TaxTMI 
TaxTMI 
TaxTMI 
2010 (10) TMI 1123
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....ain the technical assistance/collaboration due from the US company and, therefore, your appellants were put to an irreparable loss of profit-making apparatus. (c) The CIT(A) has erred in law and on facts in upholding the decision of the ITO that in order to compensate for the loss of profit-making apparatus, the said US company agreed to compensate your appellants company with an amount of US $ 2.25 million amounting to ₹ 8,93,22,047 and the same is connected with loss of income or profits by virtue of loss standing charges and fees and therefore the receipt would assume the form of a revenue receipt and not capital receipt. (d) The CIT(A) has erred in law and on facts by not appreciating the fact that the receipt of US $ 2.25 million was not towards past and/or future loss of profits as the joint venture never made profits. Consequently, the CIT(A) should have appreciated that the question of compensating the loss of profits cannot arise. (e) The CIT(A) ought to have held that the compensation received from WRG is capital in nature and is not a source of income by any stretch of imagination. Moreover, the CIT(A) should have held that in the absence of any be considered....
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....ction under s. 80-IA. Additionally, the ITO has made certain unwarranted allocations of overheads having no bearing on the profits of eligible units. (c) The CIT(A) ought to have taken cognizance of the decisions rendered by the Tribunal in your appellants' own case for preceding proceedings for the above-mentioned year. 5. Disallowance of interest-free advances to subsidiary companies : (a) The learned CIT(A) has erred in law and on facts in not appreciating the fact that your appellants had sufficient funds generated by their business and consequently they were capable of investing in the shares of its subsidiaries and to advance interest-free loans out of its own source or internal accruals. (b) The learned CIT(A) has erred in law and on facts in partially upholding the presumption of the ITO that your appellants had borne interest on funds borrowed by it, which do not appear to have been deployed for the purposes of their business but utilized for lending to your appellants' group companies and subsidiaries and made an estimated disallowance in the assessment order. 6. Disallowance of interest expenditure on investment for controlling interest : (a) The lear....
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....proceedings against WRG for recovery of compensation for termination of the joint venture agreement before the International Chamber of Commerce by way of an arbitration and ultimately the matter was settled between the parties through a settlement agreement dt. 31st March, 1998 by which WRG agreed to pay a sum of US $ 2.25 millions equivalent to ₹ 8,93,22,047. This amount was credited to P&L a/c as revenue receipt and in the statement of income this amount was shown as extraordinary item of compensation and included in the income returned by the assessee. Later on, a letter dt. 19th Feb., 2002 was submitted to AO through which it was requested to treat this amount of compensation as capital receipt. Through this letter it was mainly stated that to be an assessable income the item must fulfil the basic condition that it should fall under one of the heads of income. It was claimed that an amount received by an assessee as compensation for loss of profit-making apparatus is a capital receipt and, therefore, same is not taxable and for this reliance was placed on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Khushalbhai Patel & Sons (1979) 118 ITR 656(....
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....reement, supplementary agreements for the termination of the joint venture company. In conclusion, the Revenue is therefore inclined to hold that the compensation received by the assessee company to the extent of US $ 2.25 millions amounting to ₹ 8,93,22,047 (net of expenses relating thereto and aggregating ₹ 78,03,453) can directly be connected with the loss of income or profits by virtue of loss of standing charges and fees, which the assessee company was in enjoyment of, during the currency of business of the joint venture company In the light of this stand adopted by the Revenue. It is further stated, that, such a receipt would assume the form and substance of revenue receipt and not capital receipt as vehemently contended on behalf of the assessee company. However, no material change or alteration to the net profits declared by the assessee company as per P&L a/c is required to be affected, as the said amount of ₹ 8,93,22,047 stands credited to the P&L a/c already." 4. Before the CIT(A) various submissions were made which have been summarized by him at pp. 9 and 10 of his order which are as under : (a) During the previous year relevant to this asses....
