STANDARD CHARTERED BANK (PAKISTAN) LTD. VS PAKISTAN through Secretary Finance (Revenue Division), 2017 PTD-KARACHI-HIGH-COURT-SINDH 1585 (2016)

Income Tax Ordinance (XLIX of 2001)---

---Ss.24, 97 & 122(5-A)---"Goodwill"---Intangible assets---Amalgamation of Banking companies---Taxpayer assailed show cause notice issued under S.122(5-A) of Income Tax Ordinance, 2001---Validity---Transferor Banking company was 'generator/creator' of goodwill and would have been entitled to amortize the same and entitled to benefit of deductions allowable under S.24 of Income Tax Ordinance,2001 and as provided in S.97 (2)(c) of Income Tax Ordinance,2001 the benefit thereof passed on to the transferee company, the petitioner---Even if the authorities were correct in ascertaining that S.97 of Income Tax Ordinance, 2001 applied to amalgamation situation, that would not materially alter the position and bring it in its own favour---Taxpayer was required under S.24(1)(a) of Income Tax Ordinance, 2001, wholly or partly 'use' intangible in tax year to derive income from business chargeable to tax---Intangible was 'available for use' on any day (including a non-working day) in the tax year was to be treated as having been used on that day---"Goodwill" was inextricably linked to, and based on, transferor Bank's banking business which was acquired by taxpayer as a whole and a going concern and that business was continued and operated by the latter, it was clear that the goodwill was not merely 'available for use' during tax year concerned but was so in fact used---To operate business was, in effect, to use goodwill---High Court restrained the authorities from taking any proceedings on the basis or in terms of first part of the show cause notice which was set aside and quashed---Constitutional petition was allowed accordingly.

Dr. M.B. Ankalsaria v. Commissioner of Wealth Tax Karachi 1992 SCMR 1755; Commissioners of Inland Revenue v. Muller and Co.'s Margarine Ltd. (1901) AC 217 and Commissioner of Income Tax Kolkota v. Smifs Securities Ltd. (2012) 348 ITR 302 ref.

Dr. M. Farogh Naseem for the Taxpayer.

M. Sarfraz Ali Metlo for Respondent Department in the Constitutional Petition.

Kafeel Ahmed Abbasi, for the Respondent Department in the Tax Reference, both along with.

Dr. Najeeb Ahmed, Additional Commissioner IR, Range B, Zone II, LTU, Karachi.

Asim Mansoor Khan, DAG.

Ashfaq Rafiq Janjua, Standing Counsel.

Dates of hearing: 10th 11th February and 9th May, 2016.

ORDER

MUNIB AKHTAR, J.---These two matters, filed by the same taxpayer ("Petitioner"), a banking company incorporated under the laws of Pakistan, arise under the Income Tax Ordinance, 2001 ("2001 Ordinance"). The income tax reference application relates to the tax year 2008 and assails the order of the learned Appellate Tribunal dated 22.06.2010. The constitutional petition relates to the tax year 2012 and assails a show cause notice (to the extent presently relevant, i.e., its para 1) issued to the Petitioner under section 122(5A) of the 2001 Ordinance. Learned counsel for the Petitioner submitted that the objection to the Petitioner's tax return (deemed assessment) taken in para 1 of the notice was based squarely on the aforementioned order of the learned Tribunal, and for this reason had prayed that the two matters be heard together.

2.The issue that arises is the proper interpretation and application of section 24 of the 2001 Ordinance. That section allows amortization (which is analogous to depreciation) and deduction, as a business expense, of the expenditure incurred by a taxpayer in acquiring or creating intangibles. The Petitioner seeks to amortize and hence expense certain goodwill that it claims to have acquired in terms shortly to be stated. The Department (whose view has been upheld by the Appellate Tribunal) denies that the Petitioner can lawfully do so and indeed questions whether goodwill is even an intangible within the meaning of subsection (11) of the section, where this term is defined.

3.Learned counsel for the Petitioner submitted that the Petitioner was incorporated on 19.07.2006 under the laws of Pakistan for purposes of taking over the Pakistan business of the Standard Chartered Bank (UK), which is part of the well-known multinational banking conglomerate, and also to acquire the business of the Union Bank Ltd. that was, at that time, a locally incorporated bank doing business in this country. The Petitioner is thus part of, and a subsidiary in, the Standard Chartered group, and the ultimate holding company appears to be Standard Chartered plc, incorporated under the laws of England. As is well known, the Standard Chartered Bank has been operating in Pakistan for decades (in fact going back to well before pre-Partition days), but hitherto the banking business was being carried on as a foreign entity doing business through Pakistani branches. Explaining the transaction, learned counsel submitted that in the first instance, on or about 05.09.2006, the Petitioner acquired 95.37% of the shares of Union Bank. Thereafter, there was a tri-partite amalgamation duly sanctioned by the State Bank of Pakistan under section 48 of the Banking Companies Ordinance, 1962. The amalgamation was of the Pakistan branches of the Standard Charted Bank, the whole of the business of the Union Bank and the Petitioner, and resulted in the Petitioner being the entity that thenceforth (from 30.12.2006) carried on the banking business that had earlier been conducted by the former two entities, separately and each in its own respective right (although of course since 05.09.2006. Union Bank was a subsidiary of the Petitioner). Learned counsel referred to the relevant clauses of the Scheme of Amalgamation that had been sanctioned by the State Bank, and to the latter's order, dated 04.12.2006, under section 48. Learned counsel submitted that the banking business of Union Bank had been acquired as a going concern, and at a premium on account of the goodwill associated with that business. It was submitted that the goodwill was an asset in its own right and in this regard reference was made to various legal material. Learned counsel principally relied on a judgment of the Supreme Court reported as Dr. M.B. Ankalsaria v. Commissioner of Wealth Tax Karachi l992 SCMR 1755 ("Ankalsaria"). On such basis it was submitted that the goodwill was an "intangible" within the meaning of section 24(11) and the Petitioner was therefore entitled to amortize and expense it in terms as made permissible thereby. Learned counsel further submitted, relying on International Financial Reporting Standard No. 3 ("IFRS 3") that as required in terms thereof, the goodwill of the business acquired was duly reflected in the Petitioner's books of account, and this represented the cost of the goodwill for purposes of section 24. It was submitted that the learned Tribunal had erred in coming to the conclusion that section 24 was not applicable in the facts and circumstances of the Petitioner's case. The impugned order was not sustainable in law. The show cause notice in relation to the tax year 2012 as presently relevant, inasmuch as it was based squarely on the impugned order, was likewise liable to be set aside. It was prayed accordingly.

