(a) Income Tax---

---- Agreement between private parties-Transaction ---Taxability-- Validity---Taxability of a transaction or otherwise is determinable under the law and not through the recitation made in the agreement between the private parties.

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

----S. 27---Capital gains---Principle that "when asset itself is lost and the entire source of business is taken away which is separable from the other business of an assessee, the compensation received would be a capital gain and not revenue receipt" is a principle independent of the fact whether the amount received is on account of a voluntary agreement regarding relinquishing the source of income or otherwise---Said principle remains unaltered on transition from Income Tax Ordinance, 1922 to Income Tax Ordinance, 1979 as the fundamentals on the subject remain the same.

(1908) 77 Tax 35 (Trib.) rel.

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

----S. 27---Capital gain---Capital receipt---Any voluntary payment to take away the source of income described by whatever name is a capital receipt not liable to tax.

39 Tax 21 rel.

(d) Income-tax---

----Principle of consistency and certainty---Administration of justice-Principle of consistency and certainty occupy a very prominent position in the law of precedence which has to be adhered to in order to maintain discipline in the administration of justice.

(1998) 77 Tax (Trib.) 35; 39 Tax 21 and 75 Tax 108 rel.

(e) Income-tax---

----Splitting of business in three entities---Camouflaged arrangement-- Validity---Department itself had not made any objection in two earlier assessment years and secondly the issue raised was not subject matter of appeal---Objection raised was rejected by the Appellate Tribunal.

(f) Precedent---

---- Foreign Courts---Precedence---Reference to---Superior Courts do refer to precedence of foreign origin and follow the precedents laid down by the foreign Courts on corresponding provisions.

(g) Income Tax Ordinance (XXXI of 1979)---

----S. 27---Capital gain---Capital receipt ---Exemption---Principles-- Capital receipts not in the nature of capital gain are exempt from taxation on the principle of law enunciated by the Supreme Court and not on account of any statutory provision.

(h) Income Tax Ordinance (XXXI of 1979)---

----S. 16(2)(c)(1)---C.B.R. letter No. F.7(3) S.Asstt/97-1295-Pt, dated 26-7-1997---Salary---Capital receipts---S. 16(2)(c)(1) of the Income Tax Ordinance; 1979 makes the capital receipt of compensation on termination of employment taxable which was a capital receipt not liable to tax as per earlier decisions of the Courts.

(i) Income Tax Ordinance (XXXI of 1979)----

----S. 14---Second Schedule ---C.B.R. Letter No. F7(3) S. Asstt/ 97-1295-Pt; dated 26-7-1997---Exemption---Principle of law---Premium on issuance of right shares---Clarification of the Central Board of Revenue regarding non-taxability of premium on issuance of right shares to the share-holders is on the basis of principles of law and not on the basis of any clause in the second Schedule to the Income Tax Ordinance, 1979.

(j) Interpretation of statutes---

---- Where two interpretations are equally possible then the one favourable to the subject was to be adopted and where the transaction could equally be placed within or outside the dividing taxing line, the one falling outside should be preferred against the one falling inside.

2001 PTD 1180 rel.

(k) Income Tax Ordinance (XXXI of 1979)---

----Ss. 27, 28 & 16(2)(c)(1)---Sales of Goods Act (III of 1930)---C. B. R. letter No.F7(3) S.Asstt/97-1295-Pt, dated 26-7-1997---Capital gain-- Amount received for surrender of trade mark and intellectual property was taxed as capital gain under S.27 of the Income tax Ordinance, 1979---First Appellate Authority deleted the addition on the ground that where the asset itself is lost and entire source of business of the assessee was taken away the compensation receipts would be treated as capital and not revenue income and such compensation received could not be brought to tax under S.27 of the Income Tax Ordinance, 1979-- Validity---Such was a voluntary agreement of transfer of trade mark and intellectual property bat the same represented the only earning source of the assessee and the agreement did affect the trading structure of the assessee's business and deprived them from their sole source of income- Neither any evidence existed on record nor produced during the hearing to the effect that either .the trade mark and intellectual property was not the sole income earning apparatus of the assessee or the same had not deprived them of the said source of income---Interest income of the assessee were fruits of a different tree of crop of a different field---Order of the First Appellate Authority was upheld by the Appellate Tribunal and Appeal of the department was dismissed.

(1998) 77 Tax 35 (Trib.); 39 Tax 21; Shahvallis case AIR 1932 PC 139; 75 Tax 108; Vishmudatta Antharajanam v. CIT (1970) 78 ITR 58 (SC)/(HCJ) and 2001 PTD 1180 rel.

1999 PTD (Trib.) 2356; (1992) 66 Tax 11; (1992) 66 Tax 6; I.T.A. No.698/Kb of 1998-99 and 1979 PTD 4 distinguished.

1999 PTD (Trib.) 2356 ref.

Messrs Aqeel Ahmad Abbasi, Legal Advisor alongwith Inayatullah Kashani, D.R. Javed Iqbal Rana, D.R. and Nazeer Ahmed Shorro IAC for Appellant.

Messrs Shahid Pervaiz Jami alongwith Waseem Sheikh FCA for Respondent.

