COMMISSIONER INLAND REVENUE VS AMEER ABDULLAH KHAN ROKHARI
2019 P T D 1278
[Lahore High Court]
Before Muhammad Sajid Mehmood Sethi and Muzamil Akhtar Shabir, JJ
COMMISSIONER INLAND REVENUE
Versus
AMEER ABDULLAH KHAN ROKHARI
P.T.R. No.83 of 2012, heard on 13/03/2019.
(a) Income Tax Ordinance (XXXI of 1979) [sincerepealed]---
----S.9---Chargeability of tax---Principles---Adjudication to determine whether tax was chargeable on receipt of revenue / fee by taxpayer---Burden of proof---Scope---Anything which was not income could not be treated as income and receipt was not sole test of chargeability of tax---Initial burden to show that a receipt was income taxable under law, was on Department and said burden of proof could not be shifted on the taxpayer---Taxpayer could not be expected to quote any provision of law, which specifically declared that a sum received by taxpayer was exempt from tax instead of Department specifying the charging provision purportedly covering it---One must look at the substance of somethingandnotatthemannerinwhich the account was stated.
Guffic Chem (P) Ltd. v. C.I.T. Belgaum and another (2011) 4 SCC 254; Pakistan Industrial Development Corporation v. Pakistan through the Secretary, Ministry of Finance 1992 PTD 576; Commissioner of Income Tax v. Smith Kline and French of Pakistan Ltd. and 2 others 1991 PTD 999 = 1991 SCMR 2374; B.P. Biscuit Factory Ltd., Karachi v. Wealth Tax Officer and another 1996 SCMR 1470 and Messrs Habib Insurance Co. Ltd. v. Commissioner of Income Tax (Central), Karachi PLD 1985 SC 109 rel.
(b) Income Tax Ordinance (XXXI of 1979) [sincerepealed]---
----Ss.22 & 133---Chargeability of income tax---Income from business or profession---Non-competition fee---Nature of receipt of non-competition fee---"Revenue receipt" and "capital receipt"---Distinction---Onus on Department to establish chargeability of income tax on capital receipt---Scope---Question before the High Court was whether "non-competition fee" received by taxpayer, for not competing with another entity, was "revenue receipt" chargeable to income tax under S. 22 of the Income Tax Ordinance, 1979---Held, that non-competition fee was considered to be a "capital receipt" and in the present case, it was the sum taxpayer received by virtue of non-competition agreement whereby taxpayer had lost its source of income---Unlike a revenue receipt, which was a substitution of income and chargeable to tax; a capital receipt was received in exchange for source of income and was not chargeable to tax unless specifically made taxable by charging provision of a taxing law---Unless such capital receipt was hit by charging provision of the Income Tax Ordinance of 1979, it could not be subjected to tax---Contention of Department that said competition fee was benefit "arising out of business" under S.22(c) of the Income Tax Ordinance, 1979 was not tenable as Department had failed to show that compensation for non-competition received by taxpayer had any nexuswithanysourceofincometaxableunderthelawandthe samewasnotcoveredbyanychargingprovisionoftheIncome TaxOrdinance,1979 ---Referencewasanswered,accordingly.
Oberoi Hotel (Pvt.) Ltd. v. Commissioner of Income Tax 1999 PTD 3270; Commissioner of Income Tax (East) Karachi v. Forbes Campbell & Co. Ltd. PLD 1978 Kar. 1047 = 1978 PTD 328 and Maxwell on the Interpretation of Statutes, Twelfth Edn. p.256 rel.
(c) Interpretation of statues---
----Taxing statute---Charges upon subject of a taxation statute must be imposed by clear and unambiguous language, since in some degree the same operated as penalties ---Such subject was not to be taxed unless language of a statute clearly imposed such obligation andsaid language must not be strained in order to tax a transaction which, had the Legislature thought of it, would have been covered by appropriate words.
Maxwell on the Interpretation of Statutes, Twelfth Edition, p.256 rel.
