TaxTMI 
TaxTMI 
2004 (9) TMI 573
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....nder the head 'Income from other sources.'" 2. The facts of the case leading to this appeal briefly are that the assessee-company was incorporated in 1962. It entered into a Promotion Agreement on 30-9-1963 with M/s. Meturit AG, a company which was hundred per cent subsidiary of a German Company, Krupp Widia GmbH which, in turn, was a hundred per cent subsidiary of another German Company, Fried Krupp Essen, Germany. In terms of this Promotion Agreement, a manufacturing company was floated in India by the name of Widia (India) Ltd. at Bangalore. 3. In terms of the Promotion Agreement, M/s. Meturit AG were to hold 60% of the paid-up capital of M/s. Widia (India) Ltd., "Sak & Associates" 21.4% and the balance by general public. In keeping with the policies of Govt. of India operative from time to time and in view of the expansion of the licensed capacity of M/s. Widia (India) Ltd., the shareholding by M/s. Meturit AG came to be reduced from 60% to 51%. The shareholding pattern for the assessment year under consideration was as under : (a)M/s. Meturit AG-51% (b)Sak & Associates-26% (c)General public-23% 3.1 In terms of the Promotion Agreement, in the Articles of Association of Wi....
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....ssociates on the one hand and Meturit and its associates on the other. For this purpose, the share capital of M/s. Widia (India) Ltd. had been divided in three categories : (i)'A' series equity shares to be held by the foreign partner (Promoter and its partners, associates etc.) (ii)'B' series equity shares to be held by the assessee-company, its associates etc. (iii)'C' series equity shares to be held by Indian public. 5.2 The Assessing Officer found that both clause 9 of Promotion Agreement and the Articles of Association of M/s. Widia (India) Ltd. in clauses 30 to 54 had restricted transfer of 'A' series equity shares and 'B' series equity shares. The salient features of the Articles of Association were : "'A' class equity shares can be transferred to (i) any other member holding 'A' series equity shares, or (ii) to any subsidiary company of Meturit, or (iii) any Company or companies directly or indirectly controlled by Fried Krupp, Essen. If the aforesaid are not willing to purchase or to take a transfer of the shares or any of them, the same shall be offered to or may be transferred to any member holding 'B' series equity shares at such price as may be agreed upon or fail....
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.... 21-2-1994 asserting that there was no change in the shareholding of Widia (India) Ltd.; a meeting between the assessee-company and its partner during 25-4-1994 to 29-4-1994. On 8th May, 1994, a note on the discussion held in Dusseldorf on 29-4-1994 was prepared. This note stated that there was no violation of any agreement but at the same time, Fried Krupp and Krupp Widia GmbH showed willingness, in view of the long association of the assessee-company, to pay an unconditional sum of DM 4 millions. The Assessing Officer further noticed that in the letter dated 11-5-1994 Shri Autar Krishan talked about the unconditional payment and quantification of such payment as the only major difference between the two companies. On the same date, a tele-fax was received by Shri Autar Krishan wherein it was stated that the offer made in Dusseldorf was a final offer to cover the "nuisance factor and the necessity for the redrawing the shareholder agreements to avoid any further misinterpretation between the parties". The Assessing Officer noted that another important correspondence was dated 28-10-1994 being a letter addressed to Shri Autar Krishan wherein the following was stated : "I appreciat....
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.... stand terminated. (e )SAK shall acknowledge and agree to the transfer the right, duties, obligation, assets, liabilities under the Promotion Agreement." 7.1 According to the Assessing Officer, the amount received by the assessee-company was for the breach of trust stipulated in the Promotion Agreement and the Articles of Association. The assessee's business operation through the joint venture company did not have any direct bearing. In other words, the assessee's contention that payment of DM 10.5 million made by Krupp was voluntary and there was no transfer of shares and therefore the said amount was not open for taxation, did not have any bearing when the assessee did not want to open up the corporate veil. But on perusal of Promotion Agreement dated 30-9-1963 and Settlement Agreement dated 20-12-1994, it was evident that the payment had been made to the assessee-company in lieu of the surrender of their rights under the Promotion Agreement especially their right of presumption in respect of the shares of M/s. Widia (India) Ltd. Another very important right surrendered by the assessee-company was its right to remain the exclusive Indian Manufacturer and Seller of various produ....
