High Court Of Karnataka
CIT & ANR. vs. Tata Coffee Ltd.
Section 4
Asst. Year 1995-96
V. Gopala Gowda & Aravind Kumar, JJ.
IT Appeal No. 458 of 2004
31st July, 2009
Counsel appeared :
M.V. Seshachala, for the Appellants : G. Sarangan for Smt. Vani H., for the Respondent JUDGMENT ARAVIND
KUMAR, J. :
This appeal by the Revenue under s. 260A of the IT Act, 1961 (Act, for short) is against the order dt. 24th Feb., 2004 passed by Tribunal, Bangalore Bench-B, in ITA No. 526/Bang/1999 relating to the asst. yr. 1995-96. The assessee is engaged in the business of cultivating coffee, selling it and exporting the same among other businesses. During the assessment year, the assessee sold plant, machinery, equipment and technology for manufacture of quartz alarm time pieces at Hyderabad for a sum of Rs. 2,56,50,000 to Titan Industries Ltd. As per the sale agreement the assessee was not entitled to deal with watch sales for a period of 10 years. The assessee filed a return of income on 30th Nov., 1995 declaring a total income of Rs. 7,49,630. The AO found during the course of assessment proceedings that a sum of Rs. 30,00,000 had been paid to the assessee as non-competition fee by Titan Industries. Since the SIFCO Vender which was manufacturing alarm time pieces was part and parcel of the assessee and discontinuance of that particular unit did not involve loss of enduring trading asset, the competition fee of Rs. 30,00,000 was treated as the income of the assessee as per the assessment order dt. 22nd Jan., 1998 (Annex. C). The assessee being aggrieved by the same filed an appeal before the CIT(A). The appellate authority found that out of Rs. 30,00,000 non-competition fee received by the assessee that Rs. 10,00,000 was towards goodwill and balance of Rs. 20,00,000 was towards fee. Insofar as Rs. 10,00,000 paid towards goodwill, the matter was remitted back to the AO for reconsideration and deleted the addition of Rs. 20,00,000 made by the AO by holding it as capital receipt and not liable for income-tax and allowed the appeal by order dt. 11th June, 1999 (Annex. B).
The Revenue being aggrieved by the same filed an appeal before the Tribunal. The Tribunal rejected the appeal filed by the Revenue holding that this amount of Rs. 20,00,000 paid to restrain the assessee from not conducting the said business for 10 years period as capital receipt and confirmed the order of CIT(A) by order dt. 24th Feb., 2001 (Annex. A). The Tribunal further held that s. 55(2) of the Act had been introduced by Finance Act of 1998 and was applicable from the asst. yr. 1998-99 onwards and not to the assessment year in question, i.e., 1995-96. Feeling aggrieved the Revenue has filed this appeal contending that following substantial questions of law arise for consideration on the facts and circumstances :
“(i) Whether the appellate authorities were correct in holding that a sum of Rs. 20 lakhs received by the assessee as non-competition from M/s Titan Industries Ltd. for sale of its ‘quartz alarm time piece units’ along with plant and machinery, goodwill, etc., should be treated as a capital receipt or the same should be treated as a revenue receipt as held by the AO ?
(ii) Whether the assessee which was carrying on number of business activities had transferred only one such activity not resulting in cessation of the rest of the business nor creating a loss of any enduring trading asset and therefore the sum of Rs. 20 lakhs non- competition fee cannot be treated as an item not liable to tax ?
” We have heard Sri M.V. Seshachala, learned senior standing counsel for the Revenue, and Sri G. Sarangan, learned senior counsel, assisted by Ms. H. Vani for the respondent assessee. Sri M.V. Seshachala contends that though the nomenclature is given as non-competition fee, the amount is received by the assessee in the course of business and accordingly it has to be treated as revenue receipt and in support of the said contention cl. 16 of the agreement is pressed into service. The said clause reads as follows : “CCL further confirms and agrees that with effect from the transfer of its rights as aforesaid, it will have no claims whatsoever with regard to the same. CCL also undertakes that with effect from the date on which payment of the consideration is completed as herein provided, it will not access to any know-how or technology from collaborators for the manufacture/sale of quartz alarm time pieces or related products and also that it will not otherwise compete with Titan in the manufacture and sale of such products for a period of 10 (Ten) years from such date.” He further contends that the assessee had number of divisions and it is only one unit, i.e., one unit that was sold and contends that entire consideration is revenue receipt and relies upon the decision in the matter of Tam Tam Pedda Guruva Reddy vs. Jt. CIT (2006) 206 CTR (Kar) 97 : (2007) 291 ITR 44 (Kar).
