Gujarat High Court
Principal Commissioner Of Income Tax 3 vs M/S Surbhi Milk Foods And Beverages Ltd on 24 June, 2024
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 244 of 2024
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PRINCIPAL COMMISSIONER OF INCOME TAX 3
Versus
M/S SURBHI MILK FOODS AND BEVERAGES LTD.
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Appearance:
MR. KARAN SANGHANI, STANDING COUNSEL FOR MRS KALPANA K
RAVAL(1046) for the Appellant(s) No. 1
MR MANISH J SHAH(1320) for the Opponent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE NIRAL R. MEHTA
Date : 24/06/2024
ORAL ORDER
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. This Tax Appeal is filed by the Appellant-Revenue under Section
260A of the Income Tax Act, 1961 (for short "the Act") proposing the
following substantial questions of law arising out from the order dated
7.3.2023 passed by the Income Tax Appellate Tribunal, Ahmedabad (for
short "the Tribunal") in ITA No.1223/Ahd/2012 for the assessment year
2007-2008.
"A) Whether on the facts and circumstances of the case and in
law, the Appellate Tribunal has erred in deleting the addition on
account of unproved creditors for goods of Rs. 29,41,612/- made u/
s 68 of the IT Act ?
B) Whether on the facts and circumstances of the case and in
law, the Appellate Tribunal has erred in deleting the addition on
account of termination of bottling license as capital receipt of
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Rs.4,30,34,088/- & Rs. 1,50,00,000/- is not taxable u/s
28(iv)/28(νa) or alternatively u/s 45 of the IT Act?a) or alternatively u/s 45 of the IT Act?
C). Whether on the facts and circumstances of the case and in
law, the Appellate Tribunal has erred in restricting the
disallowance of Rs.25,31,640/-made 20% of total purchases of raw
material to 10%"
2. The brief facts of the case are as follows :-
2.1 The Assessee-Respondent Company is engaged in the business of
Manufacturing of beverages & foods products. The assessee filed the
return of income on 14.11.2007 for the assessment year 2007-2008
declaring total loss of Rs.1,26,23,824/- .
2.2 The case of Assessee-Respondent company was selected for
scrutinizing under Section 143(2) of the Act vide notice dated 15 th
September, 2008. The Assessing Officer in absence of necessary
evidences framed assessment under Section 144 read with Section 143(3)
of the Act vide order dated 24th December, 2009 wherein the Assessing
Officer assessed the income of the assessee at Rs.9,48,78,035/- .
2.3. The following additions/disallowances were made by the Assessing
Officer :-
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Loss as per statement of income 1,26,23,824/-
Add: Additions/Disallowance
1. Unsecured Loans 56,77,422/-
2. Liabilities 8,55,59,306/-
3. Prior period expenses 32,600/-
4. Disallowance u/s. 43B 42,47,320/-
5. Legal & professional charges 1,39,434/-
6. Income Tax 2,03,098/-
7. Expenses 4,69,838/-
8. Interest Expenses 16,19,578/-
9. Purchases 25,31,640/-
10. P.F. 27,398/-
11. Depreciation 69,94,225/-
Assessed Income 9 ,48,78,035/-
3. Being aggrieved by the assessment order, the assessee
preferred Appeal No. CIT (A) XIV//DCIT.Cir 8/280/09-10 before CIT
(Appeals) and submitted that its business was closed and the employee
who was looking after the accounting and other related works also left.
Therefore, the details were not timely arranged at the time of assessment.
The assessee prayed the learned CIT(Appeals) to accept the additional
evidences as per Rule 46A of the Income Tax Rules 1962 (for short
"the Rules") .
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4. CIT (Appeals) vide order dated 30.3.2012 allowed the appeal of
assessee in issue No. 1 to 3 and allowed the following grounds of
unsecured loan of Rs.56,77,422/- related to the following liabilities :-
Sr.No. Issue Amount (Rs.)
