JUDGMENT
U. T. SHAH. J. – The issue involved in this reference pertains to the taxability of Rs. 93,450 received by the assessee and the head under which it would be taxable if at all.
The assessee is a company and it carrying on business in machines, machine parts and tractors. The assessment year involved is 1964-65 and the relevant previous year ended on June 30, 1963.
By an agreement dated March 20, 1958, the assessee was appointed as a sole distributor in India for a certain type of wheel tractors and agricultural machines manufactured by Motto Imports, Warsaw (Poland) (hereinafter referred to as the “the Polish company”). The agreement made it clear that the assessee, as sole distributor, would be acting on its own account and all orders would be issued in its own name. The selling prices were to be fixed by mutual consultation and it was specifically stipulated that the assessee would be entitled to no commission. Under clause 15 of the agreement, it was stated that the period of the agreement would be five years but the Polish Company retained the right to terminate the agreement by giving 45 days notice in the event of the assessee infringing any of the essential terms and conditions of the agreement. In such an event, it was also provided that “Termination of this Agreement, if any, will not affect in any respect the fulfillment of the contracts concluded between the parties in execution of the Agreement”. Yet another agreement was also entered into in February, 1961, under which the assessee was granted sole distributorship in respect of other additional items.
In pursuance of the said agreement, the assessee placed orders for 2,340 units of tractors during the period February 11, 1958 to June 27, 1960. However, by the time 586 tractors had been imported, serious trouble developed between the parties, i.e., between the assessee and the Polish company. One Dass Motors of Delhi to whom 75 of the tractors had been supplied lodged a claim against the assessee alleging mechanical and operational defects in the tractors supplied to it. The assessee, in its turn, passed on this information to the Polish company. Similarly, some other tractors which were sold to the Government of Maharashtra were also rejected and the assessee was once again obliged to communicate this fact to the Polish company. While these matters were still pending, the Polish company acting under clause 15 of the agreement terminated the agreement by alleging that the assessee had failed to comply with some of the vital terms and conditions thereof. The assessee thereupon moved the First Civil Judge, Kanpur, for obtaining an injunction against the Polish company which in turn moved the Allahabad High Court for quashing the injunction. At this stage, it was felt that the matter could be mutually settled by an agreement.
Negotiations, therefore, started between the parties and an agreement was arrived at whereby the parties agreed to the following position :
(i) 100 (C-325) tractors were to be handed over to Escorts Ltd. as agents of Motto Imports against payment at the rate of Rs. 6,800 plus C.S.T. delivery ex-stock, Bombay;
(ii) Escorts Ltd. were to pay to the assessee Rs. 175 per tractor on completion of import of 200 (C-325) tractors which in the process of being imported by the appellant;
(iii) Similarly, Dass Motors were to be entitled to the assignment benefits of the three licences for the import of outstanding number of tractors and spare parts and were likewise to pay to the assessee a sum of Rs. 175 per tractor.
In accordance with the aforesaid agreement, the assessee received a sum of Rs. 58,450 from Dass Motors and Rs. 35,000 from Escorts making a total of Rs. 93,450.
In its return originally filed, the assessee had shown Rs. 93,450 as a revenue receipt under the head “Compensation for Surrender of Rights of Import Licence”. Later on, it filed a revised return wherein it excluded Rs. 93,450 from its total income and claimed that it was a capital receipt. The Income-tax Officer, however, rejected the assessees contention as, according to him, the cancellation or variation in the agreements entered into between the assessee and the Polish company did not affect the profit-making apparatus of the assessee and, therefore, Rs. 93,450 received by the assessee was a revenue receipt.
