MRS. AMBREEN ASLAM, (JUDICIAL MEMBER).--- The titled appeal has been filed by the appellant/taxpayer calling in question the impugned Order No,16/2018 dated 25.04.2018 passed by the learned Commissioner-IR (Appeals-III), Karachi. The appellant/taxpayer agitated on the following grounds of appeal:
1. The appellate order dated April 25, 2018 passed by the Commissioner -IR, Appeals-Ill (CIR-appeals) under section 129 of the Income T ax Ordinance, 2001 ('Ordinance') is bad in law and on facts of the case.
2. The CIR (A) has erred in maintaining the action of the ACIR in invoking provisions of section 122(5A) of the Ordinance.
3. The CIR (A) and the ACIR have erred in misreading and misinterpreting the proviso to clause (99) of Part I of the Second Schedule which requires exclusion of bonus shares, bonus units and bonus certificates while computing 'income' for purpose of determining whether 90% of the 'income' is distributed for claiming exemption.
4. The CIR (A) has erred in confirming invocation of proviso to clause (99) for rejecting the claim of exemption in spite of the fact that the appellant has not issued any bonus units during the year under consideration and as such application of the proviso was not warranted.
5. The CIR (A) has patently erred in holding that reinvestment of dividend (after withholding of tax under section 150 of the Ordinance) under the Cumulative Investment Plan (CIP) attracts applica tion of proviso to clause (99) of Part I of the Second Schedule. Such reinvestment represents purchase of new units out of dividend proceeds by the unit holders as per the mandate (instruction) provided by such unit-holders.
6. The CIR (A) has erred in passing the order without considering the fact that in case of declaration of bonus units every unit-holder/share-holder as at the date of declaration is entitled to receive bonus unit / share in proportion to his existing share-holding. Had CIP being the bonus issue it would have been distributed to all the unit-holders and not to a few unit-holders who have given mandate/instruction.
7. The CIR (A) has erred in alleging that the scheme for issuance of units CIP has been created with the intention to defraud revenue and claim exemption despite the fact that cash dividend as required by law was not issued by the taxpayer .
8. Without prejudice To the above grounds of appeal and not conceding to the stance of the department, the CIR
(A) has erred in maintaining computation of the impugned tax liability on total "accounting income" instead of computing "taxable income" and applying the relevant tax rates prescribed under the Ordinance for specified income.
9. The appellant craves leave to add to, amend or alter the above grounds of appeal.
2. Brief facts of the case, as gathered from the record, are that the appellant is NIT-Income Fund (the "Fund") which was established under a Trust Deed executed on 17-09-209 between National Investment Trust Limited ('NITL'), as Management Company , and Central Depository Company of Pakistan Limited ("CDC"), as Trustee. The fund is an open-ended mutual fund and is listed on Pakistan Stock Exchange Limited. Return of total income for tax year 2017 was e-filed on 21.12.2017 determining income of Rs,207,639,000/- which was treated as an assessment order deemed to have been issued in terms of section 120(1) of the Income Tax Ordinance, 2001. Subsequently , the deemed assessment order was found erroneous and prejudicial to the interests of revenue. After confronting the taxpayer on issues vide show-cause notice under sections 122(9)/122(5) of the I.T. Ord. 2001 and obtaining necessary replies, deemed assessment was amended under section 122(5A) of the I.T. Ord., 2001 by determining income of Rs,207,639,000/- and creating demand of Rs,64,368,090/-.
3. Being aggrieved and dissatisfied with the Order dated 16.01.2018, the appell ant preferred appeal before the learned Commissioner-IR (Appeals-III) Karachi who, after considering facts and circumstances of the case, maintained the Amended Order .
4. Again feeling aggrieved and dissatisfied with the impugned order of the learned CIR (Appeals-III) Karachi, the appellant has come up in appeal before this Tribunal.
5. On date of hearing, Mr. Amin Malik, FCA appeared on behalf of Appellant while Mr. Muhammad Aslam Jamro, represented on behalf of the Respondent/Department.
