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Petitioner: THE COMMISSIONER OF INCOME TAX VS Respondent: M/S. SMITH, KLINE & FRENCH OF JUDGMENT
Court Name: Supreme Court of Pakistan Judge(s): Sajjad Ali Shah, Naimuddin, Zaffar Hussain Mirza Title:THE COMMISSIONER OF INCOME TAX vs M/S. SMITH, KLINE & FRENCH OF
JUDGMENT
Reported As: 1991 PTD 999 Result: Appeals dismissed Judgment JUDGMENT NAIMUDDIN, J.---All these four appeals are by leave from the judgments of the High Court of Sindh. We propose to dispose of them by this common judgment. 2. Civil Appeal No. 119-K of 1985 is from the judgment of the High Court dated 23-2-1984 passed in I.T.C. No.78 of 1983. In this case following question was referred to the High Court, which was answered in the affirmative: "Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the receipt of Rs.1,38,867 was not income in the hands of M/s. Smith Kline and French of Pakistan Limited?" 3. Civil Appeals Nos.32-K and 33-K of 1988 are from the judgment of the High Court dated 3-4-1986 passed in I.T.C. Nos. 34 and 35 of 1987. In these cases the following questions were referred to the High Court: "(i) Whether on the facts and in the circumstances of the case, the learned Tribunal was justified in deleting the amount received by the assessee and stated as promotion allowance from M/s. Sandoz Limited (Basle) from the total income of the assessee? (ii) Whether on the facts and in the circumstances of the case, the amount received by the assessee and stated as promotion allowance from M/s. Sandoz Limited (Basle) qualified for exemption under section 4(3)(vii) of the Income Tax Act? (iii) Whether on the facts and in the circumstances of the case, the amount received as promotion allowance is not liable to tax under the Income Tax Act?"
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4. Civil Appeal No. 639-K of 1990 is from the judgment of the High Court dated 25-1-1989 passed in I.T.C. No.6 of 1981. In this case also the same questions came up for consideration as in Civil Appeals No.32-K and 33-K of 1988. 5. Now, we propose to call the first mentioned appeal as the "First Appeal" and second and third mentioned appeals jointly as "Second. Appeal" and the fourth mentioned appeal as the "Third Appeal". 6. Leave to appeal was granted to consider the submission that the High Court erred in relying on the case of H.H. Maharani Shri Vigaykuverba Saheb of Morvi and another v. Commissioner of Income Tax, Bombay City II (1963) 49 I.T.R. 594. 7. In the Second Appeal leave to appeal was granted to consider the same question as is involved in the First Appeal. 8. In the Third Appeal leave to appeal was granted because of leave granted in the Second Appeal. 9. The facts giving rise to the First Appeal, as stated in the statement of facts, are that the respondent company was incorporated in December, 1949 under the name of Pharma Company Limited. However, in June, 1964 the name of the Company was changed to the present one. The respondent's paid-up capital upto 30-11-1963 was Rs.1,00,000 and was wholly owned by M/s. Smith Kline USA Laboratories. 10. On 30-11-1963 the respondent had a net accumulated loss of Rs.78,776 and was mostly dealing in foreign goods which were indented. At this point of time the respondent decided to start manufacturing activities with foreign participant. The capital of the company was, therefore, raised to Rs.16,00,000, of which shares worth Rs.11,75,000 were to be issued to the foreign participants while those amounting to Rs.4,25,000 were to be allotted to local shareholders. It was also decided that as the company was running into losses the accumulated losses upto 29-2-1964 may be absorbed by the foreign shareholders. After working the loss upto 29-2-1964, the losses to be borne by the foreign shareholders were determined by the auditors at Rs.1,38,867. The foreign participants, therefore, remitted amounts to this extent to the respondent and the same were duly shown in the accounts drawn up. This amount was credited in the respondent's account as miscellaneous income in the profit and loss statement. 11. After realising the implication of this credit entry the respondent contended before the Income- tax Officer that this amount received from the foreign participants was not income at all, and if it was income, it was of a casual nature and as such exempt from the provisions of section 4(3)(vii) of the Income Tax Act, 1922. The Income-tax Officer, however, rejected both these contentions and taxed the amount of Rs.1,38,867 as income in the hands of the respondent. 12. The respondent preferred an appeal before the Income Tax Appellate Tribunal which was allowed by the judgment dated 18-10-1972. The appellant submitted a reference to the High Court, which was also decided in favour of the respondent by the judgment now impugned in this appeal. 