Date of hearing: 1st March, 2002.

ORDER

The department through this appeal has agitated the impugned order, dated 2-8-2001 of the learned CIT(A). The grounds of appeal taken by the department are as under:---

1. That the learned Commissioner of Income Tax (Appeals) Zone-VI, Karachi, erred in law and fact by deleting the additions made in respect of amount received for surrender of trade mark, as capital gain under section 27 of the Income tax Ordinance, 1979.

2. That the learned Commissioner of Income-tax (Appeals) Zone-VI, Karachi erred in law and fact by deleting the additions made in respect of amount received for surrender of intellectual property. (Formula/Know-how), as capital gain under section 27 of Income Tax Ordinance, 1979.

3. That the learned Commissioner of Income-tax (Appeals) Zone-VI, Karachi in spite of having accepted the amount received in respect of surrendering of Trade Mark and Intellectual Property as capital in nature, wrongfully treated the out of such capital asset as exempt for being not in the nature of capital gain.

4. That the order of the learned Commissioner of Income-tax (Appeals) Zone-VI, Karachi is bad in law and fact as the learned Commissioner of Income Tax (Appeals) failed to appreciate the express provision of section 27 whereby any sum i.e. profit or gain arising from the transfer of capital asset shall be chargeable under the head capital gains and shall be deemed to be income of the income year which the transfer took place.

5. That the learned Commissioner of Income-tax (Appeals) Zone-VI, Karachi misdirected herself by wrongfully placing reliance on case law cited as (1998) 77 Tax 35 (Trib.) as neither the ratio of the decision nor the fact of the case are applicable to the facts of this case.

2. The brief facts of the case as mentioned in the impugned order of the learned CIT(A) and the assessment order are asunder:---

"Finis International Enterprise was formed in the assessment year 1998-99 on account of separation of the partners carrying on business of manufacture and sale of Finis products under the name and style of Standard Finis Oil Company since 1950. The business was existing both in East and West Pakistan.

After great tragedy of separation and break-up of East Pakistan as Bangladesh they lost control of business in Bangladesh where it was continued by their former employees by unauthorised use of Trade Mark of ".FINIS".

The business continued in West Pakistan with manufacturing facility at Karachi, Lahore.

On 30-6-1997 the existing partners split up in two groups of 3 partners each and decided to carry on business Separately at Karachi and Lahore; One group taking Karachi and other group taking the Lahore.

The Karachi factory continued in the status of Firm under the name "Standard Finis Oil Company, Karachi" consisting of 3 partners instead of six.

The Lahore factory started operating in the status of the firm under the name of "Standard Finis Oil Company, Lahore" with other 3 persons as its partners.

As partition of tangible assets like factory at Karachi and Lahore etc. was possible. It was achieved through that manner.

But the other properties of the original firm of 6 partners, which were trade-Mark and Intellectual Property (Formula/Know-how) was not divisible and all the six partners had a right and ownership of this also. It was decided to form a new firm of these 6 partners under the name "Finis International Enterprise" (the present assessee) and Trade Mark and formula/ know how, (intellectual property) was given to this firm. Actually this amounted to change of name of old firm of six partners from Standard Finis Oil Company to Finis International Enterprise".

That after these changes, Standard Finis Oil Karachi and Lahore manufactured and sold the product of Finis in their respective territories by using the Trade Mark (Finis) and its (formula/know-how) Intellectual Property on payment of royalty for such use.

The ownership of Trade Mark (Finis) and its Intellectual Property (formula/know how) was .the sole income earning apparatus of Finis International Enterprise.

According to assessee the S.C. Johnson & Sons, incorporated of USA were interested in entering in business of insecticides/pesticides the product for which the assessee (Respondent Company) had popular, prestigious and well-known Trade Mark and Formula (Intellectual Property). The trade mark and the products manufactured through intellectual property (Formula/know-how) had market all over Pakistan through goods manufactured and sold by their licensees under royalty agreement.

S.C. Johnson & Sons, approached respondent-Company for complete surrender of Trade Marks/Intellectual Property in their favour.

For this purpose, S.C. Johnson & Sons entered into an agreement dated 22-7-1999 for purchase of trade marks and Intellectual Property for consideration of Rs.12,25.89,000 and Rs.10,85,70,000 respectively.

After signing the agreement, respondent surrendered the right/interest and ownership of the Trade Mark (Finis) and Intellectual Property (Formula/know-how) forever and these became the property of S.C. Johnson USA to be used by them or any person/persons authorised/licensees by them.

That perhaps, S.C. Johnson & Sons USA were also interested in acquiring the rights of Trade Mark (Finis) of Bangladesh also which is being used in Bangladesh. As a measure of extreme precaution, they purchased from Respondent-Company the right of trade mark of Bangladesh for token sum of Rs.1,151 (Million).

In the 'return of income' for the assessment year under review, filed by the assessee the amount received for surrender of Trade Mark and Intellectual Property (Formula/know how) of Pakistan business' and amount received for surrender of trade mark rights of Bangladesh were claimed exempt from tax by the respondent Company as capital receipt not in the nature of capital gain.