Mubashir Ali (vice Mian Yousaf Umar), Ch. Shakeel Ahmad (vice Sarfraz Ahmad Cheema) and Muhammad Yasin Zahid for Applicant.
Mian Ashiq Hussain for Respondent.
Date of hearing: 13th March, 2019.
JUDGMENT
MUHAMMAD SAJID MEHMOOD SETHI, J.---This consolidated judgment shall decide instant Reference Application under Section 133 (1) of the Income Tax Ordinance, 2001 ("the Ordinance of 2001"), along with following connected cases, as common questions of law and facts are involved in these cases:-
1.PTR No.84 of 2012 titled Commissioner Inland Revenue v. Ameer Abdullah Khan Rokhari
2.PTR No.85 of 2012 titled Commissioner Inland Revenue v. Ameer Abdullah Khan Rokhari
3.PTR No.86 of 2012 titled Commissioner Inland Revenue v. Ameer Abdullah Khan Rokhari
4.PTR No.87 of 2012 titled Commissioner Inland Revenue v. Mst. Begum Mumtaz Niazi
5.PTR No.121 of 2012 titled Commissioner Inland Revenue v. Sh. Muhammad Ashraf
6.PTR No.122 of 2012 titled Commissioner Inland Revenue v. Sh. Muhammad Ashraf
7.CTR No.01 of 2004 titled Aamer Hayat Khan Niazi v. Taxation Officer of Income Tax, Lahore
8.ITR No.193 of 2016 titled Commissioner Inland Revenue v. Messrs Coca Cola Beverages, Pakistan Limited, Lahore
9.ITR No.194 of 2016 titled Commissioner Inland Revenue v. Messrs Coca Cola Beverages, Pakistan Limited, Lahore
2.The following questions of law, asserted to have arisen out of the impugned order dated 27.09.2011 passed by learned Appellate Tribunal Inland Revenue, Lahore Bench, Lahore ("Appellate Tribunal"), have been proposed for our opinion:-
i.Whether on the facts and in the circumstances of the case, the learned Appellate Tribunal Inland Revenue was justified to hold the non-competition fee, received by the assessee under the agreement as capital receipt, while it is recurring annually (for five years) and is rightly assessed in the hands of the assessee as income?
ii.Whether under the facts and in the circumstances of the case, the learned ATIR was justified to hold the non-competition fee, received by the assessee as capital receipt, ignoring the fact that it is a consideration and not compensation for any loss under the subject agreement?
iii.Whether under the facts and in the circumstances of the case, the learned ATIR was justified to hold the non-competition fee, received by the assessee as capital receipt and not covered under any provision of Ordinance?
3.Brief facts of this case are that respondent-taxpayer was director in Messrs Adil Beverages Company (Pvt.) Ltd. and Messrs Duranni Bottling Company (Pvt.) Ltd. Both the companies were franchisees of a foreign company, namely Messrs Coca Cola Export Corporation Ltd., for manufacturing and marketing beverages under the brand names of Coca Cola, Fanta and Sprite. In the year 1998, the foreign company changed its sale policy and formed a new company for manufacturing and marketing the products of the company, namely Messrs Coca Cola Beverages Pakistan Ltd., which purchased the assets of all the franchise holders of the country. It also entered into agreement with respondent-taxpayer on 08.01.1998. Similar agreements were executed with the other persons running those franchisee companies to refrain from engaging directly or indirectly in the business of production, distribution or sale of the said soft drinks in Pakistan for five years. The Assessing Officer proportionated total amount received against the said non-competition agreement for five years and accordingly added a sum of Rs.20,000,000/- as income for each tax year. Feeling aggrieved, respondent-taxpayer filed appeal before CIT (Appeals), which was dismissed vide order dated 30.06.2005. Being dissatisfied, respondent-taxpayer preferred second appeal before learned Appellate Tribunal, which was accepted vide order dated 27.09.2011 and demand of tax raised by treating non-competition amount as income, was deleted. Hence, this Reference Application.
