9911796707
TMI Blog2010 (10) TMI 1123X X X X Extracts X X X X X X X X Extracts X X X X ..... laboration due from the US company and, therefore, your appellants were put to an irreparable loss of profit-making apparatus. (c) The CIT(A) has erred in law and on facts in upholding the decision of the ITO that in order to compensate for the loss of profit-making apparatus, the said US company agreed to compensate your appellants company with an amount of US $ 2.25 million amounting to ₹ 8,93,22,047 and the same is connected with loss of income or profits by virtue of loss standing charges and fees and therefore the receipt would assume the form of a revenue receipt and not capital receipt. (d) The CIT(A) has erred in law and on facts by not appreciating the fact that the receipt of US $ 2.25 million was not towards past and/or future loss of profits as the joint venture never made profits. Consequently, the CIT(A) should have appreciated that the question of compensating the loss of profits cannot arise. (e) The CIT(A) ought to have held that the compensation received from WRG is capital in nature and is not a source of income by any stretch of imagination. Moreover, the CIT(A) should have held that in the absence of any be considered as income subject to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er s. 80-IA. Additionally, the ITO has made certain unwarranted allocations of overheads having no bearing on the profits of eligible units. (c) The CIT(A) ought to have taken cognizance of the decisions rendered by the Tribunal in your appellants' own case for preceding proceedings for the above-mentioned year. 5. Disallowance of interest-free advances to subsidiary companies : (a) The learned CIT(A) has erred in law and on facts in not appreciating the fact that your appellants had sufficient funds generated by their business and consequently they were capable of investing in the shares of its subsidiaries and to advance interest-free loans out of its own source or internal accruals. (b) The learned CIT(A) has erred in law and on facts in partially upholding the presumption of the ITO that your appellants had borne interest on funds borrowed by it, which do not appear to have been deployed for the purposes of their business but utilized for lending to your appellants' group companies and subsidiaries and made an estimated disallowance in the assessment order. 6. Disallowance of interest expenditure on investment for controlling interest : (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nched certain proceedings against WRG for recovery of compensation for termination of the joint venture agreement before the International Chamber of Commerce by way of an arbitration and ultimately the matter was settled between the parties through a settlement agreement dt. 31st March, 1998 by which WRG agreed to pay a sum of US $ 2.25 millions equivalent to ₹ 8,93,22,047. This amount was credited to P L a/c as revenue receipt and in the statement of income this amount was shown as extraordinary item of compensation and included in the income returned by the assessee. Later on, a letter dt. 19th Feb., 2002 was submitted to AO through which it was requested to treat this amount of compensation as capital receipt. Through this letter it was mainly stated that to be an assessable income the item must fulfil the basic condition that it should fall under one of the heads of income. It was claimed that an amount received by an assessee as compensation for loss of profit-making apparatus is a capital receipt and, therefore, same is not taxable and for this reliance was placed on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Khushalbhai Patel Sons (1979 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt venture agreement, supplementary agreements for the termination of the joint venture company. In conclusion, the Revenue is therefore inclined to hold that the compensation received by the assessee company to the extent of US $ 2.25 millions amounting to ₹ 8,93,22,047 (net of expenses relating thereto and aggregating ₹ 78,03,453) can directly be connected with the loss of income or profits by virtue of loss of standing charges and fees, which the assessee company was in enjoyment of, during the currency of business of the joint venture company In the light of this stand adopted by the Revenue. It is further stated, that, such a receipt would assume the form and substance of revenue receipt and not capital receipt as vehemently contended on behalf of the assessee company. However, no material change or alteration to the net profits declared by the assessee company as per P L a/c is required to be affected, as the said amount of ₹ 8,93,22,047 stands credited to the P L a/c already. 