The Assessing Officer did not, accept the claim of exemption of the respondent-Company and treated the three receipts as the amount received for surrender of trade mark and the amount received for surrender of Intellectual Property (Formula/know-how) was taxed as capital gain under 'section 27/28 of the Income Tax Ordinance 1979. However, the amount received for surrender of trade mark right in Bangladesh was treated as windfall gain fully taxable as income from other sources under section 30 of the Income Tax Ordinance, 1979.

The respondent-assessee filed appeal before the learned CIT(A) against the treatment given by the Assessing Officer wherein it was claimed that all three amounts received by the respondent were of capital receipts and not in the nature of capital gain as envisaged under section 27 and hence exempt from tax learned CIT(A) accepted the claim of exemption of the respondent in respect of the amount received for surrender of trade mark and the amount received for surrender of intellectual property observing that the amounts received were capital receipts and not in the nature of capital gain and that the amount has been paid against the relinquishment of the total income earning apparatus of the assessee placing reliance on the case reported as (1988) 77 Tax 35 (Trib.), wherein it is held that the principle is that when asset itself is lost and the entire source of business is taken away which is separable from the other business of an assessee, the compensation received would be a capital receipt and not revenue source". The conclusion of this judgment is that when asset itself is lost the entire source of business of an assessee is taken away, the compensation received would be capital receipts and not revenue income and cannot be brought to tax.

The action of the Assessing Officer in respect of amount received for surrender of trade mark right of Bangladesh was however, confirmed by the learned CIT (A) and it is not the subject-matter of this appeal.

3. Apart from the above facts Mr. Aqeel Ahmed Abbasi, Legal Advisor representing the appellant-department, with the assistance of the learned D.R. has submitted regarding the facts that in this case the assessee had filed return of total income for the year under review declaring income from royalty amounting to Rs.100,000 and interest received amounting to Rs.6,42,926 alongwith Sale Receipt of Trade Mark/Intellectual Property amounting to Rs.232,710,000. Assessment was finalized under section 62 of the Income tax Ordinance, 1979 and income of the assessee was computed as under:---

1. Income Sale of Trade Mark Rs.230,768,000

2. Sale of Trade Mark in Bangladesh at Rs.1,550,000,

3. Income from Royalty Rs.1,000,0000

Total assessed income Rs.232,418,000

That the assessee entered into an agreement with SC Johnson & Johnson on 22-7-1999 for purchase of trade mark of intellectual property for consideration of Rs.122589000 and Rs.108570000. The Assessing Officer was of the opinion that the amount received by the way of sale of trade mark/intellectual property is a capital gain and taxable under section 27 of the income Tax Ordinance, 1979 income from capital gains.

The Assessing Officer further observed that the sale of intellectual property and trade mark are absolutely covered by the definition of capital assets given in subsection (12) of section 2 of the Income Tax Ordinance, 1979. According to the Assessing Officer the similar issue was examined by this Tribunal in a case cited as (1999) PTD (Trib.) 2356. Wherein it is held, that goodwill has ample cost because of money in efforts have to be pumped into the building the name and good will of a product. In fact all the money spent on advertisement and publicity of the product through press and. electronic media and through advertising agencies are claimed as revenue expenses in a P&L account. These expenses are deductible from gross profit so the same can be claimed as capital cost or good will under section 28 at the time of sale of the capital asset. Whereas on behalf of the assessee, it was pleaded that surrender of Trade Mark by the assessee cannot be brought to tax as capital gain under section 27 of the Income Tax Ordinance, 1979 and that the case law quoted by the Assessing Officer has been challenged in the High Court and a decision is pending. It was further contended by the assessee that the receipt of assessee from sale of trade mark cannot be treated as capital gain on the ground that cost of the asset in this case is not determinable. In the absence of cost of capital asset receipt cannot be taxed under section 27 i.e., income from capital gain. The reliance was placed on the decision of Hon'ble Supreme Court of India reported as 128 ITR P. 294. But the plea of the assessee was not accepted during the assessment proceeding and assessment was finalized by the Assessing Officer wherein receipts and sale .of trade mark/intellectual property was treated as capital gain under section 27 of the Income Tax Ordinance, 1979. Secondly sale of trade mark in Bangladesh was assessed under section 30 i.e. income from other source. The assessee preferred appeal before the CIT (Appeals): The learned CIT (Appeals) has rejected the contention of the DCIT on the ground that the receipt of the assessee are capital receipt and is not taxable under section 27 of the Income Tax Ordinance, 1979, the reliance was placed on the decision of ITAT reported as (1998) 77 tax 35 (Trib.). It is further held by the learned CIT(A) that this Tribunal has already' decided the matter and it was held that in cases, where the asset itself is lost and entire source of business of the assessee is taken away the compensation receipts would be treated as capital and not revenue income. The compensation received cannot be brought to tax under section 27. According to Mr. Aqeel Abbasi, the greater significance has been given to one point that the cost of asset is not determinable. In this case the cost of asset is determinable, as the assessee has sold formula and trade mark. The formula is a scientific formula and had been prepared by a Scientist, therefore, it should have the cost of acquisition. In this case the-- cost of purchase of assets has not been declared. Messrs Finis International Enterprise obtained the scientific formula and trade mark from Messrs Standard Oil Co., Karachi and Standard Oil Co., Lahore both sister concern of the assessee. No amount was paid to both sister concerns. for purchase of trade mark and the formula/intellectual property. Virtually the cost of acquisition of formula and expenses incurred on building up of good will and trade mark was paid by both sister concerns. The assessee has made paper arrangements in order to hoodwink the department on the issue of cost of acquisition of capital assets and avoidance of tax. According to learned counsel, the assessee has also goodwill in the form of trademark. No separate agreement in respect of sale of goodwill was executed therefore the sale of trade mark has also been considered as the sale of goodwill too. The goodwill is an asset that can be built by incurring huge expenses on quality control advertisement, marketing and involvement of human element. The sale of goodwill and trade mark by Messrs Finis International to S.C. Johnson is taxable under section 27 of the Income tax Ordinance, 1979. On July 20th 1999 three agreements were signed between Messrs Finis International Enterprise, Standard Finis Oil Co., Karachi and Standard Finis Oil Lahore (Collectively called as finis Entities) and Messrs S.C. Johnson & Sons of Pakistan (Pvt.) Ltd. on following accounts---

