PUNJAB SMALL INDUSTRIES CORPORATION, LAHORE VS COMMISSIONER OF INCOME-TAX, COMPANIES ZONE, LAHORE
2001 P T D 2282
[Lahore High Court]
Before Nasim Sikandar and Jawwad S. Khawaja, JJ
PUNJAB SMALL INDUSTRIES CORPORATION, LAHORE
Versus
COMMISSIONER OF INCOME‑TAX, COMPANIES ZONE, LAHORE
C.T.R. No.56 of 1992, heard on 10/04/2001.
(a) Income Tax Ordinance (XXXI of 1979)‑‑--
‑‑‑‑Ss. 2(24), 15 & Second Sched., Part I, Cl.(65) [since omitted]‑‑ "Income"‑‑‑Definition‑‑‑Grant‑in‑aid to a statutory Corporation ‑‑‑Tax ability‑‑‑‑Capital receipt‑‑‑Case and non‑recurring receipt ‑‑‑Exemption‑‑ Assessment years 1981‑82 to 1983‑84‑‑‑Provision of S.2(24), Income Tax Ordinance, 1979 only gives a general concept of the word "income"‑‑ Assessee, a statutory Corporation was not a trading organisation as such nor it engaged itself in business‑‑‑Grant‑in‑aid was provided by the Provincial Government to the Corporation to take care of the losses already sustained by it while providing promotional service to small and medium size entrepreneurs and receipt of the said grants was not co‑related to any business, production of service activities rendered or to be rendered by the Corporation‑‑‑Levy of income‑tax on such grant‑in‑aid‑‑‑Validity‑‑‑Held, receipts in the form of grant‑in‑aid by the Corporation were not taxable at the relevant time‑‑‑Such receipts partook of the nature of capital receipts and were also exempt from levy of income‑tax on account of their being casual and non‑recurring‑‑‑Principles.
The Punjab Small Industries Corporation was served with a notice under section 56 of the Income Tax Ordinance, 1979 to file returns for the assessment years 1981‑82 to 1983‑84. In reply it was submitted that being a body corporate under the Government of the Punjab established through Punjab Small Industries Corporation Act No.XV of 1975 to promote small industries in the Punjab Province, the provisions of the Income Tax Ordinance were not applicable to it. However, after the Assessing Officer remained persistent the returns for the aforesaid assessment years were filed to disclose losses at various sums in the three years involved. The Assessing Officer noted that besides interest, renewal and registration fee and miscellaneous income the corporation also received grant‑in‑aid of Rs.25,739,200, 2,72,73,444 and Rs.3,76,93,710. On expression of his intention to tax these amounts by treating them income, the assessee raised a number of objections. Firstly the amounts were claimed exempt under Article 165 of the Constitution and secondly with reference to clause 136(A) of the Second Schedule to the Income Tax Ordinance, 1979. Thirdly, it was stated to be a casual and non‑recurring receipt, and therefore, exempt from levy of income‑tax.
The Assessing Officer, however, rejected the contentions. First plea was rejected by referring to addition of Article 165‑A to the Constitution by Presidential Order No. 11 of 1985 while the second plea was rejected by taking into consideration the exact wording of the clause to hold that it was not attracted in the case of the assessee.
After adding the grant‑in‑aid in total receipts and on allowing expenses as claimed, the Assessing Officer proceeded to frame assessments in the three years involved.
The assessee failed before the A.C. as well as the Tribunal where findings recorded by the Assessing Officer while rejecting the claim of exemption with regard to grants‑in‑aid, were maintained.
The definition of the word "income" as given in subsection (24) of section 2 of the Income Tax Ordinance only gives a general concept of the term. To treat a receipt as income necessarily requires a finding of fact that it was covered by the word "income" as defined in the above clause which is not exhaustive. The use of the word "includes" in the definition clause certainly means that an income may also accrue, result or arise in a manner not expressly stated in that subsection. It is, however, always for the Revenue to bring a receipt under any one or more heads specified in section 15.
In all cases in which a receipt is sought to be taxed as income, the burden lies upon the department to prove that it is within the taxing provision. Where, however, a receipt is in the nature of income, the burden of proving that it is not taxable because it falls within an exemption provided by the Act lies upon the assessee.
