NASIM SIKANDAR, J.- These cross references have been made by the Lahore Bench of the Income Tax Appellate Tribunal at the request of an individual assessee as well as the C.I.T. Companies, Lahore. Following questions have been framed for our consideration and reply:- QUESTIONS OF LAW PROPOSED DY THE ASSESSEE.
(a) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the sum of Rs. 4,06,448/- being the assessee's share in the sale proceeds of a piece of land sold by M/s. Sultan Industries Ltd., Karachi was taxable in the hands of the assessee under Section 151 of the Income Tax Ordinance, 1979?
(b) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the decision of the Supreme Court of Pakistan in the case of C/T Vs. E.V. Miller, reported in PLD 1959 S.C.
219 is no longer good law?
(c) Whether in the facts and circumstances of the case the Tribunal is right in applying Section 151 of the Income Tax Ordinance, 1979?"
QUESTION OF LAW PROPOSED BY THE DEPARTMENT.
"Whether in the facts and in the circumstances of the case the Tribunal's view is correct that the CIT
(A) has no jurisdiction to make an addition u/S. 13 of the Income Tax Ordinance?"
2. According to the statement of the case, the assessee is an individual and at the relevant time, was a Director/share-holder of a Private Limited Company namely M/s. Sultan Industries Ltd., Karachi. The Company which was established in the year 1965 purchased a piece of land which was subsequently sold on 19.5.1983. The difference between the purchase price of Rs. 1,86,669/- and the sale price of Rs. 49,00,000/- was distributed to the Share-holders on lst of July, 1983 and the company was voluntarily liquidated on 11.2.1984. The assessee while filing a return in the year 1984- 85 claimed his share of Rs. 4,06,448/- in the sale proceeds as accretion in his wealth. Also It was claimed exempt from income tax on account of Its being capital gain. The Assessing Officer, however, by relying upon the provisions of Section 151 of the Income Tax Ordinance proceeded to disallow exemption on the ground that the amount of Rs. 49,00,000/- received by the Company, as sale price of the said land was a capital gain in its own hands but when passed on was assessable in the hands of the individual. The view so adopted was finally maintained by the Tribunal, It was concluded that the ratio settled by the Hon'ble Supreme Court of Pakistan in Re: C.I.T, v. E.V. Miller reported as PLD 1959 S.C. 219 was no longer good law after the introduction of provision of Section 151 in the Income Tax Ordinance, 1979.
3. Besides, the assessee also claimed accretion of net wealth at Rs. 1,70,000/- which was shown to have accrued to him as prize money won on prize bonds. The claimed exemption, however, was refused by the assessing officer as he disbelieved that the claimed prize money could have accrued to a person on a number of bonds held by him. He was therefore of the view that the assessee had purchased these bonds on premium from open market in order to justify the claimed accretion. The learned C.I.T. (Appeals) recorded a different finding. Though he accepted the possession of the prize bonds and their winning of lucky numbers, yet not only he maintained he addition but also enhanced the same by 10% on the ground that the investment so made in the purchase of bonds including the premium paid at 10% remained un-explained. The Tribunal, by a majority decision, however, concluded otherwise. They expressed their doubts if the CIT (Appeals) should make an addition under Section 13 of the Income Tax Ordinance without observing the conditionalities and the safe-guards unbuilt in law for the benefit of assessee.
4. Heard the learned counsel for the parties. The learned counsel for the petitioner by relying upon a judgment of the Hon'ble Supreme Court of Pakistan in Re: Messrs Julian Hoshang Dinshaw Trust and others Vs. Income Tax Officer, Circle XVII South Zone, Karachi and others reported as 1992 PTD 1, claims that the facts in hand and those considered by their lordships of the Supreme Court being completely identical a negative answer to the three questions proposed by the assessee needs to be returned.
5. The learned counsel for the Revenue, however, supports the view adopted by the Tribunal. Also attempts to distinguish the facts in hand from those which fell for consideration by the Hon'ble Supreme Court of Pakistan in the said decision. However, we are not persuaded to agree with him.
6. In the afore-said judgment, the appellant was a trust which was a share-holder of a private limited Company known as Eduljee Dinshaw Limited. That company owned some agricultural land which was acquired under the provisions of Land Acquisition Act at the instance of Ministry of Defence. Out of the compensation so received, the company Pacifa sum to the Trust representing its share in the compensation. These payments were referable to the assessments years 1979-80 and 1978-79 for which the appellant trust had filed "nil" return. However, along with the returns an explanation was made to the income Tax Officer that the payments received by it were compensation for acquisition of agricultural land and therefore being of capital nature were not liable to tax. The Assessing Officer refused the claim. However as the matter was still pending before him, the appellant Trust brought two Constitutional petitions before the High Court and sought a declaration that the sums received by it from the Company being in nature of capital gain on transfer of immovable property were not liable to be taxed. Further, that in any case, the transfer of capital assets having taken place by reason of compulsory acquisition, the receipt was not chargeable to tax under any Taxing Statute. The Karachi High Court did not accept the argument that the assessee had sufficient reasons justifying invocation of Constitutional jurisdiction. On further appeal, the Hon'ble Supreme Court of Pakistan found for the assessee appellant, In the view of their lordship under Section 27 of the Income Tax Ordinance immovable property was excluded from the definition of "capital assets" on transfer whereof taxable capital gains could arise. Also that compulsory acquisition of any capital asset was not treated as transfer for the purposes of commutation of capital gains under Section 28. Thereafter the Hon'ble Judges referred to item 50 of the Federal Legislative List Part-1, Fourth Schedule of the Constitution and concluded that imposition of tax on capital gains arising from the transfer of immovable property was beyond the taxing power of the Federation. Further their Lordships concluded that ratio in the case of E.V. Miller (supra) was not applicable to the appeal before them Inasmuch as the distribution was made by the Company to the share-holder out of receipt of capital nature which continued to bear its original character and retained the attributes of capital receipts. To support their view, the Hon'ble Supreme Court referred to a judgment of Supreme Court of India in Re: Commissioner of income Tax VKama Behari Lai Singha (1971) 82 I.T.R. 464.
