2017 (11) TMI 1311 - HC - Income Tax

Nature of amount received as award against damages for breach of contract - capital receipt or revenue receipt - Compensation of a settlement for loss of its bottling rights with Coca Cola Company, USA - whether the amount partakes the character of income in terms of section 2(24) of the Act and to be taxed as income from other sources? - Tribunal held that compensation received was a capital receipt, that was not taxable - Held that - Tribunal concluded that the receipt of compensation amount must be considered in the backdrop of the master agreement. Under the master agreement, the right of first refusal was vested with LFFL to carry out the bottling activities in the territory of Bangalore. There was a clear indication that there would be formation of Bangalore subsidiary and there would be an investment agreement also between the parties for this purpose. The necessary guidelines as to how the subsidiary would be formed, various assignments of the bottling rights only to such a newly formed company and to be held and formed by Parle Group and later on the Coca Cola Company will join in after subscribing 30% of the shares, are the provisions or guidelines in the master agreement itself. It was to this subsidiary company that the bottling rights were to be given in the territory of Bangalore. This subsidiary company was formed as Parle Soft Drinks Pvt. Ltd. Thus, the assessee company was formed only for carrying out bottling activities in the territory of Bangalore. There was, thus, no dispute that the assessee was entitled to receive the compensation amount on the breach of this agreement from Coca Cola Company. Thus, even though the right of first refusal was with LFFL, but it was always agreed upon by the parties that the same should be for the newly formed subsidiary at Bangalore. That Bangalore subsidiary is the assessee company only. Once these bottling activities were to be carried out for the Coca Cola Company and the Bangalore territory that the assessee was formed. It was not necessary that the assessee should have installed entire plant and machinery for carrying on such business. The right of first refusal itself stated a substantial right and foundation on which the assessee could have built its bottling business. If such right would have been assigned to the assessee, it would have been the source of assessee s income and profit making apparatus. The assessee has also submitted its business plans and various modes for carrying out the bottling business to the Coca Cola Company. There is no dispute that the Coca Cola Company has breached the agreement and particularly the right of first refusal by not assigning the rights. It was on account of breach of this agreement that the compensation amount was settled between the parties. The fundamental right for starting the bottling business was taken away as a result of breach of the right of first refusal by the Coca Cola Company. That is the reason why the Coca Cola Company paid this amount to the assessee and not to LFFL. To our mind, therefore correct conclusion has been arrived. See Hon ble Supreme Court has in the judgment in the case of Kettlewell Bullen and Co. Ltd. vs. Commissioner of Income Tax, Calcutta (1964 (5) TMI 4 - SUPREME Court). We do not think that the view of the Tribunal is any way erroneous or illegal. Thus, it is not vitiated by any error of law apparent on the face of the record of perversity. - Decided in favour of assessee. Tribunal concluded that the Commissioner of Income Tax (Appeals) was right that sale proceeds on a capital assets cannot be held to be a revenue receipt and after the sale, the block of assets have been reduced and accordingly whatever is there in the block of assets, deprecation has to be allowed in accordance with the provisions of law. Thus, the finding of fact recorded by the Commissioner of Income Tax (Appeals) has been endorsed and confirmed by the Tribunal. We do not think that this finding of fact is perverse or vitiated by an error of law apparent on the face of the record.

Issues Involved:
1. Taxability of compensation received for loss of bottling rights.
2. Classification of compensation as capital receipt or revenue receipt.
3. Treatment of compensation under the Income Tax Act.
4. Depreciation on bottles and crates and its impact on taxable income.
5. Application of precedents and legal principles to the facts of the case.

Detailed Analysis:

1. Taxability of Compensation Received for Loss of Bottling Rights:
The central issue was whether the compensation of ?16.05 crores received by the assessee for the loss of bottling rights with Coca Cola Company, USA, should be taxed. The Assessing Officer classified it as income from other sources, while the assessee claimed it as a capital receipt not liable to tax. The Tribunal concluded that the compensation was a capital receipt for the loss of the source of business or trading activity and was not taxable. The High Court upheld this view, emphasizing that the compensation was for the breach of the right of first refusal, a fundamental right for the assessee's business.

2. Classification of Compensation as Capital Receipt or Revenue Receipt:
The Tribunal, guided by precedents from the Supreme Court, determined that the compensation received was a capital receipt. The High Court referenced the Supreme Court's tests in cases like Kettlewell Bullen and Co. Ltd. vs. Commissioner of Income Tax and Oberoi Hotel Pvt. Ltd. vs. Commissioner of Income Tax, which state that compensation for loss of a source of income is a capital receipt. The High Court agreed with the Tribunal's application of these tests, confirming that the compensation was for the loss of a capital asset and not a revenue receipt.

3. Treatment of Compensation Under the Income Tax Act:
The Revenue argued that the compensation should be taxed as income, either as capital gains or under other provisions. The Tribunal found no transfer or extinguishment of any rights that would constitute a capital gain. The High Court endorsed this view, stating that the compensation was not taxable as capital gains or under section 115JA of the Income Tax Act. The court emphasized that the compensation was for the loss of a potential business source, aligning with the Tribunal's finding that it was a capital receipt.

4. Depreciation on Bottles and Crates and Its Impact on Taxable Income:
The Revenue contended that the sale of bottles and crates, on which 100% depreciation had been claimed, should be treated as revenue receipts. The Tribunal and the Commissioner of Income Tax (Appeals) held that the sale proceeds were part of the block of assets and should be treated accordingly, allowing depreciation as per the law. The High Court upheld this finding, rejecting the Revenue's argument and confirming that the sale proceeds of capital assets could not be held as revenue receipts.

5. Application of Precedents and Legal Principles to the Facts of the Case:
The High Court referred to several Supreme Court judgments to support its conclusions. It emphasized that the compensation received was for the breach of a fundamental business right, making it a capital receipt. The court also addressed the Revenue's reliance on the Supreme Court's judgment in Commissioner of Income Tax vs. Shantilal (P.) Ltd., clarifying that the context of that case was different and not applicable to the present facts. The High Court concluded that the Tribunal's findings were consistent with established legal principles and were not erroneous or perverse.

Conclusion:
The High Court dismissed the Revenue's appeals, affirming that the compensation received by the assessee was a capital receipt not liable to tax and that the sale proceeds of bottles and crates should be treated as part of the block of assets, allowing for depreciation. The court found no substantial questions of law in the Revenue's appeals and upheld the Tribunal's detailed and reasoned findings.

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