4.Mr. Sarfraz Metlo, who appeared for the Department in the constitutional petition, submitted that the "goodwill" being claimed by the Petitioner did not fall within the definition in section 24. In particular, learned counsel submitted that goodwill was not specifically listed therein and was not property or a right "like" the enumerated categories. It was submitted that nothing intangible had been acquired by the Petitioner. All that it had was the assets of the Union Bank and nothing else. The Petitioner was merely attempting to put a value on the physical assets (which were manifestly not intangible) and force the result into the definition given in section 24. Learned counsel submitted that goodwill, if at all relevant for purposes of the definition, was something that had to be generated or created by the taxpayer or some person from whom the taxpayer acquired it, and nothing of the sort had happened in the present case. The definition was restrictive, using the word "means", which was decisive. Learned counsel relied on certain case law in support of his submissions.

5.Mr. Kafeel Abbasi, who appeared for the Department in the tax reference, referred to the impugned order of the learned Tribunal and submitted that the law had been correctly stated and applied therein. Learned counsel submitted that section 24 did not at all apply in the facts and circumstances of the case. It was emphasized that it was the Petitioner, and not the UK entity that had acquired the shares of Union Bank. The latter had been de-scheduled by the State Bank on account of the merger. Learned counsel also submitted that when the Petitioner had acquired the 95.37% shareholding of Union Bank, it (the Petitioner) had itself regarded and characterized the transaction as capital gains. In this regard, it was submitted that some of the shareholders from whom shares were acquired were non-residents and the Petitioner would have been obliged to withhold tax from the remittance of consideration to them, in terms of section 152. However, the Petitioner had itself applied for an exemption in this regard, relying on clause (110) of Part I of the Second Schedule to the 2001 Ordinance. That applied only in relation to capital gains. The Petitioner could not now turn around and claim that it had acquired "goodwill" and then seek to amortize and expense the same under section 24. It was submitted that the Petitioner's claim was wholly unmeritorious.

6.Dr. Najeeb Ahmed, Additional Commissioner Inland Revenue also made submissions with our permission, and we would like to record our appreciation of the assistance provided to the Court. The learned Additional Commissioner also filed a detailed synopsis of his submissions supported by various documents that was invaluable in understanding the Department's case. Explaining the transaction, the learned Additional Commissioner submitted that on 05.09.2006, 95.37% of the shareholding of Union Bank (representing around 323 million shares out of a total of approx. 338 million) was acquired by the Petitioner for a total sale consideration of (approx.) Rs. 30.8 Billion. Out of this amount, Rs. 17.588 Billion had to be remitted to non-resident shareholders (who held around 57% of the shares being acquired). The Petitioner would have had to withhold a certain amount (by way of tax) under section 152 but it applied for an exemption certificate, basing its claim on the aforementioned clause (110). Thus, it was the Petitioner's own case that its acquisition was nothing other (or more) than a capital investment, and Union Bank thereafter simply became a subsidiary of the Petitioner. The learned Additional Commissioner submitted that the acquisition of the shareholding was in fact funded by the Standard Chartered Bank (UK). The latter had given a loan of (approx.) Rs.29.397 Billion to the Petitioner for this purpose. After the shares had been acquired, the Petitioner's balance sheet showed a long term investment (the Union Bank shares) on the credit side, and the loan from its parent entity on the debit side. (We may note that a great deal of emphasis was laid on this aspect, i.e., that the acquisition was nothing but capital gains, both by learned counsel appearing for the Department, and the learned Additional Commissioner.) The learned Additional Commissioner also submitted that the Petitioner issued approx. 2.9 Billion shares to the UK entity, which settled the loan amount. When amalgamation took place, the 95.37% shares held by the Petitioner in Union Bank were cancelled (per clause 9(f) of the Scheme of Amalgamation). The few remaining third party shareholders (holding 4.63% of the shares) were allotted shares in the Petitioner at a swap ratio of 2.5:1. The learned Additional Commissioner submitted that if there was any goodwill involved in the transaction/transfer (which was not admitted) that was already factored into the share price and the consideration paid by the Petitioner on 05.09.2006. It was submitted that the Petitioner characterized the difference between the fair market value of the assets of Union Bank and the price paid for them as "goodwill". However, it was submitted that in reality, this was an indeterminate number, which could be settled at whatever value suited the buyer and seller. In other words, it was contended that the so-called "goodwill" was nothing but an artificial construct, created only as a result of accounting legerdemain. In this regard, the learned Additional Commissioner carried out a detailed analysis, in "economic terms", of the transaction (para 4 of the written synopsis) and characterized the claimed goodwill as nothing but part of an "aggressive tax avoidance strategy".

