TMI Blog2011 (3) TMI 587X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee have not been scrutinized - the case has not traveled to any higher forum whose decision could be said to be the precedent in the matter. - Decided in favor of revenue. - ITA No. 4720(Del)/2009 - - - Dated:- 4-3-2011 - I.P. Bansal, K.G. Bansal, JJ. A.K. Monga, DR, for the Appellant Salil Aggarwal, Adv., for the Respondent ORDER K.G. Bansal: The solitary ground taken by the revenue is to the effect that the ld. CIT(Appeals) erred in deleting the addition of Rs. 48,64,490/- made by the AO by treating trading settlement amount received as revenue receipt as against the capital receipt claimed by the assessee. 2. The facts as mentioned in the assessment order are that the return was filed on 29.10.2002 declaring loss of Rs. 14,95,640/-. In the course of scrutiny of the case, it was found that the assessee-company created capital reserve of Rs. 48,64,490/-. In this connection, it has been mentioned that on 19.03.1996, the assessee and other members of Jain group entered into a joint venture agreement with Gillette India Pvt. Ltd. (GIPL) to jointly pool their resources and strengthens to carry on the business of manufacturing and marketing the wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lette group to Newell. This condition has never been fulfilled. The reason stated by the assessee is that Jain group raised several objections, and that Gillette and Newell threatened with legal action sought settlement of disputes such as suitable relief including specific performance of rights and obligations under agreement dated 19.3.1996. Thereafter, an out of court settlement was arrived at under which Newell inter-alia agreed to pay the aforesaid sum to the assessee for agreeing to release and withdrawal of all claims by the assessee. Similarly, payments of different amounts were made to members of Jain group. This argument was not accepted as in the first place there was no basis on which the assessee or Jain group could file legal suit against Newell. It is further mentioned that there has been no transfer of any capital asset as the right to sue is not a transferable right. Thus, the amount received is under a compromise or amicable settlement, which is in the nature of profit in view of the decision of apex court in the case of Seth Banarsi Das Gupta vs. CIT, (1987) 166 ITR 783. Reliance has also been placed on the decision in the case of CIT vs. Best and Co. Pvt. Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the capital structure or the trading structure. However, this issue is no longer res-integra in view of the decision of Hon'ble Tribunal in the case of Payal Kapoor and Others vs. ACIT, (2006) 98 ITD 19, dealing with payment received by that assessee and other members of Jain family from Gillette Company Inc., USA, in 2001 as a result of Consent and Waiver Agreement dated 17th January, 2001. Following this decision, it was held that the receipt is capital in nature. 3.1 Further, the ld. counsel referred to page nos. 16 to 115 of the paper book, being the joint venture agreement among members of Jain family, the assessee and GIPL. Page no. 40 shows that Jain group as a whole was to own 50% shares, and GIPL and its affiliates the balance 50% shares in LWIL. Article 2.1 of the agreement regarding "basic principles" is to the effect that the parties desire to establish and develop a long term business alliance in India. Article 19A regarding "duration and termination" inter-alia contains two important clauses regarding termination as under:- "19A. 1.1 either (i) GIPL and/or its nominated affiliates or (ii) Jain Group shall cease to hold at least 10 (ten) per cent of the equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (or to such other members of the Jain Group, as Mr. D.K. Jain may nominate) a further sum of USD 1,000,000 by 30th June, 2002. 4.3 Newell shall credit LWIL in an amount not to exceed USD 2,000,000 for obsolete and/or unsaleable stock of the products and components and parts thereof and presently held by LWIL and such stock shall be, at Newell's sole discretion, exported to Newell or to its designees or destroyed. The costs of shipment or destruction shall be borne initially by Newell and thereafter shall be deducted from the credit. The remainder of the credit shall be used by LWIL to offset the cost to it of components, parts and products purchased by LWIL under the supply agreement." The case of the ld. counsel is that in view of the decision in the case of Payal Kapoor (supra), the amount received by the assessee is on capital account not liable to tax. 4. We have considered the facts of the case and submissions made before us. The facts are that the assessee, members of Jain Group and GIPL were carrying on the business of manufacturing writing instruments and stationery through LWIL, in which the GIPL etc. on one hand and members of Jain family and the assessee on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were in the nature of compensation received on termination of the agency and, therefore, not includible in the total income, being receipts of capital nature. It was claimed that the assessee had employed expert officers who were accustomed to handle explosives and cancellation of the agency seriously affected the organization. The assessee was undoubtedly dealing in several inflammable substances, such as petroleum, kerosene oil, timber etc. It was found that 80% of the staff attached to the magazine section was maintained at the expense of the principal company, out of which services of five officers were taken over by the principal company and six were retained by the assesseecompany. The Hon'ble Court came to the conclusion that the termination of agency did not result into impairment of trading organization of the assessee company. No doubt one of the agencies was lost and there was temporary dislocation in the organization of the business. However, there was nothing on record that the assessee could not repair the dislocation. Therefore, the Hon'ble Court concurred with the High Court in its finding that the termination of the agency did not affect profit making structure of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost could also be attributed to the right. Therefore, the sum of Rs. 1,02,500/- received by him was not assessable as capital gains. Therefore, the question was answered in favour of the assessee and against the revenue. 