1993 (3) TMI 29 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of Rs. 93,450 received by the assessee.
2. Determination of whether the amount is a capital receipt or a revenue receipt.
3. Appropriate head of assessment under the Income-tax Act, 1961.

Detailed Analysis:

1. Taxability of Rs. 93,450 Received by the Assessee:
The central issue revolves around the taxability of Rs. 93,450 received by the assessee, a company engaged in the business of machines, machine parts, and tractors, for the assessment year 1964-65. The amount was received following a settlement agreement with the Polish company, Motto Imports, Warsaw, after disputes arose from the supply of defective tractors. The assessee initially declared this amount as a revenue receipt but later revised the return, claiming it as a capital receipt.

2. Determination of Whether the Amount is a Capital Receipt or a Revenue Receipt:
The assessee contended that the amount should be treated as a capital receipt, arguing that the termination of the sole distributorship agreement with the Polish company affected its profit-making apparatus. The Income-tax Officer, Appellate Assistant Commissioner (AAC), and the Income-tax Appellate Tribunal (the Tribunal) rejected this contention, concluding that the amount was received in the course of business dealings and did not affect the profit-making apparatus of the assessee.

The AAC's detailed analysis emphasized that the amount was received for disposing of stock-in-trade (tractors) and not as compensation for loss of a monopolistic right. The Tribunal agreed with the AAC's reasoning, confirming the amount as a revenue receipt.

3. Appropriate Head of Assessment under the Income-tax Act, 1961:
The assessee sought a reference to the High Court, posing two questions:
1. Whether the amount received was a capital receipt not liable to tax.
2. If taxable, whether it should be assessed under "Business" or "Capital gains."

The High Court examined various precedents cited by the assessee, including P. H. Divecha v. CIT and Bombay Burmah Trading Corporation Ltd. v. CIT, distinguishing the facts of those cases from the present one. The court noted that the agreement with the Polish company was for a fixed term of five years with a termination clause, unlike the indefinite and monopolistic agreements in the cited cases.

The court concluded that the amount received was a revenue receipt, as it was related to the disposal of stock-in-trade (tractors) and did not impact the profit-making apparatus of the assessee. Consequently, the court answered the first question in the affirmative, against the assessee, and determined that the amount should be assessed under the head "Business" under section 28 of the Income-tax Act, 1961.

Conclusion:
The High Court upheld the decisions of the lower authorities, concluding that Rs. 93,450 received by the assessee was a revenue receipt assessable under the head "Business" under section 28 of the Income-tax Act, 1961. The court distinguished the facts of the present case from those in the cited precedents, emphasizing that the amount was received in the course of business dealings and not as compensation for loss of a profit-making apparatus.