MESSRS ALNOOR SUGAR MILLS LTD., KARACHI VS MESSRS ALNOOR SUGAR MILLS LTD., KARACHI
2002 P T D 728
[Karachi High Court]
Before Zahid Kurban Alavi and Muhammad Mujeebullah Siddiqui, JJ
Messrs ALNOOR SUGAR MILLS LTD., KARACHI
versus
COMMISSIONER OF INCOME‑TAX,
CENTRAL ZONE `B', KARACHI
I.T.R. No. 64 of 1982, heard on 22/08/2001.
(a) Income‑tax Act (XI of 1922)‑‑‑.
‑‑‑‑Ss.4(3)(vii) & 17(5)‑‑‑Securities and Exchange Ordinance (XVII of 1969), S.14‑‑‑Assessee received gain from Bank earned from sale of shares of assessee in, pursuance of S.14 of Securities and Exchange Ordinance, 1969‑‑‑Authority found such receipt to be income‑‑ Contention of assessee was that such receipt being of casual and non recurring nature was not taxable and enjoyed exemption‑‑‑Validity‑‑‑Two conditions had to be established for claiming exemption under S.4(3)(vii) of the Income‑tax Act, 1922, firstly, the receipt had not arisen from business, or exercise of 'a profession, vocation or occupation and secondly, the receipt was of casual and non‑recurring nature‑‑‑Direction of law contained in S.14 of Securities and Exchange Ordinance, 1969, was in definite term, thus, receipt in question could not be said to be without any design or totally unforeseen‑‑‑Such receipt was not of casual nature and claim of exe mption was not available to the assessee.
(b) Income‑tax Act (XI of 1922)‑‑‑
‑‑‑‑S. 17(5)‑‑‑Securities and Exchange Ordinance (XVII of 1969), S.14‑ Assessee received gain from Bank earned from sale of shares of assessee in pursuance of S.14 of Securities and Exchange Ordinance, 1969‑‑ Authority added such receipt to the total income of assessee and taxed it at normal rate‑‑‑.Validity‑‑‑Receipt having a definite 'source would be treated as income‑‑‑Law as embodied in Securities and Exchange Ordinance, 1969, was the source of such receipt and there was definite nexus between the receipt and source‑‑‑Receipt derived by assessee was income as it was ‑from a source, whose object was production of definite return‑‑‑Income coming to an assessee by operation of law would not be .exempt, as the same was not less income for the purpose of income‑tax ‑‑‑Assessee had received the gains through operation of law, thus, could not escape the liability of taxation simply because the shares did not belong to assessee.
Commissioners of Inland Revenue v. Newcastle Breweries Ltd. (1927) 12 Tax Cases 927; B. Malick v. Commissioner of Income‑tax (1970) 21 TaX Lahore .347; Pakistan Cement Pipe Construction Company v. Commissioner of Income‑tax (1973) 28 Tax 115; Kamakshya Narain Singh v. CIT (1943) 11 ITR 513; Asher v. London Film Productions Ltd. (1994) KB 133; Bennett v. Ogston (1928‑31) 15 Tax 374; Commis sioner of Income‑tax v. Smith Kline & French of Pakistan Ltd. 1991. PTD 999 = 1991 SCMR 2374; Susil C. Sen (1941) 9JTR 261; Ratna Sugar Mills Co. Ltd. v. CIT (1958) 33 1TR 644 and Parelkar Gore & Parpia v. Commissioner of Income‑tax, Bombay (1958) 34 ITR 312 ref.
(c) Income‑tax Act (XI of 1922)‑‑‑
‑‑‑‑S. 4(3)(vii)‑‑‑Exemption‑‑‑Casual and non‑recurring receipts‑ ‑‑Nature of receipt. must be casual and non‑recurring for claiming exemption under S.4(3)(vii) of the Income‑tax Act, 1922‑‑‑Such exemption would not be available, if either of the conditions was lacking.
(d) Income‑tax‑‑‑
‑‑‑‑Exemption‑‑‑Interpretation‑‑‑Law in case of exemption has to be interpreted strictly and not liberally in favour of assessee‑‑‑Doubt if any with regard to taxability of any income has to be resolved in favour ofassessee‑‑‑Exemption is not to be extended to assessee unless all conditions for availing exemption are fulfilled.
(e) Income‑tax Act (XI of 1922)‑‑‑
‑‑ Preamble‑‑‑Object of Income‑tax Act, 1 22‑was to tax every income until and unless the same enjoyed exemption from payment of income tax.
(f) Income‑tax Act (XI of 1922)‑‑‑
‑‑‑‑ Preamble‑‑‑Term "income" having not been defined in the Act it was not possible to define the same with exactitude and precision.
(g) Income‑tax‑‑‑
‑‑‑‑Income‑‑‑Receipt and its source‑‑‑Every income barring deeming income is a receipt, but every receipt is not an income‑‑‑Receipt having a definite source can be treated as income‑‑‑Source of receipt must be defined, determined and known, so that nexus between the receipt and source is established‑‑‑Source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of definite return excluding anything in the nature of mere windfall‑‑‑Source of receipt may be an activity on the volition of assessee or may be traced in any provision of law‑‑‑Any receipt arising out of or as a result of a provision of law connected with business, vocation or profession adopted by an assessee on his own volition is to be treated a source in pursuance of such business, vocation or profession.
Commissioner of Income‑tax, Madras v. R.P. Peyer AIR 1932 Mad. 424; Commissioner of Income‑tax, Bengal v. Messrs Shaw, Wallace & Company AIR 1932 PC 138; In re: Turner Morrison & Co. Ltd: AIR 1929 Cal. 212; Senairam Doongarmall v. The Commissioner of Income‑tax (1961) 42 ITR 392; Commissioners of Inland Revenue v. Newcastle Breweries Ltd. (1927) 12 Tax Cas. 927; Gappumal Kanhaiyalal v. Commissioner of Income‑tax (1961) 43 ITR 46 and P.H. Divecha v. Commissioner of Income‑tax, Bombay City‑I (1963) 48 ITR 222 ref.