In appeal before the Appellate Assistant Commissioner (the AAC), the assessee once again contended that on proper appreciation of the matter available on record and considering the various agreements including the litigation, the amount of Rs. 93,450 cannot be treated as a revenue receipt and it should be treated as a capital receipt. According to the assessee, since the assessee had lost its monopolistic right of purchase and sale of tractors manufactured by the Polish company in the territory of India, it had affected its profit-making apparatus and, therefore, the amount received on giving up such monopolistic right was a capital receipt. In support of its submission, the assessee had relied on the decision of the Supreme Court in the case of P.H. Divecha v. CIT [1963] 48 ITR (SC) 222, and the decision of this court in the case of Bombay Burmah Trading Corporation Ltd. v. [1971] 81 ITR 777. In his elaborate and well reasoned order, the Appellate Assistant Commissioner rejected the assessees contention as, according to him, the assessee received the amount in dispute for disposing of its stock-in-trade which was either on the high seas or was to be imported from Poland. In this connection, the Appellate Assistant Commissioner had discussed in great detail the import licence obtained by the assessee and thereafter its transfer to the other parties after following the Government Rules and Regulations. The Appellate Assistant Commissioner was also of the view that the assessee had received Rs. 93,450 in the course of its business in dealing in machinery, machinery spare parts and tractors and by arriving at a settlement with the Polish company, there was no damage to its profit-making apparatus.
Thereafter, the assessee went up in appeal before the Income-tax Appellate Tribunal (the Tribunal) and once again urged that Rs. 93,450 cannot be treated as a revenue receipt in its hands. It was, therefore, urged that the inclusion of the said amount in its total income should be deleted. Since the Tribunal was in full agreement with the well reasoned order of the Appellate Assistant Commissioner, it has confirmed the order of the Appellate Assistant Commissioner without much discussion.
Being dissatisfied with the order of the Tribunal, the assessee made an application under section 256(1) of the Income-tax Act, 1961, and requested the Tribunal to refer the following two questions to this court :
“(1) Whether, on the facts and in the circumstances of the case, the claim of the applicant that the sum of Rs. 58,450 received by the applicant company from Dass Motors and Rs. 35,000 received from Escorts Ltd., are in breach of the agreement and, therefore, capital receipts not liable to tax under the Income-tax Act, 1961, has been rightly rejected by the Tribunal ?”
If the answer to question No. 1 is in the affirmative, then :
“(2) whether it is assessable under the head Business under section 28 or under the head Capital gains under section 45 of the Income-tax Act, 1961 ?”
Learned counsel for the assessee carefully took us through various agreements and the material already brought on record and strongly urged that, on a proper appreciation thereof, the Tribunal ought to have accepted the assessees contention that Rs. 93,450 was a capital receipt in its hands and, therefore, was no assessable to tax. He stressed the point that after giving up the sole distributorship of the tractors manufactured by the Polish company, the assessee had stopped dealing in the said tractors altogether and, therefore, according to him this has destroyed the profit-making apparatus of the assessee. Since Rs. 93,450 were received in connection with this event, the same should be held to be a capital receipt and, therefore, should not have been included in the total income of the assessee. He, once again, relied on the reported decisions which were cited before the lower authorities with a view to impress upon us that the lower authorities have not appreciated the assessees case in the proper perspective, inasmuch as, according to him, the ratio laid down in the reported decisions in clearly applicable to the facts and circumstances obtaining in the present case. We may mention that the cases referred to by him were Bombay Burmah Trading Corporation Ltd. v. CIT [1988] 169 ITR 148 (Bom), P. M. Divecha v. CIT [1963] 48 ITR 222 (SC) and CIT v. Automobile Products of India Ltd. [1983] 140 ITR 159 (Bom).