The source of income in the present case was the Government of the Punjab which controlled the corporation under the provisions of the Act. The treatment of grant‑in‑aid received by the corporation from the Government as income required a finding of fact that it was covered by the concept of income as contemplated in the Ordinance as it properly fell under one or more of the heads given in section 15 of the Ordinance. It was never so done. No finding or reason was ever stated as to how the said grant‑in‑aid was "income" of the assessee. It appears that the Assessing Officer was under an impression that all receipts are income unless proved exempt from levy of income‑tax. That perception was obviously wrong.
The term "income" was a term of wide significance and generally and ordinarily it connoted a periodical monetary return, coming in with sonic sort of regularity or expected regularity, from a definite source. Also that (multiplicity of forms which an income may assume is beyond enumeration. An income need not necessarily be a recurrent return from a definite source, though it is generally of that character. The question whether a particular kind of receipt is income or not would depend for its answer on the peculiar facts and circumstances of the case.
In order to treat a receipt as income it must be established that there was a continuous exercise of activity or an organised or systematic effort on the part of the assessee. Earning of an income is the end result of a process which starts from a desire and then the intention gets on the move on engagement of an activity by involving labour or capital or both: Where the case of the assessee is that a receipt did not fall within the taxing provision, the source of the receipt is disclosed by the assessee and there is no dispute about the truth of that disclosure, the income‑tax authorities are not entitled to raise an inference that the receipt is assessable to income‑tax on the ground that the assessee has failed to lead all the evidence in support of his contention that it is not within the taxing provision.
Income is a tax on a person in relation to his income. A tax is not imposed on an income generally, it is imposed on the income of a person natural or artificial. Obviously to tax the income or tax a receipt in the hands of an assessee it must be established to be an income in relation to that assessee. Mere fact that a person has received a sum of money from another will not by itself make the receipt liable to tax unless the Revenue is able to bring home that the receipt amounted to "income" of the assessee. As to what amounts to income, will largely depend upon the facts of each case.
A grant‑in‑aid or any similar receipt cannot be treated as income of an assessee. Particularly the one which is not engaged in a business or vocation as is in common parlar. The word "income" is not limited by the words "profits and gains". It means anything which could properly be described as income and was taxable under the Act unless expressly exempted. The grant‑in‑aid as received by the assessee did not fall in any of the heads given in section 15 of the Income Tax Ordinance, 1979. In fact no effort whatsoever was made by the Assessing Officer to establish that the receipt was covered by one or more of the heads stated in that section. On the other hand the assessee had also been changing stances to claim exemption. It is here that the whole tenor of the assessment order changed. In the beginning an exemption was claimed on the ground of the corporation being a part of the Provincial Government. Then the claim was rested on Article 165 of the Constitution which was rightly brushed aside with reference to Article 165‑A. Then came the defence that the receipt enjoyed exemption under clause (136‑A) of the Second Schedule to the Ordinance. That clause clearly being inapplicable the claim was again validly refused. At the relevant time, however, clause (65) of that Schedule titled "casual receipts" was a complete alternate defence, of the first that the receipt was not an income, failed.
The corporation in the three years involved received the grants‑in -aid but this recurrence did not make the receipts to be continuous or recurring.
In the facts of the present case, no effort whatsoever was made to establish that the receipt in question was an income of the assessee falling under any of the heads enumerated in section 15 of the Ordinance. The source of receipt being clearly available a finding of fact was needed to be recorded that receipt amounted to income for any good reason including providing any service, present or future, or supply of any material in the present or in the future to the grantor Government of Punjab. The corporation was not a trading organization as such nor it engaged itself in business. Stately the grant‑in‑aid was provided to take care of the losses already sustained by the corporation while providing promotional service to small and medium size entrepreneurs. The receipt was not correlated to any business, production or service activities rendered or to be rendered by the corporation. It could not be held to be an income of the assessee. At best the receipt in question could be taken to be a capital receipt which was not liable to tax in the facts and circumstances of the case.