(h) Income‑tax‑‑‑
‑‑‑‑Compensation, how and when can be treated as profit‑‑‑When business of an assessee is closed permanently or under compulsive circumstances and any compensation is paid, but no manner and method of the payment is decisive of the character of compensation‑‑‑Such compensation can neither be treated as taxable profit nor same comprises any element of income.
In re: Turner Morrison & Co. Ltd. AIR 1929 Cal. 212 ref.
(i) Income‑tax Act (XI of 1922)‑‑‑ .
‑‑‑‑S. 4(3)(vii)‑‑‑Exemption‑‑‑Casual and non-recurring receipt is not taxable profits, if not derived from business, exercise of a profession, vocation or occupation‑‑‑Receipt arising from business, exercise of a profession, vocation or occupation, notwithstanding its nature being casual and non‑recurring, is liable to be taxed.
Senairam Doongarmall v. The Commissioner of Income‑tax Act, (1961) 42 ITR 392 ref.
(j) Income‑tax‑‑‑
‑‑‑‑Burden of proof‑‑‑Receipt, whether income‑Burden to establish that a receipt is an income is initially on the Department and once such burden is discharged then, the assessee has to show that such receipt enjoyed exemption or was not liable to tax.
Iftikhar Ahmed Butt v. Government of Pakistan Writ Petition No.1973 of 2001 ref.
(k) Income‑tax‑‑‑
‑‑‑‑Undisclosed income‑‑‑When nature of receipt and its source are not satisfactorily explained by an assessee i.e. the facts which are generally within his specific knowledge, then Income‑tax Officer may presume that the amount of receipt is an income of assessee from an undisclosed source.
Sirajul Haq Memon for Applicant.
Shaikh Haider for Respondent.
Date of hearing: 22nd August, 2001.
JUDGMENT
MUHAMMAD MUJEEBULLAH SIDDIQUI, J.‑‑‑In this reference under section 66 of the Income‑tax Act, 1922, at the instance of applicant/assessee, the following questions have been referred for our opinion:‑‑‑
"(1) Whether in the facts and circumstances of the case, the Tribunal was justified in holding that the sum of Rs.1,28,531 received by the applicant‑assessee from United Bank Limited on sale of shares of the assessee by them in pursuance of section 14 of the Securities and Exchange Ordinance was taxable income of the applicant?"
"(2) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the said sum of Rs.1,28,531 was not casual and non‑recurring receipt within the meaning of section 4(3)(vii) of the Income‑tax Act?"
"(3) Whether in the facts and circumstances of the case, the Tribunal having found that section 17(5) of the Income‑tax Act was not attracted as the shares did not belong to the assessee‑company it could legally `restore' the order of the Income Tax Officer who had taxed the said sum of Rs.1,2'8,531 under section 17(5) of the Income‑tax Act, 1922?"
"(4) Whether in the facts and circumstances of the case; the Tribunal had jurisdiction to hold that even though section 17(5) of the Income‑tax Act was not attracted to the said receipt of Rs.1,28,531 yet the same was taxable income under section 12 of the Income‑tax Act, when it was not the case of the Income -tax Department and on which applicant‑assessee was not afforded any opportunity of being heard?"
2. The relevant facts as stated by the Income Tax Appellate Tribunal are that the assessee/applicant is a private limited company. It had allotted its shares inter alia, to United Bank of Pakistan Limited, which was 10% beneficial owner of assessee's shares. The United Bank Limited sold shares of the Company within six months from the date of allotment and earned a gain of Rs.1,28,531 from these sales. This gain was paid by the U.B.L, to the assessee‑company as laid down by section 14 of Securities and Exchange Ordinance, 1969.
3. The Income Tax Ordinance, Circle 18 Karachi, held that this transaction was covered by section 17(5) of the Income Tax Act and added the profit so earned to the total income of assessee and taxed it at the normal rates. The assessee/applicant preferred an appeal before the Appellate Assistant Commissioner `A' range Karachi, who by his order, dated 1‑4‑1976 allowed the appeal holding that subsection (5) of section 17 of the Income‑tax Act, 1922 was not attracted to the facts of the case, as the shares were not sold by the assessee. The Income‑tax Officer, filed second appeal against the order of Appellate. Assistant Commissioner,, before the Income Tax Appellate Tribunal, being I.T.A. No. 1171/KB of 1975‑76. The Appellate Tribunal by its order, dated 20‑9‑1977, allowed the appeal and restored the order of Income Tax Ordinance, holding that although section 17(5) of the Income‑tax Act, 1922 was not attracted as the shares did not belong to the Company, yet the gains were received by the assessee‑company through operation of law and thus it could not escape the liability of taxation. In coming to this section the learned Members of the Appellate Tribunal, held that they were not able to persuade themselves to accept that the gains were not income in the hand of the assessee. According to learned Members of the Appellate Tribunal, the Income‑tax Act, does not define income from other source and possibly it could not do so. Under the Income‑tax Act, all receipts are' taxable unless exempt under the law. It was further held that the view taken ‑by them was in consonance with the decision in the case of Commissioner of Income‑tax Madras v. R.P. Peyer AIR 1932 Mad. 424. In that case it was held that section 12 of Income‑tax Act, was sufficiently wide to bring into its net income, profits and gain from whatever source derived and it is for the persons who received them to show that it was exempt from payment of income‑tax, and this can be done only by showing that the income is of a class specified in subsection (3) of section 4 of the Income Tax Act.
