TaxTMI 
TaxTMI 
2015 (1) TMI 199
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....h the appellant in this regard. It has undertaken to meet the expenditure for installation of the new machinery and to place orders for ensuring viable production thereon. In accordance with the contract entered into by it, with M/s. P&G, the appellant acquired the machinery for manufacture of new product, and the test run was also conducted. At that stage, M/s. P&G expressed its inability to continue with the contract and resiled from it. The appellant submitted a claim for Rs. 1,08,94,000/- as compensation for unilateral termination of the contract. After negotiation, M/s.P&G paid a sum of Rs. 87,33,056/- towards sterilization of assets of the company and Rs. 21,60,944/- towards reimbursement of interest and other revenue expenditure. The amounts received by the appellant from M/s. P&G were reflected in the return submitted for the Assessment Year 1998-99. The amount was claimed as capital receipt. The Assessing Officer passed an order under Section 143(1) of the Income Tax Act, 1961 (for short the Act), on 30.09.1999. However, on 12.02.2002, a fresh order under Section 143(3) of the Act was passed duly exercising power under Section 148 of the Act and the amount of Rs. 87,33,0....
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....nt in the ordinary course of business and on the other hand, it was meant for installation of the machinery, which was specially got manufactured for production of a typical product, namely, Vicks 1000. He contends that M/s. P&G itself recognized that the appellant is exposed to huge loss on account of the installation of machinery and thereafter keeping it idle, and accordingly, paid the compensation in the form of sterilization of assets. He submits that the case is squarely covered by the judgment of this Court in Commissioner of Income Tax v. Barium Chemicals Ltd 168 ITR 164 and that the Assessing Officer, the Commissioner and the Tribunal were not justified in concluding that the amount received by the appellant towards sterilization of assets deserves to be treated as revenue receipt. Learned Senior Counsel further submits that if the concern of the Department is that the amount, which is received as compensation for the machinery, should not go untouched under the Act, in the event of it being treated as capital receipt, the same can be taken into account, in the context of determining the written down value of the assets. Ms. Kiranmayee, learned counsel representing ....
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.... such receipt not being in the ordinary course of the assessees business, it must be construed as a capital receipt. The following paragraph of the judgment of the Supreme Court in Godrej and Company v. CIT ((1959) 37 ITR 381 (SC)) was taken note of. On an analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance 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 assessees income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. From the above, it becomes clear that broadly stated, the dis....
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....paid the amounts as indicated in the preceding paragraphs. The basis for the respondent to treat the amount as revenue receipt is that a. The sample of the product, which was required to be manufactured through a machinery, was already produced. b. The machinery was being put to use, even after the cancellation of the contract. As regards the former, it needs to be observed that the production of the item, was not on commercial scale but was only as a sample. It is too well known, the sample can be manufactured with ordinary techniques and once it is approved, a specialized machinery is required to be installed, for commercial production. As regards the second, the observation of the Commissioner was that though for the manufacture of the same product, for which, the machinery was meant, it was being used to produce other drugs. When the entire machinery was installed in connection with a typical product to be produced on commercial lines, for the first time, the inference drawn by the authorities under the Act cannot be sustained in law. Reliance is placed by the respondent upon the judgment of this Court in Commissioner of Income Tax, Nagpur v. Rai Bahadur Jairam ....