7.The learned Additional Commissioner also submitted that even if at all any goodwill were involved, the transaction was carried out on a tax neutral basis, and in this regard relied on sections 97 and 97A of the 2001 Ordinance. Referring to clause (62) of Part IV of the Second Schedule, it was submitted that this was inserted on 29.08.2006, i.e., only a few days prior to the acquisition of the shares of Union Bank. It was submitted that if the foregoing provisions did not apply, the Standard Chartered Bank (UK) would have been liable to tax on the goodwill of its Pakistan business. However, the Petitioner would still not be able to claim the goodwill in respect of the Union Bank acquisition and amortize and expense the same. Referring to section 24(11), and the definition of "intangible", it was submitted that goodwill did not come within the scope thereof. It was an intangible of a nature different from that of the types enumerated in the definition. The learned Additional Commissioner submitted that goodwill was simply the "habit" of consumers and customers to return to a business and it could arise from various factors, some of which were described during arguments and also set out in the written synopsis. It was further submitted that the treatment of the excess paid over the fair market value of the assets of Union Bank, as per IFRS 3, also did not advance the Petitioner's case. Reference was also made in this regard to the concept of "impairment" of goodwill, and to the requirements of IAS 36. It was also submitted that the value of the claimed goodwill had not in any case been properly computed in accordance with law. On the foregoing basis, it was submitted that the Petitioner had no case, and it was prayed accordingly.

8.Exercising his right of reply, learned counsel for the Petitioner submitted that the definition of intangible included a license and in this regard, referring to various documents on the record, submitted that the Petitioner had acquired the branch operating licenses of Union Bank as part of the acquisition. Reference was also made to the last part of the definition, and it was submitted that on any view of the matter, goodwill was included in the definition. Learned counsel also filed a written synopsis, as did Mr. Sarfraz Metlo, learned counsel for the Department.

9.We have heard learned counsel and the learned Additional Commissioner, considered the record and the written synopses filed, and reviewed the case law and other legal material relied upon. In our view, the issues raised can be formulated as the following questions, which can also be regarded as the questions of law arising out of the impugned order of the learned Tribunal:--

a.Is goodwill an intangible within the meaning of the definition given in section 24(11)?

b.Whether, in the facts and circumstances of the present case, the Petitioner acquired any goodwill within the meaning of section 24?

c.Whether, in the facts and circumstances of the present case. the Petitioner is entitled to amortize and expense any goodwill in terms of section 24?

10.We first set out section 24, to the extent presently relevant. The section was in the terms as given below for both the tax years in question:--

"24. Intangibles.---(1) A person shall be allowed an amortisation deduction in accordance with this section in a tax year for the cost of the person's intangibles-

(a)that are wholly or partly used by the person in the tax year in deriving income from business chargeable to tax; and

(b)that have a normal useful life exceeding one year.

(2)No deduction shall be allowed under this section where a deduction has been allowed under another section of this Ordinance for the entire cost of the intangible in the tax year in which the intangible is acquired.

(3)Subject to subsection (7), the amortization deduction of a person for a tax year shall be computed according to the following formula, namely:-

A/B

where -.

Ais the cost of the intangible; and

Bis the normal useful life of the intangible in whole years.

(4)An intangible -

(a)with a normal useful life of more than ten years; or

(b)that does not have an ascertainable useful life,

shall be treated as if it had a normal useful life of ten years.

(7)The total deductions allowed to a person under this section in the current tax year and all previous tax years in respect of an intangible shall not exceed the cost of the intangible.

(10)For the purposes of this section, an intangible that is available for use on a day (including a non-working day) is treated as used on that day.

(11)In this section, ---

"cost" in relation to an intangible, means any expenditure incurred in acquiring or creating the intangible, including any expenditure incurred in improving or renewing the intangible; and

"intangible" means any patent, invention, design or model, secret formula or process, copyright, trade mark, scientific or technical knowledge, computer software, motion picture film, export quotas, franchise, licence, intellectual property, or other like property or right, contractual rights and any expenditure that provides an advantage or benefit for a period of more than one year (other than expenditure incurred to acquire a depreciable asset or unimproved land)."

11.We begin with the first question. We have carefully considered the legal material relied upon by both sides and the submissions made. In our view, the question is conclusively determined by the judgment of the Supreme Court in Ankalsaria and therefore, without intending any disrespect, we will not (save with regard to one case) consider in detail the other material. The appeal in Ankalsaria arose under the (late) Wealth Tax Act, 1963 ("1963 Act"). The principal judgment was delivered by Sajjad Ali Shah, J. (as his Lordship then was). Ajmal Mian, J. (as his Lordship then was) agreed and gave a concurring judgment. The appellant ran a successful nursing home in Karachi. In assessing his liability to pay wealth tax, the taxing authority added the value of the goodwill of the business (as computed by the authority) to the appellant's assets. The assessee appealed to the appellate authority on the ground, inter alia, that goodwill was not an asset within the meaning of that term as given in section 2(e) of the 1963 Act. The appeal was allowed. (There was in fact more than one appeal since a number of assessment years were involved, but nothing turns on that.) The Department appealed to the Tribunal, which was dismissed. The Department filed a reference in this Court, and it was held that goodwill was indeed an (intangible) asset within the scope of the 1963 Act. The assessee appealed to the Supreme Court. In the principal judgment, a number of different authorities were referred to, including Black 's Law Dictionary and Salmond on Jurisprudence, and a decision of the House of Lords reported as Commissioners of Inland Revenue v. Muller & Co's Margarine Ltd. [1901] AC 217. Extracts were cited with approval from these authorities and others, and it was held as follows (pg. 1764):--

"It is, therefore, manifestly clear and further there is no dispute about it, in the light of what is stated above, that goodwill is incorporeal property in the class of patents, copyrights and trade-marks and as such is movable property and is therefore, caught within the definition of "assets" including property of every description movable or immovable as contemplated under section 2(e) of Wealth Tax Act, 1963."

