I.T.AS. NOS.4670/LB AND 5200/LB OF 1997, DECIDED ON 27TH MARCH, 1999 VS I.T.AS. NOS.4670/LB AND 5200/LB OF 1997, DECIDED ON 27TH MARCH, 1999
1999 P T D (Trib.) 2356
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Sharif Chaudhry, Accountant Member and Muhammad Tauqir Afzal Malik, Judicial Member
I.T.As. Nos.4670/LB and 5200/LB of 1997, decided on 27/03/1999.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss.2(12) & 27---Capital asset---Goodwill---Goodwill was a capital asset for the purpose of Income Tax Ordinance, 1979---Definition of capital asset as contained in S.2(12) & S.27 of the Income Tax Ordinance, 1979 did not exclude "goodwill" from the ambit of capital asset.
128 ITR 294; V. R. Sonti v. C.I.T., West Bangal 117 ITR 836 and Devidas Vithaldas & Co. v. C.I.T. (1972) 84 ITR 277 ref.
Messrs Ankalsaria v. C.W.T. Karachi (1992) 66 Tax 11 (SC Pak.) rel.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.28---Computation of capital gains---Goodwill---Cost of goodwill---Sale of goodwill---Contention that goodwill had no cost was rejected by Appellate Tribunal---Expenses incurred into building the name and goodwill of a product were cost of goodwill which were claimed in profit and loss account---Such expense could not be claimed as capital cost of goodwill under S.28 of the Income Tax Ordinance, 1979 at the time of sale of that capital assets i.e. goodwill.
(c) Income Tax Ordinance (XXXI of 1979)---
----S.28---Computation of capital gains---Capital assets---When no cost---If there was no cost of capital assets or no expenditure had been incurred in connection with its transfer, then nothing would be deducted and total sale proceeds of such capital asset shall be considered as capital gains under S.28 of the Income Tax Ordinance, 1979.
(d) Income Tax Ordinance (XXXI of 1979)---
----First Sched., Part IV, para. 4---Capital gain---Goodwill---Date of acquisition of capital asset---Contention that since the date of acquisition of goodwill was not known, capital gain arising thereon could not be brought to tax was repelled---Responsibility to disclose date of acquisition of capital asset was on the assessee---Date on which the goodwill started appearing in the accounts would be treated as the date of acquisition---If goodwill did not appear in the accounts before the date of its sale, then the date of sale would be the date of its acquisition.
(e) Income Tax Ordinance (XXXI of 1979)---
----S.27---Capital gains---Goodwill---Sale of ---Chargeability of tax---Capital gain on sale of goodwill was chargeable to tax under S.27 of the Income Tax Ordinance, 1979.
Manzoor Hussain Mir, F.C.A. for Appellant (I.T.A. No.4670/LB of 1997)
Muhammad Iqbal Ahmad, D.R. and Shafqat Mahmood Chohan; L.A. for Respondent (in I.T.A. No.4670/LB of 1997).
Shafqat Mahmood Chohan, L.A. and Muhammad lqbal Ahmad, D.R. for Appellant (in I.T.A. No.5200/LB of 1997).
Manzoor Hussain Mir, F.C.A. for Respondent (in I.T.A No.5200/LB of 1997).
Date of hearing: 13th February, 1999.
ORDER
MUHAMMAD SHARIF CHAUDHRY (ACCOUNTANT MEMBER). ---These cross appeals arise out of appellate order dated 20-9-1997 made by Commissioner of Income-tax Appeal Zone-III, Lahore. Authorized representatives of both the parties, revenue and assessee, have been heard and relevant records and documents have been perused. Appeals are decided as under:---
2. The appellant is a public limited company, which derives income from manufacturing and sale of various electric items and gauges such as meters, transformers, switch gears, electric motors, air conditioners, deep freezers refrigerators and compressors etc.
