargeability of Tax" thereon are two different subjects in the Income Tax Ordinance, 2001 for example before the advent of the PTR insofar as it relates to the property income, the rental income of the taxpayers concerned was required to be subjected to tax at the normal rate of tax whereas the payer at the "Rent" was required to withhold there from the tax at source at the rate of 5%.
22. Learned DR has contended that the Commissioner Inland Revenue (Appeals-1) vide appellate order deleted the demand raised by the AC (Audit) without any justification. Learned DR has supported the order of first appellate authority on the issue of disallowance of exchange loss.
23. After hearing the arguments of both the rival parties considering the facts of the case and perusal of the record, the appeal is disposed of as under:-- Taxation of Dividend Income The department has contested deletion of demand by CIR(A) raised by the Additional Commissioner in the amended order on the dividend income received by the Company from resident companies which as per DR is subject to tax @ 35% against the claim of AR that the same is subject to tax 10%. The controversy between the Company and the Department resolves around whether dividend income of the Company is subject to tax under section 5 or not. If it is subject to tax under section 5 the rate of tax would be 10% and if the same is chargeable under section 39, the rate of tax would be 35%. As per learned AR the Company's dividend income which has been received from resident companies is subject to tax under section 5 read with section 94(2) whereas DR is of the view that the same is chargeable to tax under section 39 as income from other sources @ 35%. Before proceedings further it would be worthwhile to refer the amended order which supports the departmental contention and CIR(A) order which supports the AR contention.
24. On perusal of the order of CIR(A), the arguments of learned DR and AR, it is found that arguments of AR carry weight that CIR(A) has correctly deleted the demand of dividend income raised in the amended order by charging rate of tax at the rate of 35 %. In this connection reference to the following provisions of the law would be appropriate which support contentions of the A.R.
25. Subsection (2) of section 94 governs the taxation of resident companies whereas subsection (3) of section 94 deals with the taxations of non-resident companies reproduced below:-- "(94) Principles of taxation of companies.---(1) A company shall be liable to tax separately from its shareholders.
(2) A dividend paid by a resident company shall be taxable in accordance with section 5.
(3) A dividend paid by a non-resident company to a resident person shall be chargeable to tax under the head "Income from Business", or "Income from other Sources", as the case may be, unless the dividend is exempt from tax."
26. As is evident from above that under section 94(2) dividend paid by resident company shall be taxable in accordance with section 5 whereas under section 94(2) dividend paid by a non-resident company shall be chargeable to tax under the head "Income from Business" or "Income from Other Sources", as the case may be.
27. The question arises whether dividend income paid by a resident company would still be taxable under section 5 @ 10% after the same has been excluded from the ambit of final taxation under section 8 through Finance Act, 2007 by amendment in section 8. To answer this question the provisions of section 4 section 5, section 8, section 39, Division III of Part-I and other related provisions of law requires closer look whether the taxation of dividend income received by the Company from the resident companies is subject to tax at concessional rates or at normal rate as applicable to Company, which read as under: "(4) Tax on taxable income
(4) Certain classes of income (including the income of certain classes of persons) may be subject to.--
(a) Separate taxation as provided in sections 5, 6 and 7; or
(b) Collection of tax under Division II of Part-V of Chapter X or deduction of tax under Division III of Part-V of Chapter X as a final tax on the income or the person."
28. "(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.
(2) The tax imposed under subsection (1) on a person who receives a dividend shall be computed by applying the relevant rate of tax to the gross amount of the dividend.
(3) This section shall not apply to a dividend that is exempt from tax under this Ordinance."
29. "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:-
(5) This section shall not apply to any income received by a person in a tax year that is chargeable to tax under any other head of income or subject to tax under sections 5, 6 or 7."
30. As is evident from above that in subsection (5) of section 4 it is laid down that dividends income is subject to tax as provided in section 5 whereas section 8 deals with the Computation of taxable income since the legislature have used the words "income referred to in subsection (4) shall be subject to tax as provided for in sections 5, 6 or 7 and shall not be included in the computation of taxable income in accordance with section 8. In subsection (5) of section 39 the legislature has also used the words "this section shall not be applied to any income received by a person in the tax year subject to tax under sections 5, 6 and 7. In other words section 5 is the charging section and not section 8 as held by the Additional Commissioner in the amended order.
