TMI Blog2007 (2) TMI 179X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the course of assessment it was claimed as capital receipt. The Assessing Officer treated the said receipt to be a revenue receipt. Being aggrieved by the said decision the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) which did not find favour from the appellate authority. Grieved by the non-success before the first appellate authority the assessee preferred an appeal being I. T. A. No. 133/Ind of 1991 before the Tribunal. It was contended by the assessee before the Tribunal that UCIL was a regular purchaser of industrial gases produced by the assessee and an agreement was executed to that effect between the parties. At the instance of the UCIL, the assessee had installed its unit near UCIL so that the gases could be regularly supplied to it through pipelines. The agreement entered into between the assessee and the UCIL, continued with certain addenda amending certain clauses of the agreement. As per the agreement and the amended clauses the UCIL was required to purchase a minimum quantity of gases per year worth Rs. 20 lakhs inclusive of sales tax and excise duty. It was stipulated in the agreement that in the event of failure by UCIL to purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterpretation of the clauses of the agreement, the amount paid and stipulations in the agreement the background which led to the closure of the manufacturing unit, the circumstances under which the amount was claimed by the assessee, in the intention of the assessee, the prevalent practice by the assessee in issuing the debit note to VCIL, the language in which the termination letter has been couched and the second agreement entered into between the assessee and the VCIL, and how the amount paid did not partake of the character of compensation accordingly rejected the contentions that the amount received by the VCIL was a capital receipt. Mr. Prakash Shrivastava, learned counsel appearing for the assessee submitted that the Tribunal has failed to appreciate that the disaster caused in the winter of December, 1984, which resulted in destruction of the profit-making business of the assessee unit and hence, the amount received by the assessee from VCIL deserved to be treated as a capital receipt. Learned counsel submitted that if the nature and character of the agreement is dissected in proper perspective it will be absolutely vivid that the plant was established with the solitary a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly put forth that there was a second agreement in respect of a lesser field and, therefore, the intention of grant of compensation to the assessee by UCIL does not arise. Learned counsel to bolster his submissions commended us to the decisions rendered in the cases of CIT v. Premier Engineering Co. [1995] 213 ITR 522 (Ker), Seth Banarsi Dass Gupta v. CIT [1987] 166 ITR 783 (SC), CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 (SC), United Construction Contractors v. CIT [1994] 208 ITR 914 (Ker), CIT v. Manna Ramji and Co. [1972] 86 ITR 29 (SC), E. I. D. Parry (I) Ltd. v. CIT [2002] 258 ITR 404 (Mad), CIT v. Shri Chunnilal Tak [1986] 160 ITR 617 (Raj) and CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148 (SC); AIR 1959 SC 291. Before we scan the anatomy of the agreement and the nature of transaction, it is apposite to refer to certain citations in the field to which our attention has been invited. In Kettlewell Bullen and Co. Ltd. [1964] 53 ITR 261 (SC) the appellant therein was a public limited company and by agreement dated May 1, 1925, the Fort William Jute Company Ltd. appointed the appellant as its managing agent upon certain terms and conditions set out ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er observing that the compensation received under the agreement was for an outright sale of such an agency to a third party not being one which a businessman enters into in the normal course of business. At the instance of the Commissioner of Income-tax the Tribunal referred the matter to the High Court to answer whether the amount received was a revenue receipt assessable under the Act. The High Court answered the question in the affirmative. In this factual backdrop their Lordships of the apex court posed the question whether the compensation received by an agent for premature termination of the contract of agency is a capital or revenue receipt. Their Lordships observed that the question is not capable of solution by application of a single test as its solution would depend upon a correct appraisal in their perspective of all the relevant facts. In this context, their Lordships referred to the observations made in the case of Rai Bahadur Jairam Valji [1959] 35 ITR 148 (SC) which we think it necessitous to refer to: "The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r surrendering the managing agency was a revenue receipt. The apex court did not accept the finding recorded by the High Court and proceeded to deal with the distinction "under what circumstances a receipt becomes a capital or an income from business" and expressed the opinion as under: "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 a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. Cases on the borderline give rise to vexing problems. The Act contains no real definition of income; indeed it is a term not capable of a definition in terms of a general