4.Learned counsel for applicant-department submits that the non-competition fee is not capital receipt, therefore, it was rightly assessed as income by the assessing officer as well as CIT (Appeals). He further submits that non-competition fee is a consideration, not compensation for any loss under the subject agreement. He adds that the material aspects of the matter have not been correctly appreciated by learned Appellate Tribunal while passing impugned order, thus, same is not sustainable in the eye of law.
5.Conversely, learned counsel for respondent-taxpayer defends the impugned order and submits that the non-competition fee, received by respondent-taxpayer under the agreement, is capital receipt, which is not covered under any charging provision of the Ordinance of 1979. In support of his contention, he has relied upon judgment dated 16.03.2011, passed by the Hon'ble Supreme Court of India in a judgment reported as Guffic Chem (P) Ltd. v. C.I.T., Belgaum and another [(2011) 4 SCC 254]. In the end, he submits that applicant-department has failed to point out any illegality or legal infirmity in the impugned order, thus, same is liable to be upheld.
6. Arguments heard. Available record perused.
7. It is well settled law that anything which is not income cannot be treated as income. It, therefore, follows that receipt is not the sole test of chargeability. The initial burden to show that a receipt is income taxable under the law, is on the applicant-department. This burden of proof cannot be shifted on the respondent-taxpayer to quote any provision of law, which specifically declares that the sum received by the respondent-taxpayer was exempt from income tax instead of specifying the charging provision purportedly covering it. Needless to say that in revenue cases one must look at the substance of the thing and not at the manner in which the account is stated. Reference in this regard can be made to Pakistan Industrial Development Corporation v. Pakistan through the Secretary, Ministry of Finance (1992 PTD 576), Commissioner of Income Tax v. Smith Kline and French of Pakistan Ltd. and 2 others [(1991 PTD 999 = 1991 SCMR 2374], B.P. Biscuit Factory Ltd., Karachi v. Wealth Tax Officer and another (1996 SCMR 1470) and Messrs Habib Insurance Co. Ltd. v. Commissioner of Income-Tax (Central), Karachi (PLD 1985 SC 109).
8.Learned counsel for applicant department has argued that the amount received by the respondent-taxpayer is a benefit arising from business on which tax is chargeable under clause (c) of Section 22 of the repealed Income Tax Ordinance, 1979 ("the repealed Ordinance"). In the present case, the applicant-department has not impugned the genuineness of the transaction. It is also not disputed that the amount received by the respondent-taxpayer under the agreement with Messrs Coca Cola Beverages Pakistan Ltd. is a non-competition fee received for agreeing to refrain from carrying on competitive business. We have gone through the charging provision under the repealed Ordinance of 1979 to see whether non-competition fee falls within the mischief of charging provision,asclaimed,ornot.Section22ibidisreproduced hereunder:-
"22. Income from business or profession. The following incomes shall be chargeable under the head "Income from business or profession", namely:--
(a)profits and gains of any business or profession carried on, or deemed to be carried on, by the assessee at any time during the income year;
(b)income derived by any trade, professional and similar association from specific services performed for its members; and
(c)value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession."
According to the learned counsel for the applicant department, the phrase "arising from business" includes negative covenant of not doing business, and comes within the scope of afore-referred provision of law for the purposes of taxing the non-competition fee.
9.Under the law, non-competition fee is considered a capital receipt. Unlike a revenue receipt, which is a substitution of income and is chargeable to tax, whereas a capital receipt is received in exchange for the source of income and is not chargeable to tax unless specifically made taxable by the charging provision of the taxing law. Reference, in this regard, can be made to Oberoi Hotel (Pvt.) Ltd. v. Commissioner of Income-Tax (1999 PTD 3270) and Commissioner of Income Tax (East) Karachi v. Forbes Campbell & Co. Ltd. [PLD 1978 Kar. 1047 = 1978 PTD 328]. Hon'ble Sindh High Court, in Forbes Campbell & Co. Ltd. (supra), while dealing with a similar issue, has observed as under:-
"10. .It is not disputed that if the compensation was paid for agreeing not to compete with the principal's business, it would prima facie be a capital receipt. It is true that the letter of 17th November 1962, setting out the terms of the new arrangement did not categorically provide for compensation for refraining from competing with the principal. But, the sum of Rs.60,000 was offered to the respondent on condition that it accepted the offer to become a main dealer. The letter also provided that each main dealer was to be exclusive dealer of "Exide" batteries within his own territory. Reading the two provisions together, there is no difficulty in holding that by agreeing to become one of the main and exclusive dealers, the respondent had agreed not to compete with the business of the principal. In the Gillanders Arbuthnot case, above-quoted, it has been held that compensation paid for agreeing to refrain from carrying on competitivebusinessinthecommoditiesinrespectofthe agency terminated is, prima facie, of the nature of a capital asset."