13. The facts of the second appeal, as taken from the statement of facts, are that the respondent is a private limited company, 75% of whose share-capital is held by M/s. Sandoz Limited, (Basle) and the balance by the general public. During the assessment year 1970-71 the respondent received a sum of Rs.16,00,000 from M/s. Sandoz Limited (Basle) as promotion allowance. The respondent excluded this amount from the total income claiming that it was `not income' and even if it was income, it was of casual and non-recurring nature and hence exempt under section 4(3)(vii) of the Income-tax Act, 1922. The Income--tax Officer did not accept the respondent's contention and included the amount in the total income of the respondent. The Income-tax Appellate Tribunal has, however, deleted the said amount from the total income of the respondent. 14. It may be stated that the facts of Civil Appeals Nos.32-K and 33-K of 1988 are common except that Civil Appeal No.32-K of 1988 relates to the assessment year 1970-71 and Civil Appeal 33-K of 1988 relates to assessm ent year 1969-70. It may be further added that for assessment year 1968-
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69 also same proceedings were taken and same questions were referred to the High Court and same judgment was delivered by the High Court but the Department chose not to file any petition against the judgment relating to assessment year 1968-69. 15. The facts of the third appeal, as taken from the statement of facts, are that the respondent is a subsidiary non-resident company. Its majority shares are held by the non-resident parent company. During the assessm ent year 1975-76 the respondent received a sum of Rs.12,42,000 from M/s. Ciba Geigy Limited as promotion allowance. The respondent excluded this amount from the total income claiming that it was not income and even if it was, it was of a casual and non- recurring nature and was, therefore, exempted under section 4(3)(vii) of the Income-tax Act, 1922. The Income-tax Officer, however, did not accept the respondent's contention and included the amount in the total income of the respondent. On appeal, the Income Tax Appellate Tribunal, however, deleted the amount from the total income of the respondent. Thereafter, the questions mentioned in paragraph 3 of this judgment were referred to the High Court which were all answered in the affirmative giving rise to this appeal. 16. We have heard Mr. Shaikh Haider, learned counsel for the appellant in all the appeals, Mr. A.A. Shareef, learned counsel for the respondent in the first appeal and Mr. Lqbal Naim Pasha, learned counsel for the respondents in second and third appeals. 17. Mr. Shaikh Haider, learned counsel for the appellant, submitted that: (i) the finding by the Tribunal that "From the letter of Sandoz (Bazle) to the Management, Sandoz (Pakistan) Limited, which was also produced before the Income-tax Officer, it is clearly borne out that the said company had made these payments voluntarily considering the circumstances of the assessee- company" is erroneous as there were no such letters written by the foreign promotors. The letters were written by the Pakistani counter-part, (ii) the High Court erred in treating the receipts as casual receipts in view of business dealings between the parties and the High Court further erred in not considering that the onus to prove that the income through the receipts was casual, was on the respondent and that there was no material before the Tribunal or the High Court on the basis of which the Tribunal and the High Court could come to the conclusion that they were voluntary payments by the foreign companies, (iii) the High Court failed to notice in second appeal that the receipts were of recurring nature as for all the three years payments were received from the foreign company. For the assessm ent year 1968-69 a sum of Rs.8,00,000 was received. For the assessm ent year 1969-70 a sum of Rs.50,000 was received. In the assessment year 1970-71 a sum of Rs.16,00,000 was received, (vi) the High Court erred in holding that it has never been even alleged by the Commissioner of Income-tax that the imports which had been made by the Pakistan Company were not paid for by the Switzerland company or that there had been any over payment by Pakistani Company for the goods imported by them from the Switzerland Company and that there was no evidence to that effect. The learned counsel submitted that the High Court missed the point that what was shown to the High Court was that there were business dealings between the Switzerland company and the Pakistan company in second appeal and these payments were received because of these business dealings, (v) the High Court erred in the first appeal in relying on the case of H.H. Maharani Shri Vigaykuverba Saheb of Morvi and another (Supra) in which it was held that a voluntary payment which is made entirely without consideration and is not traceable to any source which a practical man may regard as a real source of his income, but depends entirely on the whim of the donor cannot fall in the category of income, and (vi) the High Court unduly held that the cases cited before them, namely, Pakistan International Airlines Corporation v. Commissioner of Income-tax PLD 1975 Kar. 924, and Raja Bahadur Kamakshya Narain-Singh of Ramgarh v. Commissioner of Income Tax, Bihar and Orissa (1943) 11 ITR 513, were distinguishable.