I Creditors for capital goods 32,29,218/-
II Creditors for goods 29,41,612/-
III Creditors for expenses 1,01,365/-
IV Statutory liabilities 57,48,517/-
V Other liabilities 33,98,647/-
VI Deposit from debtors received from 9,000/-
Coca cola for sterilization of source of 5,00,00,000/-
income (closure of business) 2,01,30,947/-
Total 8,55,59,306/-
5. For the remaining issues, CIT (Appeals) passed the following
order:-
"7.1 For Sr. No. IV, on the issue of statutory liabilities of Rs.
57,48,517/- which includes Rs.23,42,134/-, output tax of Rs.7732/-, PF
payable account of Rs.4215/-, Professional tax of Rs.2979/-, Sales tax
Payable of Rs.33,85,398/- & TDS on contract of Rs.18,523/- Out of
which CIT(A) confirmed the PF payable account of Rs.4215/- and
Professional tax payable of Rs.2979/-, deleted Rs. 23,42,134/- output
tax @ 12.5%, Rs.7732/-output tax @ 4% & sales tax payable account of
Rs. 33,88,398/-. Regarding the amount of Rs.18,523/ being TDS payable,
the TDS payable, the AO has proposed in the remand remand report that
the TDS has not been deposited in the Government account, the related
expenditure of Rs. 8,30,410/- should be disallowed u/s.40(a)(ia) of the
I.TAct which was disallowed and added to the total income of the
assessee by the Ld. CIT(A) in view of the judgment of Hon'ble Gujarat
High Court in case of Saheli Synthetic. Therefore, the income is enhanced
accordingly to this extent.
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7.2 For Sr. No.V of other liabilities of Rs.33,98,647/- which includes
interest payables of Rs.32,05,445/- salary payable of Rs. 63,091/- and
expenses payable of Rs.1,30,111/-, out of which an amount of
Rs.32,05,445/- & an amount of Rs.1,30,111/- being expenses payable had
deleted by the Ld. CIT(A).
7.3 On Sr. No.VI issue related to addition of Rs.7,01,39,947/- which
includes Deposit from debtors of Rs.9,000/-, Sundry debtors
Rs.2,01,30,947/- & the sum of Rs.5,00,00,000/- received from Hindustan
Coca Cola. Out of which an amount of Rs.9,000/- upheld and
Rs.2,01,30,947/- deleted. However, on the issue of sum of Rs.
5,00,00,000/- received from Hindustan Coca Cola, CIT(A) has stated that
receipts of Rs.4,30,84,088/- are in the nature of capital receipt and the
receipt of Rs.1,50,00,000/- are also in the nature of capital in nature and
enhanced the income of the assessee."
6. The Appellate-Revenue being aggrieved by the order passed by the
CIT(Appeals) preferred an appeal before the Tribunal. Tribunal after
considering the submissions and the documentary evidence placed on
record as well as order passed by the CIT (Appeals) so far as the question
No.1 is concerned held as under:-
"25. We have heard the rival contentions of both the parties and perused
the materials available on record. From the preceding discussion, we note
that the assessee has received compensation from the parties as detailed
below :-
Sr.No Name of the Company Amount of
compensation.
1. Hindustan Coca-Cola Beverage Pvt. Rs.5 Crore
Ltd.
2. Coca-Cola India Pvt. Ltd. Rs.1.5 Crore
25.1 The assessee out of the compensation received of ₹ 5 crores has 5 crores has
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offered a sum of Rs.69,15,912.00 to tax in the income tax return and the
balance amount of Rs.4.30,84,088.00 was treated as capital receipt not
chargeable to tax. Likewise, the amount of compensation of ₹ 5 crores has 1.50 crores
received from Coca- Cola India Pvt Ltd was treated as capital receipt not
chargeable to tax.
25.2 However, the revenue was of the view that the impugned
compensation was to be taxed either under clause (va) to section 28 of the
Act or under section 45 of the Act. Thus, the amount of compensation of
Rs.4,30,84,088/- and 1.50 crores was added to the total income of the
assessee.