At the relevant time, clause (65) of the Second Schedule, Part I, (since omitted) was also a good answer to the intended action of the Assessing Officer to treat the receipt as an income. This aspect of the matter, however was not mooted either before the Revenue Authorities or even before the Tribunal. Since the provision of law is clear and beneficial to the assessee it has been allowed to be raised for consideration as the material already available on record was sufficient to make clause (65) applicable.
The receipts in the form of grants by the Provincial Government were not taxable at the relevant time. These partook of the nature of capital receipts and were also exempt from levy of income‑tax on account of their being casual and non‑recurring.
Deputy Managing Director, National Bank of Pakistan v. Ataul Haq PLD 1965 SC 201; CIT, Central Zone, Karachi v. Sandoz (Pak.) Ltd. 1987 PTD 482; CIT v . Smith Kline & Prench of Pakistan Ltd. and 2 others 1991 PTD 999 = 1991 SCMR 2374; CIT v. Gogte Minerals 1998 PTD 2498 = 222 ITR 245; CIT v. Anand & Co. 2000 PTD 823; Sint. Parimisetti Seetharamamma alias Mrs. Manavathi Bai v. Commissioner of Income‑tax, Hyderabad (1965) 56 ITR 3 I ; CIT, Rawalpindi Zone, Rawalpindi v. Messrs Haji Maula Bux Corporation Ltd., Sargodha PLD 1990 SC 990; Shaik Ibrahim v. CIT, Andhra Pradesh 1970 PTD 8; .Haji Ibrahim Ishaq Johri v. CIT (West), Karachi 1993 PTD 114 and Mahrajkumar Gopal Saran Narain Singh v. CIT, Bihar and Qrissa (1935) 3 ITR 237 ref.
(b) Income Tax Ordinance (XXXI of 1979)‑‑‑-
‑‑‑‑Ss. 136, 2(24) & Second Sched., Part I, Cl.(65)‑‑‑Reference to High Court‑‑‑Scope‑‑‑"Income"‑‑‑Definition‑‑‑Provision of law as contained in Cl.(65), Part I, Second Sched. to the Ordinance at the relevant time was a good answer to the intended action of the Assessing Officer to treat the receipt of the assessee as "income" which aspect was not mooted either before the Revenue Authorities or .even before the Appellate Tribunal‑‑ Said provision of law being clear and beneficial to the assessee was allowed to be raised for consideration by the High Court as the material already available on record was sufficient to make the said provision applicable.
Muhammad Iqbal Hashmi for Petitioner.
Muhammad Ilyas Khan for Respondent.
Date of hearing: 10th April, 2001.
JUDGMENT
NASIM SIKANDAR, J.‑‑‑This is a case stated by the Lahore Bench of the Income Tax Appellate Tribunal under section 136(1) of the Income Tax Ordinance, 1979. The following questions of law are said to have arisen out of its order, dated 14‑4‑1987 in I.T.A. Nos. 370,371 and 372‑LB of 1986‑87: ‑‑‑
"(a)That the petitioner Corporation is exempt from payment of income tax on the ground that it is in fact a Provincial Government performing the Governmental functions of the Provincial Government without any profit, motivation of revenue consideration.
(b) That without prejudice to the above ground the petitioner Corporation claims that the capital contribution/grants made by the Provincial Government to the petitioner Corporation are not taxable entity.
(c) That again without prejudice to the above ground that petitioner Corporation claims that the capital contribution/grants made by the Provincial Government to the petitioner Corporation are not taxable. The amount of Rs.25,739,200 per year has to be excluded from its income.
(d) That in the alternative it is also claimed that the respondents have erred in not granting credit to the so‑called income of the petitioner Corporation received through deposits in National Saving Scheme. These deposits were approximately to the tune of Rs.112,678,857.
(e) That the precedent cases cited by the respondents in the support of their orders are distinguishable.
(f) That the impugned orders are bad in law and are thus unlawful and without jurisdictions.