4. The learned Members of the Appellate Tribunal, further observed that, although the word "income" has not been defined by the Income Tax Act, but there are judicial opinions which gave us an idea as to what is meant by the word "income" used in the Income Tax Act. In Commissioner of Income‑tax, Bengal v. Messrs Shaw, Wallace & Company, their lordships of the Privy Council observed as follows:‑‑‑
"Income, their Lordships think, in this Act connotes a periodical monetary return `coming in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return excluding anything in the nature of mere windfall:"
5. The learned Members of the Tribunal further held that with this exposition of the word income' they cannot escape the conclusion that the income received by the assessee was from a source whose object was the production of definite return. The source was the law embodied in the Securities Exchange Ordinance. It was further held that the income coming to an assessee by operation of law would not be exempt, as such income, is not less income for the purpose of income tax. They further held that the income could not escape the taxation simply because the shares did not belong to the assessee.
6. It was further held that the claim of the assessee that the income was casual and non-recurring was also wrong. They held that there may be other instances of sale of shares and, therefore, it could not be said that it was non-recurring. It was further held that the gain was certainly .not casual because it was through operation of law.
7. We have heard Mr. Sirajul Haq; learned counsel for the applicant and Mr. Shaikh Haider, learned counsel for the Revenue.
8. Mr. Sirajul Haq, learned counsel for the applicant, has addressed his arguments mainly on questions Nos.1 and 2. He has submitted that the observations made by the learned Members of the Tribunal with reference to the case reported as AIR 1932 Mad. 424 and in the case of Shaw Wallace & Co. are incorrect. He has produced the Privy Council judgment in the case of Commissioner of Income Tax Bengal v. Messrs Shaw Wallace & Co.. and has referred to the following passage from the said judgment:‑‑‑
"The object of the Indian Ac: is to tax `income', a term which it does not define. 1t is expanded, no doubt, into `income profits and gains' but the expansion is more a matter of words than of substance. Income, their Lordships think, in this Act connotes a periodical monetary return `coming in' which some sort of regularity, or expected regularity; from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the, fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as `capital.' But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production."
9. Mr. Sirajul Haq, has submitted that the judgment is Shaw Wallace & Co. case supports the version of the applicant. In this case following questions were referred to Calcutta High Court:‑‑‑
(a) Was not the sum of Rs.9,83,361 which had been included in the total income of the assesses for purposes of assessment for 1929‑30, in the nature of a capital receipt and, therefore, not income, profits or gains within the meaning of the Income‑tax Act?
(b) If it could be said to be income, profits or gains within the meaning of the Act, was it liable to be assessed under either of the sections 10 and 12 of the Act, inasmuch as (1) it was not the profits, or gains of any business carried out by the assessees within the meaning of section 10 of the Act, nor .(2) income, profits or gains from other sources within the meaning of section 12 of the Act?
(c) In the alternative, was not the payment of Rs.9,83,361 an ex gratia payment in the nature of a present from the oil companies in question and was it not, therefore, exempt under section 4 (3) (vii) of the Act?"
The Privy Council, held as follows:‑‑‑
"The sources from which the taxable income under the Act are to 'be derived are enumerated in section 6, which runs as follows:‑‑
`Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income‑tax in the manner hereinafter appearing, namely (I) Salaries, (ii) Interest on securities, (iii) Property, (iv) Business, (v) Professional earnings, (vi) Other sources. 'The claim of the taxing authorities is that the sum in question is chargeable under head (iv) business. By section 2(4) .`business' includes any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture.' The words used are no doubt wide, but underlying each of them is the fundamental idea of the continuous exercise of an activity. Under section 10 the tax is to be payable by an assessee under the head business "in respect of the profits or gains of any business carried on by him.' Again, their Lordships think, the same central idea; the words italicized are an essential constituent of that which is to produce the taxable income; it is to be the profit earned by a process of production. And this is borne out by the provision for allowances which follows. They include rent paid for the premises where the business is carried on; the cost of current repairs in respect of such premises; interest on money borrowed for carrying on the business, etc."
10. Some reliance has been placed in argument upon section 4(3)(v) which appears to suggest that the word "Income" in this Act may have a wider significance than would ordinarily be attributed to it. The subsection says that the Act `shall not apply to the following classes of income,' and in the category that follows, clause (v) runs:‑‑‑"Any capital sum received in commutation of the whole or a portion of a pension, or in the nature of consolidated compensation for death or injuries, or in payment of any insurance policy, or as the accumulated balance at the credit of a subscriber to any such Provident Fund".
11. Their Lordships do not think that any of these sums, apart from their exemption, could be regarded in any scheme of taxation as income, and they think that the clause must be due to over anxiety of the draftsman to make this clear beyond possibility of doubt. They cannot construe it as enlarging the word "income" as to include receipts of any kind which are not specially exempted. They do not think that the clause is of any assistance to the appellant.
12. Following the line of reasoning above indicated; the sums which the appellant seeks to charge can, in their Lordships' opinion, only be taxable if they are the produce, or the result of carrying on the agencies of the oil companies in the year in which they were sums received, not for carrying on this business but as some sort of solatium for its compulsory cessation, the answer seems fairly plain.
13. If the business had been sold‑‑‑even if that somewhat indeterminate asset known as the "good will" had been assigned to the employing companies, as the High Court seems to have though it had‑‑‑it is conceded that the price paid would not have been taxable. But why? Plainly because it could not be regarded as profit or gain from carrying on the business, and their Lordships think that the same reasoning must apply when the sum received is in the nature of solatium for cessation.
14. It is contended for the appellant that the "business" of the respondents did in fact go on throughout the year, and this is no doubt true in a sense. They had other independent commercial interests, which they continued to pursue, and the profits of which have been taxed in the ordinary course without objection on their part. But it is clear that the sum in question in this appeal had no connection with the continuance of the respondents other business. The profits earned by them in 1928 were the fruit of a different tree, the crop of a different field.
15. For the reasons given their Lordships are of opinion that question (a) was rightly answered by the High Court in favour of the assessee. No objection has been taken to the form of the answer or to its sufficiency, and it would seem unnecessary, therefore, to deal with the other two questions. Their Lordships will only add that the reasoning of this judgment would apply equally if the appellant based his claim on head (vi) "other sources." and the corresponding provisions of section 12.