(a)Trade Mark purchase agreement whereby Finis Entities sold the Trade Mark to S.C. Johnson & Sons and the consideration was transferred to Finis International Enterprises.

(b)Intellectual property purchase agreement whereby Finis Entities sold the formula/know-how to S.C. Johnson & Sons and the consideration was transferred to Finis International Enterprises:

(c)Restrictive covenant agreement whereby the Finis International Entities agreed to restrain from engaging in products earlier manufactured by Finis Entities. The exceptions to this covenant were that the finis Entities could engage in manufacturing and distribution of Messrs S.C. Johnson & Sons.

(d)The consideration for this conversant was however transferred to Standard Finis Oil Co: Karachi and Standard Finis Oil, Lahore where the assessee previously had manufacturing activity.

According to learned counsel the learned CIT(A) has ignored the judgment of ITAT cited as (1999) PTD (Trib:) 2356 where in the similar issue was already decided. According to learned counsel the taxability of capital asset of similar nature were adjudicated by this Tribunal in a case cited as Agrevo Pakistan (Pvt.) Limited v. DCIT in the said judgment the ITAT had placed reliance on various reported judgments of Indian High Court as well as case decided by Division Bench Lahore cited as (1999) PTD (Trib.) 2356. In that case the Tribunal held that even if the cost of occasion of the capital asset is not determinable the same falls in the ambit of chargability of section 27 of the Income Tax Ordinance, 1979. Mr. Aqeel Abbasi has contended that the learned CIT(A) in his judgment has held that since the sole income earning apparatus i.e. trade mark and intellectual property has been surrendered therefore the receipt though capital in nature cannot be treated as capital gain.. According to learned counsel that this version of the CIT(A) does not tally with fact of the present case as perusal of the agreements entered into between Finis Entities and S.C. Johnson would reveal that Messrs Finis International' .Enterprise is by itself party to the restrictive covenant agreement whereby two of his sister concerns would continue to earn profit on account of production of goods for Messrs S.C. Johnson at their manufacturing establishment at Karachi and Lahore. Moreover, the restrictive covenant is only for a period of five years, therefore, the source of income of Messrs Finis Enties has not extinguished completely. Mr. Aqeel Ahmed Abbas, has submitted various case laws, which has already been mentioned in the impugned order of the learned CIT(A) and argued that intellectual property, technical know-how is the goodwill of the company and goodwill is capital asset and transfer of capital asset is taxable under section 27 of the Income Tax Ordinance, 1979 as capital gain. Hence he contended that Assessing Officer rightly taxed the same under section 27 as capital gain.

Regarding the Agreements, Legal Advisor of the appellant department firstly highlighted the relevant provision of the trade mark and intellectual property purchase agreements in support of its contention that these are simple purchase and sale agreements. Wherein clause (21) of the trade mark agreement reads as under:---

"2L.Purchase and Sale of Trademarks.---On and subject to the terms and conditions of the agreement SCJ hereby agrees to, purchase from the Finis Group, and Finis Enterprises hereby agrees to sell transfer, convey, assign and delivers to SCJ the trademarks registered in its name and to cause each member of the Finis Group in whose name any Trade Mark is registered or applied for to sell, transfer, convey and deliver to 3011 each such trademark.

