ORDER
Vimal Gandhi, President
1. These two appeals by the assessee, one against quantum addition and other against penalty under Section 271(1)(c) against orders of CIT(A) involve a common issue and, therefore, were heard together and are disposed of through this consolidated order. In fact, only penalty appeal was fixed for today, the 2nd Feb., 2006, but as the same point was involved in quantum appeal, the second matter was also taken up and heard, with the consent of the parties.
2. The facts of the case are that assessee is a dealer in vans and had purchased a Santro car from Hyundai company. There was some problem in the said car, which according to the assessee was a defective piece and assessee returned the same to the company. The company took back the car and in addition to the price also issued a credit note worth Rs. 3,25,000, which was to the following effect:
Being amount credited to your account with us towards compensation for Santro Model L-2 bearing Vin No MAHAA51GRY M 078386 in terms of your various communications with Hyundai Motor India Ltd. as a goodwill gesture gift.
The assessee divided and credited above amount as gift to the accounts of the partners. The assessee also made suitable changes in the block of assets relating to cars on which depreciation was claimed in the period under consideration.
3. The AO, on examination of depreciation chart noted down that Santro was purchased by the assessee and later on returned to Hyundai company and thereafter Accent was purchased and shown as a capital asset acquired and depreciation claimed thereon. He noted that credit note worth Rs. 3,25,000 was issued to the assessee as a gift. The AO was, however, of the view that amount was realized by the assessee-firm as a taxable business receipt. He, therefore, made addition of Rs. 3,25,000 towards income of the assessee, with the following observations:
6. The reply of the assessee has been considered. There was dispute between the assessee and the Hyundai company on the Hyundai-Santro purchased by the assessee. As is admitted by the assessee in its reply, on insistence, following and complaints, the Hyundai company in order to avoid litigation and loss of reputation in the market, came out with this goodwill gesture. This resulted in that the assessee has been issued credit note worth of Rs. 3,25,000. This transaction in no way appears to be a gift, but a compensation arrived after a dispute to avoid the litigation and to upkeep reputation. No gift deed was entered into. No cash/cheque/draft was transacted between the two parties. A settlement arrived on a dispute cannot be deemed as a gift. The origin and circumstantial evidence clearly show that the assessee got benefited ‘ at the outcome of dispute, resulting into a gain of Rs. 3,25,000 received as compensation. The gift is not executed by any gift deed. The gift is not out of love and affection. But the gift in this case is for some consideration. The consideration is that out of settlement to buy peace and to save reputation of a big car company. It is purely an out of Court settlement. The consideration of Rs. 3,25,000 has been arrived at by mutual talks. Controversy erupted and the same was settled. It is purely a compensation received by the assessee. The settlement was arrived on 12th Nov., 2000, as appearing in two credit notes issued by Samara Hyundai, one for purchase of second hand Hyundai-Santro held by the assessee, and other credit note for Rs. 3,25,000 towards difference amount of Santro and Accent, as a result of compensation. The credit note for Rs. 3,25,000 cannot be constructed as a gift in view of origin and circumstantial evidences of the case. Hence, it is held that the assessee has received a compensation of Rs. 3,25,000 during the year under consideration and the amount of compensation received is added back to the income of the assessee for the year under consideration. However, the assessee is entitled for depreciation of capital asset as was claimed by the assessee.
4. The assessee filed an appeal before CIT(A) but remained unsuccessful. The CIT(A) took into account decisions of the Supreme Court in the cases of Mc Dowell & Co. v. CTO , CIT v. Rai Bahadur Jairam Valji , Kettlewell Bullen & Co. Ltd. v. CIT , Gillanders Arbuthnot & Co. Ltd. v. CIT , CIT v. Groz-Beckeit Saboo Ltd. and confirmed the addition with the following observations:
5. Now, it is an undisputed position in the present matter that both the subject motor cars, i.e., of the Santro model and the Accent model were treated by the appellant-firm as its assets of business and they were duly reflected in the block of assets. To my mind, it would be quite reasonable to hold that the subject difference of Rs. 3,25,000 was a benefit or perquisite which arose from the tax payer’s business and it was thus assessable under Section 28(iv) of the Act. It is to be remembered that Clause (iv) of Section 28 comes into play irrespective of whether the value of such benefit or perquisite is convertible into money or is not so convertible. The impugned addition of Rs. 3,25,000 is sustained on the reasoning aforesaid and I am fortified in this view by the ratio laid down by the apex Court in CIT v. Groz-Beckert Saboo Ltd. . Grounds numbered 2(c) to 2(e) are also rejected.
The assessee is aggrieved and has brought the issue in appeal.
5. The AO also initiated penalty proceedings under Section 271(1)(c) of the IT Act taking above addition as income in respect of which inaccurate particulars were furnished and it was also concealed income of assessee and imposed penalty of Rs. 1,27,400 calculated @ 100 per cent of tax sought to be evaded. This penalty was confirmed on appeal by the learned CIT(A). The aforesaid penalty order is also subject-matter of second appeal before the Tribunal.