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.... the Settlement Agreement in 1994 only formalized the existing state of affairs. The shareholding pattern of M/s. Widia (India) Ltd. remained unchanged, Meturit AG held 'A' series shares, assessee-company held 'B' series shares and public held 'C' series shares and their shareholding percentage was to be 51%, 25.3% and 23.5% respectively. The company's name, trade-mark, manufacturing activity and business territory remained unchanged. The assessee-company argued that it had not lost anything and money was received from Fried Krupp to avoid unnecessary litigation and nuisance value created by the assessee-company. Fried Krupp wanted to dispose of its 100% subsidiary during December 1994 and it did not want to be involved in any prolonged and protracted litigation or arbitration. The assessee received money as one time exception and, therefore, it was capital receipt. The assessee argued that Krupp Widia GmbH was finally sold to U.S. Company, Cincinnati Milacron which did not/do not have any competitive business in India against Widia (India) Ltd. Thus, the original competitive clause in 1963 Promotion Agreement was also not affected. The only change that had taken place was that the....
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....receipt. 11. During the course of proceedings before the Commissioner (Appeals), the assessee also furnished copy of judicial opinion given by Mr. T.N. Pandey, retired Chairman of the Central Board of Direct Taxes. The ld. Commissioner (Appeals) has reproduced the aforesaid judicial opinion. According to that opinion, the payment was made to ward off controversies and for peaceful disposal of the interest Fried Krupp had in Krupp Widia GmbH and other subsidiaries. The assessee argued that while determining the question as to whether a receipt was chargeable to tax, the legal character of the transaction i.e. the source of the receipt could not be ignored. Reliance in this respect was placed on the judgments in Addl. CIT v. Ram Kripal Tripathi [1980] 125 ITR 4081 (All.), CIT v. B.M. Kharwar [1969] 72 ITR 603 (SC) and CIT v. Purandas Ranchoddas & Sons [1988] 169 ITR 480 (AP). It was relevant to examine whether the receipt could be said to arise from an adventure in the nature of trade or was of casual and non-recurring nature or came within the purview of section 28(ii). The receipt could not by any stretch of imagination be described as arising from an adventure in the nature....
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....o have good relation. The shareholders agreement signed between the assessee-company and Meturit in 1994 were on the same terms as in Promotion Agreement of 1963. The only change, if at all it could be called a change, was that the parent company, Fried Krupp, washed off its hands which otherwise was not a party to Promotion Agreement 1963. The ld. Commissioner (Appeals) noted that Krupp Widia GmbH was subsequently purchased by USA Company, Cincinnati Milacron which did not have competitive business in India. The joint venture between Meturit and the assessee-company signed in 1963 had no right to prevent transfer of Krupp Widia GmbH to the US Company. Thus, what the assessee received was neither a compensation nor a damage but a fortuitous receipt which was purely discretionary in nature and not chargeable to tax as income. The receipt was not from a source and it was not out of a trading activity. It was not at all casual income because it was a voluntary payment entirely on the whim and discretion of the payer. It did not fall in any of the five heads of income mentioned in section 14. The ld. Commissioner (Appeals) referred to the judgment of Hon'ble Supreme Court reported in P....
