SHC holds Bonus Shares to be taxable, dismisses seven suits

KARACHI: A bench of High Court of Sindh (SHC) deciding a number of suits challenging the levy of income tax on “Bonus shares“ dismissed the same holding that bonus shares are also taxable.

Justice Muhammad shafi Siddiqui of SHC heard the suit filed by Muhammad Hussain Kassim and 12 others against Secretary Revenue Division/ Chairman FBR.

Seeking a declaration and permanent injunction, the plaintiff raised the law point that  whether Section 2 (29) , 39(1), 236 (M )and 236 (N) of Income Tax Ordinance 2001 as inserted through Finance Act are ultra vires of the law and the Constitution of Pakistan 1973.

The amendment paved the way for levy of income tax on bonus shares too.

The counsel for plaintiffs maintained that bonus share have not been defined in Companies Ordinance 1984 but defined in Section 2(9) of the Income Tax Ordinance 2001. He further contended that shares could be considered as a moveable property or an asset.

The plaintiffs side maintained that in case share holders are paid dividends they are liable to pay income tax but does not liable to pay such taxes on receipt of bonus shares since same is not the income in any rational sense but construed as an asset and moveable property in the hands of the shareholders.

The law permits a tax payer to arrange the tax affairs in ‘best tax efficient manner ‘which may be termed as “Tax avoidance” which is permissible under the law while tax evasion entails consequences of concealment and suppression of income and transaction prohibited and punishable under relevant laws.

The plaintiff’s counsel prayed to the court to declare the impugned legislative amendment as ultra virus of the Constitution read with Article 52 of the Constitution and thus annulled.

The counsel for defendants argued that legislature has the widest powers to levy taxes or any amount or value susceptible to income. They also contended that under the company law, the value of bonus share is implied /transferred from surplus account to the capital assets of the company in the name of the shareholders.

By issuing bonus shares, nothing in terms of money is relieved by the shareholder but it increases the ownership of shareholders in the company as the capacity to earn increases so does the capacity to tax increases.

They also argued that by taxing on “issuance of bonus shares“ legislature has not eroded any fundamental right of the subject. The learned judge held that bonus shares under the impugned amendment are lawfully considered as taxable.

Exemption is not a right to concession and can be lifted or withdrawn by the legislature at any time expressly or impliedly, the court held while dismissing the suit without any cost.

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