6. We have carefully considered rival submissions of the parties. The short question involved before us is whether sum of Rs. 3,25,000 in respect of which credit note was issued in favour of assessee-firm and which was claimed to be gift by the assessee is a capital receipt. Only a revenue receipt is liable to be taxed in the hands of the assessee. It is not in dispute that while issuing the credit note in question, Hyundai company stated it to be a gift. Thus, both the parties to the transaction took it as a gift and not as a business receipt. Though above statement treating the amount as “gift” was not conclusive and it was open to the Revenue to see whether the amount was gift or a taxable receipt, yet this statement without any material to the contrary could not be rejected. The authorities could go behind the transaction and examine facts and circumstances under which the alleged gift was made to the assessee. The background and circumstances under which credit note was issued have been examined by the Revenue but no material has been brought on record to show that amount in question was a taxable revenue receipt liable to be taxed under the IT Act. It is not sufficient to hold a receipt as of revenue nature with mere finding that it is connected with business of the assessee. It has to be shown that it is a trading or a taxable receipt, i.e., it is income liable to be taxed in accordance with provisions of IT Act. There is no presumption that a device has been adopted in every case to hoodwink the Revenue where a receipt is shown as gift or is otherwise claimed to be not taxable. The onus is on the Revenue to prove that a colourable device has been adopted and taxable income is concealed. On the facts of the case, we are of the view that no material has been brought on record to show that device was adopted and under that device taxable income was shown in the garb of a gift.
7. Even if it is assumed that credit note given was not a gift, but was received in the course of business, the same could not be subjected to tax unless it is shown that receipt has a proximate connection with stock-in-trade and thus a taxable receipt. In every business there are capital assets and stock-in-trade. Capital asset is machinery or tools with which business is carried. Realisation of capital asset leads to capital receipts or capital gains, which is different and distinct from revenue gains liable to be taxed.
8. In the latest case of Oberoi Hotel (P) Ltd. v. CIT , their Lordship while holding that particular receipt was a capital receipt not liable to tax, has referred to and relied upon and quoted following observations:
CIT v. Rai Bahadur Jairam Valji :
…whether a payment of compensation for termination of an agency is a capital or revenue receipt, it would have to be considered whether the agency was in the nature of capital asset in the hands of the assessee, or whether it was only part of his stock-in-trade.
Kettlewell Bullen & Co. Ltd. v. CIT :
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.
After considering various decisions it was further held as under (p. 272):
These cases illustrate the principle that compensation for injury to trading operations, arising from breach of contract or in consequence of exercise of sovereign rights, is revenue. These cases must, however, be distinguished from another class of cases where compensation is paid as a solatium for loss of office. Such compensation may be regarded as capital or revenue : it would be regarded as capital, if it is for loss of an asset of enduring value to the assessee, but not where payment is received in settlement of loss in a trading transaction.
9. So the question whether the amount paid to the assessee is capital or revenue receipt would turn on fact whether the asset with which it was connected was a capital asset or part of stock-in-trade. In the present case, there is ample evidence that assessee had taken Santro car as a capital asset and not as a trading asset. In this connection we may refer to the following:
From the orders of AO and CIT(A):
(i) In para 3 of the assessment order, the AO refers to depreciation chart where addition of Santro car was shown as block of assets and reference to receipt in question was made.
(ii) At the end of para 3, p. 2, the AO has observed, “The assessee has claimed depreciation of Rs. 1,49,290 during the year including the full value of Hyundai Accent; the above transaction shows that the assessee received a gift of Rs. 3,25,000 from Samara Hyundai on 12th Nov., 2000, in lieu of compensation for old Hyundai Santro.
(iii) The AO has further observed this type of treatment having a bearing on taxability of income as (a) claiming depreciation on capital asset allegedly shown as gift. The AO has allowed depreciation as claimed subject to disallowance of 1/4th for personal use of car by the partners. Thus, treatment given by the assessee to Santro car as a capital asset was not disputed.
(iv) The last line of assessment order is as under:
However, the assessee is entitled for depreciation of capital asset as was claimed by the assessee.
Thus, depreciation treating the Santro car as a capital asset has specifically been allowed.
10. On appeal, learned CIT(A) in para 5 of impugned order quoted above has observed, “both the subject motor cars, i.e., of Santro model and the Accent model were treated by the appellant-firm as its assets of business and they were duly reflected in the block of assets.” Thus, CIT(A) has also noted that Santro car was treated as a capital asset and included in the block of assets for claiming depreciation.
It is no doubt true that Santro car was a business asset but then as already noted a distinction has to be drawn between a capital asset and a trading asset. Only gain or compensation paid or connected with trading assets, i.e., stock-in-trade could give rise to revenue/taxable receipt. Compensation paid for a capital asset is not a taxable income. There is absolutely no finding that Santro car was a trading asset and, therefore, compensation paid in lieu of the car could be a revenue receipt. There is clear admission on the part of the Revenue authorities that aforesaid car was a capital asset. Having regard to above facts and circumstances of the case, we are of opinion that compensation could not be treated as a revenue receipt. It was rightly treated as a capital receipt and credited to the accounts of the partners. The addition made is accordingly deleted.
11. That in view of above finding deleting the addition, there is no question of levy of penalty under Section 271(1)(c) of the IT Act. The same is liable to and is hereby cancelled. Both the appeals of the assessee are allowed.
12. In the result, both the appeals of the assessee are allowed.