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....for agreeing to give up its rights arising from 1963 Promotion Agreement. Accordingly, the entire case law relied upon in the assessee's paper book was not applicable because the same was based on incorrect premise as to the nature of the receipt. The ld. Departmental representative argued that the concept "Income" was very wide and it embraced all receipts that could be considered to be in the nature of income. He referred to the detailed discussion in the commentary of Chaturvedi & Pithisaria's "Income-tax Law", 5th Edition - Vol. I, page 413. He emphasised that even voluntary and gratuitous payments connected or linked with an office, occasion or occupation shall be covered by the description "income". He referred to the judgment of the Hon'ble Kerala High Court in the case of Father Epharam v. CIT [1989] 176 ITR 78 and submitted that any monetary return "coming in" could be described as income. The ld. Departmental Representative argued that there were a number of decis-ions to the effect that income is anything which can properly be described as income and is taxable under the Act unless expressly exempt. He referred to the judgment of the Hon'ble Supreme Court in the ca....
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....s reported in CIT v. D.G. Goenka [1981] 129 ITR 260 (Bom.) and in Devidutt Dhurmal Bajaj v. CIT [1981] 131 ITR 16 (Bom.). 16. The ld. CIT (DR) argued that the receipt in question in the case of the assessee-company was not in the nature of windfall. The assessee received it on account of its business connection in relation to the business of M/s. Widia (India) Ltd. There were certain commitments and obligations of the foreign parties in relation to the arrangement of the assessee with them in connection with the business of M/s. Widia (India) Ltd. The assessee was paid as there was breach of contract on the part of the foreign companies. The ld. Departmental Representative referred to page 438 of the book (supra). He referred to the judgment of the Hon'ble Supreme Court in CIT v. Kamal Behari Lal Singha [1971] 82 ITR 460 and argued that in order to find out whether any receipt is a capital or revenue receipt, one has to see what it is in the hands of the receiver and not its nature in the hands of the payer. The source from which the payment is made has no bearing on the question. Where an amount is paid which, so far as the payer is concerned, is paid wholly or partly out of....
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....in a German newspaper on 17-1-1994 suggesting that Fried Krupp Essen, Germany, had plans to sell Krupp Widia GmbH as a whole to a third party. This news item was faxed to the Managing Director of the assessee-company by Shri R. Srinivasan, M.D. of Widia (India) Ltd. Thereupon, the Managing Director of the assessee-company addressed a letter dated 19-1-1994 to the Managing Director of Krupp Widia GmbH and referred to the statement of the Chairman of Fried Krupp Essen, Germany, that had been referred to in the newspaper. He made an offer to purchase the shareholding of Meturit AG in M/s. Widia (India) Ltd. Thereafter, certain correspondence ensued between the Managing Director of Krupp Widia GmbH and the Chairman of Fried Krupp Essen, Germany, on the one hand and the assessee-company on the other hand. Thus, the negotiations culminated into two agreements viz. Settlement Agreement and Shareholders Agreement being signed on 20-12-1994. 18. The ld. Counsel pointed out that thereafter, M/s. Cincinnati Milacron, a US company purchased the shares of M/s. Krupp Widia GmbH, as a result of which the latter ceased to be a subsidiary of M/s. Fried Krupp Essen, Germany. There was no change, ho....
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....ly change, if at all it could be called a change, was that the assessee could not hereinafter look upon Fried Krupp Essen, Germany as the foreign collaborator. Krupp Widia GmbH would be the collaborator, but this company would be under the control of the new purchaser and not Fried Krupp Essen, Germany. The assessee-company had also to desist from taking any action by way of suit or otherwise based on the breach under the Promotion Agreement. The amount was paid to the assessee-company, a mutually agreed ad hoc amount, as a measure of goodwill for the breaking away of Fried Krupp Essen, Germany, from the collaboration agreement and freedom there-from and also the right to sell its subsidiary without any hindrance. The assessee-company's agreement with M/s. Meturit AG remained intact even after this change. Legally speaking, there had been no alteration in the Promotion Agreement or in the relationship between the assessee and M/s. Meturit AG and Krupp Widia GmbH. The assessee-company could not have legally prevented the divesting of Krupp Widia GmbH by Fried Krupp Essen, Germany. 20. The ld. Counsel argued that the Assessing Officer had based her case by over simplifying the issue....
