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Blue Star Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)12ITD285(Mum.)
AppellantBlue Star Ltd.
Respondentincome-tax Officer
Excerpt:
1. to 3. [these paras are not reproduced here as they involve minor issues.] 4. in the main appeal, objection is taken to the following two additions made in the assessment: (i) disallowance of initial depreciation claimed by the assessee in respect of its power generation unit--rs. 23,170.5. the ito disallowed the assessee's claim for initial depreciation for the following two reasons: (i) that the assessee did not manufacture items covered by the ninth schedule of the income-tax act, 1961 ; and (ii) also that the machinery or plant in question was not installed for the purpose of business of generation or distribution of electricity.6. on appeal it was contended that section 32(1)(vi) of the income-tax act, 1961 ('the act'), allowed such initial depreciation on the generation unit......
Judgment:
1. to 3. [These paras are not reproduced here as they involve minor issues.] 4. In the main appeal, objection is taken to the following two additions made in the assessment: (i) disallowance of initial depreciation claimed by the assessee in respect of its power generation unit--Rs. 23,170.

5. The ITO disallowed the assessee's claim for initial depreciation for the following two reasons: (i) that the assessee did not manufacture items covered by the Ninth Schedule of the Income-tax Act, 1961 ; and (ii) also that the machinery or plant in question was not installed for the purpose of business of generation or distribution of electricity.

6. On appeal it was contended that Section 32(1)(vi) of the Income-tax Act, 1961 ('the Act'), allowed such initial depreciation on the generation unit. But, the Commissioner (Appeals) did not agree. He held that a reading of the section showed that initial depreciation was allowable, provided the purpose was the business of generation and distribution of electricity. He, therefore, confirmed the disallowance of the assessee's claim for initial depreciation as justified.

7. Before us, Shri Dinesh Vyas contended that his case was not that the assessee manufactured items specified in the Ninth Schedule as erroneously assumed by the ITO but that the assessee-company was carrying on the business of generation of electricity with the help of the power generation unit installed by the assessee in its factory at Thane, and that, therefore, the assessee was entitled to initial depreciation in respect of this power generation unit under Section 32(1)(vi). The learned counsel argued that the assessee-company generates electricity as part of its business, for its own use, with this new captive power generation plant, that this power generation unit was installed to generate and supply electricity to the assessee's factories, in addition to the electricity supplied to the assessee's factories from conventional sources such as the Maharashtra State Electricity Board, that this power generation unit supplied the additional power required by the assessee's factories and that such generation of electricity, in the captive plant by the assessee for consumption or use in its own factories amounted to carrying on the 'business of generation of electricity' contemplated by Section 32(1)(W). Shri Vyas pointed out that the object of Section 32(1)(W) was to give relief to the assessees, who helped to solve the energy problem or shortage in their factories. He further pointed out that Section 2(13) of the Act defined 'business' in very wide terms and that the trend of judicial decisions was that it should be construed in a broad sense, in a taxing statute, as held by the Supreme Court in Mazagaon Dock Ltd. v. CIT [1958] 34ITR 368. Shri Vyas relied on the case of Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 (SC), particularly, the last para of the head-note, and submitted that there was no difference between a 'feeding activity' and a 'captive plant'.

He also relied on the decision of the Calcutta High Court in CIT v.Hindustan Motors Ltd. [1977] 107 ITR 164, and the decision of the Supreme Court in Narain Swadeshi Wvg. Mills v. CEPT [1954] 26 ITR 765 at 773. Shri Vyas submitted that to qualify for allowance of initial depreciation, it was not necessary that the power generated by the assessee's power generation unit should be supplied or sold to other third parties, to constitute business, and that the electricity generated by the assessee from its own power plant was as much an intermediate product as the compressors manufactured by the assessee's factory, which go into the manufacture of the final products, namely, air-conditioning machinery or plants manufactured and sold by the assessee. The learned counsel fairly stated that there was no direct authority on the subject but that we may get useful guidance from the following decisions--CIT v. Gaekwar Foam & Rubber Co. Ltd. [1959] 35 ITR 662 at 672 (Bom.), Bank of India Ltd v. CIT [1969] 72 ITR 157 at 161 (Bom.), Chandulal Harjiwandas v. CIT [1967] 63 ITR 627 at 631 (SC), CIT v. Satellite Engg. Ltd. [1978] 113 ITR 208 (Guj.), CIT v. Gujarat State Warehousing Corpn. [1980] 124 ITR 282 at 290 and 291 (Guj.) and Smith Barry v. Cordy 28 TC 250, 259 (CA).

