Commissioner of Income Tax Vs. Mrs. Masuda Khatun,

Commissioner of Income Tax


Mrs. Masuda Khatun,

Supreme Court

Appellate Division



Kemaluddin Hossain CJ   

Fazle Munim J 

Ruhul Islam J

Badrul Haider Chowdhury J

Commissioner of Income Tax…………………….Appellant


Mrs. Masuda Khatun………………………………………Respondent


August 3, 1978

Cases Referred To-

Premier Construction Co. Vs. I. T. Com­missioner AIR 1949 PC) 20 ; Com. of I. T. Vs. Maharajadbiraj of Darbhanga AIR 1935 (PC) 172; Nawab Habibullah V. Com. of I. T, Bengal AIR 1943 (PC) 20; Md. Isa V. Com. I. T. C & U, Prov. AIR 1942 (All) 194; I. T. Com Vs. EVH. Miller PLD 1956 (Lah) 45; Hamilton Vs Commissioner, Inland Revenue ‘6 Tax Cases 221; Cape Brandy Syndicate vs. I.R. (1921) 1KB 54; H. L. Canadian Eagle Oil Co. vs. King 27 T. C. 205.

Lawyers Involved:

A.K.M. Mozammel Hoque Bhuiyan with Rabia Bhuiyan, Advocate, instructed by M.R. Khan, Advocate-on-Record,—For the Appellant.

Rafique-ul-Hoq, Senior Advocate, with T. Islam and Mostafa Adil, Advocate, instructed by B Hossain, Advocate-on Record. —For the Respondent.

Civil Appeal Nos. 130,131 and 132 of 1977.

(From the judgment and order dated 13.2.76 passed by the High Court Division in Income Tax Reference Application No, 51 of 1972).


                 Badrul Haider Chowdhury J.—This appeal by special leave arises out of a judgment passed by the High Court holding that the dividend in the hand of an assessee is exempt from tax under section 15-BB of the Income Tax Act on giving an affirmative answer to the question of law which was framed as under:

“Whether on the facts and in the circumstances of the case the Tribunal was justified in its decision that dividend income from a company whose profit is exempt from tax under section 15-BB of the Income Tax Act is exempt from tax in the hands of the share­holders under same section.”

The connected appeals, Civil Appeal Nos. 131 and 132 of 1977 were also heard analo­gously as the same question of law is involved and are disposed of by this judgment.

2. In response to a notice under section 34 of the Income Tax Act (hereinafter re­ferred to as the Act), the respondent-assessee filed his return disclosing the income which showed the dividend received from W. Rahman Jute Mills, an undertaking which was enjoying tax holiday under sec­tion 15-BB of the Act. The assessee claimed that these dividends were exempt from tax in his hand also but the Income Tax Officer rejected the contention and included in his assessment under section 23(3)/34 of the Act the dividends as income received by the assessee for the assessment year 1967-68.

3.  The assessee preferred an appeal against this order before the Income Tax Appellate Tribunal and the Tribunal held that the dividend income derived from tax-holiday profit cannot be included in the taxable income of the assessee share-holders. Reliance was placed on a decision in the case of Commissioner of Income-Tax vs. Messrs. E.V. Miller (1959) 11 DLR (S.C.).  430.

The Revenue filed reference application under section 66 (i) of the Act formulating the afore-mentioned question of law which was answered in the affirmative by the High Court.

Leave was granted as it involved question of law on the construction of section 15-BB of the Act which required consideration by this Court.

4. Mr. A. K M. Mozammel Hoque Bhuiyan, the learned Counsel appearing for the appellant contended that section 15-BB does not expressly, exempt the dividend from tax and therefore, in computing the total income of the assessee the dividend received by an  assessee from the Company which is enjoying tax-holiday is to be included. The learned Counsel argued; (a) that section 15-BB is available to Companies only and as such the dividend received by the share­holders from those Companies cannot claim exemption; (b) exemption to the Compa­nies is granted on fulfillment of certain con­ditions attached to Section 15-BB; (c) had the legislature intended to exempt the divi­dend income in the hands of the share­holders, relevant amendment would have been passed to give effect to that intention. The learned Counsel drew the attention to various sections of the Act e.g. sections 2(15), 4(1) (c), Explanation No. 3 to section 4(1), section 4(3) (xv), section 10 and section 12.

