TaxTMI 
TaxTMI 
2011 (4) TMI 825
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....T(A) did not appreciate the fact that the said expenditure included expenditure on food and beverages to guest and also the expenses on presentation articles and gifts and that the disallowance made by the Assessing Officer at 20 per cent of the total expenditure under this head is justified on the facts. 3. The ld. CIT(A) has erred in law and as on facts on of the case in directing to include the excise duty and sales tax aggregating to Rs. 72,45,365 in the figure of total turnover for the purpose of deduction under section 80HHC. 4. The ld. CIT(A) has erred in law and as on facts on of the case in directing to include income by way of sale of empty bags, income by way of sale of C.B. Dust Sinews and income by way of sale of scrap and waste chemicals in the profits of the business for the purpose of deduction under section 80HHC, disregarding the facts that these items of income are not derived by the industrial undertaking from the export business." 3. The facts of the case are that assessee-company is involved in the manufacture of "ossein" and "gelatine" from animal bones. The first issue in Revenue's appeal relates to deletion of ....
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....h Court. 4. As a result claim of assessee for depreciation is allowable. This ground of Revenue is accordingly rejected. 5. Next issue relates to disallowance out of sale promotion expenses. The Assessing Officer disallowed a sum of Rs. 1,47,410 out of sale promotion expenses. He had relied on the findings given in the assessment order for the assessment year 2001-02. This order of ld. Assessing Officer and order of ld. CIT(A) thereon was considered by Tribunal. After considering the facts the Tribunal restricted the disallowance to 10 per cent of total expenditure. 6. We have heard the parties. Following the order of Tribunal, we remit the matter back to the file of Assessing Officer for considering disallowance at 10 per cent of the total expenses subject to the rider that such disallowance will not be more than the disallowance already made by the Assessing Officer. With this observation, this ground of Revenue's appeal is allowed but for statistical purposes. 7. The third issue relates to including excise duty and sales tax accrued amounting to Rs. 72,15,365 in the total turnover for the purpose of deduction under section 80HHC. 8. We have heard the parties and i....
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.... travelled to the Tribunal which has allowed the claim. On the basis of above order, the ld. AR claimed that once the Tribunal has by following the decision of Hon'ble Supreme Court in CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 has allowed the claim treating it as additional liability of capital, or rather cost of the capital, then the claim of the assessee should have been allowed. He submitted that the Tribunal had, in that assessment year in the case of the assessee allowed the claim, as under :- "From the above it is clear that the increased liability which is on revenue account is not a notional or unascertained liability but actual liability and hence allowable in the year in which the increased liability arose due to exchange rate fluctuation. Similarly the increased liability which was utilized for acquisition of capital asset is to be added as cost of capital asset. It has also been clarified that amendment in section 43A by Finance Act, 2002 with effect from 1-4-2003 is prospective in nature. Therefore, in view of the authoritative pronouncement of the Hon'ble Supreme Court, the increased liability on account of working operation is allo....
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.... the direction of the Tribunal with respect to the items constituting calculation of relief under section 80HHC. Since this ground is general in nature it requires no specific adjudication. Hence it is rejected. 16. Ground No. 4 relates to disallowance out of sales promotion expenses. Similar ground was raised in Revenue's appeal. While disposing of the same, we have held that once the Tribunal in assessment years 2000-01 and 2001-02 in the order referred to above has restricted the disallowance to 10 per cent on total claim the Assessing Officer is required to calculate such disallowance subject to overall limit of disallowances made by him in his Assessment Order as observed by us while disposing of Revenue's appeal. This ground is accordingly allowed but for statistical purposes. 17. Ground No. 5 relates to disallowance under section 14A. The facts relating to this issue are that assessee company claimed income of Rs. 88,77,869 as exempt under section 10(33) of the Income-tax Act, 1961. 18. After considering the reply of the assessee and his order for assessment year 2000-01 the Assessing Officer worked out disallowable under section 14A at Rs. 12,76,089 as under :- ....