16. With regard to the claim to exemption under section 4(3)(vii), their Lordships think that the decision in the case of Turner Morrison & Company v. Commissioner of Income‑tax, Bengal, to which reference has been made ab6ve; may need re‑consideration in the light of this judgment. In their Lordship's view the expression "receipts arising from business" in tile clause must mean receipt arising from the carrying on of business".
17. This was an appeal against the judgment of Calcutta High Court at the instance of Revenue and the judgment of Calcutta High Court in favour of assessee was upheld and the appeal was dismissed.
18. Mr. Sirajul Haq, in support of his contention that reference to the judgment in the case of Commissioner of Income Tax Madras v. R. Panchapakesa Ayyar AIR 1932 Madras 424, was misplaced has produced the judgment. A perusal of this judgment shows that the assessee was the Government employee who was compulsorily retired before attaining the age of superannuation. Subsequently, he was paid lump sum compensation. The Income Tax Authorities desired to tax the said receipt under the Income‑tax Act, 1922, and therefore, a question was referred to the Madras' High Court to the effect whether the sum paid to the assessee by the Government of Madras was income liable to tax and whether the said sum was exempted from tax under clause (v) of clause (VII) of subsection (3) of section 4 of the Income‑tax Act. It was observed by a Full Bench of the Madras High Court that under the Indian statute every profit, income or gain is taxable, that is not excluded. Section 4(1) and section 6 were considered which read as follows:‑‑‑
"S.4(1) says:
"Save as hereinafter provided, this Act shall apply to all income, profits or gains, as described or comprised in section 6, from whatever source derived, accruing or arising or received in British India, or deemed under the provisions of this Act to accrue, or arise, or to be received in British India."
Section 6 deals with the heads of income chargeable to income‑tax and ' reads:‑‑‑ .
"Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income‑tax in the manner hereinafter appearing, namely; (1) Salaries, (2) Interest on securities, (3) Property, (4) Business, (5) Professional earnings and (6) Other sources."
19. A plea was taken on behalf of assessee that no source could be traced to the money paid to the assessee by the Government, to which the Indian Income Tax Act, was applicable. It was contended that it could not be traced to a Government source because Government service had ended. The contention was not accepted and it was held that section 12(1) was sufficiently vide to bring into its net income, profit or gain which comes from anywhere; if not taxable under the other sections and it was .for the person who receives it to show that it vas exempt from payment of income tax. It was further observed that, "he can do only by bringing himself within the provisions of section 4(3) of the Act"
20. It was held that a case very nearly in point was In re: Turner Morrison & Co . Ltd. AIR 1929 Cal. 212. In the said case a large sum of money was paid to the assessee as compensation for their sudden dismissal without notice in the middle of the year and one of their managing agencies was brought to a close. Rankin, C.J., held as follows:‑‑
"In my judgment, it is impossible to say that the receipt is not a receipt arising from business and that is the statutory test which in this country has to be applied."
It was further held that:
"There is no doubt upon the Indian Act that the payment to the present case is income within the meaning of section 12 unless it is saved by section 4 (3)(vii)."
Beasley, C.J, of Madras High Court after making reference to the judgment by C.J. Calcutta High Court, observed that in the case before them, the money received by the assessee would not fall to be taxed as a profit or gain derived from a business since the assessee was not carrying on a business but had been in receipt of a salary in respect of his Government service; and if it is not taxable under section 6, then it may be taxable under section 10 he held that it was taxable under section 6. It was argued before the Full Bench of Madras High Court that‑the amount received falls within clause (vii) of section 4(3) being receipt of money not arising from business or the exercise of a profession, vocation or occupation and which is of a casual and non‑recurring nature. The contention repelled and it was held that clause (vii) of section 4(3) was not applicable.
21. Mr. Sirajul Haq Memon, has referred to a large number of cases in support of this contention that, first, the receipt is not income and in the alternative if it is income it is of casual and non‑recurring nature, and therefore, it was not taxable. The first judgment is in the case of Commissioner of Income‑tax Madras v. Muhammad Ahmed Badsha Sahib 1943 11 ITR 590. In this case a merchant agreed to act as an arbitrator in a dispute, which arose between the heirs of Nawab, regarding the division of the estate. When he agreed to so arbitrate, no stipulation was made for his remuneration, but in view of the task involved, he was paid a certain amount by way of award for his services. It was held, that there could be no rule laid down with regard to what is of a casual or non‑recurring nature. Each case must be decided on its particular facts. Looking to the facts and circumstances of the cited cases, it was held that the receipt did not arise from exercise of profession, vocation or occupation as the assessee was a merchant dealing in hides. When he agreed to assist in settling the differences of the heirs of the Nawab, no stipulation was made for remuneration. He consented to act, as he was friend of the family; but it had turned out that the task involved far more time than was anticipated, and therefore, it was decided to grant reward to the arbitrators. It was further observed that this amount was sanctioned by a Judge of the Madras High Court when the award was accepted. There was no obligation to remunerate the arbitrators and if the Judge of High Court would have refused to sanction remuneration nothing would have been payable. It was ultimately held that in these circumstances, the receipt was of a casual and non‑recurring nature. The second judgment is in the case of Senairam Doongarmall v. The Commissioner of Income Tax Act (1961) 42 ITR 392 (Supreme Court of India). In this case the assessee owned a tea estate consisting of tea gardens, factories and other buildings, carrying on the business of growing and manufacturing tea. The factory and other plots on the estate were requisitioned for defence purposes by Military Authorities. Though the assessee continued to be in possession of the tea garden and tended them to preserve the plants, the manufacture of tea was stopped completely. The assessee was paid compensation under the Defence of India Rules, calculated on the basis of the turn out of tea that would have been manufactured by the assessee during the period. The question was whether the amount of compensation was Revenue receipt taxable in the hands of the assessee. It was held that before holding a receipt to be profits or gains of business within section 10 of the Income‑tax Act, it was to see if there was a business at all of which it could be said to be income. The primary condition of the application of section 10 was that .tax was payable by an assessee under the head "Profits and gains of a business" in respect of the business carried on by him. Where an assessee could not carry, on business at all, the section could not be made applicable and any compensation for requisition of assets that he received could not bear the character of profits and gains. It was further held that business denoted and activity with the object of earning profit. To say that a business was being carried on, meant no more than that profit was to be earned by a process or production. The business of a tea‑grower and manufacturer was not merely to grow tea plants but to collect tealeaves and render them fit for sale. The tending of his tea gardens to preserve the plants was not a continuation of the business of the assessee, which had come to an end for the time being. It was next held that the manner and method of the its payment was not decisive of the character of payment of compensation and that the compensation paid to the assessee did not partake of the character of profits because, business not having been done by the assessee, no question of profits taxable under section 10 arise, and therefore, the amount of compensation received by the assessee was not Revenue receipt and did not comprise any element of income.
