Calculation of Total Income for Tax in Bangladesh in 2024

by Tahmidur Remura Wahid | Sep 12, 2024 | Corporate Tax, Finance Law, Tax Law, Uncategorized

Calculation of Total Income for Tax in Bangladesh in 2024

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Heads of Income of a company:

The total income’ of a company is computed in the same manner as income of other types of assessee. The steps are as follows:

(a) The first step is to calculate income under different heads of income. In this exercise however, income under the Salary head’ shall not be applicable.’ The other heads of income shall be aggregated.

(b) The second step is to consider the effect of $19 with respect to unexplained investment, etc. for the purpose of computing the income.

(c) The third step is to consider the effects of section 43(2), 43(5), 43(6), 48(2) and 62 in aggregating the income.

(d) The fourth step is to consider set-off and adjustment of current and carry forward of losses in accordance with $$ 37 to 42.

It is to be noted here that the Ordinance puts the tax payment obligation on the company and any infraction in this regard is solely attributable to the company and not to its principal officer who merely acts as an agent of the company.*

This Chapter deals with step (a) as stated above (the heads of income). The other three steps (b), (c) and (d) are discussed in Chapters 5, 6, and 7, respectively.

Income from business or profession

Business:

The word “business” is defined in $2(14) to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The term “includes” indicates that the word “business” has a wider meaning than the words “trade, commerce or manufacture”s The activities which constitute carrying on of business need not necessarily consist of activities by way of trade, commerce or manufacture or activities in the exercise of a profession or vocation. They may even consist of rendering services of a variegated character to others.®

Profession or vocation:

The word “profession” is defined in $2(49) to include vocation. Profession involves occupations requiring purely intellectual or manual skills? Due to the advent of technological and financial development the word “profession” now has a broader

and more comprehensive meaning. It has been held that politics is a

profession® but not a shipping agency. The word “vocation”, however, is not defined in the Ordinance. It has been interpreted as analogous to “calling”, a word of wide signification, meaning the way in which a man passes his life.!° Acting as an arbitrator in a dispute”, social work”, formation and promotion of a company!, and fighting atheism’ may amount to vocation.

Distinction between business and profession:

All professions are businesses, but all businesses are not professions.! Whether a particular activity can be identified as business or profession will depend on the facts and circumstances of each case. The word “profession” involves the idea of an occupation requiring purely intellectual skills or manual skill controlled by the intellectual skills of the operator as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale of commodity.

Although income from business or profession is taxable under the same head ($28), where specific reference is made to “business” in a particular provision, it cannot be understood that business should include “profession” in every case and there is no reason to infer that their definitions have to be ignored without any indication of contrary legislative intent.

Income: Under $2(34), “income” includes profits and gains. Income chargeable under this head should be computed in accordance with the method of accounting regularly employed by the assessee. Profit motive not essential: There is no requirement that the person carrying on a business or engaged in a profession or vocation should make a profit for the purpose of $28.19 4.9 General principles for computing business income:

Business or profession must be carried on by the assessee: Under §28, emphasis is on the person carrying on the business and not on the owner of the business? Thus, where the court takes the owner’s right to carry on and manage the business and appoints someone else to carry on the business, the owner will not be assessable on the income of such profits.

Business or profession must be carried on for a time during the previous year (i.e. income year): Income chargeable under this head must be derived from business carried on or profession engaged in by the assessee at any time during the previous year (i.e. income year), however short it is.22

Suspension of business or profession does not necessarily amount to discontinuance of the business or profession: It is not imperative that the business or profession has work all the time to be regarded as “carrying on or engaged in” business or profession. There may be long intervals of inactivity and yet a business or profession may be regarded as a going concern, though such concern, for the time being, is regarded as dormant. The mere fact that a business or profession has not been able to generate work and has, for sometime, remained dormant, would not mean that it has ceased to exist if the assessee continues to maintain an establishment and incurs expenses in the expectation that work will come and the business or profession will be successful.23 A business or profession may remain inactive for a particular period and, merely because of such inactiveness, it cannot be concluded that the business or profession has ceased to run.?* It is only a complete discontinuances of the business or profession that will put an end to its existence.

Profits of only the previous income year are chargeable: Under this head, the profits that have accrued to the business during the previous income year are charged to tax. For the purpose of profit computation, each year is regarded as a self-contained period of time and profits earned or losses sustained before commencement or after closure of a particular year are irrelevant. The profits of the annual period have to be computed in accordance with the accounting method regularly employed by the assessee under $35 on the basis of accrual of income or expenditure or actual receipts or disbursement, as the case may be.?6

Several Businesses:

The income of each distinct business must be computed separately? However, tax will be charged under this head not on the separate income of each business but on the aggregate income of all the businesses carried on by the assessee?8 The words “any business or profession,” as used in §28(1)(a), means each and every business of the assessee put together?9

Lease of business assets:

Generally, income from exploitation of business assets would be taxed under $28 whether the exploitation is done directly or through some other agency. Problematic questions arise when a business leases out its assets to others for rental income. Whether or not a particular lease or letting is a business depends on the facts and circumstances of each case according to ordinary common sense principles. Where the assessee leased out its production unit as a temporary measure to tide over- a financial crisis, it was held that the leased product unit did not cease to be a commercial asset merely because of an intervening lull during which it was let out to a third party and the rental income received from the lessee was assessable as income from business.” If the commercial asset is not capable of being used for busincas purposes, then its lease to a third party does not result in an Income from business,

Thus, Income derlved from letting out a factory”, a factory shed”, a studio”, or a go-down’ may constitute business Income under $28 where the letting is temporary and not permanent. The assessee may carry on the business of leasing commercial assets”, for example letting out a building for functions, and may also carry on the business of acquiring houses and letting them out on monthly rent for the purpose of earning profit.” In order to determine whether the income of the assessee-company from letting out of vacant land and building is business income under $28, the memorandum and articles of association of the assessec-company should be looked at.10 k-9.7 Investment of surplus funds is not business: Merely investing surplus funds instead of keeping them idle and obtaining interest therefrom would not constitute income from business.” However, where a fixed deposit is made as margin money or collateral security for a loan for the purpose of a business, the interest income from such deposit may constitute business income under $28 because such deposit has a direct nexus with the assessee’s business.

Reimbursement of expenses is not business income:

Expenditure incurred by the business which is later reimbursed by a sister concern is not business income under $28.13 Money received from an assessee’s principal as reimbursement of expenses

incurred on behalf of the principal is not income in the hands of the assessee.**

Cash subsidy received from the government: The amount of cash subsidy or cash incentive received from the government by the assessee is an incentive relating to the assessee’s trade or business and therefore, falls to be taxed under $28(1)(c) as “value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession” and not under $3345 as income from other sources.

Deeming clause for underinvested capital for new assessee (528(1)(i)):

Under $28(1)(i), a new category of business income has been inserted by the Finance Act 2020 which corresponds to §82BB(12) of the Ordinance”, under which the assessee must maintain the amount of capital in the business or profession for the income year during which the initial capital was invested and four subsequent income years, and if there is any amount of shortfall in the capital in any of these income years, then such shortfall amount shall be deemed as business income under §28(1)(i) of the Ordinance

for that income year and shall be included in the total income of the assessee.

Special treatment in case of business income of commercial banks and financial institutions ($28(3)): To tackle the complexities of taxability of troublesome loans, $28(3) was inserted by the Finance

Act 1996, which provides that interest on prescribed bad or doubtful

debts’ shall be charged to tax only in the year in which the interest is actually received or is credited to the profit and loss account, whichever is earlier. The benefit of $28(3) has been extended to financial institutions by the Finance Act 2015. The word “classify” in $28(3) relates to the classification of categories of bad or doubtful debts by the Bangladesh Bank. However, if the Bangladesh Bank gives any different direction regarding recognition of interest income, the provision of $28(3) shall prevail over such direction. 49

Capital gains from transfer of capital assets:

Capital asset: The words “capital asset” are defined in $2(15) of the Ordinance. It means property of any kind but does not include (a) any stock-in-trade (not being stocks and shares), (b) consumable stores or raw materials held for business or professional purposes, and (c) personal effects (that is, movable property including wearing apparel, jewellery, furniture, fixture, equipment, and vehicles) held exclusively for personal use by the assessee and not used for business or profession of the assessee or any member of the assessee’s family dependent on him. Before the Finance Act 2014, “capital asset” also excluded agricultural land in Bangladesh but did not exclude any urban agricultural land or any area which the government earmarks for urbanisations The Finance Act 2014 has included agricultural land as “capital asset”. Capital asset includes the right to subscribe so See $2(15)(c) of the Ordinance – (i) any area which is within the jurisdiction of the districts of Dhaka, Chittagong, Narayanganj, Gazipur, Narsingdi, Munshiganj and Manikganj, Khulna Development Authority (KDA), Rajshahi Development Authority

(RDA), a City Corporation, Municipality, Paurashave or Cantonment Board; or (ii) any area within a 5 mile distance from the local limits of RAJUK, CDA, KDA, RDA, a

City Corporation, Municipality, Paurashave or Cantonment Board, as the government may specify by gazette notification. See CIT v. Satinder Pal Singh (2010) 33 DTR 281 (P&H) where it was held that measurement of distance (used in S2(15)(c)(ii)) from the municipality etc. to ascertain whether a land is agricultural land or not, has to be measured in terms of the approach by road and not by a straight line distance on

horizontal plane or as per crow’s flight. For shares in a company’, a partner’s share in a firm?, goodwill of

a business, right to claim specific performance of an agreements (but not the right to sue for damages’), the management right of a business, and any incentive given by the government to the exporter for export of non-traditional items. The word “held” as used in $2(15) includes constructive holding or possession of the capital asset.58 Trees that were planted to give shade to tea plants cannot be regarded as capital asset if such trees were later cut down and sold at a price because the source of income of the business in this case was not the shade-trees but the tea plants which remained in existence even after cutting down the trees in question.» The term “stock-in-trade” means stock of commodities for sale by the dealer or shop-keeper.. In the case of a ship-breaking business, the ships are the raw materials and the scraps resulting from any ship-breaking would be the finished products and stock-in-trade of the assessee..

Whether shares are stock-in-trade or capital assets: Under the Ordinance, there is a distinction between capital assets and trading assets. Generally, income from capital assets is taxed under $31 and income from trading assets (stock-in-trade) is taxed under $28. With respect to dealing with shares, frequently the issue becomes whether any income from sale of such shares would be capital gains or business income. The issue of whether shares are stock-in-trade or capital assets is a mixed question of law and fact. Generally, whether

Corporate Tax Law & Practice a particular shareholding is investment or forms part of the stock-in- trade, is a matter which is within the knowledge of the assessee who holds the shares and the assessee should, in normal circumstances, be in a position to produce evidence from his records to show whether he holds such shares as investment or as part of his stock-in-trade. 3 The substantial nature of transactions, the manner of maintaining books of accounts, the magnitude of purchase and sale, the ratio between purchase and sale, and the holding would provide a good guide to determine the nature of transactions.

In One Bank Ltd v. Commissioner of Taxess, the High Court Division held that the shares in a share trading business are capital assets irrespective of those being held as stock-in-trade. The High Court Division did not cite any caselaw to support its conclusion. The High Court Division relied on the expression “stock-in-trade (not being stocks and shares)” in $2(15)(a) of the Ordinance to arrive at its conclusion that shares will always be capital assets even if they are held as stock-in-trade. With due reverence, it is submitted that this is a wrong statement of law.

The provisions of $2(15), while defining the term “capital asset”, state, inter alia, that it means property of any kind held by an assessee, whether or not connected with his business or profession. Then $2(15)(a) gives an exclusion that takes certain things outside the ambit of “capital asset”. These are any stock-in-trade (not being stocks and shares), consumable stores or raw materials held for the purposes of his business or profession. The expression “any stock- in-trade (not being stocks and shares)” can be viewed from three standpoints. First, the bracketed words “(not being stocks and shares)” could point towards an exception to the words “any stock-in-trade” appearing before the bracketed portion. But this reading makes the word “any” appearing before the expression stock-in-trade” completely superfluous. It is a fundamental principle of statutory interpretation that every word of the statute has to be given its due meaning. However, if the words “(not being stocks and shares)” are read as exception to the expression “any stock-in-trade”, then the word “any” loses its relevance within the scheme of $2(15)(a), which cannot be allowed as a matter of statutory interpretation. The High

Court Division in One Bank Ltd did not consider this point while interpreting $2(15)(a).