We have carefully gone through each of these reported decisions and we do not intend to discuss the same in detail as we find that the facts and circumstances obtaining in the instant case are clearly distinguishable from the facts and circumstances obtaining in the reported cases. In Bombay Burmah Trading Corporation Ltd. [1988] 169 ITR 148 (Bom), the assessee had to stop its business in Siam during the Second World War. After the war was over, the Governments of Great Britain, India and Siam evolved a scheme by which the taxpayers who suffered during the war years were to be compensated. Under these circumstances, the Bombay Burmah Trading Corporation Ltd. received certain compensation which it claimed was not liable to taxation. Dealing with this case, this court had held that merely because the compensation was worked out on the basis of profit measure, it cannot be equated as if the compensation received by the assessee was revenue receipt and not a capital receipt. In the case of P. H. Divecha [1963] 48 ITR (SC) 222, the assessee was conducting a business in electrical goods including electric lamps. In 1938, it entered into an agreement with Philips Electrical Co. for the exclusive rights to purchase and sell electric lamps manufactured by Philips in certain areas of Indian territory. After almost 16 years of uninterrupted arrangement, Philips Electrical Company decided to take over the distribution of lamps in certain areas in which P. H. Divecha had a right. After serving a termination notice and some deliberations with P. H. Divecha, it was agreed that a sum of Rs. 20,000 would be paid to P. H. Divecha as “the three years remuneration”. This was taxed in the hands of P. H. Divecha. The Supreme Court held that the amount received by P. H. Divecha was a capital receipt. In this connection, it had noticed that the agreement entered into with Philips was not for the purchase of bulbs or lamps, that no quantity or quality or price was mentioned in the agreement and that under the said agreement only a right was secured for exclusive purchase for sale in exclusive territory. There was no time limit stipulated in the agreement for the duration of the period of the agreement. However, Philips had kept a right to terminate the agreement in any year on 3 months notice. On an appreciation of these facts, the Supreme Court held that the assessee had obtained a monopoly right of purchase and a monopoly right to sale in certain territories. Since this monopoly right was affected due to the termination of the agreement, the Supreme Court came to the conclusion that it had affected the profit-making apparatus of the assessee. However, in the instant case, the facts are entirely different, inasmuch as the agreement is only for 5 years and the Polish company had kept a right to terminate the agreement by giving 45 days notice in the event of the assessee infringing any of the essential terms and conditions of the agreement. Once the Polish company was informed about the complaints of the purchasers of the tractors, it was of the view that the purchasers were not satisfied due to the assessees dealing with them and not due to the defects in the tractors as alleged by the purchaser. This could be borne out from the fact that there was litigation between the assessee and the Polish company. In the case of Automobile Products of India Ltd. [1983] 140 ITR 159 (Bom) also, the facts are quite different from the facts obtaining in the instant case. In that case, the assessee was carrying on business in assembling cars which was subsequently discontinued and in 1953, the licence given under the Industries (Development and Regulation) Act, 1951, was also cancelled. In December, 1955, the assessee obtained an industrial licence to manufacture diesel engines in collaboration with a foreign company. One of the conditions of the agreement was that the assessee should have an installed capacity for the manufacture of 3,000 Meadows diesel engines. The assessee entered into a collaboration agreement with Meadows and, under the terms of the agreement, the assessee was to pay a royalty amount of 5 per cent. of the selling price of all Meadows engines, spares or component parts thereof manufactured and sold in the territory during the term of the agreement. Even though the assessee was well established in its venture, there was a change in the Government policy whereby licences were to be granted to the automobile industry where the same person should manufacture both engines as well as tractors. Due to lack of foreign exchange, it was not possible for the assessee to secure such a licence. Under the circumstances, it entered into an agreement with Premier Automobiles Limited for the transfer of its undertaking pertaining to the manufacture of Meadows engines. This is a clear case where the assessee had not only stopped its business, but its profit-making apparatus was transferred to another company. On these facts, the High Court held that the amount received by the assessee from Premier Automobiles Limited by way of compensation was a capital receipt.
It would thus appear from the above discussion that none of the reported decisions cited on behalf of the assessee would be of any help in claiming that Rs. 93,450 was a capital receipt. We may mention that learned counsel for the Revenue had also placed before us certain reported decisions. However, in view of the peculiar facts and circumstances obtaining in the instant case, it is not necessary to refer to the said decisions. In our view, the conclusion arrived at by the income-tax authorities as well as the Tribunal that Rs. 93,450 was a revenue receipt is a correct conclusion on the facts and circumstances obtaining in the instant case. It is pertinent to note that, after litigation, some arrangement was arrived at between the assessee and the Polish company regarding the tractors already in the possession of the assessee, the ones which are on the high seas and the ones which are to be imported in future. Since the assessee is dealing in tractors, the tractors were its stock-in-trade. By arriving at the arrangement with the Polish company, Escorts Ltd. and Dass Motors, the assessee was able to dispose of the tractors which were its stock-in-trade. In this view of the matter, we answer question No. 1 in the affirmative and against the assessee.
As regards the issue raised in question No. 2 we answer that Rs. 93,450 would be assessable under the head “Business” under section 28 of the Income-tax Act, 1961. No order as to costs.