formula. Section 2(6C) catalogues broadly certain categories of receipts which are included in income. It need hardly be said that the form in which the transaction which gives rise to income is clothed and the name which is given to it are irrelevant in assessing the exigibility of receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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." In the case of Bombay Burmah Trading Corporation [1986] 161 ITR 386, the apex court was dealing with the factual matrix where the assessee-respondent, a public limited company carrying on business of selling timber in India and abroad, entered into contracts in the nature of forest leases with the Government of Burma. Under these leases the assessee-company was authorised to fell teak trees and convert them into logs and upon completion of the extraction thereof, to remove logs after payment of royalty to the Government of Burma for its own purposes. The leases were made first in 1862, each for a durati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after stating the facts in paragraph 35 discussed the basic principles relating to determining of capital payment. We think it profitable to reproduce the same: "It is, therefore, necessary as mentioned hereinbefore, to examine whether the acquisition of forest leases by the assessee were acquisition of capital assets. Though we will refer to some of the decisions to which our attention was drawn and which were referred to by the High Court, it is well to bear in mind the basic principles. These are: if there was any capital asset and if there was any payment made for the acquisition of that capital asset, such payment would amount to a capital payment in the hands of the payee. Secondly, if any payment was made for sterilisation of the very source of profit-making apparatus of the assessee, or a capital asset, then that would also amount to a capital receipt in the hands of the recipient. On the other hand, if forest leases were merely stock-in-trade and payments were made for taking over the stock-in-trade, then no question of capital receipt comes. The sum would represent payment of revenue nature or trading receipts. Whether, in a particular case, for the contracts of the ty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e apex court in the case of CIT v. Gangadhar Baijnath [1972] 86 ITR 19; [1972] 4 SCC 28 wherein their Lordships observed that the question whether a particular receipt is capital or revenue is largely a question of fact but often we come across border line cases which do present difficulties in arriving at a conclusion. In CIT v. Vazir Sultan and Sons [1959] 36 ITR 175 (SC); AIR 1959 SC 814, it was ruled by the apex court that while considering whether compensation paid to an agent on the cancellation of his agency was a capital asset or a revenue receipt, the first question that required to be considered was whether the agency agreement in question was a capital asset of the assessee's business and constituted its profit-making apparatus and was in the nature of its fixed capital, or it was a trading asset or circulating capital or stock-in-trade of its business. If it was the former, compensation received would be a capital receipt, if the agency was entered into by the assessee in the ordinary course of carrying on that business it would fall into the latter category and compensation received would be a revenue receipt. In the case of Oberoi Hotel P. Ltd. [1999] 236 ITR 903, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a capital receipt, but this rule is subject to an exception that payment received even for termination of an agency agreement would be revenue and not capital in a case where the agency was one of many which the assessee held and its termination did not impair the profit-making structure of the assessee, but was within the framework of the business, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken. Thereafter the court held that it was difficult to lay down a precise principle of universal application but various workable rules have been evolved for guidance." Thereafter, their Lordships referred to the law laid down in the case of Rai Bahadur Jairam Valji [1959] 35 ITR 148 (SC), Kettlewell Bullen and Co. Ltd. [1964] 53 ITR 261 (SC) and Karam Chand Thapar and Bros. P. Ltd. v. CIT [1971] 80 ITR 167; [1972] 4 SCC 124 and taking note of the fact that the assessee-appellant therein had given up his right to purchase and to operate the property for getting it on lease before it is transferred or let out to other persons expressed the view as under: "11. The aforesaid principle is relied upon in the case of Kar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be treated as a capital receipt. In this factual backdrop the Division Bench of the High Court of Madras expressed the view as under: "The Assessing Officer and the Commissioner held, which finding has been upheld by the Tribunal, that the payment of this Rs. 20 lakhs purportedly for the assessee agreeing to accept a restraint on its trading in goods similar to that manufactured by the subsidiary, was not a genuine transaction, but was only intended to transfer to the assessee a sum of Rs. 20 lakhs from its subsidiary as consideration for the termination of the agreement. The subsidiary company is, after the termination of the selling agreement, to carry on the distribution and sale of its products itself, which