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TMI Blog1987 (2) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... /s. Atkins Pvt. Ltd., Calcutta, could be allowed as business expenditure partaking of the nature of revenue ? 2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 42,212 paid by the assessee to M/s. Chemicals and Technical Services, London, could be allowed as business expenditure partaking of the nature of revenue ? " The facts leading to the two references in question in brief are as follows: The assessee-company is a registered company under the Indian Companies Act. It entered into an agreement with Messrs. L. A. Mitchells Ltd., Manchester, United Kingdom, on October 12, 1961, according to which the English company was required to erect a barium chemical plant for the assessee at Kothagudem, Andhra Pradesh, for producing certain barium salts. The consideration fixed for the erection of the plant was 1,84,500 pounds. The work was to be commenced within four months and completed within 9 to 12 months from the issue of the letter of credit. The English company had agreed to ensure a certain quality of barium salts and also guaranteed certain quantity of production per annum. As differences arose between the assessee and the English company, a supplem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all claims for spares and stores left at the site and abandoned by Mitchells in February, 1966, of the value of Rs. 1,61,008 (d) surrendering claim for the credit balance of Rs. 2,38,942 in the account of Mitchells in the books of the assessee. " The total value of the above four items was Rs. 56,87,402. The Income-tax Officer (the assessing authority) considered the question whether the aforesaid amounts constituted capital receipt or revenue receipt. The contention raised by the assessee was that the entire amount received under the settlement dated February 22, 1967, represented compensation for liquidated damages and so the same should be treated as capital in nature. The Income-tax Officer, after considering the submissions made by the assessee, excluded the amount of Rs. 1,61,008 on account of the value of spares and stores left at the erection site and treated the balance amount as revenue receipt liable to tax under the provisions of the Income-tax Act. On appeal, the Appellate Assistant Commissioner came to the conclusion that the value of the kiln (27,000 pounds = Rs. 5,66,513) supplied by the English company and the surrender of claim for the credit balance of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain errors in the installation of plant and machinery by Messrs Mitchells Ltd. who had abandoned the work. Messrs Chemicals and Technical Services went into the matter and submitted a report giving suggestions as to how the assessee could improve the existing working of the plant and machinery and suggested modifications for improving the efficiency. The Income-tax Officer considered the expenditure to be capital in nature and disallowed the same. On appeal, the Appellate Assistant Commissioner agreed with the assessee and held that the payment was a revenue receipt. On further appeal, the Income-tax Appellate Tribunal expressed the view that the same constitutes capital expenditure: when the damages received by the assessee from Messrs Mitchells Ltd. were capital in nature, the expenditure incurred on account of the payment made to Messrs Chemicals and Technical Services also must be considered as capital expenditure. We shall first take up question No. 1 raised by the Revenue which pertains to Rs. 47,20,539. The question whether a payment is revenue receipt assessable to tax or a capital receipt not so assessable defies easy solution. The dividing line is not clear cut, at any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viz., settlement deed dated February 22, 1967, must be examined and in the course of such examination, it would be necessary to consider the earlier two agreements of the years 1961 and 1963 also, since the 1967 settlement was the culmination of the earlier two agreements. The Revenue need not seek reference as to whether or not the findings of fact recorded by the Tribunal were supported by evidence. The High Court will have to look into the nature of the compensation in answering question No. 1. Sri Ratnakar, learned counsel for the assessee, says that this court, in the absence of a reference sought by the Department on the question whether or not the findings of fact recorded by the Tribunal were supported by evidence, cannot independently embark upon an enquiry in order to ascertain the facts for the purpose of reaching its conclusions. The findings of fact recorded by the Tribunal, according to Sri Ratnakar, are binding on this court in the present reference as the Department did not seek any reference disputing the findings of fact recorded by the Tribunal. We think, Sri Ratnakar is well-founded in his submissions. In Karam Chand Thapar Bros. P. Ltd. v. CIT [1971] 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt it or if it is perverse. (4) When the finding is one of fact, the fact that it is itself an inference from other basic facts will not alter its character as one of fact." The