The Commissioner Of Income Tax-8 vs M/S. Parle Soft Drinks Pvt. Ltd
2017 Latest Caselaw 8790 Bom

                                                       Judgment-ITXA.978.2014+1.doc


  IN THE HIGH COURT OF JUDICATURE AT BOMBAY
      ORDINARY ORIGINAL CIVIL JURISDICTION

                  INCOME TAX APPEAL NO. 978 OF 2014

 The Commissioner of Income           }
 Tax-8,                               }
 Room No. 214, Aayakar                }
 Bhavan, M. K. Road,                  }
 Mumbai - 400 020                     }       Appellant
           versus
 M/s. Parle Soft Drinks               }
 (Bangalore Pvt. Limited)             }
 (since amalgamated with              }
 Bisleri International                }
 Limited), Western Express            }
 Highway, Andheri (East),             }
 Mumbai - 400 099                     }
 PAN - AAACP4620J                     }       Respondent

                                WITH
                  INCOME TAX APPEAL NO. 1765 OF 2014

 Commissioner of Income Tax,}
 Central - II,                 }
               th
 R. No. 414, 4 floor,          }
 Aayakar Bhavan, M. K. Road, }
 Mumbai - 400 020              }              Appellant
           versus
 M/s. Parle Bottling Pvt. Ltd. }
 Western Express Highway,      }
 A-9, Andheri (E),             }
 Mumbai 400 099,               }
 PAN - AAACP8417H              }              Respondent


 Mr. Arvind Pinto for the appellant in
 ITXA/978/2014.

 Mr. A. R. Malhotra with Mr. N. A. Kazi for
 the appellant in ITXA/1765/2014.

 Mr. J. D. Mistri-Senior Advocate with
 Mr.Hiten Chande i/b. M/s. PDS Legal for
 the respondent in ITXA/978/2014.

                               Page 1 of 19
 J.V.Salunke,PA




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                                                           Judgment-ITXA.978.2014+1.doc


 Mr. Firoze Andhyarujina-Senior Advocate
 with Mr. Sameer Dalal for the respondent
 in ITXA/1765/2014.


                               CORAM :- S. C. DHARMADHIKARI &
                                        PRAKASH. D. NAIK, JJ.

Reserved on 25 th September, 2017 Pronounced on 17 th November, 2017

JUDGMENT :- (Per S. C. Dharmadhikari, J.)

1. The Revenue has filed Income Tax Appeal No. 978 of 2014

challenging the order dated 20th September, 2013 of the Income

Tax Appellate Tribunal, Bench at Mumbai. The assessment year

is 1998-99.

2. The facts in brief are that the respondent assessee is a

private company and during the relevant assessment year, it had

shown income from the hire charges of vehicles and interest.

During scrutiny of the return for assessment year 1998-99, the

Assessing Officer noted that the company had received a sum of

Rs.16.05 crores as compensation of a settlement for loss of its

bottling rights with Coca Cola Company, USA. The company

claimed the amount to be a capital receipt not liable to tax and

was declared in the accounts as a capital reserve after deducting

Rs.10 lakhs for professional fees paid.

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3. The Assessing Officer, on scrutinising the agreement dated

18th September, 1993, noted that the payment was made for

settlement of dispute between the Coca Cola Company, UAS and

the respondent assessee. Accordingly, the amount partakes the

character of income in terms of section 2(24) of the Act and to be

taxed as income from other sources. As an alternate argument

canvassed by the assessee that the amount was received as

surrender of the right of first refusal for giving up the rights of

setting up a bottling plant, the Assessing Officer noted that this

right was assigned to Limca Flavours and Fragrances Ltd. (LFFL)

and the respondent assessee was not in a position to show how it

had acquired the rights. That is how the assessee's alternate

argument was also rejected.

4. The aggrieved assessee went in appeal before the

Commissioner and complained that the assessment order dated

13th March, 2013 be set aside. The Commissioner held that the

receipt was taxable as capital gains since section 55(2)(a)

coveres such a situation as that of the respondent assessee.

However, he held that the right of first refusal dated back to the

31st March, 1994, the date when the subsidiary company was

formed for developing this new line of business or profit and

hence the said receipt was taxable as long term capital gain.

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Since the receipt was held to be long term capital gain, it was not

to be added to book profits as stipulated under section 115JA of

the Act. This order was passed on 14th June, 2001 and the

assessee, aggrieved by it, preferred a further appeal to the

Tribunal. That was against part of the order of the Commissioner

of Income Tax (Appeals). The Revenue also filed an appeal

aggrieved by the other part of the order of the Commissioner of

Income Tax (Appeals). The assessee filed cross objections. All

these were heard together and the impugned order has been

passed.

