I.T.A. No.1640/KB of 2004, decided on 24th March, 2006. VS I.T.A. No.1640/KB of 2004, decided on 24th March, 2006., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2291 (2006)

2006 P T D (Trib.) 2291

[Income-tax Appellate Tribunal Pakistan]

Before Khawaja Farooq Saeed, Chairperson and Shaheen Iqbal, Accountant Member

I.T.A. No.1640/KB of 2004, decided on 24/03/2006.

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

----S. 27---Capital gain---Goodwill---Assessee was engaged in manufacturing and distribution of' non-pharmaceutical skin and beauty-care product under the exclusive agency and licence agreement---Assessee, therefore, had exclusive right to use the trademark of' principal company---Principal company terminated such agency and withdrew such licence agreement by stating only that service of assessee were no more required---Assessee was debarred from purchase, manufacture, sell or distribute the said products as registered users of trademark owned by the principal company---Assessee approached High Court with object to protect its main earning apparatus---Both companies arrived at an agreement and as a result of such agreement, assessee was compensated for succession of the licence and business as well as the agency agreement---Such amount was assessed by the Assessing Officer as capital gain by treating the amount as a `goodwill'---Assessee claimed the said amount as capital receipt exempt from charge under the Income Tax law while the department treated the same as yearly earned `goodwill' and consequently the capital gain---Validity---Bringing such amount to charge under the garb of provision of S.27 of the Income Tax Ordinance, 1979 by calling it a goodwill could not be supported---Goodwill was a tree sprouted from seed which in this case was agency and licence from principal company which was withdrawn from the assessee---Assessee had nothing in his hands, even the temporary injunction of the Court could not rebuild the same, it was not a goodwill but capital receipt on termination of contract--Capital assets presupposed existence of the same in a visible established and accumulated form---Some entry obtaining in balance sheet or such or similar or auxiliary and ancillary documents could be the only evidence---Strong doubt existed about holding the goodwill a capital asset in a case like the present one where it had never been established to be accumulated---If the department insisted that there was a goodwill and thus a capital asset then what had to be transferred should also have been identified which would all the more necessary as to bring the profit and gains within the mischief of S.27 of the Income Tax Ordinance, 1979--Such profit and gain should have necessarily been arisen from the sale exchange or transfer of capital asset---Orders of the two officers below were disapproved and the addition made by the Assessing Officer and confirmed by the First Appellate Authority was deleted by the Appellate Tribunal.

1984 CLC 2804; PLD 1963 SC 663; "Words and Phrases" Permanent Edition (Volume 6) published by St. Paul, Minn. West Publishing Co.; Corpus Juris Secundumm" Volume-12 published by St. Paul, Minn. West Published Co.; (1962) 48 ITR 1935; (1965) 57 ITR 2999 (S.C. of India); ITAT in 1993 PTD (Trib.) 1175; 1979 PTD Trib. 4; 1985 PTD 3; Commissioner of Income Tax Bangaglore v. B.C. Srinivisa Setty and others (1981) 128 ITR P. 294; 2002 85 Tax 225 (Trib.); 85 Tax 332 H.C.; 1984 PTD 368; CIR v. Shiparo C.C.A. 125F, 2d 532, 535 & 536; 1927 Privy Council 76; 1993 PTD (Trib.) 1175; 1998 (77) Tax Para H on its page 40 and ITAT decided on 31-8-1999 in ITAT No.598 of 1998-99 ref.

1979 (39) Tax 21 (H.C.) and 1992 PTD 232 rel.

2002 PTD 983; 2001 PTD 1047; 2003 PTD 2331 and 1999 PTD Trib. 2356 distinguished.

(b) Income-tax---

----`Income'---Connotation---Agreement of agency between assessee and its principal company---Termination of agreement---Compensation---Nature of receipt---Determination---Principles---Connotation of term `income' was very wide and in fact covered anything, which came in, however, one could not ignore that it had to come within the charge created by various provisions of the prevailing law for considering the income as taxable income---Nature of transaction had always been considered, the base of such determination---Contract between assessee and its principal company was to be considered as the basic evidence for determination thereof--Nature of contract intended by the parties should not be ignored unless proved contrary---Nature of contract intended by the parties could not be changed by presumptions or self-created understandings; it could only be disregarded with a valid counter-agreement.

(c) income-tax---

----Capital receipt---Capital receipts on cessation of licence and termination of agency was like compensation on termination of employment and that need not be given any other nomenclature like `goodwill'.

Farogh Naseem for Appellant.

Sheikh Muhammad Hanif D.R. for Respondent.

ORDER

KHAWAJA FAROOQ SAEED (CHAIRPERSON).---This appeal has been preferred at the instance of the appellant Company to challenge the first appellate order, dated 10-10-2004 passed by the learned CIT, Appeals-IV, Karachi pertaining to the assessment year 2001-2002 on the ground set forth as under:

"That the learned Commissioner of Income Tax (Appeal-IV), Karachi has erred in confirming the action of the Assessing Officer in treating the receipt of Rs.343 Million as capital receipt liable to be taxed as capital gains, when in law such receipt, being capital in nature, was not liable to be taxed as income in the first place."

2. The issue involved, therefore, is as to whether the amount in question is an exempt Capital Receipt as claimed by the appellant-Company or a Capital Gain within the meanings of section 27 and thereby chargeable to tax as per para 4(b)(2) of Part-IV of Third Schedule to the Income Tax Ordinance, 1979 (hereinafter referred to as the "Repealed Ordinance").

3. Before, we move on to the arguments of the learned A.R. it will be in the fitness of things if the facts of the case are recapitulated. The appellant is a Private Limited Company engaged in manufacturing and distribution of non-pharmaceutical skin and beauty-care products, like Ponds. Veseline, and Cutex under the exclusive agency and license agreement entered into with Messrs Chese Brough Pond's renamed as Conopco Ino USA since 1956 till 2000. The appellant-Company during the said period had exclusive right to use the trademark of CP Inc. On the products of Ponds, Vaseline and Cutex as per the said written agreement. The licensee, therefore, had the right to manufacture and sell/distribute the said products. The appellant-Company during the continuation of the said period received a letter from the Principal Company on 31-1-1991 stating that their services were no more required. No reason for the said termination of the Agency and withdrawal of the License Agreement was mentioned therein. As a result of which the appellant-Company was debarred from purchase, manufacture, sell or distribute the said products as registered users of trademark owned by the US companies. The appellant-Company filed a writ petition against the said notice before the High Court of Sindh with the intention to protect its main earning apparatus. On the other hand, Messrs CP Inc. not only filed the written statement but also a Counter Suit. Further, the Registrar of' trademarks in Pakistan was also approached to change the name of the registered users of trademark in Pakistan by assigning right to purchase, manufacture, sell and distribute the same products to Messrs Lever Brothers Pakistan Limited. The litigation continued for the next 10 years when ultimately both the companies arrived at an agreement. As a result of which the Agency Holder was compensated for the succession of the license and business as well as the agency agreement. This amount when came for discussion before the Assessing Officer was assessed as a capital gain by treating the amount as a goodwill. This agreement was made on 24-10-2000 between the appellant-Company and Messrs Lever Brothers Pakistan Limited. The assessee claimed the said amount as a capital receipt exempt from charge under the Income Tax Law while the department treated the same as yearly earned goodwill and consequently the capital gain. Before the learned first appellate authority, the appellant-Company contested the same but was not successful.