8. Per contra the learned senior counsel Sri Sarangan, contends that it is a lump sum amount which has been paid and contends that the burden lies on the Department, to establish this fact and in the absence of it, it should be held in favour of the assessee as capital receipt. He further contends that it should be looked into from the point of view of prayer and also press into service s. 29 of Contract Act. He also contends that it is a lump sum payment for sale of one unit of the assessee and there is no termination of any agency.
9. The following authorities are relied upon by the assessee : (i) CIT vs. Chari & Chari Ltd. (1965) 57 ITR 400 (SC) (ii) CIT vs. Best & Co. (P) Ltd. (1966) 60 ITR 11 (SC) (iii) CIT vs. Shaw Wallace AIR 1932 PC 138 (iv) Contract Act, 9th Edition, Vol. I, illustration No. 3, Sl. No. 47, p. 262 and Sl. No. 49, p. 266 (v) CIT vs. Saraswathi Publicities (1981) 132 ITR 207 (Mad) (vi) CIT vs. Automobile Products of India Ltd. (1982) 26 CTR (Bom) 116 : (1983) 140 ITR 159 (Bom)(vii) CIT vs. Late G.D. Naidu by LRs (1986) 51 CTR (Mad) 256 : (1987) 165 ITR 63 (Mad) (viii) Oberoi Hotel (P) Ltd. vs. CIT (1999) 152 CTR (SC) 474 : (1999) 236 ITR 903 (SC) (ix) CIT vs. Saroj Kumar Poddar (2006) 200 CTR (Cal) 616 : (2005) 279 ITR 573 (Cal) (x) CIT vs. A.S. Wardekar (2005) 199 CTR (Cal) 255 : (2006) 283 ITR 432 (Cal) (xi) CIT vs. Shyam Sundar Chhaparia (2008) 220 CTR (MP) 172 : (2008) 305 ITR 181 (MP) (xii) Rohitasava Chand vs. CIT (2008) 218 CTR (Del) 617 : (2008) 306 ITR 242 (Del) (xiii) CIT vs. Narendra D. Desai (2008) 214 CTR (Bom) 190
10. The issue that requires to be considered by us is that whether compensation which has been paid for agreeing to refrain from carrying on business as non-competition fee in respect of the unit is in the nature of capital receipt or revenue receipt. The Hon’ble Supreme Court while examining the said issue in the case of Gillanders Arbuthnot & Co. Ltd. vs. CIT (1964) 53 ITR 283 (SC) held : “That if the profit-making structure of the assessee is not affected by such transfer or such a transfer would not involve a loss of enduring trading asset by depriving the assessee of a trading avenue, leaving it free to devote its energies after the cancellation to carry on the rest of the business, the income cannot be treated as capital receipt and would be Revenue.” The tests to be adopted are enumerated by their Lordships in the said judgment, examining as to whether the compensation paid by the principal company for cancellation of the agency may be regarded as capital receipt or revenue receipt. The Hon’ble Supreme Court held as follows : “Examining the circumstances of the present case in the light of that principle, we agree with the High Court that what was received by the appellant was income and not capital. Compensation received by the appellant was for cancellation of the agency which was terminable at will. The appellant was to be paid an amount which was to be computed on the basis of the profits of the business. Under the letter dt. 2nd March, 1947, the appellant was to be paid for the first three post-transfer years’ two-fifths of the commission accrued on actual sales in the territory of the appellant’s agency taken over by the Imperial Chemical Industries (India) Ltd.; such commission to be computed at the rates of commission formerly paid to the appellant and that in the ‘third post-transfer year’ the principal company was to pay the appellant in addition a sum equivalent to full commission on the sales for that year effected by the Imperial Chemical Industries (India) Ltd. In the appellant’s territory calculated at the same rates.”
