BEFORE MUHAMMAD DAUD KHAN, ACCOUNTANT MEMBER AND MUHAMMAD TAUQIR AFZAL, JUDICIAL MEMBER VS BEFORE MUHAMMAD DAUD KHAN, ACCOUNTANT MEMBER AND MUHAMMAD TAUQIR AFZAL, JUDICIAL MEMBER
2002 P T D (Trib.) 257
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Daud Khan, Accountant Member and Muhammad Tauqir Afzal, Judicial Member
I.T.A. No. 795/KB of 1999-2000, decided on 15/12/2000.
Income Tax Ordinance (XXXI of 1979)---
----Ss. 66-A & 23---Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Deduction---Payment made to secure the market free from competition---Business expenditure-- Amortization of expenditure for three years--- -Addition was made out of such expenditure by the Inspecting Additional Commissioner under S.66-A of the Income Tax Ordinance, 1979---Validity---Payment was made to secure the market free from competition by the assessee for the specified number of years and thereby to ensure good profits for the succeeding period and proper establishment of the business---Expenditure was not in the nature of capital as no assets of enduring nature had come into existence---Expenses could not be amortized as there was no concept of amortization of expenses in the income-tax law---Order of the Inspecting Additional Commissioner was vacated by the Tribunal.
1998 PTD (Trib.) 1935; (1959) 1 Tax (111-101); CIT, Bombay v. C.I.B.A. of India Limited 69 ITR 692 (SC India) and 58 ITR 241 rel.
Asif Ali Khan, A.C.M.A. and Muhammad Irshad, I.T.P. for Appellant.
Muhammad Umer Farooq, D.R. for Respondent.
Date of hearing: 9th December, 2000.
ORDER
MUHAMMAD DAUD KHAN (ACCOUNTANT MEMBER).-- As per this appeal the assessee-appellant agitates against the addition of sum of Rs. 2,30,45,000 paid by the assessee to Messrs Shell Pakistan Limited non-competition in the market, by the I.A.C. under section 66-A of Income Tax Ordinance, 1979. Mr. Asif Ali Khan, A.C.M.A. and Mr. Muhammad Irshad, I.T.P. of Messrs Taseer Hadi Khalid & Company appeared for the appellant while Mr. Muhammad Umer Farooq, D.R. represented the department. Assessee's A.R. explained that during the year (on 16th September, 1994) the assessee-company entered into an agreement with Shell Pakistan Ltd., to buy their assets and business of the research and development, manufacturing, formulation, licensing, marketing and selling of herbicides, insecticides, acaricides, nematicides, redenticides and plant growth regulators for use in agriculture, animal health, public health and homes and gardens carried on by it in Pakistan. Besides payment for the assets, good-will etc., a sum of Rs. 23.045 million (0.75 million US $) was paid for non- competition by the sellers with the assessee in the line of business for a period of three (3) year. This payment was strictly for assessee's business consideration and did not bring into existence any asset of enduring nature. It was further elaborated that the expenditure was incurred to ensure that assessee gets established in the new line of business and earns the projected profits during the initial period. The assessee had charged a sum of Rs. 1.9 million to its accounts for the year while the remaining amount was amortized over, a period of three (3) years. In the return however, and the income and tax computation filed alongwith there-with the whole amount was claimed as expense for the year because there is no concept of amortization of expenses in the tax laws as repeatedly held by this Tribunal. In this connection reference was made to this Tribunal's decision reported as (1998) 77 Tax 204 (Trib.) which is being consistently followed in other cases also. It was also argued that lump sum expenditure incurred in a year was admissible as an expense for the year though it may not strictly speaking pertain only to that year. Reference was made to decision cited as (1959) 1 Tax (111-101) of the Bombay High Court, wherein compensation of Rs. 1,00,000 paid to the Managing Director of the company was held be proper deduction against income of one year. He also referred to case of CIT Bombay CIT v. CIBA of India Limited (and Vice-Versa) reported as 69 ITR 692 (SC India) wherein amount paid for use or processes, scientific data, patent, trade mark etc. were held to be allowable as deduction from profit as expenditure incurred. He also referred to a decision of Privy Council reported as 58 ITR 241 in which payment by one company to another company for their stopping to produce certain goods were held to be admissible. It was repeatedly stressed that the benefit of the payment pertained to a limited period of three years only and no asset of enduring nature had been brought into existence on which depreciation could be claimed over a number of years and this way the assessee to be assessed only at correct incomes. In case the amount is disallowed as done by the I.A.C. The assessee would be assessed on unreal profits. He also informed that the issue was examined by the Assessing Officer who after detailed consideration of the matter accepted the assessee's view point and allowed the deduction according to the law and therefore, his order was neither prejudicial to the Revenue nor erroneous and the I.A.C. misdirected himself by invoking section 66-A on the issue. D.R. on the other hand defended the treatment meted out and prayed for over sustaining the same.
2. We have carefully considered the arguments of both the sides and perused the orders. In our opinion the argument of the learned A.R. carry force. We have also obtained photo copies of the whole agree ments. The payment was, no doubt, a part of the purchase consideration of Shell's Agriculture related business operation and reportedly the Shell did not do this business afterwards. However, the payment was made specifically to ensure that they do not compete with the assessee within a period of three (3) years (paras. 15 and 15.1 of the agreement) either directly or through affiliate or agent etc. Payment was made to secure A the market free from competition by the agent for the specified number of years and. thereby to ensure good profits for the period, and proper establishment of the business in the process. It is not an expenditure of capital nature as no assets of enduring nature has come into existence. Also the expense cannot be amortized as there is no concept of amortisation of expenses in the income tax law, as held by this Tribunal in a number of cases. The case law relied upon by the assessee supports their, viewpoint. We therefore, accept the appeal and vacate I.A.C's. order under section 66A of Income Tax Ordinance, 1979 on the issue.
3. Assessee-appellant's appeal succeeds as above.
C.M.A./M.A.K./141/Tax (Trib.) Appeal accepted.