TaxTMI 
TaxTMI 
2013 (10) TMI 1133
X X X X Extracts X X X X
X X X X Extracts X X X X
....., each, towards compensation received from The Coca Cola Co., is a capital receipt or revenue receipt or capital gain or casual income and in whose hands it should be taxed 3. The facts relating to this issue is permeating through in all the appeals, on which the various authorities have taken different views and different stands with regard to the taxability of the receipt of the same compensation amount. For the sake of convenience, we first take up appeals in ITA no.5072/Mum./2001, ITA no.5284/Mum./2001 and C.O. no.136/Mum./2002, which were argued by the learned Sr. Counsel, Mr. S.E. Dastur. The grounds raised by the Revenue in ITA no.5284/Mum./2001, are as under:- 1. "On the facts and in the circumstances of the case, the learned CIT(A) erred in law in directing the Assessing Officer to treat the amount of Rs. 16,05,82,500/- being the compensation received from Coca Cola Co. as long term capital gains whereas the Assessing Officer had treated the same as income from other sources of alternately as short term capital gains for the reasons discussed by him in the asstt. orders." 2. "On the facts and in the circumstances of the case, the learned CTT(A) erred in law in holding ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f section 22(2)(a) of the Act nor did the transaction involve any transfer of any chargeable asset within the meaning of section 2(47) of the Act. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not admitting claim of the appellant for depreciation @ higher rate of 40% in respect of vehicles used in the business of hire." 4. The relevant facts, apropos the issue of treatment of amount of Rs. 16,05,82,500, which are culled out from the records and submissions made by either party are that, all the aforesaid assessee's (who are in appeal) are part of Parle Group owned by Mr. Prakash Chauhan and Mr. Ramesh Chauhan. The Parle Group of companies were engaged in the business of manufacturing, bottling and distribution of soft drinks and beverages under several popular brands viz., Thumbs Up, Limca, Gold Spot, Maaza, Citra, etc., and other popular brands. The Parle Group of companies entered into a "master agreement" with The Coca Cola Co. of U.S.A. (for short "TCCC") on September 1993, for transfer of intellectual property rights in the nature of trade marks, knowhow, franchisee rights, etc., in respect of various brands of beverages / soft ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ights for the products "Coca-Cola", "Fanta" and "Sprite" in certain bottling territories containing the cities of Poona and Ban galore, provided that certain standards customarily used by the Buyer for qualification are met, including quality standards and capitalization requirements." 5. The draft of ROFR agreement was elaborated in Exhibit-J of the master agreement. For bottling rights in the territory of Bangalore, LFFL was assigned to become licensed bottler of TCCC in the city of Bangalore. It was also agreed upon by the parties in the master agreement itself, that a new company i.e., a Bangalore subsidiary was to be established for carrying out bottling operations in Bangalore. The Article-1 of the master agreement contained the definition of Bangalore subsidiary which, inter-alia, means that the company to be formed for the production, distribution and sale of products of TCCC for the city or nearby territories of the city of Bangalore. For this purpose, Exhibit-L of the master agreement provided the manner and the guideline on which this Bangalore subsidiary was to be established, which would be initially owned by Parle Group entities and the TCCC would later on invest up ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s Rs. 16,05,82,500. Such a receipt of compensation which was in breach of ROFR is the subject matter of dispute before us whether it is a capital receipt or revenue receipt or casual income or to be taxed as long term capital gain or short term capital gain and also in whose hands it should be taxed. 6. In case of the present assessee i.e., Parle Soft Drinks Pvt. Ltd., in the return of income filed on30th November 1998, for the assessment year 1998-99, the amount received from TCCC at Rs. 16,05,82,500, was treated as capital receipt not chargeable to income tax. Along with the return of income, the assessee has annexed the following note:- "During the previous year relevant to A.Y. 1998-99 the company received an amount of Rs. 160582500 as compensation from Coca Col Co. USA. In the accounts for the year ended 31.3.1998, the aforesaid amount received as deducting Rs. 10 lakhs for professional fees paid. In the return of income, the aforesaid amount has been taken to capital reserve after deducting Rs. 10 lakhs for professional fees paid. In the return of income, the aforesaid amount has been treated as capital receipt not liable to tax. Since the said compensation has been receive....