5. If the provision of the enactment is looked at it is found that income tax is charged for any year at the rate fixed by the relevant Finance Act in respect of the total income of the previous year of any person (sec.3). “Person” has been defined in section 2(9) which includes an individual, a Hindu undivided family, a firm, an association of persons or a body of individuals, whether incorporated or not, a company, Government of Province, a local authority and every other artificial juri­stic person.

6. “Assessee” is defined in section 2(2) which means a person by whom income tax or any other sum of money is payable under this Act, and includes every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the loss sustained by him or of the am­ount of refund due to him and every person who is required to file a return of income under section 22.

Section 2(15) says “total income” means total amount of income, profits and gains referred to in sub-section (1) of section 4 com­puted in manner laid down in the Act.

7. Section 4 provides that subject to the provisions of the Act, the  total income of any previous year of any person includes all income, profits and gains from whatever source derived which ; (a) are received or are deemed to be received in such year by or on behalf of such person: (b) if such person is resident in the country during such year—(i) accrue or arise or are deemed to accrue or arise to him during such year, or (ii) accrue or arise to him  dur­ing such year; (c) if he is not a resident in the country during such year,  accrue or arise or are deemed to accrue or arise to him during such year.

8.  Explanation 3 to the section is in the following terms:—

“A dividend paid within Pakistan by Company formed and registered under the Companies Act, 1913 and having its registered office in Pakistan shall be deemed to be income accruing and ari­sing in Pakistan to the extent to which it has been paid out of profits subjected to income tax in Pakistan or profits exempt from tax under section 15-BB or section 15-BB”.

Chapter-III under the title “Taxable Income” deals with the heads of income chargeable to income tax vide section 6. It reads thus:—

“6. Save as otherwise provided by this Act, the following heads of income, profits and gains shall be chargeable to income tax in the manner hereinafter appearing, namely,—

(i) Salaries

(ii) Interest on securities

(iii) Income from property

(iv) Profits and gains of business, profession or vocation

(v)  Income from other sources

(vi) Capital gains”.

9. Section 7 dealt with salaries, section 8 deals with interest on securities, section 9 deals with the tax on the head of income from property and section 10 deals with the income from business under the head profits and gains of business, profession or vocation, section 12 deals with head “income from other sources” that the tax shall be payable by an assessee under the other source’s head, income from other sources in respect of income to the profits and gains of every kind which may be included under any of the preceding heads”. Sub-section (2) says:

“Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earn­ing such income, profits or gains subject to the allowances mentioned in clauses (a), (b) and (c).

Section 12 (b) deals with the Capital Gain Tax. Section 13 provides the method of coun­ting for the purpose of sections 10 and 12, Sec­tion 15 deals with the exemption in certain cases. Section 15 B deals with the exemption from the tax of newly established industrial un­dertaking subject to certain conditions.

Section 15-BB was introduced in 1959 and the industrial undertakings set up between April, 1959 and 30th June, 1965 were given exemption from the tax for specified period.

The material portion of section 15-BB is as follows:—

“15-BB. (1) Subject to the provisions of this Act the income, profits and gains of an industrial undertaking set up in Pakistan between the first day of April, 1959 and the thirtieth day of June, 1965 both dates inclusive, shall be exempt from the tax payable under this Act for a period of four years beginning with the month in which the undertaking is set up or the commercial production is commenced whichever is the later.”

The object of inserting section 15-BB by way of giving tax-holiday was the rapid indus­trialisation of the country and creation of in­centive for each investor. Tax-holiday was devised as one of the schemes.