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....e that the same is not chargeable to tax. The ld. Counsel argued that the facts of the case suggested that the assessee received voluntary and gratuitous payment from Fried Krupp Essen. It was settled legal position that voluntary payments received at the whim of the giver are not income. In support of this contention, the ld. Counsel placed reliance on the following judgments : (a) Siddhartha Publications (P.) Ltd.'s case (supra); (b) Rani Amrit Kunwar v. CIT [1946] 14 ITR 561 (All.); (c) H.H. Maharani Shri Vijaykuverba Saheb of Morvi's case (supra); (d) Yuvrani Premkumari & Yuvraj Udaybhansinghji's case (supra); (e) Padmaraje R. Kadambande's case (supra); and (f) Pran Jiban Jaitha's case (supra). 22.1 The ld. Counsel argued that the ld. Departmental Representative was not justified in his arguments that even if the payment was received for no consideration, it could always be brought to tax under the head "Income from other sources". Any receipt which is not in the nature of income could not be described to be in the category of casual and non-recurring receipt. For this purpose, the ld. Counsel placed reliance on the judgment in P.H. Divecha's case (supra). 23. The ld. C....
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....the subject of the receipt was received and that no subsequent operation could change the nature of the receipt. Learned counsel for the respondent countered the argument and cited CIT v. Karam Chand Thapar [1966] 222 ITR 112 (SC), where this Court noted the decisions in Jay's - the Zall ER 762 (KB), and Elson (Inspector of Taxes) v. Prices Tailors Ltd. [1963] 1 All ER 231 (Ch D) with approval as limiting the principle enunciated in Tattersall's case [1939] 7 ITR 316 (CA). It was held by this court that the proposition enunciated in Tattersall's case [1939] 7 ITR 316 (CA), was not absolute and that in given cases amounts which were not received initially as trading receipts could eventually be regarded as business income by reason of subsequent events. The subsequent event must be such that 'a different quality is imprinted' on the receipt. An example of such subsequent event was found in the case of Jay's - The Jewelers (1947) 29 TC 274 (KB) where (page 129 of 222 ITR) : ** ** ** In determining whether compensation received for breach of a contract is a capital or trading receipt, the relevant rule has been formulated by Diplock L.J. in London and Thames Haven Oil Wharves Ltd....
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....ued that various case law related to the definition of "income" relied upon by the counsel for the assessee did not apply on the facts and circumstances of the case. He argued that there was long standing business relationship between the payer and the payee. They were not strangers to each other. There was no question of Fried Krupp Essen agreeing to pay such a huge amount to the assessee-company for no reason at all. It was only when Fried Krupp Essen realized that it was obliged to make the payment that they settled the dispute by making payment of an amount mutually agreed upon. The amount was obviously paid for a breach of contract. The ld. Departmental representative relied in this respect on the judgment of the Hon'ble Supreme Court in CIT v. Prabhu Dayal [1971] 82 ITR 804 . He argued that a payment made for past services or discharge of past liabilities does not lose its revenue nature. Hence, the compensation had to be in the nature of revenue receipt. The ld. Departmental Representative argued that in the case of the assessee there was no destruction or termination of income producing asset. Therefore, the receipt in question could not be called to be a capital receipt. T....
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....ide by these provisions. I look forward to hearing from you in this matter." 29. The Managing Director of Krupp Widia GmbH replied to Mr. Autar Krishna on 24th January, 1994. In this reply it was, inter alia, stated : "It has never been and, as far as I am concerned, will not be the intent of the shareholder to dispose of Meturit or having Meturit disposing of their shareholding in Widia (India) Ltd. The cooperation discussions encompasses all activities and shareholdings; thus, all activities of the Widia group are considered in cooperation agreements. Therefore, there will not be a change in our shareholding nor in our policies as regards Widia (India) Ltd. and/or SAK Industry is concerned. Be assured that the past excellent association between Krupp Widia GmbH and our company Widia (India) Ltd. will be maintained." 30. Thereafter, on 16th February, 1994 it was officially announced that Fried Krupp Essen had signed a letter of intent with Sandvik AB relating to Sandvik AB buying the shares of Krupp Widia GmbH and thus taking over all the activities including Meturit AG. The Managing Director of K. Widia GmbH informed this fact to Mr. Autar Krishna vide its letter dated 16th F....