3. First common grievance of both the parties pertains to the treatment given by the Commissioner (Appeals) to the profit and loss add-backs. Following table shows the position of expenses claimed by the assessee, expenses disallowed by the Assessing Officer and treatment given by the C.I.T. (Appeal) to the add backs under various heads of profits and loss account:
| | Expenses Claimed Rs. | Disallowed by JAC Rs. | Addition fixed by CIT(A). Rs. |
| Administrative expenses. | | | |
| (1) Salaries & other benefits. | 15,882,000 | 3,000,000 | 350,000 |
| (2) Travelling & Conveyance | 1,260,000 | 300,000 | 150,000 |
| (3) Repair & maintenance | 1,560,000 | 400,000 | 300,000 |
| (4) Vehicle running & maintenance.?????? | 1,551,000 | 350,000 | 350,000 |
| (5) Postage, Telegram & Telephones.?? | 2,782,000 | 417,300 | 417,300 |
| (6) Entertainment & staff welfare.????????? | 1,425,000 | 400,000 | 400,000 |
| (7) Provision of doubt? full debts. | 1,910,000 | 1,910,000 | 1,190,000 |
| (8) Donation. | 300,000 | 300,000 | 300,000 |
| (9) Printing, Stationery & Periodicals. | 1,810,000 | 300,000 | 100,000 |
| (10) Rent, rate and taxes. | 766,000 | 300,000 | Deleted. |
| (11) Depreciation amortization. | 4,112,000 | 1,000,000 | Deleted. |
| Selling Expenses | | | |
| (1) Salaries & other benefits | 13,241,000 | 2,500,000 | 200,00(2) |
| (2) Travelling & Conveyance | 2,822,000 | 940,000 | 200,000 |
| (3) Repair & maintenance | 1,264,000 | 300,000 | 100,000 |
| (4) Vehicle running & maintenance. | 1,917,000 | 130,000 | 130,000 |
| (5) Printing, Stationery & Periodicals.?? | 1,053,000 | 200,000 | 100,000 |
| (6) Freight & Forwarding. | 12,943,000 | 2,000,000 | 350,000 |
| (7) Postage, Telegram & Telephones. | 2,204,000 | 800,000 | 600,000 |
| (8) Entertainment & Staff welfare.? | 888,000 | 200,000 | 200,000 |
| (9) Advertisement & Sale Promotion.??? | 25,203,000 | 5,000,000 | 1,000,000 |
| (10) Warranty period service. | 10,985,000 | 3,000,000 | 500,000 |
| (11) Rent, rate & taxes. | 1,939,000 | 600,000 | Deleted |
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4. Both the parties are dissatisfied with the treatment given by the learned Commissioner to various add-backs made by the Income-tax Officer. The assessee company feels aggrieved as the relief given by the learned C.I.T. is not upto its satisfaction whereas the Revenue feels aggrieved as the relief given by the learned Commissioner is unjustified or more than reasonable in its view. The add-backs were initially made by the Assessing officer for unverifiable expenses, un vouched expenses, for inadmissible expenses and for personal and non-business expenses etc. On the other hand the assessee-company claims that all the expenses have been incurred wholly and absolutely for the purpose of business and there is hardly any element of personal or inadmissible expenses. It has been further contended by the assessee-company that it is a public limited company and so proper books of accounts alongwith proper documents and vouchers are being maintained which are strictly subjected to audit and are examined by competent Auditors.
We have considered the contentions of both the parties and have heard the arguments of their representatives. There is no justification for making any add-backs under the head 'salaries and other benefits' in respect of administrative expenses as well as selling expenses. So, the add-backs under this head in both the items are deleted. Under the head 'printing, stationery and periodicals' in respect of both the divisions of administrative expenses and selling expenses the add-back is again unjustified which is deleted entirely. However, the CIT's treatments in respect of remaining add-backs is found to be reasonable and proper. Therefore, no interference is made and the order of the learned C. I. T. regarding the same is confirmed.