25.3 Before we deal with the issue raised before us, we are inclined to
refer the judgement of Hon'ble Supreme Court in the case of Oberoi
Hotels Pvt Ltd vs. CIT, reported in [1999] 236 ITR 903 (SC) wherein it
was observed that amount received in pursuance to an agreement
resulting in loss of source of income of the assessee then such receipt
shall be capital receipt. The relevant extract of the judgement is
reproduced as under:
"After analysing number of cases, the Supreme Court in the case of
Kettlewell Bullen & Co. Ltd. v. CIT [1964] 53 ITR 261 had
observed that the following satisfactory measure of consistency in
the principle was 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 : Whereby 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 capital receipts.
Considering the aforesaid principles laid down as per article XVIll
of the principal agreement, the amount received by the assessee
was for the consideration for giving up his right to purchase and/or
to operate the property or for getting it on lease before it was
transferred or let out to other persons. It was not for settlement of
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rights under trading contract, but the injury was inflicted on the
capital asset of the assessee and giving up the contractual right on
the basis of principal agreement had resulted in loss of source of
the assessee's income. Therefore, the amount received was a capital
receipt.
25.4 Now coming to the issue on hand. As regards the compensation
received by the assessee for ₹ 5 crores has 1.50 crores, we have referred the main
settlement agreement dated 23rd December 2006, placed on pages 15 to
22 of the paper book and find the relevant clause is reproduced as under:
"On closing Date, CCIL shall pay on of before 28th December
2006 a sum of Rs. 1,50,00,000 to Surbhi as compensation for
termination of the Schweppes Agreement. This sum is in addition
to the Settlement Amount.
Upon payment of the above mentioned compensator, the
Schweppes Agreement shall stand terminated and any and all
accrued rights of Surbhi, whether in law or in equity, to seek
remedy, either contractual or otherwise, in any manner whatsoever,
against Cadbury Schweppes Beverages India Private Limited, or
against Atlantic Industries Inc., for any demands, differences,
losses, liabilities, damages and claims arising under the Schweppes
Agreement shall stand abandoned and waived. Further, Surbhi shall
not raise any claims, demands, differences, disputes or liabilities
against Cadbury Schweppes Beverages India Private Limited or
against Atlantic Industries Inc under any other communication,
letter or understanding."
25.5 On perusal of the above clause, it is evident that such compensation
of ₹ 5 crores has1.50 was awarded to the assessce for termination of the contract.
Thus, it becomes evident that the source of income to the assessee as a
result of termination of the agreement has come to an end. Accordingly,
we find that the principles laid down by the Hon'ble Supreme Court in the
case cited above are directly applicable as far as the compensation of
₹ 5 crores has1.50 crores received from the company namely Coca-Cola India Pvt
Limited is concern. Therefore, such compensation is to be treated as
capital receipt not chargeable to tax. Even at the time of hearing, the
learned DR did not point out any distinguishing features with respect to
the compensation of 1.50 crores received from the company namely
Coca-Cola India Pvt Ltd suggesting that the principles laid down by the
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Hon'ble Supreme Court in the case cited above are not applicable.
25.6 Moving further, it is relevant at this juncture to refer the clause
number B to D and F of the main settlement agreement dated 23rd
December 2006 as reproduced below:
"B. WHEREAS, Surbhi executed a Bottler's Agreement with The
Coca-Cola Company, a corporation organized and existing under
the laws of the State of Delaware, United States of America dated
24 February, 2001 (hereinafter referred to as the "Bottler's
Agreement"), pursuant to wrrich7Anfer a/is, Surbhi was authorized
to prepare and package the Beverages (as defined therein) in
Authorized Containers (as defined therein) at the said Facility for
exclusive sale to the Company. The initial term of the Bottler's
agreement expired by efflux of time on 24 March, 2004. However,
the expiry notwithstanding the parties thereto continued to act upon
the same terms and conditions.
C. WHEREAS in connection with the Bottler's Agreement, sales of
the beverages were made by Surbhi to the Company on the basis of
purchase orders issued from time to time by the Company.
D. "WHEREAS certain claims, counter-claims and disputes
arose between Surbhi and the Company in relation to the purchase
orders issued pursuant to the Bottler's Agreement. These disputes
resolution. are presently pending resolution.
Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
F. WHEREAS Surbhi has availed of a loan facility from ICICI
Bank Limited (hereinafter the Tank") for Rs. 1,98,00,000
comprising of a term loan and a cash credit facility "(collectively
referred to as the "Loan). The Company acted as a sponsored
corporate of Surbhi and in relation thereof opened an escrow
account with the Bank (A/C No.010205000174) in which
conversion fees were to be deposited. In relation to this
arrangement, certain disputes arose between the Company and
Surbhi, on the one hand, and the Bank, on the other hand. These
disputes have been settled under the Bank Settlement Agreement of
even date entered into by and amongst the Bank, the Company/ and
Surbhi, attached hereto as Annex 1."
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25.7 Based on the above clause, what is transpired is this that there were
certain trade disputes arose between the assessee and the company
namely Hindustan Coca-Cola Beverage Pvt Ltd and in order to settle
those disputes the amount of compensation was received for Rs.
4,30,88,084/- only. Thus, it was alleged by the Revenue that the
impugned amount does not represent the compensation as a result of
termination of the contract and thus the principles laid down by the
Hon'ble Bupreme Court in the case of Oberoi Hotels Pvt Ltd (supra)
cited above are not applicable. Therefore, the same should be made
subject to tax either under the provisions of section 45 or 28(va) of the
Act. Thus the issue arises before us so as to find out whether the amount
of Re 4,30,84,888/-represents the compensation for the termination of the
contract.
25.8 At this juncture, it is important to note that the main settlement
agreement has to be read as a whole and in substance. For this purpose,
we are inclined to make reference to various clause of the main settlement
agreement and note certain facts as detailed:
1. All the disputes between the assessee and the company shall
come to an end by virtue of this main settlement agreement.
2. The purchase orders executed by the company in the name of
the assessee shall stand abandoned and waived.
3. All the capital assets/ OMT assets stated in annexure 2 & 3
and 4 of the main settlement agreement shall be handed over by the
assessee to the company.
4. The assessee shall transfer 4 sets of moulds to the company
against the consideration.
5. The assessee shall transfer the raw material listed in
annexure 3 to the company against the consideration.
6. The assessee waives/abandons its right to seek any legal
remedy against the company or its associates. It was agreed
between the parties to avoid expensive and time consuming legal
proceedings.
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7. In the event of any breach of any clause of the agreement, the
company shall terminate the main settlement agreement and will be
entitled to recover from the assessee all the money paid by it in
pursuance to the main settlement agreement.
25.9 A conjoint reading of the above clause reveals the fact that the
arrangement between the assesse and the company has come to an end
which certainly re-presents the loss of source of revenue/ Income to the
assessee in substance. Merely, the word termination has not been used in
the settlement agreement does not imply that the compensation was not
paid against the termination of the contract. As such in substance, the
assessee was working exclusively for the Coca-Cola group and once the
compensation received by it in pursuance to the main settlement
agreement certainly represents the compensation for the loss of revenue to
the assessee.
25.10 Admittedly, the company has deducted the TDS on the payment
made by it to the assessee under the relevant provisions of the Act. The
company has done so for the reason that it has to claim the amount of
compensation paid by it to the assessee as revenue expenditure.
Furthermore, the character of the amount representing the compensation
will not change merely on the reasoning that party deducted the TDS on
the payment made to the assossee. What is the substance in the present is
this that there was loss of source of income to the assessee on account of
the main agreement as discussed above.
25.11 At this juncture, it is important to note that the word cease to
subsist has been used in the main settlement agreement. Perhaps, these
words have been used in the main settlement agreement for the reason
that the original contract entered between the assessee and the company
was ended by efflux of time but still the same was continued. Thus, it
appears that though the agreement has come to an end but it was
subsisting as on the date of main settlement agreement on account of the
conduct of the assessee and the company. In other words, once the
agreement has already been terminated but subsisting because of the
conduct of the parties, may be for this reason the word cease to subsist
was used in the agreement. But we have to see the substance of the main
settlement agreement instead of making reference to the relevant clause.