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce (he purpose of remittance has been stated as 'flu and final settlement of certain disputes. In the account for the year ended 31-03-1998, the aforesaid amount was credited directly to capital reserves by Pane Soft Drinks (Bangalore) Ltd. wider the heading "compensation received from Coca Cola Company, USA on settlement." 8. Besides submitting the relevant terms of agreement and Exhibits given in the master agreement, the assessee also explained the reasons as to why such a receipt cannot be taxed in the hands of the assessee. Reliance was placed on the following decisions also:- i) Kettlewell Bullen & Co. Ltd., [1964] 53 ITR 261 (SC); ii) Mahindra & Mahindra Ltd., [1973] 91 ITR 130 (Bom.); iii) Gillanders Arbuthnot & Co. Ltd. [1964] 53 ITR 283 (SC); and iv) Oberoi Hotels Pvt. Ltd. v/s CIT, [1999] 236 ITR 903 (SC). 9. It was further submitted that the amount received is not taxable under section 10(3) as casual and non-recurring receipt because the said receipt cannot be characterised as income. Besides this, it was also pleaded that the receipt in question cannot be taxed as capital gains, because there was no cost of acquisition for the so called rights in question and, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e also distinguished all the judgments relied upon by the assessee. Lastly, he referred to the decision of Kerala High Court in Malabar Industrial Co. Ltd. v/s CIT, [1992] 198 ITR 611 (Ker.) to hold that the receipt should be assessed under the head "Income From Other Sources". He also made reference that earlier this company was in the name and style of "General Knightware Exports Pvt. Ltd." which was neither engaged in the business of bottling nor had any machinery or plant for the purpose of business. Its main objects were also different. Later on, the name of the company was changed to Parle Soft Drinks (Bangalore) Pvt. Ltd. Thus, he held that the amount received by the assessee company is nothing but a revenue receipt chargeable to tax. Alternate plea of the assessee regarding taxability as capital gain, he concluded that it is a short term capital gain and for arriving to this conclusion, he has given a very detail finding from page-22 to 25 of the assessment order. The sum and substance was that the right, as per the agreement which was available with the assessee was for a period of less than 36 months and, therefore, it has to be taxed only as short term capital gain. 11....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isagreed with the assessee's contention that there is no cost of acquisition, because section 55(2) was modified by the Finance Act, 1997, w.e.f. 1st April 1998, to include such kind of right and cost of acquisition has to be taken as "nil". Lastly, whether it is a long term capital gain or short term capital gain, he analysed the sequence of event of these transaction in the following manner and held it to be long term capital gain, after observing and holding as under:- 1. The agreement by TCCC with LFFL on 11.11.93 granting ROFR to the subsidiary to be treated by LFFL with an inbuilt stake of 30% in the newly created subsidiary. 2. The assurance of Ramesh Chauhan and Prakash Chauhan to create the subsidiary before 31st March 1994. 3. The taking over of M/s. General Knitwear Exports Pvt. Ltd. changing the name of Parle Soft Drinks and submitting the depreciation of the land to M/s. TCCC for approval in June 1993." 5.2 These factors indicate that the ROFR has been assigned on the date of creating of the subsidiary since the object of such creation of a new company was to develop the right for profit. With coming into existence of the subsidiary company ie., the appellant, the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee. Thus, the entire capital gain added on substantive basis, stands deleted from the stage of learned Commissioner (Appeals) against which the Department has come into appeal before us. 14. In the third case of Parle Bottling Co. Ltd., the Assessing Officer has treated the receipt of Rs. 16,05,60,000, as long term capital gain, however, assessed the same on protective basis, in view of the fact that, already substantive addition on account of capital gain has been taxed in the hands of Aqua Bisleri Ltd. The learned Commissioner (Appeals) in this case has taken all together different stand and after discussing the issue in detail held that it is not a capital gain but it is a non-recurring casual income which is to be taxed under section 10(3) of the Act and, therefore, the action of the Assessing Officer in treating the receipt as long term capital gain and taxing it on protective basis, has no basis. Thus, he held that it is to be taxed as casual and non-recurring receipt. 