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18. The learned counsel in support of his submissions relied on a large number of cases, namely, (i) The Commissioner of Taxation of the Commonwealth of Australia v. The Squatting Investment Company Limited (PLD 1954 PC 114), (ii) Muhammadi Steamship Co., Ltd. v. The Commissioner of Income-tax (Central), Karachi (PLD 1966 SC 828), (iii) Mrs. Samina Shaukat Ayub Khan v. Commissioner of Income-tax, Rawalpindi (PLD 1981 SC 85), (iv) Susil C. Scn, In re. (1941) 9 ITR' 261, (v) Ratna Sugar Mills Co. Ltd. v. Commissioner of Income-tax, U.P. & V.P. Lucknow (1958) 33 ITR 644, (vi) Parelkar, Gore and Parpia v. Commissioner of Income-tax, Bombay City 1 (1958) 34 ITR 312, (vii) P. Krishna Menon v. Commissioner of Income-tax, Mysore, Travancore, Cochin and Goorg, Banglore (1959) 35 ITR 48, (viii) A. Cajapathi Naidu v. Commissioner of Income-tax, Madras (1960) 40 ITR 282, (ix) Dr. K. George Thomas v. Commissioner of Income-tax, Kerala (1985) 156 ITR 412, (x) Pakistan International Airlines Corporation v. Commissioner of Income-tax PLD 1975 Kar. 924 and (xi) Commissioner of Income-tax v. Pfizer Laboratories Limited 1989 PTD 612. 19. Now, taking up the first submission it may be stated that no such question has been raised either by way of an application under section 35 of the Income Tax Act, 1922 or before the High Court that such a finding is erroneous and is based on no evidence. The proper course for the appellant was either to raise such a question before the High Court so that the High Court could go into it. We have to take the facts as stated by the Tribunal. It is now a well-settled proposition that the High Court deciding a question on a reference/application, which speaks of "on the facts and in the circumstances of the case" is not entitled E to decide the reference on facts and circumstance that may be found by it, on its own examination of material but it means on the facts and circumstances found by the Tribunal. Reliance is placed on an unreported decision of this Court in Civil Appeals Nos.104-K to 111-K of 1984, decided on 23-5-1991, reliance in this appeal was placed on an Indian Supreme Court decision in the case of Karnani Property Ltd. v. Commissioner of Income- tax West Bengal (1971) 82 ITR 547, wherein it was held as follows: "Neither the High Court nor this Court has jurisdiction to go behind or to question the statements of fact made by the Tribunal. The statement of the case is binding on the parties and they are not entitled to go behind the facts found by the Tribunal in the statement." And it was further held in the unreported judgment of this Court as under; "The reason that prevailed with the learned Judges was simply that the question as to the correctness of the facts found by the Tribunal was not before the High Court nor before the Supreme Court as it was not within the province of the Court to re-appreciate the evidence on record:" Reference may also be made to a judgment from Indian Jurisdiction in the case of India Cement Limited v. Commissioner of Income Tax, Madras (1966) 60 ITR 52, wherein on page 64 of the Report it was observed as follows: "Before we conclude, we must deal with the point raised by Mr. Sastri that the High Court erred in law in preferring the findings of the Income-tax Officer to that of the Appellate Tribunal. It is not necessary to decide this question but it seems to us that, in a reference, the High 'Court must accept the findings of fact made by the Appellate Tribunal and it is for the person who has applied for a reference to challenge those findings first by an application under section 66(1). If he has failed to rile an application under section 66(1) expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the High Court that the findings are vitiated for one reason or the other." 21. Before we consider the other submissions, we may set out the relevant provisions of section 4(1) and section 4(3)(vii) of the Act. Section 4(1) of the Act reads as follows: "4 -- (1) Subject to the provisions of this Act, total income of any previous year of any person includes all income, profits and gains from whatever source derived which-