8. Shri Roy Alphonso, the learned departmental representative, submitted that the assessee's claim for initial depreciation was in respect of a captive power plant installed by it for generation of electricity for its own consumption or use in its factory and that this was not business of generation of electricity specified in Section 36(1)(vi). The learned departmental representative submitted that the concept of. a business as such would entail dealings with outside or third parties, that in the present case, there was no dealing with outsiders or third parties involved, as the assessee-company itself utilised the energy produced in its captive plant in its main manufacturing activity of producing air-conditioning products and that there was no question of sale of electricity produced by the assessee in the present case to call it a business of generation of electricity.. Shri Roy Alphonso argued that a careful reading of the provision of law in Section 32(1)(vi) showed that the emphasis in the said provision was on the 'business aspect' rather than on a particular activity, that the deduction of initial depreciation was allowed by Section 32(1)(vi) with reference to the various types of businesses carried on by the assessees as specified in the said provision of law, and that what is contemplated by Section 32(1)(vi) is the business of generation of electricity for sale to others, as for example Tata's Hydro Electric Co. Ltd. He contended that though the generation of electricity was for the purpose of the business of (manufacture of air-conditioning products carried on by the assessee, it was not a business by itself as contemplated in Section 32(1)(vi). Shri Roy Alphonso drew support from Textile Machinery Corpn. Ltd.'s case (supra), relied on by the assessee itself, and contended that to constitute a business undertaking, there should be an integrated unit of business by itself. He relied on the case of Madras Machine Tools Mfrs. Ltd. v. CIT [1975] 98 ITR 119 (Mad.), wherein it has been held that an undertaking could not be equated with a company or business and, therefore, one particular asset could not be equated to a business. The learned departmental representative relied on the decisions of the Bombay High Court in CIT v. N.U.C. (P.) Ltd. [1980] 126 ITR 377 and CIT v. Shah Construction Co. Ltd. [1983] 142 ITR 696, and pointed out that these cases differentiated between an activity and a business and further held that there was no scope for dividing a business into two parts, while considering the scope and ambit of the definition of an 'industrial company', in the Finance Acts. Shri Roy Alphonso submitted that the decisions relied on by the learned counsel were not directly in point, that in view of the authorities cited by him, the department rightly disallowed the assessee's claim for initial depreciation in respect of its new power generation unit and that the same deserved to be upheld.9. Section 32(1)(vi), under which the assessee claims initial depreciation, reads as follows: 32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed-- (vi) in the case of a new ship or a new aircraft acquired after the 31st day of May, 1974, by an assessee engaged in the business of operation of ships or aircraft or in the case of new machinery or plant (other than office appliances or road transport vehicles) installed after that date for the purposes of business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in items 1 to 24 (both inclusive) in the list in the Ninth Schedule or in the case of new machinery or plant (other than office appliances or road transport vehicles) installed after that date in a small-scale industrial undertaking for the purposes of business of manufacture or production of any other articles or things, a sum equal to twenty per cent of the actual cost of the ship, aircraft, machinery or plant to the assessee, in respect of the previous year in which the ship or aircraft is acquired or the machinery or plant is installed, or if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year ; but any such sum shall not be deductible in determining the written down value for the purposes of Clause (ii): 10. A careful reading of this provision of law indicates that initial depreciation is allowable in respect of new machinery or plant installed after 31-5-1974, inter alia, for the purpose of business of generation of electricity or any other form of power. The appellant, in the present case, admittedly, does not carry on any business of generation of electricity or any other form of power. Its main business, as indicated already, is in manufacture of air-conditioning products in its factory at Thane and undertaking job contracts in air-conditioning and allied field. It is not the assessee's case that it has started a new line of business in generation of electricity by applying for the necessary licences under the Electricity Act, to the Central electricity authority and the other Government authorities. On the other hand, what the assessee has donees to] install a power generation unit in its existing factory at Thane for the manufacture of air-conditioning products to supplement the shortage of power experienced by it in the carrying on of its main business. As rightly contended for the revenue, the mere installation of a power generation unit would not amount to carrying on the business of generation of electricity as specified in Section 32(1)(vi). The generation of electricity by the power generation unit installed by the assessee in its factory is incidental to its main business in the manufacture of air-conditioning products. At the highest, it can be described as a feeding activity only. Certainly, it cannot be considered as carrying on business in the generation of electricity as required by Section 32(1)(w).