Ajmal Minn, J. expressly agreed that "'goodwill', being incorporeal property, is susceptible to be included within the definition of 'assets' given in section 2(e) of the Wealth Tax Act, 1963" (pg. 1769).

12.No doubt the definition of "assets" in the 1963 Act was broadly worded and inclusive whereas, as learned counsel for the Department and the learned Additional Commissioner were at pains to point out, the definition of "intangible" in section 24 is restricted and specific. Be that as it may, the traditional affinity between wealth tax law and income tax law cannot be denied. Thus, to take but one example, income tax law has long required that taxpayers file a wealth statement, setting out their assets and liabilities in detail; such an exercise was of course central to the charge of wealth tax. In our view, for present purposes, the definition of "intangible" can be set out as follows: "'intangible' means any patent, ... copyright, trade mark, ... or other like property or right ...." When so stated, its resemblance to what was observed in Ankalsaria, in the extract given above, is striking. That observation, it is to be noted, was made in strong terms: that what was being stated was "manifestly clear", and not open to any dispute. In our view, it is hardly arguable that if (as held by the Supreme Court) goodwill is incorporeal property of the same "class" as patents, copyrights and trade-marks, it is not property or a right that is "like" them. The judgment of the Supreme Court is conclusive and determinative. We are therefore in no doubt that the first question must be answered in the affirmative.

13.While the foregoing clearly concludes the first point, for purposes of completeness we would like to refer to a judgment of the Indian Supreme Court relied upon by learned counsel for the Petitioner. This is the decision reported as Commissioner of Income Tax Kolkota v. Smifs Securities Ltd. (2012) 348 ITR 302. The Court was there concerned with section 32 of the (Indian) Income Tax Act, 1961, which deals with depreciation. The third explanation to subsection (1) (which allows for depreciation) defines "assets" in its clause (b) as meaning "'intangible assets', being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial' rights of similar nature". The resemblance with the definition in section 24 is obvious. The question, whether goodwill came within the meaning of "intangible assets". was answered in the affirmative, the Court observing as follows:--

"8. A reading the words 'any other business or commercial rights of similar nature' in Clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a cimilar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).

9. In the circumstances, we are of the view that 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act."

It may be noted that learned counsel for the Department and the learned Additional Commissioner, in support of their interpretation of the definition of "intangible", relied on the rule of ejusdem generis as excluding goodwill from the definition. However, the Indian Supreme Court, while considering a similarly worded definition has used that same rule as including goodwill in the definition. We respectfully agree with the view adopted by the Indian Supreme Court. Thus, although the issue was approached from different perspectives, the same conclusion has been arrived at in India as found favour with the Supreme Court in Ankalsaria.

14.We turn to the other two questions, which can be taken up together. The first point to note is the great stress that was laid on behalf of the Department on the "capital gains" issue. It would not be too far wrong to say that learned counsel and the learned Additional Commissioner regarded this point as virtually conclusive against the Petitioner. It will be recalled that the submission arose on the basis of the purchase of 95.37% shares of Union Bank by the Petitioner on 05.09.2006. Rs. 17.588 Billion had to be remitted to non-resident shareholders (who held around 57% of the shares being acquired). The Petitioner would have had to withhold a certain amount (by way of tax) under section 152 but it applied for an exemption certificate, basing itself on clause (110) of Part I of the Second Schedule. That clause, since omitted, exempted tax on capital gains made on the sale of, inter alia, shares of listed companies. The Petitioner would have been under an obligation to deduct tax in terms of section 152(2), but sought an exemption under subsection (3). This, it was submitted, was conclusive against it, in that the Petitioner regarded the transaction as being one of capital gains. Once the Petitioner itself so regarded the transaction, it was contended, it could not then turn around and claim an amortization deduction under section 24. The learned Tribunal also observed, with reference to the exemption certificate, that the Petitioner had "never surrendered its claim" to it, and held that this also established that "it [was] due to an afterthought that the taxpayer [had] resorted to colouring of the transaction in a manner that [suited] its objective of avoiding the tax" (see para 9 of the impugned order). With respect, these observations and the submission, are misconceived. The capital gains, if any, were made by the sellers of the shares and not the Petitioner, which was the buyer. Section 152(3) states, in its clause (d), that subsection (2) does not apply "where the non-resident person is not chargeable to tax in respect of the amount". It was the non-resident sellers, and not the Petitioner, who were entitled to the benefit of the aforementioned clause (110), and since on account thereof there was no obligation to withhold tax the Petitioner applied accordingly. But it would be erroneous to conclude from this that the transaction constituted capital gains insofar as the Petitioner was concerned. It patently did not, for the simple reason that no such gains accrued to the Petitioner. It is also well settled in income tax law that a payment may take one color when viewed from the perspective of one party and an altogether different color when viewed from the perspective of another. The point has been stated thus in Kanga & Palkiwala's The Law and Practice of Income Tax Law (10th ed., 2014, Vol. I, pg. 989; internal citations omitted):--

"The fact that a certain payment constitutes an income or capital receipt in the hands of the recipient is not material in determining whether the payment is a revenue or capital disbursement qua the payer. As Macnaghten J said in Racecourse Betting Control Board v. Wild [22 TC 182], 'The payment may be a revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver and vice versa'. This is now established by the decision of the Supreme Court in Empire Jute Co. Ltd. v. CIT [124 ITR 1]."