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....still be dealt with by the assessee company. Further assessee company had also entered into'(i) Manufacturing agreement (ii) General and administrative services agreement and (iii) Laboratory facility and service agreement with the joint venture for which the assessee company received separate consideration in the form of standing charges and management fees etc. It was further observed that assessee company went on receiving technology from WRG because in terms of settlement agreement WRG had agreed to supply new technical know-how and an agreement was also entered into in this respect. Therefore, assessee company was not deprived of any capital asset or profit-making apparatus as the company continued to manufacture and sell the same products and even received technology from WRG even after termination of the joint venture agreement. The learned CIT(A) also placed reliance on the following decisions : (a) CIT vs. Best & Co. (P) Ltd. (1966) 60 ITR 11 (SC); (b) Bombay Burmah Trading Corporation Ltd. vs. CIT (1971) 81 ITR 777 (Bom); (c) Blue Star Ltd. vs. CIT (1996) 131 CTR (Bom) 387: (1996) 217 ITR 514(Bom). On the basis of above observations and case law learned CIT(A) ....
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....into in normal course of business is not correct because a foreign company i.e., WRG which was in similar business wanted to enter Indian market along with an organization which was in the similar field and since the assessee was in the similar field special kind of effort was made to boost the business by combining the capabilities of both the organizations by creating a new set up. 7. He then referred to the decision of Hon'ble Supreme Court in the case of Oberoi Hotel (P) Ltd. vs. CIT (1999) 152 CTR (SC) 474: (1999) 236 ITR 903(SC). In that case the assessee company was operating and managing various hotels belonging to the assessee as well as others. An agreement was entered into with Singapore company whereby the assessee company was to operate the hotel known as Hotel Oberoi Imperial for which the assessee company was to receive certain fee called management fee which was calculated on the basis of gross operating profits. The agreement was for 10 years and could be renewed for further term of ten years. There was also a covenant which gave the assessee a right to exercise an option of purchasing the hotel in case its owner decided to transfer the same during the currenc....
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....estion arose whether the said compensation was taxable ? The Tribunal held that it was a case of structure of foundation on which the joint venture was to be built and accordingly such structure was a capital asset and the compensation received was capital receipt not liable to tax. The learned counsel of the assessee argued that in the case of the assessee also the structure or foundation was created through joint venture through which some business was to be conducted and when that agreement had been terminated then the decision of the Tribunal in the case of Ms. Payal Kapur vs. Asstt. CIT (supra) will be clearly applicable. 8. On the other hand, learned Departmental Representative also referred to the orders of the lower authorities and pointed out that AO has noted that assessee has credited the amount of compensation to the P&L a/c and even offered the same for taxation. Later on, somehow or the other the assessee changed its stand and wrote a letter to the AO to treat this compensation as capital receipt. He also referred to the various pages of the joint venture agreement and submitted that reading of the same would show that the joint venture agreement was mainly entered i....
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....as become the gainer because assessee could expand its business. He particularly referred to art. 3 of the settlement agreement and pointed out that payment of US $ 2.25 millions was a lump sum payment and WRG was relieved from all liabilities which clearly shows that money was in lieu of standing charges which means that it has to be concluded as revenue receipt only. 10. He then contended that the case law cited by the learned counsel of the assessee are based on different facts and are totally distinguishable. For example, the decision of the Delhi Tribunal in the case of Ms. Payal Kapur vs. Asstt. CIT (supra), wherein the Jain Group entered into the joint venture with Gillette Group of USA the sources were pooled to carry on the business of manufacturing and marketing of writing instruments, which means some fixed assets were created because manufacturing cannot be done without such fixed assets, whereas in the case before us no assets have been created in the joint venture. Similarly, in the case of Oberoi Hotel (P) Ltd. vs. CIT (supra) assessee had two rights, namely, (a) right to receive fees for operating the hotel and (b) right to purchase the hotel. Since assessee lost t....