4.15 Secondly, the High Court Division in One Bank Ltd also did not consider the significance of “brackets/parentheses” in statutory interpretation. Generally, the purpose of a parenthesis (or bracket) is to insert an illustration, explanation, definition or additional piece of information of any sort into a sentence that is logically and grammatically complete without its The expression “any stock- in-trade” is grammatically complete without the bracketed words “(not being stocks and shares)”. Therefore, it could be argued that the bracketed words “(not being stocks and shares)” are inserted after the words “any stock-in-trade” to explain or clarify the expression “stock-in-trade”, which is not defined in the Ordinance. There is an inherent confusion in the word “stock” due to its multiple meanings in different context. For example, in mercantile law, the word “stock” means goods and wares of a merchant or tradesman, kept for sale and traffic.” In corporate law, the word “stock” is used in various senses?, which may mean the capital or principal fund of a corporation or joint-stock company, formed by the contributions of subscribers or the sale of shares; or the aggregate of a certain number of shares severally owned by the members or stockholders of the corporation or the proportional share of an individual stockholder; or the incorporeal property, which is represented by the holding of a certificate of stock; and in a wider and more remote sense, the right of a shareholder to participate in the general management of the company and to share proportionally in its net profits or earnings or in the distribution of assets on dissolution?” Moreover, the expression “stock-in-trade”

Corporate Tax Law to Practice also means merchandise or goods kept for sale?? And it is unclear whether the expression “stocks and shares” in the bracketed portion of $2(15)(a) is meant to convey two separate things. If the word “stocks” is different from the word “shares”, then what does it mean? Does the word “stocks” mean goods of a merchant or tradesman that are kept for sale?3? If the word “stocks” means goods for sale kept by a merchant, then what relevance remains of the words “any stock-in- trade” appearing at the beginning of $2(15)(a) given the expression “stock-in-trade” also means merchandise or goods kept for sale? ? Or does the word “stocks” mean fully paid shares?

If the word “stocks” means shares, then would it logically follow that loan stock?, debenture stock, or convertible debentures® would not fall within the word “stocks”? 4.16 These inherent ambiguities in the words “stock” and “stock-in-trade” mean that the clearest linguistic exposition is required to depart from their natural meanings. In R. v. North American Van Lines (Alberta) Ltd’, the Ontario Supreme Court, Court of Appeal, was deciding an appeal that required interpretation of the word “stock-in-trade” in the context of an extra-provincial trucking licence issued by the Province of Ontario under the Public Commercial Vehicles Act, R.S.O. 1980, c. 407.

The issue in the appeal was whether for the purpose of being labelled as “stock-in-trade”, new furniture had to be transported along with used furniture and equipment to the store in which it was to be used or whether new furniture could be labelled as “stock-in-trade” while being transported independently of the movement of such used furniture and equipment. The expression “stock-in-trade” was not defined in the statute under appeal.

The Ontario Supreme Court, Court of Appeal, while interpreting the expression “stock-in-trade”, observed as follows- “The judgment of Wilson C.J. in the Nolan case, supra, emphasizes that the term “stock-in-trade” must be used carefully in relation to the facts and circumstances surrounding each case. If there was to be any departure from the ordinary meaning of “stock-in-trade” as relating to goods in the possession of a trader or merchant, it would require the clearest possible language in the governing statute and regulations to bring this about.”

(a) without it being statutorily defined in the Ordinance, it required the clearest possible language in the Ordinance if there was to be any departure from the ordinary meaning of “stock-in-trade”81 It is submitted that by using the word “any” at the start of $2(15)(a) and before the expression “stock-in-trade”, the bracketed words “(not being stocks and shares)” thereafter have certainly not provided the clearest

possible language to make the desired departure from the ordinary meaning of the expression “stock-in-trade”.

The ambiguity presented by the bracketed words “(not being stocks and shares)” in §2(15)(a) of the Ordinance can be demonstrated by an example. In the case of Commissioner of Taxes v. Prime Bank the High Court Division, while analysing the expression “stock-in-trade” in the context of share dealing, made the following two observations®3:

“Now, let us turn back to the facts of the case. The assessee is a banking company. In course of its business, it held shares and debentures, definitely for the purpose of earning profit and gains by transfer of them. So, it could be said that it deals in shares and debentures, by purchase and sale of them. Such shares and debentures are, no doubt, stock-in-trade of the assessee. It would be allowed to classify the income out of the profits and

gains from transfer of such stock-in-trade as income under the head, “Income from business”.

In sum, the stocks and shares held by a banking company are its stock-in-trade for it deals in such stocks and shares. It buys them to sell to earn profit and/or gain. In such sense, this stock- in-trade is a part of its capital assets.”

The above two observations in Prime Bank are diametrically opposite and conceptually irreconcilable. Under the first observation®*, the High Court Division correctly held that the shares and debentures are stock-in-trade of the assessee-Bank engaged in share dealing and the income would be classified under the head “income from business” under $28 of the Ordinance.

But in the same judgment, under the second observation®, the court concluded that the shares, although stock-in-trade of the assessee-Bank, are part of its capital assets, which is assessable to tax under $31 of the Ordinance. In other words, the judgment in Prime Bank deals with the issue of shares as stock-in-trade once as revenue assets (under paragraph 22) and the second time as capital assets (under paragraph 32). It is submitted that the High Court Division’s judgment in Prime Bank shows the ambiguity arising out of the expression “stock-in-trade” in $2(15)(a). Furthermore, it is respectfully submitted that the judgment in Prime Bank suffers from error in iudicando and should not be followed insofar as it relates to the analysis and conclusions reached with regard to the characterisation of income from share dealing and the expression “stock-in-trade” in $2(15)(a) of the Ordinance.

Alternately, a more meritorious proposition is that given the multiple meanings of the word “stock” in different context, it requires clarification and emphasising for the readers to understand what it actually means in a given context. It is submitted that by inserting the bracketed words “(not being stocks and shares)” after the expression “stock-in-trade” and the word “any” before it, the draftsman of $2(15) (a) was emphasising and clarifying to the readers that “stock-in-trade” not only means “stocks and shares”, but means any stock-in-trade that is held for the purposes of the assessees business or profession.

Thirdly, reading the judgment in One Bank Ltd as correct would result in absurdity which must be avoided in statutory interpretation. The expression “broker” is defined in the Securities and Exchange Ordinance 1969 as any person engaged in the business of effecting transactions in securities for the account of others.

The definition of the word “securities” in the Securities and Exchange Ordinance 1969 includes, inter alia, any stock, transferable share, note, debenture, debenture stock, bond, derivative, commodity futures contract, options contract, exchange-traded fund and any interest or instrument commonly known as a “security”s Thus, under the scheme of the Securities and Exchange Ordinance 1969, a broker can engage in securities trading which may involve share trading, bond trading, derivatives trading, options trading, etc. If the judgment in One Bank Ltd is considered as correct, then it would mean that bonds and derivatives (which are “securities” under the Securities and Exchange Ordinance 1969) in the possession of a broker would be its stock-in-trade under $2(15)(a) and any income from bond trading or derivatives trading would be regarded as its business income taxable under $28 of the Ordinance.

But if the same broker has shares in its possession and earns income from any share dealing, then under One Bank Ltd, the shares (which are also “securities” under the Securities and Exchange Ordinance 1969) would be capital assets and not stock-in-trade under $2(15)(a) for which tax will be charged under $31 of the Ordinance. Again, the position becomes more complicated in case of “hybrid securities” having both debt and equity feature. For example, if a broker holds convertible debentures”, then under the reasoning of One Bank Ltd, such convertible debentures would be regarded as stock-in-trade (or revenue assets) for which the broker may claim deductions under $29 of the Ordinance. But if such convertible debentures are converted into shares, then under the principle of One Bank Ltd, immediately after the conversion, the shares in the hands of the broker would turn into capital assets which would be taxed under $31 of the Ordinance. In other words, if the judgment in One Bank Ltd is regarded as correct, then one asset (the convertible debenture) would be treated as revenue asset (while it remains as convertible debenture) before the conversion and as capital asset after the conversion (when it is converted into shares). It is submitted that these conclusions result in absurd positions with respect to $2(15)(a) of the Ordinance which must be avoided in statutory interpretation.’!

A person may hold shares for the purpose of earning some extra money by sale or as security for future exigencies in the course of his usual profession or business. But such a person can hardly be deemed to be dealing in shares in order to call such shares as his stock-in-trade.? Receipt of non-cash remuneration in the form of fully paid up shares against services rendered by the assessee is like any other receipt, and therefore, cannot be termed as capital receipt in the hands of the assessee.’ The entries in the assessee’s books of accounts are not decisive of the issue.94

Transfer:

Under $31, capital gains arise only when there is “transfer” of a capital asset. If there is no “transfer” or if there is a transaction that is not regarded as “transfer” under 52(66)95 of the Ordinance, then there will not be any capital gains. Redemption of a mutual fund scheme on maturity does not constitute “transfer” and therefore, the surplus cannot be treated a capital gains but only interest.” Conversely, redemption of bonds constitutes “transfer” as there is “extinguishment of rights” by contractual operation and also a “relinquishment” of rights in the assets in lieu of which the assessee receives cash from the competent authority” Redemption of preference shares by a company is a “transfer” in the hands of the shareholders and they will be liable to capital gains.?8

Sale:

In considering “transfer” under S2(66), regard has to be given to the word “sale” as it does not have any definition in the Ordinance and it has been held that in construing the term “sale”, reference must be given to its definition in the Transfer of Property Act 1882 in case of immovable property and the Sale of Goods Act 1930 in case of movable property.®9 Specific problems arise in dealing with joint venture property development agreements whereby a development company contracts with a landowner to develop the landowner’s land. Generally, such a joint venture property development agreement is not an agreement for sale simpliciter because there is no “buyer-seller” relationship at the time of the agreement. Nevertheless, it has been held in some cases10 that a joint venture property development agreement is an agreement for sale. In contrast, some cases have taken the opposite view that such agreement is not an agreement for sale.

It has been held that if the contract read as a whole indicates passing of, or transferring of complete control over, the property in favour of the developer then the contract could be regarded as an agreement for sale. 102 If the contract confers rights of ownership to the developer for the developer’s share of the land at the date of the contract, then the same would constitute “transfer” in relation to the developer’s share in the capital asset (i.e. the land). In a joint venture land development agreement, generally, there are three contracts involved:

(i) a joint venture agreement under which the landowner agrees to give up the right, title and interest over a certain portion of his land in favour of the real estate developer in exchange for cash and some specified flats to be built by the developer on the said land;

(ii) an irrevocable registered power of attorney executed by the landowner in favour of the real estate developer that allows the developer to mortgage the said land to banks or financial institutions to raise financing for the real estate development project, and also to sell the developer’s portion of the flats to various purchasers by way of registered conveyance;

and iii) a registered agreement between the real estate developer and a third party purchaser for sale of the developer’s portion of the flats.10 Looking from this standpoint, when the real estate developer, pursuant to a joint venture land development agreement with the landowner, sells the developer’s portion of the flats to various purchasers by way of registered conveyance, it would be wrong to conclude that such sale by the developer of flats to various purchasers is a “transfer” by the landowner for the purpose of imposing capital gains tax under $31 because of two reasons.

Firstly, the return of investment for the real estate developer for the construction of the building is the sale proceeds from the transfer of the developer’s portion of the flats to various purchasers by way of registered conveyance and secondly, unless the contract stipulates otherwise, whatever amount is received by the real estate developer in the sale of the developer’s portion of the flats to various purchasers cannot be deemed to have been received by the landowner under any provision of the Ordinance’S and it is never intended by the landowner and the developer that the sale proceeds arising out of such sale of the flats to various purchasers go into the pocket of the landowner.106

Exchange:

The word “exchange” is defined in $118 of the Transfer of Property Act 1882. Conversion of preference

shares into ordinary shares amounts to exchange!°7 4.23.3 Relinquishment of the asset: The word “relinquishment” means giving up anything. By relinquishment, the owner withdraws himself from the property and abandons his rights thereto. The property, however, continues to exist and becomes a property of someone else.108 For example, giving up the right to subscribe for shares would be regarded as “relinquishment”, However, a unilateral action of writing off the claim in the books of accounts does not amount to relinquishment.10 In a joint venture land development agreement, if the agreement provides for the landowner receiving cash and/or flats for its contribution of the land in the joint venture project, such an arrangement could be regarded as “relinquishment” of the land within the meaning of $2(66) of the Ordinance.!!

Where the assessee gave up his right, title and interest on the property in favour of another person by way of an unregistered document, and when other purchasers acquired rights over that property from that other person in subsequent transactions, it would be incorrect to say that there was no “relinquishment” of the property by the assessee within the ambit of $2(66) for want of registration of the unregistered document under the Registration Act.

Extinguishment of any right in the capital asset: In case of “extinguishment”, the subject matter is “rights” as opposed to “assets” as in the case of “exchange” and “relinquishment”.