limitations imposed on the High Court in this regard have been considered by the Supreme Court in Karnani Properties Ltd. v. CIT [1971] 82 ITR 547 (SC) (at p. 551): " The jurisdiction of the High Court in dealing with a reference under section 66 is a very limited one. It must take the fact as stated in the statement of the case unless the question whether the findings of the Tribunal are vitiated for one or the other of the reasons recognised by law is before it." The Supreme Court in CIT v. S. P. Jain [1973] 87 ITR 370 restated the aforesaid rule. The contention of Sri Suryanarayana Murthy is that the present question is a pure question of law since it relates to construction of documents, viz., settlement deed dated February 22, 1967, and the earlier two agreements of 1961 and 1963 and, therefore, we can review the facts as found by the Tribunal. It is difficult to agree with this contention. The settlement deed dated February 22, 1967, based on which the amount in question was received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid certain amounts during three successive years after the termination of the agency and as a condition, the assessee undertook for a period of five years to refrain from selling or accepting any agency for explosives competitive with those covered by the agency agreements terminated. These amounts were claimed by the assessee as capital receipts and he did not place any material before the Department to establish the relative importance of the agency in the framework of the earning apparatus of its business or to prove that the agency was a pivot of its structure. The Income-tax Tribunal held that the amounts were received based on future sales and so they constitute normal commission receipts. The question referred to the High Court was whether the amounts are assessable under section 10 for the assessment years 1951-52 and 1952-53 ? The High Court, reversing the decision of the Appellate Tribunal, expressed the view that the, amounts were capital receipts and so not liable to tax. In the appeal preferred by the Commissioner to the Supreme Court, the evidence was scrutinised for the purpose of ascertaining the true nature of the receipts and it was held that the compensation r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nglish company undertook " that the machinery supplied by us shall be of first class materials and of sound workmanship and that we will make good or replace any defects or defective parts therein which may appear within six months of delivery from the works and which are proved to be due solely to the use of defective materials or bad workmanship and defective parts replaced are to be our property." Clause No. 18 provides for arbitration. In the supplemental agreement dated August 3, 1963, by clause 1, the English company undertook that " they take complete responsibility for the plant and machinery supplied and to be supplied for producing the quantity and quality of salts as contracted, with the available raw materials and that they are prepared to give the necessary guarantees in this regard." On December 20, 1965, the English company wrote a letter to the assessee stating, inter alia, that they would incur on the job a loss, approximately of 3,50,000 pounds " This is a considerably higher loss than we had hitherto contemplated ......... In short, we are faced with spending over 5,00,000 pounds on a contract priced at 1,84,500 pounds ". By then the English company was awa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s hereinafter set out. 1. Mitchells shall on the delivery to them of this agreement duly signed by Barium's authorised representative (a) pay to Barium's authorised representatives in England the sum of 225,000 pounds; (b) pay to Messrs Stocken Company, Barium's solicitors, the sum of 10,000 pounds on account of their costs and disbursements; and (c) release for collection within three calendar months at Barium's own expense and cost the kiln (as described in the schedule hereto) which is now at 72, Purely Way, Croydon, Surrey, England, and which Barium has agreed to accept in such condition as it may be on the date of collection. (d) Barium hereby acknowledges that it accepts the above sums and the release of the said kiln in full and complete settlement and discharge of all claims of any kind, whether present or future, actual or contingent, against Mitchells, L. A. Mitchel (Holdings) Ltd., and S. Pearson Industries Ltd. and against any other parent or associated or subsidiary company and against Lord Poole and any other individual arising out of or connected with the said contract ....... 