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Petitioner: Messrs ALNOOR SUGAR MILLS LTD., KARACHI VS Respondent: COMMISSIONER OF INCOME- JUDGMENT
Court Name: Sindh High Court Judge(s): Zahid Kurban Alavi, Muhammad Mujeebullah Siddiqui Title:Messrs ALNOOR SUGAR MILLS LTD., KARACHI vs COMMISSIONER OF INCOME-
JUDGMENT
Reported As: 2002 PTD 728 Result: Order accordingly Judgment JUDGMENT MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---In this-reference under section 6' of the Income-tax Act, 1922, at the instance of applicant/assessee, the following questions have been referred for our opinion:--- "(1) Whether in the facts and circumstances of the case, the Tribunal was justified in holding that the sum of Rs.1,28,531 received by the applicant-assessee from United Bank Limited on sale of shares of the assessee by them in pursuance of section 14 of the Securities and Exchange Ordinance was taxable income of the applicant?" "(2) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the said sum of Rs.1,28,531 was not casual and non-recurring receipt within the meaning of section 4(3) (vii) of the Income-tax Act?" "(3) Whether in the facts and circumstances of the case, the Tribunal having found that section 17(5) of the Income-tax Act was not attracted as the shares did not belong to the assessee- company it could legally 'restore' the order of the Income Tax Officer who had taxed the said sum of Rs.1,28,531 under section 17(5) of the Income-tax Act, 1922?" "(4) Whether in the facts and circumstances of the case, the Tribunal had jurisdiction to hold that even though section 17(5) of the Income-tax Act was not attracted to the said receipt of Rs.1,28,531 yet the same was taxable income under section 12 of the Income-tax Act, when it was not the case of the Income-tax Department and on which applicant-assessee was not afforded any opportunity of being heard?" 2. The relevant facts as stated by the Income Tax Appellate
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Tribunal are that the assessee/applicant is a private limited company. It had allotted its shares inter alia, to United Bank of Pakistan Limited, which was 10% beneficial owner of assessee's shares. The United Bank Limited sold shares of the Company within six months from the date of allotment and earned a gain of Rs.1,28,531 from these sales. This gain was paid by the U.B.L, to the assessee- company as laid down by section 14 of Securities and Exchange Ordinance, 1969. 3. The Income Tax Ordinance, Circle 18 Karachi, held that this transaction was covered by section 17(5) of the Income Tax Act and added the profit so earned to the total income of assessee and taxed it at the normal rates. The assessee/applicant preferred an appeal before the Appellate Assistant Commissioner 'A' range Karachi, who by his order, dated 1-4-1976 allowed the appeal holding that subsection (5) of section 17 of the Income-tax Act, 1922 was not attracted to the facts of the case, as the shares were not sold by the assessee. The Income-tax Officer, filed second appeal against the order of Appellate Assistant Commissioner,, before the Income Tax Appellate Tribunal, being I.T.A. No. 1171/KB of 1975-76. The Appellate Tribunal by its order, dated 20-9-1977, allowed the appeal and restored the order of Income Tax Ordinance, holding that although section 17(5) of the Income-tax Act, 1922 was not attracted as the shares did not belong to the Company, yet the gains were received by the assessee-company through operation of law and thus it could not escape the liability of taxation. In coming to this section the learned Members of the Appellate Tribunal, held that they were not able to persuade themselves to accept that the gains were not income in the hand of the assessee. According to learned Members of the Appellate Tribunal, the Income-tax Act, does not define income from other source and possibly it could not do so. Under the Income-tax Act, all receipts are taxable unless exempt under the law. It was further held that the view taken by them was in consonance with the decision in the case of Commissioner of Income-tax Madras v. R.P. Peyer AIR 1932 Mad. 424. In that case it was held that section 12 of Income-tax Act, was sufficiently wide to bring into its net income, profits and gain from whatever source derived and it is for the persons who received them to show that it was exempt from payment of income-tax, and this can be done only by showing that the income is of a class specified in subsection (3) of section 4 of the Income Tax Act. 4. The learned Members of the Appellate Tribunal, further observed that, although the word "income" has not been defined by the Income Tax Act, but there are judicial opinions which gave us an idea as to what is meant by the word "income" used in the Income Tax Act. In Commissioner of Income-tax, Bengal v. Messrs Shaw, Wallace & Company, their lordships of the Privy Council observed as follows:--- "Income, their Lordships think, in this Act connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources.. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return excluding anything in the nature of mere windfall." 5. The learned Members of the Tribunal further held that with this exposition of the word income' they cannot escape the conclusion that the income received by the assessee was from a source whose object was the production of definite return. The source was the law embodied in the Securities Exchange Ordinance. It was further held that the income coming to an assessee by, operation of law would not be exempt, as such income, -is not less income for the purpose of income tax. They further held that the income could not escape the taxation simply because the shares did not belong to the assessee. 6. It was further hal that be claim of the assessee that the income was casual and non-recurring was also wrong. They held that there may be other instances of sale of shares and, therefore, it could not be said that it was non:recurring. It was further held that the gain was certainly .Not casual because it was through operation of law.
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7. We have heard Mr. Sirajul Haq, learned counsel for the applicant and Mr. Shaikh Haider, learned counsel for the Revenue. 8. Mr.. Sirajul Haq, learned counsel for the applicant, has addressed his arguments mainly on questions Nos.1 and 2. He has submitted that the observations made by the learned Members of the Tribunal with reference to the case reported as AIR 1932 Mad. 424 and in the case of Shaw Wallace & Co. Are incorrect. He has produced the Privy Council judgment in the case of Commissioner of Income Tax Bengal v. Messrs Shaw Wallace & Co. And has referred to the following passage from the said judgment:- "The object of the Indian. Act is to tax 'income', a term which it does not define. It is expanded, no doubt, into 'income profits and gains' but the expansion is more a matter of words than of substance. Income, their Lordships think, in this Act connotes a periodical monetary return 'coming in' which some sort of regularity, or expected regularity: from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as `capital.' But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production." 9. Mr. Sirajul Haq, has submitted that the judgment is Shaw Wallace & Co. Case supports the version of the applicant. In this case following questions were referred to Calcutta High Court:--- (a) Was not the sum of Rs.9,83,361 which had been included in the total income of the assesses for purposes of assessm ent for 1929-30, in the nature of a capital receipt and, therefore, not income, profits or gains within the meaning of the Income-tax Act? (b) If it could be said to be income, profits or gains within the meaning of the Act, was it liable to be assessed under either of the sections 10 and 12 of the Act, inasmuch as (1) it was not the profits, or gains of any business carried on by the assessees within the meaning of section 10 of the Act, nor . (2) income, profits or gains from other sources within the meaning of section 12 of the Act? (c) In the alternative, was not the payment of Rs.9,83,361 an ex gratia payment in the nature of a present from the oil companies in question and was it not, therefore, exempt under section 4 (3) (vii) of the Act?" The Privy Council, held as follows:--- "The sources from which the taxable income under the Act are to be derived are enumerated in section 6, which runs as follows:-- `Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing, namely (I) Salaries, (ii) Interest on securities, (iii) Property, (iv) Business, (v) Professional earnings, (vi) Other sources. 'The claim of the taxing authorities is that the sum in question is chargeable under head (iv) business. By section 2(4) 'business' includes any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture.' The words used are no doubt wide, but underlying each of them is the fundamental idea of the continuous exercise of an activity. Under section 10 the tax is to be payable by an assessee under the head business `in respect of the profits or gains of any business carried on by him.' Again, their Lordships think, the same central idea; the words italicized are an essential constituent of that which is to produce the taxable income; it is to be the profit earned by a process of production. And this is borne out by the provision for allowances which follows. They include rent paid for the premises where the business is carried on; the cost of current repairs in respect of such premises; interest on money borrowed for carrying on the business, etc."