10. Requirements of law for enjoying tax holiday under section 15-BB may be summa­rised:

(1) The undertaking should be owned and managed by a Company incorporated under the Companies Act or it should be wholly incorporated.

(2) The nature and structure:—(a) the concern should be  an industrial  undertaking having its registered office in the country, (b) it must be set up between 1.7.65 and 30.6.70 with subscribed and paid up capital of not less than Rs. 50.000/-, (c) it should not be a company to which the First and Second Schedules of the Act applied i.e. it should not be an insurance and petroleum company, (d) undertaking must be approved by the Government for  tax-holi­day under section 15-BB.

11. The period of exemption from tax is for specified period. Exemption from tax is restricted from the income, profits and gains which arise on the operations of the under­taking. At least 60% of the exempted profits should be set apart in special fund   to   be utilised for the purpose of expansion and development of the undertaking or issue of bonus shares but no dividend can be paid out of the same.

12. The following conditions applied to the existing tax-holiday company in respect of any accounting year ended after 10.6.67 as provided by the Finance Act, 1967: 40% of its exempted profits should be set aside for the purpose of expansion and development. The company will have to declare before the due date after filing its tax return that it shall distribute to its share-holders as divi­dend the remaining 60% or the amount required to distribute 10% dividend but in­cluding dividend on shares entitled to a fixed rate or return whichever is the less.

13. The amount left over, if any, out of the said 60% will have to be carried over to the following year for a similar distribution. This process will continue each year until the end of the tax-holiday period when the Company will be free to utilise the undis­tributed balance in any manner it likes. If the company does not comply with the require­ment in any year, its tax-holiday for that year will stand withdrawn.

14.  Computation of profits and gains:

(a)  tax-holiday should be computed as required under the clause of the Act.

(b) tax-holiday losses can be adjusted against tax-holiday profits but no unabsorbed tax-holiday losses can be carried forward to be adjusted against profits from non-tax holiday period.

(c) If the Income Tax Officer finds at a later stage that the conditions on the premises of which tax-holiday was granted have not been fulfilled, proceed­ing under section 34 can be initiated and the industrial under-taking would be assessed as if no tax-holiday were to have been granted.

Provision has been made for cancellation of the approval of tax-holiday if undertaking applies to the Government for such can­cellation within 6 months of the grant of the approval.

14A. The requirement of compulsory distribution of dividend was waived in 1968 for tax-holiday companies 60% of whose tax-holiday profits in any year are insuffi­cient to pay even 5% dividend and tax-holi­day companies which are not public compa­nies under the Companies Act and where paid up capital and fee reserved do not exceed Rs. 5 lacs.

Rules have been framed by the Govern­ment called the “Income Tax Exemption of Industrial Undertaking Rules, 1967″.

15. What is meant by dividend? Divi­dend has been defined in section 6(A):—

“(a) any distribution or payment made by a company to its shareholder, or on behalf of its shareholders, of accumulated profits, whether capitalised or not, if such distribution or payment entails the release of payment by the company to its shareholders, or on their behalf, of all or any part of the assets or reserves of the company ;

(b) any distribution by a company to its shareholders, or on behalf of its share­holders, of debentures  debentures-stock or  deposit certificates in any form and  any distribution to its preference shareholders of shares by way of bonus to the extent to which the company possesses accumulated profits, whether capitalised or not ;

(c) Any distribution made to the share­holders of a company out of accumu­lated profits, whether capitalized or not of the company or the liquidation of the company;

(d) any distribution by a company on the reduction of its capital on the extent to which the company possesses accu­mulated profits, whether such accumu­lated profits have been capitalised or not; and

(e) any distribution by a company of bonus or bonus shares out of accumulated profits exempt from tax under section 15-BB”

16. Thus “dividend” means the sum of money set aside out of profits of a company for distribution amongst the shareholders. Profits of a company may be distributed to shareholders in the shape of:—(i) cash or some other assets, (ii) bonus shares of a company, (iii) shares or debentures of the other company, (iv) deposit certificates of deferred warrants. The dividend includes (a) any distribution of accumulated profits whether capitalised or not if such distribution entails the release to the share­holders all or any part of the assets, (b) bonus debentures, (c) any distribution out of accumulated profits of the company in liquidation, (d) any distribution on reduction of capital to the extent of accumulated profits.

