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2016 (1) TMI 504 - HIMACHAL PRADESH HIGH COURT

2016 (1) TMI 504 - HIMACHAL PRADESH HIGH COURT - [2016] 383 ITR 685 - Compensation received towards cancellation of the SPA - whether was a revenue receipt taxable in the hands of the appellant? - Held that:- If a receipt is a capital receipt in the hands of a recipient, it does not necessarily follow that expenditure is capital expenditure in the hand of a payer. Whether it is capital expenditure or revenue expenditure would have to be determined having regard to the nature of the transaction a .....

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mpensation to be a revenue receipt. Income earned from such sources was to be taxed as business income. - ITA No. 24 of 2014 - Dated:- 4-1-2016 - Mr. Sanjay Karol and Mr. P.S. Rana, JJ. For the Appellant: M/s Chythanaya K.K. and Vijay Kumar Verma, Advocates. For the Respondent: Mr. Vinay Kuthiala, Sr. Advocate with Ms. Vandana Kuthiala, Advocate. JUDGEMENT Per: Sanjay Karol: The present appeal stands admitted on the following substantial questions of law:- "Whether in the facts and circumst .....

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Sections 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act). 3. Vide order dated 28.12.2010 (Annexure P-1), the Assessing Officer, reassessed the income by disallowing (i) the depreciation of goodwill and (ii) claim of capital receipt. The order stood affirmed by the Commissioner of Income Tax (Appeals), Shimla, in terms of order dated 12.12.2011 (Annexure P-2). Findings of fact returned by such authorities, on the point in issue, came to be affirmed by the Incom .....

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d is revenue receipt or not, is always upon the revenue. However once it is so established, whether it comes under the clause of exemption or not is for the assessee to establish. Facts must be formed by the Tribunal and the High Court must proceed on the basis of such facts as may be determined by the Tribunal, for it is not the requirement of law that the High Court is to look into the facts afresh, overruling them, unless there is a question to that effect, challenging the facts formed by the .....

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ntion of the Courts but it has not been possible to lay down any single criterion as decisive in the determination of the question. Time and again, it has been reiterated that answer to the question must ultimately depend on the facts of a particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a conclusion. 15. In CIT Versus Rai Bahadur Jairam Valji, AIR 1959 SC 291, it was observed thus (AIR pp. 292 .....

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ng on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. [Vide Van Den Berghs Ltd. (Inspector of Taxes) vs. Clark, (1935) 3 ITR (Eng Cas) 17 (HL)]. That, however, is not to say that the question is one of fact, for, as observed in Davies (Inspector of Taxes) vs. Shell Company of China Ltd. (1952) 22 ITR Supp 1 (CA): these questions between capital and income, trading profit or no trading profit, are questions which, though they may .....

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ust have regard to the nature and quality of the payment. If the payment was not received to compensate for a loss of profits of business, the receipt in the hands of the appellant cannot properly be described as income, profits or gains as commonly understood. To constitute income, profits or gains, there must be a source from which the particular receipt has arisen, and a connection must exist between the quality of the receipt and the source. If the payment is by another person it must be fou .....

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may even be described as "pay", "remuneration", etc., but that does not determine its quality, though the name by which it has been called may be relevant in determining its true nature, because this gives an indication of how the person who paid the money and the person who received it viewed it in the first instance. The periodicity of the payment does not make the payment a recurring income because periodicity may be the result of convenience and not necessarily the resul .....

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2 ITR 392: (AIR 1961 SC 1579)." (Emphasis supplied) 8. The Apex Court in Kettlewell Bullen and Co. Ltd. Versus Commissioner of Income-tax, Calcutta, AIR 1965 SC 65, has further held:- "11. Whether, a particular receipt is capital or income from business, has frequently engaged the attention of the courts. It may be broadly stated that what is received for loss of capital is a capital receipt: what is received as profit in trading transaction is taxable income. But the difficulty arises .....

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ip; "36. … … …Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination 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 .....

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of a contract is a capital or trading receipt, the relevant rule has been formulated by Diplock L. , J. in London and Thames Haven Oil Wharves Ltd. vs. Attwooll (Inspector of Taxes), (1968) 70 ITR 460, 488 (CA) as : "Where, pursuant to a legal right, a trader receives from another person compensation for the trader s failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by h .....

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on of the agency may be regarded as a capital or revenue receipt. We have in a recent case in Kettlewell Bullen and Co. vs. Commissioner of Income Tax, C.A. No.226 of 1963 D/- 1-5-1964: (AIR 1965 SC 65) made a survey of the important cases which have arisen before the courts in the United Kingdom and an Indian in India about the principles which govern the determination of the nature of compensation received on the termination of an agency. We observed in that case: "On an analysis of these .....

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e 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"." 11. Applying the aforesaid principles to the given facts, which we clarify we are not reappreciating, we do not find any justification to interfer .....