Thus, there must be a destruction or extinction of any “right” in the capital asset for there to be an extinguishment. Compensation received from an insurance company on the damage or destruction of an asset is not liable to capital gains tax because, when an asset is destroyed, it is not possible to say that it is transferred, and the words “extinguishment of any rights therein” as used in $2(66) contemplates the continued existence of the property.!13 When the share capital of a company is reduced by paying off a part of the capital by reducing the face value of the shares, the shares in the company remain, but the right of the shareholders to dividends and the right to share in the distribution of the net asset of the company upon liquidation is extinguished proportionately to the extent of reduction in capital and hence, the share capital reduction, results in a transfer.!! Forfeiture of convertible warrants results in extinguishment of right to obtain shares in the company and results in loss under $31.115 Mere deferment of right does not amount to extinguishment. 6 Compulsory acquisition of immovable property under any law is a “transfer” while requisition of any capital asset is not unless it is subsequently acquired.

Interrelation between 531 and S53H with respect to transfer of immovable property: Under $53H(1) of the Ordinance, the registration authority shall not register any document involving immovable property which is required to be registered under $17(1) (b), 517(1)(c) or 817(1)(e) of the Registration Act 1908 unless tax at the prescribed rate and stamp duty chargeable under the Stamp Act 1899 are paid in relation to the property to which such document relates, at the time of registration of such document, by the transferor of such immovable property.

Under the Proviso to §53H(1), the tax rate has been capped and shall not exceed BDT10,80,000/- per katha (or, 1.65 decimal) for land, BDT600/- per square metre for any structure, building, flat, apartment or floor space on the land, or 4% of the deed value, whichever is higher. The question that arises here is that if an assessee makes payment of the tax and stamp duties as stipulated under §53H(1) at the time of registration of the sale deed relating to a land, would the assessee again be charged to capital gains tax on the amount of capital gains realised on the sale of such land to the purchaser?

Previously, pursuant to the unamended $82C’s of the Ordinance, deduction or collection of tax at source under $53H on transfer of immovable property was the final discharge of all tar liability against such transfer and no tax was further charged on the capital gains on such transfer of immovable property under $31 of the Ordinance! Under the unamended $82C(1) of the Ordinance, tax deducted or collected at source in accordance with the provisions referred to in $82C(2) was deemed to be the final discharge of tax liability from that source!?

The provisions of the unamended $82C of the Ordinance created “presumptive taxation” 21 for $53H whereby tax collected under $53H shall be deemed to be the final discharge of tax liability from transfer of immovable property by the transferor- assessee. However, the benefit of final discharge of tax liability under the unamended $82C has been changed to the concept of minimum tax!2 by the Finance Act 2016123 Under the amended $82C(2)(a) and (b) of the Ordinance, any tax deducted or collected at source under several sections that include §53H, shall be the minimum tax on income from the source or sources for which tax has been deducted or collected. If the assessee has no other income source, then under $82C(2)(a) and (b) of the Ordinance, deduction or collection of tax at source under $53H on transfer of immovable property shall be in effect the minimum and final tax of the assessee.

Section 32 of the Ordinance deals with computation of capital gains. Generally, in computing capital gains the cost of acquisition of the capital assets shall be deducted from the sale price. Specifically, under §32 the following formula is applied when computing capital gains: Full value of consideration or fair market value, whichever is higher (532(1)) Less (a) Expenditure incurred solely in connection with such a transfer (532(1)(a)) (b) Cost of acquisition (532(1)(b)) (c) Capital expenditure incurred for any improvement excluding

allowances under $$ 23, 29, and 34 (532(1)(b))

Capital gains Less Exemption available under (532(5) to $32(11))

Taxable capital gains

Full value of consideration:

The term “full value of consideration” has not been defined in the Ordinance. It generally means what the transferor receives, or is entitled to receive, as consideration for the capital asset transferred. It is interesting to note here that $32(1) uses the term “full consideration” as opposed to simply “consideration”. Thus, it could be argued that for the purpose of $32(1), the Legislature intended that “transfer” does not only include merely “sale” but also includes other modes of transfer such as “exchange”, “relinquishment of the capital assets”, and “extinguishment of rights” in the capital assets as stipulated in $2(66) of the Ordinance. In a transaction where the consideration is not in money, under $32 the value given to such transaction by the parties will have to be taken into consideration when determining the full value of consideration. Even if the full consideration is received in instalments in different years, the entire value of the full consideration has to be taken into account for computing the capital gains which become chargeable in the year in which the capital asset

Is transferred, However, where the capital asset is transferred in part against a part of the agreed consideration, capital gains should be assessed on the basis of the transfer of the possession in proportion to the consideration recelved by the assessee, Where the government pays an extra amount by way of solatlum at the time of compulsory acquisition of Immovable property, the solatium forms part of the full consideration.

This is because under 532(1) capital gains is assessed on the basis of the full consideration or the fair market value, whichever is higher and although solatium is in the nature of ex gratia payment, not forming part of the fair market value, it is nevertheless compensation and forms part of the “full value of consideration” 2 In case of “exchange”, the full value of consideration shall be the market value of the property received as on the date of exchange! However, unless it is established by material that the property or goods received in exchange is of a higher value than the property or goods exchanged with, there can be no capital gains.2 Also, it should be noted that “consideration” may flow from the transferee or any other person.22

Expenditure incurred solely in connection with the transfer: The words “in connection with” are very wide in their ambit. Expenditure incurred in connection with land acquisition reference came before the district court for enhanced compensation 3, expenses for legal fees’3, stamp duty and registration charges!3, and expenses for receiving a no-objection-certificate for sale of flats!33 are allowable as

deductions under $32(1)(a).

Cost of acquisition:

$32(2) of the Ordinance deals with “cost of acquisition”. Under 532(2)(i), when the assessee acquires the capital assets by purchase, the cost of acquisition is the actual cost of such purchase. Under $32(2)(ii), in certain specific situations 34 the cost of acquisition of the previous owner is deemed to be the cost of acquisition to the assessee. In these situations, while calculating the cost of acquisition to the assessee, the cost to the previous owner shall be reduced by the amount of depreciation allowed to the previous owner. However, where the actual cost of acquisition of the previous owner cannot be ascertained, the cost of acquisition of the previous owner will be the “fair market value” of the capital asset at the date on which the capital asset became the property of the previous owner. 135 Any premium or excess paid for purchase of shares for acquiring a controlling stake in a company shall be part of the cost of acquisition. 136 Legal expenses incurred by way of litigation to compel the company to register the shares in the name of the assessee would form part of cost of acquisition of the shares.137 Interest on money borrowed for purchase of shares would form part of the cost of acquisition while computing capital gains on the sale of such shares, even though such interest will not be paid till the time the shares are sold 138

Actual cost of acquisition to previous owner:

Where a capital asset is acquired by the previous owner and later converted into a new asset, the period of holding of the new asset will commence on the date of conversion of the old asset into the new asset, and the date of acquisition shall not be the date on which the original asset was

acquired by the previous owner but when the old asset was converted into the new asset.

Fair market value:

The term “fair market value” is defined in $2(30) of the Ordinance. In relation to capital asset or a business or undertaking!40, it means the price which such asset would ordinarily fetch on sale in the open market on the relevant day, and, where such price is not ascertainable, the price which the DCT may, with the approval in writing of the Inspecting Joint Commissioner, determine. The onus is on the assessee to show that the DCT did not obtain the approval in writing of the Inspecting Joint Commissioner!

This concept of “fair market value” brings in the question of a hypothetical seller and a hypothetical buyer in a hypothetical market.142 In considering this hypothesis, the concept of “willing buyer and willing seller” is an irrelevant factor!43 If a capital asset in an area is sold in a particular year and the market price of the assets in the same area, as relied upon by the DCT, is related to another year, it cannot be said that the value estimated by the DCT is a “fair market value” for the purpose of $2(30) because the market price as relied upon by the DCT would not be related to the time-line in which the sale of such capital asset took place.

The DCT cannot rely upon the inspector’s report to determine the fair market value when such report is too general without reference to any comparable case!45 Moreover, $2(30) gives a special definition of “fair market value” with respect to leasing companies, who are regarded as “financial institutions” having licence from the Bangladesh Bank 14 In the case of leasing companies, under $2(30), the fair market value of a capital asset is the residual value received from the lessee on termination of lease agreement on maturity.! However, for the residual value to be treated as the fair market value, the residual value plus amount realised by the leasing company during the currency of the lease agreement from the lessee towards the cost of the capital asset must not be less than the cost of acquisition to the leasing company.

Depreciable assets:

The First Proviso to 532(2) is a deeming provision. It relates to assets in respect to which the assessee has obtained depreciation allowance and provides an exception to the general rule that capital gain to the assessee is to be computed by deducting the cost of acquisition from the sale price. In case of depreciable assets, the written down value!48, whether diminished or increased upon adjustment under 519(16), 519(17), $27(1)(j) or $29(1)(xi) of the Ordinance, is deemed to be the cost of acquisition. In order to reduce the cost of acquisition to the written down value under the First Proviso to $32(2), the depreciation allowance must be taken by the assessee and not the previous owner.!49 The term “adjustment” is inserted to avoid the possibility of there being a double tax where the question of any balancing charge or balancing allowance is involved. The term “adjustment” implies that the written down value ascertained according to the provisions of paragraph 11(5) of the Third Schedule so of the Ordinance shall be adjusted with the addition of the amount of the balancing chargels, if any, Corporate Tax Law & Practice under $27(1)(j) or 529(1)(xi) 152 If for any reason no such balancing allowance is deducted or balancing charge is levied, then the written down value must be taken without any increase or decrease.153 To understand the impact of the First Proviso to $32(2), the case of Gowri v. CIT154 is instructive. In this case, the son of a deceased partner in a firm filed a suit for declaration that the firm stood dissolved on the death of his father. The court appointed a commissioner who stopped the business of the firm and brought the assets of the firm to a public sale.

The figures were as follows:

A. Assets sold to the highest bid : 152600
Less: Costs etc. of the sale : 2511
Balance price deposited in court : 150089

B. Original cost of the asset to the firm : 88949 Less:
Depreciation actually allowed : 20723
Written down value in the last year of : 68226
business of the firm C.
Balance price deposited in court : 150089
Less: Written down value 68226
Excess 81863

Out of this 81863, the balancing charge of 20723 shall be added to the business income under $28 of the year in which the sale took place, under the provisions of the then prevailing $41(2) of the Indian Income Tax Act 1961 (similar to $19(16) of the Ordinance).

Computation of Total Income: Heads of Income 103

Therefore: 1. Excess 2. Less: Balancing charge “adjustment made” 81863 20723

under the then prevailing $41(2) of the Indian Income Tax Act 1961 (similar to $19(16) of the Ordinance)

Chargeable capital gains : 61140

The above example could be simplified like this—let the original cost of a capital asset be taken at X (say, BDT100/-) and depreciation already allowed in respect of the asset is Y (say, BDT10/- ). The written down value of the asset is BDT90/- (X – Y, i.e. BDT100/- minus BDT10/-). The capital asset is now sold for Z (say, BDT200/-). Now that Z (200/-) is greater than BDT90/- (i.e. X – Y), the balancing charge shall, to the extent of Y (i.e. the depreciation already taken at BDT10/-), be treated under $19(16) of the Ordinance as the assessee’s income for the year in which Z (BDT200/-) becomes payabless and the remaining balance, meaning the amount of BDT100/- (that is, BDT110/- (i.e. Z minus (X – Y)) minus Y (i.e. BDT10/-)) shall be charged as capital gains under $31 of the Ordinance.

The above calculation in Gowri v. CIT could also be summed up under the First Proviso to $32(2) read with 532 (1) as follows:

Full value of consideration or fair market value, whichever is 152600

higher Less (a) Expenditure incurred solely in

connection with such a transfer 2511 (b) Cost of acquisition under the First Proviso to $32(2) 68226 Add (e) Balancing charge by “adjustment made” 20723 88949 91460 61140

Taxable capital gains under $31

In the above example, 88949/- is the original cost of acquisition to the assessee and depreciation actually allowed is 20723/-. Thus, the written down value is 68226/- (i.e. 88949 – 20723). When the asset is sold at 152600/-, after deducting costs of 2511/- incurred in connection with the sale, the balance sale price becomes 150089/-. The balance sale price of 150089/- minus the written down value of 68226/-, i.e. 81863 is bifurcated into (i) depreciation actually allowed (i.e. 20723/-) and (ii) the further surplus of 61140/-. Thus, 20723/- shall be includible in the assessees total income as balancing charge under $19(16) and 61140/- shall be includible as capital gains under $31 of the Ordinance,156

Succession, inheritance or devolution:

The Second Proviso to $32(2) provides that where the capital asset becomes the property of the assessee by succession, inheritance or devolution, the cost of acquisition to the assessee shall be the fair market value of the property at the time when the asset becomes the property of the assessee. The expression “inheritance” only denotes property passing on death from the deceased to his heirs. But the expression “succession” might denote not only succession by death of a person but also other modes of change of ownership inter vivos. For example, there is a succession to a business when there is a transfer of the business from one living person to another. The term “devolution”, on the other hand, is a term of widest import. It certainly includes a devolution or passing of property on the death of a person. But devolution of interest is not only confined to testamentary or intestate succession. Any process recognised by law under which property changes hands from one owner to another, even inter vivos, if it cannot altogether be regarded as a disposition, transfer or conveyance or succession or inheritance, must be regarded as a devolution.! The term “devolution” as used in the Second Proviso to §32(2) of the Ordinance has similar connotation as used in Order 22 Rule 10 of the Code of Civil Procedure 1908.