2. According to the statement of the case, the respondent was served with a notice under section 56 of the Income Tax Ordinance, 1979 to file A returns for the assessment years 1981‑82 to 1983‑84. In reply it was submitted that being a body Corporate under the Government of the Punjab established through Punjab Small Industries Corporation Act No.XV of 1975 to promote small industries in the Punjab Province, the provisions of the Income Tax Ordinance were not applicable to it. However, after the Assessing Officer remained persistent the returns for the aforesaid assessment years were filed to disclose losses at various sums in the three years involved. The Assessing Officer noted that besides interest, renewal anti registration fee and miscellaneous income the Corporation also received grant‑in‑aid of Rs.25,739,200, 2,72,73,444, and Rs.3,76,93,710. On expression of his intention to tax these amounts by treating them income, the assessee raised a number of objections. Firstly the amounts were claimed exempt under Article 165 of the Constitution and secondly with reference to clause 136(A) of the Second Schedule to the Income Tax Ordinance, 1979. Thirdly, it was stated to be a casual and non‑recurring receipt, and therefore, exempt from levy of Income‑tax.
3. The Assessing Officer, however, rejected the contentions. First plea was rejected by referring to addition of Article 165‑A to the Constitution by Presidential Order No. 11 of 1985 while the second plea was rejected by taking into consideration the exact wording of the clause to hold that it was not attracted in the case of the assessee. Clause 136(A) at the relevant time read as under:‑‑‑
"Any income of a person representing a subsidy granted to him by the Federal Government for the purposes of implementation of any project approved by Government in this regard. "
4. After adding the aforesaid grant‑in‑aid in total receipts and on allowing expenses as claimed the Assessing Officer proceeded to frame assessments in the three years involved.
5. The assessee failed before ‑the A.C. as well as the Tribunal where findings recorded by the Assessing Officer while rejecting the claim or exemption with regard to grants‑in‑aid were maintained. The case‑law relive by the learned counsel for the assessee was also distinguished by the Tribunal. By relying upon a judgment of the Supreme Court of Pakistan in re: Deputy Managing Director, National Bank of Pakistan v. Ataul Haq (PLD 1965 SC 201) the alternate plea of the corporation of being a local authority was also rejected. Lastly the claim that grant‑in‑aid having been given without any service or revenue consideration was capital in nature was found untenable. Thereafter, at the request of the assessee corporation the aforesaid questions were framed.
6. Heard the learned counsel for the parties. The learned counsel for the petitioner at the outset presses question (c) only. Therefore, the other questions (a), (b), (d), (e), and (f) were declined to be answered.
7. In support of the contentions that grant‑in‑aid given in this case was a capital receipt made by the Provincial Government, it is stressed that objects of the Corporation are promotional and not commercial and that in case of its dissolution all assets of the Corporation will revert to the Provincial Government. To support his plea that these amounts could by no stretch of imagination be taken to the income of the assessee‑Corporation, learned counsel relies upon re: CIT Central Zone Karachi v. Sandoz (Pak.) Ltd. 1987 PTD 482, re: CIT v . Smith Kline & Prench of Pakistan Ltd. and two others 1991 PTD 999 = 1991 SCMR 2374, re: CIT v. Gogte Minerals (1998 PTD 2498) 222 ITR 245 and re: CIT v. Anand & Co. (2000 PTD 823).
8. Learned counsel for the Revenue, however, supports the order of the Tribunal for the reasons stated therein. He claims that the assessee Corporation was certainly engaged, in pursuing commercial objects inasmuch as not only it was advancing loans on interest but also developing industrial estates for sale to small and, medium size entrepreneurs. Therefore, in hi view the different kinds of receipts including grant‑in‑aid were rightly taken to be the income of the Corporation.