The purpose of citing the above extract is not of course to suggest that (e.g.) the consideration paid for the Union Bank shares by the Petitioner was a capital receipt in the hands of the sellers, and revenue expenditure from the Petitioner's perspective. Rather, it is simply to highlight, with respect, the fallacy in the submission made for the Department. It would be erroneous to conclude simply from the application made by the Petitioner seeking exemption from having to withhold any amount under section 152 that the transaction was "capital gains" from its perspective. We so hold.

15.In order to properly consider whether the Petitioner acquired goodwill within the meaning of section 24, it is necessary to consider what it was that the Petitioner acquired, insofar as Union Bank was concerned, in the transaction that culminated in the Scheme of Amalgamation. More precisely, did the Petitioner only acquire the assets (and of course liabilities) of Union Bank (as strongly submitted on behalf of the Department), or did it acquire its business as a whole and a going concern (as contended for the Petitioner)? The importance of this question lies in the nature and concept of goodwill. At least as presently relevant, goodwill does not lie in this or that asset of a business, or even in the assets taken in aggregate. It lies (if course there is at all any goodwill) in the business as a whole, and in the operation of that business. This is clear from the judgment of the Supreme Court in Ankalsaria and the various authorities cited therein. The flavor of what was held is given by the following extract from the speech of Lord Macnaghten in Commissioners of Inland Revenue v. Muller and Co's Margarine Ltd. [1901] AC 217, which was cited with approval by Ajmal Mian, J. in his concurring judgment (at pp. 1769-70):--

"What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old-established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyze goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the air, seems to me to be as useful for practical purposes as it would be to resolve the human body into the various substances of which it is said to be composed. The goodwill of a business is one whole, and in a case like this it must be dealt with as such." ([1901] AC at pp. 224-5)

16.So, the question: what was it that the Petitioner acquired? In our view, in order to answer this question, one has to look to section 48 of the Banking Companies Ordinance, 1962 ("1962 Ordinance"), in terms whereof the Scheme of Amalgamation was sanctioned. Subsections (5) and (6) are as follows (emphasis supplied):--

"(5) Where a scheme of amalgamation is sanctioned by the State Bank under the provisions of this section, the State Bank shall transmit a copy of the order sanctioning the scheme to the registrar before whom the banking companies concerned have been registered and the registrar shall, on receipt of any such order, strike off the name of the company (hereinafter in this section referred to as the amalgamated banking company) which by reason of the amalgamation will cease to function.

(6) On the sanctioning of scheme of amalgamation by the State Bank, the property of the amalgamated banking company shall, by virtue of the order of sanction, be transferred to and vest in, and the liabilities of the said company shall, by virtue of the said order be transferred to and become the liabilities of the banking company which under the scheme of amalgamation is to acquire the business of the amalgamated banking company, subject in all cases to the terms of the order sanctioning the scheme."

The "business" referred to in subsection (6) can only be the banking (and other allied and/or permissible) business that was being carried on by the amalgamated banking company. We find it significant that the subsection, as a matter of primary legislation, speaks of the transfer of the assets and liabilities of the amalgamated banking company not in and of themselves as such, but rather in the context of its business being acquired by the other company. And, perhaps even more significantly, this is so even though subsection (5) expressly requires the striking off of the name of the banking company that "will cease to function" because of the amalgamation. Reading the subsections together, it is clear that while the amalgamated banking company will cease to function, that will not be true of its business. It necessarily follows that that business will be carried on, though not under the previous name or "flag" but under the name and style of the acquiring bank. The de-scheduling of the amalgamated banking company (here Union Bank), the required cancelling of its branch licenses, and the further requirement that the acquiring bank (here the Petitioner) obtain fresh licenses for those branches must be understood in this context. The learned Tribunal was apparently much impressed by these requirements (set out also in clause 10 of the Scheme of Amalgamation) and concluded from the same that that "clause clearly shows that the seller's (UB) business [ceased] to exist on the date of amalgamation". With respect, we are unable to agree with this conclusion although it does have a certain attraction at first sight. In our view, the legislative intent is clear from section 48(6): amalgamation is not simply a transfer of the assets and liabilities, but rather the acquiring of the business. The State Bank's order of 04.12.2006 sanctioning the Scheme had a condition in the same vein but significantly, it put the matter differently (emphasis supplied):

"(v)SCB [i.e., Standard Chartered Bank (UK)] and UnBL [i.e. Union Bank] shall immediately surrender the banking licenses, in original, issued to them under Section 27 of BCO, 1962 as well as the branch licenses issued under Section 28 of BCO, 1962. SCBPL [i.e., the Petitioner] shall obtain fresh branch licenses under Section 28 of BCO, 1962 for continuation of existing branch offices under the Branch Licensing Policy in-force."