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....Ltd. There was nothing contained in the wording of Article 12 of the Promotion Agreement also because no sale of the shares of Meturit AG of Widia (India) Ltd. had been planned. Mr. Autar Krishna responded vide his letter dated Ist March, 1994 to Dr. G. Cromme, Chairman, Fried Krupp Essen, with copy of Managing Director Krupp Widia GmbH, Meturit AG, and also to Mr. P.O. Eriksson, President & CEO Sandvik AB Sweden. In this letter Mr. Autar Krishna reiterated that Fried Krupp Essen had committed a serious violation of the Promotion Agreement, particularly, Article 12 thereof. If there was a sale of Meturit AG, Switzerland, it involved transfer of 'A' series equity shares of Widia (India) Ltd. being held by Meturit AG. Sandvik AB was a direct competitor of Widia (India) Ltd. and thus there was a violation of the condition that the sale of the product in India shall be carried out by only Widia (India) Ltd. On the proposed sale, the entire technical know-how was being made available to Sandvik Asia Ltd. and therefore, there was violation of technical collaboration agreements as well and therefore the steps could be initiated to recover the technical assistance fees paid by Widia (India....
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....e learned counsel for the assessee has argued that there was no such breach and there was no legal obligation for Fried Krupp Essen to pay any damages or compensation or payment of any kind whatsoever to the assesee-company and therefore the payment of DM 10.5 million to the assessee-company was merely a voluntary and fortuitous payment to avoid nuisance created by the assessee-company which could have delayed disposal by Fried Krupp Essen of its hundred per cent subsidiary Krupp Widia GmbH in favour of U.S. party much beyond December 1994. As Fried Krupp did not want to be involved in any prolonged or protracted legal proceedings, it desired to have a smooth sailing and to buy peace by making one time payment. 34. On the facts and in the circumstances of the case, enumerated by us in the former paragraphs, we find that the dispute between the parties was settled by turn of events without there being any authoritative adjudication and judicial pronouncement over the respective claims of the parties. In such circumstances, we are of the view that both the learned Assessing Officer as well as the learned CIT(A) erred in their assumptions one way or the other. The Assessing Officer h....
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....90,000 and transferring and assigning its rights under the agreement in favour of a third party M/s. Advani and Batra. On these facts the Hon'ble Bombay High Court in their judgment in Tata Services Ltd.'s case (supra) : "It is no doubt true that at one stage Anandji Haridas wanted to treat the transaction as cancelled, a position which was not accepted by the assessee. The assessee, however, had throughout been insisting that the agreement of sale is a subsisting agreement and that it would be constrained to file a suit for specific performance of that agreement for sale. What-ever may have been the controversy between Anandji Haridas and the assessee prior to 23rd September, 1963, when the assessee executed the receipt for Rs. 5,90,000, the position on that day was not only that the original agreement of sale between the assessee and Anandji Haridas was to be treated as subsisting but also that the tripartite agreement between the assessee, Anandji Haridas and M/s. Advani and Batra that the money paid by the assessee to Anandji Haridas was to be returned by M/s. Advani and Batra and an additional sum of Rs. 5,00,000 was also to be paid to the assessee by M/s. Advani and Batra wa....