The Hon’ble Supreme Court referred to the judgment rendered by the Co-ordinate Bench on the same day in the case of Kettlewell Bullen & Co. Ltd. vs. CIT (1964) 53 ITR 261 (SC), wherein it had been held as follows : “On an analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. 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 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.” Thus, the compensation if paid towards the loss of capital asset it will amount to capital receipt. On the other hand, if the said amount is towards not carrying on the business activity of the assessee firm whereby the assessee would be deprived of its revenue that it may accrue from carrying on the business would definitely be termed as a revenue receipt. In the instant case, the assessee company was refrained from manufacturing and selling only a few products for a period of 10 years which was revenue yielding to the assessee company. Thus, from out of the business activity that was carried on by the assessee it had sold only one unit and thus there was no loss or transfer of the entire or part of the income and assessee continued with its business activity. Hence, it has to be held that the amount of Rs. 20,00,000 received by the assessee is revenue receipt.
11. Sri Sarangan contends that said judgment is not applicable to the facts of the case inasmuch as there is no termination of agency and further on account of transfer of unit the asset has got transferred which in lieu of it assessee had received the amount and thus it has to be classified as capital receipt and relies upon the decision of Gillanders Arbuthnot & Co. Ltd. vs. CIT (1964) 53 ITR 283 (SC). In the said case noticing its earlier judgment Hon’ble Supreme Court held that cancellation of the contract agency did not affect the profit-making structure of the appellant nor did it involve loss of an enduring asset and it merely deprived the appellant of a trading avenue leaving it free to devote its energies after the cancellation to carry on rest of the business and to replace the contract lost by a similar contract. We notice in the instant case that assessee is continuing its business and there is no prohibition for channelising and devoting all its energies even after the sale of its unit to Titan Industries. In fact, the turnover during the year was Rs. 77.79 crores as against Rs. 44.66 crores in last year. Thus, there was no loss of income to assessee. Hence, the amount received by the assessee terming it “non-competition fee” cannot be termed as capital receipt.
12. The next judgment relied upon by Sri G. Sarangan is CIT vs. Chari & Chari Ltd. (supra). In the said case assessee was managing agent of 3 companies one which was an electricity undertaking and the said agency of electricity undertaking was prematurely terminated because the Madras Government in exercise of its powers under Madras Electrical Undertakings Acquisition Act, 1949, compulsorily acquired the undertaking and in lieu of it assessee was paid compensation and it has been held therein that Department had failed to establish that case, falls within the exception to ordinary rate except holding that assessee continued with other 2 agencies. However, in the instant case the Department has been able to establish that transfer did not result in any loss of income to the assessee or any part of income-generating apparatus and there was no loss on transfer of entire unit of the income generating apparatus. Hence, it has to be held that said judgment relied would not be of any assistance to the assessee in the facts and circumstances of the case.
13. The next judgment relied upon by the counsel for assessee respondent, Sri Sarangan is CIT vs. Best & Co. (P) Ltd. (supra). It is brought to our notice the following passage of the dicta laid down in the said case, namely : “(ii) that restrictive covenant was an independent obligation which came into operation only when the agency was terminated and that part of the compensation. which was attributable to the restrictive covenant was a capital receipt and hence not taxable.” Their lordship have observed at p. 17 to the following effect : “Whether the compensation received by an assessee for the loss of agency is a capital receipt or a revenue receipt depends upon the circumstances of each case. Before coming to a conclusion one way or other, many questions have to be asked and answered : what was the scope of the earning apparatus or structure, from physical financial, commercial and administrative stand points ? If it was a business of taking agencies, how many agencies it had, what was their nature and variety ? How were they acquired, how one or some of them were lost and what was the total income they were yielding ? If one of them was given up, what was the average income of the agency lost ? What was its proportion in relation to the total income of the company ? What was the impact of giving it up on the structure of the entire business ? Did it amount to a loss of an enduring asset causing an unabsorbed shock dislocating the entire or a part of the earning apparatus or structure ? Or was it a loss due to an ordinary incident in the course of the business ? The answers to these questions would enable one to come to a conclusion whether the loss of a particular agency was incidental to the business or whether it amounted to a loss of an enduring asset. If it was the former, the compensation paid would be a revenue receipt; if it was the latter, it would be a capital receipt. But, these questions can only be answered satisfactorily if the relevant material is available to the IT authorities. The evidence of witnesses in charge of the business, the relevant accounts and balance sheets of the assessee before and after the loss, other evidence disclosing the previous history of the total business and the relative importance of the agency lost and the present position of the business after the loss of the said agency have to be scrutinized by the Department.” Applying these principles in the instant case AO has come to the conclusion that no loss has occurred to the assessee on account of transfer of enduring asset and as such that amount was brought to tax under revenue receipt and this finding of fact recorded by him by applying the ratio of the Hon’ble Supreme Court, referred to supra we find that both appellate authorities were in error in upsetting this finding of the AO. Hence, we hold that the above said judgment upon which reliance was placed by the learned senior counsel does not come to rescue of assessee for treating Rs. 20 lakhs as capital receipt.
