2013 (10) TMI 1133 - AT - Income Tax

Nature of compensation received for breach of contract - capital receipt or revenue receipt or casual income or to be taxed as long term capital gain or short term capital gaine - Compensation amount of ₹ 16,05,82,500 is capital receipt or revenue receipt that is whether it is non-taxable or taxable receipt Held that - The Hon ble Supreme Court in Kettlewel Bullen & Co. Ltd. 1964 (5) TMI 4 - SUPREME Court have observed that 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 is substance of 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 the receipt is revenue. However, where by the cancellation of an agency, the trading structure of the assessee itself is impaired or such cancellation results into loss of what may be regarded as the source of the assessee s income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. In the present case, 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 - 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 Decided in favor of Assessee. Whether the receipt is casual income - taxability u/s 10(3) -Held that - the receipt cannot be said to be casual because it has not been incurred by chance or by fortuitous. Here, it is a case of breach of an agreement and the amount has been settled after a dispute among the parties. This receipt cannot be termed as neither casual nor non recurring - Decided in favor of assessee. Higher rate of depreciation to be allowable to the assessee, when the vehicle is used by the third party instead of assessee Held that - Once it is not disputed that the assessee was the owner of the vehicle and its business is for hiring and leasing of vehicles to the third parties, the higher rate of depreciation has to be allowed Reliance has been placed upon the decision of Delhi High Court in MGF India Ltd., 2006 (7) TMI 125 - DELHI High Court Professional fee paid for negotiation with Coca-cola Co., a business expenditure to be deductible Held that - He was a person who was instrumental in carrying out the negotiation with The Coca Cola Co. for settling the dispute and for awarding the compensation, such an expenditure has to be allowed as business expenditure and no disallowance can be made Decided in favor of Assessee.

Issues Involved:
1. Taxability of the compensation received from The Coca Cola Co.
2. Classification of the receipt as capital or revenue.
3. Applicability of capital gains tax.
4. Allowance of professional fees as business expenditure.
5. Depreciation claims on vehicles used for hire.
6. Treatment of deposits on bottles and crates.
7. Prior period expenses.
8. Excess consumption of raw materials.
9. Disallowance of interest on borrowings.
10. Unutilized MODVAT credit.
11. Sale consideration of bottles and crates as part of the block of assets.

Detailed Analysis:

1. Taxability of the Compensation Received from The Coca Cola Co.
The main issue was whether the compensation amount of Rs. 16,05,82,500 received by Parle Soft Drinks Pvt. Ltd. and Parle Bottling Co. Ltd. from The Coca Cola Co. should be treated as a capital receipt, revenue receipt, capital gain, or casual income, and in whose hands it should be taxed. The Tribunal concluded that the compensation was a capital receipt not chargeable to tax. The compensation was received due to the breach of the Right of First Refusal (ROFR) agreement, which was a foundational right for the assessee's business. This breach resulted in the loss of a potential source of income, making the compensation a capital receipt.

2. Classification of the Receipt as Capital or Revenue
The Tribunal held that the compensation received for the breach of the ROFR agreement was a capital receipt. The ROFR constituted a substantial right and foundation upon which the assessee could have built its bottling business. The loss of this right was considered a loss of a source of income, thus making the compensation a capital receipt.

3. Applicability of Capital Gains Tax
The Tribunal examined whether the compensation could be taxed as capital gains. It was concluded that there was no transfer or extinguishment of any rights, and the ROFR did not represent a right to manufacture, produce, or process any article or thing. Therefore, the compensation could not be taxed as capital gains.

4. Allowance of Professional Fees as Business Expenditure
The Tribunal upheld the allowance of Rs. 10,00,000 paid as professional fees to Mr. R.N. Mungale. It was established that Mr. Mungale played a crucial role in negotiating the settlement with The Coca Cola Co., and hence, the payment was justified as a business expenditure.

5. Depreciation Claims on Vehicles Used for Hire
The Tribunal allowed the higher depreciation rate of 40% on vehicles used for hire, following the Supreme Court's decision in ICDS Ltd. v/s CIT. It was established that the assessee was the owner of the vehicles and used them for hiring and leasing, thus qualifying for the higher depreciation rate.

6. Treatment of Deposits on Bottles and Crates
The Tribunal restored the issue of the treatment of deposits on bottles and crates to the Assessing Officer for verification. It was to be confirmed whether these deposits, previously taxed, were refunded to the customers.

7. Prior Period Expenses
The Tribunal set aside the issue of prior period expenses amounting to Rs. 1,63,901 to the Assessing Officer to verify if these expenses were crystallized during the year.

8. Excess Consumption of Raw Materials
The Tribunal followed the precedent set in earlier years and dismissed the Revenue's appeal, upholding the deletion of the addition on account of excess consumption of raw materials.

9. Disallowance of Interest on Borrowings
The Tribunal upheld the deletion of the disallowance of interest on borrowings, following the decision in the assessee's own case for the assessment year 1996-97.

10. Unutilized MODVAT Credit
The Tribunal dismissed the Revenue's appeal, following the Supreme Court's affirmation of the Bombay High Court's decision in CIT v/s Indo Nippon Chemicals.

11. Sale Consideration of Bottles and Crates as Part of the Block of Assets
The Tribunal agreed with the Commissioner (Appeals) that the sale proceeds of bottles and crates should be treated as part of the block of assets and not as revenue receipts. The block of assets should be reduced by the sale proceeds, and depreciation should be allowed accordingly.

Conclusion:
The Tribunal ruled in favor of the assessee on most issues, concluding that the compensation received from The Coca Cola Co. was a capital receipt not chargeable to tax. The professional fees were allowed as business expenditure, and the higher depreciation rate on vehicles used for hire was upheld. The treatment of deposits on bottles and crates and prior period expenses were remanded for verification. The Tribunal dismissed the Revenue's appeals on excess consumption of raw materials, disallowance of interest on borrowings, and unutilized MODVAT credit. The sale consideration of bottles and crates was to be treated as part of the block of assets.

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