Capital expenditure incurred for any improvement:

Capital gains shall be computed under $32 by ascertaining the full value of consideration received from the asset transfer or the fair market value of the asset (whichever is higher) and by deducting from that amount (i) the cost of acquisition and (ii) the capital expenditure incurred for any improvement under §32(1)(b). However, no capital expenditure shall be allowed on account of any deductions that has been allowed from interest on securities (under $23), business income (under $29), and income from other sources (under $34). Only those expenses which have actually been incurred by the assessee shall be taken into account. 59 Where the title to the capital asset is defective or imperfect, the expenditure for improvement can also include improvement or enlargement of the right to the title of the capital asset.160 The word “improvement” includes everything by doing which there is an enhancement in the value of the asset or the asset is to grow better or it is followed up by something better.

Power of the Deputy Commissioner of Taxes: 55 32(3) and 32(4) allow the DCT to determine a notional consideration based on the fair market value of the capital asset by ignoring the actual consideration received by the assessee on the date of the transfer and upon obtaining the prior approval of the Inspecting Joint Commissioner 62 On the question of approval, the approving authority is also competent to disapprove or modify what is referred to it or him for approval, 163 Under §32(4), if the fair market value, as determined by the DCT, exceeds by more than 25% of the declared value, then the government may offer to buy the capital asset in the manner specified in the Rules.64 85 32(3) and 32(4) do not contemplate fictional gains. What an assessee might have gained is not relevant for the purpose of 5$ 32(3) and 32(4),165 Under $$ 32(3) and 32(4), the burden of proof is on the NBR to show why the actual consideration received by the assessee on the date of the transfer should be ignored. Unless there is evidence that more than what was stated in the sale instrument

Corporate Tax Law & Practice was received, no higher price can be taken by the DCT to be the basis for the computation of capital gains. 66 S$ 32(3) and 32(4) of the Ordinance do not apply to bona fide transactions where the full value of the consideration for the transfer is correctly declared by the assessee, even if the condition of 15% (under 532(3)) or 25% (under $32(4)) difference between the fair market value as on the date of transfer of the asset and the full value of consideration declared by the assessee is satisfied. Appeal lies against the order of the DCT before the Appellate Joint Commissioner under Rule 42(6) of the Rules.

Capital gains from transfer of business or undertaking (§31A)

The Finance Act 2020 introduced $31A to capture capital gains arising out of transfer of business or undertaking. Under 532A, capital gains will arise from the transfer of business or undertaking in its entirety with all of its assets and liabilities and the capital gains will be deemed to be the income of the assessee in the income year during which the transfer takes place.

The words “transfer in its entirety” suggest that the contemplated transfer is a “slump sale” or sale as a “going concern”. The words “slump sale” and “going concern” are not statutorily defined in the Ordinance. Generally, a “slump sale” or “sale as a going concern” means transfer of a business or undertaking with all its goodwill, land, building, plant, machinery, raw materials, industrial licences, technology, trade mark, etc. along with all the liabilities!68 For the purpose of “transfer in its entirety” the sale does not need to be contained in one single contract and there can be multiple and simultaneous contracts achieving one contractual objective—that is the sale of business or undertaking as a going concern! The word “business” is defined in §2(14) of the Ordinance to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The word “undertaking” is not defined in the Ordinance but has been

Computation of Total Income: Heads of Income

interpreted to mean anything undertaken or any business, work or project which one engages in or attempts, as an enterprise. 7 Prior to introduction of $32A, when the entire business of an undertaking is sold together with all the assets and liabilities including depreciable assets for a slump price without any itemised earmarking, the excess sale proceeds could be chargeable as capital gains under $31.171

Computation of capital gains from transfer of business or undertaking ($32A)

4.39 The Finance Act 2020 introduced $32A to stipulate the computation of capital gains arising out of transfer of business or undertaking. Under $32A, the following formula is applied when computing capital gains from transfer of business or undertaking:

Full value of consideration or fair market value, whichever is higher (532A)

Less (a) Expenditure incurred solely in connection with such a transfer ($32A(a))

(b) The book value of the assets minus the liabilities taken up as on the date of transfer ($32A(b))

Taxable Capital gains

4.40 Expenditure incurred solely in connection with the transfer (532A(a)): For this deduction, the principles under 532(1)(a) shall apply, for which see paragraph 4.27 supra.

4.41 The book value of the assets minus the liabilities taken up as on the date of transfer (532A(b)): Under this deduction, the NBR essentially indicates the net worth of the business or undertaking,

However, the computation in $32A does not say anything about treatment of depreciable assets in the context of computation of the “net worth” (that is book value of the asset minus the liabilities). It is submitted that to appropriately compute the net worth of the business or undertaking, a suitable stipulation regarding the status of the written down value of depreciable assets in a slump sale or sale of a going concern should be inserted in $32A or in paragraph 11 of the Third Schedule.

Exemptions of capital gains

Exemptions of capital gains are currently provided under $$ 32(5), 32(7), 32(10), and 32(11) subject to the assessee fulfilling specific conditions contained therein.

Two conditions must be fulfilled under $32(5) in order to obtain the exemption of capital gains. Firstly, the asset! must be used for the assessees business or profession immediately before the date of the transfer of asset, and secondly, the assessee must purchase the new asset within a period of 1 year before or after the date of the transfer of the old asset for the purpose of his business or profession.

If the above two conditions are satisfied, then: (i) where the amount of the capital gains of the old asset is greater than the cost of acquisition of the new asset – (1) it is the difference between the capital gains amount and the cost of acquisition of the new asset that will be taxed under $31 as income of

the income year; and

(2) if the new asset is transferred subsequently, then

for the purpose of computing (x) depreciation allowance under the Third Schedule of the

Computation of Total Income: Heads of Income 109

transfer, its cost of acquisition or written down Ordinance or (y) capital gains in such subsequent value shall be taken at nil; or

(ii)

where the amount of the capital gains of the old asset is

asset – equal to, or less than, the cost of acquisition of the new

(1) old asset shall not be taxed; and the capital gains arising from the transfer of the

(2) if the new asset is transferred subsequently, then allowance under the Third Schedule of the for the purpose of computing (x) depreciation Ordinance; or (y) balancing charges under $19(16) in respect of the new asset; or (z) capital gains in such subsequent transfer of the new asset, the cost of acquisition or the written down value of the new asset shall be reduced by the amount of the capital gains on the former transfer of the old asset.

4.44 The above stipulation could be illustrated by the following example:

Situation 1: A Ltd. had purchased machinery for its business on 01.01.2005

for BDT100,000/-. The machinery is sold by A Ltd. on 01.01.2012 for BDT1,000,000/-. A Ltd. purchased another machinery for its business on 01.07.2011 for BDT500,000/-. The new asset is bought within a period of 1 year before the date of sale of the old asset. The capital gains exemption under 532(5)(a) (i) would

be calculated as follows: Tk. 1000000/-

Full value of consideration (income year 2011-2012) Tk. 100000/- Cost of acquisition in 2005

Less Tk. 900000/- Capital gains of the old asset Less Capital gains exempt under $32(5)(a)(i) Cost of acquisition of the new property Tk. 500000/-

Tk. 400000/-

Balance capital gains charged under $31

Now, suppose the new machinery is sold in 01.02.2012 for BDT12,00,000/-. For the purpose of 532(5)(a)(ii), the capital gains calculation for the transfer of new asset would be as follows:

Full value of consideration of the transfer of new asset Tk. 1200000/- Less Cost of acquisition or written down Nil value of the new property Capital gains of the new asset charged Tk. 1200000/-

Situation 2:

A Ltd. had purchased machinery for its business on 01.01.2005 for BDT100,000/-. The machinery is sold by A Ltd. on 01.01.2012 for BDT1,000,000/-. A Ltd. purchased another machinery for its business on 01.07.2011 for BDT900,000/-. The new asset is bought within a period of 1 year before the date of sale of the old asset. Here, the capital gains of the old asset is equal to the cost of acquisition of the new asset. The capital gains exemption under 532(5)(b)(i) would be calculated as follows:

Full value of consideration (income year 2011-2012) Tk. 1000000/-

Less Cost of acquisition in 2005 Tk. 100000/- Capital gains of the old asset Tk. 900000/- Less Capital gains exempt under $32(5) (a)(i) Cost of acquisition of the new Tk. 900000/- property Balance capital gains charged under Nil $31

Now, suppose the new machinery is sold in 01.02.2012 for BDT12,00,000/-. For the purpose of §32(5)(b)(ii), the capital

gains calculation for the transfer of new asset would be as follows:

Full value of consideration of the transfer of new Tk. 1200000/-

asset Less Cost of acquisition or written Tk 900000/- down value of the new property Less Capital gains of the Tk. 900000/- old asset Capital gains of the new asset Tk. 1200000/- charged under §31

Thus, from Situation 1 above, under §32(5)(a)(i), if the amount of capital gains of the old asset is greater than the cost of the new asset, then only the excess amount of capital gains of the old asset (after deducting the cost of the new asset) is chargeable to tax.

From Situation 2 above, under §32(5)(b)(i), if the amount of capital gains of the old asset is equal to or less than the cost of the new asset, then the entire capital gains of the old asset shall be exempted. However, if the assessee transfers the new asset subsequently, then, from Situation 1, under $32(5)(a) ii), for the purpose of computing capital gains arising from the transfer of the new asset, the cost of acquisition or the written down value of the new asset is taken as nil. In case of Situation 2, under §32(5)(b)(ji), for the purpose of computing capital gains arising from the transfer of the new asset, the cost of acquisition of the new asset is reduced by the amount of the capital gains arising from the transfer of the old asset. As a result, in both these situations, in case of subsequent transfer of the new asset under $32(5)(a) (ii) and 932(5)(b)(ii), the assessee loses the benefit of exemption provided in 532(5)(a)(i) and $32(5)(b)(i).

Under the Proviso to 532(5), the DCT has the discretion (subject to obtaining prior approval of the Inspecting Joint Commissioner) to extend the period of 1 year for purchase of the new capital asset (either before or after the transfer of the old asset) if the DCT is satisfied that the assessee, despite exercising due diligence, was unable to purchase the new capital asset’s within the period of 1 year. It should be noted here that the DCT may exercise this discretion only in the case of capital assets consisting of plant and machinery.

In the context of $32(5), plant and machinery purchased for future economic benefit can form part of “new asset” 176

The term “new asset” used in various parts of 532(5) must be understood by reference to the main paragraph of $32(5) and this can only be an asset that had been acquired within a period of 1 year before or after the date of transfer of the old asset!”. However, under the Finance Act 2019, the words “capital asset” have been removed from the main paragraph of $32(5) and are replaced with the words “plant, machinery, equipment, motor vehicle, furniture, fixture, and computer”. It seems that the benefit of $32(5) has been restricted to certain asset classes and not all types of capital assets are covered under 32(5). However, the Proviso to $32(5) still retains the words “capital asset” in the context of “plant or machinery”.

The issue here is that whether, by removing the words “capital asset” from the main paragraph of $32(5) and yet retaining the same in the Proviso, a gap is created as to the proper characterisation of the asset class for the purpose of computing capital gain tax. For example, could it be argued that “computer software” would be regarded as “capital asset” in the context of the word “machinery” by taking advantage of these words appearing in the Proviso to $32(5)? Or whether “computer software” would be an excluded asset class due to the specific use of the word “computer” in the main paragraph of $32(5) of the Ordinance. One way to argue is that when a software is acquired through out-right sale which could be used to generate technical know-how for the assessees business, then such a software, capable of generating technical know-how, could be regarded as a “plant”79, which falls under the broad definition of “machinery” and the expenditure for acquiring such technical know-how would be deductible as capital expenditure.180 Another way to argue is that without the software (that is, computer language, programme, operating system, etc.), the hardware (that is, the actual computer and its accessories) would be incomplete, rendering the shell of the component containing the hardware a mere “dumb box”. In other words, the hardware portion of the computer would be of no use at all to the customer, and the hardware and the software together make a workable computer, and both these components are part and parcel of the product “computer” 81 These are critical questions and serious issues for research and development organisations, medical science organisations or pharmaceutical companies due to the extreme importance of technological know-how and computer software in these types of businesses.! It is important for the NBR to clarify these points.