4. The A.R. first of all, challenged the very concept of treating the amount as a `goodwill' commenting that this amount is on account of relinquishment of business. He referred section 27 of the Repealed Ordinance which speaks as follows:

"(27) Capital gains.---(1) any profits or gains arising from the transfer of a capital asset shall be chargeable under the head "Capital gains" and shall be deemed to be income of the income year in which the transfer took place.

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

(a) "capital asset" does not include

(i) any asset or class of assets in respect of which the assessee is entitled to any allowance for deprecation under the Third Schedule; and

(ii) any immovable property; and

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

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

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

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

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

5. Reading through the first Para i.e. 27(1) the A.R. said that a capital gain is profit on gain arising from the transfer of a capital asset. He, then, moved on to section 2(12) of the Repealed Ordinance, the said section defines the tern `capital asset' and speaks as follows:

"2(12) "Capital asset" means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include--

(i) any stock-in-trade (not being stocks and shares), consumable stores or raw materials held for the purposes of his business or profession;

(ii) personal effects, that is to say, movable property (including wearning apparel, jewellery and furniture) held for personal use by the assessee or any member of his family dependent on him; and

(iii) any land from which the income derived by the assessee is agricultural income;"

6. The A.R. said that the above definition is not an inclusive definition, which widens the scope of a word but a direct one which restricts the meanings of the term `capital asset'. It says that any kind means any kind of property held by an assessee. This property may not be in business use but has to be a property. The definition further says that it shall not include stock-in-trade, consumable stores or raw materials held for the purpose of business or profession. Further it also does not include immovable property like wearing apparel, jewellery, furniture and other personal effects held by an assessee or his family. It further, excludes the agricultural land from where the assessee is or had been earning agricultural income. Referring back section 27 he repeated that it also does not include any asset or class of assets in respect of which the assessee is entitled to an allowance for depreciation which obviously includes plant and machinery or for that matter any other similar property. Coming to the term "transfer" as is defined in section 27(2)(b), he said that any kind of transfer of right exchange dispossession or relinquishment of the asset of the assessee can be included therein but it does not include any compulsory acquisition, gift, bequest or will or an irrevocable trust, distribution of the assets of the company to the shareholder on its liquidation or distribution of the capital asset on the dissolution of the firm or other Associations of Persons. All these exceptions exclude even the compulsory acquisition of the capital asset from the definition of the capital gain but in the present case, we have yet to determine as to whether the transaction between the two is a transfer of capital asset or not. Commenting that if at all we call this amount as goodwill, then in a case like this who is owner of same does not need any debate is to get a reply. The action of Messrs CP Inc. to cancel the right of manufacturing and assessee's invoking the powers of law in itself makes it clear that it does not had any goodwill of its own. The goodwill, if any, was the ownership of the principal company and it was said company which could pass it on to anybody else or continue with this assessee at their own will. He said that it is where we would like to refer 1984 CLC 2804, remarking that two different words used in same enactment would carry different meanings. The term "capital asset" as per section 2(12) has given slightly wider meanings but section 27(2)(a) has further restricted it by excluding assets on which depreciation is chargeable and immovable property also. He then moved on to refer PLD 1963 SC 663 saying that no part or word of statute is to be held as surplus-age. It is the `capital asset' the sale of which, if results in gain can be treated as a `capital gain. Further it does not include compulsory transfer of assets. Moving back to the definition of "capital assets", he again said that in general terms a `capital asset' is a property acquired for investment and it is more in the nature of tangible assets.

7. Referring "Words and Phrases" Permanent Edition (Volume 6) published by St. Paul, Minn. West Publishing Co., he mentioned following general definitions of the term "capital assets":---

"Term "capital assets" means property acquired for investment and held for more than two years. Dunigan v. Burnet, 66 F. 2d 291, 202, 62 App. D.C. 221.

In distinguishing between ordinary income and gain from disposition of capital asset, "capital asset" is to be narrowly applied and statutory exclusions to be broadly interpreted; and every day operations of a business are directed towards ordinary income or loss. Frank v. C.I.R., C.A. Ark. 321 F.2d 143. 148.

The words "capital assets" should be given their usual and ordinary meaning; that is to say, permanent or fixed assets used in a trade or business and not securities acquired by a taxpayer in a transaction entered into for profit unconnected with a trade or business. Stern v. Gray, 5 N.W.2d 299, 302, 72 N.D. 134.

Under provision of Revenue Acts of 1924 and 1926 excluding property held over two years by taxpayer primarily for sale in course of his trade or business from definition of "capital assets," taxpayer's "business" need not be his sole occupation nor take all his time, but may be seasonal, and may be carried on through agents whom taxpayer supervises. Snell v. C.I.R. C.C.A. Fla., 97 F. 2d 891.

Where manufacturer operating on accrual basis had sold part of its products through four branch establishments in charge of salaried managers, and each manager created a corporation which purchased the business and manufacturer took notes and accounts receivable at appraised value below face value, since the sale was not in course of business to customers but a part of ending of a business, transaction was a sale of "capital assets", and hence the loss was not deductible by manufacturer as a "business loss". Graham Mill & Elevator Co. v. Thomas, C.C.A.. Tax, 152 F. 2d 564, 565.

The term "capital assets," within revenue statute defining capital assets as property held by the taxpayer excluding stock in trade or other property which would be included in business inventory or property held primarily for sale to customers, is not used in any technical sense, but in its natural and ordinary signification, and means all capital invested plus surplus account or undivided profits left in the business for purpose of accumulating and being used in business, and such good will as has been established and accumulated over the years of its existence. C.I.R. v. Shapiro, C.C.A., 125F.2d.532,535,536.

Apartment Buildings.