5. The Revenue feels aggrieved with the deletion of the entire add-back of Rs.8,28,11,000 under the head financial expenses. The assessee company had made total consolidated claim of Rs.21,43,29,000 under the head financial expenses during the year under consideration as against last years claim of Rs.13,15,18,000. The Assessing Officer observed that the increase in expenses was hardly justifiable on the face of the fact that production in most of the units during the period under consideration had declined by 50% or more as compared with the preceding years but on the other hand the expenses under this head had increased. It has also been contended by the Assessing Officer that the assessee company failed to substantiate this claim with bank documents, hypothecation statements, details of principals amounts of loan invested in the business of company etc. So, the Assessing Officer curtailed the claim under the head financial expenses by an amount of Rs.8,28,11,000 which was found in excess of last year figure. In appeals before the Commissioner it was contended by the assessee-company that the Assessing Officer had disallowed the claim on account of interest expenditure on very flimsy and irrelevant grounds. It was further stated before the Commissioner that all the loans outstanding in the balance sheet had been brought forward from the preceding years and no new loan was contracted during the year under consideration. At the time of contracting of these loans the relevant documents were submitted to the then Assessing Officer who had requisitioned these documents. It was also contended before the Commissioner that no notice under section 62 of the Income Tax Ordinance has been issued before making this huge add-back. The Commissioner was also told that no such addition had been made by the Assessing Officer under this head during the assessment year 1996-97. In view of this situation the learned C.I.T. deleted the entire addition with the observations that the addition was found unjustified.
The contentions of both the parties before us are the same, which were placed before the learned C.I.T. Appeals. So, the same need not be repeated. We have considered the contentions of both the parties and the arguments of their learned representatives. In our opinion, the issue of financial expenses needs further probe. So, it would meet the ends of justice if this issue is remanded back to the Income-tax Officer for reconsideration. He is directed to confront this issue to the assessee in a notice under section 62 and provide him reasonable opportunity of being heard. The books of accounts and all the relevant documents pertaining to financial expenses should be examined and, if need be, information regarding payment/accrual of interest may be obtained from the banks and financial institutions from whom loans have been contracted. The issue should be resolved after considering all the relevant facts and after hearing the assessee.
GOODWILL:
5. Perhaps the most important issue in this case relates to taxability of sale proceeds of goodwill amounting to Rs.80 million. According to the facts available on record, the assessee company by virtue of an agreement, dated 26-2-1995 made with P.E.L. Appliances Ltd. another Public Ltd. Co., discontinued production of Window type air-conditioners after 1st March 1995 and received an amount of Rs.80 million on account of good-will allowing the buyer company to manufacture air-conditioners under the trade name of P. E, L. In the return of income filed for the assessment year 1995-96 the assessee claimed exemption of this amount of goodwill on the ground that the same was in the nature of capital receipt and was not chargeable to tax under any of the heads of income narrated under section 15 of the Income Tax Ordinance, 1979. The Assessing Officer, however, did not accept this plea of the assessee and brought the amount of sale of goodwill td the charge of income-tax under the head capital gain under section 27 of the Income Tax Ordinance. In appeal filed at the instance of the assessee-company, the learned Commissioner of Income Tax set aside the issue of taxability of goodwill and remanded it back to the Assessing Officer for further probe. It is against this treatment of the learned Commissioner (Appeals) that both the parties have come up in further appeal before us. Incidentally both the parties unanimously hold that the learned C.I.T. was not justified in setting aside the assessment on the issue of chargeability of goodwill as the matter involved being purely and simply a question of law requiring no further details or evidence the learned First Appellate Authority should have decided the same instead of remanding it back for further probe.