22. The Hon'ble Supreme Court of India, examined various cases including the Commissioners of Inland Revenue v. Newcastle Breweries Ltd. (1927) 12 Tax Cases 927.
In this case, it was observed by Rowllat, J. "this was a case of compulsory sale of rum, and that a compulsory sale was also a sale, the receipt was held to be a profit." Another case was Ensign Shipping Co. v. Commissioner of Inland Revenue 1927 (12) Tax Cases. 1169. The view of Rowllat, J. 'was ,reproduced to the effect that if there was an operation, which produce income, it was nonetheless taxable because it was a compulsory operation. It was further observed by learned Judge that "Now it is quite clear that if a source of income, is destroyed by the exercise of the permanent right and compensation is paid for it, that is not income although the amount of the compensation is the same sum as the total of the income that has been lost." It was held that if compensation were paid to some ship‑owners in lieu of receipt of the ship during the time of interruption it would amount to income, which is taxable.
23. In the case of Gappumal Kanhaiyalal v. Commissioner of Income Tax (1961) 43 ITR 46. The question of casual receipt came for consideration before the Allahabad High Court with reference to the provisions contained in section 4(3)(vii). The relevant facts were that an assessee had maintained a home chest account in which it maintained large cash balance, part of which it employed in a money‑lending business. During the accounting year the assessee had in its possession as part of its cash balance, nearly 48,600 silver rupee coins which had ceased to be legal tender several years back. The assessee sold about 27,000 silver coins and received Rs.3,600 in excess of their face value. The question was whether the sum of Rs.3,600 was taxable income. It was held by the Allahabad High Court, that the cash balance of the assessee could consist only of money, which was legal tender and the silver coins, ceased to be part of the assessee's cash balance when they ceased to be legal tender. The sum of Rs.3,600 was thus not profit due to appreciation of the stock‑in‑trade of the assessee's business but again of a casual acid non‑recurring nature and was not income liable to tax.
24. In the case of P.H. Divecha v. Commissioner of Income Tax, Bombay City‑I (1963) 48 ITR 222 the provisions contained in section 4(3)(vii) of the Income‑tax Act, 1922, came for consideration. A principle was laid, down that, "to constitute income, profits or gains, there must be a source from which the particular receipt has arisen, and a connection must exist between the quality of the receipt and .the source. If the payment is by another person it must be found out why that payment has been made. It is not the motive of the person who pays that is relevant. More relevance attaches to the nature of the receipt in the hands of the person who receives it though in trying to find out the quality of the receipt one may have to examine the motive out of which the payment was made"‑The Supreme Court of India, while laying down above principle referred to four earlier judgments of the said Court.
25. The question under discussion came for consideration before Allahabad.High Court in the case of B. Malick v. Commissioner of Income‑tax (1970) 21 Tax Lahore 347, in very interesting circumstances. The assessee while he was Chief Justice of Allahabad High Court, was requested to act as an arbitrator in a certain matter. Though the assessee expressed his unwillingness but in view of certain intervention from high Governmental level, agreed to act as such. A fee of Rs.20,000 was paid to the assessee for acting as such, as a special case, though there was a prohibition against Judges being paid any honoraria for taking up any other functions. On the question whether this sum of Rs.20,000 was liable to be taxed as income in the hands of the assessee: It was held that it was exempt from taxation as being a receipt of casual and non recurring nature not arising from the exercise of a profession or occupation within the meaning of section 4(3)(vii) of the Indian Income- tax Act, 1922.
The point in issue was examined by a Division Bench of this Court in the case of Pakistan Cement Pipe Construction Company v. Commissioner of Income‑tax (1973) 28 Tax 115. The relevant facts were that the assessee, a registered firm, carried on business of manufacture of R.C.C. cement pipes and contracts for sewerage work. The business of the firm was closed in the year 1956. However, the dissolved firm maintained a skeleton establishment up to the year 1958 for the purpose of realising the claims pending with the M.E.S. Authorities and for winding up the affairs of tae firm. The dispute with regard to the claim with M.E.S. Authorities was referred to arbitrator and in July, 1958, the arbitrator gave award in the sum of Rs.11,81,276 in favour of the dissolved firm. The dissolved firm filed return of income for the assessment year 1959‑60 showing a net surplus of Rs.2,94,814 but it was claimed that the said amount was not taxable for the reason that it was received long after the firm was dissolved and had ceased to carry on business. The contention was not accepted by the Income Tax Officer arid the Income‑tax Appellate Tribunal. On reference to this Court, it was held that the amount received after discontinuance of a business or profession or vocation or occupation are neither taxable income nor income. In coming to this conclusion, a large number of judgments from English and Indian jurisdiction were considered. After examining all the relevant provisions in the Income‑tax Act, 1922 and various judgments,' it was held as follows:‑‑‑
"There can be no dispute with the proposition that, to charge the profits ‑and gains of the business, 'profession or vocation, to income‑tax during any particular accounting year the business, profession or vocation must at least have been carried on during some part of the accounting year, though not necessarily throughout the year. The continued existence of the source of profits during the accounting year is necessary, and a business which is non‑existence during the whole of an accounting year is an extinct business and cannot be taxed."