Identical language has been used in the other agreement pertaining to Intellectual Property. Learned counsel argued that the subject transactions come within the ambit of section 27 of the Income Tax Ordinance, 1979. According to which any profits or gains arising from the transfer of a capital asset shall be chargeable under the head Capital Gain. He relied upon clause (b) of subsection (2.) of section 27 according to which "transfer" includes the sale, disposition, exchange or relinquishment of the asset or the extinguishments of any rights therein. He also referred to section 28(1) according to which in computing the income under the head "capital vain", the cost of acquisition of the capital asset and any expenditure incurred wholly and exclusively in connection with the transfer thereof shall be deducted. He has in this respect placed reliance upon judgment, of the Hon'ble Supreme Court of Pakistan reported as 1992) 66 Tax 11 wherein goodwill "has been held to be an asset on which wealth tax is chargeable. From that goodwill and intellectual property are capital assets. According to learned counsel main argument of the assessee before the Assessing Officer as well as before the learned CIT(A) was that since there is no cost of acquisition of the trade mark and the intellectual property so the charging provision of section 27 are not attracted in the view of mandatory deduction of cost of acquisition envisaged in section 28(1) of the Income Tax Ordinance, 1979. He argued that this contention of the assessee was not valid in view of the judgment of the Hon'ble Supreme Court reported as (1992) 66 Tax 6 which pertained to the method of valuation of bonus share which at the time of allotment does not cost anything to the shareholder. He has argued that this judgment negates the contention of the assessee that for taxing of capital gain there must be some cost of acquisition. He also referred to the judgment of this Tribunal reported as 1999 PTD 2356, wherein it is held that where there is no cost of a capital asset (goodwill in that case) or no expenditure had been incurred in connection with its transfer, then nothing would be deducted and total sale proceeds of such capital asset shall be considered as capital gain under section 28 of the Income Tax Ordinance, 1979. The learned counsel has referred an unreported judgment of this Tribunal in I.T.A. No.698/KB of 1998-99 dated 31-8-1999 wherein the contention of the appellant that since there is no cost of acquisition of goodwill so the same cannot be taxed was rejected by placing reliance upon aforesaid reported judgment 1999 PTD 2356. The learned counsel has referred the two judgments which according to him has been relied upon by the learned, CIT(A) for deciding the issue in favour of the assessee. He has contended that the facts of the case reported as 1979 PTD 4 were that the assessee-Company was engaged in the shipping business and received compensation from the insurance business for its ship lost in the war. The receipts over and above the cost of ships were charged to tax as capital gain under section 12-B of the Income Tax Act, 1922. In that case, it was held that the receipts were not in the nature of sale exchange or transfer of a capital asset as envisaged by section 12-B, but were compensation for asset lost and were hot chargeable to tax as capital gain. He pleaded that the case of the assessee is distinguishable as here the amount has been received on account of a. sale agreement which comes under the ambit of section 27. In respect of other judgment (77 Tax 35) he pleaded that this case is also distinguishable as it was a case of compensation for taking over the business of life insurance and was not a case of sale of any capital asset. He has finally contended that reliance on foreign judgments is not justified when judgments of our Courts/Tribunal are available and prayed that the order of the learned CIT(A) be reversed and that of the Assessing Officer be restored.

4. Mr. Shahid Pervaiz Jami, learned counsel of the respondent on the other hand pleaded that all the arguments of the appellant are out of context and do not address the core issue. He argued that the argument of the assessee before the Assessing Officer and the First Appellate Authority regarding "inapplicability of section 27 of the Income Tax Ordinance, 1979, where there is no cost of acquisition of asset was an alternate arguments and that is the reason that the same has not been discussed and adjudicated by the First Appellate Authority who allowed relief on the main argument. Whereas according to learned counsel the entire thrust of the argument of the appellant/department represented is on cost of acquisition which is not the subject matter of appeal. He also distinguished the judgment relied upon by the learned representative of the appellant. He pleaded that the first judgment reported as 66 Tax 11 (SC) is not relevant to the point in issue as it deals with the issue of goodwill as an asset for wealth tax purpose. The said judgment has not been followed by this Tribunal in another judgment relied upon by the appellant representative reported as 1999 PTD 2356 wherein on page 2364 following observation has been made:---

"No doubt the revenue has quoted in its favour as case decided by the Hon'ble Supreme Court of Pakistan (1992) 66 Tax 11. But this case pertain to taxability of goodwill under the Wealth Tax Act, 1963 whereas issue before us is the chargeability of capital gain arising on sale of goodwill under the Income Tax Ordinance. The Supreme Court's case is, therefore, not helpful to us in deciding the issue under consideration."

Mr. Shahid Pervaiz Jami has contended that three other cases relied with reference to cost of acquisition i.e. 66 Tax 6 (SC), 1999 PTD 2356 and I.T.A. No. 698/KB of 1998-99, dated 31-8-1999 are not relevant to the issue under appeal. He pleaded that ratio of the judgment of the Tribunal reported as 77 Tax 35 is fully applicable on the case of the appellant and this judgment is binding on this Bench as per principle of precedence as it still hold the field. He pleaded that the main points involved have been enumerated by the learned CIT(A). He pleaded that the concept of the exemption of capital receipt is well-recognized principle of law. By relying on section 16(2)(c)(I) of the Income Tax Ordinance, 1979 pertaining to taxability of compensation in connection with the termination of or the modification of any terms or conditions relating to an assessee he argued that capital receipts are exempt unless they are expressly made taxable and conversely the revenue receipts are taxable unless specifically exempted. In support of his contention he also produced a clarification issued by the C.B.R. vide No. F7(3) S. Asstt/97-1295-Pt, dated 26-7-1997 through which it has been instructed to the field officer that the premiums received by the companies on issuance of right share is not their income and as such not liable to tax. He pointed out that issuance of shares by the `Company to the share holders for consideration is also a sale transaction as per Sale of Goods Act but in spite of that any amount received by the Company over and above the face value of shares offered is not subjected to tax as capital gain. He argued that this exemption of excess amount is based on the principle of law and. not on any statutory provision and that is the reason that instead of any notification of exemption a clarification was issued by the CBR. He also referred to section 28 of the Indian Income Tax Act, 1961 and produced copies thereof in support of his contention that transaction of the nature as in the case of respondent has been made taxable by express provision of law which is not the case under the Income Tax Ordinance, 1979.