In our view, the manner in which the State Bank has put its condition properly captures, and accurately reflects the consequences of, subsections (5) and (6) of section 48. The acquired business went on and was continued, as per the legislative intent.

17.It follows from the foregoing that what was acquired by the Petitioner was not the assets and liabilities of Union Bank, whether taken separately or in the aggregate, but rather its banking (and other allied and/or permissible) business, when taken as a whole, and as a going concern. The submissions to the contrary by learned counsel for the Department and the learned Additional Commissioner cannot, with respect, be accepted. It therefore further follows that the most basic requirement for the acquiring of goodwill-a business taken over as a whole and continued as such-existed in the facts and circumstances of the present case. That does not of course automatically mean that goodwill was, in fact, acquired, and so we move to the next stage of the analysis. In our view, if a business is acquired as a whole and a going concern, and the price paid is a premium over the fair market value of the net assets, that is a strong (though not infallible) indication that there is goodwill associated with the business, and is being acquired. Now, it is not disputed that the price paid by the Petitioner for the 95.37% shares acquired on 05.09.2006 represented a premium over the fair market value of the net assets. The question is what did the premium represent? The learned Additional Commissioner sought to characterize this differential, in the context of whether it represented goodwill, as an artificial construct, essentially created out of nothing as part of an "aggressive tax avoidance strategy". With respect, we are unable to agree. The differential or premium was real and substantial. We may note that it appears that Union Bank was established in 1991 and prior to the transaction of 2006 had 65 branches in 22 cities, with assets of about USD 2 Billion and a customer base of around 400,000. Indeed, it would seem that Union Bank was itself built and based on acquisitions of the (Pakistan) banking business of other banks, being the Bank of America (2000) and the Emirates Bank International (2002), the latter being, it appears, one of the non-resident shareholders whose shares were acquired by the Petitioner. By 2006 Union Bank was apparently Pakistan's eighth largest bank. It is pertinent to note that in Ankalsaria, after holding on the point of law as noted above, the Supreme Court observed that whether a particular trade or business had acquired goodwill was a question of fact (principal judgment, at pg. 1769) and that "simpiliciter adoption of a trade or a business name or carrying on a particular business at a particular place, does not necessarily result in generating goodwill until it reaches at a stage, when it acquires power of attraction sufficient to bring customers because of its standing good name reputation and businesses connection, etc." (concurring judgment, at pg. 1770). Looking at the totality of the facts, we are of the view that Union Bank's business, as acquired by the Petitioner, was a going concern that did have the necessary indicia and characteristics, as described in Ankalsaria, of having goodwill.

18.The foregoing however, still does not quite answer the question whether that goodwill was acquired by the Petitioner within the meaning of section 24. The reason is that the premium that is said to represent the value of the goodwill was paid at a stage anterior to the amalgamation. No doubt, on 05.09.2006 Union Bank became, essentially, a wholly owned subsidiary of the Petitioner. If that had been the whole of the transaction, there can he no doubt that the Petitioner would not have had the benefit of section 24. This is so because in such a situation, in law (and certainly for purposes of section 24) the business (and hence the goodwill) would have remained the property of Union Bank and the taxpayer who would have used that goodwill to derive income from business chargeable to tax would have been that bank and not the Petitioner. It was not until the Scheme of Amalgamation was transacted and duly sanctioned by the State Bank that the Petitioner itself became directly the owner of the business and hence of the associated goodwill. But that occurred on, and with effect from, a subsequent date, 30.12.2006. Hence the question: if the amount said to represent the goodwill was paid at one stage and as part of a transaction seemingly one step removed from the business itself (i.e., the acquisition of the shares) and the business (and hence the goodwill) itself was acquired subsequently and as part of what appeared to be another transaction (the amalgamation), could it be said that the goodwill had been acquired within the meaning of section 24? This question is, in a sense, the nub of it. We have carefully considered the matter. In our view, what happened in 2006 has to be viewed holistically and as one transaction, rather than as two separate and distinct events. The reason is that the record clearly establishes that it was envisaged from the beginning that the Pakistan business of Standard Chartered Bank (UK) and that of a local bank (to be acquired) would be merged with and into the Petitioner. It was never the case that the shareholding of Union Bank was acquired as a capital investment, and subsequently it was considered expedient to have the merger. No doubt different routes could have been adopted to achieve the ultimate objective, but merely because the desired result was achieved in two distinct steps ought not to obscure the substance of what was going on. In our view, with respect, it is the Department that is attempting to break up what is nothing other than the discrete steps of a single transaction into separate, standalone events. We are unable to agree that this is the correct approach. When viewed from a holistic perspective, it is clear that the Petitioner acquired the business of Union Bank as a whole and a going concern, and that that included also an acquisition of the goodwill associated with the business such as came within the meaning of section 24.

19.It will be recalled that the learned Additional Commissioner had submitted that if at all the Petitioner was to be regarded as having acquired goodwill that still would not give it the benefit of section 24. This was so because, it was contended, the transaction was tax neutral and in this regard reliance was placed on section 97, and section 97A was also referred to. Since we have come to the conclusions as aforesaid, it is necessary now to look at these sections. Section 97A applies in respect of schemes of amalgamation as are, inter alia, sanctioned by the State Bank under section 48 of the 1962 Ordinance. However, this section has no application in the facts and circumstances of the present case. This is so because clause (d) of subsection (1) expressly provides that the section anolies to amalgamations sanctioned on or after 01.07.2007 and in the present case the transaction of course took place in 2006. Therefore, it is necessary only to consider section 97. As presently relevant, it provided as follows:--

"97. Disposal of asset between wholly-owned companies.---(1) Where a resident company (hereinafter referred to as the "transferor") disposes of an asset to another resident company (hereinafter referred to as the "transferee"), no gain or loss shall be taken to arise on the disposal if the following conditions are satisfied, namely:-

(a)Both companies belong to a wholly-owned group of resident companies at the time of the disposal;

(b)the transferee must undertake to discharge any liability in respect of the asset acquired;

(c)any liability in respect of the asset must not exceed the transferor's cost of the asset at the time of the disposal; and

(d)the transferee must not be exempt from tax for the tax year in which the disposal takes place.