3. Without prejudice to the generality of the foregoing, Barium hereby waives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he compensation of 225,000 pounds was agreed to be paid under the settlement deed dated February 22, 1967. But the Tribunal without considering this aspect merely surmised that the details regarding the basis, if any, could be in possession of Messrs Mitchells and in that erroneous view recorded a finding that both the Income-tax Officer and the Appellate Assistant Commissioner fell into error in expressing the view that the assessee had withheld the relevant details regarding the receipt of compensation. There is no basis for the Revenue, in our view, to advance this contention. The finding of fact recorded by the Tribunal that the asses" see had not withheld any relevant details regarding the receipt of compensation from Mitchells has not been questioned by the Department by seeking a reference on that. When the Department had accepted the fact as found by the Tribunal, it is not open to learned counsel for the Revenue now to contend that there was no basis for the finding recorded by the Tribunal. Even if we were to go into the question whether the assessee had withheld any relevant details regarding the receipt of the amount in question, our answer would have been the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tlement deed dated February 22, 1967, was mostly the result of oral discussions, the material portions of which were recorded in the form of an aide-memoire and the assessee furnished the same to the assessing authority. We, therefore, do not find any justification for the criticism advanced that the assessee had suppressed any relevant information. At the time of the trial run in 1964, it was noticed that the plant and machinery were defective. After completion, the plant went into production in May, 1965. There is no dispute that its optimum production was 30% of the installed capacity and that the quality of the barium salts was not what was stipulated in the agreement entered into by the assessee company with the English company. The injury caused to the assessee company was substantial as found by the Tribunal. The non-fulfilment of the contract on the part of the English company, according to the Tribunal, had resulted in serious damage to the profit-making apparatus of the assessee-company ultimately affecting the production. When the injury found was substantial so as to affect even the basic foundation of the assessee-company, the Tribunal opined that " the damages recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three films and received towards commission a sum of Rs. 26,000. The Tribunal and the High Court were of the view that the amount constituted a capital receipt. By a majority judgment, the Supreme Court ruled that the assessee received the amount in the ordinary course of business to adjust the relation between the assessee and the producers ; the termination of the agreements did not radically or at all affect or alter the structure of the assessee's business. The amount received was only towards commission, i.e., as compensation for loss of commission, which it would have earned had the agreements not been terminated and, therefore, the amount could not be construed as a capital asset. It was received only in the ordinary course of business and, therefore, it was liable to tax as a revenue receipt. It is useful to notice in this context three other cases relating to compensation received for termination of managing agents. In Godrej Co. v. CIT [1959] 37 ITR 381 (SC), the assessee received certain amount by way of compensation under an agreement for surrendering its claim for 20 per cent. of commission as managing agent and agreeing to receive only 10 per cent. Rejecting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from which otherwise profit might have been obtained " was approvingly referred to. Applying the test, the Supreme Court held that (p. 187 of 36 ITR): "The agency agreements in fact formed a capital asset of the assessee's business worked or exploited by the assessee by entering into contracts for the sale of the Charminar cigarettes manufactured by the company to the various customers and dealers in the respective territories. This asset really formed part of the fixed capital of the assessee's business. It did not constitute the business of the assessee but was the means by which the assessee entered into the business transactions by way of distributing those cigarettes within the respective territories. It really formed the profit-making apparatus of the assessee's business of distribution of the cigarettes manufactured by the company. If it was thus neither circulating capital nor stock-in-trade of the business carried on by the assessee, it could certainly not be anything but a capital asset of its business and any payment made by the company as and by way of compensation for terminating or cancelling the same would only be capital receipt in the hands of the assessee." Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... naged company, (ii) to procure repayment of all loans made by the assessee to Fort William Jute Company, and (iii) to procure that the managed company will compensate the assessee for loss of office by payment of a sum of Rs. 3,50,000 after the assessee resigned its managing agency and reimburse that amount to the managed company. The assessee-company tendered resignation of the managing agency and received the sum of Rs. 3,50,000 from the managed company. The question arose whether the amount of Rs. 3,50,000 received by the assessee to relinquish the managing agency was a revenue receipt liable to tax. The agreement was made some time on May 21, 1952. In the normal circumstances, the managing agency was to continue up to