I.T.A. No. 1045/KB of 2000-2001, decided on 30th October, 2001. VS I.T.A. No. 1045/KB of 2000-2001, decided on 30th October, 2001., 2002 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 983 (2001)

(a) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S.27‑‑‑Capital gains‑‑‑Taxation‑‑‑Principles‑‑‑Right to carry on a business in a capital asset‑‑‑Profits and gains from transfer of intangible assets are chargeable to tax as capital gains under S.27 of the Income Tax Ordinance, 1979‑‑‑Profits and gains on sale, exchange or transfer of an asset can be computed for purposes of S.27 of the Income Tax Ordinance, 1979 even if the cost of acquisition of the asset is nil.

I.T.A. No.698 of 1998‑99 rel.

(b) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss.27 & 30‑‑‑Capital gains‑‑‑Income from other sources‑‑‑Receipt in terms of compensation for termination of distributorship agency was taxed under S.30 of the Income Tax Ordinance, 1979‑‑‑Validity‑‑ Compensation received was for transfer or relinquishment of a right 'i.e. distributorship of two products‑‑‑Such right was clearly a capital asset and the compensation received for its transfer was chargeable to tax under S.27 of the Income Tax Ordinance, 1979 as it was not specifically excluded from the purview of S.27(2)(b)(i), (ii), (iii) & (iv) of the Income Tax Ordinance, 1979‑‑‑Such receipt were chargeable to tax as "capital gains" under S.27 of the Income Tax Ordinance, 1979 and not as casual income‑‑‑Orders of two officers below were modified accordingly by the Tribunal.

1998 PTD (Trib.) 11.03 distinguished.

1999 PTD (Trib.) 2356 and I.T.A. No.698 of 1998‑99 rel:

(c) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S.50(5) & (4)‑‑‑Deduction of tax at source‑‑‑Supply of imported goods‑‑‑Assessing Officer treated the tax deducted under S.50(4) of the Income Tax Ordinance, 1979 on, supplies of imported goods as part of final discharge of tax liability which action was maintained by the First Appellate Authority‑‑‑Validity‑‑‑Once the goods had suffered incidence of tax under S.50(5) of the Income Tax Ordinance, 1979 at the import stage, it would amount to full and final discharge of tax liability and no further deduction could be made under S.50(4) of the Income Tax Ordinance, 1979 on supplies of the same goods‑‑‑Order of the First Appellate Authority was vacated by the Tribunal being contrary to law.

1997 PTD 1143 rel.

Javed Zakariya and Jan‑e‑Alam, A.R, for Appellant Fahimul Haq, D.R. for Respondent.

Date of hearing: 16th October, 2001.

ORDER

S. HASAN IMAM (JUDICIAL MEMBER).‑‑‑By this order we intend to decide the appeal of the assessee captioned above preferred from the order dated 2‑11‑2000 passed by the learned CIT(A).

2. The assessee a private limited company engaged in the business of distribution of pharmaceutical products of various pharmaceutical companies, objected the order:

(i) holding that receipt in terms of compensation for termination of distributorship agency amounting to Rs.2,550,333 is liable to tax.

(ii) maintaining the order of the Assessing Officer treating the tax deducted under section 50(4) of the Income Tax Ordinance, 1979 on supplies of imported goods as part of final discharge of tax liability.

3. We have heard the learned representatives of the two parties and have gone through the record.

4. The present issue pertains to the action of the Assessing Officer in taxing compensation receipts received on termination of distributorship/agency. The assessee is a sole distributor/agent having rights of Messrs Allegan Pakistan and Messrs Allegan USA. Distributorship was terminated during the relevant year vide notice of termination of the rights given by the principal, thereafter claims were also finalized vide settlement signed on 2‑12‑1998 between the assessee and Messrs Allegan Pakistan and Messrs Allegan USA, whereby assessee received Rs.25,50,000 in terms of compensation for termination of distributorship.

5. The assessee claimed the receipt as exempt being a capital receipt not being in the nature of capital gain. The Assessing Officer did not accept the claim of exemption observing that the capital receipts are not in the nature of capital gain and treated it as casual income being liable to tax after deletion of casual 65 , of Part I of the Second Schedule to the Income Tax Ordinance, 1979 and taxed it as income from other sources under section 30.

6. Before the CIT(A) the appellant assessee challenged the taxability of the receipts as casual income and without prejudice to arguments in this respect also stated that at worst the agency distribution right could be treated as. a capital asset and the income arising out of surrendering of this right could be treated as capital gain and taxed at the rate of 25 % as per sub‑para. (4) of Part IV of the First Schedule.

7. The CIT(A) observed that the claim was not based' on a terminated agreement and the settlement was done through negotiations to resolve amicably the disputed amounts. The treatment given by the Assessing Officer was confirmed by the CIT(A). The CIT(A) did refer to the fact that the appellant assessee had relied on a number of case‑laws (Indian as well as Pakistani), however, the applicability of the case‑laws or the facts of the cases relied upon were not discussed/elaborated in the appellate order.

8. Before us the A.R. for the appellant has assailed the order of CIT(A) mainly on the following grounds:

(i) Compensation received at Rs.25,50,000 for termination of Distributorship/agency rights was a capital receipt and not assessable as a trading receipt.

(ii) The compensation received was not for trading loss. A source of income was taken away which is separable from the other business of the assesse6.

