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2002 (5) TMI 22 - HC - Income TaxDepreciation, Balancing Charge - Whether the learned Tribunal was right in law in holding that the amount of Rs. 2,75,000 received by the assessee-company from Coca-Cola Export Corporation was liable to be taxed as income within the meaning of section 41(2) of the Income-tax Act, 1961? - Whether the learned Tribunal was right in law in holding that the amount of Rs. 38,500 received by the assessee-company from Coca-Cola Export Corporation was liable to be taxed as income within the meaning of section 41(2) of the Income-tax Act, 1961? - we answer the question referred to us in each case in the affirmative, that is to say, in favour of the Revenue and against the assessee and hold that the amount received by the assessee-company from Coca-Cola Export Corporation as a compensation for destruction of Coca-Cola and Fanta bottles, was liable to be taxed as income of the previous year relevant to the assessment year in which such amount was received under section 41(2) of the Income-tax Act as it was existing during the relevant assessment years.
Issues Involved:
1. Nature of the amount received from Coca-Cola Export Corporation. 2. Applicability of Section 41(2) of the Income-tax Act, 1961. Detailed Analysis: 1. Nature of the Amount Received from Coca-Cola Export Corporation: The assessee-company, engaged in manufacturing and selling soft drinks under a license from Coca-Cola Export Corporation, USA, faced disruption in the supply of concentrate, rendering the Coca-Cola and Fanta bottles unusable. Coca-Cola Export Corporation, through a letter dated February 2, 1978, offered an ex gratia compensation to the bottlers for destroying the unusable bottles. The assessee received Rs. 2,75,000 for the assessment year 1979-80 and Rs. 38,500 for 1980-81. The assessee contended that the compensation was an ex gratia payment and a capital receipt, not includible in taxable income. The Assessing Officer, however, treated it as revenue receipt chargeable to tax under section 41(2), asserting that the cost of the bottles had been previously deducted under the Income-tax Act. 2. Applicability of Section 41(2) of the Income-tax Act, 1961: The Tribunal faced differing opinions: the Judicial Member agreed with the Assessing Officer, while the Accountant Member viewed it as a capital receipt. The President of the Tribunal sided with the Judicial Member, holding the amounts taxable under section 41(2). The key issue was whether the amounts received were taxable as income under section 41(2), which deals with amounts received on the sale, discard, demolition, or destruction of assets for which depreciation has been claimed. Court's Analysis: The court examined the letter from Coca-Cola Export Corporation, noting that the payment was made specifically for the destruction of the bottles, which were business assets. The court concluded that the payment had a direct nexus with the destruction of the capital assets (bottles) and was not merely an ex gratia payment. The court referred to the provisions of section 41(2) as it stood during the relevant assessment years, which stated that any amount received from the sale, discard, demolition, or destruction of assets exceeding the written down value should be charged to income-tax as business income. The court found that all conditions for the applicability of section 41(2) were met: the bottles were business assets, used for business, destroyed during the relevant years, and the assessee received money for their destruction. The court distinguished the case from others cited by the assessee, noting that the payments in question were directly related to the destruction of business assets and not subsidies or compensation for loss of capital assets. Conclusion: The court affirmed the Tribunal's decision, holding that the amounts received by the assessee from Coca-Cola Export Corporation were taxable as income under section 41(2) of the Income-tax Act. The court answered the referred questions in the affirmative, in favor of the Revenue and against the assessee, confirming the taxability of the compensation received for the destruction of Coca-Cola and Fanta bottles. There was no order as to costs.
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