TaxTMI 
TaxTMI 
2012 (9) TMI 660
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....of the case, the Tribunal erred in holding that the professional fees of Rs.71,200/- paid by the assessee in respect of its cement project was a capital expenditure and not revenue expenditure ? (3) Whether on the facts and in the circumstances of the case, the Tribunal erred in holding that Rs.75,00,000/- received by the assessee from B.B.C. Brown Broweri Company Limited, Switzerland under Memorandum of Settlement dated 12th March, 1979 was a revenue receipt ? 2. The assessee filed Notice of Motion No.1679 of 1991, seeking a direction to annex thereto, the documents mentioned in the affidavit in support of the Notice of Motion and, in the alternative, seeking leave of the Court to refer to the said documents. As an order of remand would unnecessarily delay this Reference, which has already been pending for over twenty years, we permitted the respondent to refer to the documents. Re: Question No.1. 3. The facts, so far as Question No.1 is concerned, are these :- The assessee had availed of an export packing credit facility from the State Bank of India. The assessee relied upon the details of the expenses under section 35B as furnished in Exhibit-A to the Notice of Motion....
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....d, therefore, not be deductible. The question is, therefore, answered in the negative and in favour of the Revenue." 5. Question No.1 is, therefore, answered in the negative, against the assessee and in favour of the respondent. Re: Question No.2. 6. Before the Tribunal the assessee conceded that for the reasons stated in an earlier order of the Tribunal in the case of the assessee itself, the issue is liable to be decided against it. It is obviously, however, open to the assessee to urge the contention in this Reference. 7. However, in the assessee's case, a Reference was filed before this Court, inter-alia, on this issue being Reference No.67 of 1989. By an order dated 15th June, 2012, we answered the Reference in favour of the Revenue considering ourselves bound by the decision of this Court in Commissioner of Income-tax v. J.K. Chemicals Ltd. 207 ITR 985 and Trade Wings Limited v. Commissioner of Income-tax 185 ITR 267. This question is also, therefore, liable to be answered in the negative, against the assessee and in favour of the respondent. Re: Question No.3. 8. This question requires the facts to be stated in detail. The facts, as stated in the stateme....
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....w of the prices at any other time should it deem it necessary. .............. 10. NO AGENCY RELATIONSHIP 10.1 It is distinctly understood that L&T shall buy from HBB the products on Principal to Principal basis and on L&T's account and nothing herein contained or done pursuant hereto shall constitute L&T as agents of HBB for any purpose whatsoever and that all acts and things done or to be done by L&T unless expressly other provided herein shall be at L&T's own cost and expenses." (B) The above agreement would have expired on 10th May, 1979. The assessee relied upon minutes of a meeting held by it on 9th February, 1979, which record that the assessee's Chairman referred to a letter dated 1st February, 1974 from Brown Boweri & Company Limited (hereinafter referred to as "BBC") agreeing to support the renewal of the 10th May, 1974 agreement between the assessee and HBB and that in view thereof, the assessee's Chairman proposed that the assessee ought to requisition an EOGM of the shareholders of HBB to consider it's reappointment for a further period of five years in terms of the 10th May, 1974 agreement. The following resolution was passed : "RESOLVED THAT Larsen & Toubr....
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....lause 5 required the assessee to sell and transfer the equity shares held by it in HBB to the parties mentioned therein within one year. It further provided that the assessee would not purchase or subscribe to or otherwise acquire any shares, equity or preference, of HBB. A similar provision was made in clause 6 in respect of the shares held by EEC. Clauses 8 and 9 provided that till the said shares were sold by the assessee and ECC, they would support and vote in favour of any and all proposals of the Board of Directors of HBB. Clauses 10, 11 and 12 of the Memorandum of Settlement read as under :- "(10) BBC shall pay to L&T the sum of Rs.7,500,000/- (Rupees seven million five hundred thousand only) as follows :- Rs.2,500,000/- (Rupees two million five hundred thousand only) within 30 days from the date of this Memorandum of Settlement. Rs.5,000,000/- (Rupees five million only) within 30 days of notification by L & T to BBC of the sale and transfer by L & t and ECC in accordance with the provisions of clause (5) and (6) hereof and confirmation by HBB that such transfer has been duly recorded in its Register of Members. (11) In the event of the average selling price of all the s....
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....stance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue : Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt." 12. In Karam Chand Thapar & Bros. P. Ltd. v. CIT (1971) 80 ITR 167, the Supreme Court noted that the question whether a particular income arising from the termination of one of the managing agencies of a multi-agency concern is a capital receipt or a revenue receipt, is undoubtedly a difficult question, the difficulty being inherent in the problem itself. It was further observed that none of the numerous decisions of this Court had laid down a precise principle of universal application, but various workable rules had been evolved for guidance. The Supreme Court held that in determining the question whether the receipt is capital or income it is not possible to lay down any....