9. The question as to what amounts to an "income" is not easy to answer. The definition of the word "income" as given in subsection (24) of section 2 of the Income Tax Ordinance only gives a general concept of the term. According to the Supreme Court in re: CIT v. Smith Kline and French of Pakistan (Supra) to treat a receipt as income necessarily requires a finding of fact that it was covered by the word "income" as defined in the above clause which is not exhaustive. The use of the word "includes" in the definition clause certainly means that an income may also accrue, result or arise in a manner not expressly stated in that subsection. It is, however, always for the Revenue to bring a receipt under any one or more heads specified in section 15. In re: Smt. Parimisetti Seetharamamma alias Mrs: Manavathi Bai v. Commissioner of Income Tax, Hyderabad (1965) 56 ITR 31, the Supreme Court of India were considering the nature of receipt which was claimed by the assessee to be a gift. Their Lordships observed that "by sections 3 and 4, the Indian Income‑tax Act, 1922, imposes a general liability to tax upon all income. But the Act does not provide that whatever is received by a person must be regarded as income liable to tax. In all cases in which a receipt is sought to be taxed, as income, the burden lies upon the Department to prove that it is within the taxing provisions. Where however, a receipt is of the nature of income, the burden of proving that it is not taxable because it falls within an exemption' provided by the Act lies upon the assessee".
10. The source of income in this case was the Government of the Punjab which controlled the Corporation under the provisions of the aforesaid Act. p The treatment of grant‑in‑aid received by the Corporation from the Government as income required a finding of fact that it was covered by the concept of income as contemplated in the Ordinance as it properly fell under one or more of the heads given in section 15 of the Ordinance. It was never so done. No finding or reason was ever stated as to how the said grant‑in‑aid p was "income" of the assessee. It appears that the Assessing Officer was under an impression that all receipts are income unless proved exempt from levy of income tax. That perception was obviously wrong when seen in the light of the above cases from local as well as the foreign jurisdiction. ,
11. In re: CIT Rawalpindi Zone Rawalpindi v. Messrs Haji Maula Bux Corporation Ltd., Sargodha (PLD 1990 SC 990), the Supreme Court was of the view that the term "income" was a term of wide significance and generally and ordinarily it connoted a periodical monetary return, coming in with some sort of regularity or expected regularity, from a definite source. Also that multiplicity of forms which an Income may assume is beyond enumeration. Further that an income need not necessarily be a recurrent t return from a definite source, though it: is generally of that character. In the last analysis the Court observed that" the question whether a particular kind I of receipt is income or not would depend for its answer on the peculiar facts and circumstances of the case. The Andhra Pradesh High Court in re: Shaik Ibrahim v. CIT Andhra Pradesh (1970 PTD 8) expressed the view that in order to treat a receipt as income it must be established that there was a continuous exercise of activity or an organised or systematic effort on the part of the assessee. In our view earning of an income is the end result of a process which starts from a desire and then the intention gets on the move on engagement of an activity by involving labour or capital both. In S.M.T. Partmisetti Seta Ram Mama v. CIT Hyderabad (Supra) the Supreme Court of India while commenting upon the placement of burden of proof further concluded that "where the case of the assessee is that a receipt did not fall within the taxing provision, the source of the receipt is disclosed by the assessee and there is no dispute about the truth of that disclosure the income tax authorities are not entitled to raise an inference that the receipt is assessable to income tax on the ground that the assessee has failed to lead all the evidence in support of his contention that it is not within the taxing provision".
12. "Income‑tax according to Muhammad Afzal Lone, J. in re: Haji Ibrahim Ishaq Johri v. CIT (West) Karachi (1993 PTD 114) is a tax on a person in relation to his income. A tax according to his Lordship is not imposed on an income generally, it is imposed on the income of a person natural or artificial. Obviously to tax the income or tax as receipt in the hands of an assessee it must be established to be an income in relation to that assessee. Mere fact that a person has received a sum of money from another will not by itself make the receipt liable to tax unless the Revenue is able to bring home that the receipt amounted to "income" of the assessee. As to what amounts to income, as noted earlier, will largely depend upon the facts of each case.