Where four parties purchased apartment building under contract for deed and thereafter jointly operated property for rental purposes, and in addition purchased jointly a relatively small amount of bonds issued by another apartment operator, each individual party as a partner possessed a partnership interest which was itself a "capital asset" regardless of nature of partnership property. Shapiro v. U.S. D.C. Minn. 83 F. Supp. 375, 376, 378.

Wherefour parties purchased apartment building under contract for deed and thereafter jointly operated property for rental purposes, and in addition purchased jointly a small amount of bonds issued by another apartment operator, and thereafter one partner contracted to sell to another his one-fourth interest in the partnership operating the building, and sale was consummated by an assignment of interest in the contract for deed, sale of one-quarter interest was sale of a "capital asset", and profit on sale was taxable as a long-term "capital gain". Shapiro v. U.S., D.C. Minn. 83 F. Supp. 375, 376, 378.

Where four parties purchased apartment building under contract for deed and thereafter jointly operated for deed and thereafter jointly operated property for rental purposes and in addition purchased jointly a small amount of bonds issued by another apartment operator and thereafter one partner contracted to sell to another his one-fourth interest in the partnership operating the building and the sale was consummated by an assignment of interest in the contract of deed, transfer of the one-quarter interest was a sale of a "capital asset" resulting in a long term "capital gain" even though the building was subject to allowance for depreciation under section 23(1) and was therefore not a capital asset under section 117(a)(1) (26 U.S.C.A. (I.R.C. 1939) 23 (1), 117(a) (1)), U.S. v. Shapiro, C.A. Minn., 178 F. 2d 459.

Capital Gains for Tax Purposes

Funds received under deferred payments provision of contract for sale of capital stock were taxable only as profits on sale of "capital asset". Haynes v. U.S. 50 F. Supp. 238, 242. 100 Ct. Cl. 43.

Term "capital asset" is to be construed narrowly in accordance with congressional intent to afford capital gains treatment only in situations typically involving realization of appreciation value accrued over substantial period of time and thus to ameliorate hardship of taxation of entire gain in one year Maryland Coal & Coke Co. v. McGinnes. D.C. Pa., 225 F.Supp 854, 856.

The term "capital asset" in statute authorizing capital gains treatment where there is sale or exchange of capital asset is narrowly construed, as connoting investment of money in property with resulting appreciation in value accruing over requisite length of time, and the statute is designed to lessen hardship of taxing such appreciation in one year U.S. v. Woolsey, C.A. Tex., 326 F.2d 287, 290.

Claim for Professional Services

As respects income tax, ordinary income derived from professional services rendered is not a "capital asset" and sale of claim for professional services is not a "sale of capital assets" Doyle v. C.I.R., C.C.A.. 102 F.2d 86, 88.

Corporate Stocks

Corporate stock purchased by a taxpayer within 30 days after he sold stock of the same issue which he had owned for over 2 years was not held by taxpayer for more than 2 years so as to be "capital assets" within Revenue Act and hence aggregate loss sustained by taxpayer on sale of such stock was not a "capital loss" but was deductible as an ordinary deduction U.S. v. Bok. D.C. Pa. 22. F Supp, 864, 866."

8. The A.R. argued that from the above definitions, it is clear that 'capital asset' is something tangible and the transfer of goodwill is not a capital gain. Without prejudice to his earlier claim that it was not a goodwill being an amount of compensation for succession of license and agency. He said that even if it is presumed that it was a goodwill it obviously is not a 'capital asset'. Referring "CORPUS JURIS SECUNDUM" Volume-12 published by St. Paul, Minn. West publishing Co. he said that in his opinion the transaction was not covered even by the term business.

9. After having dilated above issue, the learned A.R. moved on to the taxability of the nature of the amount under discussion. He said that if the circumstances as mentioned above are kept in view, nobody can doubt that it was neither a voluntary contract nor the business were discontinued by option. The circumstances of the case are pretty obvious. The Agency was discontinued by the owners of the product, who are the owner of, the goodwill for all practical purposes. It was after a long litigation and negotiations that the principal company under the compulsion that the Petitioner shall withdraw all his cases from the

concerned Courts agreed to compensate. The transaction therefore, was a slump transaction, which has got nothing to do with the business of manufacturing and sales of the product of the assessee. The business having been discontinued and the company having been pressed to surrender all its rights the receipt was not an income and the sale of the whole income earning apparatus was not a business transaction.

10. In support of above contention the learned A.R. referred case law reported as AIR 1927 Privy Council 76. (1962) 48 ITR 1935 and (1965) 57 ITR 2999 (S.C. of India). He added that similar findings have been given by the ITAT in 1993 PTD(Trib.) 1176. The ITAT while defining slump transaction has held that a part of the sale consideration which was fully attributable to the goodwill was not chargeable under Clause (7) & (8) of the Third Schedule to the Income Tax Ordinance, 1979 (Now Repealed).

11. Further arguing the learned A.R. said that there are certain direct judgments on the issue which in fact have decided this issue with clarity and in unequivocal terms. Notwithstanding the fact that the judgments referred by the Assessing Officer in his order are distinguishable for the reasons of difference in the facts and circumstances of the said cases, even otherwise the judgments produced here being earlier in time and having never been considered, otherwise, either by a Full Bench of the ITAT or Superior Judiciary, held field and must have been followed under principles of "Stare dicises". He said that the very first judgment he wish to refer is 1979 PTD Trib. 4. In this judgment Mr. M.T. Siddiqui, the President of the Tribunal as he the then was has concluded in the following manner:

"We have given our due consideration to the facts of the case, and we are of the opinion that compensation received in lieu of an asset lost cannot be termed as a gain. Admittedly, it is received in lieu of an insurable interest, which the appellant had when he entered into a contract of insurance. This compensation was not in lieu of the ships, nor it represents the sale price of the ships which was not being paid in exchange of the ships and no more, it is neither for the exchange, nor any transfer of the assets, in the shape of ships, to the Insurance Company. The receipt is because the appellant was indemnified by the corporation in terms of the contract. The term sale; in our opinion, clearly signifies the transfer of property for price. There was no transfer and no price was obtained for the ships that were lost. The appellant had only an insurable interest which can be quoted with a right and by the adjustment of this right, had received the compensation, which cannot be termed as a price of the ship. The ship may have lower or higher values but the compensation was restricted in terms of the policy of insurance and was to compensate the appellate for its right. Since the company had indemnity against such losses, in our opinion, the case reported as (1968) 68 ITR 240 would squarely cover the appellant's case. We, therefore, hold that admittedly the compensation received merely recognized the legal rights of the appellant, and was received in lieu of the indemnity given by the Insurance Company. The transaction therefore, cannot be equated either with the transaction of sale, or that of exchange nor was it a transfer in any other manner. The provisions of section 13-B of the Income Tax Act are meant to catch only such transactions with respect to capital asset at arise from the sale, transfer or exchange of the capital assets. It is none of the eventualities which had occurred in the present case. The gain even if is termed as a capital nature would not fall within the ambit of these provisions. In our opinion, therefore, it cannot be taxed as a capital gain under section 12-B of the Income Tax Act. The order of the learned Appellate Assistant Commissioner in this view would therefore, be vacated on this issue, and the appeal would succeed."

