2024 (10) TMI 261 - HC - Income Tax

Compensation for termination of bottling license treated as non-taxable capital receipt under IT Act sections 28/45

Gujarat HC upheld ITAT's decision treating compensation of Rs. 4,30,88,084 received by assessee for termination of bottling license with Hindustan ... Nature of receipt - compensation as awarded to the assessee for termination of the contract - taxable under Sections 28(iv)/28(va) or alternatively u/s 45 -ITAT deleting the addition on account of termination of bottling license as capital receipt as not taxable u/s 28(iv)/28(νa) or alternatively u/s 45 of the IT Act - HELD THAT:- There were certain trade disputes arose between the assessee and the company namely Hindustan Coca-Cola Beverage Pvt Ltd and in order to settle those disputes the amount of compensation was received for Rs. 4,30,88,084/- only. Thus, it was alleged by the Revenue that the impugned amount does not represent the compensation as a result of termination of the contract and thus the principles laid down in the case of Oberoi Hotels Pvt Ltd [1999 (3) TMI 2 - SUPREME COURT] are not applicable. Therefore, the same should be made subject to tax either under the provisions of section 45 or 28(va). Thus the issue arises before us so as to find out whether the amount represents the compensation for the termination of the contract. As important to note that the main settlement agreement has to be read as a whole and in substance. Tribunal after considering the settlement agreement arrived at by the respondent- assessee with the Coco Cola India has upheld the order passed by the CIT(Appeals) on finding of fact that the source of income of the assessee as a result of the main agreement had come to an end. Tribunal also verified the said facts from the financial statements filed by the assessee in the year ending on 31st March, 2009 and 2010 for the subsequent years. In view of the above concurrent findings of facts, we are of the opinion that the Tribunal has rightly followed the decision of the Hon’ble Apex Court in case of Oberoi Hotel (P) Ltd [1999 (3) TMI 2 - SUPREME COURT] Disallowance made 20% of total purchases of raw material - ITAT restricted addition to 10% - Undeniably, the onus lies upon the assessee justify its claim based on the documents. In the event the assessee fails to justify, the AO has to see the claim of the assessee based on the circumstantial evidence, history of the case, comparable cases so as to find out whether the claim of the assessee is genuine or excessive before making any disallowance. But we find that the AO has not done such exercise but made the ad-hoc disallowance in the absence of supporting documents. In our considered view, such ad-hoc disallowance is not permitted under the provisions of law unless it is based on scientific basis. Yet, the claim of the assessee cannot be allowed in to-to in the absence of documentary evidence. No substantial question of law. Issues Involved:1. Deletion of addition on account of unproved creditors for goods under Section 68 of the IT Act.2. Deletion of addition on account of termination of bottling license as capital receipt not taxable under Sections 28(iv)/28(va) or alternatively under Section 45 of the IT Act.3. Restriction of disallowance of purchases of raw material from 20% to 10%.Issue-wise Detailed Analysis:1. Unproved Creditors for Goods under Section 68:The Appellant-Revenue challenged the Tribunal's decision to delete the addition of Rs. 29,41,612/- made under Section 68 of the Income Tax Act, 1961, concerning unproved creditors for goods. The Tribunal, after reviewing the evidence and submissions, upheld the CIT(A)'s decision, which had accepted additional evidence under Rule 46A of the Income Tax Rules, 1962. The Tribunal found that the assessee had satisfactorily demonstrated the legitimacy of the creditors, thereby justifying the deletion of the addition. The High Court concurred with the Tribunal's assessment, noting no substantial question of law arose from this issue.2. Termination of Bottling License as Capital Receipt:The Revenue contended that the compensation received by the assessee for the termination of a bottling license, amounting to Rs. 4,30,34,088/- and Rs. 1,50,00,000/-, should be taxable under Sections 28(iv)/28(va) or alternatively under Section 45 of the Act. The Tribunal, referencing the Supreme Court's decision in Oberoi Hotels Pvt. Ltd. vs. CIT, held that the compensation was a capital receipt as it resulted in the loss of a source of income for the assessee. The Tribunal highlighted that the termination of the contract impaired the trading structure of the assessee, thereby classifying the compensation as a capital receipt, not chargeable to tax. The High Court upheld this finding, agreeing with the Tribunal's interpretation and application of the Supreme Court's precedent, thus dismissing the Revenue's appeal on this ground.3. Disallowance of Purchases of Raw Material:The Revenue also disputed the Tribunal's decision to restrict the disallowance of purchases of raw material from 20% to 10%. The Tribunal noted that the assessee's business had ceased operations, leading to difficulties in providing complete documentation. However, the Tribunal found that the Assessing Officer's ad-hoc disallowance lacked a scientific basis and was not justified under the law. The CIT(A) had partially upheld the disallowance, granting partial relief based on the circumstances and evidence presented. The High Court agreed with the Tribunal's findings, stating that the issue was factual and did not constitute a substantial question of law, thereby dismissing the appeal on this ground as well.Conclusion:The High Court dismissed the appeal filed by the Revenue, affirming the Tribunal's decisions on all three issues. The Court found no substantial questions of law, as the Tribunal had appropriately applied legal principles and evaluated the factual matrix. The judgment reinforced the principle that compensation received for the loss of a source of income is a capital receipt and not taxable, aligning with established judicial precedents.