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....r, therefore, would consider reasonable amount of disallowance. Accordingly this issue is restored to the Assessing Officer for fresh adjudication in the light of decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra). 20. The main issue in this appeal is raised in ground No. 1. It relates to treating a sum of Rs. 10,14,54,000 being compensation received by the assessee company from M/s Konica Gelatine Corporation, Japan, as revenue receipt by the Assessing Officer as against claim of capital receipt by the assessee. 21. The facts relating to this issue as noted by the Assessing Officer and the ld. CIT(A) are that the assessee company is involved in the manufacturing of "ossein" and "gelatine" from bones. M/s Konica Gelatine Corporation which was purchasing "ossein" from assessee company was a promoter of the assessee company. The "ossein" purchased by M/s Konica Gelatine was apparently used for manufacturing "gelatine" which was further used for manufacturing photographic films. The detailed facts from inception of the assessee company till the termination of agreement with Konica Gelatine which led to the award of compensation to the asses....
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....ase "ossein" from assessee company. Accordingly Konica Gelatine Corporation issued letters on 28-3-2001 and 26-6-2001 wherein Konica Gelatine Corporation expressed its intention to terminate the contract for purchase of "ossein" from the assessee company with effect from 1-2-2003. The termination agreement was finally signed on 16-11-2001 by the assessee company. Under this agreement M/s Konica Gelatine Corporation paid US $ 2.1 million to the assessee company in full and final payment of loss, liabilities, expenses, claims and demands whatsoever arising under and in relation to the project documents. The project documents were defined in the termination agreement as consisting of two agreements of 1972 and technical agreement of 1995. The assessee had claimed that due to the structural damage to the project resulting from the termination agreement the compensation received is capital in nature. The termination agreement would have left possible closing of "ossein" plant and thus damage to the profit earning apparatus of the assessee company. On the other hand, the claim of the Revenue is that the above receipt is revenue in nature as it is awarded against stoppage of purchases ....
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....eement. Takarazuka shall take up ossein produced by IGCL when ossein is offered in priority at reasonable prices through Nichimen all the machinery and equipments which Takarazuka considers essential to be supplied from Japan. Takarazuka shall obtain Japanese Government's sanctions with regard to Agreement. In respect of providing technical know-how assessee company would pay 5 million in Japanese yen to Takarazuka. Article 5 from basic agreement in this regard reads as under:- Article 5 : Know-How Fee - The Company shall pay to Takarazuka as know-how fee, a sum of Five Million Japanese Yens simultaneously with the subscription of shares. There were restrictions of transfer of shares by each party to the effect that for such transfer full agreement with other parties has to take place as the other remaining parties will have pre-emptive rights to purchase the same. Takarazuka was appointed technical consultant to the assessee company as per terms and conditions concluded with the two. It was further agreed that Takarazuka (now Konica Gelatine Corporation) would purchase "ossein" manufactured by assessee company on priority basis. Article 11 of basic agreement in this regar....
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.... payment, or if IGCL enters into bankruptcy proceedings or is unable to effect payment, Takarazuka holds the legal rights to notify IGCL by registered mail the cancellation of this agreement and in that event, Takarazuka shall hold the right to claim from IGCL its immediate performance of all its obligations under this agreement and to claim from IGCL all the losses sustained from the consequences of such cancellation. The above collaboration continued and assessee company continued to sell "ossein" to Takarazuka (Konica Gelatine Corporation) on priority basis. Thereafter in May, 1995 another technical collaboration agreement was executed between the assessee company and Konica Gelatine Corporation Ltd., (KGCL) for establishing a separate unit for manufacturing gelatine. KGCL would provide all technical assistance for production of "gelatine" as it was already engaged in this product for many years. This new plant was to be establish at Vapi, Gujarat employing KGCL's technology. The KGCL would have provided know-how and technology to the assessee company for setting up and running of this new plant. It was provided that gelatine so produced by IGCL could be exported, sold or use....