4. Before the CIT(A) various submissions were made which have been summarized by him at pp. 9 and 10 of his order which are as under : (a) During the previous year releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this joint venture agreement which could still be dealt with by the assessee company. Further assessee company had also entered into'(i) Manufacturing agreement (ii) General and administrative services agreement and (iii) Laboratory facility and service agreement with the joint venture for which the assessee company received separate consideration in the form of standing charges and management fees etc. It was further observed that assessee company went on receiving technology from WRG because in terms of settlement agreement WRG had agreed to supply new technical know-how and an agreement was also entered into in this respect. Therefore, assessee company was not deprived of any capital asset or profit-making apparatus as the company continued to manufacture and sell the same products and even received technology from WRG even after termination of the joint venture agreement. The learned CIT(A) also placed reliance on the following decisions : (a) CIT vs. Best Co. (P) Ltd. (1966) 60 ITR 11 (SC); (b) Bombay Burmah Trading Corporation Ltd. vs. CIT (1971) 81 ITR 777 (Bom); (c) Blue Star Ltd. vs. CIT (1996) 131 CTR (Bom) 387: (1996) 217 ITR 514(Bom). On the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he observation that the joint venture was entered into in normal course of business is not correct because a foreign company i.e., WRG which was in similar business wanted to enter Indian market along with an organization which was in the similar field and since the assessee was in the similar field special kind of effort was made to boost the business by combining the capabilities of both the organizations by creating a new set up. 7. He then referred to the decision of Hon'ble Supreme Court in the case of Oberoi Hotel (P) Ltd. vs. CIT (1999) 152 CTR (SC) 474: (1999) 236 ITR 903(SC). In that case the assessee company was operating and managing various hotels belonging to the assessee as well as others. An agreement was entered into with Singapore company whereby the assessee company was to operate the hotel known as Hotel Oberoi Imperial for which the assessee company was to receive certain fee called management fee which was calculated on the basis of gross operating profits. The agreement was for 10 years and could be renewed for further term of ten years. There was also a covenant which gave the assessee a right to exercise an option of purchasing the hotel in case its o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me compensation was received by the Jain Group. A question arose whether the said compensation was taxable ? The Tribunal held that it was a case of structure of foundation on which the joint venture was to be built and accordingly such structure was a capital asset and the compensation received was capital receipt not liable to tax. The learned counsel of the assessee argued that in the case of the assessee also the structure or foundation was created through joint venture through which some business was to be conducted and when that agreement had been terminated then the decision of the Tribunal in the case of Ms. Payal Kapur vs. Asstt. CIT (supra) will be clearly applicable. 8. On the other hand, learned Departmental Representative also referred to the orders of the lower authorities and pointed out that AO has noted that assessee has credited the amount of compensation to the P L a/c and even offered the same for taxation. Later on, somehow or the other the assessee changed its stand and wrote a letter to the AO to treat this compensation as capital receipt. He also referred to the various pages of the joint venture agreement and submitted that reading of the same would show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermination of the joint venture agreement the assessee has become the gainer because assessee could expand its business. He particularly referred to art. 3 of the settlement agreement and pointed out that payment of US $ 2.25 millions was a lump sum payment and WRG was relieved from all liabilities which clearly shows that money was in lieu of standing charges which means that it has to be concluded as revenue receipt only. 10. He then contended that the case law cited by the learned counsel of the assessee are based on different facts and are totally distinguishable. For example, the decision of the Delhi Tribunal in the case of Ms. Payal Kapur vs. Asstt. CIT (supra), wherein the Jain Group entered into the joint venture with Gillette Group of USA the sources were pooled to carry on the business of manufacturing and marketing of writing instruments, which means some fixed assets were created because manufacturing cannot be done without such fixed assets, whereas in the case before us no assets have been created in the joint venture. Similarly, in the case of Oberoi Hotel (P) Ltd. vs. CIT (supra) assessee had two rights, namely, (a) right to receive fees for operating the hotel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine fashion or in special circumstances. He again referred to the decision of the Tribunal in the case of Ms. Payal Kapur vs. Asstt. CIT (supra) and submitted that in that case on the basis of facts it was observed that when resources were pooled and an altogether exclusive structure or apparatus was created in which both parties had certain rights. In the case before us also through the joint venture a particular structure was created through which assessee also had certain rights. Moreover, this agreement was not terminated on routine basis and, therefore, the decision of the Hon'ble Bombay High Court in the case of CIT vs. Khushalbhai Patel Sons (supra) is clearly applicable. 