Regarding the allegation of learned representative of the appellant department that the splitting of the business in 1997 in three entities is a camouflaged arrangement. Learned counsel of the respondent pleaded that firstly the splitting up was bona fide and has been accepted by the department in two earlier assessment years and secondly this issue is not the subject-matter of appeal through any ground of appeal or otherwise and as such the appellant is not legally entitled to urge the same at this stage. He has drawn our attention to the difference between the Income Tax Ordinance, 1979 and Indian Income Tax Act, 1961. According to him, under the Indian Income Tax Act, 1961 any compensation received for the loss of income earning apparatus has been brought to tax, vide specific provision under section 28(ii)(a), (b), (c) & (d) but under the Income Tax Ordinance, 1979 only compensation for termination of service has been brought to tax under the provisions of section 16(2) of the Ordinance, and there is no such provision for taxing the amount received for surrender/loss of source of income falling under the head of business under section 22 or other sources under section 30 of the Income Tax Ordinance, 1979.

5. We have heard the representatives of both the sides and have also perused the impugned order, the assessment order and. case-law referred from both the sides. The only issue involved before us is the taxability or otherwise of capital receipt on the transfer of capital asset which is not in the nature of capital gain. The Assessing Officer at pages 6 and 7 of the assessment order has discussed the concept of capital receipt in the following manner:---

`As Income Tax Ordinance, 1979 does not define the term capital receipt and revenue receipt one has to depend upon natural and accepted meanings of these concepts as well as in the light of decided cases: Normally in trade there are two types of capitals one the circulating capital and the other fixed capital. Fixed capital is what the owner's turns to profit in keeping it in his own possession, circulating capital is what he makes profit by parting with it and letting it change hands. A receipt on account of circulating capital is revenue receipt whereas on account of fixed capital it is capital receipt. What are capital assets in the hands of one person may be trading assets in the hands of another. Compensation received from immobilization, sterilization, destruction or loss, total or partial of a capital asset would be capital receipt. If a sum represented profit in a new form then that would be income, but where the agreements relates to the structure of the assessee's profit making apparatus and affects the conduct of the business, the sum received for cancellation or variation of such agreement would be capital receipt. .[Habib Bank Safe Deposit Vault v. CIT (1967) 15 Tax 212] and [CIT v. Bombay Burmah Trading Corporation (1986) ITR 38,8, 389 (SC)]"

From the aforesaid extract it is evident that the Assessing Officer admits that on the issue of capital receipt one has to depend upon natural and accepted meanings of these concepts as well as in the light of decided cases. The Assessing Officer has concluded that trademark and intellectual property are capital assets fully covered by the definition of capital asset given in section 2(12) of the Income tax Ordinance, 1979 and further that it is a capital receipt which is taxabale under section 27. Whereas the First Appellate Authority has held that though these assets are capital assets and the receipts are capital receipts but these are not in the nature of capital gain assessable under section 27 as assessee has transferred his right, title and interest in the sole income earring apparatus and as a compensation of loss of these capital assess the amount received cannot be termed as capital gain and cannot be taxed under section 27 of the Income Tax Ordinance, 1979. With his background of the rival stands at the assessment and appellate stage we now come to the arguments of the Legal Advisor of the appellant. His reliance on the contents of the agreement is of no help in deciding the point in issue. Taxability of a transaction or otherwise is determinable under the law and the case-law and not through the recitation made in the agreement between the private parties: Same is the case of his reliance on language of section 27(2)(b) regarding transfer and section 28(1) regarding deduction of cost of acquisition. There is no dispute that the amounts received are on account of a voluntary sale agreement through which the income earning apparatus of the respondent has been surrendered/transferred but that it is not the determining factor of its taxability. Reliance of the appellant's representative on the judgment of Supreme Court of Pakistan (66 Tax 11) in our view is not relevant to the point in issue as already held by the Tribunal in another judgment reported as 1999 PTD 2356. Reliance of the Revenue on the judgments 66 Tax 6 (SC), 1999 PTD 2356 and I.T.A. No. 698/KB of 1998 is again not relevant as the learned CIT(A) has not decided the appeal of the assessee on this issue of nil cost of acquisition and as such this issue is not a subject matter of appeal before us. The argument of the learned A.R. of the appellant to distinguish the judgment of the Tribunal reported as 1979 PTD 4 and 77 Tax 35 is also not convincing. Since the judgment reported as 1989 PTD 4 has not been relied upon by the learned CIT(A) in its decision and so any argument to distinguish the same is futile. Whereas in the case reported as 77 Tax 35, the principle on the subject was reiterated holding that:---

"The principle is that when asset itself is loss and the entire source of, business is taken away which is separable from tile other business of an assessee, the compensation received would be a capital gain and not revenue receipt."