(2)Where subsection (1) applies -

(a)the asset acquired by the transferee shall be treated as having the same character as it had in the hands of the transferor;

(b)the transferee's cost in respect of the acquisition of the asset shall be -

(i)in the case of a depreciable asset or amortized intangible, the written down value of the asset or intangible immediately before the disposal;

(iii)in any other case, the transferor's cost at the time of the disposal;

(c)if, immediately before the disposal, the transferor has deductions allowed under sections 22, 23 and 24 in respect of the asset transferred which have not been set off against the transferor's income, the amount not set off shall be added to the deductions allowed under those sections to the transferee in the tax year in which the transfer is made; ...

(3)In determining whether the transferor's deductions under sections 22, 23 or 24 in respect of the asset transferred have been set off against income for the purposes of clause (c) of sub-section (2), those deductions shall be taken into account last.

(4)The transferor and transferee companies belong to a wholly? owned group if -

(a)one company beneficially holds all the issued shares of the other company; or

(b)a third company beneficially holds all the issued shares in both companies."

Reference was also made to clause (62) of Part IV of the Second Schedule:--

"(62) The following provisions of Section 97 shall not apply in case of transfer of assets on amalgamation of companies or their businesses or acquisition of shares, requiring that transferor:

(a)be resident company; and

(b)belong to a wholly-owned group of resident companies. Provided that:

(i)the transferee resident company shall own or acquire at least 75% of the share capital of the transferor company or the business in Pakistan of the transferor company;

(ii)the amalgamated company is a company incorporated in Pakistan;

(iii)the assets of the amalgamating company or companies immediately before the amalgamation become the assets of the amalgamated company by virtue of the amalgamation, otherwise than by purchase of such assets by the amalgamated company or as a result of distribution of such assets to the amalgamated company after the winding up of the amalgamating company or companies;

(iv)the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; and

(v)the scheme of amalgamation is sanctioned by the State Bank of Pakistan, any court or authority as may be required under the law."

20.The first comment that we would like to make on section 97 is that in our view it is doubtful that it applies to a merger or amalgamation situation. When read as a whole, the section appears to contemplate the continued existence of the transferor and transferee companies that belong to the "wholly-owned group" within the meaning of subsection (4). We appreciate that clause (62) points towards the section applying also to an amalgamation situation. However, it should be kept in mind that the clause was not part of the 2001 Ordinance as originally enacted but was added subsequently, and that too not by the legislature but by the Federal Government, in exercise of its powers under section 53(2) (vide S.R.O. 885(I)/2006 dated 29.08.2006). The Federal Government's understanding of the section may not necessarily accord with the legislative intent, the determination of which is peculiarly the province of the Courts. However, it is not necessary for us to give a definite finding on this point since we have concluded that even if section 97 applied, as contended for, that would not materially alter the situation in favour of the Department. We therefore proceed further on the assumption that the section applied, but emphasize that the point just mentioned is being left open for consideration in some suitable case.

21.The "tax neutral" aspect of section 97 which is being relied upon is encapsulated in subsection (1), namely that (subject to satisfaction of the conditions specified) the disposal of an asset from one company to another will not result in any "gain or loss". In principle, that gain or loss could accrue to either of the two companies, but in the situation at hand there was of course no transferor company after the amalgamation. Therefore, any putative "gain or loss" would have to have arisen in favour of the Petitioner. It is important to keep in mind that in the context of section 97 as it relates to the facts and circumstances of the present case, the asset being 'disposed off' was the goodwill, and it was the "gain or loss" on the disposal of this asset that was relevant. The mere fact that the goodwill was acquired or, as it were, "gained" by the Petitioner (as part of it having "gained" the business of Union Bank) in and of itself was not the gain contemplated by the section. Sub-section (2)(a) of section 97 provides that the asset (here the goodwill) acquired by the transferee is to have the "same character" with it as in the hands of the transferor, which would mean that the goodwill continued to be such in the hands of the Petitioner. But this could only be so if the Petitioner acquired Union Bank's business as a whole and a going concern, and not merely the (net) assets thereof. The submission on behalf of the Department that section 97 would apply therefore tends, if only subtly, to undermine the other submissions that have been made for it. Be that as it may, we are more directly concerned with sub-section (2)(c). This deals specifically with deductions allowable under section 24, as well as the complementary sections 22 and 23 (which relate to depreciation). It is clear, on account of this provision, that the question of the amortization of an intangible is to be considered regardless, and quite independently, of any "gain or loss" that, absent section 97, could have been made on the "disposal" thereof. In terms of subsection (2)(c) allowable deductions under section 24 accrue to the benefit of the transferee company and may be claimed by it. The only question is whether the transferor company was (or would have been) allowed deductions in terms of the section in respect of the asset concerned. Therefore, if at all section 97 applied to the transaction at hand, even then the Petitioner, the transferee company, would be entitled to deductions under section 24 in respect of goodwill if the transferor company (Union Bank) would have been so entitled. The question is whether that would have been so?