14. We have considered the rival submissions carefully in the light of the material on record as well as the judgments cited by both the parties. We have also perused the paper book filed on behalf of the assessee carefully. We find that the assessee company is engaged in the business of manufacturing and selling of water treatment equipments and chemicals. A joint venture agreement was entered into by the assessee company with WRG of USA. The recital clauses which are on p. 3 of the joint venture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... joint venture agreement reads as under : 2.4.3 : Water treatment chemical marketing and distribution activities of IEI IEI is engaged, inter alia, in marketing, distribution, supply and provision of water treatment chemicals, support equipment and services. Upon establishment of the joint venture company, IEI will cease its activities of marketing, distribution, supply and provision of water treatment chemicals, support equipment and services provides always that nothing contained herein shall prevent IEI from continuing on undertaking the activities as are set out in Ext. F hereto. Upon the establishment of the joint venture company, and EIE ceasing its marketing and distribution activities, as aforesaid, the JV Company will hereafter exclusively carry on the water treatment chemical marketing and distribution activities which had earlier been carried on by IEI. The above shows that upon establishment of the joint venture, the assessee company ceased to do its marketing and distribution business except for the Ext. 'F' listed in the agreement. Exhibit 'F' reads as under : Products Polyelectrolyte as sold by Polyelectrolyte India Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l convey to IEI all of Grace's interest in and to joint venture company; 3. Grace shall grant joint venture company certain limited, non-exclusive licenses for certain trademarks and technology; 4. Grace will be released from all its liability, if any, including but not limited to any liability under Grace's guarantee to HSBC under the line of credit extended by HSBC to the joint venture company, and Grace shall receive from HSBC both a letter evidencing the release and the original guarantee documents; 5. The joint venture agreement, the Grace trademark license agreement, the corporate name and logo license agreement and the old technical know-how license agreement shall be terminated; and 6. IEI and joint venture company shall release and discharge Grace and the released parties of and from any and all liabilities and obligations arising out of or relating to the joint venture company, the joint venture agreement, the ancillary agreements or otherwise from the relationship between the parties and shall indemnify and hold Grace and the released parties harmless against any damages (as defined herein). The above clearly shows that WRG was relieved f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to sell the same through the joint venture with the help of the WRG. (2) No new source of income has been created. The source of income remains the same i.e., manufacturing and selling of water treatment equipments and chemicals etc. (3) Even during the existence of the joint venture, the assessee company kept on manufacturing the goods which were supplied even to the joint venture for which it received the prices to be determined in accordance with the agreement as well as some standing charges, general and administrative charges and R D fee for providing administrative services and laboratory services to the joint venture. (4) The assessee company also continued to sell some of the products as provided in Ext. 'F' which we have reproduced above and which was outside the scope of the joint venture. (5) The joint venture never made any profits. (6) Even after termination of the joint venture agreement, the assessee company reverted back to its original position and kept on manufacturing various products and started selling these products on its own. (7) Even the advantage of technology which was available through the joint venture agreement, was still a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue : Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in 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. On the basis of the above principles, the Hon'ble Court held that the compensation was a capital receipt. The reasoning given is at p. 907 of the Report which reads as under : Applying the aforesaid test laid down by this Court in the present case, in our view the Tribunal was right in arriving at a conclusion that it was a capital receipt. The reason is that as provided in art. XVIII of the first agreement assessee was having an option or right or lien, if owner desired to transfer the hotel or lease or part of the hotel to any other person, the same was required to be offered first to the assessee (operator) or its nominee. This right to exercise its option was given up by a supplementar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee by entering into a joint venture agreement and since even after the termination of the joint venture the assessee continued its business of manufacturing and selling of water treatment equipments and chemicals etc., and, therefore, there is no loss of any source of income. 