The benefits of $32(5) shall be provided to the assessee even if borrowed funds are utilised to purchase the new asset. & Previously, under the unamended $32(5) (before the Finance Act 2019), shares of companies could come within the ambit of the word “capital asset”186 but after the amendment of the Finance Act 2019, it is submitted that it would be unlikely that shares of companies would fall under any of the words “plant, machinery, equipment, motor vehicle, furniture, fixture, and computer” appearing in the main paragraph of §32(5).

Exemption under $32(7)

4.49 Under $32(7), no capital gains tax shall be charged under $31 in case of transfer of government securities. The idea behind this exemption seems to promote investment in government securities. The benefit of exemption accorded to the assessee under §32(7) cannot

be denied by giving interpretation based on some other provision of the Ordinance.185

Exemption under $32(10)

4.50 Under $32(10), no capital gains tax shall be charged under §31 in case of transfer of capital assets being buildings or lands to a new company for setting up of an industry if the whole amount of the capital gains arising from such transfer is invested in the shares of the company. The logic behind the provision of $32(10) is that in such a transaction, the assessee cannot be said to have gained anything when capital assets are transferred to a new company in exchange for shares. 86 Also, the benefit of §32(10) cannot be denied if the assessee nominates third persons (for example, children) as the recipients of the shares in the new company instead of receiving such shares himself or herself in exchange for the capital assets (buildings or lands).

The term “industry” is not defined in $32(10) or anywhere else in the Ordinance with regard to non-recognition of capital gains from transfer of capital asset. The closest expression has been used in $$ 46A and 46B, where “industrial undertaking” has been defined as an industry engaged in the “production” of certain listed items or goods.8 Thus, it seems that the term “industry” as used in $32(10) refers to activities involving manufacture or production of goods.

A provision for exemption or relief should be construed liberally!9 and therefore, it is submitted that the term “industry” in §32(10) should be liberally construed. Moreover, the objective behind $32(10) seems to promote industrial activities and economic growth. Any provision in a taxing statute granting incentives for promoting growth and development should be construed liberally191 and from that standpoint the term “industry” in §32(10) should not be given a restrictive meaning.

Computation of Total Income: Heads of Income Exemption under §32(11)

4.51 Under $32(11), no capital gains tax shall be charged under $31 in case of transfer of capital assets of a firm to a new company if the whole amount of the capital gains is invested in the share capital of the company by the partners of the firm. On conversion of a firm to a company when erstwhile partners are the only shareholders in company and shares are allotted to them in the same proportion as in firm, there is no transfer attracting $2(66) of the Ordinance s Where a partnership firm is treated as company under the provisions of the Companies Act 1994, neither $2(66) nor $31 shall be attracted even

though there was transfer of assets from firm to newly constituted company. 93

Unavailability of exemptions:

The exemption from capital

gains tax provided in $$ 32(5), 32(7), 32(10), and 32(11) is subject to

$32(12) whereby if the assessee receives investment allowance at any time as per paragraphs 1 to 6, 8 (now stands repealed by the Finance Act 2011), 9 (now stands repealed by the Finance Act 2011), 10 and 11

of Part B of the Sixth Schedule of the Ordinance, then such investment allowances shall be taken into account when calculating the cost of acquisition of the capital asset and the capital gains tax exemption that may be allowed. In other words, under §32(12), if the assessee receives any investment allowance at any time as per paragraphs 1 to 6, 8 (now stands repealed), 9 (now stands repealed), 10 and 11 of Part B of the Sixth Schedule of the Ordinance, then the amount of any exemption from capital gains tax under §$ 32(5), 32(7), 32(10), and 32(11) shall be reduced by the amount of any such investment allowance.

Interest on securities (§22)

Introduction: The provisions of $22 corresponded with 58 of the Income Tax Act 1922, the predecessor of the Ordinance.

116 Corporate Tax Law & Practice 4.54 Scope of $22: Until 2004, $22 was substantially in the same language as Section 8 of the Income Tax 1922. In the Finance Act 2004, one important change was brought to $22. While the pre-2004 version of $22 only mentioned “security of the Government”, the amendment of 2004 replaced it with “security of the Government or any security approved by the Government”. This insertion has been explained by the NBRi to the effect that not only any security of the Government but any security which is “approved” by the Government would be within the purview of $22. It was held that securities issued by a foreign government is outside the ambit of $2219; however, after the amendment of $22 by the Finance Act 2004, it can be argued that if any securities issued by a foreign government are “approved” by the Bangladesh government, then such securities would be within the ambit of $22. It is also to be noted that §22(b) brings within the ambit of “interest on securities” interest on debentures and other securities of money issued by or on behalf of a “local authority” or a “company”. Here, the word “company” has been used and defined in a wider sense than the traditional definition of “company” under the Companies Act 1994.1% Therefore, the word “company” in $22(b) would include any “corporation”197 established by or under any Act of Parliament. Consequently, interest on debentures and other securities of money issued by or on behalf of a corporation would be within the purview

of $22.

4.55 Position of securities held as trading assets: Income from “interest on securities” must be charged to tax under $22 and not under $28 of the Ordinance even where the securities are held as stock- in-trade or trading assets in the course of the assessee’s business. 198 However, it has been held that where the assessee is carrying the business of banking and held securities as part of its circulating capital in the course of its banking business, any profit derived by the assessee on the sale of such securities would be assessed as business income under $28 instead of $22.19 Nevertheless, where the assessee- bank’s by-laws did not allow it to deal with shares as part of its own business but on behalf of others, any dealing with shares by such bank cannot be regarded as within the ordinary functions of such bank 200

Meaning of “receivable”: Under $22, tax shall be charged and payable by the assessee for interest on securities which is “receivable” by the assessee. The word “receivable” as used in $22 does not mean “capable of being received”? In other words, under $22, interest on securities only becomes income when it is actually received and not when it is due or capable of being received by the assessee.202 The preceding statement, it is submitted, is correct in view of the language used in $22 read with 5$ 51(1), 51(2), and 531 of the Ordinance where the person responsible for issuing any security (which is issued or approved by the government) shall collect income tax upfront on interest “receivable on maturity” (in case of conventional security) or on profit “at the time of making payment” (in case of security based on Islamic principles) from the purchaser of such security203 and, in case of interest on deposit of a Post Office Savings Bank Account, any person responsible for making payment of any such interest, shall deduct tax “at the time of making payment” 204 Thus, S$ 51(1) and (2) and 531 imply that unless interest is received or paid “on maturity” or credited to the assessee’s account, it does not become liable to tax and, merely because the interest accrued is due and becomes receivable, it does not attract the liability to pay tax at that point in time under $22.205

Income from house property ($24)

Salient feature of charge: Income from house property under $24 is perhaps the only income that is charged to tax on a notional basis. The notional basis of charge is based upon the “annual value” of the house property-which is the inherent capacity of the property to earn income. Thus, the “annual value” is the amount the property might reasonably be expected to generate if it was let out from year to year. The method of determination of annual value is discussed in detail later in this Chapter. It should be noted here that the provisions of $24 are applicable in case of companies.206

Essential conditions of $24:

Three conditions must be fulfilled for charging the income under $24. These are: (a) the property must consist of building, furniture, fixture, fittings, etc. and lands appurtenant thereto; (b) the assessee must be the owner of the property; and (c) the property may be used for either commercial or residential purposes, but it must not be used by the owner for the purpose of any business or profession carried on by him, the income from which chargeable to tax under the Ordinance.

Condition 1:

Property must consist of building, furniture, fixture, fittings, etc. and lands appurtenant thereto: Although $24 uses the word “property”, income from all types of property is not taxable under $24. For example, “business” is also a “property”o, but it is not taxable under $24. Only properties consisting of any “building, furniture, fixture, fittings, etc. and lands appurtenant thereto” are within the purview of the word “property”s Thus, income from vacant ground is not taxed under $24 but may be taxed under the residuary head “Income from other sources” under 533209 and the requirement of tax deductible at source from the rental value of vacant ground shall be guided by $53) of the Ordinance.

Condition 2:

Ownership of the property: For the purpose of $24, the “owner” must be that person who can exercise the rights of the owner, not on behalf of the owner but in his own right.21 Furthermore, under $24, it is open to the DCT to find out who has provided the funds and the real owner of the property and tax such person even though the title deed may be in the name of another person?’? Also, it should be noted that to establish ownership of the property in the context of $24, the requirement of registration of the sale deed under the Registration Act is not warranted 213 In case of disputed ownership pending before a court of law, the decision as to who will be the owner of the property and chargeable to income tax under $24 will be of the NBR until the court gives its decision in the suit filed with respect to such property?

With respect to ownership of structures built by the lessee on the lessor’s land, ownership does not need to extend both to the site and the structure built thereon. An assessee who builds a structure upon a land held by him under lease would be the owner of the structure during the life of the lease, though he may have to transfer the structure to the lessor free of cost according to the lease deed on the expiry of the lease term. Thus, during the tenure of the lease, the owner of the structure shall be assessed under $24.215 Consequently, the person who owns the building need not be the owner of the land on which the building stands. “The word “owner” in $24 refers to the owner of the property itself, and not the owner of the annual value?” In other words, the “Owner of the property” does not mean the owner of the annual value of the property. * Where, for example, the assessee executed a deed cot settlement in favour of his father granting the latter, the right of i racome from the property, the ownership of the property for the

yourpose of $24, continued to vest in the assessee, and the assessee but not his father, remained liable to be assessed with respect to the annual value of such property?19 The issue of whether or not a person

is the “owner” of a property is one of fact.

Effect of $53A of the Transfer of Property Act 1882:

553A of the Transfer of Property Act 1882 deals with part performance of a contract for transfer of immovable property. Under $53A of the Transfer of Property Act 1882, a right is created in favour of the transferee to protect his possession against any challenge to it by the transferor or any person claiming under him contrary to the terms of the contract. However, it is a settled proposition that the provisions of $53A of the Transfer of Property Act 1882 can only be used as a shield to protect possessory right of the transferee and not as a weapon to assert title over the property?21 Thus, $53A of the Transfer of Property Act 1882 does not establish the transferees right as the “owner” of the immovable property?2 In other words, for the purpose of $24 of the Ordinance, the transferor still remains the “owner” of the immovable property and not the transferee, even though the transferees possessory right is protected under $53A of the Transfer

of Property Act 1882.

Condition 3:

Use of the house property: The amendment introduced by the Finance Act 2002 to $24 specified usage of the property. Under the amendment of the Finance Act 2002, the property may be used for either commercial or residential purposes. However, even before this amendment, judicial decision was to the effect that the purpose for which the property is used was not material,223 $24 specifically excludes from its scope the entire or part of the property (a) that the owner may occupy for the purpose of any business or profession carried on by him, and (b) the income from which is chargeable to tax under the Ordinance. Both these conditions must be satisfied to exclude the property from taxation under $24.224 In this regard, the word “occupy” refers to the occupation directly by the assessee or through an employee or an agent and such occupation must be subservient to and necessary for the business of the assessee.225 It has been held that rent from putting up hoarding on top of the building is not income from house property under $24 and it will be taxed under the head income from other sources under $33.226 On this analogy, it is submitted that mobile phone towers set up on the rooftop of the building is not income from house property under $24 and it will be taxed under the head income from other sources under $33. House owning and letting out property do not normally constitute business and income from such property is taxable under income from house property under $24.227

The case of composite rent:

Where the landlord charges both rent and service charges to the tenant on account of various facilities provided with the house, such rent is known as “composite rent”. Composite rent falls under two categories, (a) composite rent on account of rent for the property and service charges for various facilities provided along with the house, for example, lift, gas, water, electricity, security service, air conditioning, etc., and (b) composite rent on account of rent for the property and the hire charges for machinery, plant or furniture belonging to the owner. In case of the former (i.e. (a) above), the composite rent should be split up and the amount which is attributable to the property should be assessed under $24 while the amount which relates to the service charges for various facilities provided along with the house should be brought to charge under $28 or $33.228 In case of the latter (i.e. (b) above), it is important to note that by virtue of the amendment introduced by the Finance Act 2009 to 524, any rent of furniture, fixture and fittings along with the property shall be charged to tax under $21.