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....,14,54,000 which was claimed as capital receipt by the assessee. Article 13 : Termination - 13. Each party shall have the right to terminate this Agreement by a notice in writing to operate on a date specified in the notice, if :- (i) the other party fails to observe any of the terms hereof to a material and significant extend and to remedy such failure (where it is capable of being remedied) within the period specified in the notice given to it by the aggrieved party calling for the remedy being a period of not less than 60 days. (ii) The other party becomes insolvent or has a Receiver appointed of its assets or execution or distress levied is such as would materially affect the ability of that party to discharge its obligations under this Agreement. (iii) As order is made a resolution is passed for winding up or liquidation of the other party except where in such an event is only for the purpose of amalgamation with another or reconstruction and the resultant company emerging is or agrees to be bound by the terms hereof. 13.2 No waiver of any antecedent deed and no grant of time and indulgence shall prejudice any subsequent right to t....
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....n as revenue receipt. His reasons are summarised as under :- (1) According to the ld. CIT(A) if compensation is paid for structural damage or damage to the infrastructure or damage to the income-earning apparatus, the receipt will be capital in nature whereas if compensation is received in lieu of loss of profit of the business it would be revenue receipt. (2) As per notice given by KGCL dated 28-3-2001 to the assessee company the heading is termination of purchase of "ossein from you". The second part of that letter clearly indicates that termination agreement dated 16-11-2001 spoke of only termination of purchases as under :- "In view of discontinuation of procurement of gelatine from us and the likely closure of our business, we have no alternative but to terminate our contract for purchase of ossein from your company. Accordingly, we hereby serve you a formal notice for termination of purchase from you of ossein with your delivery of ossein to us in October this year. We have endeavoured to provide this to you at the earliest possible opportunity and have provided you with termination notice of over 6 months, to allow you to identify alternative....
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....toppage of purchase of "ossein" by KGCL from assessee company. The ld. CIT(A) also gave a finding that there is no indication in the notice, letter and termination agreement that compensation has been given for any structural damage or infrastructural damage or damage to income-earning apparatus. (5) The basic agreement of 1972 provided that IGCL was not bound to sell "ossein" only to KGCL. The assessee company was not precluded from selling "ossein" to any other country. The termination so made, resulted in loss to the business transaction but that does not mean a damage to the infrastructure of the assessee company or to the income earning apparatus. No material has been placed by the assessee to show that there was any structural damage or damage to the infrastructure. There is no decline in the output but there is only a decline in sales transactions and this by itself cannot lead to an inference that compensation so received is capital in nature. 26. Against this the ld. AR for the assessee submitted that :- (1) The termination of agreement should be read as a whole. It provided compensation for termination of basic agreement and technical agre....
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....nd support of KGCL. In support of its argument that compensation received on termination of agreement dated November, 2001 was capital, ld. AR relied on following three judgments :- 1. Kettlewell Bullen & Co. Ltd. v. CIT [1964] 53 ITR 261 (SC) 2. P.H. Divecha v. CIT [1963] 48 ITR 222 (SC) 3. Karamchand Thaper & Bros. (P.) Ltd. v. CIT [1971] 80 ITR 167 (SC) In addition to this, the ld. AR also referred to one more authority as under :- (1) Inter Gold (India) (P.) Ltd. v. Jt. CIT [2010] 37 SOT 45 (Mum.) 27. In response to above, the ld. DR submitted that as per agreement of 1972 Takarazuka (KGCL) is not indefinitely supplying technical know-how to the assessee company. The supply of technical know-how was limited to initial period of 5 years for which separate payment was made by IGCL. Further as per agreement of 1972 Takarazuka was to purchase only ossein and not gelatine. Even the letter being a notice for termination for purchase referred to "ossein" only and not gelatine. Once termination agreement of November, 2001 refers to purchase agreement then assessee company was to show what was the purchase agr....
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....minated it will not be legally valid. Even otherwise major part of technical collaboration for Vapi plant was over before termination agreement of November, 2001. Even though term of 1995 agreement was for 10 years but various obligations contained therein are already over. Ld. DR submitted that letters/notices issued by KGCL to assessee company for termination of purchase agreements contained reference to purchase only. Even the letter from Rajni & Associates attorney for the assessee company mentions that erection, commissioning, production and trial were all over in last 30 years. In nutshell when all the letter issued by KGCL and letter of "Rajni Associates" is considered then project documents are confined to only purchase of "ossein" and, therefore, the compensation paid to the assessee company was for termination of purchase from assessee company. 28. The ld. DR submitted that even as per 1972 agreement KGCL or Takarazuka was not the sole purchaser of ossein from the assessee. They refer only to the sale to Takarazuka/KGCL on priority basis. In other words assessee company was free to market its products in any other country which has been clearly specified in 1972 agreem....
