The Supreme Court has ruled that dividend income received by companies shall be subject to the tax levied under section 5 of the Income Tax Ordinance 2001, and it cannot be brought under the purview of the 35 percent normal corporate tax.
A two-member bench comprising Chief Justice Yahya Afridi and Justice Aqeel Ahmed Abbasi dismissed nine civil petitions filed by the Commissioner Inland Revenue, Large Taxpayers Office Islamabad, thereby upholding the Islamabad High Court’s judgment dated September 19, 2024.
Justice Aqeel Ahmed Abbasi authored the verdict, which was reserved on July 3, 2026. The judgment stated that section 5 of the Income Tax Ordinance 2001 is a special and self-contained legal provision for taxing dividend income, under which tax is collected at a separate rate. Such income cannot be categorized as income from other sources under section 39 to subject it to the 35 percent normal corporate tax.
The court held that if dividend income were to be taxed under section 39, section 5 would be rendered redundant, whereas a well-established principle of statutory interpretation is that no legal provision should be rendered unnecessary or ineffective.
The ruling noted that section 5 is a separate charging provision under the Income Tax Ordinance, which not only levies tax on dividends but also prescribes a distinct rate and mechanism for collection, hence it cannot be brought under the normal tax regime.
Referring to its previous judgment in the case of Fawad Ahmed Mukhtar versus Commissioner Inland Revenue (2022 SCMR 426), the Supreme Court reiterated that it has already been clarified that dividend income constitutes a distinct block of income and only section 5 applies to it.
The court also dismissed the Federal Board of Revenue’s (FBR) stance that a clause inserted into section 8 via the Finance Act 2007 excluded dividends received by companies from the final tax regime. The court ruled that section 8 is merely a procedural provision and cannot alter or restrict a substantive legal command like section 5.
Concluding that the Islamabad High Court’s decision is in accordance with the law and warrants no interference, the Supreme Court dismissed all civil petitions filed by the FBR.