12. He remarked that in view of above finding nothing further requires. However, in addition the judgment decided by a Division Bench of the ITAT which again is a direct case the ITAT after having dilated upon a lot of case-law held:--

"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 produced 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 respondent 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 Hon'ble 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 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 21 and reiterated by this Tribunal in a case reported as 77 Tax 35.

13. The matter does not end here. The learned A.R. remarked. The Hon'ble High Court Sindh in judgment reported as 1985 PTD 3 has held that "the running business of a firm taken over by the company against a determined value of shares is not a business transaction". In the said judgment according to sale agreement all assets and liabilities as were existing in books of firm on certain dates were taken over by the company. The company had same share holders who were partners in the firm and the shares were allotted in the same proportion as were held in the partnership firm. The Assessing Officer determined the break up value of shares, considered the same as cost and difference between the share value in the partnership and the value of shares in the company, was added as income. The addition having not been itemized, the Hon'ble High Court considered the same as a slump transaction for a slump price and since the same could not be pitched against a particular item or items the same was held to be not chargeable to tax. He finally referred to a judgment from Supreme Court of India which says that the goodwill is the benefit arising from connection and reputation. In this regard a very important principle was laid by the Supreme Court of India in the said judgment reported as (Commissioner of Income Tax Bangalore v. B.C. Srinivisa Setty and others) (1981) 128 ITR page 294. It has been held that:

"Goodwill denotes the, benefit arising from connection and reputation. A variety of elements goes into its making, and its composition varies in different trades and in different business in the same trade, and while on element may preponderate in one business, another may dominate in another business. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socioeconomic epology, introduction to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time.

The charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section.

All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge: What is contemplated by section 48(ii) is an asset in the acquisition of which it is possible to envisage a cost; it mush be an asset which possess the inherent quality of being available on the expenditure of money to a person seeking to acquire it. None of the provisions pertaining to the head "Capital gains" suggest that they include an asset in the acquisition of which no cost at all can be conceived. When goodwill generated in a new business is sold and the consideration brought to tax, what is charged is the capital value of the asset and not any profit or gain. Further, the date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gain but in the case of goodwill generated in a new business it is not possible to determine the date when it comes into existence."

14. He, therefore, urged that the transaction should be considered as a capital receipt not liable to charge under any provision of the Income Tax Ordinance, 1979. Commenting upon the judgment mentioned by the Assessing Officer in his order, he pointed out the distinguishing facts, which however, shall be taken up later while discussing the arguments of learned D.R.

15. The learned D.R. at the very outset aside that the Assessing Officer has duly taken care of all the arguments advanced by the learned A.R. and in fact he has very rightly assessed the income being a capital gain under section 27. He said that the assessee had the exclusive rights through license and Agency of manufacturing and sale of the products, which was registered under trade mark of CP Inc. He had for this purpose established a big industry and during the period of license/Agency he had been paying Royalty. Dividend and Bonus share to the principal company. The said amount was claimed as P&L expense as deduction and were obviously allowed by the Department. It was for these reasons that he developed goodwill which later has been surrendered through a voluntary agreement. He said that the goodwill was of this company otherwise principal company could not have paid for the same. The relinquishment of right through an agreement for a huge consideration, though out of Court Settlement, voluntarily amounts to transfer of a `capital asset'. He said that it is not correct to say that the assessee had no goodwill and that the goodwill belongs to the principal company. He argued that the capital asset very well includes all tangible and intangible assets created by virtue of relationship of the assessee with its customers. Moreover the cost being Nil 40 years back the total amount becomes its gain at the time of sale as has been shown by the assessee. He remarked that such a huge amount, which is more than 10 years profit of the assessee, couldn't be a windfall or a casual receipt. Coming to the term "income", he said that the Income Tax Ordinance has defined it in a very wide manner and it has included even the losses. Furthermore, it also includes any sum deemed to be as income or any income accruing or arising or received in Pakistan under any of the provisions of the Ordinance. He said that the capital gain also is one of the heads of the income and its specifically includes sale of `capital assets' Furthermore, the goodwill being a capital asset of the company was, therefore, very well chargeable as a capital gain. In reply to a question the learned D.R. said that since there was no doubt about its being `goodwill' and consequently a capital gain other provisions have not been invoked. On his insistence that the goodwill was relinquished under freewill after negotiating the question was raised as to whether assessee had any right to pass on the said right to a third party and/or to negotiate with anybody else in open market? The D.R. conceded that it was not possible. He, however reiterated that the action of parting the right of manufacturing being out of Court Agreement was a result of freewill and the size of the amount in itself predetermines that it was in terms of transfer of an asset called goodwill. He remarked that the Assessing Officer has drafted a very good order. He referred various cases wherein on termination of the distribution the compensation by the principal company was treated as capital gain and chargeable to tax. In this regard he says that case reported as 2002 PTD 983 is very relevant. He further referred the case reported as (2002) 85 Tax 225 (Trib.) Wherein the ITAT has held that the compensation by the principal company on termination of distribution, was subject to tax under section 27. The important factor, which has been highlighted in the above judgment is that the department had charged the said Income under section 30. However, the Tribunal has ultimately held that the said sum is against a capital asset covered within the purview of capital gain. He further referred 2001 PTD 1047 which has discussed the windfall and casual receipt as business income. He said that the Hon'ble ITAT in the above judgment has held that the casual receipt which is of non-recurring nature is taxable under law.

16. The learned D.R. therefore, urged that following the judgments referred by him and the detailed discussion by the Assessing Officer the orders of the subordinate officers should be upheld. The learned D.R. then moved on the provisions of section 16. He said that he has referred the same only to support his argument. Giving the example of the cases of Golden Hand Shake Scheme announced by some banks in Pakistan he brought attention of the Court towards the judgment given by the learned Honourable High Court in terms of 85 Tax 332 H.C. He said in the above referred case, the Honourable High Court. Lahore, while deciding the controversy with regard to the charge of the income on termination of the services has subjected the same to tax. It was pointed out to him that the said charge was created under a particular provision of section 16(2)(c)(i) wherein "profits in lieu of salary" was defined to be as inclusive of the "amount received on termination of service". The same being a specific charge created through section 16 was no parallel to the argument taken by him.

