2025 PLP 1863 (PTD)

BABAR SATTAR, J.

This reference arises from an order of the Appellate Tribunal Inland Revenue ("ATIR") dated 13.06.2014. The question framed for our consideration is as follows: Whether on the facts and in the circumstances of the case, the Hon'ble ATIR was justified to vacate the order of the Additional Commissioner Inland Revenue and the CIR (Appeals), Islamabad wherein expense claimed under the head "staff separation costs" was treated as "Intangible" in terms of the provisions of section 24(11) of the Income Tax Ordinance, 2001?

2. Learned counsel for the Commissioner submitted that staff separation cost ought to have been treated as capital cost. He contended that section 40(6) of the Income Tax Ordinance, 2001 ("ITO") defined expenditure of a capital nature as expenditure that has a normal useful life of more than one year. He then submitted that section 12(1) deals with salary income and section 12(2) of the ITO acknowledges that the salary received by an employee can be of a revenue capital nature. He submitted that the salary in question in the instant matter fell within section 12(2)(e) (iii) of the ITO which included within the definition of salary any amount received "on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments." Learned counsel for the Commissioner argued that in terms of section 24(1)(b) of the ITO an intangible asset included something that had a normal useful life exceeding one year. He submitted that the Commissioner had come to the conclusion that the voluntary staff separation scheme and the payment made to employees of the company under such scheme had a useful life of more than one year and such expense was to be amortized. He submitted that for purposes of determining whether the expenditure was of a capital nature or revenue nature the character of such amounts in the hands of the receiver was to be taken into account as held by the Supreme Court in Model Town Society Limited v. Income Tax Authority Tribunal and others (2006 SCMR 1867). The Tribunal erred in holding that the expenditure was of a revenue nature and deduction in tax year 2009 could be allowed in terms of section 20 of the ITO.

3. Learned counsel for the respondent taxpayer submitted that the payments made qualified as salary in terms of section 12(2)(e)(iii) of the ITO. And it was settled law that salary expense constituted revenue expense and deduction in lieu thereof was permitted under section 20 of the ITO. He submitted that the Commissioner had erred in holding that the salary expense was an intangible in terms of section 24(1)(b) of the ITO that had a normal useful life exceeding one year, which error had been corrected by the Tribunal.

4. We agree with the learned counsel for the respondent as well as the Tribunal that the expense sought by the respondent taxpayer to be deducted while computing income from business in relation to payments made to employees under a voluntary separation scheme constituted salary expense in terms of section 12(2)(e)(iii) of the ITO. There is no reasoning in the order of the Commissioner or that of Commissioner (Appeals) establishing how the payments made under the voluntary separation scheme, that constitute salary payments, could qualify as an intangible asset of the respondent taxpayer that had a normal useful life exceeding one year in terms of section 24(1)(b) of the ITO.

5. The conclusion drawn by the Commissioner could not have been drawn without inflicting serious injury on the concept of salary payments. Any payment under a golden handshake scheme qualifies as a salary payment in terms of section 12(2)(e)(iii) of the ITO as is acknowledged by the tax department. By refusing to allow deduction of such expense the route chosen by the tax department is to argue that such payment is of a capital nature as the benefit that it procures for the company has a normal useful life of more than one year. By this logic any salary payment by a company to an employee can arguably produce a benefit for the company for more than one year as it has the effect of retaining such employee in the employment of the company. Such argument cannot be countenanced. The VSS expense incurred by the company to terminates its employees created no benefit for the company in terms of section 24(1)(b) of the ITO that had a normal useful life exceeding one year. By no stretch of imagination could such expense be treated as a capital expense thereby refusing a deduction of such expense in the relevant tax year. The law relied on by the tax department is not relevant in the context of the question before this Court.

6. As a general rule funds used for payment of salaries are a revenue expense that are deducted from the company's revenue in the tax year in which such salaries are paid to calculate the company's taxable profit. Salaries are paid to employees to sustain day-to-day operations of the company and generate revenue in the relevant tax period. They are fully deductible in the tax year in which they are paid, as they are not paid to acquire a long-term asset for the company. (There may be limited exceptions to this general principle, which we need not indulge with for our present purposes, but such exceptions only prove the rule.) Likewise, payments made in relation to a golden handshake or voluntary separation scheme also qualify as salary payments in terms of section 12 (2)(e)(iii) of the ITO, as already discussed above, and do not constitute a capital expense. Such payments are made as part of the company's operational restructuring strategy, to manage its workforce and control ongoing costs. There is nothing before us to establish that the Voluntary Separation Scheme was not a redundancy scheme to manage costs, but was instead an expense incurred to create a lasting asset, such that it ought to be treated as a capital expense and not a revenue expense. We therefore find that the Tax Department's treatment of the salary expense as a payment to acquire an intangible assets was not in accordance with law and company did not err while claiming deduction of the VSS payment as a revenue expense.

7. We therefore find that the judgment of the Tribunal suffers from no infirmity when it concludes that the VSS payment is a salary expense which was deductible in terms of section 20 of the ITO in the relevant tax year. We answer the question framed for consideration accordingly in favor of the taxpayer and against the tax department.

8. A copy of this order is directed to be sent to the Registrar of the Tribunal under the seal of this Court. MQ/201/Isl. Reference dismissed.