TMI Blog2012 (9) TMI 660X X X X Extracts X X X X X X X X Extracts X X X X ..... project - Capital expenditure or Revenue expenditure - Held that:- As decided in CIT Versus J. K. Chemicals Limited [1992 (10) TMI 18 - BOMBAY HIGH COURT] & Trade Wings Limited v. Commissioner of Income-tax [1989 (9) TMI 21 - BOMBAY HIGH COURT] order to decide whether to acquire some profit-making assets for the purposes of its business which would be of an enduring nature. The expenses incurred for the project report have, therefore, to be viewed as being capital in nature. Simply because the assessee had a running business of manufacturing it cannot be said that the expense for obtaining such a project report was a part of the expenses incurred by the assessee for running its business. It was clearly an expenditure incurred for ascertaining whether to acquire new assets of some durability for the purpose of earning profits - against assessee. Receipt from B.B.C. Limited, Switzerland under Memorandum of Settlement - Revenue receipt OR Capital receipt - Held that:- The termination of distributorship agreement and the compensation allegedly paid in respect thereof was only a part of the normal running of the business of the assessee - conclusion is based on the fact that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Notice of Motion and, in the alternative, seeking leave of the Court to refer to the said documents. As an order of remand would unnecessarily delay this Reference, which has already been pending for over twenty years, we permitted the respondent to refer to the documents. Re: Question No.1. 3. The facts, so far as Question No.1 is concerned, are these :- The assessee had availed of an export packing credit facility from the State Bank of India. The assessee relied upon the details of the expenses under section 35B as furnished in Exhibit-A to the Notice of Motion. We will, for the purpose of this Reference, presume the same to be correct. It shows that an amount of Rs.28,07,372/- was paid towards interest in India. The assessee claimed the benefit of section 35B in respect thereof. We will also presume that the applicant was a registered export house at the relevant time. Further, we will presume, as stated in the certificates furnished by the State Bank of India and by the Canara Bank, that the applicant availed of export credit facilities from them and that the advances from the account were given only for the purchase of raw material for manufacturing goods to be export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -alia, on this issue being Reference No.67 of 1989. By an order dated 15th June, 2012, we answered the Reference in favour of the Revenue considering ourselves bound by the decision of this Court in Commissioner of Income-tax v. J.K. Chemicals Ltd. 207 ITR 985 and Trade Wings Limited v. Commissioner of Income-tax 185 ITR 267. This question is also, therefore, liable to be answered in the negative, against the assessee and in favour of the respondent. Re: Question No.3. 8. This question requires the facts to be stated in detail. The facts, as stated in the statement of case, are these. (A) The assessee had entered into an agreement dated 10th May, 1974 with Hindustan Brown Broweri Limited (HBB). The recital, inter-alia, states that the assessee was actively engaged in the business of sale and distribution of several engineering and electrical products throughout the territory of the Republic of India . It further stated that HBB was desirous of appointing the assessee as the distributor of electrical motors of various types manufactured by it. Clauses 2, 3, 6 10 of the agreement read as under : 2. APPOINTMENT 2.1 This agreement confers on L T the nonexclusive right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 9th February, 1979, which record that the assessee's Chairman referred to a letter dated 1st February, 1974 from Brown Boweri Company Limited (hereinafter referred to as BBC ) agreeing to support the renewal of the 10th May, 1974 agreement between the assessee and HBB and that in view thereof, the assessee's Chairman proposed that the assessee ought to requisition an EOGM of the shareholders of HBB to consider it's reappointment for a further period of five years in terms of the 10th May, 1974 agreement. The following resolution was passed : RESOLVED THAT Larsen Toubro Limited being a shareholder of HBB holding more than 10% of the equity capital of HBB requisition an Extra-ordinary General Meeting of the shareholders of HBB to consider the reappointment of Larsen Toubro Limited as the distributors / sole selling agents of HBB for a further period of five years from 20th March 1979 on the terms and conditions finalised between the Company and the Managing Director of HBB as evidenced by the letter dated 19th August 1978 addressed by Mr. K.N. Shenoy the Managing Director of HBB to Mr. D.L. Pradhan one of the Vice-Presidents of the Company. (C) The assessee, accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) BBC shall pay to L T the sum of Rs.7,500,000/- (Rupees seven million five hundred thousand only) as follows :- Rs.2,500,000/- (Rupees two million five hundred thousand only) within 30 days from the date of this Memorandum of Settlement. Rs.5,000,000/- (Rupees five million only) within 30 days of notification by L T to BBC of the sale and transfer by L t and ECC in accordance with the provisions of clause (5) and (6) hereof and confirmation by HBB that such transfer has been duly recorded in its Register of Members. (11) In the event of the average selling price of all the said 99,542 equity shares and the said 10,000 equity shares being less than Rs.260/- (rupees two hundred and sixty only) per share, BBC shall pay to L T 50 per cent of the aggregate amount of the difference calculated on the basis of Rs.260/- (Rupees two hundred and sixty only) per share and the said average price per share, it being agreed and understood that BBC's total liability under this clause (excluding BBC's liability under this clause) excluding BBC's liability under clause (10) hereof for the said sum of Rs.7,500,000/- (Rupees seven million five hundred thousand only) shall not in any event e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t noted that the question whether a particular income arising from the termination of one of the managing agencies of a multi-agency concern is a capital receipt or a revenue receipt, is undoubtedly a difficult question, the difficulty being inherent in the problem itself. It was further observed that none of the numerous decisions of this Court had laid down a precise principle of universal application, but various workable rules had been evolved for guidance. The Supreme Court held that in determining the question whether the receipt is capital or income it is not possible to lay down any single test as infallible or any single criterion as decisive. The question must ultimately depend on the facts of the particular case and the authorities bearing on the question are valuable only as indicating the matters that have been taken into account in reaching a decision. 