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3. M/s Sarabhai Zydus Animal Health Limited (hereinafter referred to as Zydus) was incorporated in the year 2000. The equity participation of the said company was in the following manner: (i) 50% with M/s Cadila Healthcare Limited (Cadila Group engaged in the business of Pharmaceuticals and Allied Industries - hereinafter referred to as Cadila) and (ii) 50% with: (a) Ambalal Sarabhai Enterprises Limited, a company incorporated under the Companies Act, 1956, having its registered office at Dr. Vi .....

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referred to as the Sellers). 14. It is the case of the assessee that the sellers had pledged their equity with Cadila, against a loan of ₹ 21,71,68,263/-. Also they were in debt to the company (Zydus). Vide Special Purchase Agreement dated 10.03.2007 (hereinafter referred to as SPA), the Sellers agreed to transfer their entire shareholdings (50% of Zydus) in favour of the assessee. This was for a valuable consideration of ₹ 72.5 crores. In terms of the SPA, a sum of ₹ 24, 81, .....

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terminated. (i) The Vendors shall not be entitled to terminate this Agreement on any grounds whatsoever. (ii) In the event the Condition Precedent (i.e. the due diligence) to Closing, as specified in Article 6 above, is not completed on or prior to the Closing Date, to the satisfaction of the Purchaser, then the Purchaser shall be entitled to forthwith terminate this Agreement by a written notice to the Vendors. (iii) In the event the Other Shareholder exercises its rights to purchase the Share .....

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; (Emphasis supplied) 16. Agreement contemplated consequence of termination in the following manner:- "7.7 Consequences of termination: (i) In the event of termination of this Agreement by the Purchaser, the Vendors shall repay the Earnest Deposit Amount and separately, pay a penalty equivalent to 25% annualized return on pro rata basis on the Earnest Deposit Amount or 5% of the Earnest Deposit Amount, whichever is higher, to the Purchaser, as follows: (a) where the Agreement is terminated .....

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the Vendors, pursuant to its Right of First Refusal, whichever is earlier; (c) where the Agreement is terminated in accordance with the provisions of Article 7.6(iv) above, then within 30 days of the date of such termination. (ii) Upon the actions specified in Clauses 7.7 (i) above, being completed to the full satisfaction of the Purchaser, the Escrow Agent will release, upon receipt of a written intimation from the Purchaser in this respect, to the Vendors the duly executed blank share transfe .....

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their inability to sell their shares, conveying Cadila s intention of purchasing the same by virtue and in exercise of their pre-existing contractual Rights of Refusal. Accordingly Sellers, categorically called upon the assessee to terminate the SPA and accept the following sums, in terms of Clause-7 of the SPA:- (i) Earnest Deposit Amount: Rs.24,81,68,263.00 (ii) Interest: Rs.59,01,645.27 (iii) Penalty: Rs.1,24,08,413.15 19. There is nothing on record to establish as to what transpired thereaf .....

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- Less: TDS on interest @ 22.44% (One TDS certificate for interest upto 31.03.07 and another TDS certificate from 01.04.07 to 10.05.07 will be provided within 7 days) Rs.13,45,689/- Net Interest payable now Rs.46,51,144/- (iii) Payment of Penalty as per the SPA Rs.1,24,08,413/- (iv) Compensation for Termination of SPA Rs.2,25,91,587/- Aggregate amount payable Rs.28,78,19,407/ 20. This amount of ₹ 2,25,91,587/-, received as compensation by the assessee for termination of the SPA, was so cla .....

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n the business, similar to that of the assessee, who was exploring the possibility of expanding its business interests. Compensation is not on account of any injury to any of the capital assets of the assessee. The assessee, as is evident from the order dated 28.12.2010 (Annexure P-1) had also entered into business acquisition agreement with M/s Wipro and Godrej Industries Ltd. The assessee was pursuing strategic inorganic growth through acquisitions. Zydus was in the similar business as that of .....

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ition that in order to find out whether a receipt is a capital or revenue receipt, one has to see it in the hands of the receiver and in order to find out whether an expenditure is a capital or revenue expenditure, one has to see what it is in the hand of the payer. In the case of Commissioner of Income Tax, West Bangal-II Versus Shri Kamal Behari Lal Singha, Etc. Etc., (1971) 3 SCC 540, the Apex Court has stated the legal position in the following words: "4. It is now well settled that, in .....

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come on his part, the entire receipt is taxable in the hands of the receiver. Therefore, the fact that the amount sought to be taxed in these appeals was capital gains in the hands of the company is not a relevant circumstance. What we have to see is what it was in the hands of the assessee." … … … 25. If a receipt is a capital receipt in the hands of a recipient, it does not necessarily follow that expenditure is capital expenditure in the hand of a payer. Whether it i .....

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