Income Tax Ordinance, 1979: Entitlement of a company to benefit cannot be denied to it: SC

ISLAMABAD: The Supreme Court has held, if a company was entitled to the benefit of a particular provision of the Income Tax Ordinance, 1979, it could not be denied its benefit.

A two-judge bench, comprising Justice Qazi Faez Isa and Justice Yahya Afridi, declared that on the appeal of the Commissioner Inland Revenue, Lahore, against the Lahore High Court (LHC)’s judgment.

Three legal forums, i.e., the Commissioner Appeals, the Income Tax Appellate Tribunal and the LHC had decided the matter in favour of the respondent (Bank of Punjab). The High Court relied on a precedent of the apex court in the EFU General Insurance Ltd vs Federation.

According to paragraph A of Part V, Rates of Income Tax for Companies, of the First Schedule to the Income Tax Ordinance, 1979; the rate mentioned are 66 percent in the case of banking company, 44 percent in the case of public company other than a banking company, and 55 percent in case of any other company, while in para D the rates of income tax in respect of the amount representing income from dividends declared or distributed by a Pakistani company or modarba is five percent.

The Supreme Court in the EFU General Insurance Ltd vs Federation case had decided in favour of an insurance company. However, to curtail/ restrict the effect of the judgment clause (a) of the para D was amended, by disallowing insurance company to avail the rate mentioned therein.

The Court noted that the para A specifically states that the rates mentioned therein, would only be applicable if, among other, para D is not applicable, but in the present case para D was applicable and as dividends were paid by Pakistan companies.

The judgment said the legislature in its wisdom had prescribed a reduced rate of tax in respect of dividends paid by Pakistani companies to encourage that shares of Pakistani companies are purchased to help stimulate the establishment and development of the corporate sector and its businesses.

The court stated that the precedent of the EFU case is still applicable with regard to dividends declared/ distributed by Pakistani companies in terms of para D in respect of other companies, including a banking company. And there is no reason to withhold the same from such companies, including a banking company.

The judgment said: “Such unambiguously clear language leaves no room to countenance another interpretation. And, all the more so when this Court had already given a clear and emphatic answer in the EFU case. Therefore, the rates mentioned in paragraph A would not be applicable in respect of dividend income which has been declared/ distributed by Pakistani companies and the applicable rate of income tax on such dividend income would be the one mentioned in paragraph D.”

“We are constrained to observe that the income tax authorities unnecessarily wasted time, money and effort which could have been better utilised for more productive causes. They discarded the clear determinations by three forums and the EFU case precedent.”

Copyright Business Recorder, 2022