January 14, 1957. Observing that the question is not capable of solution upon application of any single test and after referring to the observations of Venkatarama Aiyar J. in CIT v. Rat Bahadur Jairam Valji [1959] 35 ITR 148 (SC), the Supreme Court observed that the assessee-company was formed with the object of acquiring managing agencies of companies and to carry on the business and to take part in the management, supervision or control of the business or opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. " Applying the said rule, the court ruled that the amount received by the assessee was a capital receipt since it was paid to compensate loss of a capital asset. In Jairam Vali's case[1959] 35 ITR 148 (SC), the assessee received a sum of Rs. 2,50,000 as solatium for termination of a contract when the rates were found by the purchaser to be uneconomical. While considering the question whether the sum was a capital or revenue receipt, the Supreme Court considered several English rulings apart from certain Indian decisions and held that the amount received by the assessee was liable to tax as a revenue receipt. The business which the assessee was carrying on was the very business to which the agreement by which the solatium received related, and as it was in the ordinary course of business, any compensation received for its termination must be held to be revenue receipt. While stating so, the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee, the Collector agreed to allow the assessee to remain in possession of the office premises from where he carried on business. A compensation of Rs. 1,85,200 for requisitioning the premises was awarded and after some correspondence the matter was referred to an arbitrator the Civil judge, Poona, who, inter alia, held that the assessee was entitled to a lump sum of Rs. 1,25,500 for loss of earnings The Income-tax Officer deducted a sum of Rs. 20,426 from out of the aforesaid amount as that amount was spent by the assessee in the claim proceedings against the Government over and above the amount of Rs. 2,000 which was awarded towards costs. On the balance amount of Rs. 1,05,074, he levied tax treating the same as a revenue receipt. On appeal, the Appellate Assistant Commissioner allowed the appeal and set aside the Income-tax Officer's order. The Income-tax Appellate Tribunal, on further appeal, held that the sum of Rs. 1,25,000 was a revenue receipt. The High Court, on a reference, held that the amount was a capital receipt not liable to tax. The Supreme Court reversed the finding of the High Court, agreeing with the view expressed by the Tribunal. The assessee was not dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue receipt, its true nature and substance must be looked into. The form in which it is expressed is not decisive. How the assessee treated the payment is not conclusive of its nature. If the assessee himself has treated the payment in his account books as compensation or consideration received for loss of earnings or profits, it is a revenue receipt. If the payment is received in the ordinary course of the business of the assessee for loss of stock-in-trade, it is revenue receipt. If, on the other hand, the payment received is towards compensation for extinction or sterilisation partly or fully of a profit-earning source (capital asset), such receipt not being in the ordinary course of the assessee's business, it must be construed as a capital receipt. Neither on the findings of the Tribunal, nor on an examination of the terms of the settlement dated February 22, 1967, can it be said that the amount in question represented loss of profits. The business the assessee carried on was in barium chemicals. The settlement dated February 22, 1967, concluded between the assessee and the English company cannot be treated as one in the ordinary course of the business carried on by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to fulfil their obligations under the agreements concluded with the assessee. Unless the transaction falls within any of the categories specified in the aforesaid definition clause, the amount cannot be brought to tax under section 45 of the Income-tax Act as capital gains. As there was no transfer of any capital asset as envisaged under section 45, agreeing with the view taken by the Tribunal, we answer the question in favour of the assessee and against the Department. Question No. 1, raised by the assessee, relates to the sum of Rs. 50,000 paid by the assessee to M/s. Atkins Private Limited, Calcutta, and whether the sum could be allowed as business expenditure partaking of the nature of revenue. This amount was not the subject-matter of the settlement dated February 22, 1967. M/s. Atkins Private Limited were engaged by the assessee to conduct investigations into the deficiencies of the various production units and to suggest improvements. M/s. Atkins Private Limited did not complete their investigations and half way through, their assignment was cancelled. The assessee-company paid M/s. Atkins a sum of Rs. 50,000 as against the originally contracted amount of Rs. 1,00,000. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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