5. The Tribunal held that as per the master agreement, there

was a clear indication regarding the formation of Bangalore

subsidiary and this subsidiary would be given the bottling rights.

The Tribunal held that the respondent company was entitled to

receive compensation for breach of the right of first refusal from

Coca Cola Company. Thus, the Tribunal concluded that the

assessee has lost the source of its business or trading activity.

The compensation received was a capital receipt, that was not

taxable. It is this order of the Tribunal which is challenged in this

appeal.

6. Mr. Arvind Pinto appearing in support of this appeal would

submit that the questions of law and formulated at pages 6 and 7

of the paper book deserve admission of this appeal.

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7. Income Tax Appeal No. 1765 of 2014 is for the assessment

year 1998-99. The assessee is the same.

8. The facts are that the Parle Group of Companies was

engaged in the business of manufacturing, bottling and

distribution of soft drinks and beverages under several popular

brands, namely, Thums-Up, Limca, Gold Spot, Mazaa, Citra etc.

The assessee had filed a return of income on 30 th November, 1998

showing loss of Rs.2,16,70,502/- under normal provisions of the

Act and book profit under section 115JA was shown at

Rs.4,76,290/-.

9. The Assessing Officer observed, during the assessment, that

the assessee had received a sum of Rs.16,05,60,000/- from Coco

Cola Company of USA (TCCC), which was claimed to be exempt

from tax on account of it being a capital receipt. This

compensation was claimed to have been received as

compensation related to the right of first refusal for bottling

rights in the city of Pune. A reference was made to the master

agreement with Coca Cola Company of September, 1993 for

transfer of intellectual property rights in the nature of

trademarks, knowhow, franchisee rights etc. in respect of various

brands of beverages/soft drinks owned by the Parle Group. After

the transfer of trademark, as per the master agreement, wherein

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the Parle Group of Companies along with Mr. Ramesh Chauhan

and Mr. Prakash Chauhan is the seller and TCCC is the buyer

along with Coco Cola South Asia Honding (Inc.) as the confirming

party, bottling of soft drink was to be continued by Mr. Ramesh

Chauhan and Mr. Prakash Chauhan through Parle Bottling

Company having bottling rights in Pune while LFFL known as

Aqua Bisleri, having bottling rights in the territory of Bangalore.

In the said agreement itself, a draft of right of first refusal

regarding bottling rights was also elaborated. However, later on,

TCCC took strategic policy decision to set up its own bottling plant

at Bangalore. This led to breach of obligation by TCCC in respect

of the right of first refusal given to M/s. Parle Group in the master

agreement and led to dispute between M/s. Parle Group and TCCC.

This dispute was ultimately settled with TCCC agreeing to pay

US$4.5 million which in terms of Indian Rupees was

Rs.16,05,82,500/-. The Assessing Officer disallowed

Rs.16,05,82,500/- on protective basis and also made addition of

Rs.42,33,833/- on account of 100% depreciation on bottles. The

assessment under section 143(3) was completed on 30 th March,

2001 assessing the total income at Rs.14,87,82,130/-. The

Assessing Officer computed book profit under section 115JA of

the Act at Rs.4,86,44,290/-.

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10. As against this order and being aggrieved by it, an appeal

was preferred to the Commissioner of Income Tax (Appeals). He

passed an order on 29th November, 2012 holding that the sale

proceeds relate to capital assets and hence, the same is to be

reduced from the block assets.

11. The Revenue did not accept this order of the Commissioner

and preferred an appeal to the Tribunal. The Tribunal held that

the compensation received by the assessee is the capital receipt

and since there was no transfer for extinguishment of any rights,

there is no question of capital gain and accordingly, the Tribunal

dismissed the Revenue's appeal.

12. Mr. Malhotra appearing for the Revenue in this appeal

would submit that all the four questions proposed at pages 6 and

7 of the paper book are substantial questions of law. He would

submit that the Tribunal failed to appreciate the relevant

provisions of the Income Tax Act, 1961 in their right perspective.

Mr. Malhotra would submit that the Tribunal was aware that this

respondent had obtained benefits and which could not be be held

to be revenue receipts. Further, the Tribunal erred in ignoring

the reasoning of the Assessing Officer that up to the assessment

year 1995-96, the assessee had claimed the purchases of bottles

and crates as revenue expenses as the value was less than

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Rs.5,000/- though the expenses were incurred for capital assets

and therefore, the amounts received against such assets will be

revenue receipts.