The learned Legal Advisor of the appellant department has not been able to dislodge the aforesaid principle. He has only tried to distinguish it on facts. Whereas as per our opinion the aforesaid principle is independent of the: fact that whether the amount received is or account of a voluntary agreement regarding relinquishing the source of income or otherwise. Similarly this principle remains unaltered on transition from Income Tax Act, 1922 to Income Tax Ordinance, 1979 as the Fundamentals on the subject remain the same. The only reported judgment referred before us on the taxability of capital receipt on loss of source of income is judgment of the Honourable Sindh High Court reported as 39 Tax 21 wherein the department had referred to the High Court the following question of law for their opinion:--

"Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in holding that sum of Rs.60,000 paid to the assessee's company by Messrs Exide Batteries Pakistan Limited as compensation for loss of profit could not be treated as "income" and as such could not be legally taxed?"

The brief facts of the case were that the respondent was sole selling bent and distributor of Exide Batteries manufactured by Exide. Batteries of Pakistan Limited on commission basis under an agreement. Which provided for termination of the said agency by three months notice on either side. By letter, dated 7-11-1962 the respondent's principal gave notice of termination of the, agency advising the respond at that it had been decided to change the existing method of distributing their Exide batteries by appointing several main dealers who would be required to sell the Exide batteries exclusively. It was also mentioned in the letter that respondent's sole agency was being terminated with utmost reluctance, but, as it is was not possible to continue to offer, the respondent the old terms since these would be more favourable than given to other main dealers, an amount of Rs.60,000 was being offered as compensation of loss of profits provided the respondent accepted the offer to become a main dealer. The offer was accepted by the respondent and accordingly the respondent received an amount of Rs.60,000 as loss of profit. The respondents reflected the said amount in the profit and loss appropriation account and claimed it as a capital receipt. The Income Tax Officer rejected the contention and taxed the same. The respondent preferred an appeal which was allowed by majority of two members of the Appellate Tribunal. The majority opinion was that the amount of Rs.60,000 was compensation for less of its sole distribution and sole selling agency rights and ,also as a consideration for agreeing to become a main dealer. As such it was a capital receipt not liable to tax. On that the aforesaid question was referred to the Honourable High Court. The Honourable Court observed that "the main question for consideration is whether the amount of Rs.60,000 received by the respondent is is the nature of a capital receipt or is taxable as an income". Thereafter the following principle was laid down by the Court in para. 5:----

"There is no single infalliable test which can be applied to resolve the question. Neither the form of the transaction giving rise to the payment nor the name which is given to it is relevant in determining the liability of tax. In general it may be said that what is received for loss of capital is a capital receipt and what is received as profit in trading transaction, is taxable income.

The Court thereafter framed another question "whether the amount received by the respondent was compensation for loss of a capital asset or represented loss of future profit in a trading transaction".

After framing the aforesaid question the Court observed that "a useful test for determining whether an amount received is a capital or a revenue receipt, has been laid down in reported cases, which have been referred to in the order of the Appellate Tribunal. A particular reference may be made co the test laid down in a case decided by the Indian Supreme Court reported in Ketllewell Blullen & Co. v. Commissioner of Income Tax, Calcutta (1965) 53 ITR 26 which was applied in Gillanders Arbouthnot & Co. v. Commissioner of Income Tax, Calcutta (1964) 53 ITR 283 and is as follows:--

"On analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. Where on a consideration' of circumstances, payment is made to compensate a person .for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, the termination of the contract being normal incidence of a business and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue, where by the cancellation of an agency the trading structure of the assessee is impaired or such cancellation results in loss of what may be regarded as the source of assessee's income, the payment made to compensate for the cancellation of the agreement is normally a capital receipt."

After enumerating the aforesaid test the Court in, para. 6 of the judgment has held that it is clear that the respondent was being offered the sum of Rs.60,000 to compensate for the loss of the, sole selling agency right. The sole selling agency right of the respondent was undoubtedly an income yielding asset and a capital asset, compensation received for loss of a capital asset is a capital receipt. The Court further observed that the parties had loosely described the amount as loss of profit and the name given to the payment is irrelevant.

The Honourable Court further held that `there was no evidence on record to suggest that the respondent was acting as sole distributor or selling agent of the products of other concerns as well, or that the termination of the agency in question did not affect the trading structure of the respondent's business or deprive it of its source of income". The Court rejected the argument of the counsel of the department that the payment of an amount of Rs.60,000 to the respondent being a voluntary payment, to which the respondent had no legal right under the agreement, could not be treated as capital receipt. The Court observed that "this submission has not impressed us. It is not supported by case- law."