would mean that, that company would earn the profit which the assessee otherwise would have earned by the sale of the subsidiary's products. Thus, the profits on the sale of the products of the subsidiary to the extent it had been allowed to be enjoyed by the assessee was thereafter to be retained by the subsidiary itself. In the normal course, the holding company would not carry on a business competing with that of its subsidiary and thereby reduce the profits whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UCIL to increase or decrease this off take from time to time up to a maximum of twenty per cent. of the said quantities. The rate was also provided therein. Clause 9 provides for delivery conditions. Clause 10 lays a postulate in regard to measurement and sampling. Clause 11 provides for qualities. Clause 12 deals with operational process. Clause 13 relates to base price. Sub-clause (c) of clause 13 deals with failure on the part of UCIL to purchase the minimum quantity as agreed to. Clause 13(c) being pertinent is reproduced below: "(c) UCIL shall purchase from EAPPL, such minimum quantities of the gases per year as would be worth Rs. 22,00,000 (inclusive of sales tax and excise duty). In the event VCIL fails to take such quantities of the gases in any year and such failure on its part is not due to force majeure or any fault on the part of EAPPL, then UCIL shall pay to EAPPL a sum of money making up the difference between the sum of rupees twenty-two lakhs (Rs. 22,00,000) and the value of the quantities of the gases already purchased in that year. Provided, however, that the provisions of this sub-clause shall become applicable and come into force only from the year commencing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the factory was closed by the order of the Government of Madhya Pradesh. The singular question that arises for determination is whether the agreement of this nature amounts to a capital asset of the business of the assessee and was in the nature of fixed capital or was a trading asset, circulating capital or stock-in-trade of business. The submission of Mr. Shrivastava, learned counsel for the assessee is that the agreement with VCIL, was basically a capital asset as it constituted a profit making apparatus having the character of fixed capital and on termination of the agreement the amount of compensation received should be treated as capital receipt. It is urged by him that the factory was established exclusively for VCIL in their vicinity so that supplies of the gases could be made to it through pipelines and hence, the difference of minimum quantity amount which was received by the assessee should be regarded as the amount paid in pursuance of the termination of the contract. It was, as canvassed by Mr. Shrivastava, the final payment made on the termination of the agreement has all the characteristics of capital receipt. It is emphasised by him that the Government of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the disaster. There is no clause in the original agreement or in the addendum that VCIL would be liable to pay any compensation in case the contract is repudiated or gets foreclosed due to any other event occurring. VCIL has not paid any amount to the assessee as a matter of compensation for destruction of its capital assets. There is no evidence that the assessee had given up its valuable right for earning profit in lieu of something. The assessee had issued a debit note for the differential sum. There was cancellation of the earlier agreement. A fresh agreement was entered into for a short term. In the case of Kettlewell Bullen and Co. Ltd. [1964] 53 ITR 261 (SC), their Lordships have held that where on a consideration of circumstances payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of its business, nor causes deprivation of what in substance is a source of income, and is a normal incident of the business and such termination leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue and where by the cancellation of any agency the trading structure of the assessee is impair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee had not claimed any amount as compensation for deprivation of its sources of income. The debit note was issued claiming the differential sum. It was entered into the books of account as a revenue receipt. The letter of UCIL does not indicate in the remotest sense that the amount was paid as compensation. On cancellation of the earlier agreement a fresh agreement was drawn up on the happening of the gas tragedy which resulted in lessening of supply of gases. The relevant part from the letter dated February 5, 1985, is reproduced below: "As discussed, a fresh purchase order is being issued for supplies of HP Nitrogen through pipeline effective from 6th February, 1985, at the rate of Rs. 2.60 per cu.me. excise and taxes with a minimum of guarantee of Rs. 50,000 per month with option of terminating this arrangement on 24 hours notice." On a studied scrutiny of the entire factual matrix we do not perceive that any amount was paid as compensation. The agreement was cancelled and a fresh agreement was entered into, as is manifest, by mutual understanding. Neither of the agreements has any clause for payment of compensation on termination of the contract. The submission of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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