13. The appellant-Revenue has pointed out, according to

Mr.Malhotra, these bottles and crates sold during the year were

admittedly worn out over the period of time and the assessee was

not able to furnish the details of sale of bottles on which 100%

depreciation had been allowed and therefore, such assets

purchased prior to 1st April, 1995, on which 100% depreciation

had been claimed and allowed, were logically sold first vis-a-vis

such assets purchased on or after 1 st April, 1995 on which 50%

depreciation had been allowed. Thus, Mr. Malhotra urges that the

compensation of Rs. 16,05,60,000/- should have been treated as

income. Secondly, he has adopted the arguments of the Revenue

in Income Tax Appeal No. 978 of 2014. Thirdly, he has addressed

us on the two other questions proposed as question nos. 6.3 and

6.4 at page 7 of the paper book.

14. Mr. Malhotra relied upon a judgment of the Hon'ble

Supreme Court in the case of Commissioner of Income Tax vs.

Shantilal (P.) Ltd.1.

1 (1983) 144 ITR 57

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15. Mr. Mistri and Mr. Andhyarujina learned senior counsel

appearing for the respondent would submit that there is no merit

in both the appeals. They would submit that the Tribunal, in

Appeal No. 978 of 2014, had before it the undisputed facts. The

compensation amount can be treated as capital receipt or revenue

receipt. In other words, is it non-taxable or taxable. They would

submit that the Hon'ble Supreme Court has in the judgment in the

case of Kettlewell Bullen and Co. Ltd. vs. Commissioner of Income

Tax, Calcutta2 already settled the tests. These tests emerge

from a decision of the Hon'ble Supreme Court in the case of

Commissioner of Income Tax, Hyderabad-Decan vs. Vazir Sultan

and Sons3. The Tribunal, while being guided by these tests and

applying them to the facts and circumstances of this case,

concluded that the receipt of compensation amount must be

considered in the backdrop of the master agreement. Under the

master agreement, the right of first refusal was vested with LFFL

to carry out the bottling activities in the territory of Bangalore.

There was a clear indication that there would be formation of

Bangalore subsidiary and there would be an investment

agreement also between the parties for this purpose. The

necessary guidelines as to how the subsidiary would be formed,

various assignments of the bottling rights only to such a newly 2 (1964) LIII ITR 261 (SC) 3 (1959) XXXVI ITR 175 (SC)

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formed company and to be held and formed by Parle Group and

later on the Coca Cola Company will join in after subscribing 30%

of the shares, are the provisions or guidelines in the master

agreement itself. It was to this subsidiary company that the

bottling rights were to be given in the territory of Bangalore. This

subsidiary company was formed as Parle Soft Drinks Pvt. Ltd.

Thus, the assessee company was formed only for carrying out

bottling activities in the territory of Bangalore. There was, thus,

no dispute that the assessee was entitled to receive the

compensation amount on the breach of this agreement from Coca

Cola Company. Thus, even though the right of first refusal was

with LFFL, but it was always agreed upon by the parties that the

same should be for the newly formed subsidiary at Bangalore.

That Bangalore subsidiary is the assessee company only. Once

these bottling activities were to be carried out for the Coca Cola

Company and the Bangalore territory that the assessee was

formed. It was not necessary that the assessee should have

installed entire plant and machinery for carrying on such

business. The right of first refusal itself stated a substantial right

and foundation on which the assessee could have built its bottling

business. If such right would have been assigned to the assessee,

it would have been the source of assessee's income and profit

making apparatus. The assessee has also submitted its business

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plans and various modes for carrying out the bottling business to

the Coca Cola Company. There is no dispute that the Coca Cola

Company has breached the agreement and particularly the right

of first refusal by not assigning the rights. It was on account of

breach of this agreement that the compensation amount was

settled between the parties. The fundamental right for starting

the bottling business was taken away as a result of breach of the

right of first refusal by the Coca Cola Company. That is the reason

why the Coca Cola Company paid this amount to the assessee and

not to LFFL.

16. To our mind, therefore, all the tests that were evolved by

the Hon'ble Supreme Court in the decisions noted above, have

been applied and to arrive at the correct conclusion. We do not

think that the view of the Tribunal is any way erroneous or

illegal. Thus, it is not vitiated by any error of law apparent on the

face of the record of perversity.

17. Mr. Mistry was also right in relying upon the Judgment of

the Hon'ble Supreme Court in the case of Oberoi Hotel Pvt. Ltd. vs.