22.Now, section 24 contemplates that amortization of an intangible is permissible to the taxpayer who either acquires or creates it (and of course uses it within the meaning of the section to derive income from business chargeable to tax). Hence. we need to take a look at the creation of an intangible. If one looks at the definition in section 24(11) and for the moment considers only the specifically enumerated categories, it is obvious that there can be considerable variation in the difficulty of determining whether, and if so when, an intangible is created. For example, copyright inheres in a "work", such as a "literary work" (see the definitions in the Copyright Ordinance, 1962). If therefore the taxpayer has (e.g.) written a novel, he owns the intangible asset of copyright. A determination of whether (and when) the taxpayer has created this intangible is pretty straightforward: does he have a manuscript of the novel, and when did he finish it? A patent is an invention that is filed with the Patents Office, and if approved is thereafter sealed in accordance with the Patents Ordinance 2000. Once sealed, certain monopoly rights vest in the patentee in respect of the invention for the specified period. If therefore the taxpayer has a sealed invention (i.e., the patent) in his favour, he owns an intangible asset within the meaning of section 24(11). Again, the determination of whether (and when) the intangible was created is relatively easy. However, if the taxpayer does not have a patent but simply an invention, that too is an intangible. As is obvious, determining whether the taxpayer has created an (unpatented) invention is somewhat more difficult than ascertaining whether he has a patent. It is self-evidently more difficult still (and may be considerably more so) to determine whether (e.g.) a taxpayer has created the intangibles referred to as a "secret formula or process", or the more amorphously worded "scientific or technical knowledge", or the completely generic "intellectual property". Yet, no matter how difficult the ascertainment may be, it cannot stand in the way of a taxpayer applying section 24 to an intangible created by him, if the facts and circumstances of his case come within the scope of the section.

23.The nature of the intangible here relevant (goodwill) has already been considered in the above. It is inextricably linked to, and based on, the business as a whole and the operation of that business. To put it differently, it is the operation of the business that "generates", i.e., creates the goodwill. Thus, the owner-operator of the business is the "creator" of the goodwill and hence entitled to amortize this intangible in terms of section 24. It may be that it is difficult (and perhaps exceedingly so) to ascertain whether and when, the goodwill was created, and the difficulty may well be compounded by the fact that it is in the nature of goodwill that it is dynamic and not static, and may increase or decrease (i.e., become "impaired", which decline may sometimes be precipitous). But, in principle, none of that can stand in the way of the "creator" of the goodwill claiming amortization under section 24. In the situation at hand, Union Bank, the transferor, being the "generator"/"creator" of the goodwill would have been entitled to amortize the same and entitled to the benefit of deductions allowable under section 24. Therefore, as provided in section 97(2)(c), the benefit thereof passed on to the transferee company, the Petitioner. Hence, in our view, even if the Department is correct in asserting that section 97 applies to amalgamation situations, and did apply to the facts and circumstances of the case, that would not materially alter the position and bring it in its favour. On any view of the matter therefore, the second of the three questions posited above (see para 9) must be answered in the affirmative.

24.We turn to the third question. Section 24(1)(a) requires that the taxpayer must wholly or partly "use" the intangible in the tax year to derive income from business chargeable to tax. Now, subsection (10) provides that an intangible that is "available for use" on any day (including a non-working day) in the tax year is to be treated (i.e., deemed) as having been used on that day. Given that the goodwill is inextricably linked to, and based on, Union Bank's banking business, which was acquired by the Petitioner as a whole and a going concern, and that business was continued and operated by the latter, it is clear that the goodwill was not merely "available for use" during the tax years concerned, but was in fact so used. To operate the business was, in effect, to use the goodwill. The third question must therefore also be answered in the affirmative.

25.One final comment may be made before we conclude. In para 9 of his written synopsis, the learned Additional Commissioner relied on the Seventh Schedule to the 2001 Ordinance. That schedule (in the form that its takes today), along with the corresponding section 100A, were added in 2007 and make special provision for the taxation of banking companies. But, as subsection (2) makes clear, these provisions are to apply only from the tax year 2009 onwards. They are therefore irrelevant for purposes of the income tax reference, which relates to the tax year 2008. Inasmuch as the show cause notice, as presently relevant, is based squarely on the impugned order, the provisions may not even apply in respect of the tax year 2012. However, it is not necessary to consider this point further because these provisions were not specifically relied upon by the learned Additional Commissioner when he addressed the Court at the bar. With respect, merely alluding to them in the written synopsis is not enough.

26.In view of the foregoing discussion and analysis, we hold and declare as follows:-

a.In the income tax reference, the questions of law arising out of the impugned order of the learned Tribunal, being the three questions set out in para 9 herein above, are answered in favour of the Petitioner and against the Department. The impugned order stands modified accordingly and the Office is directed to send a copy of this judgment to the Tribunal in terms of section 133(5).

b.In the constitutional petition, the first para of the show cause notice dated 12.11.2012 is quashed and set aside, and the Respondents are restrained from taking any proceedings on the basis or in terms thereof. However, insofar as the show cause notice relates to other issues raised by the concerned Additional Commissioner, it shall (if not already proceeded with) be deemed to be subsisting and proceedings in respect thereof may be taken and/or continued in accordance with law.

c.There will be no order as to costs.

MH/S-13/Sindh Order accordingly.