It is beyond doubt that the source of income of the assessee as a result of
main settlement agreement has come to end which can be verified from
the financial statements filed by the assessee for the year ending 31st
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March 2009 and 2010, placed on record. Thus, in view of the above, we
are not convinced with the finding of the AO. Accordingly, we uphold the
finding of the learned CIT-A and direct the AO to delete the addition
made by him. Hence, the ground of appeal of the Revenue is hereby
dismissed."
7. From the above findings of the Tribunal, it is clear that the Tribunal
after considering the settlement agreement arrived at by the respondent-
assessee with the Coco Cola India has upheld the order passed by the
CIT(Appeals) on finding of fact that the source of income of the assessee
as a result of the main agreement had come to an end. The Tribunal also
verified the said facts from the financial statements filed by the assessee
in the year ending on 31st March, 2009 and 2010 for the subsequent
years. In view of the above concurrent findings of facts, we are of the
opinion that the Tribunal has rightly followed the decision of the Hon'ble
Apex Court in case of Oberoi Hotel (P) Ltd. Vs. Commissioner of
Income Tax reported in [1999] 103 Taxman 236 (SC) wherein in
similar facts it is held as under:-
"8. The aforesaid judgment was considered in the case
of Kettlewell Bullen & Co. Ltd. v. Commissioner of Income Tux,
Calcutta, (1964) 53 ITR 261, wherein the Court has held as under :
"Whether a particular receipt is capital or income from busi-ness,
has frequently engaged the attention of the courts. It may be
broadly stated that what is received for loss of capital is a capital
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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."
9. Alter considering various decisions it was further held as
under :
"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
com-pensation 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."
10. After analysing number of cases, the Court observed that
following satisfactory measure of consistency in the 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."
11. The aforesaid principle is relied upon in the case of Karam
Chand Thapar and Bros's case (supra). Considering the aforesaid
principles laid down as per Article XVIII of the Principal
Agreement, the amount received by the assessee is for the
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consideration for giving up his right to purchase and/ or to operate
the property or for getting it on lease before it is transferred or let
out to other persons. It is not for settlement of rights under trading
contract, but the injury is inflicted on the capital asset of the
assessee and giving up the contractual right on the basis of
principal agreement has resulted in loss of source of assessee's
income.
8. In view of the above dictum of law and in view of the concurrent
findings recorded in the facts of the case, we are of the opinion that the
question Nos.(A) and (B) would not arise and can not be said to be
substantial questions of law. So far as question No. (C) is concerned, it
being purely a factual question, the Tribunal while dismissing the appeal
filed by the Revenue held as under:-
"34. We have heard the rival contentions of both the parties and
perused the materials available on record. Admittedly, the business
of the assessee was closed down. Once the business is closed, it is
obvious that the employees of the assessee must have left. But it
does not mean that the onus of assessee has also come to the end
for furnishing the details in support of its claim. Undeniably, the
onus lies upon the assessee justify its claim based on the
documents. In the event the assessee fails to justify, the AO has to
see the claim of the assessee based on the circumstantial evidence,
history of the case, comparable cases so as to find out whether the
claim of the assessee is genuine or excessive before making any
disallowance. But we find that the AO has not done such exercise
but made the ad-hoc disallowance in the absence of supporting
documents. In our considered view, such ad-hoc disallowance is
not permitted under the provisions of law unless it is based on
scientific basis. Yet, the claim of the assessee cannot be allowed in
to-to in the absence of documentary evidence. However, we find
that the Id. CIT-A has upheld the order of the AO in part after
giving partial relief to the assessee based on reasoning as discussed
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above which has not been controverted by the Id. DR of the
Revenue. Hence, the ground of appeal of the Revenue is hereby
dismissed."
9. In view of the above finding arrived at by the Tribunal,
question No. (C) also cannot be termed as substantial question of law. As
a result, appeal fails and is accordingly dismissed.
(BHARGAV D. KARIA, J)
(NIRAL R. MEHTA,J)
BEENA SHAH