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10. Some reliance has been placed in argument upon section 4(3)(v) which appears to suggest that the word "Income" in this Act may have a wider significance than would ordinarily be attributed to it. The subsection says that the Act 'shall not apply to the following classes of income,' and in the category that follows, clause (v) runs:---"Any capital sum received in commutation of the whole or a portion of a pension, or in the nature df consolidated compensation for death or injuries, or in payment of any insurance policy, or as the accumulated balance at the credit of a subscriber to any such Provident Fund". 11. Their Lordships do not think that any of these sums, apart from their exemption, could be regarded in any scheme of taxation as income, and they think that the clause must be due to over anxiety of the draftsman to make this clear beyond possibility of doubt. They cannot construe it as enlarging the word "income" as to include receipts of any kind which are not specially exempted. They do not think that the clause is of any assistance to the appellant. 12. Following the line of reasoning above indicated, the sums which the appellant seeks to charge can, in their Lordships' opinion, only be taxable if they are the produce, or the result of carrying on the agencies of the oil companies in the year in which they were sums received, not for carrying on this business but as some sort of solatium for its compulsory cessation, the answer seems fairly plain. 13. If the business had been sold---even if that somewhat indeterminate asset known as the "good will" had been assigned to the employing companies, as the High Court seems to have though it had---it is conceded that the price paid would not have been taxable. But why? Plainly because it could not be regarded as profit or gain from carrying on the business, and their Lordships think that the same reasoning must apply when the sum received is in the nature of solatium for cessation. 14. It is contended for the appellant that the "business" of the respondents did in fact go on throughout the year, and this is no doubt true in a sense. They had other independent commercial interests, which they continued to pursue, and the profits of which have been taxed in the ordinary course without objection on their part. But it is clear that the sum in question in this appeal had no connection with the continuance of the respondents other business. The profits earned by them in 1928 were the fruit of a different tree, the crop of a different field. 15. For the reasons given their Lordships are of opinion that question (a) was rightly answered by the High Court in favour of the assessee. No objection has been taken to the form of the answer or to its sufficiency, and it would seem unnecessary, therefore, to deal with the other two questions. Their Lordships will only add that the reasoning of this judgment would apply equally if the appellant based his claim on head (vi) "other sources and the corresponding provisions of section 12. 16. With regard to the claim to exemption under section 4(3)(vii), their Lordships think that the decision in the case of Turner Morrison & Company v. Commissioner of Income-tax, Bengal, to which reference has been made above, may need re-consideration in the light of this judgment. In their Lordship's view the expression "receipts arising from business" in the clause must mean receipt arising from the carrying on of business". 17. This was an appeal against the judgment of Calcutta High Court at the instance of Revenue and the judgment of Calcutta High Court in favour of assessee was upheld and the appeal was dismissed. 18. Mr. Sirajul Haq, in support of his contention that reference to the judgment in the case of Commissioner of Income Tax Madras v. R. Panchapakesa Ayyar AIR 1932 Madras 424, was misplaced has produced the judgment. A perusal of this judgment shows that the assessee was the Government employee who was compulsorily retired before attaining the age of superannuation. Subsequently, he was paid lump sum compensation. The Income Tax Authorities desired to tax the said receipt under the Income-tax Act, 1922, and therefore, a question was