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....e decision of the Tribunal in the case of Ms. Payal Kapur vs. Asstt. CIT (supra) and submitted that in that case on the basis of facts it was observed that when resources were pooled and an altogether exclusive structure or apparatus was created in which both parties had certain rights. In the case before us also through the joint venture a particular structure was created through which assessee also had certain rights. Moreover, this agreement was not terminated on routine basis and, therefore, the decision of the Hon'ble Bombay High Court in the case of CIT vs. Khushalbhai Patel & Sons (supra) is clearly applicable. 14. We have considered the rival submissions carefully in the light of the material on record as well as the judgments cited by both the parties. We have also perused the paper book filed on behalf of the assessee carefully. We find that the assessee company is engaged in the business of manufacturing and selling of water treatment equipments and chemicals. A joint venture agreement was entered into by the assessee company with WRG of USA. The recital clauses which are on p. 3 of the joint venture agreement and p. 17 of the paper book reads as under : "Whe....
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....emical marketing and distribution activities of IEI IEI is engaged, inter alia, in marketing, distribution, supply and provision of water treatment chemicals, support equipment and services. Upon establishment of the joint venture company, IEI will cease its activities of marketing, distribution, supply and provision of water treatment chemicals, support equipment and services provides always that nothing contained herein shall prevent IEI from continuing on undertaking the activities as are set out in Ext. F hereto. Upon the establishment of the joint venture company, and EIE ceasing its marketing and distribution activities, as aforesaid, the JV Company will hereafter exclusively carry on the water treatment chemical marketing and distribution activities which had earlier been carried on by IEI." The above shows that upon establishment of the joint venture, the assessee company ceased to do its marketing and distribution business except for the Ext. 'F' listed in the agreement. Exhibit 'F' reads as under : "Products Polyelectrolyte as sold by Polyelectrolyte India Ltd. Process chemicals for the sugar industry. Basic chemicals and water quali....
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....mpany certain limited, non-exclusive licenses for certain trademarks and technology; 4. Grace will be released from all its liability, if any, including but not limited to any liability under Grace's guarantee to HSBC under the line of credit extended by HSBC to the joint venture company, and Grace shall receive from HSBC both a letter evidencing the release and the original guarantee documents; 5. The joint venture agreement, the Grace trademark license agreement, the corporate name and logo license agreement and the old technical know-how license agreement shall be terminated; and 6. IEI and joint venture company shall release and discharge Grace and the released parties of and from any and all liabilities and obligations arising out of or relating to the joint venture company, the joint venture agreement, the ancillary agreements or otherwise from the relationship between the parties and shall indemnify and hold Grace and the released parties harmless against any damages (as defined herein)." The above clearly shows that WRG was relieved from all the liabilities of joint venture and the compensation received was a lump sum amount. Further as per cl. 3 WRG also ag....
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....al position and kept on manufacturing various products and started selling these products on its own. (7) Even the advantage of technology which was available through the joint venture agreement, was still available even after termination of the joint venture agreement; and lastly, (8) The joint venture agreement was terminated because WRG has sold its business to a competitor. Thus, no separate source or apparatus for earning a separate income was created through the joint venture. It was a simple case of doing the business in a particular way and the whole business was carried on even after the termination of the joint venture agreement. 18. Now let us deal with the legal propositions. The first decision relied on by the learned counsel of the assessee is in the case of Oberoi Hotel (P) Ltd. vs. CIT (supra). In this case, the assessee company was engaged in the business of operating, managing and administering various hotels belonging to the others for a fee. The assessee company had entered into an agreement with the Singapore company in 1970 through which assessee company agreed to operate the hotel known as Hotel Oberoi Imperial for which certain fee called 'manageme....
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....r the hotel or lease or part of the hotel to any other person, the same was required to be offered first to the assessee (operator) or its nominee. This right to exercise its option was given up by a supplementary agreement which was executed in September, 1975, between the receiver and assessee. It was agreed that receiver would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under any obligation requiring the purchaser thereof to enter into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise and in its return, agreed consideration was as stated above in cl. X. On the basis of the said agreement the assessee has received the amount in question. The amount was received because the assessee had given up its right to purchase and or to operate the property. Further, it is loss of source of income to the assessee and that right is determined for consideration. Obviously, therefore, it is capital receipt and not a revenue receipt." Thus, from the above it is clear that this compensation was held to be of capital nature because the assessee company....