With respect to the renting of plant or machineries forming part of the composite rent, it should be considered whether such renting of plant or machineries is inseparable from the letting of the property. If such renting of plant or machineries is separable from the letting of the property, then the rent attributable to the letting of the premises shall be charged to tax under $24 and the other portion of the composite rent (attributable to renting of plant or machineries) shall be assessed to tax as business income under $28 or $33 (as the case may be).229 However, if such renting of plant or machineries is inseparable from the letting of the property, then the entire income would be taxed as business income under $28 or income from other sources under $33, and in this case, there is no room for separating the rent or a part of it from the total income and charge it to tax as income from house property under $24.230

Determining the annual value of property: Under $2(3)(a)(i) of the Ordinance, the annual value of any property shall be the sum for which the property might reasonably be expected to be let from year to year and any amount received by letting out furniture, fixture, fittings, etc. The word used in S2(3)(a)(i) is “might” and therefore, the annual value is a notional income to be gathered from what a hypothetical tenant would pay which is to be objectively ascertained let out or not.” The word “reasonably” is important in §2(3)(a)(i). It on a reasonable basis irrespective of the fact whether the property is is largely a question of fact dependent on the facts and circumstances of each case having regard to the condition of the property and all other prevailing circumstances including prevailing rents of similar house or houses similarly situated 232 Any evidence of fraud, emergency, relationship between the tenant and landlord resulting in deflation or inflation of rent shall affect the test of reasonableness. The assessee-landlord permits the tenant to sub-let the premises at a higher rent which the tenant keeps for himself, such higher rent cannot be included in the calculation of the annual value of the property while computing the income of the assessee-landlord. 234 Annual value of property should be determined on the basis of the bilateral lease agreement? and not on the basis of the Inspector’s report26, especially when such report comes at a later stage and is not allowed to be challenged by the assessee.

Introduction: Originally, agricultural income was not chargeable to tax in view of $6 of the Income Tax Act 1922 which excluded agricultural income from the heads of income. Under 520

of the Ordinance, agricultural income is listed as one of the heads of income.

Ambit of 526(1): 526(1) charges to tax (a) agricultural income as defined in $2(1) of the Ordinance, (b) the excess amount referred to in $19(17), and (c) the excess amount referred to in $19(19).

Agricultural income:

The term “agricultural income” is defined in $2(1) as, amongst others, any income derived from any land in Bangladesh which is used for agricultural purposes by means of agriculture. The character of agricultural income depends on the source of the income and the fact that such income is derived from agricultural land and not from some other sources and therefore, the motive with which such income is derived does not have any effect on the character of the receipt and does not convert the agricultural income into business income or income from other sources?

Corporate Tax Law & Practice there to be agricultural income, there must be a nexus between income, land, and agricultural operation and there must be something done to the land by human or mechanical operation to produce out of such land any crop, tree, plantation or other produce or product and the immediate source of the income must be land of the character referred to in $2(1) of the Ordinance.

The word “forestry” is not synonymous with “agriculture” and when crops grow in the forest, activities involving (i) weeding and cutting, (ii) fencing and pruning, (iii) burning of leaves, and (iv) protection of the crops against grazing in the forest do not fall within the word “agriculture”.?40

4.68 Excess amount under $19(17): Under $19(17) where any machinery or plant is exclusively used by the assessee for agricultural purposes and such machinery or plant is disposed of in any income year and the sale proceeds from such disposal exceeds the written down value of the machinery or plant, then the excess amount representing the difference between the original cost and the written down value shall be deemed to be agricultural income of the assessee for that income year. The following illustration shows the computation

under $19(17):

Original cost of the machinery in 2002 Tk. 100000/- Less Written down value Tk. 40000/-

Difference between the original cost and the written down Tk. 60000/-

value (deemed agricultural income under $19(17)) Machinery sold in 2011 (income year 2011-2012) Tk. 200000/- 4.69 In the above example, the difference between the original cost of the machinery and the written down value is BDT60,000/- but the difference between the sale price of the machinery in 2011 and the written down value is BDT160,000/-. Under §19(17), the excess that is deemed to be agricultural income of the assessee for the income year 2011-2012 shall not exceed the difference between the original cost of the machinery and the written down value. Therefore, under $19(17) the excess amount of BDT60,000/- shall be deemed to be

agricultural income of the assessee for the income year 2011-2012,

although the difference between the original cost and the sale price is

BDT100,000/-. It is to be noted here that in the context of §19(17), the

term “sale proceeds” should be understood by reference to paragraph 11(3) of the Third Schedule of the Ordinance, which defines “sale

proceeds, inter alia, as (1) where the asset is actually sold, the amount of such sale or the fair market value24 (whichever is higher), (2) where the asset is transferred by way of exchange, the fair market value of the asset acquired in exchange, and (3) where the asset is transferred otherwise by sale or exchange, the consideration of such transfer.?43

Excess amount under $19(19):

Under $19(19) where any machinery or plant is exclusively used by the assessee for agricultural purposes and such machinery or plant is discarded, demolished or destroyed and the assessee receives any insurance, salvage or compensation money in any income year as a result of such discard, demolition or destruction of such machinery or plant and the money received from such insurance, salvage or compensation exceeds the written down value of the machinery or plant, then the excess amount representing the difference between the original cost and the written down value less the scrap value shall be deemed to be agricultural income of the assessee for that income year.

The following illustration shows the computation under §19(19):

Original cost of the machinery in 2002 Tk. 100000/- Less Written down value Tk. 40000/- Difference between the original cost and the written Tk. 60000/- down value Less Scrap value Tk. 20000/-

Balance (deemed agricultural income under § 19(19)) Tk. 40,000/-

Receipt of any insurance, salvage or compensation money in 2011 Tk. 110000/- (income year 2011-2012)

In the above example, the difference between the original cost of the machinery and the written down value is BDT60,000/- but the difference between the money received from such insurance,

salvage or compensation for the machinery in 2011 and the written down value is BDT70,000/-. Under § 19(19), the excess that is deemed to be agricultural income of the assessee for the income year 2011- 2012 shall not exceed the difference between the original cost of the machinery and the written down value less the scrap value of the machinery. Here, the scrap value is BDT20,000/-.

Therefore, under $19(19) the excess amount of BDT40,000/- (i.e. the difference between the original cost of the machinery and the written down value minus the scrap value) shall be deemed to be agricultural income of the assessee for the income year 2011-2012.

Ambit of $$ 26(2) and 26(3) – Income from sale of tea, rubber, tobacco, sugar, etc.: Under $$ 26(2) and 26(3) agricultural income from sale of tea, rubber, tobacco, sugar and any other produce grown and manufactured by the assessee is computed under Rules 31 and 32 of the Rules. Special provision is stipulated in these rules dealing with agricultural income derived from income from agricultural produce and manufacturing process. Also, under Rule 30 of the Rules, special provision is made for disintegrating income which is partly agricultural income and partly business income.

Income from other sources (§33):

Introduction: $33 generally corresponds to $12(1) of the Income Tax Act 1922. It is a residuary head of income. Where the income can appropriately fall under any of the specified heads of income, no resort could be made to $33.

Taxation of dividend (533(a)):

Under $19(7)245 of the Ordinance, dividend declared or distributed by a company shall be deemed to be income in the income year in which it is received and shall be included in the total income of the assessee in that income year.

What is dividend:

In general corporate term, dividend refers to distribution of profits by the company to its shareholders.246 In taxation parlance, the word “dividend” has been given a wider connotation in $2(26) of the Ordinance, which is popularly known as “deemed dividend”.

4.76 $2(26)(a)-any distribution by a company of accumulated profits involving release of the company’s assets: Two conditions are essential for treating a distribution to be deemed dividend under $2(26)(a): (i) the company must possess accumulated profits and (ii) such accumulated profits are distributed in cash or in kind and where the distribution is in kind, the market value of the assets (not the book value) shall be deemed dividend in the hands of the shareholders. For the purpose of $2(26)(a), where assets are distributed as dividend, the dividend amount shall be calculated by reference to the market value of the property on the date on which the shareholders become entitled to receive the assets by way of distribution?

The word “distribution” must be given a broad and expansive meaning to include not only distribution involving payment of accumulated profits in cash but also a distribution not involving such payment.248

(26)(b)— any distribution of debentures, debenture stock or deposit certificates in any form: 52(26)(b) deals with distribution in kind in that it deals with distribution of debentures, debenture stock or deposit certificates in any form and with or without interest. This provision is enacted to overcome decisions in CIT v. Mercantile Bank of India? (a case dealing with debentures), CIR v. Fisher’s Executors250 (a case dealing with debenture stock), and CIT v. MP Viswanatha Raos! (a case dealing with deposit certificate). Without $2(26)(b), under the abovementioned cases, although there was distribution, there was no deemed dividend as there was no release by the company to its shareholders all or any part of the assets of its property (which is captured by $2(26)(a)). Thus, 52(26)(b) enlarges the net of taxation in these circumstances.

4.78 52(26)(c)-any distribution on liquidation of the company:

Under $2(26)(c), three conditions must be satisfied: (i) there must be a liquidation, (ii) in such liquidation there is distribution, and (iii) that distribution is attributable to the accumulated profits of the company immediately before its liquidation.252 Even if an assessee has incurred loss by subscribing to the capital of the company and receives, upon winding up of the company, less than the subscribed capital, the distribution on such winding up is taxable as dividend to the extent such distribution is out of the accumulated profits of the company (albeit less than the assessee’s original subscription amount).253

In determining dividend under $2(26)(c), the starting point is that there is in the hands of the liquidator of the company only one fund. When a distribution is made out of the fund, for the purpose of determining tax liability, and only for that purpose, the amount distributed is disintegrated into its components, namely, capital and accumulated profits, as they existed immediately before the commencement of liquidation of the company.

In any distribution made to the shareholders of a company by the liquidator, that part which is attributable to the accumulated profits of the company immediately before its liquidation, whether such profits have been capitalised or not, would be treated as dividend and be liable to tax under the Ordinance? Consequently, the amount distributed would, therefore, be deemed to be received by the shareholders partly as accumulated profits and the rest as capital, the proportion being the same which the accumulated profits bore to the capital in the accounts of the company at the commencement of the winding up, and that part of the receipt which is attributable to the accumulated profits would be taxable. Therefore, under $2(26)(c), the DCT has to firstly determine the accumulated profits in the hands of the company, whether capitalised or not, and the rest of the capital immediately before the liquidation. Thereafter, the DCT has to determine the ratio between such capital and the undistributed profits and to apply the ratio to the amount distributed to determine the component attributable to the accumulated profits.256

(26)(d)-any distribution on reduction of capital: The amount distributed by a company on reduction of its capital has two components: (i) accumulated profits and (ii) capital257 If there are no accumulated profits in the company, then the deeming provision of $2(26)(d) read with the taxing provision under $33 will not be attracted.258

2(26)(dd)-any distribution by a foreign company not incorporated in Bangladesh: This sub-section is inserted by the Finance Act 2002 to bring under the net of taxation dividend distributed by a “branch company” —that is, a foreign company not incorporated under the laws of Bangladesh-and remitted outside Bangladesh.259 However, $2(26)(dd) does not use the word “branch company”, which appears in the explanation provided by the NBR.60 Without clarification in the language, it seems that there will be uncertainty about the treatment of a “branch company” keeping in mind its relationship with the head office abroad. It has been held in cases that a branch office does not have a separate legal existence and payment by a branch office to its foreign head office is actually a payment to self? Thus, it could be argued that the distribution by a “branch company or office” in Bangladesh, which does not have any existence

Corporate Tax Law & Practice independent from its parent head office in a foreign country, could not be regarded as “deemed dividend” since the distribution does not change hands when it is made from the “branch company or office” to its foreign head office or parent company.

4.81 The concept of branch company taxation has its origin in US tax laws. Under the Tax Reform Act of 1986, the concept of “branch profit tax” was first introduced. Under the “branch profit tax” method, a second layer of tax was imposed on the profits of a U.S. branch of a foreign corporation by imputing a dividend distributed from the domestic branch to the foreign corporation. The logic behind this inclusion was the acknowledgement that at that time there was no comparable shareholder-level taxes imposed by the United States on the distributed profits or remitted interest of a US branch of a foreign corporation?62 The “branch profit tax” was a “dividend equivalent amount” which was directly related to the income that was “effectively connected with the foreign corporation’s US trade or business”263, which is similar to deemed accrual of income concept under $18 of the Ordinance.2 It is submitted that to avoid the self- payment argument between a branch and the head office of a foreign company 65, the NBR should clarify the language of $2(26)(dd) by introducing a “separate entity rule”26 between the foreign company abroad and its branch in Bangladesh. Alternatively, it can also clarify the language by introducing the concept of permanent establishment while dealing with branch company distribution, which has been incorporated in $18(2)(a) of the Ordinance?

4.82 $2(26)(ddd)-any distribution of profit of a mutual fund or an alternative investment fund:

This sub-section is inserted by the Finance Act 2017. The NBR does not provide any explanation or basis for this insertion 68 It is submitted that this insertion is fundamentally incorrect and has been introduced without appreciating the basic structure of trust taxation. Let us take the alternative investment fund

as an example to understand the problem. The starting point is to consider the following issues:

The trustees make the distribution on behalf of the alternative investment fund 269 An alternative investment fund is formed as a trust.270

The company makes the dividend payment under the Ordinance. 271

A trust is not a company under 52(20) of the Ordinance, 272

All the other distribution under S2(26) except $2(26) (ddd) are made by a “company” In light of the above issues, the central question that arises is that how can “distribution of profit” be termed as “dividend” under S2(26)(ddd) when the distribution is not made by a “company” as defined in S2(20) of the Ordinance but by a “trust”, especially when a dividend can only be paid by a company under $54 of the Ordinance?