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referred to the Madras 'High Court to the effect whether the sum paid to the assessee by the Government of Madras was income liable to tax and whether the said sum was exempted from tax under clause (v) of clause (VII) of subsection (3) of section 4 of the Income-tax Act. It was observed by a Full Bench of the Madras High Court that under the Indian statute every profit, income or gain is taxable, that is not excluded. Section 4(1) and section 6 were considered which read as follows:--- "S.4(1) says: "Save as hereinafter provided, this Act shall apply to all income, profits or gains, as described or comprised in section 6, from whatever source derived, accruing or arising or received in British India, or deemed under the provisions of this. Act to accrue, or arise, or to be received in British India." Section 6 deals with the heads of income chargeable to income-tax and reads:--- "Save as otherwise provided by this Act, the following heads of income , profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing, namely; (1) Salaries, (2) Interest on securities, (3) Property, (4) Business, (5) Professional earnings and (6) Other sources." 19. A plea was taken on behalf of assessee that no source could be traced to the money paid to the assessee by the Government, to which the Indian Income Tax Act, was applicable. It was contended that it could not be traced to a Government source because Government service had ended. The contention was not accepted and it was held that section 12(1) was sufficiently vide to bring into its net income, profit or gain which comes from anywhere; if not taxable under the other sections and it was .For the person who receives it to show that it was exempt from payment of income tax. It was further observed that, "he can do only by bringing himself within the provisions of section 4(3) of the Act". 20. It was held that a case very nearly in point was In re: Turner Morrison & Co. Ltd. AIR 1929 Cal. 212. In the said case a large sum of money was paid to the assessee as compensation for their sudden dismissal without notice in the middle of the year and one of their managing agencies was brought to a close. Rankin, C.J., held as follows:- "In my judgment, it is impossible to say that the receipt is not a receipt arising from business and that is the statutory test which in this country has to be applied." It was further held that: "There is no doubt upon the Indian Act that the payment to the present case is income within the meaning of section 12 unless it is saved by section 4 (3)(vii)." Beasley, C.J, of Madras High Court after making reference to the judgment by C.J. Calcutta High Court, observed that in the case before them, the money received by the assessee would not fall to be taxed as a profit or gain derived from a business since the assessee was not carrying on a business but had been in receipt of a salary in respect of his Government service; and if it is not taxable under section 6, then it may be taxable under section 10 he held that it was taxable under section 6. It was argued before the Full Bench of Madras High Court that the amount received falls within clause (vii) of section 4(3) being receipt of money not arising from business or the exercise of a profession, vocation or occupation and which is of a casual and non-recurring nature. The contention repelled and it was held that clause (vii) of section 4(3) was not applicable. 21. Mr. Sirajul I-Iaq Memon, has referred to a large number of cases in support of this contention that, first, the receipt is not income and in the alternative if it is income it is of casual and non- recurring nature, and therefore, it was not taxable. The first judgment is in the case of Commissioner of Income-tax Madras v. Muhammad Ahmed Badsha Sahib 1943 11 ITR 590. In this case a merchant agreed to act as an arbitrator in a dispute, which arose between the heirs of Nawab, regarding the division of the estate. When he agreed to so arbitrate, no stipulation was made for his remuneration, but in view of the task involved, he was paid a certain amount by way
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of award for his services. It was held, that there could be no rule laid down with regard to what is of a casual or non-recurring nature. Each case must be decided on its particular .Facts. Looking to the facts and circumstances of the cited cases, it was held that the receipt did not arise from exercise of profession, vocation or occupation as the assessee was a merchant dealing in hides. When he agreed to assist in settling the differences of the heirs of the Nawab, no stipulation was made for remuneration. He consented to act, as he was friend of the family; but it had turned out that the task involved far more time than was anticipated, and therefore, it was decided to grant reward to the arbitrators. It was further observed that this amount was sanctioned by a Judge of the Madras High Court when the award was accepted. There was no obligation to remunerate the arbitrators and if the Judge of High Court would have refused to sanction remuneration nothing would have been payable. It was ultimately held that in these circumstances, the receipt was of a casual and non-recurring nature. The second judgment is in the case of enairam Doongarmall v. The Commissioner of Income Tax Act (1961) 42 ITR 392 (Supreme Court of India). In this case the assessee owned a tea estate consisting of tea gardens, factories and other buildings, carrying on the business of growing and manufacturing tea. The factory and other plots on the estate were requisitioned for defence purposes by Military Authorities. Though