6. During the proceedings before this Court the A.R. of the appellant/taxpayer submitted that the impugned order dated 25.04.2018 is bad in law and on facts of the case and Department misread and misinterpreted the proviso of clause (99) of Part I of the Second Schedule which requires exclusion of bonus shares, bonus units and bonus certificates while computing income for purpose of determining whether 90% of the income is distributed for claiming exemption.
7. The A.R. of the appellant argued that clause (99) of the Second Schedule is unconditiona l in character and is based on distribution in character and is based on distribution of 90% of accounting profit excluding realized and unrealized capital gains) to the unit holders for claiming exemption of the income of the mutual fund. The term "distribution" as used in clause (99) has not been defined in the Ordinance.
8. He contended that the ordinary dictionary meaning and meaning . in common parlance includes distribution in cash and kind/specie. The department has not been able to come up with any reason as to why issuance of bonus shares out of the profits is not the distribution.
9. The department's case is that the bonu s shares issued was liable to withholding of tax under section 150 and for the alleged failure to deduct tax on bonu s units distributed to unit holders, the exemption is not available to the mutual fund under section (99) of Part I of the Second Schedule. The A.R. further contended that the appellant has duly complied with the condition of distribution of accounting income by way of cash dividend and issued bonus units. Consequently , the action of the Department to imposed further conditions otherwise are not specified in clause (99), is patently erroneous and illegal.
10. The A.R. contended that the provision inserted in clause (99) through Finance Act, 2014 regarding bonus issues not to be regarded as distribution is clarificatory in nature and as such applicable retrospectively . The A.R. strongly submitted that nothing has been stated in the proviso inserted that it would have retrospection application.
The proposition to apply an amendment from prior period has always been disapproved by the Court unless such retrospective application is expressly provided in the amendment itself. He also referred to Circular 2 of 2014 wherein it is categorically stated by the FBR that the said proviso would apply "from now onwards" and as such the retrospective application is also negation of the view taken by the FBR. It is also settled principle of law that FBR give benevolent and beneficial Circular that is applicable and binding on taxing authorities.
11. On the other hand, the learned D.R. strongly opposed the contentions submitted by the learned counsel and supported the orders passed by the authorities below . It is argued that the order passed by the learned CIR (Appeals) is legal, lawful and in accordance with the relevant provisions of the Income Tax Ordinance, 2001. The learned CIR (Appeals) has thoroughly discussed the assertions of the taxpay er according to the facts and circumstances and adjudicated the matter as per law .
12. It is further submitted that proper opportunity was provided to . the appellant/taxpayer to defend the case by furnishing details, evidences and explanations and further stated that appellant distributed cash dividend of Rs,73,373,000/- which constitutes 36.35% of the accounting income. The appellan t has not accounted for units of Rs,126,893,000/- which have been issued out of proceeds of dividend to the unit holders. This distribution of profits in shape of units instead of cash dividen d does not qualify as "distribution" as envisaged in clause (99) and is against the spirit of provision of clause (99) of Part I of the Second Schedule.
13. The learned D.R. further stated that CIP, cash was neither released from the accounts of the Fund nor it was credited into bank account of the unit holders. The unit holders were made to pay tax applicable on dividend under the I.T. Ord., 2001. The upshot of this entire scheme was to retain the money and issue the units to the unit holders. Apparently , this scheme has been created as an artificial devise to defraud the revenue and claim exemption despite the fact that cash dividend as required by the law was not issued by the taxpayer . It is trite law that exemption clauses are to be interpreted strictly and in favour of the revenue. Finally prayed to maintain the order of the learned CIR (Appeals) and to dismiss the taxpayer's appeal.
14. We have heard the learned representatives of both sides and have perused the impugned orders of the authorities below and have gone through the available record. To decide the instant appeal question before us is whether impugned order passed by the learned Commissioner-IR (Appeals) requires interference?
