ISLAMABAD: While turning down identical pleas in a tax matter, the Supreme Court ruled that dividend income received by companies is assessable to tax under Section 5 of the Income Tax Ordinance, 2001, and not under Section 39 as ‘income from other sources’.
A Division Bench of the top court comprising Chief Justice Yahya Afridi and Justice Aqeel Ahmed Abbasi has rejected Commissioner Inland Revenue (Zone-1) Large Tax Payer office Islamabad’s leave to appeal, saying “these Civil Petitions being devoid of any merits, are hereby dismissed, and leave refused”.
The department has invoked appellate jurisdiction of the top court, challenging the Islamabad High Court verdict of September 19, 2024 in connected Income Tax References, including the case titled Commissioner Inland Revenue v. M/s Saudi Pak Industrial Agricultural Investment Company Pvt. Ltd. The respondents in the connected petitions included Saudi Pak Industrial Agricultural Investment Company, Fauji Foundation, Fauji Fertilizer Co. Ltd, CAPGAS Pvt Ltd, and State Engineering Corporation Pvt Ltd, among others.
The core legal question was whether dividend income received by a taxpayer company should be assessed under Section 5 of the ITO, 2001 – chargeable at a flat 10% as final tax – or under Section 39, which treats such income as chargeable to normal corporate tax at 35%.
Section 5 of Income Tax Ordinance, 2001 deals specifically with tax on dividends – that is, the profit shareholders receive from companies. Section 39, on the other hand, is a broader provision called ‘Income from Other Sources.’ It covers income that doesn’t fit into categories like salary, business, property, or capital gains, such as bank profit, royalties, lottery winnings, and certain other receipts. The exact tax treatment and rates depend on the applicable provisions and schedules for the relevant tax year, Law Today learnt.
The department argued that, following a proviso inserted into Section 8(1)(e)(ii) through the Finance Act 2007 (later omitted through the Finance Act 2013), the final-tax regime under Section 8 did not apply to dividends received by a company, and that such income should therefore be taxed at the normal rate under Section 39.
While writing the judgment, Justice Aqeel Ahmed Abbasi held that Section 5 creates a separate and distinct charge on dividend income, complete with its own computation mechanism and tax rate, independent of the general charge created under Section 4 of the Ordinance.
The Court observed that treating dividend income as “income from other sources” under Section 39 would render Section 5 redundant – a result inconsistent with settled principles of statutory interpretation, under which redundancy cannot be attributed to any provision of law.
The Court further held that Section 8 is a machinery provision, not a substantive charging provision, and therefore cannot be used to dilute or override the specific charge created under Section 5. It rejected the department’s reliance on the proviso to Section 8(1)(e)(ii), noting that the section’s machinery character means it cannot determine whether dividend income falls under Section 5 or Section 39.
The Court also relied on its earlier ruling in Fawad Ahmad Mukhtar and others v. Commissioner Inland Revenue (Zone II), Regional Tax Office, Multan (2022 SCMR 426), which had already settled that dividend income constitutes a separate block of income taxable solely under Section 5, with Section 39 serving only as a residual provision applicable when income does not fit within any specific charging section.
Resultantly, finding no merit in the department’s petitions, the SC held that the question of law framed in I.T.R. Nos. 84 to 86 of 2015 – regarding the applicability of Section 5 and the 10% tax rate – stood answered in the affirmative, while the question framed in I.T.R. Nos. 190 to 192 of 2015 – concerning the applicability of the 35% normal corporate tax rate – was answered in the negative. Both questions were decided against the petitioner-department and in favour of the respondent-taxpayers. Consequently, the Civil Petitions were dismissed and leave to appeal was refused.
