1987 PLP 182 (PTD)

MUHAMMAD ZAHOORUL HAQ, J.--The following questions raised by the Commissioner of Income-tax require our answer:- (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? Fourth question' is not reproduced as it is now given up.

2. In these three cases Mr. Shaikh Haider, Advocate, represents the applicant in cases 3 and 4 while Mr. A-A. Dureshani, Advocate, represents Commissioner of Income-tax, in Case No. 5.

3. Both the learned counsel had at the very outset stated that they do not press question No. (iv), consequently there is no need to answer the said question. The relevant facts are that the respondent company is owned to the extent of 75% by M/s. Sandoz Limited, Bazle, Switzerland. There were business dealings between Pakistan Company and Bazle company to the extent herbs etc. were exported by Pakistan company which was paid for by the Switzerland company and the Switzerland Company sent its products to the Pakistan company which was paid for: by the Pakistan Company.

4. The present three cases relate to the assessment years 1968-69, 1969-70 and 1970-71. The respondent-company had shown in its return in separate sheets amounts of Rs. 8,00,000; Rs.5,00,000 and Rs.16,00,000 for the respective three years as having been received by them from Switzerland company. They claimed that it was a casual receipt sent by the Switzerland company voluntarily in order to save its international reputation.

5. The Income-tax Officer, however, did not agree with the interpretation of the company and based his judgment upon lack of evidence. He held that since there were regular business dealing between two companies and the Switzerland company had imported larger quantity of raw-materials for the Pakistan company, therefore, the receipts can be considered as discount given by the foreign company on its sales to the Pakistan company or reimbursement of the price of raw material which might have been found to be sub-standard. For these reasons such income were, therefore treated as revenue income.

6. The respondent went in appeal before the Tribunal and the Tribunal came to the conclusion that income-tax Officer has committed an error in holding the receipts in question to be the income of the assessee for the respective years. Following extract from the said judgment is very relevant:- "From the letters of Sandoz Ltd. (Basle) to the Management Sandoz Pakistan Ltd., which were also produced before the Income-tax Officer, it is clearly borne out that the said company had made these payment voluntarily considering the circumstances of the assessee-Company. The various cases cited by the appellant's counsel including the order of the Tribunal lend full support to the contention of the assessee. 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 except the recurrence since the Donor 'Company was under no obligation whatsoever to make such payments. It could at best hope for it."

7. Mr. Shaikh Haider and Mr. A.A. Dureshani who have argued the matter on behalf of the petitioner have submitted that these receipts could not be treated as casual receipts on account of business dealing between the parties and that the onus was upon the respondent to prove that they were merely casual receipts. It is further contended that there was no material before the Tribunal upon basis of which it could come to the conclusion that they were mere voluntary payment made by the Switzerland company. It was also stated that the recurring nature of the receipts showed that they were not of casual nature. Reliance had been placed upon PLD 1975 Kar. 924 and 11 ITR

513. However, we are of the view that the two cases are distinguishable. In first case, PLD 1975 Kar. 924- under section "26 of PIAC Act, 1956; the Government of Pakistan had taken upon itself responsibility to reimbursing the loss of PIA, in the first three years, and therefore, the subsidy made by the Government of Pakistan was rightly treated as an income as there was a clear liability of the Government under the statute and, therefore, PIA could rightly expect to be reimbursed if they suffered losses. But in the present case before us there is no such agreement or obligation by Switzerland company in favour of Pakistan company by virtue of which the Pakistan company could 4xpect that its loss would be made good by the Switzerland company. In the second case 11-I T R-513 the Privy Council had ruled that royalty received by the assessee-Company could not be treated as capital and they were treated as income. However, in that case, also there was a clear stipulation in the contract of the assessee with the company giving royalty the such royalty would regularly be going to the assessee and therefore, this royalty could not be treated as income of casual nature.

8. On the other hand, as we have reproduced the extract of the Tribunal it appears to us that there was material available to the Tribunal that the amounts paid by the Switzerland company were merely' voluntary payments without there being any legal obligation upon them to do the same or without there being any liability 'obligation to that effect. They had made payment voluntarily in order to save their International reputation. Mere recurrence of payment without there being any definite understanding to that effect cannot convert those payments into receipts for business. 9.We may here point out 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 overpayment by Pakistan company for the goods imported by them from Switzerland company. There is no evidence to that effect, therefore, in the absence of that evidence the explanation tendered by M/s. Sandoz Limited, (Basle) had to be accepted by the Tribunal. We, therefore, do not find any justification for the question, which had been posed before us because the judgment of the Tribunal is based upon the relevant facts produced before it.

10. The submission that there was no evidence before the Tribunal is completely belied by the judgment of the Tribunal itself and we do not find anywhere in the application made by the Commissioner of Income-tax a grouse to the effect that there was no evidence before the Tribunal at all in respect of the letters of Switzerland and Pakistan companies. .

11. Consequently, the question No.l is answered in affirmative; question No.2 is again answered in affirmative as letter of M /s. Sandoz Ltd. (Basle) did provide a justification for treating the amount sent by them to the Pakistan company as promotion allowance. The 3rd question is answered as under; the promotion allowance received by the Pakistan company is not liable to tax in view of the letters of Switzerland company explaining the position that they were making voluntary payment to safeguard their international reputation.

12. For the reasons stated above, all the gases are disposed. M.B.A./C-10/K Reference answered accordingly.