The problem can be seen from another stand L la car of alemnative inrestment d when the investre octapuTY pays dividend to the alamative investment fund (which is a trust), it will dedect tat under $54** of the Ordimance. Therefere, by labeling “distributica of proix” as “dividend”, $2(26)(831) in eEz is imposing ter da the same income twice, that is (a) once when the inrestee company deducts tar under 554 wben it pays dividend to the alternative investment fund (which is a trust); and (b) during a second time, when the aternative investment fund (which is a trut) through the trustee distributes the profit, as “deemed dividend” under $2(26)(ded), to the ultimate investor. In this second leg, the trustee of the alternative investment fund would have to deduct tar at source under $54 of the Ordinance.

In the above example, the second round of tar on the distribution of profit as “deemed dividend” under $2(26)(dad) distorts the concept of “representative taration”. §95(4)(c) of the Ordinance states that the trustee or trustees appointed under a trust decared by a duly executed instrument in writing and who receite or are entitled to receive any income for or on behalf or for the benefit of any person shall be the representative in respect of such income Under $95(1), every person who is a representative of another person

(which incudes a trustee under $95(4)(c)) in respect of any income shall (a) be subject to the same duties, responsibilities and liabilities as if such income were received by, or accruing to, or in favour of, him beneficially; and (b) be liable to assessment in his own name. In other words, under “representative taxation”, a trustee or the trustees can be iable to tas for income which lawfully accrues to the beneficiaries. However, if the trustee is assessed under $95(1) as a representative in of any income of the beneficiaries, then under §95(2), the NBR cannot subsequently assess the same income in the hands of the ba sunder any other provision of this Ordinance. But the labelling of “distribution of profit” as “dividend” under $2(26) (diddl has made the concept of “representative taxation” completely eaningless. In other words, by introducing $2(26)(ddd), the benefit of a single layer of tax treatment of income, which was provided in case of representative assessee (either in the hands of the trustee or the beneficiary) under $95, has been obliterated in case of a mutual fund or an alternative investment fund. It is submitted that the insertion of $2(26)(ddd) is legally unsound and violates provisions of the Trusts Act 1882 along with various provisions of the Ordinance276 and should be removed.

(e)-loans/advance to shareholders: Under S2(26)(e), the following requirements must be fulfilled, namely: (i) there must be a payment by the company; (ii) the payment can be represented by cash or kind (including the assets of the company); (iii) the payment shall be by way of loan or advance; (iv) the loan or advance shall be made (x) to a shareholder of the company or (y) on behalf of or for the individual benefit of any shareholder of the company; and (v) the payment shall be made to the extent of the accumulated profits of the company. It should be remembered here that by enacting $2(26)(e), the Legislature has created a legal fiction and has made the payments referred to in S2(26)(e) “dividend” for the purposes of the Ordinance.

However, it should also be remembered that the fiction cannot be extended or interpreted to such an extent that it goes beyond the Legislature’s intention in creating the fiction.278 Four classes of payments are stipulated in $2(26)(e) —(a) an advance; (b) a loan; (c) any payment on behalf of a shareholder; and (d) any payment for the individual benefit of a shareholder. The first two ((a) and (b)) denote payments to the shareholder directly and the last two ((c) and (d)) refer to payments to persons other than the shareholder but for the benefit of the shareholder? If the requisite conditions are satisfied, then any payment is liable to be taxed under 52(26) (e) as deemed dividend. The only limitation on the quantum is that the payment should be to the extent the company has accumulated profits? If there are no accumulated profits with the company at

134 Corponite Tar Law & Practice the relevant time, then the payment to the sharcholder cannot be considered as dividend under $2(26)(e) * Furthermore, it should be remembered that any deemed dividend under $2(26)(e) reduces or extinguishes the “accumulated profits” and, once an amount goes out of the accumulated profits as a loan, the same amount when repaid by the shareholder would not replenish the accumulated profits back to its original amount.

For example, the accumulated profits of X Ltd is BDT5000/-. Shareholder A takes a loan of BDT2000/- from X Ltd on 01.01.2014.

A repays BDT2000/- back to X Ltd on 15.01.2014. Shareholder B takes a loan of BDT6000/- from X Ltd on 10.02.2014. In this case, BDT2000/- given to shareholder A as a loan shall be deemed dividend in the hands of A under $2(26)(e) and taxable in his hands under $33 as income from other sources. The accumulated profits of X Ltd will be reduced to BDT3000/- (i.e. BDT5000/- minus BDT2000/-) and the fact that A later repaid BDT2000/- is irrelevant for the purpose of $2(26)(e) and will not replenish X Ltd’s accumulated profits back to BDT5000/- from BDT3000/-. Out of the loan of BDT6000/- to shareholder B, BDT3000/- shall be deemed dividend in the hands of B under $2(26)(e) and taxable in his hands under $33 as income from other sources?82 Under $2(26)(e), the word “shareholder” also includes a corporate entity.

Thus, any loan from a subsidiary company to its parent company would attract the deeming provision of $2(26)(e).283 The word “shareholder” however, can only mean a “registered” shareholder of a company and $2(26)(e) cannot be invoked when the loan is given to a mere beneficial owner of the shares who is not a registered shareholder28, or when the loan is given to an associated entity within a group when the associated entity is not a registered shareholder?85 Also, the provisions of $2(26) (e) cannot be invoked when a loan is given to a borrower-company which, immediately after obtaining the loan, becomes a shareholder of the lender-company28 Even a loan obtained by a shareholder from a company out of the accumulated profits that are exempted in the hands of the company shall be treated as deemed dividend in the hands of the shareholder?87 The provisions of §2(26)(e) must be strictly construed 88 and it is improper to import the words “directly or indirectly” in $2(26)(e) when interpreting the words “by way of advance or loan to a shareholder”,89 Even a bona fide loan granted for a short period would also come under the purview of 52(26)(e).290

What is not deemed dividend: 52(26) sets out certain exceptions to 5$ 2(26)(c), (d), and (e).

Sub-clause (i) – distribution in respect of any share (including preferred shares) for full cash consideration: Under this sub- clause, a distribution made in accordance with 52(26)(c) and $2(26)(d) is not regarded as “dividend” if such distribution is in respect of any shares (including any preference shares) issued for full cash consideration or redemption of debenture or debenture stock and the holder of such shares or debenture or debenture stock is not entitled to participate in the surplus assets of the company in the event of its liquidation. Thus, if any preference shareholder has participating liquidation preference rights291 under a shareholder’s agreement, then such shareholder will not be able to get the benefit of this sub-clause (i) and in his case, the distribution will be deemed dividend because in that case such shareholder shall be

entitled to participate in the surplus assets of the company in the event of its liquidation.

2 Sub-clause ii)-advance or loan in the ordinary course of business: This sub-clause is an exception to $2(26)(e). Under this sub-clause, where lending of money is a substantial part of business of the company, any advance or loan made to a shareholder by the company shall not be regarded as deemed dividend.

3 Sub-clause (iii) – dividend paid if set off against loan already treated as deemed dividend: Under this sub-clause, where, after a payment is made and treated as dividend within the meaning of $2(26)(e), the company pays dividend and the said dividend is set off against the whole or part of the payment which is treated as dividend within the meaning of $2(26) (e), then the dividend which is subsequently paid will not be included in the total income of the shareholder under $33 to the extent the amount is set off with the amount paid earlier (and treated as dividend within the meaning of $2(26)(e)).

If the dividend is not so set off but is paid to the shareholder while the loan remains outstanding, the benefit of exception under this sub-clause (iii) cannot be obtained.294 The word “set off” in this sub-clause (iji) denotes that there are some amounts receivable by the company from the shareholder. If by the time the company pays actual dividend there remains nothing payable by the shareholder in respect of the loan or advance as contemplated under $2(26)(e), then there is no occasion for the company to set-off the amount of actual dividend against such loan or advance and in such situation the shareholder is not entitled to set-off any deemed dividend under $2(26)(e) against dividend that is actually declared and paid by the company.?95

4.86.4 Sub-clause (itia)-bonus shares: Under this sub-clause, any bonus shares issued by the company shall not be included as dividend under S2(26). When bonus shares are issued to the shareholders, nothing goes out of the company’s coffers and nothing is put in the shareholder’s pocket, but what happens is that the accumulated profits which are capitalised (i.e. the conversion of profits or income into capital) are applied in paying up the amount due on bonus shares to be issued to the shareholder as fully paid up bonus shares?

It has been held that bonus shares given by a company to the shareholders are capital and not income and therefore, cannot be treated as dividend.297 Since the bonus share is not income in the hands of the assessee-shareholder, no question of any investment by the assessee arises in receiving such bonus share and hence, the assessee cannot claim any deduction on account of such bonus share.

‘Meaning of “accumulated profits” (Explanation to $2(26)): The term “accumulated profits” for a company which is not in liquidation under 52(26)(a), 52(26)(b), and $2(26)(d) shall include all profits of the company up to the date of distribution or payment.? Conversely, “accumulated profits” for a company which is in liquidation under $2(26)(c) shall include all profits of the company up to the date of its liquidation.

Also, “accumulated profits” includes any reserve made up wholly or partly of any allowance, deduction or exemption under the Ordinance but does not include capital gains arising before 01.04.1946 or after 31.03.1949 and before 08.06.19633

Amounts in the share premium account are not accumulated profits because $57 of the Companies Act 1994 puts a statutory bar on a share premium account being used for distribution of dividend and therefore, deemed dividend provision under $2(26)(e) shall not apply in case of share premium account 302 The term “accumulated profits” means commercial profits” and general reserves’* and development rebate amounts are includible in the accumulated profits.

Meaning of “taxed dividend” (52(62B)): The new definition of “taxed dividend” was introduced by the Finance Act 2018 through insertion of $2(62B), which states that “taxed dividend” means the dividend income on which tax has been paid by the recipient under the Ordinance.

The provision of §2(62B) is based on the concept of “franking credit” under which, as a general rule, a shareholder of a company will be taxed on the full amount of the franked distribution (meaning the amount on which tax has been paid by the company at the time of dividend distribution) and on the attached franking credits (meaning the amount of tax the company has already paid on the dividend) but will be entitled to an imputation credit, which means a tax offset that will be equal to the franking credits (meaning the amount of tax the company has already paid) on the dividend distribution included in that shareholder’s assessable income for the tax already paid by the company.

Thus, for example, Company A is a 50% shareholder of Company B and Company B has paid BDT1,000,000/- as dividend in the income year 2017-2018. As the 50% shareholder, Company A is entitled to receive BDT500,000/- as dividend. At the time of paying dividend to Company A, Company B has deducted 20% tax at source on the BDT500,000/- dividend under the Ordinance, which is BDT100,000/- and has transferred the balance dividend amount of BDT400,000/- (BDT500,000/- minus BDT100,000/- tax deducted at source) to Company A. Under §2(62B), BDT400,000/- as received by Company A is “taxed dividend” as tax has already been paid on this dividend income (that is, the 20% tax of BDT100,000/- that has been deducted at source by Company B at the time of paying the dividend to Company A).307

However, it is submitted that $2(62B) has not been clearly drafted. The words “tax has been paid by the recipient” should have been clarified to mean that Company A will receive a credit under $62 of the Ordinance’08 (like the “franking credits” as discussed above) for the tax deducted at source by Company B (at the time of making dividend payment to Company A). The NBR has clarified this point in its explanation. 309 This can be explained by the following example: (a) Company A paying a 100% taxed dividend. (b) Company A makes a profit of BDT500/- per share and decides to distribute it all to shareholders. (c) Company A first withholds and pays the 20% tax (under §54 of the Ordinance) on the dividend amount totalling BDT100/- per share (20% of BDT500/-), and then distributes the remaining BDT400/- per share as taxed dividend.

(d) The BDT100/- tax deducted and paid by Company A becomes the franking credit or a credit under $62 of the Ordinance310 in the name of the shareholder.

(e) If Shareholder X has 1000 shares in Company A, then he will receive a dividend of BDT400,000/- (1000 shares × BDT400/- dividend) plus franking credits or $62 credits that represent the tax already paid. The franking credit in this example would be BDT100,000/- (1000

shares x BDT100/- tax deducted and paid by Company A).