13. Mr. Mistri submitted that it is not a part of the assessee's business to give up its business viz. the distributorship of HBB's products. Nor is it it's business to give up its right to nominate directors on the Board of other companies or to agree to sell its shares in companies pursuant to such an arrangement. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s aspect in further detail. 16. Clause 10 of the memorandum of settlement merely states that BBC shall pay the respondent, the sum of Rs.75,00,000/- in the manner stated therein, but does not specify the purpose for which it is paid. The respondent has also not clearly stated the purpose for which BBC agreed to pay it the said amount. A construction of the agreement leads to a variety of reasons for which the payment may have been made. Indeed, the payment of Rs.75,00,000/- could be in consideration for any one or more of the assessee's promises/obligations under the memorandum of settlement. Under the memorandum of settlement, the assessee had agreed, inter-alia, not to insist upon its reappointment as a distributor after the expiration of the distributorship agreement dated 10th May, 1974 with HBB; to vote in favour of any and all proposals of the Board of Directors of HBB till the shares were sold; to procure the resignation of its nominees on the Board of Directors of HBB and to sell its shares in HBB and to procure the performances of similar covenants by EEC. 17. It is pertinent to note that before the authorities, the assessee had contended that the payment of Rs.75,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to do so for any reason. The assessee has not established that its trading structure even in respect of activities similar to the said distributorship agreement with HBB were impaired. In this regard it is important to recall that in the recital to the distributorship agreement it is stated that the assessee was actively engaged in the business of sale and distribution of several engineering and electrical products throughout the territory of the Republic of India . 20. The distributorship agreement entitled the parties to have the price stipulated therein reviewed periodically. It is doubtful if the agreement could ever have continued in the event of the parties not having agreed to the price at the periodical reviews. Clause 6.2 of the agreement reads as under : 6. PRICES .................. 6.2 The prices in the price-lists attached hereto and marked A shall be subject to review normally in May and October every year taking into account market conditions and any changes will be implemented by mutual agreement. Either party shall be entitled to request review of the prices at any other time should it deem it necessary. The prices were subject to the review to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It ceased to operate upon the termination thereof. It is not the assessee's case that it was either prevented or even otherwise unable to enter into similar agreements in respect of such products manufactured by other enterprises. In a given case, the termination of a distributorship agreement may affect the distributors trading structure. In this case, however, the assessee has not established any factors to indicate that its trading structure was adversely affected. 25. It is also significant to note that the assessee was not dependent upon this business alone. It engaged itself in various other business activities. The return of income filed by the respondent on 31.7.2008 declaring a total income of Rs.11,32,55,290/- derived from its business activities which included the business as industrial engineers, manufacturers of switchgears, dairy machinery, paper machinery, cement machinery, petrol pump machinery and goods for industrial use. The distributorship agreement was but a part of it. Moreover, this was not the only distributorship agreement that the assessee had. It was on its own admission in the recital to the distributorship agreement actively engaged in the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trading contract entered into in the ordinary course of the assessee's business. The assessee carried on widespread business activities as is evident even from the assessment order for the relevant assessment year showing the taxable income of the assessee at more than Rs. 86 lakhs. The agency agreement of the assessee with BME as borne out from the said agreement was only one of the many activities of the assessee. The widespread nature of business activities carried on by the assessee were not adversely affected by the termination of the said agreement and in the facts of the case, it cannot be said that there was cessation of business resulting in destruction of the source of income so far as the assessee is concerned. The said agency agreement was entered into by the assessee in the normal course within the framework of the normal business of the assessee and the termination thereof could be treated as a normal incident of the business. Even with the termination of the said agreement, the assessee was left free to carry on its normal trading activities. By cancellation of the agency, the trading structure of the assessee was not impaired. In the facts of the case, we hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an assessee on account of the termination. 28. Mr. Mistri relied upon a judgment of the Supreme Court in Oberoi Hotels pvt. Ltd. vs. CIT (1999) 236 ITR 903 in respect of his submission that merely because the assessee engaged itself in more than one business, the ground of loss of source of income is not inapplicable. We have just expressed our views on this proposition. As far as this judgment is concerned, the nature of the agreements therein and the nature of distributorship agreements such as the one before us are entirely different. It involved the assessee operating, managing and administrating the hotels belonging to others. The assessee had entered into an agreement for operating a hotel in Singapore. The agreement was to remain in force initially for ten years. The assessee however, had an option to have the same renewed for two further periods of ten years each. The agreement gave the assessee an option of purchasing the hotel in certain circumstances. A Receiver was appointed in respect of the hotel, with whom the assessee entered into a detailed agreement. The assessee gave up its rights under the original agreement for a consideration. The question was whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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