19. The next decision relied on by the learned counsel of the assessee is the decision of Hon'ble Bombay High Court in the case of CIT vs. Kantilal Shah Anr. (supra). In that case assessee had agreed to finance a manufacturing firm upto an extent of ₹ 1 lakh for a period of six years for which assessee was to receive 25 per cent share from the profits of the firm. Some payments were received as profits, but later on certain differences arose and the agreement was terminated and the assessee was paid a sum of ₹ 50,000. A question arose whether the sum of ₹ 50,000 is taxable or not. The Hon'ble High Court held as under : Held, that in this case the assessee was a lady who had no income from business and only had income from other sources. She had not entered into such agreement previously. The financing agreement possessed the unusual feature that the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to time be determined by the partners. The assessee firm entered into two finance agreements with the Western India Oil Distributing Co. Ltd. (hereinafter referred to as the company ), one dt. 29th Aug., 1953, and the other dt. 11th Jan., 1955. The former finance agreement related to the finance that was to be made available by the assessee firm to the company in respect of the business of the company in imports of petrol, kerosene oil and other petroleum products in Bombay, while the latter agreement related to the finance that was to be made available by the assessee firm at Bombay in respect of the company's business of importing petrol, kerosene oil and other petroleum products in Madras. Under these two agreements, the assessee firm agreed to finance the company such sum or sums of money as the company from time to time required for importing the aforesaid commodities either in Bombay or in Madras on certain terms and conditions set out in the aforesaid respective agreements. On 12th Jan., 1955, the first agreement dt. 29th Aug., 1953, was varied to certain extent and the altered terms under which finance was agreed to be made available by the assessee firm to the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law and particularly the provisions of the Bombay Moneylenders Act and Usurious Loans Act and it would be prepared to pay only interest @ 9 per cent per annum being the maximum rate of interest as provided under the Moneylenders Act, on the amount advanced by the assessee firm from time to time. The assessee did not accept the suggestions of the company and, therefore, the company filed a suit in this Court, being Suit No. 87 of 1956, for certain reliefs. The assessee firm filed a written statement in the suit and a counter-claim against the company. Ultimately, a consent decree dt. 21st June, 1956, came to be passed whereunder the company agreed to pay to the assessee firm as and by way of compensation and/or damages for termination of the agreements, a sum of ₹ 3,00,000 by five equal instalments of ₹ 60,000 each; the first of such instalments was paid on 31st Dec., 1956, and the subsequent instalments on 31st of December of each succeeding year and it is with reference to this amount of ₹ 3,00,000, which was receivable by the assessee firm from the company, that the question arose in assessment proceedings before the taxing authorities as well as before the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agency may, therefore, be viewed as the apparatus which leads to the business rather than the business itself. Considered in this light the agency right can be held to be of the nature of a capital asset invested in business. But this cannot be said of a contract entered into in the ordinary course of business. Such a contract is part of the business itself, not anything outside it as is the agency, and any receipt on account of such a contract can only be a trading receipt. Because compensation paid on the cancellation of a trading contract differs in character from compensation paid for the cancellation of an agency contract, it should not be understood that the latter must always, and as a matter of law, be held to be a capital receipt. An agency contract which has the character of a capital asset in the hands of one person may assume the character of a trading receipt in the hands of another as, for example, when the agent is found to make a trade of acquiring agencies and dealing with them. Therefore, when the question arises whether the payment of compensation for the termination of an agency is a capital or a revenue receipt, it would have to be considered whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Kapur vs. Asstt. CIT (supra) cannot be applied to the case before us. 22. The learned Departmental Representative had relied on the decision of Gillanders Arbuthnot Co. Ltd. (supra). In that case the assessee company was carrying on the business on diverse lines besides acting as managing agent. The assessee company was also having sole agency for distribution of explosives manufactured by Imperial Chemical Industries (Export) Ltd. This agency was terminated and compensation was paid to the assessee. A question arose whether this sum was taxable or not and the Hon'ble apex Court held as under : Held, that, having regard to the vast array of business done by the appellant as agents, the acquisition of agencies was in the normal course of business and determination of individual agencies, a normal incident, not affecting or impairing the trading structure. The amounts received by the appellant for the cancellation of the explosives agency therefore did not represent the price paid for the loss of a capital asset : they were of the nature of income. There is no immutable principle that compensation received on cancellation of an agency must always be regarded as c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... office premises at Corporate Park, Bombay. AO observed that the issue regarding depreciation on these office premises was examined in appeal for asst. yrs. 1997-98 and 1998-99 as these premises were acquired in earlier years and after detailed examination held that depreciation in respect of the entire value of these assets could not be claimed as value attributable to land which was comprised in these superstructures had to be reduced before allowing depreciation on the basis of decision of the Hon'ble Supreme Court in the case of CIT vs. Alps Theatre (1967) 65 ITR 377(SC). Accordingly, depreciation in respect of land comprising in these structures was not allowed. 