15. Precisely grumble of the taxpayer is that the ACIR misread and misinterpreted the scheme of proviso 99 of Part 1 of the Second Schedule which excludes bonus shares, bonus units and bonus certificates while computing income for purpose of determining 90% of income distributed for claiming exemption. Whereas the stance of the department is that the taxpayer distribu ted cash dividend of Rs,73,373,000/- which constitutes 36.35% of the accounting income and the taxpayer has not accounted for units of Rs,126,893,000/- which have been issued out of proceeds of dividend to the units holders this distribution profit in shape of cash dividend does not qualify as distribution in terms of clause 99 of Part-I of Second Schedule and the said act of the taxpayer as department does fall in defraud the revenue.
16. Keeping in mind the case as placed before us we have taken into account Regulation 63 of the Non-Banking Finance Companies and Notified Entities Regulations, 2008, for the sake of convenience the said Regulation is being reproduce here as under:- "Amount distributable to shareholder s. - [(1)] An Asset Management Company on behalf of a Collective Investment Scheme shall, for every accounting year, distribute by way of dividend to the unit holders, certificate holders or shareholders as the case may be, not less than ninety per cent of the accounting income of the Collective Investment Scheme received or derived from sources other than H capital gains as reduced by such expenses as are chargeable to a Collective Investment Scheme under these Regulations."
Provided that in case of a Closed end Fund, the realized capital gains shall also be distributed as per above requirement.] Explanation .---For the purpose of this Regulation the expression "accounting income" means income calculated under the International Accounting Standards and verified by the auditors. [(2) Unless otherwise advised by the unit/certificate holders, all dividends to which a unit holder is entitled, shall be credited by the AMCs in the bank accoun t of the unit holder provided by him/her on the application for investment or otherwise.] "
17. In the above mentioned Regulation the legislature clearly explicit that an asset management company on behalf of collective scheme for every accounting year distribute amount to shareholders by way of dividend to the unit holders/certificate holders or shareholders as the case may be, not less than 90% of the income of the collective investment recovered or derived from sources other than capital gains as reduced by such expenses as are chargeable to a collective investment scheme under the Regulations. This regulation further clarifies that for the purpose of this Regulation the expressio n "accounting income" means income calculated under the International Accounting Standards verified by the Auditors.
18. On this account the most important aspect of this case brought in our notice by the taxpayer's representative was that the taxpayer acted as per law and on the request of the shareholders the taxpayer reinvested the dividend amount in purchase of new shares on behalf of the shareholders and to proving that he produced details of tax withholding and dividend distribution for the year ended June 30th 2017. We have gone through the entire details comprising of (18) eighteen sheets perus al of the same indicates the names of shareholders, units which they are holding the gross dividend tax, which is withheld by the taxpayer and the net dividend.
19. Keeping in mind above mentioned details we are again reverted back to the Regulation 63 of the Banking Finance Companies and Notified Entities Regulations 2008. Proviso 2 of above regulation clarify the situation it shows that on the advise of the unit holders/certificate holders all dividends for which a unit holder is entitled, shall be credited by the AMCS in the bank account of the unit holder provided by his/her on the application for investment or otherwise for the sake of convenience the said proviso of said regulation is reproduce as under: "[(2) Unless otherwise advised by the unit/certificate holders, all dividends to which a unit holder is entitled, shall be credited by the AMCs in the bank accoun t of the unit holder provided by him/her on the application for investment or otherwise.] "
20. From the abovementioned proviso it is clear that the ACMS can reinvest the dividend amount on the request of the shareholders or unit holders.
21. Keeping in mind above mentioned provision we have also gone through the CBR's letter bearing C.No,F4(6)ITP/94 dated June 14, 1997, for the sake of convenience the relevant extract of the letter is reproduce here:- "The matter has been considered in the Board and the opinion of law division has also been obtained. As a result, it is clarified that the proviso to subsection (1A) of section 9 does not qualify distribu tion of profit to be in the form of cash. Thus it can be in the form of bonus shares as the real criteria would be the transfer of the profit to the Modaraba certificate holders. Therefo re, distribution of profit in the form of bonus shares qualifies for distribution of profit for purpose to subsection (1A) of section 9 of the Income Ordinance, 1979."