14. Another judgment relied upon by Sri Sarangan, learned senior counsel is CIT vs. Saraswathi Publicities (supra) wherein the assessee had agreed to refrain from carrying on business with Hindustan Lever to contend that same is applicable to facts of the case. The said judgment though refers to restrictive covenant their Lordships have also referred to the various judgments of the Supreme Court (referred to by us supra) and came to the conclusion and held that termination of agency resulting in business loss is a capital receipt. However, on examination of facts of the present case, by applying the principles enunciated by their Lordships of the Hon’ble Supreme Court we have held that sale of the unit has not resulted in loss to assessee and hence it has to be held revenue receipt. Thus, the said judgment is not applicable to the facts of this case,
15. The other judgments relied upon by the learned senior counsel Sri Sarangan are : (i) CIT vs. Automobile Products of India Ltd. (supra) (ii) CIT vs. Late G.D. Naidu by LRs (supra) (iii) Oberoi Hotel (P) Ltd. vs. CIT (1999) 152 CTR (SC) 474 : (1999) 236 ITR 903 (SC); (iv) CIT vs. Saroj Kumar Poddar (supra); (v) CIT vs. A.S. Wardekar (supra); (vi) CIT vs. Shyam Sundar Chhaparia (supra); (vii) Rohitasava Chand vs. CIT (supra) (viii) CIT vs. Narendra D. Desai (supra) In all the above judgments the restrictive covenant viz., non-competition clause in the agreement has been considered by their Lordships with reference to the facts of those cases and have come to conclusion that it does result in (a) loss of an enduring asset or (b) loss of income to the assessee and accordingly held it would be capital receipt and not exigible to tax. Per contra, in the instant case, we have held that it has not resulted in the loss of enduring asset nor it has resulted in loss of income of the assessee but, on the other hand, turnover of the assessee has increased. Hence, we have no option but to hold that these authorities would not be of any assistance to the assessee in the present case. Yet another judgment relied upon by assessee to repel ground No. 9 urged by Revenue with regard to applications of s. 55(2) of Act is CIT vs. Narendra D. Desai (supra). The Revenue has contended that by bringing in an amendment to s. 55(2) of the Act was in order to crystalise the existing practice and legal position by way of a legislation and not to take converse view that this legislation was not applicable for earlier assessment years. It is seen from the judgment that it has been held therein that in the facts and circumstances of the case, therein it had been held, it was a capital receipt and receipt of the same during the year in question and it was held that s. 55(2) of the Act would not be applicable. It would not be out of place for us to mention here that unless section is brought about in the statute retrospectively, it cannot be made applicable unless it is held that it is clarificatory legislation. We do not wish to embark upon enquiry on this issue, since we have held in the facts and circumstances of this case the receipt of the amount by the assessee as revenue receipt and exigible to tax.
In view of the above discussion we hold that the appellate authorities were in error in holding that the sum of Rs. 20,00,000 received by the assessee as non-competition fee should be treated as capital receipt and not as revenue receipt. For the reasons above said, we allow this appeal and answer the question of law formulated hereinabove in favour of the Revenue and against the assessee.
[Citation : 326 ITR 214]