15. Thus, various authorities in the aforesaid cases of the assessees have taken different views on different reasoning which can be summarised in the following manner:- A. Aqua Bisleri Ld. Particular....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itory of Bangalore. In support, he also pointed out the relevant terms as given in Exhibit-L. This Bangalore subsidiary company was Parle Soft Drinks (Bangalore) Pvt. Ltd. Only and he further explained as to how this company had come into existence solely for this purpose. He submitted before us a sequence of events to show as to how this company have come into existence and has received the compensation from TCCC, which, for the sake of ready reference, is reproduced below:- Date Particulars 18 October 1991 Incorporated as General Knitwear Exports Pvt. Ltd. 24th June 1993 Limca Flavours and Fragrances Ltd. entered into MOU to acquire General Knitwear Exports Pvt. Ltd. (date wrongly mentioned as 1st July 1993 by AO) through Parle International ltd. and Golden Agro Products Ltd. (Now Bisleri Sales Ltd.) 3 July 1993 100% shares of General Knitwear transferred to Pane International Ltd and Golden Agro Products Ltd (Now Bisleri Sales Ltd.) Shri R.N.Mungale and Shri S.K. Motani appointed as directors of Incorporated as General Knitwear Exports P. Ltd. 18 September 1993 Master Agreement ('MA') between Parle Group and The Coca Cola Company ('TCCC') granting Right of First Refusa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on which the company was found was taken away and, therefore, the amount which was received, is nothing but compensation for losses of potential source of income viz. bottling operations in Bangalore territory. In support of his contention, he, first of all, relied upon the judgments of Hon'ble Supreme Court in CIT v/s Vazir Sultan, [1995] 36 ITR 175 (SC) and Oberoi Hotels Pvt. Ltd. v/s CIT, [1999] 236 ITR 903 (SC). 19. Regarding the learned Commissioner (Appeals)'s finding that there was a transfer of a capital asset within the meaning of section 45 and it is a long term capital gain, he submitted that for attracting the provisions of section 45, the very premise of the transfer of capital asset, is lacking completely in the present case. This is a case, where there has been a breach of contract and the amount was received as damages for not carrying out the obligation. It was not for any transfer of capital asset. Thus, here is the case, where there is a breach of contract and any compensation received on such a breach, is a capital receipt and not receipt on account of any transfer of capital asset. He also placed reliance on the decision of the Hon'ble Supreme Court in CIT v/....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s "capital gain" on substantive basis in case of Aqua Bisleri Ltd. (LFFL), therefore, the same should be deleted from here as there cannot be double transaction. 21. For the sake of continuity, we are also referring to the arguments placed by learned Senior Counsel, Mr. Firoze Andhyarujina, who has argued the case of Parle Bottling Pvt. Ltd., wherein the Assessing Officer has treated the receipt to be taxed as long term capital gain on protective basis and the learned Commissioner (Appeals) has treated the same receipt to be taxed as casual and non-recurring taxable income under section 10(3) on substitutive basis. The learned Senior Counsel submitted that in this case also, the assessee has received an amount of Rs. 16,05,60,000, as compensation from The Coca Cola Co. for breach of ROFR agreement with regard to bottling rights of Pune territory. The Assessing Officer solely relied upon the observations and the findings given in the assessment order dated 30th March 2001, in case of Aqua Bisleri Ltd., wherein the entire receipt have been taxed on substantive basis under the head "long term capital gain". 22. Before the learned Commissioner (Appeals), the entire facts were narrate....