17. We have heard both and have also perused the record, in detail. The summary of the order of the Assessing Officer which has been confirmed by the CIT(A) is:--

That the amount received by the assessee was a goodwill.

That the contract of cessations of the business was a voluntary transfer of goodwill, hence a capital asset and consequently capital gain.

That the payment has been received for withdrawal of the suit.

That the assessee still runs its industry with a parallel system of manufacturing wherein similar products under certain other names is being produced.

18.1 The assessee's case on the other hand is that it was not a 'goodwill'.

If for argument sake one calls it a `good will' the same is not covered within the definition of capital asset.

Even if the above two arguments fail then it is not a case of transfer.

That in any case this amount is a capital receipt not a capital gain.

19.1 This is where referred the terms of contract becomes imperative.

19.2 The agreement starts from the language "Agreement for compensation for cessation of license and agency agreement, dated 1-1-1982, dated 24th October, 2000" respectively.

19.3 Other relevant provisions of the said Agreement are at page-3 that are as follows:--

"And whereas in view of the change of ownership whereby Conopco became a wholly owned subsidiary of Unilever it was fell that a more closely affiliated concern, such as LPBL, under a revamped set-up would closely affiliated concern, such as LBPL, under a revamped set-up would be better placed than ILL under the then existing arrangement to more effectively promote and more fully develop the Chesobrough Pond's Inc. line of business in Pakistan, and that while the licensing arrangement with ILL was intended to promote and develop the international Chesebrough Pon's Inc. business in Pakistan it was felt, special according to the perceptions of Unilever as a multinational business concern, that the business was capable of accelerated development of a considerably higher order through necessary financial and technical inputs and of a measure which ILL would be inhibited, even it able, to provide on a licensing basis, and accordingly following the change of ownership whereby Conopco became a wholly owned subsidiary of Unilever. ILL was informed of the decision of transfer to LBPL the right to manufacture and sell the Pond's and Vaseline and other brands of products of Conopco.

And whereas ILL has as its principal business exclusively enjoyed in Pakistan for over forty years the license and agency to manufacture market sell and distribute the said Pond's Vaseline and other' brands of products of the Chesebrough Pond's Inc. line of business which it has taken over forty years of enormous investment to develop the said products in the Pakistan market, and as per ILL upon the cancellation/cessation of' the exclusive license and agency the company's income earning apparatus will be immobilized, sterilized and destroyed ultimately leading to the extermination of its business. (Above underlinings are ours)

Suit No. 372 of 1993 shall be withdrawn by ILL immediately in terms of and under Order XXIII Rule 1 read with section 151 of the Code of Civil Procedure 1908 in the form annexed hereto."

The impression which comes from the above clause are that decision was taken by the principal company and ILL was only informed. From the second para. it appears that upon cession of this exclusive license and Agency the companies income earning apparatus, stand immobilized, sterilized and destroyed, ultimately leading to the extermination of its business. This obviously means that the contract is of total discontinuation of the business under the license and agency. Other terms of the Agreement mostly related to the withdrawal of the suit, which of course is the bench mark and the instrument, which has resulted into the said compensation. The compensation might not have been passed on to this assessce if the termination of the agency by the principal company in the first instance, had been accepted by this assessee. The amount received therefore, is neither result of voluntary contract, nor by option to this assessees. They came to the knowledge of decision of the U.S. based principal company through license termination letter. The petitioner was neither taken into confidence prior to the same nor there was any legal obligation on the C.P. Inc. for doing the same. They were owner of the product and have given right to the petitioner to produce the same in Pakistan which was withdrawn. However, its being voluntary or in-voluntary does not make any difference with regard to the actual controversy in hand. No further discussion on the same therefore is made.

20. The other argument that it is goodwill of the petitioner-Company also is not at all correct. If it was a goodwill of this assessee then it was his right to sell the same to anybody he likes and obviously if the principal company under pressure of the Court proceedings can offer such a huge amount its negotiation in open market through bidding or other methods of sale .otherwise would have definitely resulted in still more money as is received by this assessee. It was therefore, the fear of the loss of the earning apparatus that persuaded this assessee for the Agreement. Apparently, if it is a goodwill then it belongs to principal company who could always and as stands proved from the circumstances withdraw the same.

21. The argument of the learned D.R. that it was compensation of the termination of the license/distribution, which in fact had grown as goodwill by the passage of time. However, would need further discussion. This amount definitely was on account of compensation for cessation of the license and Agency Agreement and the same is the most appropriate term for the said amount. In similar situation in case of the bank employees when it came for consideration of the various High Courts it was found by them initially that the amount was not taxable and the deductions made by the banks from their employees were refunded back to them. However, at a later stage it was found that section 16 obtains a very clear charge for such amounts. It was for the said reason that later a Division Bench of Lahore High Court vide judgment reported as 85 Tax 332 H.C. held the same as taxable. The history of the said provisions of section 16 when located it was found that there was no such charge in the corresponding provision of the said section i.e. 7(1) and 7(2) of the Income Tax Act, 1922. It was found by the Hon'ble High Court in 1984 PTD 368 that compensation for termination of employment being not covered by any provision of the Income Tax Act, 1922, was not chargeable to tax. This provision therefore, in section 16 was brought, wherein the earlier term `profit in lieu of salary' was defined to be inclusive of the `compensation in connection with the termination of service'. This addition, therefore, was specific and because of the clear language the parallel can easily be drawn. A doubt however, remain that so long as a distributor remains licence holder of its principal under the particular circumstances like in the above case, where the assessee had access to formula of manufacturing he may share a part of the goodwill during the continuance of business. However, firstly it is not determineable, secondly; no clause of agreement gives any such impression that it is goodwill which is being taken over by the principal company. Even if it is presumed for discussion sake that it is a goodwill, whether the same can be called as a capital asset would require more dilation of the two connotations.