6. It has been contended by the assessee-company that sale proceeds of goodwill are in the nature of a capital receipt and are not chargeable to income-tax under any of the heads of income mentioned in section 15 of the Income Tax Ordnance namely salary; interest on securities; income from house property; income from business or profession; capital gains and income from other sources. The explanation given in support of this contention by the A.R. of the assessee-company in his letter, dated 7-6-1996 before the Income-tax Officer is partly reproduced below because it highlights the view, point of the assessee:
"It is submitted that assessee-company is engaged in manufacturing and selling of air-conditioners at least for the last 2 decades and trade name/trade mark of P. E. L. air-conditioners has earned a good name and enjoyed valuable amount of goodwill. The company in pursuance to an agreement arrived at with its subsidiary company sold its trade mark/goodwill for a sum of Rs.80 million which though of non-recurring nature in fact represents a capital receipt of intangible asset. Income that can be brought to tax is enumerated under section 15 of the Income Tax Ordinance classified as salaries, interest on security, income from property, income from business or profession, capital gains and income from other sources. You will kindly appreciate that capital receipt irrespective of the account treatment is not liable to tax under the provisions of Ordinance. There is a long line of the decisions of Superior Courts on the issue that capital receipts are not liable to tax under the Income Tax Ordinance, 1979 or that of Repealed Act, 1922. "
At Bar, it has been further submitted on behalf of the assessee that the action of the income-tax Officer in bringing the amount of sale of goodwill to tax as income from capital gains under section 27 of the Income Tax Ordinance, 1979 is absolutely illegal and unjustified. The arguments of the learned A.R. of the assessee in the nut-shell are:
(i) In terms of section 28 of the Income Tax Ordinance, 1979 capital gain is to be computed after allowing the cost of acquisition of capital asset and any expenditure incurred wholly and exclusively in connection with the transfer thereof which shows that where cost has not been incurred on the acquisition of capital asset the same cannot be taxed as capital gain.
(ii) Paragraph 4 of Part IV of the First Schedule of Income Tax Ordinance deals with the tax payable on income chargeable under the head capital gains arising on the disposal of the capital asset. Such income has been classified broadly under two categories: one dealing with capital gain arising as a result of disposal by the assessee of his capital asset after not more than 12 months from the date of their acquisition by him; the other dealing with capital gains which has arisen on account of the disposal by the assessee of his capital assets after 12 months from the date of their acquisition by him. The capital gain of former category is to be included in the total income and subjected to tax as such; whereas capital gain of the latter category is to be subjected to different rate of tax after giving some allowances and deductions. On the basis of this provision of law, the date of acquisition of capital asset is very essential for determining the rate of tax on the capital gain arising out of the disposal of that asset.
In support of the above two arguments, the A.R. of the assessee company has produced a judgment of the Supreme Court of India, dated 19-2-1981 reported as 128 ITR 294, the most operative portion of which reads as under:
"All transactions en company section 45 fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. What is contemplated by section 48(ii) is an asset in the acquisition of which it is possible to envisage a cost; it must be an asset, which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. None of the provisions pertaining to the head 'capital gains' suggests that they include an asset in the acquisition of which no cost at all can be conceived. When goodwill generated in a new business is sold and the consideration brought to tax, what is charged is the capital value of the asset and not any profit or gain. Further, the date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gain; but in the case of goodwill generated in a new business it is not possible to determine the date when it comes into existence. "
7. On the other hand, it has been contended by the Revenue that goodwill is a capital asset and any gain occurring on the sale thereof constitutes capital gain, which is chargeable to tax under section 27 of the Income Tax Ordinance, 1979. The arguments of Revenue in support of this contention are briefly summarized as under:---
(i) The assessee has failed to indicate any specific provision of law which goes to exempt the sale of goodwill.
(ii) The receipt clearly falls within the meaning of capital gains and as such attracts provision of section 27 of the Income Tax Ordinance. It is also immaterial in this respect that no cost has been incurred on the acquisition of an asset. This view is supported by following Indian cases:
(a) ITR Vol. 117 page 836 V. R. Sonti v. C.I.T. West Bangal, decided on 29-8-1972,
(b) (1972) 84 ITR 277 Devidas Vithaldas & Co. v. CIT, decided on 28-1-1972.