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of compensation cannot be equated with the casual receipt within the meaning of section 10(3). To fall within the ambit of section 10(3), first it has to be characterised as income, which here in this case is not. He also referred to CBDT circular no.158 dated 27th December 1974, and relied upon the judgment of Hon'ble Supreme Court in Ramanathan Chettiar v/s CIT, [1967] 063 ITR 458 (SC). He further submitted that a casual and non recurring receipt can only be taxed, once there is no claim or right in the recipient to expect its recurrence. Merely because the payment has been made one time that would not lead to inference that the amount received by the assessee was casual or non-recurring. In the present case, there was a violation of ROFR agreement. It was on such a breach that the assessee had a right to be compensated by the violating party. Thus, definitely, it cannot be held as casual or non- recurring receipt. In support of his argument, he has also relied upon the judgment of Jurisdictional High Court in Mehboob Productions Pvt. Ltd. v/s CIT, [1977) 106 ITR 758 (Bom.). He has also rebutted each and every finding of the learned Commissioner (Appeals) given in this regard bef....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny, without any document or transfer and in the present case there is no such document for transfer of assigning of rights by LFFL to these companies; 26. He further submitted that the learned Commissioner (Appeals), in case of Parle Soft Drinks Pvt. Ltd. has gone by the fact that the Assessing Officer has not proved the negative and, therefore, the Assessing Officer's finding is not correct is a wrong conclusion; 27. Lastly, he concluded that the amount received has to be taxed as revenue receipt in the hands of the LFFL or alternatively in the hands of other assessee if it is held that there was no right to LFFL by the ROFR agreement. 28. In the rejoinder, the learned Senior Counsel, Mr. Dastur, submitted that first off all, the Revenue has to take a clear stand as to in which hands, these receipts are to be taxed and under which head. If the argument of the learned Special Counsel is accepted, then the additions made in the hands of Parle Soft Drinks Pvt. Ltd. and Parle Bottling Pvt. Ltd. should be deleted. In case of LFFL, the amount has already been taxed as capital gain on substantive basis, therefore, all these pleas, whether such an amount can be taxed as capital gain or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....adjudication is, whether the sum of Rs. 16,05,82,500, which has been received by the assessee from The Coca Cola Co., on the breach of ROFR agreement, is a capital receipt not chargeable to tax or to be treated as revenue receipt or casual income or long term capital gain or short term capital gain and further in whose hands it should be taxed. As already discussed above, various authorities have discussed and decided this issue in different manner and on different interpretation of the same facts placed before them. Insofar as the facts which have been narrated above, there is no dispute. The dispute is only with regard to the interpretation and the taxability of the receipt and under which head. In the main agreement which has been referred as master agreement entered by the various sellers who are Parle Group of companies with The Coca Cola Co., there was a stipulation for assignment of bottling rights for the Bangalore territory and Pune territory. In order to give priority to the Parle Group of companies for the bottling rights, ROFR agreement was entered, which flows from Exhibit-J of the master agreement. The ROFR i.e., Right Of First Refusal, is a contractual right that giv....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... given in the territory of the Bangalore. This subsidiary company was formed as "Parle Soft Drinks Pvt. Ltd." i.e., the assessee and the manner and sequence in which this company was formed has already been discussed by us in the forgoing paragraphs. Thus, the assessee company was formed only for carrying out bottling activities in the territory of Bangalore. Hence, there can be no dispute or a question, that the assessee was entitled for receiving the compensation amount on the breach of ROFR from The Coca Cola Co. Thus, even though ROFR agreement was with LFFL but it was always agreed upon by the parties to the agreement that the same should be for a newly formed entity as Bangalore subsidiary company which is the assessee company only. The agreement as well as the ROFR provided that the rights were given to the assessee for carrying out the bottling activities for The Coca Cola Co. for the Bangalore territory. It is for the purpose of this intended business that the assessee company was formed in terms of ROFR as given in Exhibit-J and L. It was not necessary that the assessee should have instaled the entire plant and machinery for carrying out such business. Thus, the ROFR itse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as inflicted on the capital asset of the assessee and for giving up the contractual right on the basis of principal agreement which had resulted into loss of source of assessee's income the receipt in the hands of the assessee is a capital receipt. 