A goodwill can be defined as to be the probability that the old customer resorts to the old place and if we go through the various definitions, it is more connected with the premises. It has been defined in the following words:

"Goodwill denotes the benefit arising from connection and reputation. The original definition by Lord Eldon in Crutiwell v. Lye (1810) 17 Ves 335 that goodwill was nothing more than "the probability that the old customers would resort to the old places" was expanded by Wood V.C. in Churton v. Douglas (1859) John 174 to encompass every positive advantage "that has been acquired by the old firm in carrying on its business whether connected with the premises in which the business was previously carried on or with the name of the old firm, or with any other matter carrying with it the benefit of the business' in Trego V. Hunt (1896) AC 7 (HL) Lord Herschell described goodwill as a connection which tended to become permanent because of habit or otherwise. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time Lawson in his introduction to the Law of the Property describes it as property of a highly peculiar Kind. In CIT v. Chunilal Prabhudas and Co. (1970) 76 ITR 566 the Calcutta High Court reviewed the different approaches to the concept (pp. 577, 578):

"It has been horitculturally and botanically viewed as a seed sprouting or an acorn growing into the mighty oak of goodwill. It has been geographically described by locality. It has been historically explained as growing and crystallizing traditions in the business. It has been described in terms of a magnet as the `attracting force'. In terms of comparative dynamics, goodwill has been described as the `differential return of profit' Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a `habit' and sociologically it is a `custom' Biologically, it has been described by Lord Machaghten in Trego v. Hunt (1896) AC 7 (HL) as the sap and life of the business. Architecturally, it has been described as the `cement' binding together the business and its assets as a whole and a going and developing concern."

A variety of elements goes into its making and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. And yet, because of its intangible nature, it remains insubstantial in form and nebulous in character. Those features prompted Lord Machaghten to remark in IRC v. Muller & Co.'s Margarine Ltd. (1901) AC 217 (HL), that although goodwill was easy to describe, it was none the less difficult to define. In a progressing business goodwill tends to show progressive increase. And in a failing business it may begin to wane."

22. The goodwill therefore, is something intangible, which keeps increasing into progress of business and decreasing with the falling of business. It may sometimes be `nil' if the business circumstances are falling down. Like in this case the assessee's agency was cancelled and it was under the Court Stay that he kept on doing business. The Principal Company had appointed a new licensee and had also made request to all concerned Agencies for transfer of the right from this assessee. Now during the period of termination and cases in the Courts whether this petitioner could sell it to any other person or was, he in a position to negotiate with someone for sale of this so called goodwill? Needs no discussion to reply. If it was sprouting of a seed or corn grown into oak in favour of the petitioners company how the principal company C.P. cancelled it without even consulting or taking petitioner into confidence. The goodwill continues into the continuity of business. It is augmented into with a passage of time and only remains if other normal business circumstances and environments are the same and conducive for business. Any bottle neck, however, small may it be, would remarkably reduce or sometimes finish the goodwill. For example, if some natural calamity or disaster breaks out at some place or a war starts in the place of business; a number of business houses may loose all its goodwill. Similarly if an educational institution is prominent being recognized by a board of education its goodwill will remain intact until its recognition remains. If said recognition is withdrawn by the competent authority the institution looses his recognition in public also. The action of the principal company to withdraw its license alone makes one thing clear that the petitioner-Company had a subordinate status and goodwill if any belonged to CP. Inc. It is true that the petitioner agitated, he made representations and fought for the loss of his earning apparatus but calling it a voluntary and optional agreement shall be naive. Moreover, its cessation by cancellation of the license was a burning news. It would have spread like a fire in the business circles. All the interested parties for the said agency under the circumstances would approach the principal and not to the one who have lost the rights to manufacture for acquiring rights. Thus calling the compensation as against `goodwill' and attributing the same to the one who has lost it is not apparently correct.

23. As far as argument of learned A.R. that it is not a capital asset and that of the department that it is a very well a `capital asset' is concerned it again requires discussion section 2(12) defined it to be a property of any kind held by the assessee. This way though it has restricted it to the extent of the property held by the assessee but otherwise the same appears to be wider to the extent that property can be either movable or immovable both. The definition has excluded certain items but not the goodwill. The learned A.R. says that the same is not included either as it is not a "property" at all. The term property in his opinion is connected with some thing tangible be that in fixed from or otherwise. His comment was that the definitions he has produced being from various dictionaries and having strength from various judgments make it clear that it cannot be beyond the assets mentioned in the balance sheet. The property is something held by the Taxpayer in its natural and ordinary signification or capital invested plus surplus account or something obtaining in balance sheet but does include anything which is in intangible form. Even for tax purposes it was the capital stock realization of the appreciation of value. For that matter even the sale of claim of professional services has been held to be as not the same of a `capital asset'. Similarly even if one ignores the term capital for sometime the terms asset clearly denotes as something of tangible form. It means and includes ownership right in a property be that in any form nature or class. However, nowhere it appears that intangible items can also be considered as an asset. It is in fact the presumption in the mind of the officers that there is no class of receipts, which can escape the charge created through the Income Tax Ordinance, 1979, or such other enactments. However, one cannot ignore that a person can only be taxed if the transaction comes within the charging provisions prescribed in income tax law. From among the definitions of the term `capital asset' mentioned earlier there is only one given in CIR v. Shiparo, C.C.A. 125F, 2d 532, 535, 536, which includes `goodwill' in the definition of the term `Capital Asset'. However, while including goodwill it uses following language:

"and such goodwill as has been established and accumulated over the years of the existence."

24. Firstly it does not include all types of goodwill and only adds a specific part of the same. By using the words `such goodwill' it has restricted the same to the type which is `established' and `accumulated'. Whether in the case of this assessee. The same was established?. Nothing on record proves the same. In fact it was never established as have never formed part of the accounts or any other parallel record.

25. The learned D.R. is correct in saying that the income tax is a charge on income but it is still not established that the amount was a goodwill, or a capital asset in any form so as to bring the receipt within the term income. Had the assessee sold its stock in lump sum on profit or the machinery, one could call it a business income being part of his regular business transaction. Cession of the business on losing income earning apparatus has never been a business of the company nor was ever intended by him in the past. This is where the nature of such transaction needs determination. The A.R. claims the same to be a slump transaction which term is not new for such and similar receipts in this regard one can refer 1927 Privy Council 76:--

"THE LORD CHANCELLOR, LORD SHAW, WRENBURY, PHILLIMORE AND BLANESBURGH William Richard Doughty-Appellant

v.

Commissioner of Taxes---Respondent

Privy Council Appeal No.92 of 1926.

Income Tax---Sale of whole concern shown as at profit---Profit is not taxable in all cases company.

Income tax being a tax upon income the sale of a whole concern which can be shown to be a sale at a profit as compare with the price given for the business or at which it stands in the books, does not give rise to a profit taxable to income tax.