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(a) are received or are deemed to be received in Pakistan in such year by or on behalf of such person; or (b) if such person is resident in Pakistan during such year, - (i) accrue or arise or are deemed to accrue or arise to him in Pakistan during such year, or (ii) accrue or arise to him without Pakistan during such year, or (c) if such person is not resident in Pakistan during such year, accrue or arise or are deemed to accrue or arise to him in Pakistan during such year Provided ------Not relevant----- Provided further ------Not relevant----- Explanation------Not relevant----- Section 4(3)(vii) of the Act reads as follows: "4(3)(vii) Any receipts not being capital gains chargeable according to the provisions of section 12B and not being receipts arising from business or the exercise of a profession, vocation or occupation which are of a casual and non-recurring nature or are not by way of addition to the remuneration of an employee:" 22. However, before proceeding further, we may state that the burden of proof of the fact that any receipt by a person is an `income' is on the Revenue. But, if the Department establishes that it is `income' then the onus that such a receipt is exempt under section 4(3)(vii) of the Act is on the assessee claiming exemption: Mrs. Samina Shaukat Ayub Khan v. Commissioner of Income-tax, Rawalpindi PLD 1981 SC 85. We may note here that Mr. AA. Shareef, appearing in first appeal also relied on (i) Parimiselti Seetharamamma v. Commissioner of Income-tax, Andhra Pradesh (1965) 56 ITR (Sh.N) 31, 532, and (ii) Additional Commissioner of Income-tax v. S. Krishnaswamy Reddiar (1978) 114 ITR 505. In the first case it was observed as follows: "By sections 3 and 4 the Act imposes a general liability to tax upon all income. But the Act does not provide that whatever is received by a person must be regarded as income liable to tax. In all cases in which a receipt is sought to be taxed as income, the burden lies upon the department to prove that it is within the taxing provision. Where, however, a receipt is of the nature of income, the burden of proving that it is not taxable because it falls within an exemption provided by the Act lies upon the assessee. The appellant admitted that she had received jewellery and diverse sums of money from Sita Devi and she claimed that these were gifts made out of love and affection. The case of the appellant was that the receipts did not fall within the taxing provision: it was not her case that being income the receipts were exempt from taxation because of a statutory provision. It was therefore for the department to establish that these receipts were chargeable to tax." 23. However, a question does arise what is `income'? The term `income' is not precisely defined in the Act. However, it came up for consideration in the well-known case of Commissioner of Income- tax, Bengal v. Shaw Wallace and Company (AIR 1932 PC 1.38), wherein at page 140 of the Report it was held as follows: "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" 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 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."