17. In lieu of distributing all of its pro­fits by wav of dividend among its shareholders a company may issue shares to the share holders of the nominal value of the divid­end. This has the effect of capitalising part of the company’s profits which would otherwise be distributed in dividends. The shares so issued, being additional to the mem­bers’ original holding, are termed as bonus shares.

By Finance Act, 1966 clause (e) was dele­ted. In other words, bonus or bonus shares out of accumulated profits exempted from tax under section 15-BBwas no longer dividend and it would be subject to tax in the hands of the company itself.

18. Thus the distinction between dividend and bonus share for the purpose of Income Tax Act now throws light as to the contro­versy that has been raised. While dividend continues to be exempted because the income profit and gains of an undertaking which have been exempted from tax, the same cannot be said about bonus shares. To claim that such dividend is taxable in the hands of the shareholders is to negate the legislative intention which impelled them from granting exemption. The purpose of section 15-BB is to grant tax-holiday to the newcomers in the industries. The capital is contributed by the shareholders. Tax-holiday generates incentive in the prospective shareholders. Unless they get some benefit out of it what will be the charm for buying share of such a company which does not declare tax-free dividend. The view of the Revenue that such income is taxable if accepted would mean that when the tax-holiday has been given to the com­pany, the benefit of it cannot be availed of by the shareholders. That is a difficult proposition because the very purpose of the law will be defeated.

19. In the case of Premier Construction Company Ltd. vs. I.T.Commissioner, Bombay, A.I.R, 1949 (P.C), 20 the Privy Council considered that the remuneration under a contract for personal service out of the money of agricultural income of the employer is not exempt because the remuneration was not an agricultural  income and was not exempt from tax. Their Lordships observed:

“but if the income received falls with­in the definition of agricultural income it earns exemption in whatever character the assessee receives it.”

20. In that case the assessee received no agricultural income as defined by the Act. It received remuneration under a con­tract for personal service calculated on the amount of profits earned by the employer payable not in specie out of any item of such profits, but out of any moneys of the employer available for the purpose. The remuneration therefore is not agricultural income and is not exempt from tax”.

21. The Privy Council considered the previous decisions of the Board, namely, Commissioner of Income Tax Bihar and Orissa Vs Maharajadhiraj of Darbhanga, A.I.R. 1935 (P.C.) 172. The assessee carried on business as a money lender. As security for a debt due to him in respect of his business he was put into possession of agricultural land as a mortgagee. It was held that the rents received by the assessee from the agricultural land were agricultural income and exempt from income tax and that the exemption was not affected by the circumstances that the rents were received as part of the money lending business of the assessee, “the exemption de­pending on the kind of income received and not on the character of the recipient”.

22. Again in the case of Nawab Habibullah Vs Commissioner of Income Tax, Bengal, A.I.R. 1943 (P.C.) 20 the assessee as the Mutwalli of a waqf received as remuneration for his services a monthly salary and it was held by their Lordships that the income of the waqf was derived from agricultural land did not make the remuneration paid to the Mutwalli “agricultural income” since the remuneration did not depend either on the nature of the properties which constituting the waqf estate, or on the amount of income derived therefrom by the Estate. Privy Coun­cil noticed A.I.R. 1949 (P.C.) 20 the Alla­habad decision in Muhammad Isa Vs. Commi­ssioner of Income Tax, Central & United Pro­vinces, A.I.R. 1942 (All), 194 where the High Court of Allahabad held that the assessee as Mutwalli of a waqf was entitled to by way of remuneration for his services to retain as a beneficiary the agricultural income of the waqf estate and that such remuneration was therefore free from income-tax.