27. .The question as to what amounts to `income' as used in Income tax Act, 1922, was also examined at length and we, can do no better than to reproduce the relevant discussion by his lordships Mr. Justices Noorul Arfin and Agha Ali Hyder, which reads as follows:‑‑
"9. ‑Another salient feature which stands out from the review of the relevant provisions of the Income‑tax Act, 1922, referred to above, is that the Act does not define `income', though the Act has artificially extended this word to include several receipts which may not have attracted the nomenclature of `income'. Yet it is riot difficult to comprehend the meaning and scope of `income' which is a word of every day use, and which most businessmen and persons in profession have no difficulty to understand. The question of the meaning `income' came for consideration before the Judicial Committee of the Privy Council in the Commissioner of Income‑tax, Bengal v. Shaw Wallace & Company (AIR 1932 PC 138). According to their Lordships, `income' in the Income‑tax Act connotes a periodical monetary return `coming in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Their Lordships likened income pictorially to the fruit of a tree, or the crop of a field and said that it is essentially the produce of something which is often loosely spoken of as 'capital' but capital though possibly the source in the case of income from securities is in most cases hardly more than an element in the process of production. This definition of 'income' was followed by Lord of Killowen in Gopal Siran Narain Singh v. CIT (1935) 3 ITR 237) though his Lordship added an important qualification that in these words anything which can properly be described as income is taxable under the Act unless expressly exempted. The Judicial Committee of the Privy Council considered this question to kamakshya Narain Singh v. CIT (1943) 11 ITR 513. Lord Wright speaking for the Judicial Committee said:
"Income, it is true, is a word difficult and perhaps impossible to define in any pr6cised general formula. It is a word of the broadest connotation ....Sir .George Lowndes speaks income being Likened pictorially to the fruit of a tree, or the crop of a field. But it is clear that such pictorial sense cannot be used to limit the broad character of income. Income is not necessarily the recurring return from a definite source, though it is generally of that character. Income again, may consist of a source of broad receipt as it generally does in the case of professional earnings. The multiplicity of forms which income may assure is beyond enumeration."
Thus, the effect of the definition of 'income' given by the Privy Council in the commissioner of Income‑tax Bengal, v. Shaw Wallace & Company has been somewhat modified by these two subsequent decisions. But in our view these two decisions do not take away the essential element inherent in. the nature of `income'. Though it may be that income may not‑necessarily be a recurrent return, yet it should be capable of recurring, even if only in the sense is related to transient circumstances. Thus, Lord Greene, M.R., observed in Asher v. London Film Productions Ltd. (1944) K.B. 133:
"The payments are annual payments in the sense that they have that recurrent quality which is the distinguishing mark differentiating an income payment from a capital payment for these purposes. You can have an annual payment under this rule (rule 21, now section 170, I.T.A. 1952), even though it happens by some accident or other to fall due in one year only. The question is, has it the necessary periodical or recurrent quality?"
Thus, the recurrent quality should be present in the receipt. Though it may not necessarily be a recurrent return, it should be capable of recurring. Further, a receipt which has this recurrent quality, should be placeable under one of the heads of income enumerated in section 6 of the Act. Section 4(1) speaks of total income from `whatever source' derived. The expression 'whatever source' has reference to section 6, which enumerates the sources of the income. The applicability of section 4(I) as made subject to the other provisions of the Act, and one of these provisions in section 6, which should, therefore, be deemed to control the expression `whatever source' used in the sense that this expression is relatable to the sources section 4(1) enumerated in section 6. If a receipt' cannot be placed under any of the heads in this section; then it is not includible in total income'.
10. On a review of the decided cases, we find that there is now judicial consensus that the source of the receipt, that is, business, profession or vocation should be in existence before the receipt which is attributable to it is charged to tax. In Bennett v. Ogston (1928‑31) 15 Tax Cas. 374), Rowlatt, J.stated the rule as follows.:
"When a trader or a follower of a profession or vocation dies or goes out of business and there remain ‑to be collected sums owing for goods sufficient during the existence of the business or for services rendered by the professional man during the course of his life or his business, there is no question of assessing those receipts to Income‑tax, they are the receipts of the business while it lasted, they are arrears of that business, they represent money which was earned during the life of the business and are taken to be covered by the assessment made during the lit of the business, whether that assessment was made on the basis of bookings or on the basis of receipt ...."
28. The question as to which receipt can be termed as `income' for the purpose of tax under the Income‑tax Act, 1922 and the scope of section 4(3)(vii) of the Income Tax Ordinance, came for consideration before a Full Bench of the Supreme Court of Pakistan in the case of Commissioner of ‑Income‑tax v. 'Smith Kline & French of Pakistan Ltd., (1991) 64 Tax 37. The relevant facts in the case were that the losses determined by the auditors which were to be borne by the financial holder were remitted to the respondent which were duly shown in the accounts. This amount was created in the respondent's account as miscellaneous income in the profit and loss statement. It was contended before the Income‑tax Officer that the amount received from foreign participant was not income at all, and if it was income, it was of casual nature and as such exempt under the provisions of section 4(3)(vii) of the Income‑tax Act, 1922. The Income‑tax Officer, rejected the contention and taxed the amount.
29. The Hon'ble Supreme Court, while considering the scope and connotation of the term `income' as used in the Income‑tax Act; 1922 held that "it connotes a periodical monetary return `coming in' with some sort of regularity, or expected regularity, through definite sources. According to their lordships, the source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. The income was thus, likened pictorially to the fruit of the tree, or the crop of a field".