The ratio of this judgment is that any voluntary payment to take away the source of income described by whatever name is a capital receipt not liable to tax. The aforesaid ratio is squarely applicable to the case of respondent before us. Though it was a voluntary agreement of transfer of trade mark and intellectual property but the same represented the only earning source of the respondent and the agreement did affect the trading structure of the respondent's business land deprived them from their sole source of income. There is no evidence either on record or produces during the hearing to the effect that either the trade mark and intellectual property was not the sole income earning apparatus of the respondent or the same has not deprived them of the said source of income. The interest income of the re-spondent were fruits of a different tree of crop of a different field as per expression of the Privy Council in Shahvalli's case AIR 1932 PC 139 quoted by the Honourable High Court in para. (7) of judgment referred supra.

As per judgment of the Full Bench of this Tribunal reported as 75 Tax 108 the principle of consistency and certainty occupy a very prominent, position in the law-of precedence which has to be adhered to in order to maintain discipline in the administration of justice. Accordingly we are, following the principle laid down by the Honourable High Court in the case reported as 39 Tax 211 and reiterated by this Tribunal in a case reported as 77 Tax 35.

We are not in agreement with the argument of Mr. Aqeel Abbasi that the splitting of business in 1997 in three entities is camouflaged arrangement as the department itself has not made any objection in two earlier assessment years and secondly the issue raised is not subject-matter or this appeal. Likewise in respect of the contention of Mr. Abbasi that precedence, of foreign-origin are not to be considered. We are of the view that our Superior Courts do refer to and follow the precedent laid down by the Foreign Courts on similar facts and corresponding provisions. In the aforesaid judgment of the Honourable Sindh High Court four judgments of the Indian Superior Courts and Privy Council have been quoted with approval. The Assessing Officer in the assessment order has also relied upon many judgments of the Indian Courts. As per a receipt in lieu of source of income is a capital receipt. For instance compensation for loss of employment is a capital receipt as it is in, lieu of source of income. Likewise, sale proceeds of trees removed from land together with their roots leaving behind no prospect of regeneration is a capital receipt as the receipt is in lieu oil source of income as held by the Supreme Court of India in a case reported Vishinudatta Antharajanam v. CIT (1970) 78 ITR 58 (S.C.) holding that these were voluntary sale proceeds of trees which were the sole income earning apparatus of the assessee. It is apparent that the version of the department is not clear about the issue and the legal interpretation on which the learned CIT (A) has allowed relief to the respondent. The departmental representative have confused the agreements executed between Finis International for surrender of formula and Intellectual property the agreement signed with the Standard Finis Oil, Karachi and Standard Finis Oil, Lahore for restrictive covenant. The impugned order of the learned CIT (A) is based on only one issue that while surrendering intellectual property and trade mark the respondent lost its sole earning apparatus, and compensation for surrendering of total income earning apparatus, is a capital receipts not in the nature of capital gain. The decision given by the CIT (A) is supported by earlier judgments of this Tribunal reported as (1998) 77 Tax 35 (Trib.). In 4the grounds of appeal and during the course of arguments the learned counsels for the department has tried to confuse the issue by referring to the facts of the case reported as (1979) PTD (Trib.) page 4, which case was considered by the Division Bench of this Tribunal while giving judgment referred supra reported as (1998) 77 Tax 35. The department has not been able to distinguish and explain why the decision in the aforesaid case is not applicable to the facts of the present case. In the impugned order the learned CIT (A) has also discussed the distinction in respect of these receipts in the Income Tax Act, 1961 and the income Tax Ordinance, 1979. The departmental representative -has tried to build their case on the right of manufacture for S.C. Johnson given to Standard Finis Oil Company, Karachi. First of all this has no connection with the issue involved, further it has been stated at-Bar by the learned representatives of the assessee that this contract was cancelled after one and half year. We find force in the contention of the learned counsel for the assessee that the capital receipts I not in the nature of capital gain are exempt from taxation on the principle of law enunciated by the Supreme Court and not on account of any statutory provision. His reliance in this regard on section 16(2)(c)(1) of the Income Tax Ordinance, 1979 as well as C.B.R.'s clarification, dated 26-7-4997 is also valid. The aforesaid section makes the capital receipt of compensation on termination of employment taxable which as per earlier decisions of the Courts was a capital receipt not liable to tax. Similarly clarification of the C.B.R. dated 26-7-1997 regarding non taxability of premium on issuance of right shares to the shareholders is on the basis of principle of law and not on the basis of any clause in the Second Schedule to the Income Tax Ordinance, 1979.

As per settled principle of interpretation of taxing statute where interpretations are equally possible then the one favourable to the subject was to be adopted and where the transaction could equally be placed within or outside the dividing taxing line, the one falling outside should I be preferred against the one falling inside. The reliance in this regard may be placed on the decision of the Honourable High Court reported as 2001 PTD 1180 (High Court).

It would be in exercise of futility to discuss each and every case cited by both the parties because each case revolve around its own facts and circumstances of the case. The learned CIT (A) while giving judgment has rightly considered the case which is at all force with the facts of the case before us. Therefore, the findings of the learned CIT(A) are hereby upheld.

The departmental appeal is found without merit and is hereby dismissed.

C.M.A./739/Tax(Trib.)Appeal dismissed.