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....he assessee was a lady who had no income from business and only had income from other sources. She had not entered into such agreement previously. The financing agreement possessed the unusual feature that the assessee was entitled to 25 per cent of the profits earned by the firm, which resulted in her securing profits of ₹ 45,243 in the first year as against the obligation to advance a loan upto the limit of ₹ 1,00,000 only. This arrangement was one which is extremely beneficial to the assessee and onerous to the firm. It is impossible upon these facts to hold that this agreement was a contract or arrangement in the course of the regular business of the assessee; and, if that is so, it must follow that the termination was tantamount to a termination or premature determination of a capital asset and any amount paid for such premature determination must be regarded as a capital receipt : Decision of the Bombay High Court in CIT vs. Khushalbhai Patel & Sons (1979) 118 ITR 656(Bom) (infra) applied. The Tribunal was, therefore, correct in holding that the sum of ₹ 50,000 received by the assessee from the firm was a capital receipt." Thus, it is clear that the ....
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....oresaid respective agreements. On 12th Jan., 1955, the first agreement dt. 29th Aug., 1953, was varied to certain extent and the altered terms under which finance was agreed to be made available by the assessee firm to the company were recorded in the said agreement. In substance, the assessee firm was to finance the company any such sum or sums of money as the company required for importing the aforesaid products either in Bombay or in Madras not exceeding at any time in the aggregate a sum of ₹ 10,00,000. The company was to import in Bombay as well as in Madras the said goods from such sources of supply and on such terms and conditions as were to be agreed upon between the assessee firm and the company, and the company was not to enter into any contract for import of the said goods without the consent in writing of the assessee firm. In consideration of the services to be rendered by the assessee firm to the company, the company was not only to pay interest to the assessee but it was also to pay on the goods imported during the continuance of the agreement, whether the company took or did not take any finance from the assessee firm, commission at certain rates specified i....
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.... and it is with reference to this amount of ₹ 3,00,000, which was receivable by the assessee firm from the company, that the question arose in assessment proceedings before the taxing authorities as well as before the Tribunal, as to whether the said amount represented a capital receipt or revenue receipt." On the above facts the Hon'ble Bombay High Court referred to the observations of the Hon'ble Supreme Court in the case of CIT vs. Rai Bahadur Jairam Valji & Ors. (1959) 35 ITR 148(SC) and the observations are at p. 662 which are as under : "The question whether a receipt is capital or income has frequently come up for determination before the Courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision'vide Van den Berghs Lt....
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....de of acquiring agencies and dealing with them. Therefore, when the question arises whether the payment of compensation for the termination of an agency is a capital or a revenue receipt, it would have to be considered whether the agency was in the nature of a capital asset in the hands of the agent, or whether it was only part of his stock-in-trade. Generally, payments made in settlement of rights under a trading contract are trading receipts and are assessable to revenue. But where a person who is carrying on business is prevented from doing so by external authority in exercise of a paramount power and is awarded compensation therefor, whether the receipt is a capital receipt or a revenue receipt will depend upon whether it is compensation for injury inflicted on a capital asset or on stock-in-trade.'" On the basis of the above observations, the Hon'ble Court analysed the facts and observed that the assessee firm had not entered into with financing arrangement in the ordinary course of business because the assessee firm was mainly engaged in the business of export of cloth on commission. Thus, the observation that the agreement was entered into in an extraordinary....
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....ore did not represent the price paid for the loss of a capital asset : they were of the nature of income. There is no immutable principle that compensation received on cancellation of an agency must always be regarded as capital. Compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of the agency terminated, or for loss of goodwill, is prima facie of the nature of capital receipt." In this case the Hon'ble Supreme Court at p. 289 quoted with approval the following para from the decision of Kettlewell Bullen & Co. Ltd. vs. CIT (1964) 53 ITR 261(SC) which we have already reproduced while dealing with the decision of Oberoi Hotel (P) Ltd. (supra) : "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 cancella....