the assessee continued to be in possession of the tea garden and tended them to preserve the plants, the manufacture of tea was stopped completely. The assessee was paid compensation under the Defence of India Rules, calculated on the basis of the turn out of tea that would have been manufactured by the assessee during the period. The question was whether the amount of compensation was Revenue receipt taxable in the hands or the assessee. It was held that before holding a receipt to be profits or gains of business within section 10 of the Income-tax Act, it was to see if there was a business at all of which it could be said to be income. The primary condition of the application of section 10 was that \tax was payable by an assessee under the head "Profits and gains of a business" in respect of the business carried on by him. Where an assessee could not carry on business at all, the section could not be made applicable and any compensation for requisition of assets that he received could not bear the character of profits and gains. It was further held that business denoted and activity with the object of earning profit. To say that a business was being carried on, meant no more than that profit was to be earned by a process or production. The business of a tea-grower and manufacturer was not merely to grow tea plants but to collect tealeaves and render them fit for sale. The tending of his tea gardens to preserve the plants was not a continuation of the business of the assessee, which had come to an end for the time being. It was next held that the manner and method of the its payment was not decisive of the character of payment of compensation and that the compensation paid-to the assessee did not partake of the character of profits because, business not having been done by the assessee, no question of profits taxable under section 10 arise, and therefore, the amount of compensation received by the assessee was not Revenue receipt and did not comprise any element of income. 22. The Hpn'ble Supreme Court of India, examined various cases including the Commissioners of Inland Revenue v. Newcastle Breweries Ltd. (1927) 12 Tax Cases 927. In this case, it was observed by Rowllat, J. "this was a case of compulsory sale of rum, and that a compulsory sale was also a sale, the receipt was held to be a profit." Another case was Ensign Shipping Co. v. Commissioner of Inland Revenue 1927 (12) Tax Cases. 1169. The view of Rowllat, J. Was ,reproduced to the effect that if there was an operation, which produce income, it was nonetheless taxable because it was a compulsory operation. It was further observed by learned Judge that "Now it is quite clear that if a source of income, is destroyed by the exercise of the permanent right and compensation is paid for it, that is not income although the amount of the compensation is the same sum as the total of the income that has been lost." It was held that if
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compensation were paid to some ship-owners in lieu of receipt of the ship during the time of interruption it would amount to income, which is taxable. 23. In the case of Gappumal Kanhaiyalal v. Commissioner of Income Tax (1961) 43 ITR 46. The question of casual receipt came for consideration before the Allahabad High Court with reference to the provisions contained in section 4(3)(vii). The relevant facts were that an assessee had maintained a home chest account in which it maintained large cash balance, part of which it employed in a money-lending business. During the accounting year the assessee had in its possession as part of its cash balance, nearly 48,600 silver rupee coins which had ceased to be legal tender several years back. The assessee sold about 27,000 silver coins and received Rs.3,600 in excess of their face value. The question was whether the sum of Rs.3,600 was taxable income. It was held by the Allahabad High Court, that the cash balance of the assessee could .Consist only of money, which was legal tender and the silver coins, ceased to be part of the assessee's cash balance when they ceased to be legal tender. The sum of Rs.3,600 was thus not profit due to appreciation of the stock-in-trade of the assessee's business but again of a casual and non- recurring nature and was not income liable to tax. 24. In the case of P.H. Divecha v. Commissioner of Income Tax, Bombay City-I (1963) 48 ITR 222 the provisions, contained in section 4(3)(vii) of the Income-tax Act, 1922, came for consideration. A principle was laid down that, "to constitute income, profits or gains, there must be a source from which the particular receipt has arisen, and a connection must exist between the quality of the receipt and the source. If the payment is by another person it must be found out why that payment has been made. It is not the motive of the person who pays that is relevant. More relevance attaches to the…
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