7. Finally their lordships considered the objection that Section 151 of the Income Tax Ordinance, had brought a change in legal position as far as capital gain arising out of the immovable property was concerned, It was concluded that the receipt in question before them was basically outside the purview of taxing statute and rather there was a Constitutional bar on its taxability. Further that keeping in view the definition of term "income" as given in the Income Tax Ordinance as well as the late Act, the receipt of the kind could not in any manner be categorized as income of the Company, In the view of their lordships it was totally wrong to give the colour of income to the receipt in the hands of Company and then treating ..................... From income tax. Therefore, it was held that the Department's reliance on section 151 was mis-conceived. The Hon'ble Court found that the distribution by the Company of the compensation for acquisition of land to the appellant in the form of dividends did not alter the basic character of the receipt and the immunity from taxability continued to the available to such receipts, even in the hands of the share-holders- appellant.
8. The learned counsel for the revenue has not been able to convince us that the ratio settled in the above case is not attracted to the facts in hand, In our view it stands on all fours to the facts before us and those earlier considered by the Tribunal. A capital gain on immovable property expressly stands excluded from the definition of word income as contemplated in section 27. In the definition clause 2 (24) of the Ordinance, it is stated that the word "income" includes any income profits or gains which are "chargeable to tax under any provision of this Ordinance". Therefore since gains from transfer of immovable property are not so chargeable under Section 27 (2)(a) (ii) as "Income", provisions of section 151 were otherwise not attracted. The bar on second exemption as contained therein is relatable only to an "income" which is "exempt" under any of the provisions of the Ordinance. Since capital gains on immovable property are not income chargeable to tax under any provision of the Ordinance, treating them exempt and then restricting them to original recipient under Section 151 was wholly misplaced. The "concession" granted by the assessing officer to the receipt in the hands of the Company and then declining to extend the exemption in the hands of the individual assessee 'was completely out of context. Factually the legal issue was never addressed in the light of the relevant statutory provisions and the binding precedents.
9. In Re: C.I.T. Punjab, N.W.F.P, and Bahawalpur V. Mrs. E.V. Miller (PLD 1959 S.C. 219), the Income Tax Officer had included the dividends in the total income of the assessee but on appeal the Appellate Tribunal found that the dividends retained the character of agricultural income and therefore could not be so included. On a reference made at the instance of the Revenue, the High Court of West Pakistan considered the following question:- "Whether in the circumstances of the case the sum of Rs......(different amounts in each case) declared as dividend by the company out of its agricultural income and received by the assessee, a shareholder in the said company, is agricultural income in the hands of the assessee, so as to be exempt from the Tax under Section 4 (3)-(viii) of the Act."
A Division Bench of the High Court of West. Pakistan endorsed the view taken by the Appellate Tribunal but certified the case to be fit for appeal to the Supreme Court.
The Hon'ble Supreme Court while interpreting the provisions of Section 16(2) read with section 4 (3)
(viii) of the late Income Tax Act, 1922 endorsed the view earlier held by the High Court that dividends received by Share-holders of a company deriving income from agriculture were also agricultural income. According to their lordships, the dividends declared by the Company were its agricultural income which did not cease to be so when it was distributed to the Share-holders by way of the dividends. Also that the extent of shares held by each share-holder merely determined his share in the income but the shares themselves were neither the source nor the producer of the Income, In view of their lordships to hold to the contrary would make the exemption to agricultural income as entirely illusory.
10. The facts as well as the issues before the Hon'ble Court were different from those of the present case. As the question referred to the High Court under Section 66 (1) of the late Income Tax Act, 1922 as re-produced above indicates, the core-issue before the Hon'ble Court being if the dividend declared by a Company out of its agricultural income and received by an assessee, a share- holder in the company was agricultural income in the hands of the assessee to be exempt from tax under Section 4 (3) (viii) of the Act. The judgment in that case to the extent of extending benefit to second recipient of exempt income certainly stands nullified by the provisions of Section 151 of the Income Tax Ordinance, 1979. However, as discussed above, the issue in the present case as also in the case of Re: Messrs Julian Hoshang Dinshaw Trust (supra) was entirely different where capital gains arising out of sale of immovable property was the subject-matter of controversy. Both the revenue as well as the Tribunal mis-understood the nature of receipt. Also they were mis-directed to hold that capital gains were exempted from levy of income tax and therefore by applying the principle contained in section 151 proceeded to dis-allow the alleged second exemption. The judgment of the Hon'ble Supreme Court in Re: C.I.T. V. Mrs. E.V. Miller (supra) therefore is clearly distinguishable. However, as for, the grant of second exemption the ratio settled in Re: C.I.T. V. Mrs E.V. Miller (supra) stands nullified by Section 151 of the Ordinance.
11. The learned Tribunal recorded a finding of fact that the assessee was in possession of prize bonds and the prizes won thereupon being established by the documents issued by the State Bank of Pakistan, needed to be accepted, In such situation, we do not find as to how the question as framed arose at all. Mere passing remarks with regard to the competency of the C.I.T. Appeal to make an addition under Section 13 of the Ordinance does not make it a legal controversy having arisen out of the order of the Tribunal.
12. Accordingly the two questions proposed by the assessee are answered in the negative while the one proposed and framed at the request of the Department is declined to be answered. An answer to question (b) proposed by the assessee is declined.