(iii) Reliance was placed on judgment reported as 1998 PTD (Trib.) 1103 in support of the above arguments.

9. Since the D.R. for the department in his arguments, while supporting the order of the CIT(A) argued that the facts of the case of compensation received for take‑over of the life insurance business by Act of the Government in the two cases involved in the cited judgments was not considered as chargeable to tax as capital gain section 27 of the Income Tax Ordinance, 1979 is reproduced here for purposes of reference.

15. Capital gains.‑‑‑(1) Any profits or gains arising from the transfer of ti capital asset shall be chargeable under the head "Capital gains" and shall be deemed to be income of the income year in which the transfer took place.

For the purposes of subsection (1) and sections 28 and 29.‑‑‑

"Capital asset" does not include‑‑‑

any asset or class of assets in respect of which the assessee is entitled to an allowance for depreciation under the Third

(ii) any immovable property; and

(b) "transfer" includes the sale, disposition, exchange or relinquishment of the asset, or the extinguishment of any rights therein, but does not include;

(i) any transfer by reason of the compulsory acquisition of any capital asset under any law for the time being in force;

(ii) any transfer of a capital asset under a gift, bequest or will or any irrevocable trust.

(iii) any distribution of the assets of a company to its shareholders on its liquidation; and

(iv) any distribution of capital assets on the dissolution of a firm or other association of persons or the partition of a. Hindu undivided family.

16. We have also come across two decisions of the two Division Benches of this Tribunal in which similar issues came up for adjudication. Since the facts of these judgments are relevant, they are

17. In the case reported as 1999 PTD (Trib.) 2356 the assessee company by virtue of an agreement with the another public company discontinued production of window type air‑conditioners and received compensation for allowing the buyer company to manufacture and sell air‑conditioners under the brand name used by the selling company. In the return of income filed the compensation received was claimed a<. exempt as being in the nature of a capital receipt. The Assessing Officer, however, charged the amount to tax as capital gains under section 27.

18. In appeal the Division Bench held that:

(i) The asset transferred in this ,case was goodwill and was chargeable to tax under section 27.

(ii) The Bench also rejected the argument that in the absence of any cost of the impugned asset, capital gain chargeable to tax could not be computed in pursuance‑to provisions of section 28 of the Income Tax Ordinance, 1979.

19. In another unreported judgment of a Division Bench dated 31‑8‑1999 in I.T.A. No.698 of 1998‑99 for assessment year 1997‑98, the assessee‑company by virtue of an agreement sold its business of manufacturing of two products. The assets sold comprised of land building, plant and machinery, office equipment, motor vehicles etc. Besides, compensation for these assets the seller also received compensation for transfer of its non‑competitive rights to manufacture or distribute the above products as well as goodwill of the business. The compensation received for transfer of goodwill and non‑competitive rights was charged to tax under section 27 by the Assessing Officer. The CIT(A) confirmed the action of the Assessing Officer on the ground that profits and gains arising from the transfer of both intangible assets were chargeable to tax under section 27. In appeal before the I.T.A.T., the appellant conceded that goodwill and the relinquishment of the right to compete were capital assets within the meaning of section 2(12) of the Income Tax Ordinance, 1979, which defines a capital asset. However, it was pleaded that since the cost of acquisition of these assets was not ascertainable, and, therefore, not deductible. Profits and gains from the transfer of these assets therefore, could not be computed. After detailed consideration and discussion of the case‑laws relied upon it was held by the Division Bench that there is no restriction placed under section 27 to the effect that in the event of the cost of acquisition being nil, no computation of gains could be made. In this situation it was held that total amount received would be charged to tax under section 27. From the perusal of the above cited judgments the following principles‑ emerge:

(i) The right to carry on a business in a capital asset.

(ii) Profits and gains from transfer of intangible assets are chargeable to tax as capital gains under section 27 of the Income Tax Ordinance, 1979.

(iii) The profits and gains on sale, exchange or transfer of an asses can be computed for purposes of section 27 even if the cost ot. acquisition of the asset is nil.

20. In the case under appeal before us the compensation received was for transfer or relinquishment of a right i.e. distributorship of two products. This right was clearly a capital asset and the compensation received for its transfer was chargeable to tax under section 27 of the Income Tax Ordinance, 1979 as it is not specifically excluded from the purview of this section i.e. under section 27(2)(b)(i); (ii) (iii) and (iv).

21. In view of the above arguments we hold that the impugned receipts of Rs.22,50,000 are chargeable to tax as `capital gains' under section 27 and not as casual income as held by the two officers below. The orders of the two officers bellow accordingly stand modified to this extent.

22. Ground related to deduction of tax under section 50(4) on supplies of imported .goods is in fact a decided issue. The I.T.A.T. vide its order dated . 1‑6‑2001 in assessee's own case bearing I.T.A. No. 193/KB of 1999‑2000 (assessment year 1998‑99) has relied upon another reported judgment cited as 1997 PTD 1143, wherein it is held that once the goods have suffered incidence of tax under subsection (5) of section 50 at the import stage, it amounts to full and final discharge of tax liability and no further deduction can be made under subsection (4) o, section 50 on supplies of the same goods.

23. In view of the above case‑law, and decision in assessee's own case, there appears reason to find that the order passed by the learned CIT(A) is contrary to law. In consequence thereof the order stands vacated.

24. The appeal is disposed of to the extent and in the manner indicated above.

C.M.A./M.A.K/216/Tax(Trib.) Order accordingly.