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24. The term `income' as defined in the above cited case was followed by this Court in the case of Mrs. Samina Shaukat Ayub Khan v. Commissioner of Income-tax, Rawalpindi (PLD 1981 SC 85), with a reference to two cases of Privy Council, namely, Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income-tax, Bihar and Orissa (1943) 11 ITR 51.3 and Commissioner of Income-tax, Bengal v. Mercantile Bank of India Limited AIR 1936 PC 238, and it was observed as follows: "This view was reaffirmed by the Privy Council in the subsequent case of Commissioner of Income- tax, Bengal v. Mercantile Bank of India Limited AIR 1936 PC -238 and it was held that where a company by resolution capitalises accumulated profits by issue of fully paid-up shares to share- holders pro rata, the transaction does not amount to dividends or income, gains or profits. Again in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income-tax, Bihar and Orissa (1943) ITR 513, the Privy Council referred with approval to this definition of the term `income', but added that "Picturesque similies cannot be used to limit the true character of income in general---Income is not necessarily the recurrent return from a definite source, though it is generally of that character. Income again may consist of a series of separate receipts, as it generally does in the case of professional earnings. The multiplicity of forms which "income" may assume is beyond enumeration. Generally, however, the mere fact that the income flows from some capital assets, of which the simplest illustration is the purchase of an annuity for a lump sum, does not prevent it from being income, though in some analogues case the true view may be that the payments, though spread over a period, are not income, but instalments payable at specified future dates of a purchase price---------" And finally it was concluded at page 91 of the report as follows: "It will be seen that the term "income" as used in the Income-tax Act is indeed, a term of wide significance, and generally and ordinarily it connotes a periodical monetary return coming in with some sort of regularity, or expected regularity, from a definite source; but as observed by the Privy Council, the multiplicity of forms which income may assume is beyond enumeration; and income need not necessarily be the recurrent return from a definite source, though it is generally of that character. It may consist of a series of separate receipts, as for instance happens in the case of professional earnings. In the last analysis, the question whether a particular kind of receipt is income or not would depend for its answer on the peculiar facts and circumstances of the case. If the nature of the receipt and its source are not satisfactorily explained by the assessee, facts which are generally within his peculiar knowledge, the Income-tax Officer may legitimately presume that the amount in question is an income of the assessee from an undisclosed source:' 25. Examined in the light of the above definition or description of the term `income', we find that the amount of Rs.1,38,867 remitted by foreign share--holders as donation/gift in first appeal and credited in the respondent's account as miscellaneous income in the profit and loss statement the two amounts of Rs.50,000 and Rs.16,00,000 remitted by foreign company as promotion allowance in the two assessm ent years under appeal in second appeal and the amount of Rs.12,40,000 remitted by the foreign company as promotion allowance in third appeal, do not, in our opinion, satisfy the test as laid down in the above-mentioned cases, as they could be termed as mere windfall, for, the foreign shareholders/companies were under no obligation to remit these amounts or to make good the losses incurred by the Pakistani companies and for the further reason that they could contribute these amounts as capital if there was no prohibition in increasing the capital. Even if we assume that these receipts satisfied some of the aspects which could approximate to the definition or description of the term `income', still the receipts in the first and the third appeals were exempt under section 4(3)(vii) of the Act, for, they were, in each of these cases, a single casual receipt not recurring in nature.
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26. It was, however, vehemently argued by Mr. Shaikh Haider that the receipts in these appeals arose from business but no such finding has been given by the Tribunal. In fact, there were no business dealings in the first and the third appeal but there were dealings only in second appeal but no finding has been given by the Tribunal that these receipts arose from business between the foreign company and the Pakistani company. Indeed, the Income-tax Appellate Tribunal has criticized the findings of the Income-tax Officer and termed them as based on conjecture and surmise in the following words: We are of the opinion that the Income-tax Officer has committed an error in holding the receipts in question to be the income of the assessee in the respective years ....The Income-tax Officer, in our opinion has proceeded on conjectures and surmises and without having any definite evidence before him, to justify his inference that these receipts had a relation with the business activities of the assessee. We are clearly of the view that the amounts in question were not earned by the assessee company during the course of carrying on its business. So also we do not entertain any doubt that in the instant case the payee, i.e. The assessee company did not and could not have a right to expect the recurrence since the Donor Company was under no obligation whatsoever to make such payments. It could at best hope for it ....... Therefore, in the second appeal also, if for any reason, it could be deemed to be covered by the term `income' it was exempt under section 4(3)(vii) of the Act, as it did not arise from business and was of a casual nature and it could not be termed as recurring because it recurred only once in a year in the particular circumstances of this case. We must not forget that the income is taxed annually on annual returns of income. It may not be out of place to observe that even a receipt by an assessee of voluntary payment, on certain facts and in certain circumstances, may constitute income provided it arises from business or the exercise of a profession, vocation or occupation, in other words, if there is nexus between the receipt and the business or the exercise of profession or vocation or occupation. 27. We must state that the submission of Mr. Iqbal Naim Pasha was that the respondents in second and third appeals…
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