23. The aforesaid decisions have led the Privy Council to come to the conclusion; (1) whether an assessee receives income not itself of a character to fall within the defini­tion of agricultural income contained in the Act, such income does not assume the character of agricultural income by reason of the source from which it is derived or the method by which it is calculated; (2) if the income received falls within the definition of agricultural income, it earns exemption in whatever character the assessee receives it.

24. In view of the above principles it is contended by the Respondent that the share­holders have received the dividends which have been exempted from tax. Therefore, the divi­dends   in the hand of the assessee is also liable to be exempted. The assessee is a shareholder of the Company in question.

25. In Income-Tax Commissioner Vs Me­ssrs. E.V.H.  Miller P.L.D. 1956 (Lah). 45, a similar question was considered, Kayani, A.C.J. considered that the dividend out of the agricultural income la the hand of the shareholders is also exempted because he rece­ives it in recognition of his right to receive it. It has been held that the real test in all cases is whether the recipient has received the income of the company in pursuance of the right to receive it as such. It is wholly immaterial for the purposes of the Act whe­ther the agricultural income has been received directly or indirectly, mediately or immediate­ly, it is enough that it has been received as of right.

26. On appeal  before the Supreme Court of Pakistan the Court  held   that the income which is an agricultural’ income in the hands of a Joint Stock Company does not cease  to be an agricultural income when it is distributed to the shareholders by way of dividends. The extent of the shares held by each share­holder merely determines its share in the in­come but the “shares thus are neither the source, not the procedure of the income”. To hold to the contrary, make exemption of the agricultural income of a company entirely illusory, Munir, CJ. considered that the dividends are not specifically mentioned in any of the categories of income enumerated under section 6 and the only head under which it can be placed is the residuary clause, sec­tion 12 (P.L.D.) 1959 (SC.) P.19).

27. Munir, C.J considered that the under­lying principle is “that a dividend represents merely the shareholders’ share in the income of the Company.” The court concluded that the income which is an agricultural income in the hand of a Joint Stock Company does not cease to be an agricultural income when it is distributed to the shareholders by way of dividends. The extent of the shares held by each shareholder merely determine his share in the income but shares themselves are nei­ther the source not the producer of the income.

28. Reliance was placed on the observa­tion of Rawlatt, J. in Hamilton vs. Commis­sioner, Inland Revenue, 16 Tax Cases, 221:

“A dividend is not a taxable subject matter in itself. The operation of dec­laring a dividend is not an operation which gives birth to a profit or gain, it is only the division of profits or gains earned by the trading operation and the bonus is assessed in respect of the trad­ing operation which is the only source of profits and gains, and the declaration of the dividend is merely the division without any income accruing of the profits and gains realised”

29. The law has given the exemption to income, profits and gains of an industrial un­dertaking under section 15-BB. When dividend is declared, it is declared from the income, profit and gain of the industrial undertaking itself. It retains that character when it reaches the hand of the shareholder. The shareholder as an assessee is not liable to be taxed for this amount which he received as dividend because the profit of the company out of which this has been paid is exempt from tax.

30. To the contention of the Revenue that had the legislature intended to give exemption then it would have said so, the reply by the respondent is that there is no presumption as to impose a tax is convincing. It is settled that in a taxing Act one has to look merely at what is clearly stated. There is no room for intendment. There is no equity about tax. “Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used” (Per Rowlatt, J. in Cape Brandy Syndicate Vs. I.R. (1921) I.K.B. 54 approved by H.L. Canadian Eagle Oil Company Ltd. Vs. King. 27 T.C. 205.

It is not the case that all the dividends are exempt from tax; subject to certain limit the “income” from dividend is taxable (vide s.4 (3) (xv).The conclusion is irresistible that such dividend is also exempt from tax. To hold to the contrary is to make the exemption illusory. Accordingly, the answer to the ques­tion framed must be in the affirmative.

The appeals are, therefore, dismissed without any order as to costs.


Source: 1982, (AD)