Law: Income Tax Ordinance, 1979

Section: 27

(a) Income Tax Ordinance (XXXI of 1979)---S.27---Capital gains---Fee for non-competition---Amount received by the assessee on account of fee for "non-competition" was found to be revenue in its nature by the Assessing Officer---Validity---Sole selling agency and exclusive distribution rights for the specified cities were terminated by the principal coupled with it not only the assessee was refrained but also his affiliates, directly or indirectly, were stopped not to carry on business of producing, distribution and selling of soft drinks in Pakistan for period of five years---Compensation was paid for agreeing to refrain from carrying on competitive business in the commodities in respect of agency terminated---Agency rights were an income yielding asset and a' capital asset and compensation received for loss of a capital asset was prima facie of the nature of a capital receipt---No evidence was on record to suggest that the assessee was acting as a sole distributor or selling agent of the products of other numerous concerns as well, or that the termination of agency in question did not affect the trading structure of assessee's business by depriving its source of income---Amount received by the assessee on account of termination of agency/franchise rights under the nomenclature of "non-competition agreement" was a `capital receipt' and it had been taxed erroneously as a `revenue receipt'---Addition made was deleted by the Appellate Tribunal. (1964) 53 ITR 283 (SC India); (1983) 140 ITR 159 and PLD 1978 Kar. 1047 = 1978 PTD 328 ref. (2001) 83 Tax 75 and Gillandes Arbuthnot & Co., Ltd. v. C.I.T., Calcutta 1979-ITR-Volume-Z III-283 (S.C.) of India) distinguished 1978 PTD 328 and C.I.T. Bombay v. Automobile Products of India Ltd. 1983 ITR 140 page (H.C. Bombay) rel. (b) Income tax--- ----Payment for cancellation of agency-'Capital' or `Revenue receipts'--Principles---Where as a result of cancellation of the agreement or the agency the trading structure of assessee was impaired or such cancellation resulted in loss of what may be regarded as the sources of the assessee's income, the payment made to compensate for cancellation of the agreement is normally the…

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