25. On appeal, the learned CIT(A) confirmed the action of the AO following the decision of the earlier year. 26. The learned counsel of the assessee fairly conceded that the issue is covered against the assessee by the order of the Tribunal in assessee's own case in ITA No. 2133/Mum/2002 for the asst. yr. 1997-98 (copy of the order filed). 27. On the other hand, learned Departmental Representative relied on the orders of the lower authorities. 28. After considering the rival submissions carefully, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that this issue is also covered against the assessee by the order of the Tribunal for asst. yr. 1997-98 in ITA No. 2133/Mum/2002. 32. On the other hand, learned Departmental Representative relied on the orders of the lower authorities. 33. We have considered the rival submissions carefully and find that this issue has been considered by the Tribunal in ITA No. 2133/Mum/2002 vide paras 25 and 26 of the order. Para 26 of the order reads as under : 26. Now the assessee has preferred appeal before the Tribunal. During the course of hearing, the learned counsel for the assessee has invited our attention to the order of the Tribunal in assessee's case for the asst. yr. 1992-93 in which identical issue was examined by the Tribunal and dismissed the appeal of the Revenue while accepting the apportionment of overhead expenses adopted by the assessee. The learned counsel for the assessee has filed a copy of the Tribunal's order for the asst. yr. 1992-93 for our perusal. From this perusal we find that the Tribunal has disposed of the issue in few lines after following its order in assessee's case in Revenue's appeal in ITA No. 5278/Mum/1992 rendered on 17th Feb., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 4,47,882 ₹ 49,57,857 On query it was explained that assessee company was having large funds of its own and such funds have been given as interest-free loans and, therefore, interest could not be disallowed. However, AO did not agree with this submission because, according to him, the funds of the assessee were pool of resources comprising of heterogeneous mixture of own funds as well as borrowings and it is difficult to identify the interest to be disallowed. Then he worked out the disallowance as under : Therefore, in order to be fair and equitable in computing the rate of interest suffered for the borrowings by the assessee company and in view of the complexity of the nature of funds flowing into the common pool of resources of the assessee company, it is presumed that the funds for investments/interest-free advances have been partly out of borrowings and partly out of assessee's own funds. In this regard, it is observed that the company's peak borrowings during the year stand at ₹ 6,70,94,275 as derived above. The interest cost factor borne by the assessee company is reflected at ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : Held, dismissing the appeal, that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption was established considering the finding of fact by the CIT(A) and the Tribunal. The interest was deductible. Therefore, we set aside the order of the learned CIT(A) and remand the matter back to the file of the AO with a direction to decide this issue in the light of the decision of the Hon'ble Bombay High Court (supra). Ground No. 6 : 39. After hearing both the parties, we find that the AO further noted that assessee had made certain investments in various subsidiary companies as discussed in para 6 of his order. He further noted that in some companies more than 50 per cent stakes were held by the assessee company and, therefore, the money has been invested to clearly gain controlling stakes in those companies. He also observed that since assessee company had also borrowed the funds therefore interest could not be allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this regard. 42. On the other hand, learned Departmental Representative referred to p. 9 of the assessment order and submitted that AO has clearly invoked the provisions of s. 14A and since investments have been made out of interest-bearing funds in the shares which would yield only exempted income, therefore, disallowance should be upheld under s. 14A. 43. In the rejoinder, learned counsel of the assessee submitted that s. 14A cannot be invoked because assessee also had interest-free funds. He again referred to the decision of the Hon'ble Supreme Court in the case of CIT vs. Reliance Utilities Power Ltd. (supra) wherein it was held that when interest-free funds and interest-bearing funds both are available, then presumption is that only interest-free funds have been invested for making loans etc. and, therefore, assessee clearly had interest-free funds and thus disallowance is not called for. 44. We have considered the rival submissions carefully and find that the AO has basically invoked s. 14A. It has already been held by the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. vs. CIT (2010) 43 DTR (Bom) 177that s. 14A is applicable to al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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