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....did not provide for any payment for structural damage. There was no compensation of loss of reputation or good-will. Therefore entire receipt by the assessee company as compensation is revenue receipt. 30. Ld. AR in rejoinder submitted that judgment of Hon'ble Supreme Court in Devecha's case was given by five judges of the Apex Court which will still hold the fields and judgments given by other Benches of the Apex Court subsequently cannot over-rule the judgment of Apex Court in P.H. Divecha's case (supra). According to him in P.H. Divecha's case (supra) if monopoly contract has come to an end then it is a loss of enduring benefit, there is a damage to profit earning apparatus, a world famous organization has withdrawn which had severely affected the goodwill and reputation of the assessee company and hence it has affected the carrying on of business in the same way and to the same extent as it was earlier done. In the present case 100 per cent production goes to the KGCL hence it is a monopoly sale. Its withdrawal has ransacked the structure of the assessee company. The 1995 agreements are project document. It was for 10 years which are yet to expire and, therefore, on both the....
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....ed by the assessee company can be exported, sold or used anywhere in the world. Such right was granted on the payment of fees. The only rider put was that manufacturing and sale of photographic "gelatine" would commence at the future date after obtaining the prior written consent of KGCL. For the purpose of transfer and selling its rights in KGCL, the assessee company was required to pay to KGCL a total Japanese year of six crores fifty lakhs which included price attributable to designs and drawing pertaining to KGCL technology whose price was estimated at Japanese yens 32,50,000. The fees for deputing technicians was separate. The terms of this agreement was for 10 years except the secrecy clause which would survive even thereafter. Article 13 of 1995 agreement provides a right to both the parties to terminate this agreement by a notice in writing to operate on a date specified in the notice if any of the parties fail to observe any terms of the agreement or other party becomes insolvent or a party is in the process of winding up. The termination agreement dated November, 2001 executed between the assessee company IGCL, KGCL and Nichimen & Co. and Khimji Vishram & Sons (Miranis....
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....rs two million one hundred thousand only) to the Account of IGCL at SMBC Mumbai Branch by telegraphic transfer (the Compensation) in full and final settlement of all losses, liabilities, expenses, claims and demands whatsoever arising under or in relation to the Project Documents or in view of the termination of the Project Documents insofar as it relates to Konica or otherwise howsoever." Clause 4 provided that Konica will not enter or participate in the business of manufacturing, marketing, sale, purchase and distribution of the product manufactured by the IGCL within territory of India. This non-competition clause reads as under :- "4. Non-Competition Konica agrees that for a period of three (3) years from the receipt of the Compensation by IGCL from Konica, it shall not, directly or indirectly, without the prior written consent of IGCL, enter or participate in the business of manufacture, marketing, sale, purchase and distribution of the product within the territory of India. For a period of three (3) years from the date of receipt of the Compensation by IGCL, Konica shall not in any manner, directly or indirectly, purchase and/or procure the Products from any third pa....
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.... (1) Guarantee given by KGCL for production of 166 kg per hour of the gelatine as provided in Article 6.1 of the agreement of 1995. (2) Transfer and continuing transfer for running and improving the Vapi plant for the period of 10 years as provided in the agreement. (3) Providing technical personal for improving and operation of the plant and other guarantees given as per article 6 of that agreement. Now the question arises is whether the sum of US $ 2.1 million (equivalent to Indian Rs. 10,14,54,000) is capital receipt in entirety or revenue receipt in entirety or a mixed capital-cum-revenue receipt. In this regard we refer to various authorities for coming to appropriate inferences. (1) In P.H. Divecha case (supra), decided by five judges of the Hon'ble Supreme Court, it was held that compensation paid by Phillip Electrical Company to the assessee being a partner in the firm which had entered into an agreement with Phillip Electrical Co., and such agreement was terminated, was held as capital receipt. The facts relating to that case are the assessee was conducting the business as a partner in the firm in electrical goo....