4.4 In the case of Seth Banarsi Dass Gupta (supra), the relevant facts were that the assessee and five brothers were partners in a firm, each having 1/6th share. Two brothers leased out their shares to the assessee on an annual payment but the lease was cancelled. These two brothers undertook to pay certain amounts for five years to the assessee. It was mentioned that the amounts were received under a compromise or by way of amicable arrangement. Therefore, the receipts were in the nature of profits received by the assessee for the interest held in the business. For the sake of ready reference, the relevant portion of the judgment is reproduced below:- "We have heard learned counsel for the assessee-appellant at length. He has referred to several authorities in support of the assessee's stand of admissibility of the claim on both scores. According to him, the proper test to be adopted should have been to find out whether the arrangement constituted an appar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 was arrived at. Under this agreement, Jain group was to withdraw all claims and disputes thereby allowing the Gillette group to sell their interest to third parties. In view of this, Gillette group agreed to pay 50 million US$ to Jain group which were remitted on 19.1.2001. The assessee received Rs. 2,31,67,000/-. It was argued that the amount received was a capital receipt not liable to tax. Referring to the decision in the case of Oberoi Hotels Pvt. Ltd., the Tribunal mentioned on page 49 of the report that the principle that emerges is that the question whether a receipt is capital or revenue turns on the facts of the case. No infallible criteria is available. Therefore, the first question is-whether, joint venture agreement is a capital asset or a revenue asset? The admitted facts are that the agreement was to establish, develop long-term business alliance between Luxor group and Gillette group. The products of Gillette were to be manufactured and sold exclusively by LWIL. The parties could not sell or transfer the shares in the company for initial seven years. Therefore, it was held that the agreement was a structure or foundation on which the joint business was to be built ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llette and Government of India also allowed permission to it to purchase the shares in LWIL belonging to Gillette group. However, it showed its unwillingness to do so. Therefore, breach was by the intending acquirer and not by the intending seller. The Gillette had already paid compensation to Jain group as a consequence of its inability to continue the joint venture agreement. The facts henceforth become distinguishable as the payment has been made by a person who only had shown intention to collaborate with the assessee by stepping into the shoes of Gillette, but it never really entered into the shoes of the Gillete. The decision in the case of Seth Banarsi Das Gupta (supra) was that the benefit u/s 10(2)(vi) of the 1922 Act would be admissible only where the assessee is the owner of the property. It too is not admissible in respect of a fractional claim. Similarly, the amounts received by the assessee under compromise or by way of an amicable settlement were in the nature of profits to be received for the interest held in the business and constituted taxable income. The decision was rendered in the background of facts that six brothers were partners in a firm, each having equal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. This advantage was lost. The assignment agreement did not come into force as it would have happened only on transfer of shares by Gillette to Newell. Upon doing so, the assignee would have become a part of joint venture agreement in place of Gillette. The only description made about the assignee in the agreement is that it is a company formed and existing under the laws of Delaware, USA, having its registered office in Illinois. The LWIL was now to carry the business under the trade marks (a) Parker; (b) Waterman; (c) Paper Mate and (d) Liquid Paper in place of earlier brand names of Gillette and Parker. The agreement does not speak of any special strengths of the Newell or its management practices. Therefore, it is a case of enrichment of the assessee, which has happened without affecting its capital structure or that of the LWIL. In any case, Newell could withdraw after a short period of two to three years. In these circumstances, it can only be held that the payment was made for any possible loss of future profits. Accordingly, the receipt is in the revenue field. 4.8 It was also the case of the ld. counsel that similar receipts in all other cases have not been taxed by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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