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....e asst. yr. 1997-98 (copy of the order filed). 27. On the other hand, learned Departmental Representative relied on the orders of the lower authorities. 28. After considering the rival submissions carefully, we find that an identical issue came up for consideration before the Tribunal in ITA No. 2133/Mum/2002 for asst. yr. 1997-98 and the same was discussed at paras 15 to 19 of the order. Para 19 of the order reads as under : "19. Having heard the rival submissions and from a careful perusal of the record we find force in the contention of the Revenue in as much as cost of flat always varies from one place to other. No doubt, in a co-operative society a member may not get the absolute right in a common land, but he has the right to use the common land/facilities of the society. It is also an undisputed fact that the super structure cannot be raised without owning a land meaning thereby the cost of constructive flats always has two components, one is cost of land and the other is cost of super structure. We also find force in the contention of the Revenue that the cost of land is a major factor in determining the cost of flat. The cost of super structure may remain the same....
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....l. From this perusal we find that the Tribunal has disposed of the issue in few lines after following its order in assessee's case in Revenue's appeal in ITA No. 5278/Mum/1992 rendered on 17th Feb., 2001. Since nothing is clear from this order of the Tribunal as to what issue was raised in the appeal and how the Tribunal has adjudicated it, we direct the assessee to file a copy of the order of the Tribunal in ITA No. 5278/Mum/1992 within a week. The assessee has filed the copy of the order in ITA No. 5178/Mum/1992 which was rendered on 17th Feb., 2001 and from perusal of this order of the Tribunal, we find that the Tribunal has decided the issue of claim of deduction under s. 80HH following its order for asst. yr. 1986-87. So far as issue of deduction under s. 80-IA is concerned the Tribunal has restored the matter to the file of the AO with the direction to examine whether the aforesaid units prescribed the specified conditions. The assessee has also filed the copy of the CIT(A)'s order for asst. yrs. 1985-86 and 1986-87 after conclusion of the hearing though not directed to file the same, but from its perusal we find that this issue was never examined by the lower aut....
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....he assessee company is reflected at ₹ 8,73,98,254. On these variables, the interest rate works out to 13.03 per cent having regard to the proportion, that the assessee's own funds bear to the peak borrowings during the previous year, the reasonable rate of interest that can be presumed to have been suffered for non-business purposes works out to 1,26,46,54,546 = 6.912% As per this method of computation, the average of interest works out to 6.912 per cent. In view of the above, the interest burden of the assessee company borne by it and attributable to those borrowed funds which in turn have been advanced to the subsidiaries as above stated is computed as under : Total advances ₹ 49,57,857 Rate of interest as discussed above 6.912 per cent Interest disallowed on the above 49,57,857 x 6.912 100 = ₹ 3,42,687 Accordingly, the above amount of ₹ 3,42,687 is disallowed on the rationale that there was diversion of interest-bearing funds for non-business purposes. Hence a sum of ₹ 3,42,687 is included in the total income of the assessee." 35. On appeal, the action of the AO was confirmed by the learned CIT(A). 36. Before us, l....
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....ied on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Amritaben R. Shah (2000) 158 CTR (Bom) 195: (1999) 238 ITR 777(Bom). 40. Learned CIT(A) principally confirmed the addition, but he was of the view that while working out the actual interest only proportionate funds deployed for such investment should be considered and ultimately he confirmed only the proportionate disallowance which has been worked out by following para : "Accordingly, the action of the AO in disallowing interest in the above investment is required to be confirmed in principle. However, in respect of the actual working, I have already held that the proportionate view is required to be taken and similarly, the loan which has been utilised for specific purpose is required to be ignored as the same cannot be used for the investment. I have already given the working of the average rate of capital employed in the business while deciding ground No. 1 wherein average rate has been taken at 2.76 per cent. Accordingly, the interest expenditure on investment on controlling interest of subsidiary company amounting to ₹ 9,04,29,960 is worked out to be ₹ 24,95,867. Similarly, the....