2003 (9) TMI 298 - AT - Income Tax

Summary

Issues Involved:
1. Nature of receipts received by the assessees.
2. Jurisdiction of the Commissioners of Income-tax under section 263.
3. Applicability of case laws cited by the assessees.
4. Whether the receipts are capital or revenue in nature.
5. Whether the receipts are casual and non-recurring under section 10(3) of the Act.
6. Whether the Assessing Officer applied due diligence in the assessment.

Detailed Analysis:

1. Nature of Receipts Received by the Assessees:
The primary issue revolves around the nature of the receipts received by the assessees, M/s. Steri Mould Pvt. Ltd. and M/s. Ranpharm Investment Pvt. Ltd., from Whirlpool Corporation, USA (WC, USA). The assessees claimed these receipts as capital receipts, not liable to tax, while the Commissioners of Income-tax (CIT) argued that these receipts were revenue in nature and thus taxable. The amounts received were for agreeing to vote with WC, USA and Whirlpool Mauritius Ltd. in a particular manner as per the agreement.

2. Jurisdiction of the Commissioners of Income-tax under Section 263:
The CITs invoked section 263, arguing that the orders passed by the Assessing Officer (AO) were erroneous and prejudicial to the interests of the revenue. The assessees contended that the CITs did not have jurisdiction as the AO had accepted the receipts as capital in nature after due application of mind. The Tribunal upheld the CITs' jurisdiction, noting that the AO failed to apply his mind properly and did not consider the full agreement or the relevant facts.

3. Applicability of Case Laws Cited by the Assessees:
The assessees relied on various case laws to support their claim that the receipts were capital in nature. These included:
- CIT v. Mahindra & Mahindra Ltd. [1973] 91 ITR 130 (Bom.)
- CIT v. Best & Co. (P.) Ltd. [1966] 60 ITR 11 (SC)
- CIT v. Prabhu Dayal [1971] 82 ITR 804 (SC)
- CIT v. Bombay Burmah Trading Corpn. Ltd. [1986] 161 ITR 386 (SC)
- Kettlewell Bullen & Co. Ltd. v. CIT [1964] 53 ITR 261 (SC)
- Seshasayee Bros. Ltd. v. CIT [1961] 42 ITR 568 (Mad.)
- A.S. Bhargava v. CIT [1973] 88 ITR 14 (Delhi)

The Tribunal distinguished these cases on the facts, noting that they involved compensation for loss of agency rights, restrictive covenants, or surrender of tenancy rights, which were not directly comparable to the present case.

4. Whether the Receipts are Capital or Revenue in Nature:
The Tribunal found that the receipts were not capital in nature as the assessees did not lose any capital asset or bundle of rights. Instead, the Tribunal concluded that the receipts were part of the sale consideration for the shares sold to JRD, as the shares were subsequently transferred, and the amount received was linked to the shareholding and voting rights.

5. Whether the Receipts are Casual and Non-Recurring under Section 10(3) of the Act:
The Tribunal rejected the assessees' argument that the receipts were casual and non-recurring under section 10(3), noting that the receipts were not received by chance but were part of a structured agreement.

6. Whether the Assessing Officer Applied Due Diligence in the Assessment:
The Tribunal criticized the AO for not applying due diligence and merely accepting the assessees' submissions without independent verification or consideration of the full agreement. The Tribunal noted that the AO's order lacked proper reasoning and failed to address the sale of shares by the assessees.

Conclusion:
The Tribunal upheld the CITs' orders under section 263, setting aside the AO's assessments. However, it modified the CITs' conclusion by holding that the receipts were not casual in nature but were part of the sale consideration for the shares sold. The AO was directed to re-compute the income by treating the receipts as part of the sale consideration of shares, liable to capital gains tax. The appeals of the assessees were dismissed.