2005 (11) TMI 198 - AT - Income Tax

Chargeable As Tax - compensation payment - Nature of receipt - capital receipt or revenue - commercial arrangement - business of manufacture and sale of writing instruments - Whether compensation paid to the assessees was a capital receipt not liable to tax - payment made to compensate the Jain Group for losing the benefits of future profits of LWIL or being exposed to enhanced losses of LWIL through the introduction of Newell - HELD THAT - There is no dispute in the cases before us that members of Jain group were carrying on business of sale and purchase of writing material as per details noted above. The facts relating to the business carried have been correctly stated by the learned representative of the assessee. The learned D.R. did not raise much dispute on them. There is further no dispute that on19-3-1996, Jain Group entered into JVA with GIPL. According to Jain Group, the JVA was an isolated agreement of unique type never entered into by Jain Group earlier with any body. Revenue has contested this proposition and accordingly it has been held that JVA was a business and commercial agreement and, therefore, compensation flowing from breach of such agreement is also a business/revenue receipt liable to be taxed. In our considered opinion, it has to be accepted that JVA was an isolated agreement entered into by Jain Group for the first time and it cannot be accepted that Jain Group was carrying on business of entering into such JVAs. It is not possible to accept on facts that Jain Group were entering into agreements with world renowned companies like Gilliete in the ordinary course of their business. It was an agreement entered into by Jain Group for purposes of business. JVA was a commercial deal providing respective rights and liabilities of parties relating to business agreed to be carried but it was not a business . JVA may not merely be a memorandum of agreement not connected with the business as contended by the assessee. It was a commercial agreement. But it was not business . We hold accordingly. Whether JVA here is a capital asset or a revenue asset - It is admitted even by the Assessing Officer and CIT(A) that parties, as per the JVA agreed to establish, develop, long-term business alliances to strengthenLuxorgroup and world renowned Gillette group. Under the agreement, business of manufacture and sale of writing instrument and stationeries was to be carried by exclusive vehicle of joint venture (LWIL etc.) companies. The joint venture companies in business was to follow Gillette's management, financial, personal, manufacturing, internal control, reporting system, policies, practices, procedures and were to be guided by Gillette's mission and value statement . Products of Gillette were to be manufactured and sold exclusively by Joint venture company. Gillette could not sell its products in competition. The parties under the agreement could not agree to sell, transfer any of shares in company for first seven years without prior written consent of the other party and any such sale or transfer of shares would constitute material breach of JVA. The joint venture agreement further provided for blending of two concerns and stated terms and conditions in respect of financing of joint venture business, insurance of shares, constitution of Boards, management, accounting, technical know, assistance, consequences of termination of agreement, material breach etc. etc. Admittedly, it is very voluminous and lengthy document. Revenue also admits that it is very comprehensive. In our considered opinion, the terms and conditions leave no amount of doubt that JVA was a structure or foundation on which the joint business was to be built and carried. It provided mechanism or blue prints and defined role of the parties to the agreement and their commitment and also the manner in which business would be carried. The JVA could not be treated as business as admittedly business agreed to be carried was that of manufacture and sale of writing material and stationery. As noted in the case of Rai Bahadur Jairam Valji, it was capital asset invested in the business but not business itself. It was clearly a capital structure having two shades, one of Jain group and other of Gillette both having committed to provide not only finances but also management skill and even culture etc. etc. It could not be treated as stock-in-trade or a revenue asset. It was a capital asset. Having reached the conclusion that JVA gave rise to rights which were capital in nature now the question whether compensation received for breach of above rights or waiver of such rights is revenue receipt or capital receipt is not difficult to decide. It is an admitted position that compensation was paid to Jain group for breach of commitment provided in JVA. It has also been observed that compensation was paid for loss of future profit or to reduce the future losses which the joint venture companies suffered or were likely to suffer. Documents referred to above make no reference to future profit or future losses and, therefore, it is not possible to enter into realm of actual losses or actual profit suffered in the joint venture. Parties to JVA or even revenue authorities did not take actual assessments of joint venture companies into account in the impugned orders. There is no such indication on record. Even compensation paid has no reference to profit or gain actually earned by the parties. It was open to the revenue to show that written agreements placed by the assessee on record were not reliable or acted upon and that compensation was paid for something else. But no case on lines above has been made out. No statement of parties to agreement was recorded nor any other material was collected to show that compensation was for any revenue loss caused to the assessees. In this background we see no reason to admit additional evidence filed on behalf of the assessees. We, further see no reason for holding that compensation received was a capital receipt not liable to tax. It is further clear from notice and waiver agreement that compensation was paid to Jain group for waiving their rights and for permitting Gillette to leave joint venture in breach of JVA. In the light of above, it is not possible to attribute compensation to anything else. There is direct reference to loss or damage caused to the trading structure on account of departure of Gillette. In the above circumstances, we see no reason to admit additional evidence filed by the assessee. We may state that the matter is fully covered by the decision of House of Lords and by the decision in the case of Hotel Oberoi 1999 (3) TMI 2 - SUPREME COURT .Thus, we hold that compensation paid to the assessees was a capital receipt not liable to tax. Accordingly, the appeal filed by the assessee is allowed, whereas those of the revenue are dismissed.