34. If we apply the said ratio and the law laid down by the Hon'ble Supreme Court in the present case, then, what the assessee has lost, is the very source of his business and loss of a trading structure. If the right given by the ROFR would have continued, the assessee would have the source of income from the bottling business and this would have constituted its profit making apparatus. It is not a case that there was some breach of agreement during the course of carrying on the business or trading activity for which the assessee has received any kind of compensation. Here, even before the assessee's actual business could start, there was a breach by the other party which ended up the said business itself. Thus, clearly this is a case of loss of source of income itself and hence, the compensation which was received by the assessee is on capital field i.e., capital receipt which cannot be taxed under the income laws. This conclusion of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed by the Revenue are treated as dismissed, as the issue of taxability of the amount received by the assessee from The Coca Cola Co. is decided in favour of the assessee that it is not taxable. 37. In ground no.2, the assessee has challenged disallowance of higher depreciation of 40% in respect of vehicle used in the business of hire. 38. The Assessing Officer noted that the assessee has disclosed hire charges of Rs. 6,18,900. These receipts have been received from the trucks / three wheelers which were leased out by the assessee. These vehicles were purchased during the year and depreciation of 40% was claimed. In response to the show cause notice issued by the Assessing Officer, it was submitted that the assessee was owner of these vehicles and were used for the purpose of its business i.e., for hiring and, therefore, depreciation has to be claimed @ 40%, as prescribed. The Assessing Officer held that the vehicle should be used by the assessee for running them on hire by different persons and it shall necessarily bear the expenditure on running and maintenance, etc. Thus, higher rate on depreciation is not admissible as it is leased out. Hence, he allowed only 20% of the deprec....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in connection with negotiation, drafting agreements and finally receiving the compensation from The Coca Cola Co. The Assessing Officer held that the communication was between The Coca Cola Co. and the assessee and moreover Mr. Mungale, is one of the employees of Parle associated group and, therefore, does not justify the payment of professional charges to him. 44. Before us, the assessee submitted a copy of Board resolution approving a payment of Rs. 10 lakhs to Mr. Mungale for the services rendered during the negotiating transactions with The Coca Cola Co. which has resulted in settling the dispute. He is neither related to the assessee nor a shareholder in the Parle group of companies. The learned Commissioner (Appeals) held that on these facts, the provisions of section 40A(2) does not attract and moreover payment of such professional charges has yielded Rs. 16.05 crores to the assessee for carrying out negotiate with The Coca Cola Co. Accordingly, he allowed the same in favour of the assessee. 45. Before us, both the parties relied upon the respective orders. 46. After carefully considering the submissions made by the parties and also the relevant findings given by the Ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... casual and non recurring nature, whereas, the Assessing Officer has made protective addition after observing that substantive addition has been made in case of Aqua Bisleri Ltd. i.e., LFFL as the same is chargeable to tax as long term capital gain. Since the facts and issue are similar which issue has been discussed by us already in the forgoing paragraphs, the same will apply mutatis mutandis in the present case also, therefore, these grounds are treated as allowed as we have already held that the amount received by the assessee is a capital receipt which is not taxable. 56. In ground no.9 and 10, the assessee has challenged that both the authorities have not considered the assessee's claim for deduction in respect of deposit on bottles and crates refunded during the year amounting to Rs. 8,30,307. 57. The relevant facts, apropos the aforesaid issue are that, the assessee in the accounts for the year ending 31st March 1988, had shown an amount of Rs. 3,42,84,765, being deposits received in respect of bottles and crates as trade deposits under the head current liabilities. Before the Assessing Officer, the assessee submitted the details of deposits received on bottles and crates....