In the instant case, respondent-taxpayer had lost the source of its income for five years on account of non-competition agreement qua sale/ production / manufacturing of cold drinks and, therefore, the amount received by the respondent-taxpayer for the loss of the source of income is capital receipt. Unless this capital receipt is hit by charging provision of the repealed Ordinance of 1979, it cannot be subjected to tax.
10.Since the applicant-department has treated the non-competition fee received by the respondent-taxpayer as a benefit arising out of business under Section 22(c) of the repealed Ordinance of 1979, it would be appropriate to have a look at clause (iv) of Section 28 of the Indian Income Tax Act, 1961 which is similar to clause (c) of Section 22 of the repealed Ordinance of 1979. Section 28(iv) of the Indian Income Tax Act, 1961 is reproduced below for ready reference:
"28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession":-
(i)
(ii)
(iii)
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession"
In the case of Guffic Chem P. Ltd. (supra), the Supreme Court of India, while discussing the chargeability of non-competition fee under the Income Tax Act, 1961, held that payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only with effect from 1.4.2003thatthesaidcapitalreceiptwasmadetaxableunder Section 28(va) of the Income Tax Act, 1961, inserted vide Finance Act, 2002, which reads as under:
"28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession":-
(i)
(ii)
(iii)
(iv)
(v)
(va) any sum, whether received or receivable, in cash or kind, under an agreement for-
(a) not carrying out any activity in relation to any business; or
(b)
Provided that sub-clause (a) shall not apply to---
(i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head "Capital gains";
(ii) any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India."
Insertion of Section 28(va) in Indian Income Tax Act, 1961 vide Finance Act, 2002 itself proves that during the relevant assessment year compensation received by the assessee under non-competition agreement was a capital receipt, not taxable under clause (iv) of the Section 28 of the Act of 1961. It became taxable only after insertion of Section 28(va) in the Act of 1961. Therefore, it can safely be held that non-competition fee received by the respondent-taxpayer is not hit by the charging provisions of the repealed Ordinance of 1979.
11.Under the law, it is the duty of applicant-department to establish the chargeability of the receipt as income. A capital receipt, which is not covered under the clear language of the charging provisions, cannot be termed as income and subjected to income tax. According to Maxwell:
"It is well-settled rule of law that all charges upon the subject must be imposed by clear and unambiguous language, because in some degree they operate as penalties: the subject is not to be taxed unless the language of the statute clearly imposes the obligation and language must not be strained in order to tax a transaction which, had the legislature thought of it, would have been covered by appropriate words."
(See Maxwell on the Interpretation of Statutes, Twelfth Edition, p.256).
Applicant-department has failed to show that the compensation received by the respondent-taxpayer for non-competition has nexus with any source of income taxable under the law, and is, thus not covered under any charging provision of the repealed Ordinance of 1979.
12.In view of the above, our answer to the proposed questions is that non-competition fee, received by the assessee, is a capital receipt which is not chargeable to income tax under the provisions of the repealed Ordinance of 1979, hence, this Reference Application, along with connected Reference Applications, is decided against the applicant-department and in favour of respondent-taxpayer.
13.Office shall send a copy of this order under seal of the Court to learned Appellate Tribunal as per Section 133 (5) of the Ordinance of 2001.
KMZ/C-3/LOrder accordingly.