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....n'ble Calcutta High Court held that a payment received on account of gratitude or valuable and legal services rendered by the assessee established a capital receipt. The facts in that case were that assessee was acting as a managing director of Airways India Ltd. The business of the company including Airways India Ltd., was acquired with effect from August 1, 1953. The Board of Directors of Airways India Ltd. recommended the payment of Rs. 50,000 to the assessee in view of the termination of assessee's association with that company due to scheme of nationalization. It was held that payment was for loss of employment and hence a capital receipt. (3) In Indian Engg. & Commercial Corpn. (P.) Ltd. v. CIT [1994] 205 ITR 1/[1993] 68 Taxman 520 (Bom.) the assessee company had received a payment on termination of agreement to sale tractors of a Polish Company and it was held as revenue receipt. The facts in that case were that by agreement of 1958 assessee was appointed as sole distributor in India for certain types of wheeled tractors manufactured by Polish Company. The agreement provided that the assessee would be acting as sole distributor, act on its own account and orde....
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....ier Automobile Ltd., it transferred the undertaking of manufacturing of engines to that company. Thus assessee stopped its business and amounts so received from Premier Automobiles was held as capital receipt. (5) In CIT v. T.I. & M. Sales Ltd. [2003] 259 ITR 116/129 Taxman 444 (Mad.) the assessee was a distributor on principal to principal basis. There was termination of distribution. Under this agreement assessee was to transfer trained staff, dealership net work, brand image and other market infrastructure. Covenant in the agreement restricted the assessee from acting as distributor of stock of any other manufacturer for three years. The compensation so received even though payable in quarterly instalment was held as capital nature. It was held that amount paid to the assessee was compensation for impairment of profit making apparatus and for sterilization of very source of its income. (6) In Eastern Air Products (P.) Ltd. v. CIT [2007] 290 ITR 562 (MP) it was held that when a payment is paid to compensate a person for cancellation of contract which does not affect the trading structure of its business nor cause a deprivation of what in substance is....
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.... Hon'ble Madras High Court. (8) In CIT v. Ambadi Enterprises Ltd. [2004] 267 ITR 702/139 Taxman 96 (Mad.), the amount received on termination of the distributorship was held as capital receipt. It was held by Hon'ble Madras High Court that one test for ascertaining as to whether what was received was a capital receipt or a revenue receipt is to find out whether the termination is linked with profit making apparatus. If in pursuance of termination agreement the source of income is totally severed whereby the profit earning purposes could never be utilized by the assessee then compensation so received would be capital in nature. Hon'ble High Court had found that entire trained man power and customers were handed over to the other party of the agreement and, therefore, the payment received had an imprint of a capital receipt. 33. Thus from the above authorities, the principles already established can be summarised as under :- (1) Where compensation is received for termination of distributorship if such distributorship is a source of income, then such compensation would be capital in nature. (2) Where source of income is sterilized or com....
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....desired to forgo all these obligations, it paid compensation to the assessee. This will certainly be in the nature of revenue receipt. (ii) The argument of the ld. AR that KGCL was its main purchaser and rather whole-sale purchaser of ossein and KGCL having withdrawn from its very such obligation, then its major source of income is impaired cannot be accepted because source of income is not KGCL but its ossein manufacturing plant. Therefore, the decision of Hon'ble Supreme Court in P.H. Divecha (supra) cannot be applied as in our considered view the source of income of the assessee is not impaired. It continues to produce ossein though it is finding it difficult to get new customers in place of KGCL but for that matter it cannot be said that source of income of the assessee company has been impaired or it is out of business because of termination of agreement or its manufacturing plant has been taken over or surrendered. Under the conditions where ossein is continued to be manufactured even after the termination of the agreement, the source of income remains intact. Therefore, the compensation paid by KGCL cannot be related to impairing of source of income. The notic....