Commissioner of Income Tax4. The Hon'ble Supreme Court, in

this decision, referred to its earlier decision in the case of

Kettlewell Bullen and Co. Ltd. (supra) and held as under:-

4 (1999) 236 ITR 903

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".....

The question whether the receipt is capital or revenue is to be determined by drawing a conclusion of law ultimately from the facts of the particular case and it is not possible to lay down any single test as infallible or any single criterion as decisive. This court in the case of Karam Chand Thapar and Bros. P. Ltd. v. CIT [1971] 80 ITR 167, discussed and held that in CIT v. Chari and Chari Ltd. [1965] 57 ITR 400 (SC) , it was held that ordinarily compensation for loss of an office or agency is regarded 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.

....."

18. Thus, the matter has to be approached from a factual view

point.

19. Even in the case of Parle Bottling Private Limited, where

the Assessing Officer has treated the receipt to be taxed as long

term capital gains on protective basis and the learned

Commissioner of Income Tax (Appeals) has treated the same

receipt to be taxed as casual and non-recurring taxable income

under section 10(3) of the Act, the argument was that the

assessee received this sum of Rs.16,05,60,000/- as compensation

from the Coca Cola Company for breach of the right of first refusal

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agreement with regard to bottling rights of Pune territory. The

Assessing Officer, according to the assessee, solely relied upon the

observations and findings in the assessment order dated 30 th

March, 2001 in the case of Aqua Bisslery Limited, wherein, the

receipt was taxed under the head "long term capital gains". Once

the factual basis was laid before the Commissioner (Appeals) and

it was found that the same was identical to the case of Parle Soft

Drinks Private Limited except for the fact that in the present

case, the assessee was in the bottling business for Parle Group of

Companies, there was a right of first refusal and the assessee was

to carry on the business of bottling for the Coca Cola Company. A

detailed business plan was submitted. However, the Coca Cola

Company, without any specific reason, rejected the business plan.

Thus, there was a breach of the right of first appeal, there was

after negotiation received compensation in the above sum, which

was shown as non-taxable capital receipt. The argument was

identical that the Coca Cola Company has deprived the assessee of

all potential right and that was to set up a bottling plant for Pune

territory. There was a breach of contract giving rise to a claim for

damages and same was paid on account of failure to honour the

commitment. That is capital in nature. That source of income, by

way of setting up of a bottling plant at Pune territory was lost

forever. Hence, relying upon the judgment in the case of Oberoi

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Hotel Pvt. Ltd. (supra), the argument that such a receipt cannot

be taxed as revenue receipt or casual income, was accepted. The

Tribunal, in para 25 of the order under appeal noted the

arguments of the Revenue and particularly the summary of the

same. Thereafter, the Tribunal dealt with the main dispute and

as above.

20. We do not, therefore, think that a different view on facts

could have been taken in the case of Parle Bottling Private

Limited.

21. The additional point raised by Mr. Malhotra with regard to

the depreciation has also been answered properly. We do not see

any merit in the argument of the Revenue on the point that the

net compensation amount received by the assessee from the Coca

Cola company is a long term capital gain and therefore added to

book profit computed under section 115JA of the Income Tax Act,

1961. The Tribunal, in dealing with this argument in para 48 has

held that the amount received by the assessee is not a capital

gain, but a capital receipt, which is not taxable. Hence, the

ground becomes purely academic.

22. The common findings of the Tribunal and endorsed by us

thus take care of the Revenue's Appeal No. 978 of 2014.

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23. In Appeal No. 1765 of 2014, the two additional questions on

the point of depreciation, namely, questions 6.3 and 6.4 also

cannot be termed as substantial questions of law. The Tribunal

had before it a challenge to the direction of the Commissioner of

Income Tax (Appeals) to treat the sale of consideration of bottles

and crates as part of the block of assets. The Assessing Officer

shown the sale of bottles amounting to Rs. 84,67,666/- from the

block of assets comprising bottles on which depreciation @ 50% is

admissible. He also noted that up to the assessment year 1995-

96, the assessee has claimed depreciation @ 100% on bottles and

crates as the cost was less than Rs.5,000/-. He directed the

assessee to furnish details of these bottles on which 100%

depreciation has been claimed in the previous year. The assessee

replied that no separate registers have been maintained for the

bottles and also accepted that the bottles on which 100%

depreciation has been claimed cannot be distinguished from the

bottles on which depreciation of 50% has been claimed in the year

under consideration. There was a reply given to the show cause

notice by the assessee and the assessee's contentions were

rejected by the assessing officer on the ground that up to the

assessment year 1995-96, the assessee has claimed expenditure

on the purchase of bottles and crates as revenue expenditure

being the value less than Rs.5,000/- and in the assessment year in

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question, namely, 1998-99, the assessee has failed to prove

