Sui Northern Gas Pipelines Limited vs Commissioner Inland Revenue, Legal

MUNIB AKHT AR, J.---This matter arises out of the Income Tax Ordinance, 2001. The question is whether the compensation payable to a taxpayer under section 171 on account of a delay in the payment of a refund that becomes due and payable to the latter is to be regarded as a capital, or revenue, receipt? The learned Appellate Tribunal, on an appeal filed by the respondent-taxpayer , concluded that such compensation was a capital amount and could not therefore be brought to tax. The department filed a tax reference in the High Court, which by means of the impugned judgment dated 19.04.2017 came to the contrary conclusion and decided the reference in favor of the former . The taxpayer petitioned this Court for leave to appeal which was granted vide order dated 01.10.2018.

After having heard learned counsel for the parties we came to the conclusion that the appeal ought to be dismissed. The following are our reasons for having done so.

2. It will be convenient to begin by setting out the provisions of sections 170 and 171, as relevant for present purposes: "170. Refunds.---(1) A taxpayer who has paid tax in excess of the amount which the taxpayer is properly chargeable under this Ordinance may apply to the Commissioner for a refund of the excess....

171. Additional payment for delayed refun ds.---(1) Where a refund due to a taxpayer is not paid within three months of the date on which it becomes due, the Commissioner shall pay to the taxpayer a further amount by way of compensation at the rate of KIBOR plus 0.5 per cent per annum of the amount of the refund computed for the period commencing at the end of the three month period and ending on the date on which it was paid-..."

We may note that the compensation involved in this matter was actually paid under section 102 of the (repealed)

Income Tax Ordinance, 1979. That and certain other provisions of the repealed Ordinance were the predecessors of sections 170 and 171 and may, for purposes of this matter , be regarded as in pari materia. In any event, the matter was argued both here and in the High Court with reference to the provisions of the present Ordinance.

3. It appears that when the appellant filed its return for the tax year 2006, it received notice of the department's intention to amend the deemed asses sment order on account of the failure by the taxpayer to offer the compensation (amounting to Rs. 367,780,909/-) for tax. The concerned officer, as is clear from the order-in-original amending the deemed assessment order , took this amount and its treatment by the appellant from the audited accounts. Reference was made to note 33.2 of the said accounts. As noted above the taxpayer's case was that this amount was a capital receipt and, not being to revenue account, there was no tax liability in respect of the same.

4. The learned High Court has carefully considered the point in issue in a detailed judgment. Learned counsel for the appellant sought to assail the judgment but, with respect, in our view was unable to do so. A payment under section 171 becomes due when the taxpayer is not refunded, in a timely manner , the "tax in excess to the amount which the taxpayer is properly chargeable under this ordinance". In essence the question boils down to this: if the amount that is liable to be refunded in terms of section 170 was to revenue account, whether the compensation payable under section 171 on account of late payment could nonetheless take the character of a capital receipt?

The learned High Court, after a careful examination of the case law, including decisions from the English and Indian jurisdictions, came to the conclusion that in such circumstances the character of the compensation could not be altered or affected and continued to retain the character of what might be called principal payment (here the refund payable under section 170). Although learned counsel for the appellant attempted valiantly to challenge the conclusions of the learned High Court on this fundamental point (and we would like to commend his submissions before us in this regard) in the end he failed to convince or persuade us to take a view different, from that which found favor with that Court.

5. We may note that even the audited accounts of the appellant (which were clearly and obviously part of the record) belie the contention that the compensation was to capital account. We have downloaded the accounts from the website of the appellant. Note 33.2 is part of note 33, which relates to "Other Operating Income". Other operating income is of course part of the Profit and Loss Account. In other words, the compensation was disclosed by the appellant itself as part of its income. Yet, it was not offered for tax. This was the very point taken by the concerned officer when issuing notice to amend the deemed assessment. The answer given was not found satisfactory by the learned High Court and we agree with that conclusion. Finally , we may note that while the learned High Court has made many observations which might be regarded as being of a general nature, our judgment is confined only to whether , in the facts and circumstances of the prese nt case, the compensation paid under section 171 on a delayed payment of a refund under section 170 can be regarded as a capital receipt. The wider and broader ramifications of this issue, even within the specific context of sections 170 and 171, must be regarded as having been left open for consideration in a suitable future case. In other words, the dismissal of the appeal should not be understood as a general or blanket endorsement of the whole of the impugned judgment.

6. For the foregoing reasons we were of the view that the judgment of the learned High Court did not warrant any interference and for that reason dismissed the appeal.