Stereo. H C J D A-38.
JUDGMENT SHEET
IN THE LAHORE HIGH COURT, LAHORE.
JUDICIAL DEPARTMENT
PTR No.83 of 2012
Commissioner Inland Revenue
Versus
Ameer Abdullah Khan Rokhari
JUDGMENT
Date of hearing: 13.03.2019.
Applicant by: M/s Mubashir Ali (vice Mian Yousaf Umar),
Ch.Shakeel Ahmad (vice Sarfraz Ahmad
Cheema) and Muhammad Yasin Zahid,
Advocates.
Respondent by: Mian Ashiq Hussain, Advocate.
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.
M/s Coca Cola Beverages, Pakistan Limited, Lahore
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9. ITR No.194 of 2016 titled Commissioner Inland Revenue v.
M/s 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 M/s Adil Beverages Company (Pvt.) Ltd. and M/s
Duranni Bottling Company (Pvt.) Ltd. Both the companies were
franchisees of a foreign company, namely M/s 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 M/s 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
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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 & Anr. [(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
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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 & French of
Pakistan Ltd. and two others [(1991) 64 TAX 37 (S.C. Pak.)], 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
Supreme Court 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 M/s 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, as claimed, or not. Section 22 ibid is
reproduced 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;
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PTR No.83 of 2012 & connected cases
(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. [(1979) 39 Tax 21 (H.C. Kar.)]. 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 competitive business in the commodities in
respect of the agency terminated is, prima facie, of the nature
of a capital asset.”
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PTR No.83 of 2012 & connected cases
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 1.4.2003 that the said capital receipt was
made taxable under 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) …
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PTR No.83 of 2012 & connected cases
(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-
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PTR No.83 of 2012 & connected cases
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.
(Muzamil Akhtar Shabir) (Muhammad Sajid Mehmood Sethi)
Judge Judge
Approved for reporting.
Judge Judge
*A.H.S.*
