Rental Income in Dubai not Taxable in Pakistan

Rental Income in Dubai not Taxable in Pakistan

ITA No.42991LB/2022 (Tax Year 2021)
Arshad Gulzar
P-1271 A, West Canal Road, Abdullahpur. Faisalabad. Appellant
The CIR, AEOI, Lahore. Respondent
• Appellant by: Mr.Mudassar Shujauddin. Advocate Respondent by: Mr.Talat Mehmood, DR. & Mr Waqas Rashid, ADCIR
Date of hearing: 02-09-2022
Date of order: 08.09.2022
RIZWAN AHMED URFI (ACCOUNTANT MEMBER) The subject appeal has been filed by the taxpayer against the appellate order dated 29.08.2022 passed by the learned Commissioner Inland Revenue (Appeals-I), Lahore whereby the order passed under section 122(5A) by the Additional Commissioner Inland Revenue, AEOI Zone, Lahore has been upheld.
2. The relevant facts of the case as mentioned in the appellate order are that the return of the total income filed by the taxpayer was treated as deemed order in terms of section 120 of the Income Tax Ordinance, 2001. Thereafter, the learned Additional Commissioner examined the record and found the already completed assessment as erroneous in so far as prejudicial to the interest of revenue. Therefore, show cause notice was issued confronting the discrepancy noticed. In response the taxpayer submitted reply which was considered and found unsatisfactory and amended assessment order was passed under section 122(5A) creating income tax demand of Rs.5,987,553 in respect of foreign rental income. First appeal filed by the taxpayer was rejected and the taxpayer is in second appeal before this Tribunal on the grounds mentioned in the memorandum of appeal.

3. Appeal was fixed for hearing on 02.09.2022 and the attending AR pleaded that the facts of the case have not been completely and correctly recorded in both the orders. The AR explained that written arguments were filed before the Commissioner (Appeals) through IRIS as well as manually and these contained the complete facts as well as arguments thereof. However, these have neither been reproduced in the appellate order nor the same have been discussed and adjudicated.

The AR explained that the appellant taxpayer is a resident of Pakistan and had filed foreign income and assets statement under section 116A(1) of the Ordinance besides filing return of total income under section 114(1). In both foreign income of Rs.20,347,902/- was declared comprising foreign property income of Rs.20,293,975/- and foreign other source income (bank interest) of Rs.53,927/-.

This income was shown as exempt from tax in the prescribed column of the aforesaid declaration in view of Article 6.1 of the tax treaty between Pakistan and the UAE read with section 107(2) of the Ordinance wherein taxing right in respect of income from property was given to the country where the property is located.

However, the Additional Commissioner issued show cause notice dated 27.12.2021 under section 122(5A) wherein it was observed that exemption was wrongly claimed since the same was taxable and taxpayer was required to show cause as to why an amount of Rs.20,347,902/- may not be added to property income under section 15(1) read with section 11(5) of the Ordinance.

The AR explained that in the reply manually filed on 14.03.2022 it was explained that on an inquiry by the taxpayer the FBR has replied through email dated 28.02.2022 that the rental income of Dubai property is exempt.

In response the Additional Commissioner through his online notice dated 12.04.2022 called for further explanation by observing that jurisdiction is with the undersigned and the purported email has no legal value.

Further, property income from the UAE is not exempt but tax credit can be availed if any such tax is paid in the UAE. In response, further explanation was filed online on 18.04.2022. The AR pleaded that the further explanation was also erroneously rejected. The AR relied upon the provision of the treaty and also produced case law on the subject to rebut the reasons given by the Additional Commissioner.

The AR prayed that the order is annulled as the same is contrary to the mandatory provision of the tax treaty which overrides the provisions of the Income Tax Ordinance, 2001. Whereas, the learned DR supported order of the authorities below and reiterated that tax credit under the treaty as well as under the Income Tax Ordinance, 2001 is available instead of exemption. He prayed for endorsing the orders of the Commissioner (Appeals).

4. We have examined the record of the case, essential facts, applicable law, case law and arguments of both the sides. The relevant columns of the return of total income filed under section 114(1) wherein the taxpayer had declared “foreign income” reads as under: taxpayer was supposed to declare amount exempt from tax.