22. From the above quoted extract we have gathered that the CBR clarified that the proviso to subsection 1(a) of Section 9 does not qualify distribution of profit to be in the form of cash so the CBR's opined that it can be in the form of bonus shares invested as the real criteria is the transfer of the profit to the Certificate holders therefore the distribution of profit in the form of bonus shares qualifies for distribution of profit for the purpose of subsection 1(a) of Section 9 of the Income Tax Ordinance, 1979. We have quoted above letter of CBR just to clarify the position of law prevailed in June 1997, thereon the amendment made in clause (99) through the Finance Act, 2014 by which the restriction was made. For the sake of convenience we are reproducing clause (99) of Schedule 1 of Part 1 of Income Tax Ordinance, 2001 as under:- (99). Any income derived by a Collective Investment Scheme or a REIT Scheme, if not less than ninety per cent of its accounting income of that year, as reduced by capital gains whether realized or unrealized, is distributed amongst the unit or certificate holders or shareholders as the case may be.
[Explanation .-- For the purpose of this clause the expression 'accounting income" means income calculated under the generally accepted Accounting Principles and verified by the auditors.
Provided that for the purpose of determining distribution of at least 90% of accounting income, the income distributed through bonus shares, units or certificates as the case may be, shall not be taken into account.]
23. From the above quoted clause we gathered that it has two parts the first is related to accounting and calculation principles whereas the second part of the abovementioned clause define the principles for determining the distribution of accounting income, this clause specifically clarify that the income distributed through bonuses shares, units or certificates shall not be taken in account for the purpose of determining distribution.
24. In that context record reveals that as per distribution statement of the audited accounts of the taxpayer accounting income was shown of Rs,207 ,639,000/- whereas cash distribution as shown of Rs,73,373,000/- and issue of units shown of Rs,126,893,000/-.
25. From the abovementioned working it is opined that the cash dividend distribution constitute 35% of accounting income which is less than the threshold of minimum 90% distribution of accounting income since we already clarified and mentioned above in detail that as per Regulation 63 of the Non-Banking Finance Companies and Notified Entities Regulations, 2008, the assessment management company on the request of the shareholders can reinvest the dividend amount for investment on new shares/units, so from that aspects of the case we are of the view that the of ficer was required to amalgamate cash distribution coupled with issue of dividend amount.
26. Keeping in mind above mentioned prospect we feel necessary to bring our understanding regarding bonus shares, units or certificates on record. So first we will take up bonus shares becaus e the later two expressions have conjunction with the prior expression, as per our understanding bonus share is free additional shares to existing shareholders as an alternative to increasing the dividend payout the same interpretation in this specific context can be drawn for above mentioned two expressions, units or certificates as the case may be. So we are of the considered view that in view of clause (99) of Schedule I of Part-1 of Income Tax Ordinance, 2001 bonus shares, units or certificates are excluded for the mentioned realm.
27. So we summarize our findings here by holding that the taxpayer issued dividends to the shareholders and amongst them some shareholders mentioned in the detail as identified above purchased new shares or we could say reinvested profit amount by purchasing new I shares and as we mentioned earlier the law permits to the shareholder and the taxpayer to do so in terms of Regulation 63 of Non-Banking Finance Companies and Notified Entities Regulations, 2008.
28. We further clarify here that the simple understanding for the expression dividend distribution could be that it is a money paid to the shareholder out of current earning or accumulated profit of the entity . We reiterate here that all the dividends are taxable income to the recipient. So far bonus issue or certificates are concerned they are a sort of an offer of free additional shares to existing shareholders as we already clarified above that the taxpayer has neither issued bonus shares, additional units nor free additional shares to the shareholders on the contrary the taxpayer purchased/invested dividend/profit of the shareholder by purchasing new shares with the amount of dividend on behalf of the shareholders.
29. So keeping in mind the above mentioned facts and circumstances of the case we are of the view that the authorities below misdirected themselves and misinterpreted the law therefore we interfere in the orders and set- aside the same and in result appeal of the taxpayer is accepted.
30. The appeal stands disposed of f in the manner as indicated above.