2005 (12) TMI 227 - AT - Income Tax

Validity of Order passed by the learned CIT u/s 263 - erroneous and prejudicial Order - highest bidder for providing basic telephony services - Compensation for termination of project agreements with Qualcomm - receipts - Capital receipt Or Not - HELD THAT - As is evident from the relevant clause, of the settlement agreement reproduced above, different performance and financial guarantees were given by Qualcomm on behalf of the assessee-company. In order to get itself discharged of the obligations under the said guarantees, it was agreed by Qualcomm that it would pay Rs. 33.33 crores to the assessee-company and in turn, the assessee-company shall indemnify Qualcomm from any liability that may arise under the said guarantees during the period in which they were in force. It is pertinent to note here that all these guarantees were given in connection with the setting up of a state of art broad-band network on convergence platform in Rajasthan Telecom Circle for providing basic telephony services in terms of license granted to the assessee-company by DoT. The said guarantees were, therefore, clearly related to the capital structure of the assessee-company or for that matter to its profit making apparatus and the amount received by the assessee company from Qualcomm as compensation for discharging the latter from the liabilities under the said guarantees was a receipt on capital account. Hon'ble Supreme Court in the case of Kettlewell Bullen Co. Ltd. 1964 (5) TMI 4 - SUPREME COURT involving almost similar facts, is directly applicable to the present case wherein it was held that the compensation paid to the assessee for termination of managing agency was a loss of capital asset and it matters little whether the assessee did continue after the termination of the said managing agency. To the similar effect is the decision of Hon'ble Supreme Court in the case of Travancore Rubber Tea Co. Ltd. 2000 (3) TMI 5 - SUPREME COURT cited by the learned counsel for the assessee wherein it was held that the, quality and nature of a receipt for income tax purposes are fixed once and for all when the subject of the receipt is received and no subsequent operation can charge the nature of the receipt. We, therefore, find no merits in the contention raised by the learned CIT-DR in this regard and reject the same. As such, we are of the considered opinion that the amount in question received as compensation by the assessee-company from Qualcomm on account of cancellation/termination of project agreements was a capital receipt not liable to tax. In that view of the matter, we hold that the learned CIT was not justified in holding the same to be a revenue receipt chargeable to tax. The addition made on this issue to the total income of the assessee is, therefore, directed to be deleted. Ground Nos. 8 to 13 of the assessee's appeal are, accordingly, allowed. In the result, the appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Validity of the order passed by the CIT under section 263.
2. Nature and taxability of the amount of Rs. 63.92 crores received by the assessee from Qualcomm.

Issue-wise Detailed Analysis:

1. Validity of the Order Passed by the CIT under Section 263:

The CIT assumed jurisdiction under section 263 on the grounds that the Assessing Officer (AO) did not make proper inquiries before accepting the assessee's claim that the amount of Rs. 63.92 crores received from Qualcomm was a capital receipt not liable to tax. The CIT observed that neither the original contracts with Qualcomm nor the settlement agreement were examined by the AO, which rendered the assessment order erroneous and prejudicial to the interests of the Revenue.

The assessee contended that all necessary documents, including a detailed note on the capital reserve and documentary evidence, were produced before the AO. However, there was no evidence on record to show that the settlement agreement was examined by the AO. The Tribunal held that the failure of the AO to examine the relevant evidence made the assessment order erroneous and prejudicial to the interests of the Revenue, thus justifying the CIT's assumption of jurisdiction under section 263.

2. Nature and Taxability of the Amount of Rs. 63.92 Crores Received by the Assessee from Qualcomm:

The amount of Rs. 63.92 crores was received by the assessee as compensation from Qualcomm for the termination of project agreements. The Tribunal examined the settlement agreement and observed that the compensation was for the waiver of a loan taken by the assessee from ABN Amro Bank (Rs. 30.19 crores), discharge of Qualcomm's obligation under financial/performance bank guarantees (Rs. 33.33 crores), and reimbursement of demurrage on imported equipment (Rs. 0.41 crores).

The Tribunal held that the waiver of the loan and discharge of obligations under bank guarantees were related to the capital structure of the assessee and constituted capital receipts. The reimbursement of demurrage was also not considered income. The Tribunal relied on various judicial precedents, including the decisions of the Supreme Court in the cases of P.H. Divecha v. CIT and Kettlewell Bullen & Co. Ltd. v. CIT, to conclude that the compensation received was a capital receipt not liable to tax.

The Tribunal rejected the CIT's contention that the compensation was a revenue receipt, holding that the termination of the project agreements affected the capital structure of the assessee and was not a normal incidence of business. The Tribunal also found that the subsequent agreement with Lucents Technology did not change the nature of the receipt.

Conclusion:

The Tribunal upheld the validity of the CIT's assumption of jurisdiction under section 263 but concluded that the compensation received by the assessee from Qualcomm was a capital receipt not liable to tax. The appeal of the assessee was partly allowed, and the addition made by the CIT was directed to be deleted.