The appellant taxpayer in the relevant column of “amount exempt” entered the amount of his foreign property income. After the issuance of show cause notice, the taxpayer sent below email at the FBR’s helpline: “From:

Sent: Saturday, 26 February 2022 1:15 PM
To: Help Line; Help Line; Helpline Case email: Helpline Cases:
helpline© pk:
Subject: Taxability of Rental Income From Property In Dubai
Dear Sir,
Please confirm the taxability of rental income from property particularly from Dubai. And if it is taxable then pleas confirm the section.
In case of exempt please also confirm the section.
Arshad Gulzar”
The FBR Support Team replied the email and the same reads as under:
“From: Help line Imailto:helplinefbr.qov.pki
Sent: Monday, February 28, 2022 1:53 PM
Subject: Re: Taxability of Rental Income From Property In Dubai
Dear Sir/Madam,
Thank you for contacting the Federal Board of Revenue. This is in reference to your Case number FBR-112782471.

Property income form UAE is exempt.

Please feel free to contact us for any further queries.


FBR Support Team”
After receiving the clarification from the FBR helpline, the taxpayer replied the show cause notice on 14.03.2022 and enclosed the emails. In the subsequent notice dated 12.04.2022 the assessing officer has observed that the email has no legal value in these proceedings. reas, as per FBR’s website the following information is publicly available in respect of Helpline:
“FBR’s Helpline is a free, fast &FBIZ’s Helpline facilitating Taxpayers FBR’s helpline is a free, fast & reliable reliable service that is committed to
provide the very best service to the public. FBR’s Helpline not only educates the public but also provides them a forum through which the public can put
forward their queries and seek resolution to most of their issues via phone, email or website.

Federal Board of Revenue (FBR) is committed towards bringing about a Service Oriented Culture — geared towards resolving challenges faced by investors and taxpayers, helping to improve the Ease of Doing Business (EoDB). FBR understands its responsibilities as a Partner in Progress – where its sole responsibility isn’t just to collect taxes but also ensure that it provides the very best service; ushering in a tax compliant culture while providing the necessary tools for economic growth. Nothing epitomizes FBR’s commitment towards a Service Oriented Culture like FBR’s Helpline.

Helpline can be reached through phone (051-111-772-772) and email (, plus complaints can also be lodged through the website ( ”

The Assessing Officer was not justified to term the email of FBR Helpline as a ‘purported email’ and ‘so-called email’ and holding it of having no legal value in the proceedings. The Assessing Officer was wrong in exercising his jurisdiction in an arbitrary manner by holding that “it is unequivocal that the jurisdiction is with undersigned alone”.

Whereas under the provision of section 207(2) the FBR is empowered to examine, supervise and oversee the general administration. Under sub-section (3) income tax authorities shall be subordinate to the FBR.

Moreover, section 214 provides that all income tax authorities shall observe and follow the orders, instructions and directions issued by the Board. In view of this section and the claim on the FBR’s website, the email response by the FBR’s Support Team cannot be termed as of no legal value by the assessing officer.

5. Under the tax treaty, taxing rights have been given either to one Contracting State or both the Contracting States in respect of various heads of income. The Article 6 pertains to property income and Article 10 and 11 pertain to dividend and interest income respectively. Comparative text of these Articles in the context of taxing rights of the tracting States is worth highlighting:
Article 6 Article 10 Article 11
o. c me from immovable
9/ property Dividends Interest

6.1 Income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State • may be taxed in that other State 10.1 Dividends paid by a company which is a resident of a Contracting State to a resident of the other

Contracting State may be taxed in that other Contracting State 11.1 Interest arising in a

Contracting State and paid to a resident of the other

Contracting State may be taxed in that other Contracting State.