31. In section 5 the legislature have used the word "person" which as per clause (42) of section 2 read with section 80 includes a company as well which provisions of law has not amended by Finance Act, 2007. Under section 5 received from a Company is also subject to tax (a 10% and the word Company refers dividend received from resident company as well as non-resident Company. It also signifies that in case of inconsistency between section 5 and section 94(3), section 5 which is charging section would prevail.
32. The dividend received from Company is still covered under section 5 after amendment in section 8 through Finance Act, 2007/ supported through F.B.R. Circular No, 05 of 2008 dated July 5, 2008, 3 of 2009 dated July 17, 2009 and circular letter dated February 16, 2010 and April 16. 2010 as referred by AR.
33. If we see the amendment in section 5 through Finance Act, 2009, we find that legislature have also included dividend paid by nonresident company subject to tax in section 5 by inserting the words in subsection (1) "or treated as dividend under clause 19 of section 2" whereas under clause 19 of section 2 remittance of after tax profit of a branch of foreign company was included in the definition of dividend income through Finance Act, 2008. This supports the contention of the learned AR that dividend received any companies is covered section 5 and subject to tax @ 10%.
34. It is also established principle of law that provisions related to imposition of tax are to be strictly construed in favour of the taxpayer so that if there be any substantial doubt it has to be resolved in his favour as held in judgment of Supreme Court of Pakistan cited as 1996 SCM R 1470.
35. The dividend income even chargeable to tax under the head "income from other sources" subjected to tax at reduced rate of taxation as separate block of income in the past under the repealed Income Tax Ordinance, 1979 as held by the High Court in judgment 72 Tax 214 (H.C.). We also agreed with the contention of learned AR that taxation of dividend at reduced rate is a beneficial provision of law which is to interpreted liberally. Reference is made to judgment of Supreme Court reported as PLD 1997 SC 700 = 1997 PTD 1693.
36. In view of above and other reasoning of AR we hold that dividend income received by the Company from resident companies is subject to tax @ 10% and accordingly confirm the order of CIR(A) on this score whereby demand raised by additional Commissioner on dividend income was deleted.
37. DISALLOWANCE OF EXCHANGE LOSS The Company has contested the order of the CIR(A) whereby he has upheld the order of the Additional Commissioner disallowing the exchange loss of Rs, 35,556.823 on the ground that the same is notional loss which cannot be claimed as a deduction. On the other hand the DR has supported the order of CIR(A).
38. On perusal of the order of CIR(A) the arguments of learned AR and DR, it is found that the Company has not claimed exchange loss of Rs,35,556,823 disallowed in tax year 2008, in tax year 2009 in spite of the fact that the same was realized in the said tax year. On this basis the AR contended that the same may be allowed in tax year, 2008 or alternatively in tax year, 2009 in the light of provisions of subsection (5) of section 124. In the said section it is laid down that where an order, any income is excluded from the computation of taxable income of the taxpayers and held to be included in the computation of taxable income for another year, the assessment or amended assessm ent relating to that year shall be treated as an assessment or amended assessment.
39. Since exchange loss is admissible on realized basis and I agree on this score with CIR(A) as held by him in his appellate order. However, due to peculiar circumstances in the present case that Company has not claimed the said exchange loss in tax year, 2009 and Additional Commissioner has also not the same in subsequent tax year, we feel that if would be in the interest justice to allow the same in tax year, 2008 keeping in view the judgment of the Tribunal reported as 2008 PTD (Trib.) 1040 referred by AR in his arguments. In the said judgment Tribunal has allowed exchange loss on mercantile system of accounting duly followed by the taxpayer and accepted by the Department in the past. Accordingly, company's appeal is accepted on this issue and addition made by the Additional Commissioner is deleted and order of CIR(A) is modified to this extent.
40. PRORATION OF TAXABLE INCOME This ground of appeal of the Company is not adjudicated since the Company's appeal is accepted on disallowance of exchange loss as referred above.
41. ASSUMPTION OF JURISDICTION The learned Additional Commissioner is well within his jurisdiction where he considers any assessm ent as erroneous in so far as prejudicial to interest of revenue. It is not the case of coram non judice.
42. The Taxpayer's appeal succeeds and Departmental appeal fails in the manner a indicated above.