Dividend income constitutes separate block of income, which is solely liable to be taxed under Section 5 of ITO: SC

ISLAMABAD: The Supreme Court held that by virtue of subsections (4) and (5) of Section 4 of the Income Tax Ordinance, 2001, dividend income constitutes a separate block of income which is solely liable to be taxed under Section 5 of the ITO, 2001.

“Consequently, the same cannot be taxed as income from other sources covered under Section 39 of the ITO, 2001, nor the same can be charged to tax at normal corporate rate @35 percent,” said a judgment of a two-judge SC bench.

Justice Aqeel Ahmed Abbasi, who authored the judgment, wrote that the apex court in Paragraph 11 of the judgment in Fawad Ahmad case, unequivocally clarified the harmonious interplay between Sections 5 and 39 of the ITO, 2001, establishing that Section 5 of ITO, 2001 is the primary charging provision for all dividends, whereas Section 39 of the ITO, 2001 serves as a residual provision.

“This means that the Tax Authorities can only resort to Section 39 of the ITO, 2001 if a dividend somehow, fails to fit within the scope of Section 5 of ITO, 2001.”

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The judgment further said that applying this settled fundamental test, the corporate dividends received by the respondents in the instant case perfectly fit-in the description of dividends under the Ordinance. “Consequently, the same must be charged under the specific provisions of Section 5, and the department cannot bypass this primary charging section to apply a higher rate of tax under Section 39 of ITO, 2001,” it added.

The judgment noted that the department’s counsel’s emphasis that dividend received by a company was excluded from the purview of Section 8 of the ITO, 2001, is equally misconceived for the reason that Section 8 is merely a machinery provision, and by settled principles of interpretation cannot replace or dilute the effect of a substantive charging provision.

It said that Section 5 of the ITO, 2001 not only provides for a separate charge in respect of dividend received from a company or treated as dividend under clause (19) of Section 2 but also provides a separate mechanism for computation of tax liability by applying the relevant rate of tax to the gross amount of the dividend @10 percent under Division III part I of the First Schedule of ITO, 2001. Therefore, the machinery provisions cannot be engineered to deny the taxpayers benefit of separate/ specific tax charging regime under Section 5 of ITO, 2001.

The two-judge bench, comprising Chief Justice Yahya Afridi and Justice Aqeel Abbasi, upheld the verdict of the Islamabad High Court.

A Division Bench of the IHC through impugned combined judgment in connected references including I.T.R No.85 of 2015 titled Commissioner Inland Revenue v M/s Saudi Pak Industrial Agricultural Investment Company Pvt. Ltd. decided in favour of the respondent (M/s Saudi Pak), while rendering decision on two questions;

“Whether in the facts and in the circumstances of the case, the learned Tribunal was justified to hold that “Dividend Income” received by the Taxpayer is assessable to tax under Section 5 of the Income Tax Ordinance, 2001 and chargeable to tax at the rate of 10 percent being final tax liability although as per Section 8 of the Income Tax Ordinance, 2001 tax deducted on dividend received by company is not final tax liability, and hence income received under this head is chargeable to normal tax at the rate of 35 percent?

Whether in facts and in the circumstances of the case, the learned Tribunal was justified to hold that “Dividend Income” received by the Taxpayer is chargeable to normal tax at the rate of 35 percent in view of Section 8 of the Income Tax Ordinance, 2001 whereby tax deducted on dividend received by company is not final tax liability?”

Copyright Business Recorder, 2026