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....ement Agreement dated 20th December, 1994, between Fried Krupp Essen, Krupp Widia GmbH, Meturit AG, the assessee-company and the group of persons represented by Mr. Autar Krishna, it is seen that the settlement was of the dispute arising between the assessee-company and Fried Krupp Essen because the assessee-company had alleged that Fried Krupp had breached the Promotion Agreement by the proposed sale by Fried Krupp of all quotas of Krupp Widia (including all of the capital stock/quotas of Meturit). On fried Krupp Essen agreeing to pay to the assessee-company a sum of DM 10.5 million, the assessee-company agreed and consented to the transfer by Fried Krupp Essen, termination of Promotion Agreement of 1963, full and final settlement of all claims, demands, causes of action, arising under or in connection with the Promotion Agreement or in breach thereof. In other words, the assessee-company received DM 10.5 million in satisfaction of its claims against Fried Krupp Essen, Krupp widia GmbH and Meturit AG. We, therefore, hold that whatever may have been the legal position prior to 20th December, 1994, as on 20th December, 1994, the assessee-company received the sum of DM 10.5 million i....
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.... should not be receipt in the nature of a mere windfall. The word 'income' is an expression of elastic ambit and definition given in section 2(24) is not exhaustive. In such circumstances one may consider the common parlance meaning of the word 'income' - CIT v. Ramdeo Samadhi [1986] 160 ITR 197 1 (Raj.). In the Oxford Dictionary income is defined as 'that which comes in as the periodical produce of one's work, business, lands or investments considered in reference to its amount and commonly expressed in terms of money' - CIT v. Little's Oriental Balm & Pharmaceuticals Ltd. [1950] 18 ITR 849 (Mad.). Only a periodical monetary return yielded by the capital is to be treated as 'income' even though it may take varied forms, for instance, produce of land or rent from property or interest on loan, etc. - DLF Housing & Construction (P.) Ltd. v. CIT [1983] 141 ITR 8061 (Delhi). It is axiomatic to say that all receipts would not necessarily be deemed to be income and the question whether any particular receipt is income or not depends on the nature of the receipt and the true scope and effect of the relevant taxing provision - CIT v. Girdharram Hariram Bhagat [1985] 154 ITR 102 (Guj.).....
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....5] 211 ITR 500 ; and the Hon'ble Bombay High Court in the case of Cadell Wvg. Mill Co. (P.) Ltd. v. CIT [2001] 249 ITR 265. The Hon'ble Supreme Court have, in their judgment in the case of Universal Radiators v. CIT [1993] 201 ITR 800 1 have held that exigibility to tax depends on a charge created by the Act and liability to pay tax on computation in accordance with the provisions in the Act. It, therefore, follows that section 10(3) cannot enlarge the charge created by section 4 of the Act. The position more or less is well-settled now that a capital receipt cannot be assessed as income unless it can be brought to tax under the provisions of "Capital gains". 42. We have already held with reference to Settlement Agreement dated 20th December, 1994, that whatever may be the conflicting stands of the parties and the legal position prior to 20th December, 1994, the sum of DM 10.5 million received by the assessee, has to be viewed as the amount received in lieu of surrender of his rights and claims against Fried Krupp Essen; Krupp Widia GmbH and Meturit AG. In other words, the amount received by the assessee was in the nature of compensation for loss of the assessee's perceived/allege....
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....Widia (India) Ltd., in the event of the proposed sale of Krupp Widia GmbH from Fried Krupp Essen to an outsider going through. This right was given up by the assessee on receipt of DM 10.5 million. In the case of the assessee before us if the assessee had succeeded to exercise its supposed right to purchase shareholding of Meturit AG in Widia (India) Ltd. that in itself would not have given rise to any income in the hands of the assessee but only created an income earning source in the hands of the assessee. It is important to bear in mind that the assessee was supposed to purchase these shares at the price mutually agreed upon. Hence compensation received by the assessee for surrender of its right cannot be viewed other than compensation received in lieu of a profit making source. 44. In the case of CIT v. Tushar Commercial Co. Ltd. [1998] 230 ITR 918 (Cal.) the Hon'ble High Court have held that right to subscribe to shares is a capital asset in the hands of an assessee other than a dealer in shares. In the case of CIT v. Hiralal Manilal Modi [1981] 131 ITR 421 4 (Guj.), the assessee entered into in 1956 an agreement of sale and paid the earnest money of Rs. 50,000 for purchase o....