(f) The slabbed tax rate of Shareholder X and the calculation

resulting from the franking credits or $62 credits would be as follows:

140 Corporate Tax Law & Practice

(1) Dividend Paid BDT400,000 (2) Franking credits or $62 credits BDT100,000 (3) Taxable Income (1+2) BDT500,000 (4) Tax for first 300,000 Zero

(5) Tax for 300,001-400,000 (5%) BDT5,000 (6) Tax for 400,001-500,000 (10%) BDT 10,000 (7) Tax payable by Shareholder X BDT15,000

(8) Tax refundable to Shareholder X (2-7) BDT85,000

In the above example, assuming Shareholder X has no other income, the franking credits or $62 credits of BDT100,000/- will result in an excess tax payment of BDT85,000/- (BDT100,000/- franking credits or $62 credits minus BDT15,000/- tax payable by Shareholder X) for which Shareholder X may be entitled to a refund under $146 of the Ordinance.31 The definition of “taxed dividend” has been introduced to offset the negative impact of multiple taxation under the Ordinance in intercompany dividend distribution.312

Taxation of stock dividend (516F): Under $16F of the Ordinance, notwithstanding anything contained in the Ordinance or any other law for the time being in force, if in an income year, the amount of stock dividend declared or distributed exceeds the amount of cash dividend declared or distributed or the stock dividend is declared or distributed without declaration or distribution of any cash dividend by a company registered under the Companies Act 1994 and listed on any stock exchange, tax shall be payable at the rate of 10% on the whole amount of stock dividend declared or distributed in that income year. The provisions of $16F has been inserted by the Finance Act 2019. There are several requirements for 516F to apply. First, there has to be stock dividend. Second, the stock dividend must be more than the declared or distributed cash dividend or the stock dividend must be the only thing that is declared or distributed in an income year. Third, the stock dividend must be declared or distributed by a listed company. If these three conditions are satisfied, then 10% tax will be imposed on the whole amount of stock dividend declared or distributed in that income year.

4.92 Meaning of stock dividend: The expression “stock dividend” is not defined in the Ordinance. The seminal case on taxation of stock dividend is Eisner v. Macomber313, where the US Supreme Court observed as follows314

“The fundamental relation of ‘capital’ to ‘income’ has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. For the present purpose we require only a clear definition of the term ‘income, as used in common speech, in order to determine its meaning in the amendment, and, having formed also a correct judgment as to the nature of a stock dividend, we shall find it easy to decide the matter at issue.

Can a stock dividend, considering its essential character, be brought within the definition? To answer this, regard must be had to the nature of a corporation and the stockholder’s relation to it. We refer, of course, to a corporation such as the one in the case at bar, organized for profit, and having a capital

stock divided into shares to which a nominal or par value is attributed.

A stock dividend’ shows that the company’s accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. Far from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund represented by the new stock has been transferred from surplus to capital, and no longer is available for actual distribution.

The essential and controlling fact is that the stockholder has received nothing out of the company’s assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations have resulted from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out the entire investment. Having regard to the very truth of the matter, to substance and not to form, he has received nothing that answers the definition of income within the meaning of the Sixteenth Amendment.

We are clear that not only does a stock dividend really take nothing from the property of the corporation and add nothing to that of the shareholder, but that the antecedent accumulation of profits evidenced thereby, while indicating that the shareholder is the richer because of an increase of his capital, at the same time shows he has not realized or received any income in the transaction.”

4.93 The above description of “stock dividend” sounds a lot like bonus shares 315 The Indian Supreme Court in CIT v. Dalmia Investment Co Ltd316, by relying upon Eisner v. Macomber, made the following observation on bonus shares317:

“In point of fact, however, what the shareholder gets is not cash but property from which income in the shape of money may be derived in future. In this sense, there is no payment to him but

an increase of issued capital and the right of the shareholder to

it is evidenced not by the original number of certificates held by him but by more certificates. There is thus no payment of dividend. A dividend in the strict sense means a share in the profits and a share in the profits can only be said to be paid to the shareholder when a part of the profits is released to him in cash and the company pays that amount and the shareholder takes it away.

The conversion of the reserves into capital does not involve the release of the profits to the shareholder, the money remains where it was, that is to say, employed in the business. Thereafter the company employs that money not as reserves of profits, but as its proper capital issued to and contributed by the shareholders. If the shareholder were to sell his bonus shares, as shareholders often do, the shareholder parts with the right to participation in the capital of the company, and the cash he receives is not dividend but the price of that right.”

Is stock dividend the same as bonus shares? It is submitted that these two terminologies convey the same concept. In the Canadian case of Re Carson318, the Ontario Supreme Court, while dealing with stock dividend and bonus shares, made the following observations:

“The term “stock dividend” does not appear to be in use in practice in England but substantially the same results are obtained by what is known in England as the issue of bonus shares.”319 Interpretational issues in 16F: It should be noted that $16F starts with a non-obstante line and therefore, has an exclusive effect regardless of anything contrary stated in the Ordinance or any other law in force. But there are several problems in §16F. First, the NBR has explained that the listed company must deposit the tax under $16F before filing its tax return for the relevant income year and this tax cannot be set-off against any other tax liability of such company.20 But the language of $16F does not say that (a) the listed company must deposit tax before filing its tax return for the relevant income year; and/or (b) the tax cannot be set-off against any other tax liability of such company.

These two requirements are stipulated in the Explanation to Finance Act 2019 as prepared by the NBR.321 It is a settled principle that any expansion by the NBR of a statutory language is not permitted by law.322 It is submitted that these two additional conditions have no force of law because $16F does not contain these conditions and the NBR cannot stretch the language of §16F by inserting these two additional conditions in the Explanation to Finance Act 2019 as prepared by the NBR.

Secondly, $16F will be regarded as an additional charging section under the Ordinance, which the Parliament is constitutionally entitled to make.323 Yet, despite this charging capacity of §16F, it should be remembered that the classification of stock dividend as income will be under one of the heads stipulated in $20.32 Thus, in view of $20, it appears that the characterisation of the stock dividend will either be as business income under $28 or income from other sources under $33 of the Ordinance.

By use of the expression “tax shall be payable”, the intention is not very clear in $16F with respect to the person responsible for paying the tax. Is it the company who is required to pay the tax imposed on the stock dividend as business income under $28? Or is it the shareholder receiving the stock dividend who will be responsible for the tax as income from other sources under $33? The NBR seems to suggest that it is the company that is responsible for paying the tax.25 If the explanation of the NBR is correct, then it would mean that the company would be paying tax on the same income twice. This is because stock dividend is actually the capitalisation of the company’s accumulated profits.326 The accumulated profit is the profit of the company that is ready for distribution to the shareholders as dividends.327 Naturally, under the double-layered corporate taxation, the accumulated profit of any company shall be taxed at the company level before it is distributed to the shareholders as dividend, which will be subject to another level of tax in the hands of the shareholders.

Thus, once an amount of accumulated profit is taxed at the company level, the second round of taxation under $16F on the same amount that is equivalent to the stock dividend declared or distributed to the shareholders would result in double taxation of a single income at the same corporate level, which is not allowed under the Ordinance.328 On the flip side, if it is accepted that the shareholders would pay the tax as income from other sources under $33, then the long standing tax position that bonus shares-which is another word for stock dividend-are outside the net of taxation 2, will be thrown into serious doubt.

4.97 Thirdly, and based on the preceding point, the question that arises is if stock dividend and bonus shares mean the same thing, then on what basis is tax imposed on stock dividend under §16F, when bonus shares are outside the net of taxation330? Or is the Ordinance making a legally fictional distinction between these two terminologies when in reality their meanings and operation are the same? It is important to note that $16F does not use the words “bonus shares”.

And neither does it use the word “deemed”, which occurs specifically when a particular income is deemed under the Ordinance, when in reality it may not be so 3′ Also, there is no other expression (e.g. “regarded to

be” or “presumed to be”), which will indicate that $16F is a deeming provision, which deems or regards or fictionalises stock dividend Corporate Tax Law & Practice as something different than what bonus shares are. The provisions of §16F simply stipulate a charging mechanism of “stock dividend” without giving any regard to the legal reality that stock dividend does not give rise to any tax payment obligation of the taxpayer 32, and consequently, there is no tax realisation event.

Therefore, a serious point could be argued that by starting with a non-obstante position (“Notwithstanding anything contained in this Ordinance or any other law for the time being in force”), §16F in effect supplants the reality, actual meaning, and effect of “stock dividend” (or “bonus shares”) by creating tax chargeability over stock dividend income when in reality there is no income resulting from the issuance of stock dividend or bonus shares to a shareholder by a listed company.

To put it more simply, the Legislature in §16F has chosen not to or did not anticipate to group “stock dividend” and “bonus shares” in the same footing. 334 From this standpoint, it could also be argued that if a listed company issues “bonus shares” instead of “stock dividend”, then due to the supplanting effect of “stock dividend” by $16F by creating a legally fictionalised distinction with “bonus shares”, and only for the purpose of $16F, such issuance of bonus shares instead of stock dividend by the listed company would not attract the 10% tax. In other words, it could be argued that the legal fiction of $16F creating chargeability of tax over stock dividend income will not travel beyond “stock dividend” and will not apply to any “bonus shares” issued by the listed company.

Fourthly, §16F poses ambiguity in terms of dealing with Double Taxation Avoidance Agreements (DTAA) that Bangladesh has with other countries. The DTAA between Bangladesh and Bahrain335 is instructive as an example to understand the problem. Article 3(2) of the Bangladesh-Bahrain DTAA states that as regards the application of the DTAA by a contracting State (Bangladesh and Bahrain), any term not otherwise defined in the DTAA shall, unless the context otherwise requires, have the meaning which it has under the law of that contracting State, relating to the taxes to which the DTAA applies. The Bangladesh-Bahrain DTAA does not define the words “stock dividend” but it defines “dividend” as, among others, income from shares or other rights, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the contracting State of which the company making the distribution is a resident.

Thus, under the expansive definition of “dividend” in Article 10(3) of the Bangladesh-Bahrain DTAA, “stock dividend” declared or distributed by a Bangladeshi company to a Bahrain shareholder would be regarded as “dividend” because the stock dividend (or bonus shares) would be other rights or participating in profits, which is subjected to the same taxation treatment as income from shares by the laws of Bangladesh of which the Bangladeshi company making the distribution is a resident. 337 Under Article 10(1) of the Bangladesh-Bahrain DTAA, dividends paid by a Bangladeshi listed company to a Bahrain resident shareholder may be taxed in Bahrain. Since stock dividend in the global standpoint is a non-tax event38, the question is whether the legal fiction created under $16F would extend to a distribution of stock dividend that falls under the Bangladesh-Bahrain DTAA (with the result that Bangladesh would be able to tax the stock dividend of the Bahrain shareholder in Bangladesh).

It is submitted that the legal fiction created by $16F shall not extend to the Bangladesh-Bahrain DAA because as a matter of law, a treaty should be construed in a manner which is international, not exclusively Bangladeshi339, and from this standpoint, the words “dividend” or “other rights” or “participating in profits” in Article 10(3) of the Bangladesh-Bahrain DTAA are to be applied to the real world where “stock dividend” does not give rise to any taxation event340, unless the effect of Article 3(2) is that the provision of $16F of the Ordinance alters the meaning of the words “dividend” or “other rights” or “participating in profits” (which include stock dividend) under Article 10(3) of the Bangladesh- Bahrain DTAA.

It is submitted that nothing in the Bangladesh- Bahrain DTAA requires the words “dividend” or “other rights” or “participating in profits” (which include stock dividend) as defined in Article 10(3) to be applied to the fictional world which is created by Taxation of interest (533(a)): Interest on securities other than those specified in $22 may be taxed under $33(a). For example, interest on loans, interest on fixed deposits342 or current account or interest payable under a decree of the court. 343 Interest on short term deposits of surplus money before commencement of business is an income from other sources under $33.344

Taxation of royalties and fees for technical services ($33(b)): The word “royalty” is defined in $2(56) of the Ordinance which includes the act of “imparting any information concerning technical, industrial, commercial or scientific knowledge, experience or skill”345 Payment for access to an internet-based air cargo portal would be royalty because it is not a case of mere internet access to information but use of the portal for booking cargo and rendering help connected therewith.

Income from letting of machinery, plant or furniture along with building ($33(c)): 533(c) deals with income from letting in “composite rent”347 It is only when such income does not fall under $24 (income

Computatios of Theal tacome: Haads of income 149 trom house property) er $28 (business income), that $33(c) shall apply and the income will be assersed as income from other sources.”* The mard “inseparable” in $33(c) does not suggest that the machinery etc. has to be affired to the building, and for ascertaining inseparability one needs to look at the intention of the contracting parties and find out whether the letting of the machinery etc. and the building is practically one letting. If it is found that the letting of the former (Le, machinery etc.) would not be accepted by the lessee without the letting of the latter (i.e. the building), then it could be concluded that it was intended by the parties that the letting would be “inseparable”.4

Certain income under $19 (§33(d)) and the residual source (553(e)): Income under $$ 19(1), (2), (3), (4), (5), (8), (9), (10), (11), (12), (13), (21), (24), (27), (29), (31) or (32) shall be charged as income from other sources under §33(d). Further, any income of any kind from any other source which is unclassified under any of the heads under $20 shall be charged as income from other sources under 533(e).