Summary

Issues Involved:

1. Nature of the Joint Venture Agreement (JVA) and whether it constitutes a business activity.
2. Taxability of the compensation received by the Jain Group from Gillette Inc., USA.
3. Determination of whether the compensation is a capital receipt or a revenue receipt.
4. Applicability of Section 28(i) of the Income-tax Act.
5. Validity and relevance of legal opinions and expert testimonies.

Issue-wise Detailed Analysis:

1. Nature of the Joint Venture Agreement (JVA) and whether it constitutes a business activity:

The court examined whether the JVA between the Jain Group and Gillette Inc. was a business activity. The JVA was an agreement to pool resources and strengths to carry on the business of manufacturing and marketing writing instruments and stationery products in India. The agreement included non-compete terms and mutual covenants ensuring cooperation. The agreement was not merely an investment but a comprehensive commercial arrangement defining the relationship and obligations of the parties. However, the court concluded that the JVA was not a business in itself but an instrument to set up a business, thereby holding it as a capital asset rather than a business activity.

2. Taxability of the compensation received by the Jain Group from Gillette Inc., USA:

The Jain Group received USD 15 million from Gillette Inc. as compensation for consenting to the transfer of Gillette's interest in the joint venture to Newell Rubbermaid Inc. The court had to determine if this compensation was taxable. The Assessing Officer treated the compensation as a revenue receipt taxable under Section 28(i) of the Income-tax Act, arguing that the receipt arose from the material breach of the JVA and was therefore exigible to tax.

3. Determination of whether the compensation is a capital receipt or a revenue receipt:

The court analyzed whether the compensation was a capital receipt or a revenue receipt. The compensation was paid for the Jain Group consenting to the transfer of Gillette's interest in the joint venture, which was considered a breach of the JVA. The court referred to various judgments, including Gillanders Arbuthnot & Co. Ltd. v. CIT and CIT v. Rai Bahadur Jairam Valji, to determine the nature of the receipt. The court concluded that the compensation was a capital receipt as it was paid for the waiver of rights under the JVA, which was a capital asset.

4. Applicability of Section 28(i) of the Income-tax Act:

Section 28(i) of the Income-tax Act deals with the taxability of income from business or profession. The Assessing Officer argued that the compensation was taxable under this section as it arose from the business activity of forming and managing joint ventures. However, the court held that the JVA was not a business activity but a capital asset, and the compensation received for its breach was a capital receipt, not taxable under Section 28(i).

5. Validity and relevance of legal opinions and expert testimonies:

The court considered various legal opinions and expert testimonies provided by the Jain Group, which supported the claim that the compensation was a capital receipt. The CIT (Appeals) had differing views, with some accepting the compensation as a capital receipt and others treating it as a revenue receipt. The court ultimately found the opinions and testimonies supporting the capital receipt view more persuasive and aligned with the legal principles established in relevant case law.

Conclusion:

The court held that the compensation received by the Jain Group from Gillette Inc. was a capital receipt and not taxable under Section 28(i) of the Income-tax Act. The appeals filed by the revenue were dismissed, and the appeal filed by the assessee was allowed.