(iii) Goodwill is a capital asset and it has been held as such by the Honourable Supreme Court of Pakistan in the case of M/s. Ankalsaria v. C.W.T., Karachi (1992) 66 Tax 11 (SC Pak.). The most relevant remarks of the Honourable Mr. Justice Sajjad Ali Shah on the issue are:---
"It is, therefore, manifestly clear and further there is no dispute about it, in the light of what is stated above, that goodwill is incorporeal property in the class of patents, copyrights and trade marks and as such is movable property and is, therefore, caught within the definition of 'assets' including property of every description movable or immovable."
It is interesting to point out that both the parties have tried to dislodge each others contentions by trying to prove that the case law provided by one is more relevant, more authentic and comparatively later than the case law produced by the other party.
8. We have considered the contentions of both the parties and have heard the arguments of their representatives. Briefly speaking, the view of the assessee is that gain arising on sale of goodwill is not chargeable to income-tax because it cannot be computed in the absence of cost under section 28 and it cannot be charged to income-tax under para. 4 of Part IV of the First Schedule to the Income Tax Ordinance in the absence of date of acquisition of goodwill. According to the assessee the amount received on account of sale of goodwill is a capital receipt immune from tax. On the contrary it is held by the Revenue that goodwill is a capital asset and any gain arising on its gale is capital gain which is chargeable to tax under section 27 of the income Tax Ordinance despite the absence of its cost and absence of its date of acquisition. As stated earlier both the parties have mainly relied on the cases decided by Indian Courts in support of their views. We, however, regret to admit that the cases of Indian Courts quoted by both the parties hardly inspire us because these cases are old ones relating to 1960's and 1970's. Moreover, neither the Indian statutory law of those days is before us nor the full facts of these cases are before us. In view of this situation, Indian case-law cannot be relied upon as a valid source of guidance. No doubt the Revenue has quoted in its favour a case decided by the Honourable Supreme Court of Pakistan (1992) 66 Tax 11 but this case pertains to taxability of goods will under Wealth Tax Act whereas issue before us is the chargeability of capital gain arising on 'sale of goodwill under Income Tax Ordinance. The Supreme Court case, is, therefore, not helpful to us in deciding the issue under consideration.
In view of the facts narrated above, let us refer to the statutory law and make exertion to interpret the law and decide issue before us by the exercise of our own judgment. The issue before us in the nut-shell is whether goodwill is capital asset and if yes whether gain arising on sale of goodwill can be charged to income-tax under the head capital gains under section 27 of the Income Tax Ordinance in the absence of cost of goodwill and date of its acquisition? So far as the question whether goodwill is or is not a capital asset is concerned, the judgment of Supreme Court of Pakistan cited above is very clear. Although the judgment pertains to Wealth Tax Act but it is also valid in determining the status of goodwill under the Income Tax Ordinance. We have, therefore, no hesitation to hold that goodwill is a capital asset for the purpose of Income Tax Ordinance, 1979. We are strengthened in this belief by definition of capital asset as contained in section 2(12) and section 27 of the Income Tax Ordinance, which does not exclude goodwill from the ambit of capital asset. Moreover, both the parties concerned have no serious difference of opinion on the status of goodwill being a capital asset.
We do not agree with the view of the learned A.R. that goodwill has' no cost. In our view goodwill has ample cost because a lot of money and effort has to be pumped into building the name and goodwill of a product. In fact, all the money spent on advertisement and publicity of the product through press and electronic media and through advertising agencies, and all the expenses incurred on liberal allowance of commissions/discounts to distributors and customers for sale of the product is cost of the goodwill. But these expenses are claimed as revenue expenses in profit and loss account and are deducted as such from income, so the same cannot be claimed as capital cost of goodwill under section 28 at the time of sale of this capital asset.
9. The next argument of the learned A.R. is that capital gain is to be computed under section 28 of the Income Tax Ordinance, 1979 after deducting the cost of acquisition of capital asset and any expenditure incurred wholly and exclusively in connection with the transfer of the capital asset. Since there is no cost of goodwill and, no other expenditure has been incurred, so capital gain cannot be computed on the sale of goodwill and, thus, there is no question of its chargeability to income-tax.