6.2 The term “immovable property” shall have the meaning which it has under the laws of the Contracting State in which the property in question is situated. The term shall in any case include property accessory 10.2 However, such dividends may also be taxed in the contracting

State of which the company paying the dividends is a resident and according to the laws of (lint State, but if the 11.2 However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax

Article 6 Article 10 Article 11 Income from immovable property Dividends Interest to immovable property, livestock and equipment used in agriculture and
forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed
payments as consideration for the working of, or the right of work: mineral deposits, sources and other natural resources. Ships. boats, and aircraft shall not be regarded as immovable property recipient is the beneficial owner of the dividends the tax so charged shall not exceed

a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company k‘hich owns at least 20 per cent of the shares of the company paying the dividends.

b) 15 per cent of the gross amount of the dividends in all other cases. This paragraph shall not effect the taxation of the company in respect of the profits out of which the dividends are paid so charged shall not exceed 10 per cent of the gross amount of the interest

From the aforesaid text of Articles 6, 10 and 11 it is evident that in respect of income from immovable property the taxing right has been given only to that contracting State where the property is situated. Whereas, in case of dividend and bank interest taxing right has been n to both the contracting states i.e. to the contracting state where e income is being earned as well as the contracting state where the ecipient of the income is resident.

Therefore, in the case of appellant only UAE had been given taxing right/jurisdiction in respect of rental income from a property situated in UAE.

6. The same argument was taken before the assessing officer and he has observed that in Article 6.1 pertaining to income from immovable property the expression used is “may be taxed” and the word “may” give a discretion to the Contracting State of Pakistan to tax where the person deriving property income is resident.

However, the assessing officer while interpreting word “may” in isolation has not considered Article 10.2 and 11.2 where it is expressly mentioned that the dividend and the bank interest income may also be taxed in other contracting State and such stipulation is not existing in Article 6.2 or anywhere else in Article 6 pertaining to income from immovable property.

The Assessing Officer erred in understanding the phrase *may be taxed” used in Article 6.1 of the Treaty by completely taking it out of context due to lack of understanding of the principles of statutory and legal interpretation. The bare reading of the Article 6.1 makes it clear that the words may be taxed” are used to cater to situations exactly like the case at hand wherein UAE has not levied tax on the rental income.

The intention of the phrase means if at all a taxpayer may be taxed in such situation where the property from which income is being derived is in one Contracting State and the owner is resident of another Contracting State it will be taxed in accordance with the laws of the State in which the property is situated, but nowhere it leaves any ambiguity as to inapplicability of laws on taxation being applied of the State where the taxpayer is resident.

7. The Assessing Officer also erred in interpreting the word ‘may” as it “ordinarily denotes permission and not command” however, he failed to appreciate the fact that Superior Judiciary have time and again 1115erated on this word and it is now settled interpretation that “Where of word “may” concern public interest or affects rights of third sons, it is construed to mean “must”. Reliance in this regard is laced on the judgment of the Honorable Supreme Court of Pakistan cited as 2007 PLD 277 (S.C.). In the same judgment Paragraph 8 are worth reproducing here for clarity:

Similarly in Nasiruddin’s case (ibid) it is observed that “it is well-settled that the real intention of the Legislature must be gathered from the language used. It may be true that use of expression shall or may’ is not decisive for arriving at a finding as to whether a statute is directory or mandatory, but the intention of the Legislature must be found out from the scheme of the Act.”

Moreover, in our considered opinion, with reference to a duty cost upon a qualified elector to propose or second a candidate to represent the members of the constituency in an elected house is mandatory and not directory. Two judgments can be cited for determining the intention of the Legislature to ascertain whether section 12(1) of the Act, 1976 is mandatory or directory.

Firstly in Re. Presidential Election. 1974 (AIR 1974 SC 1682), a principle has been laid down that where a provision is mandatory or directory, the subject-matter, the importance of the provision, the relation of that provision to the general object intended to be secured by the Act will decide whether the provision is directory or mandatory.

