Calcutta High Court

Essel Mining And Industries Ltd vs Principal Commissioner Of Income ... on 17 November, 2021

OD-61
                   IN THE HIGH COURT AT CALCUTTA
                     Special Jurisdiction (Income tax)
                             ORIGINAL SIDE


                            IA No. GA/1/2017
                         (Old No. GA/2471/2017)
                                    In
                              ITAT/274/2017


                ESSEL MINING AND INDUSTRIES LTD.
                            -Versus-
        PRINCIPAL COMMISSIONER OF INCOME TAX-2, KOLKATA



BEFORE:
The Hon'ble JUSTICE T. S. SIVAGNANAM
               AND
The Hon'ble JUSTICE HIRANMAY BHATTACHARYYA

Date : 17th November, 2021.

                                                                   Appearance:
                                                     Mr. J. P. Khaitan, Sr. Adv.
                                                        Ms. Swapna Das, Adv.
                                             Mr. Pratyush Jhunjhunwala, Adv.
                                                      Mr. Siddharth Das, Adv.
                                                            ... for the petitioner.

                                                  Mr. Debasis Choudhuri, Adv.
                                                        Mr. Madhu Jana, Adv.
                                                           ... for the Revenue.


      The Court: This appeal by the assessee is filed under Section 260A of

the Income Tax Act, 1961 (the Act in brevity) and is directed against the

order passed on 10.03.2017 by the Income Tax Appellate Tribunal in ITA

Nos. 786 and 2073/Kol/2013 for the Assessment Year 2008-09. The

assessee has raised the following substantial questions of law for

consideration:
                                         2




           (a) Whether the Tribunal was justified in law in upholding the

              invocation of rule 8D of the Income Tax Rules, 1962 in the

              appellant's case for the purpose of disallowance under

              section 14A of the Income Tax Act, 1961 and its purported

              findings in that behalf, including that the Assessing Officer

              had   recorded    his     dissatisfaction   with   regard     to   the

              appellant's claim or that the appellant had not furnished any

              materials/evidence to show that no borrowed funds were

              utilised    in   making       the   investments,   are      arbitrary,

              unreasonable and perverse?

           (b) Whether the Tribunal was justified in law in holding that the

              compensation received by the appellant from Suzlon Energy

              Ltd. in terms of the purchase orders on account of failure of

              performance guarantee parameters of capital assets, namely,

              wind turbine generators, purchased by the appellant was on

              revenue account for reducing loss incurred in the course of

              business and not a capital receipt outside the purview of

              taxation?

     We have heard learned Senior Counsel Mr. J.P. Khaitan appearing for

the appellant/assessee and Mr. Debasis Choudhuri, learned Senior

Standing Counsel for the respondent/Revenue.

The learned counsel for the appellant submitted that the appellant is

not pressing for consideration substantial questions of law. The said

submission is based on record. Therefore, we are required to decide as to

whether the compensation received by the appellant from M/s. Suzlon

Energy Ltd. in terms of the purchase order on account of failure of

performance guarantee parameters of capital assets purchased by the

appellant was a capital receipt. The Assessing Officer held against the

assessee and treated the same as a revenue receipt. On appeal, the

Commissioner of Income Tax (Appeals) - VI (CITA), by an order dated

01.02.2013 reversed the decision of the Assessing Officer and directed the

receipt to be treated as a capital receipt with a further direction to reduce

the same from the value of the capital asset. The Revenue as well as the

assessee filed appeals before the Tribunal. The Tribunal dismissed the

assessee's appeal and the Revenue's appeal was allowed. The sheet anchor

of the argument submitted by the assessee before the Tribunal was by

placing reliance on the decision of the Hon'ble Supreme Court in the case of

Commissioner of Income Tax v. Saurashtra Cement Ltd. reported in (2010)

325 ITR 422 (SC) as well as the decision of the Kolkata Bench of the Tribunal

in the case of DCIT v. Xpro India Ltd. in ITA 214/Kol/2011 and ACIT v. RDS

Construction Pvt. Ltd. in ITA 377 to 383/PN/2013. The Tribunal while

interpreting the decision in Saurashtra Cement Ltd. (supra) went into the

factual aspect and stated that in the said case, the compensation was paid

for late delivery of the machinery whereas in the assessee's case, the

compensation was paid on account of the machinery supplied not

functioning to the optimum effect. In our considered view, the manner in

which the Tribunal distinguished the decision in Saurashtra Cement Ltd. is

incorrect. What is required to be considered by the Tribunal is the ratio laid

down by the Hon'ble Supreme Court in the said decision and then test the

case of the assessee as to whether the compensation received should be

treated as a revenue receipt or a capital receipt. In the case of Rai Bahadur

Jairam Valji [CIT v. Rai Bahadur Jairam Valji (1959) 35 ITR 148 (SC)], the

Hon'ble Supreme Court after analysing the various judgments on the said

point held that where by 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.

It is settled legal position that there is no singular test available to

determine whether a receipt is a capital receipt or a revenue receipt for

which it is necessary that the Assessing Officer should examine the facts of

each case. Therefore, we are of the considered view that the manner in

which the Tribunal had interpreted the decision of Saurashtra Cement Ltd.

and come to a conclusion that it does not help the assessee is incorrect. The

Tribunal is required to rely the legal proposition laid down in the Hon'ble

Supreme Court as well as the other decisions which have been referred to by

the Hon'ble Supreme Court. In fact one such decision which was relied on

by the assessee in the said case was that of the High Court of Madras in

E.I.D. Parry Ltd. v. CIT [1998] 233 ITR 335. For better appreciation, we quote

paragraphs 11 and 12 of the decision in Saurashtra Cement Ltd. :

11. The question whether a particular receipt is capital or revenue has frequently engaged the attention of the courts but it has not

been possible to lay down any single criterion as decisive in the determination of the question. Time and again, it has been reiterated that answer to the question must ultimately depend on the facts of a particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a conclusion. In Rai Bahadur Jairam Valji [1959] 35 ITR 148 (SC), it was observed thus (page

152):

"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 a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. Vide Van Den Berghs Ltd. v. Clark [1935] 3 ITR (Eng Cas) 17. That, however, is not to say that the question is one of fact, for, as observed in Davies (H. M. Inspector of Taxes) v. Shell Company of China Ltd. [1952] 22 ITR (Suppl) 1 'these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend no doubt to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts'."

12. In Kettlewell Bullen and Co. Ltd. [1964] 53 ITR 261; AIR 1965 SC 65 dealing with the question whether compensation received by an agent for premature determination of the contract of agency is a capital or a revenue receipt, echoing the views expressed in Rai Bahadur Jairam Valji [1959] 35 ITR 148(SC)

and analysing numerous judgments on the point, this court laid down the following broad principle, which may be taken into account in reaching a decision on the issue (page 282):

"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."

In the light of the above, we are of the view that the matter requires to

be remanded to the Tribunal for a fresh consideration to consider the legal

issue which was decided by the Hon'ble Supreme Court in Saurashtra

Cement Ltd. It goes without saying that the Revenue also will be given

adequate opportunity by the Tribunal to put forth their contentions on the

grounds canvassed by the assessee before us in this appeal. In the result,

the appeal is allowed and the order passed by the Tribunal is set aside on

the subject issue alone, namely, whether the compensation received by the

assessee from Suzlon Energy Ltd. in terms of the purchase orders on

account of failure of performance guarantee parameters of capital assets,

namely, wind turbine generators, purchased by the assessee was on revenue

account made for reducing loss incurred in the course of business or a