13. A grant‑in‑aid or any similar receipt cannot be treated as income of an assessee. Particularly the one which is not engaged in a business or vocation as we understand it in common parlays. The word income is not limited by the words "profits and gains" according to the Privy Council in re: Mahrajkumar Gopal Saran Narain Singh v. CIT Bihar and Orissa (1935) 3 ITR 237). It means anything which could properly be described as income and was taxable under the Act unless expressly exempted. The grant‑in‑aid as received by the assessee did not fall in any of the heads given in section 15. In fact no effort whatsoever was made by the Assessing Officer to establish that the receipt was covered by one or more of the heads stated in that section. On the other hand the assessee had also been changing stances to f claim exemption. It is here that the whole tenor of the assessment order changed. In the beginning an exemption was claimed on the ground of the Corporation being a part of the Provincial Government. Then the claim was rested on Article 165 of the Constitution which was rightly brushed aside with reference to Article 165‑A. Then came the defence that the receipt enjoyed exemption under clause (136‑A) of the Second Schedule to the Ordinance. That clause clearly being inapplicable the claim was again validly refused. At the relevant time, however, clause (65) of that Schedule titled "casual receipts" was a complete alternate defence of the first that the receipt was not an income failed. Clause (65) at the relevant time reads as under:
"Clause (65) casual receipts:
Any receipts (not being receipts chargeable under the head Income from business or profession' or 'Capital gains' or by way of addition to the remuneration of an employee) which are of a casual and non‑recurring nature. "
The Corporation in the three years involved received the grants‑in‑aid but this recurrence did not make the receipts to be continuous or recurring.
14. The ratio settled in the two judgments relied upon in re: CIT v. Gogte Minerals (supra) and re: CIT v. Anand & Co. (supra) is closely attracted to the facts in hand. In the first case the assessee received a grant from Mineral and Metal Trading Corporation of India. Since it was calculated on the basis of total quantity shipped for export of iron ore, the Assessing Officer co‑related the production and sale of the assessee's mining business with the grant arid took the view that it was a revenue receipt, and therefore, income of the assessee. A Division Bench of the Calcutta High Court disagreed. In the view of their Lordships the amount had been giver by way of development grant by the said Corporation to the assessee to acquire new machinery and to replace old. In their view a specifies percentage worked out on the basis of quantum of sales effected was only device to calculate the entitlement of the assessee towards the benefit and that the same could not be taken to be a payment by way of revenue receipt. In the second case C.I.T. v. Anand & Co. (supra) the assessee received a subsidy from Indian Cotton Federation which was a private organization. The Revenue could not bring home any nexus between the cash assistance with any service rendered by the assessee to the Federation. It was found to be dependent on discretion of a panel which considered the case of a company in view of its export performance of a particular item to a particular destination. In the course of judgment their Lordships made a specific reference to their query put to the learned counsel for the Revenue to identify any provision of the Income‑tax Act or the Rules under which the above receipt could be taken as income of the assessee and the failure on his part to reply them. The voluntarily assistance so made was, therefore, found not liable to tax.
15. In the facts of the present case, as noted earlier no effort whatsoever was made to establish that the receipt in question was an income of the assessee falling under any of the heads enumerated in section 15 of the Ordinance. The source of receipt being clearly available a finding of fact was needed to be recorded that receipt amounted to income for any good reason including providing any service present or future, or supply of any material in the present or in the future to the grantor Government of Punjab. The Corporation it will be seen was not a Trading Organization as such nor it engaged itself in business: Statedly the grant‑in‑aid was provided to take care of the losses already sustained by the Corporation while providing promotional service to small and medium size entrepreneurs. The receipt was not correlated to any business, production or service activities rendered or to be rendered by the Corporation. Therefore, per ratio settled in the said judgment of the Supreme Court in re: CIT v. Smith Kline & French of Pakistan Ltd. (Supra) it could not be held to be an income of the assessee. The principle settled by the Calcutta and Karnatak High Courts in the said two judgments also supports the claim that at best the receipt in question could be taken to be a capital receipt which was not liable to tax in the facts and circumstances of the case.
16. As observed earlier, at the relevant time, clause (6) was also a good answer to the intended action of the Assessing Officer to treat the receipt as an income. This aspect of the matter, however, unfortunately was not mooted either before the Revenue Authorities or even before the Tribunal. Since the K provision of law is clear and beneficial to the assessee it has been allowed to be raised for consideration as the material already available on record was sufficient to make clause (65) applicable.
17. That being so we will agree that the three receipts in the form of grants by the Provincial Government were not taxable at the L relevant time. These par took the nature of capital receipts and were also exempt from levy of income‑tax on account of there being casual and non recurring.
18. Question answered accordingly.
M.B.A./P‑37Reference answered.