whether these bottles and crates sold were purchased after 31 st

March, 1995. Accordingly, the Assessing Officer allowed the

depreciation on the block of assets comprising of bottles and

crates of Rs.42,38,833/- and the balance was added. On these

facts and findings of the Assessing Officer, the Tribunal proceeded

to then note the conclusions of the Commissioner of Income Tax

(Appeals) deleting the addition. Thus, the conclusions are

reproduced in para 80 of the order under appeal. The Tribunal

concluded that the Commissioner of Income Tax (Appeals) was

right that sale proceeds on a capital assets cannot be held to be a

revenue receipt and after the sale, the block of assets have been

reduced and accordingly whatever is there in the block of assets,

deprecation has to be allowed in accordance with the provisions

of law. Thus, the finding of fact recorded by the Commissioner of

Income Tax (Appeals) has been endorsed and confirmed by the

Tribunal.

24. We do not think that this finding of fact is perverse or

vitiated by an error of law apparent on the face of the record.

25. Consequently, we find that none of the questions in both the

appeals can be termed as substantial questions of law. Some of

the questions are proposed by the revenue though the Tribunal

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has found that these were purely academic and do not survive

after the principal or primary issue is answered in favour of the

assessee.

26. We, therefore, proceed to dismiss both these appeals, but

without any order as to costs.

27. We do not see how any reliance can be placed by the

Revenue on the judgment of the Hon'ble Supreme Court in the

case of Commissioner of Income Tax vs. Shantilal (P.) Ltd.

(supra). Mr. Malhotra would pick up a stray sentence from the

Hon'ble Supreme Court judgment and urge that the award of

damages or breach of a contract is not a same thing as a party to

the contract accepting satisfaction of the contract otherwise than

in accordance with the original terms thereof. We do not think

how this observation or conclusion can be relied upon for what

happened in the case of Shantilal (P.) Ltd. (supra) was that the

assessee company contracted to sell certain commodity to a

party. It was unable to effect delivery due to a sharp rise in the

price of the commodity. This dispute, which arose due to non-

fulfillment of the contract was referred to arbitration and was

settled by an award with the result that the assessee was obliged

to pay compensation by way of damages to the other party. It is

claimed that the deduction of the amount so paid as business loss

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was disallowed by the Income Tax Officer on the ground that the

transaction was a speculative transaction as defined in section

43(5) of the Income Tax Act, 1961. The appellate Commissioner,

however, allowed this claim of the assessee on the ground that the

impugned payment represented a settlement of damages on

breach of the contract, which was distinct from the settlement of

a contract. The Tribunal dismissed the departmental appeal

against this order. Hence, the reference.

28. The Hon'ble Supreme Court, on noticing the rival

contentions, came to the conclusion that the award of damages

for breach of contract is not the same thing as a party to the

contract accepting satisfaction of the contract otherwise than in

accordance with the original terms thereof. Thus, this is not a

speculative transaction. A speculative transaction has been

defined. The contract before the Hon'ble Supreme Court was

questioned. The Hon'ble Supreme Court held that award of

damages or breach of contract did not bring the transaction

within the definition of "speculative transaction" set-forth in

clause (5) of section 43. It is that matter which was highlighted

by the Revenue. The Tribunal found it to be not speculative

transaction. There was a breach of the contract. It is not,

therefore, proper to read this one sentence in isolation. Preceding

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that sentence, the Hon'ble Supreme Court has made some

pertinent observations. Even the later observations would

clearly clinch the matter. What the award before the Hon'ble

Supreme Court settled was the claim of damages. The dispute

between the parties in relation to such claim is settled by the

award. The contract cannot be said to be settled and that is

settled, according to the Hon'ble Supreme Court, by either

performance or the other requirements stipulated in law. It is in

these circumstances that the Tribunal held that the transaction

cannot be described as a speculative transaction within the

meaning of clause (5) of section 43, where, there is a breach of

contract and on a dispute between the parties, damages are by

compensation by an arbitration award. We must not lose focus of

this essential controversy dealt with and only pick one sentence,

as desired by Mr. Malhotra, and apply it to the facts and

circumstances to the present case. The reliance on this decision

is, therefore, clearly misplaced.

(PRAKASH.D.NAIK, J.) (S.C.DHARMADHIKARI, J.)

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