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....reement between two shareholders. Secondly, the memorandum of settlement did not deal only with a settlement of disputes between the assessee and HBB in respect of the distributorship agreement. It dealt with a lot more. It also involved the assessee and EEC selling their shares in HBB, their agreeing never to subscribe for the shares of HBB and their withdrawing the Directors nominated by them on the Board of Directors of HBB. Thirdly, and most important, the memorandum of settlement does not specify the consideration for the payment of the sum of Rs.75,00,000/-. We will now deal with this aspect in further detail. 16. Clause 10 of the memorandum of settlement merely states that BBC shall pay the respondent, the sum of Rs.75,00,000/- in the manner stated therein, but does not specify the purpose for which it is paid. The respondent has also not clearly stated the purpose for which BBC agreed to pay it the said amount. A construction of the agreement leads to a variety of reasons for which the payment may have been made. Indeed, the payment of Rs.75,00,000/- could be in consideration for any one or more of the assessee's promises/obligations under the memorandum of settlement. Un....
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.... was a letter addressed prior to the execution of the distributorship agreement dated 10th May, 1974. The minutes of the meeting, however, do not indicate the duration of the alleged extension. In any event, the respondent has not indicated any facts to the effect that it conducted it's affairs in such a manner as to prepare for the alleged extended period of the distribution agreement as well. 19. Upon the expiry of the distributorship agreement, the assessee was free to enter into similar agreements with any other party. It is not the assessee's case that it was incapable of or was unable to do so for any reason. The assessee has not established that its trading structure even in respect of activities similar to the said distributorship agreement with HBB were impaired. In this regard it is important to recall that in the recital to the distributorship agreement it is stated that the assessee was "actively engaged in the business of sale and distribution of several engineering and electrical products throughout the territory of the Republic of India". 20. The distributorship agreement entitled the parties to have the price stipulated therein reviewed periodically. It is doubtfu....
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.... the same. 23. Mr. Mistri submitted that the assessee was not in the pump motor business and therefore, the termination of this agreement would be an end to this business carried on by it under the distributorship agreement. He stated that the respondent dealt only with pump motors manufactured by HBB. He relied upon clause 2.3 of the distributorship agreement which prevented the assessee from dealing in HBB's products in India or products similar thereto which were competitive to such products. 24. This restriction however, operated only during the subsistence of the agreement. It ceased to operate upon the termination thereof. It is not the assessee's case that it was either prevented or even otherwise unable to enter into similar agreements in respect of such products manufactured by other enterprises. In a given case, the termination of a distributorship agreement may affect the distributors trading structure. In this case, however, the assessee has not established any factors to indicate that its trading structure was adversely affected. 25. It is also significant to note that the assessee was not dependent upon this business alone. It engaged itself in various other busine....
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.... to compensate the assessee for cancellation of the said agreement with BME which did not affect the trading structure of the assessee nor deprive the assessee of what in substance was its source of income or by cancellation of the said agreement, the trading structure of the assessee was impaired or such cancellation resulted in loss of source of the assessee's income. Considering the nature of the said agreement and perusing the various clauses contained therein in our view, the said agreement culminating in a contract between the assessee and BME was in the nature of normal trading contract entered into in the ordinary course of the assessee's business. The assessee carried on widespread business activities as is evident even from the assessment order for the relevant assessment year showing the taxable income of the assessee at more than Rs. 86 lakhs. The agency agreement of the assessee with BME as borne out from the said agreement was only one of the many activities of the assessee. The widespread nature of business activities carried on by the assessee were not adversely affected by the termination of the said agreement and in the facts of the case, it cannot be said that th....
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.... and deprived him of his source of income. This would be so even if an assessee has several contracts of the same nature. The other contracts may be so insignificant that the termination of the one for which compensation is received dries up the assessee's source of income and affects its trading structure itself. It is impossible to lay down any parameters even in this regard such as, for instance, the percentage that the loss bears to the entire business. This may vary from year to year. It would depend upon various factors in each case, such as the future prospects lost by an assessee on account of the termination. 28. Mr. Mistri relied upon a judgment of the Supreme Court in Oberoi Hotels pvt. Ltd. vs. CIT (1999) 236 ITR 903 in respect of his submission that merely because the assessee engaged itself in more than one business, the ground of loss of source of income is not inapplicable. We have just expressed our views on this proposition. As far as this judgment is concerned, the nature of the agreements therein and the nature of distributorship agreements such as the one before us are entirely different. It involved the assessee operating, managing and administrating t....