30. In the light of above principle, it was held that the amount sent by foreign participant was in the nature of donation/gift and does not specify the test as laid down above and could be termed as mere windfall, for the foreign shareholders were under no obligation to remit these amounts or to make the good the losses incurred by the Pakistani company. It was further observed that, even if it is presumed that the receipts satisfied some of the aspects which could approximate to the definition or description of the term `income', still the receipts were exempt under section 4(3)(vii) of the Act, for they where a single receipt and not recurring in nature.
31. It was further held by the Hon'ble Supreme Court that the receipt did not arise from business. The Hon'ble Supreme observed that the necessary question whether a receipt is income or not and if it is income whether it could be claimed as casual income under section 4(3)(vii) of the Act and the answer to such questions will always depend on the facts and circumstances of each case and one case cannot be relied upon as precedent to decide another case as facts and circumstances of two cases are always different. It was further held that the receipt for payment was voluntarily, without consideration and not traceable to any source which a practical man may regard as a real source of income, and therefore, the receipt could not be treated as income. The Hon'ble Supreme Court, referred to the judgment in the case of Susil C. Sen, (1941) 9 ITR 261. In the said cases an Attorney and Advocate acting for a share‑holder in a company interviewed the Managing Agent of the company, attended a meeting of the share‑holders under a proxy from K, made a speech at the meeting and secured a substantial issue of new shares to the public, X, a firm of stock‑brokers also benefited by the issue of new shares, and paid a sum of Rs.10,000 to the assessee, even though he had not acted for them and they were not legally bound to pay anything to the assessee. On a reference by the Commissioner it was held by the Calcuta High Court that assuming the receipt was of a casual and non‑recurring nature, it arose from the exercise by the assessee of his profession as a lawyer and Advocate and it was part of the assessee's income which was not exempt front tax under section 4(3)(vii) of the Indian Income Tax Act. After referring to the above case, the Hon'ble Supreme Court observed that it would be seen that in the said case the receipt had nexus with the profession of the assessee. The case of Ratna Sugar Mills Co. Ltd. v. CIT (1958)'33 ITR 644 was also referred. In the said case the payment of subsidy out of excise duty on sugar made by the Government of India, with the object of compensating the assessee for the loss of profit arising to it from being compelled to pay additional‑ wages to the workers by the order of U.P. Government, was held to be trading receipt. The judgment in this case was referred by the Hon'ble Supreme Court with approval that it would be seen that the payment had nexus with the business of assessee.
32. Findings of Chagla, C.J., in the case of Parelkar Gore and Parpia v. Commissioner of Income Tax Bombay (1958) 34 ITR'312, was also cited with approval which reads as follows:‑‑
"Section 4(3)(vii) exempts from tax casual and non‑recurring income; but in order that section 4(3)(vii) should apply, the receipt must not be a receipt arising from business or the exercise of a profession, and if we are satisfied that this is a receipt from the exercise of a profession then no further' questions arise."
33. The word `income' has not been defined in the Income‑tax Act, 1922 and its successor statute, Income Tax Ordinance, 1979. The Privy Council, Supreme Courts' of Pakistan and India and the various High. Courts in Pakistan and in India have held that the incidence of receipts are so numerous that it is not possible to define with exactitude word `income' used in the Income‑tax Statute. In a recent unreported judgment by a Division Bench of the Lahore High Court in Writ Petition No. 1973 of 2001, Iftikhar Ahmed Butt v. Government of Pakistan it has‑been held that the word income is not confined to any specified kind of receipts, profits or gains. It has been observed that in view of various judgments by the Privy Council and the superior Courts in Pakistan and India, it can be said that anything which could properly be described as income is taxable until specifically exempted. There is a consensus that it is not possible to define the word income as a general phrase. The question is to be decided in each case depending on the peculiar facts and circum stances of the case. It has been held that whenever, an attempt has been made to define income, it has only been done in the context of a particular statute. 'f he burden of proof of the fact that any receipt by a person amounts to income is on the revenue and once it had so established then the burden changes hands and falls upon the assessee to prove that it is not so or that it enjoys exemption under any provision of law.
34. From a careful resume of the case‑law starting from 1932 Madras 424, the following conclusions can be drawn.
(a) The object of Indian Income‑tax Act, 1922, is to tax every income until and unless it enjoys , exemption from payment of income‑tax.
(b) The term income has not been defined by the Income‑tax Act, and it is not possible to define the term with exactitude and precision.
(c) Every income barring deeming income is a receipt but every receipt is not an income.
(d) The receipt can be treated as income if it .has a definite source and nexus is established between the source and the receipt. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of definite return excluding anything in the nature of mere windfall. The source should not be necessarily permanent in nature. The only condition is that the source must be defined, determined and known as that the nexus between the receipt and source is established.
(e) The source of receipt may be an activity on the volition of an assessee or may be traced in any provision of law. Any receipt arising out of or as a result of a provision of law connected with the business, vocation or profession adopted by an assessee on his own volition shall always be a source in pursuance of such business, vocation or profession. However, .if business of an assessee is closed permanently or under compulsive circumstances and any compensation is paid, where no manner and method of the payment is decisive of the character of compensation, it shall not be treated as taxable profits and shall not comprise any 'clement of income.
(f) The casual and non‑recurring receipt is not taxable profit if not derived from business the exercise of a profession, vocation or occupation. If a receipt arises from business or exercise of a profession, vocation and occupation then notwithstanding the; nature of receipt being casual or non‑recurring it is liable to be taxed.
(g) The burden to establish that a receipt is an income is initially on the, department and once the burden is discharged by the department, it is for the assessee to show that it enjoyed exemption or was not liable to tax.
(h) If the nature of, receipt and its source are not satisfactorily explained by an Assessee, facts which are generally within his specific knowledge, the I.T.O. may legitimately presume that the amount of income is an income of an assessee from an un disclosed source.