10. Before deliberating on this argument of the learned A.R. let us refer to the relevant portion of section 28 of Income Tax Ordinance. Subsection (1) of section 28 deals with computation of capital gain and it reads: "In computing the income under the head capital gains, the cost of the acquisition of capital asset and any expenditure incurred wholly and exclusively in connection with the transfer thereof shall be deducted." Thus, according to this provision of law, at the time of computing the income under the head capital gains, the cost of acquisition of the capital asset as well as any expenditure incurred in connection with the transfer thereof shall be deducted from the sale of proceeds of that capital asset. In other words if there is some cost of the capital asset and if there is any expenditure incurred in connection with its sale the same shall be deducted from the amount of its sale. But if there is no cost and if there is no such expense, then, of course, nothing shall be deducted. In other words this section does not say that in the case of absence of cost of capital asset or in case of absence of any expenditure, regarding its trans, no capital gain can be computed and brought to tax.
11. The word "shall" used in this section has been mostly emphasized by the learned A.R. and on the basis of this word it has been argued that cost of capital asset has to be deducted at the time of computing the capital gains. But the fact is that the cost of capital asset shall be deducted only in case if the same has been incurred or claimed by the assessee. The word "shall" does not mean that even in the case of no cost of such capital asset, the cost would be presumed and would be deducted from its sale proceeds. As we have already held above that goodwill does cost much in terms of money but since its cost in the form of various expenses is claimed as Revenue expense over a period, therefore, no cost can be claimed or allowed at the time of its sale. Even if for the sake of argument it is accepted that there is no cost of goodwill, even then the argument of the learned A.R. regarding non ?chargeability of capital gain arising on the sale of goodwill to tax is fallacious. As already held by us, subsection (1) of section 28 of the Income Tax Ordinance does not say that capital gain arising on sale of goodwill or any other capital asset cannot be computed simply because there is no cost of that capital asset and there is no expenditure incurred in connection with its sale. In fact, this section does not rule out the possibility of zero cost or zero expenditure of the capital asset. Thus, in our view, if there is no cost of the capital asset or no expenditure has been incurred in connection with its transfer, then nothing would be deducted and the total sale-proceed of such capital asset shall be considered as capital gains under section 28.
12. The last argument of the learned A.R. of the assessee company is that capital gain arising on sale of any capital asset is charged to tax under paragraph 4 of Part IV of the First Schedule to the Income Tax Ordinance, 1979. Under this provision of law date of acquisition of such capital asset is very material, because rate of tax is determined with reference to it. According to him, since the date of acquisition of goodwill is not known, so the capital gain arising thereon cannot be brought to tax. We have considered this argument of the learned A.R. No doubt the date of acquisition of capital asset under the abovementioned provision of law is very material, but it is the responsibility of the tax payer to disclose or claim the date of acquisition of the capital asset under consideration. Since the assessee company has not disclosed the date of acquisition of goodwill on the ground that it is not known, so it would be most appropriate if the date on which the goodwill started appearing in the accounts of the assessee company is treated to be the date of acquisition thereof. But if goodwill does not appear in the accounts of the assessee company before the date of its sale, then the date of sale would be recorded as date of acquisition thereof.
In view of the foregoing discussion, it is held that the capital gain on sale of goodwill is chargeable to tax under section 27 of the Income Tax Ordinance, 1979 and, therefore; the treatment of the Income Tax Ordinance being in accordance with law is upheld. The directions of the learned C.I.T. in the impugned appellate order regarding further probe on the issue of goodwill to the I.T.O. are, therefore, cancelled and the order of the I.T.O. on this issue is restored.
Both the appeals stand decided as indicated above.
C.M.A./28/Tax/(Trib.) ???????????????????????????????????????????????????????????? Order accordingly