2010 PTD 2197

ORDER

MUHAMMAD SAEED (ACCOUNTANT MEMBER).--- This appeal has been filed by the Department after being dissatisfied with the Order No. 30, dated 24-12-2009 passed by Commissioner Inland Revenue (Appeals-II), Karachi on the following grounds:--

"(2) That the learned CIR(Appeals) has erred in holding that a compensation paid on delayed payment of refund is a capital receipt, whereas honourable Lahore High Court in a reported decision (2003 PTD 1436) has held this sort of compensation is a revenue receipt.

(3) That the learned CIR(Appeals) has erred in relying on a reported decision of ITAT (2006 PTD 1800) in the presence of Honorable Lahore High Court decision reported as 2003 PTD 1435 in which honourable Court has held that the compensation received is a revenue receipt.

(4) That the learned CIR(Appeals) was not justified to delete the addition of Rs.1,261,798 by Taxation Officer correctly as a revenue receipt."

2. Order taken to have been passed under section 120 was amended under section 122(5A) of the Income Tax Ordinance, 2001 due to the reason that the compensation received on delayed payment of refund was not declared as an income, thus rendering the order erroneous in so far as it was prejudicial to the revenue. Resultantly an amount of Rs.1,261,798 was added to the total income. The taxpayer filed appeal before the Commissioner (Appeals-II), Karachi who deleted the addition, relying upon the order of the Appellate Tribunal reported as 2006 PTD 1800. The Department agitated against the order of the Commissioner (Appeals) on the grounds as narrated above.

3. The case was fixed for hearing on 3-5-2010. On the date of hearing, Mr. Gohar Ali, DR, appeared for the Department while Ms. Lubna Pervez, Advocate appeared for the taxpayer, and argued the case.

4. We have gone through the record and duly considered the arguments of both the representatives. The contention of the taxpayer is that the case is squarely on all fours with the reported decision of another bench of this Tribunal, reported as 2006 PTD1800. The relevant part of the decision is reproduces as under:

"(r) Taxation of compensation on delayed refund [A.Y. 2001-2002 (i) The assessee bank received compensation from the Department on account of delayed disbursement of refund due to the bank. Such compensation received was not declared by the hank as income as it was in the nature of damages for wrongful possession of assessee's property (i.e. refund,) by the department. It is the AR's. assertion before us that any damages/ compensation/interest etc. received for sterilizing of profit or loss to property or injury to capital asset are capital receipts not chargeable to tax. Following case law has been referred to:--

(1993) 199 ITR 303 (Ker.)

(1970) 76 ITR 467 (SC)

(1979) 3 SCC 150

(1989) 179 ITR 157

(iii) The CIT(A) upheld the addition of compensation amount to income with the bland observation that the AR of assessee could not sufficiently rebut the findings of the Assessing Officer.

(iv) In our considered judgment, when compensation admittedly pertains to refund due to the assessee and not disbursed in time by the Department such compensation is without doubt capital in nature and hence not taxable under the Income Tax Ordinance, 1979 (since repealed). We, therefore, vacate the CIT(A) finding and direct that the addition as made by the Assessing Officer be deleted."

5. It is however the contention of the Department that the principle regarding compensation for delayed payment of an amount being a revenue receipt had already been decided by the honourable Lahore High Court in the case of Model Town Cooperative Society v. ITAT and 2 others reported as 2003 PTD 1436. It is the case of the Department that the judgment of the honourable High Court was binding upon the bench of the Tribunal, working under the jurisdiction of the same High Court. The relevant part of the judgment is reproduced as under:

"(15) The case in hand was a case of both acquisition as well as sale of land because during the proceedings on acquisition and challenge to award the parties on 6th February, 1980 came to an agreement for transfer of land and the amount of consideration for such transfer. For 70% of the acquired area the appellant was to be paid Rs.20,000 per acre immediately subject to the other conditions in para. 9 of that agreement. As far the remaining 30% of the land a total sum of Rs.7,32,38,280 was fixed as price out of which a sum of Rs.7,00,00,000 was to be paid in five half yearly equal instalments along with interest while the remaining amount at Rs.32,38,280 was payable on execution of agreement. The price of land therefore, remained settled at Rs.7,32,38,280 for all legal practical purposes. The payment of interest was not a part of the sale price or a compensation for an injury to the capital asset as rightly held by the learned Members of the Tribunal. It was a compensation for depriving the owner of the sale price of the land for some period. The amount of interest could not be held as part of the sale price for another reasons as well. Firstly, the amount of interest was not fixed as such because it was to decrease after payment of every instalment and secondly, the transferee Messrs Lahore Development Authority could always avoid the payment of interest by paying the remaining sale price in lump sum at any time after the execution of the agreement. In cases of such nature the recitals of the transfer deed are crucial. The relevant portion of the agreement as reproduced above does not support the proposition that the interest, for delayed payment was in any manner directly or indirectly related to the proprietary interest of the seller or the price of the land earlier settled between the parties at Rs.7,32,38,280. It was not a compensation for an injury to the capital asset either. It is only the actual value of the capital asset that forms a capital receipts.

The learned Members therefore, correctly stated the law that any payment made either as disturbance for earlier vacation of land or as compensation for postponement of the payment of price not being itself a capital asset the amount received in lieu thereof will also not be a capital receipt. The view so held finds support from a number of precedents of the Courts. In re: CIT Bengal Muffassil v. Burdhan Kuti Wards' Estate (1960) 2 Tax (Suppl-1) 285 the Hon'ble Supreme Court of India held that compensation paid for compulsory vacation of premises after acquisition of building by the Government for disturbance and loss of business was a revenue and not as a capital receipt. "

6. It is seen that the learned bench of this Tribunal at Lahore was not provided proper assistance while deciding the issue. The decision regarding the nature of a receipt or an expenditure as either capital or revenue is a highly intricate matter, requiring minute examination. Plethora of case law both of Pakistan as well as foreign jurisdiction have developed over the past few years on the issue requiring detailed consideration. We therefore, set aside the case with the directions that the Officer of Inland Revenue may decide the matter afresh after taking into consideration the case law on the subject.

H.B.T./154/Tax(Trib.) Order accordingly.