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... amount in the assessment year 1997-98. In the assessment year 1997- 98, the Assessing Officer has not allowed the said claim under section 143(3) and, therefore, it should be allowed in this year. 62. The Learned Commissioner (Appeals) has disallowed the assessee's claim on the ground that the same has not been claimed in the return of income for the assessment year 1998-99. and therefore, there should be no grievance. Moreover, this expenditure relates to the assessment year 1997-98 which should have been claimed and allowed in the assessment year 1997-98 only. Accordingly, he disallowed this claim. 63. Before us, the learned Counsel submitted that this claim has been crystallized during the year and, therefore, the same should be allowed in this year because the Assessing Officer has disallowed in assessment year 1997-98 on this ground alone. 64. Under the aforesaid facts, we set aside this issue to the file of the Assessing Officer to examine whether these expenses have been crystallized during the year or not and if that is so the same should be allowed. Thus, ground no.11 and 12 are treated as allowed for statistical purposes. 65. In ground no.13 and 14, the assessee has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed to the Supreme Court; which is pending (vi) On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to treat the sale consideration of bottles and crates as part of the block of assets; (vii) On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact in earlier years the assessee claimed purchase of bottles and crates as revenue expenditure in the P & L A/c; (viii) On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that the bottles purchased during A.Ys. 1993-94, 1994-95 and 1995-96 cannot form part of block of assets since on these bottles, 100% depreciation was claimed by the assessee and the value of such assets was zero. The Ld.CIT(A) failed to observe that the assessee did not discharge his onus of maintaining proper register of stock of bottles and crates purchased in different years and no evidence with regard to the fact that the bottles sold were of current year, was produced before the AO; (ix) On the Facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition despite the fact t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es amounting to Rs. 84,67,666 from the block of assets, comprising bottles on which depreciation @ 50% is admissible. He also noted that up to the assessment year 1995-96, the assessee has claimed depreciation @ 100% on bottles and crates as the cost was less than Rs. 5,000. He required the assessee to furnish details of these bottles on which 100% depreciation has been claimed in the previous year. The assessee replied that no separate registers have been maintained for the bottles and also accepted that bottles on which 100% depreciation has been claimed cannot be distinguished from the bottles on which 50% depreciation is being claimed in the year. In response to the show cause notice, the assessee, vide letter dated 17th March 2001, has given a detail submission which has been incorporated by the Assessing Officer at Page-5 of the assessment order. The Assessing Officer rejected the assessee's submissions on the ground that up to the assessment year 1995-96, the assessee has claimed the expenditure on the purchase of bottles and crates as revenue expenditure being the value less than Rs. 5,000 and in this year, the assessee has failed to prove for such bottles and crates sold t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion of Rs.42,38,833/." 80. Based on these submissions, the learned Commissioner (Appeals) has deleted the additions after observing and holding as under:- 25. Since the bottles and crates on account of sale on which Rs.84,67,666/- is received could not be segregated between those purchases prior to 1.4.95 and w.e.f. 1.4.95 the entire receipt is reduced from block of assets from the bottles and crates as per submission of the appellant. It is submitted by the appellant that: (a) The action of the A.O in treating the same as revenue receipt is wrong because they are sale purchases of capital receipts in form of bottles and crates. It is further submitted that there is no loss to revenue because if assessee's view point is accepted sale proceeds will get taxed over a period of two years because the claim of depreciation will go down by the corresponding amount. (b) If the A.O's approach is taken to logical conclusion, then what can be taxed is only income under the head 'capital gain' where cost of acquisition is to be reduced from sale proceeds and this course of action shall be detrimental to the interest of revenue because capital gain shall be computed by deducting the cost o....