It has been further observed that “it is the duty of the Courts to get at the real intention of the Legislature by carefully attending to the whole scope of the provision to be construed. The key to the opening of every law is the reason and spirit ()Jibe lmv, it is the animus imponentis, the intention of the !mw maker expressed in the law itself, taken as whole. Secondly, in LachmilVarain v. Union of India AIR 1976 SC 714, the principle discussed hereinabove has been followed. Similarly the same principle has been highlighted in the case of Ahmed Hassan v. Government of Punjab PLD 2004 SC 694. ”

In view of the aforesaid judgement of the Supreme Court, in the situation at hand, the word “may be taxed” used in the Article 6.1 of shall mean tax jurisdiction of the country where property is situated. The assessing officer further stated that property income from UAE is not exempt but tax credit could be availed if any such tax is paid in UAE. Here again the aforesaid observation and understanding is contrary to the statutory provision. Section 103 of the Ordinance pertains to Foreign Tax Credit and it reads as under.:

“103. Foreign Tax Credit (1) Where a resident taxpayer derives foreign source income chargeable to tax under this ordinance in respect of which the taxpayer has paid foreign income tax the taxpayer shall be allowed a tax credit of an amount equal to lesser of:

a) Foreign income tax paid; or

b) The Pakistan tax payable in respect of the income.”

From the aforesaid text of the provision, it is evident that the situation of foreign tax credit arises only if the foreign income is chargeable to tax.

Under the Income Tax Ordinance, 2001. Whereas, as per Article 6.1 of the tax treaty the rental income of a resident person from property situated in the UAE is not chargeable to tax in Pakistan so question of tax credit in Pakistan does not arise. Section 107 of the Income Tax Ordinance, 2001 gives protection to the Tax Treaty and sub-section (2) giving overriding effect to the Tax Treaty reads as under:

(2) Subject to section 109, where any agreement is made in accordance with sub¬section (1), the agreement and the provisions made by notification for implementing the agreement shall, notwithstandinp, anything contained in any law for the time being in force, have effect in so far as they provide for at least one of the following —

(a) relief from the tax payable under this Ordinance;
(b) the determination of the Pakistan-source income of nonresident persons;
(c) where all the operations of a business are not carried on within Pakistan, the determination of the income attributable to operations carried on within and outside Pakistan, or the income chargeable to tax in Pakistan in the hands of non-resident persons, including their agents, branches, and permanent establishments in Pakistan:
(d) the determination of the income to be attributed to any resident person having a special relationship with a non-resident person; and
(e) the exchange of information for the prevention of fiscal evasion or avoidance of taxes on income chargeable under this Ordinance and under the corresponding laws in force in that other country.

Since under Article 6.1 of the tax Treaty relief from tax payable under the Income Tax Ordinance, 2001 has been given in this case therefore dated under section 107(2)(a), notwithstanding the provisions of come Tax Ordinance, 2001, Article 6.1 would prevail. This would care of another erroneous reason given by the Additional missioner that in this situation the rental income will escape taxation in both the countries whereas tax treaty is primarily for avoidance of double taxation.

This reasoning by the assessing officer is contrary to relief from tax envisaged under section 107(2)(a). It is settled law that in order to arrive at the correct conclusion a scheme of law is to be examined in its totality. Reference may be placed on the judgment titled as M/s Bllz (Pvt.) Ltd Vs DCIR, Multan and another 2002 PTD1(SC). It is also well settled law that when law requires act to be done in particular manner, it had to be done in that manner alone. Reliance is placed on the case titled as IAC Income Tax Vs Micro Pak (Pvt) Ltd and others, 2002 PTD 877(SC).

It is also settled law that if two interpretation are possible then one favoring the taxpayer will prevail.As far as overriding effect of tax treaty is concerned reliance is placed on the judgment of the Honorable Supreme Court of Pakistan as well, cited as 2017 SCMR 140 relevant part of which is reproduced here:

“4. In this regard the important aspect of the matter is the non-obstante clause of section 163(4) of the Ordinance which clearly postulates that such treaties for the avoidance of double taxation would be awarded preference and any tax which could be levied and charged against the respondent under the income tax law would be subject thereto”.

The aforesaid judgement was in the context of section 163(4) of the Income Tax Ordinance, 1979 and said section is similar to section 107(2) of the Income Tax Ordinance, 2001 as far as the overriding is concerned as in both sections the words of “notwithstanding” been used and hence tax treaty will prevail.

In the light of foregoing discussion the order of the assessing officer is annulled and as a consequence order of the CIR-A is vacated.

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