It is easy enough to follow out this doctrine where the business is one wholly or largely of production, e.g. dairy farming business or a sheep-rearing business, but where a business consists entirely in buying and selling goods, it is more difficult to distinguish between an ordinary and a realization sale, the object in either case being to dispose of goods at a high price than that given for them, and thus to make a profit out of the business. In such a case, profit made by the sale of whole of the stock, it is stood by itself might will be assessable to income-tax. But the case is different where the sale is only a slump transaction: J, and M. Craig Ltd. v. Inland Revenue (1914 SC 888 Apply".

26. Similarly in 1993 PTD (Trib.) 1175 the Hon'ble Tribunal defined the slump transaction in the following manner:

"Slump transaction can be defined to mean, sale of entire going concern as a whole inclusive of all movable and immovable properties goods and stock-in-trade, assets and liabilities without specifying the itemized valuation of various assets, stock-in- trade and goodwill, if any, and payment of consideration as 'a whole for entire business as such with the result that no portion of sale price is attributable to any particular item. In such transaction what is sold is not the individual itemized property but the entire business as a whole undertaking and the price so received is termed as "slump price."

27. In the above case, however, the learned Tribunal gave a separate finding for goodwill. White deciding a slump transaction the Hon'ble Tribunal' also held that the `goodwill' being a part of the transaction therein being easy to itemize was therefore to be treated as separate from the value of furniture and fixture. Furthermore, that the same was not to be charged under the provisions of Rules (7) and (8) of the Third Schedule.

28. The debate as to whether the transaction is a slump transaction or not may not be of any help to any of the two parties. Hence we leave the same to the discussion on the issue on the basis of the judgment referred by both of them by calling them as direct on the issue.

29. Coming back to the judgments referred by both the sides statedly direct on the issue, the judgment referred to by the learned A.R. in terms of 1998 (77) Tax Para. H. on its Page 40 speaks as follows:--

"Compensation---Chargeability---Assessee's entire business of life insurance was taken over---Compensation received from State Life Insurance Corporation---Whether receipt was a capital in nature and to chargeable to tax---Held yes.

We have gone through the case from Indian jurisdiction in the case of Lakshmi Insurance.

Company and we are of the opinion that it is on all fours to the present case and the distinction made by the learned two officers below is of no significance. It does not make any difference if the Lakshmi Insurance Company was engaged in the life insurance business only and the Eastern Federal Union was engaged in life insurance as well as general insurance business. 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 gain and not revenue income. The point has been considered by a Division Bench of this Tribunal also in the judgment reported as (1979) PTD (Trib.) 4 wherein Mr. M.T. Siddiqui, the then President of the Tribunal held that when compensation is received for assets lost, it is a capital gain and is not liable to charge of income tax. We are, therefore, of the considered opinion that the learned two officers below were not justified in holding that the compensation received by the assessee was chargeable to tax, and therefore, the findings of the learned two officer below in this behalf are hereby vacated and it is held that the compensation received by the assessee at Rs.60,00,000 is not liable to the charge of income tax."

30. In the above judgment as is evident the Hon'ble Mr. Muhammad Mujeebullah Siddiqui, Chairman, ITAT as the then he was relied upon' an earlier judgment reported as 1979 PTD (Trib.) 4 decided by the then President Mr. M.T. Siddiqui 1979 PTD (Trib.) (sic) which appears to be a judgment of the first impression on the subject. The Tribunal has relied upon some judgments of the Indian origin and have held that the receipt or compensation for loss of a ship was though a capital receipt but was still not liable to charge as a capital gain. In 2003 PTD (Trib.) 2321 the Hon'ble Tribunal has decided various principles. All being relevant to the issue in hand have already been reproduced by us in earlier part of the order. The finding is that compensation on loss of any asset from business which was his sole sources of income, does not constitute an income covered within the definition of income. We have already mentioned a part of the judgment in start of the case, however, since the ultimate findings also arc of relevance it is worthwhile if the same are also reproduced:--

"We find force in the contention of the learned counsel for the assessee that the 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. His reliance in this regard on section 16(2)(C)(I. of the Income Tax Ordinance, 1979 as well as C.B.R.'s clarification, dated 26-7-1997 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 interpretation 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. The reliance in this regard may be placed on the decision of the Honourable High Court reported as 2001 PTD 1180 (High Court)."

In the above judgment the argument of the learned A.R. with regard to the charge of receipts on cessation of service also stands decided besides chargeability of capital receipts.

31. The department's reliance upon the judgments of the Tribunal also cannot be ignored as already mentioned by us. Their main judgments are 2001 PTD (Trib.) 1047, 2002 PTD (Trib.) 1983 and 2003 PTD (Trib.) 2321. In the first judgment the term Casual Receipt has been defined and for the reason of withdrawal of the exemption from Second Schedule i.e. Clause (65) as the then it was such capital receipt was brought subject to charge. The facts of this case are distinguishable. The assessee was a Director employee of a company a loan was advanced to him out of which a balance was left at the time of retirement. This balance loan was waived by the employer at the time of retirement. The assessee claimed it as a capital receipt but the Revenue rejected the claim and the Tribunal upheld the treatment. Obviously the circumstances are not similar to that of case under discussion.

32. The judgment reported as 2002 PTD 983 is rather direct on the issue. In this judgment the facts are similar in the sense that the amount was also compensation for termination of Distributionship Agency. The same was taxed by the Assessing Officer under section 30 but the Tribunal held it to be as sale of capital asset chargeable to 'tax under section 27. In this judgment while defining the term capital asset the Tribunal relied-upon another judgment of the Division Bench of ITAT decided on 31-8-1999 in I.T.A. No. 698 of 1998-99 for assessment year 1997-98. In the said company the assets as well as goodwill both were sold. The learned A.R. during the course of proceedings conceded that goodwill and relinquishment of rights to compete were sale of `capital asset'. As a result of said concession the Tribunal came to the conclusion that the right to carry on a business was a capital asset and consequently profit and gains from transfer of intangible assets were chargeable as capital gain under section 27 of the Income Tax Ordinance, 1979. The inference with regard to the transaction as sale of capital asset, therefore, was on the basis of the concession of the A.R. which obviously cannot create a legal bar against those who want to contest the said preposition under actual legal and factual premises. Consent of somebody obviously cannot warrant any right either in favour or against anybody, if the law is otherwise. We have in the earlier part of our judgment discussed the definitions of the term `capital asset' and have further dilated upon the same on the basis thereof. Nowhere goodwill has been considered either as an asset or for that matter a capital asset. The use of the word capital asset in section 27 obviously cannot be ignored. The reference made by the various judgment by the learned A.R. that the word should be interpreted as they are used, nothing can be added beyond language of law and no one cannot escape the charge if it is direct is quite apt. The Hon'ble Tribunal has distinguished the earlier judgment on the subject some of which have been mentioned by us but however in view of the subsequent judgment in terms of 2003 PTD 2331 in which the implication of section 27 have been discussed in more detail besides the same being subsequent to above judgment, we respectfully disagree with the same. In this regard reference to 1999 PTD (Trib.) 2356 shall also be of no help as the same is the one on which the above judgment was relied upon. In fact this is the decision from which the earlier finding in respect of above receipts have been considered as not capital receipt but rather chargeable to capital gain. The subsequent decisions i.e. 2002 PTD (Trib.) 1983 and 2003 PTD 2331 in ignorance to earlier judgments reported as .1979 PTD (Trib.) 4 and 1998 (77) Tax 40 (Trib.), therefore are not applicable. In this regard one is rather more convinced that the judgment of the High Court Sindh Karachi in terms of 1979 (39) Tax 21 (H.C.) rather settles the issue. It was a reference filed by the department wherein following question of law was produced for adjudication:

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

33. The Hon'ble High Court answered the above question in affirmation. This means that the decision of the Tribunal to hold that sum paid to the assessee's company as compensation on termination of an Agency and not to compete with the business of the principal, as a capital receipt in the hands of the assessee and not legally taxable was held to be as justified. While deciding the issue in favour of the assessee and confirming the finding of the Tribunal the Hon'ble High Court also directed the department to bear the cost of the reference. This is the judgment on the which the learned Assessing Officer has commented that was distinguishable more for the reason that the amount involved therein is very small. The comment obviously is not to be given any weight. An amount if it is taxable, should not escape, howsoever, small it may be. Contrary to the same if a receipt is not taxable its being bigger in figures cannot make it taxable. As for example Agricultural income has not been brought to the charge and the constitution of Pakistan has provided protection to the same. Any amount earned through the said source remains outside the purview of income tax. The Assessing Officer says that in the above judgment the Agency was terminated by the principal but does not comment as to whether in the present case it was terminated by the principal or the assessee requested the principal to do the favour.

34. Even otherwise since it is a judgment by a superior Court, the judgments of the Tribunal looses it strength in view of the principal of stare decisis. Coming back to the term income which connotation is very wide and in fact covers any thing which comes in However, one cannot ignore and it has to come within the charge created by various sections of the prevailing law for considering the income as taxable income. In this regard the nature of transaction has always been considered the base of determination. The contract, therefore, is obviously to be considered as the basic evidence for determination thereof. Income Tax Authorities are no exception to the normal rule that nature of contract intended by the parties should not be ignored unless proved contrary. In this regard even tax rules of interpretation cannot be of any help. The nature of contract intended by the parties therefore cannot be changed by presumptions or self-created understandings. It can only be disregarded with a valid counter agreement which is obviously not available in this case. The amount, therefore, is on cessation of the money earning instrument, which is not a goodwill. The reference to the provision of section 16(2)(c)(i) of the Income Tax Ordinance, 1979, makes it more obvious. As already discussed it creates a charge on the capital receipts of compensation on termination of employment taxable which as per earlier decisions of the Courts was not taxable. Firstly, therefore, there remains no doubt that there can be capital receipts on cessation of license and termination of agency like compensation on termination ofemployment and that it needs not given any other nomenclature like goodwill etc. Secondly if the legislature after being wiser on receiving judgment from the then High Court could add a new provision it was obviously not stopped from creating similar charge for such like receipts under the than section 30 or may still do it for such or similar receipts.

35. Brining such amount to charge under the garb of the provision of section 27 by calling it a goodwill, therefore, cannot be supported. Goodwill is a tree sprouted from seed which in this case was agency and license from C.P. Inc. In this case even for the argument sake if fourty years working had generated the same, it fell down in the case of petitioner when it was withdrawn from hint. He had nothing in his hands. Even the temporary injunction of the Court could not rebuild the same in the case of this assessee. Thus it was not a goodwill but capital receipt on termination of contract. Whether the goodwill can be called as a capital asset also has been discussed in detail. The upshot, of the same is that capital assets presuppose existence of the same in a visible established and accumulated form. In this regard some entry obtaining in balance sheet or such or similar or auxiliary and ancillary documents can be the only evidence. Thus there is a very strong doubt, about holding the goodwill a capital asset in a case like this where it has never been established and accumulated. In this regard it may be worth-mentioning here that in the cases referred by the department the taxpayers themselves claimed to have received `goodwill' and then declared it so. Hence there was no controversy with regard to its being established and accumulated and, therefore, a Capital asset. Thus if the same have been held to be as taxable as capital gain the ratio shall still not be applicable on this case. Here firstly it was not a case of goodwill secondly; it having never been established and accumulated cannot be brought to the definition of `capital asset'.

36. In this regard a very important factor has not come to the discussion at any stage of this case. If the department insists that in this case there was a goodwill and thus a capital asset than what has be transferred should also have been identified. This was all the more necessary as to bring the profit and gains within the mischief of section 27. It is necessary that such profit and gain should have been arisen from the sale exchange or transfer of a capital asset. Here this assessee passed on nothing to the principal co. It was only a sort of permission by withdrawing cases to let operate the business which was already with them and they had shown their will and urge to exercise their right even without. As such their was no transfer, sale or exchange of any capital asset in this case.

37. In any case we have no doubt in our mind about the status of the compensation received by petitioner-Company. It is more for the reason of the judgment reported as 1992 PTD 232 by the H.C. Karachi which still holds field besides being binding through it following findings:--

"In our view the Tribunal was right in holding that the difference between the original price of the ship in question and the amount received by the assesses from the insurance company under the insurance policy and account of the loss of the ship is not a profit or gain on account of the sale exchange or transfer of the said ship.

Mr. Nasrulla Awan, learned counsel for the department made a feeble attempt to challenge the decision of the Tribunal on the basis that in fact some gain has come to the assessee. Just because some gain or profit has been received by an assessee would not be sufficient to bring such gain and profit within the mischief of section 12-B of the repealed Income Tax Act, 1922. As observed such profit or gain must arise from sale, exchange or transfer of the capital asset, which is lacking in the present case.

Finding no merit in this application this application under section 136(2) of the Income Tax Ordinance, 1979 is dismissed but with order as to costs."

28. The orders of the two officers below, therefore, are disapproved and the addition made by the Assessing Officer and confirmed by the CIT(A) is hereby deleted.

C.M.A./92/Tax (Trib.)Appeal accepted.