35. Keeping the above principles in view, now we, revert to .the facts of the present case. The amount in question was received by the, assessee/applicant under the provisions of section 14 of Securities and Exchange Ordinance, 1969, which reads as follows:‑‑‑
"14. Trading by Directors officers and principal shareholders.‑‑‑‑(1) Where any. Director or office of an issuer of a listed equity security or any person who is directly or indirectly the beneficial owner of not less than ten per cent of such securities makes any gain by the purchase and sale, of the sale and purchase, of any such security within a period of less than six months, such Director or officer or beneficial owner shall made a report and tender the amount of such gain to the issuer;
Provided that nothing in this subsection shall apply to a security acquired in good faith in satisfaction of a debt previously contracted.
(2) Where a Director, officer or beneficial owner fails or neglects to tender; or the issuer fails to recover, any such gain as is mentioned in subsection (1) within a period of six months after its accrual, or within sixty days of a demand therefore, whichever` is later, such gains shall vest in the (Federal Government) which may recover the same as arrear of land revenue."
36. A perusal of the above section shows that if any of the person named in the section makes any gain by purchase and sale or the sale and purchase of any security within a period of less than six months, he will tender the amount of such gain to issuer. The applicant‑company received the amount under consideration from United Bank Limited, on sale of shares of the assessee in pursuance of the above provision of law. Thus, the source of ‑receipt is known and there is a definite nexus between the receipt and source. Thus, die condition that a receipt, shall be treated as income if it has a definite source and nexus is established between source and receipt stands fully satisfied. We are, therefore, of the opinion that the learned Members of the Tribunal rightly observed that the receipt derived by the assessee was income for the purpose of Income‑tax Act, 1922, as it was from a source whose object was the production of definite return. We, agree with the conclusion of the learned Members of the Tribunal that the source of the receipt under consideration is the law, embodied in the Securities and Exchange Ordinance, and that the income cannot be less income for the purpose of income‑tax simply because it is produced under a provision of law. We, further agree with the impugned finding of the Tribunal that the assessee received the gains through operation of law and thus it could not escape the taxation simply because the share did not belong to it.
37. After holding that the sum of Rs.1,28,531 received .by the assessee, is income, the onus shifts to the assessee to establish that the said income is not taxable and enjoys exemption.‑ The ,contention of Mr. Sirajul Hag Memoir, learned counsel for the assessee is that it was casual and non‑recurring income therefore, it enjoys exemption under section 4(3)(vii), which reads as follows:
"(3) Subject to the provisions of this Act, any income, profits or gains falling within the following classes shall not to such extent as may be specified in this subsection or prescribed in this behalf, be included in the total income of the person receiving them:
(vii) Any receipts not being capital gains chargeable according to the provisions of section 12‑B and not being receipts arising from business or the exercise of a profession, vocation or occupation which are of a casual and non‑recurring nature or are not by way of addition to the remuneration of an employee."
38. A perusal of the above section shows that in order to avail exemption under ‑the above provision two conditions are required to be satisfied,, first that, the receipt does not arise from business or the exercise of a profession, vocation or occupation and secondly, is of .casual or non‑recurring nature. Mr. Sirajul Haq Memon, has submitted that the receipt under consideration is casual and of non‑recurring nature and, therefore, it enjoys exemption. Mr. Sirajul Haq, further submitted that the word casual has been defined in `Black's Law Dictionary' as follows:‑‑
"Casual. Occurring without regularity, occasional; impermanent, an employment for irregular periods.
Happening or coming to pass without design and without being foreseen or expected; unforeseen; uncertain; unpremeditated."
Relying on the above definition he has submitted that the receipt is not of regular nature and, therefore, it is casual and non‑recurring.
39. On the other hand, Mr. Shaikh Haider, learned counsel for the respondents, has submitted that the words take their colour and complexion from the context in which they are used. When examined in the context of word "income" for the purpose of levy of income tax,‑ the other meanings of the word casual given in the same Law Dictionary, become more relevant. He has submitted that .the word casual has been given a meaning of a happening without design and without being foreseen or expected: He has submitted that in the present case, although the receipt in pursuance of the provisions contained in section 14 of the Security and Exchange Ordinance, 1969 was contingent i.e. on sale of shares within six months, but it was not unforeseen. He contended that the receipt is by design of law and, therefore, it cannot be said to be casual. We are, persuaded to agree with the submission of Mr. Shaikh Haider, learned counsel for the Revenue. The direction of law contained in section 14 of the Securities and Exchange Ordinance, is in definite term and, therefore, it cannot be said that receipt was without any design or was totally unforeseen. It is provided in section 4(3)(vii) that in order to enjoy exemption the receipt should be of casual and non‑recurring nature, meaning thereby that both the conditions should be, satisfied. If either of the condition‑is lacking the exemption shall not be available. In order to avail exemption; the law has to be interpreted strictly and not liberally in favour of assessee. If there is question of taxability of any income, the doubt if any is to be resolved in favour of assessee and the law is to be interpreted strictly in favour of assessee while in the case of exemption, the position is diametrically opposite and otherwise. If alt the conditions for availing exemption are not satisfied, the exemption claim is not to be extended to the assessee. As in the present case, we are of the considered opinion that the receipt is not of casual nature, therefore, the claim of exemption is not available to the assessee.
40. For the foregoing‑ reasons, it is held that the I.T.A.T., was fully justified in holding that the sum of Rs.1,28,531 received by the appli cant/assessee from United Bank Ltd., on sale of shares of the assessee by them in pursuance of section 14 of the Securities and Exchange Ordinance, was taxable income of tie ,applicant. It is further held that the I.T.A.T., was fully justified in coming to the conclusion that in the facts and circumstances of the case, the said ruin was not of casual and non recurring receipt within the meaning of section 4(3)(vii) of the Income -tax Act. The questions Nos.1 and 2 are answered in affirmative.
41. Since no arguments have.been addressed in respect of questions 3 and 4, therefore, we declined to give any finding and opinion in respect of questions 3 and 4.
42. A copy of this judgment be sent under the seal of the Court and signature of Registrar, to the Registrar Income Tax Appellate Tribunal Karachi.
S.A.K./A‑296/KOrder accordingly