11. Since both sides have relied on the decision of the Supreme Court in Textile Machinery Corpn. Ltd.'s case (supra), it would be useful to refer to the said decision. In the said case, the assessee, which is a heavy engineering concern manufacturing boilers, machinery parts, wagons, etc., set up two new units, a steel foundry division and a jute mill division. The steel foundry division started manufacturing some castings, which the assessee was previously buying from the market, but the castings were mostly used by the other existing divisions of the assessee itself. Raw materials were supplied to the jute mill division by the boiler division of the assessee and after machining and forging, the parts were given back by the jute mill division to the boiler division. The assessee claimed exemption from tax under Section 15C of the Indian Income-tax Act, 1922 ('the 1922 Act'), in respect of the profits from the steel foundry division for the assessment years 1958-59 and 1959-60 and in respect of the profits from the jute mill division for the assessment year 1959-60. The Tribunal allowed the assessee's appeals and held that the assessee was entitled to relief under Section 15C in respect of the two new divisions, which were new industrial undertakings. While upholding the decision of the Tribunal, the Supreme Court held that new activity launched by the assessee by establishing new plants and machinery by investing substantial funds may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business and that these products may be consumed by the assessee in his old business or may be sold in the open market. Their Lordships further held that one thing is certain that the new undertaking must be an integrated unit by itself, wherein articles are produced and at least a minimum of ten persons with the aid of power and a minimum of twenty persons without the aid of power have been employed and that such a new industrially recognisable unit of an assessee cannot be said to be reconstruction of his old business since there is no transfer of any assets of the old business to the new undertaking which takes place when there is reconstruction of the old business. While Mr. Vyas, the learned counsel for the appellant, relied on the above observations to point out that the activity carried on by the assessee in the generation of electricity from its power plant was a feeding activity, the learned departmental representative, Shri Roy Alphonso, relied on these observations to state that there should be a new industrially recognisable unit for which the new undertaking must be an integrated unit by itself, and that the power generation plant of the assessee was not an integrated unit by itself to be considered as a separate business carried on by the appellant.

12. The above mentioned decision of the Supreme Court in Textile Machinery Corpn. Ltd.'s case (supra) related to the interpretation of the words 'new industrial undertakings' in Section 15C of the 1922 Act corresponding to Section 80J of the 1961 Act. When we apply the ratio of the said decision of the Supreme Court to the facts of the present case, we find that the appellant could not be held to be carrying on any business in the generation of electricity ; but for the purpose of its business, it had merely purchased and installed a hew power generation unit. It may be relevant to note that this provision of law in Section 32(1)(vi) allows initial depreciation in respect of all new machinery and plant installed and used for purposes of the various types of businesses specified in it, including the business of power generation. If what the appellant contends for, is right, the Parliament would have specifically mentioned a power generation unit installed by any businessman for the purpose of his business as qualifying for initial depreciation. In fact, in Section 32(1)(vi) itself, in the opening part of the section, the Parliament has specified two assets, viz., a new ship or a new aircraft acquired and installed by an assessee engaged in the business of operation of ships or aircraft as qualifying for such initial depreciation. Even in respect of such ships or air-crafts, the emphasis is that their acquisition should mainly be for the purpose of business of operation of ships or aircrafts. The revenue is, therefore, right in its submission that the emphasis in this provision of law is on the business aspect only and not merely on a particular activity carried on by the assessee as part and parcel of the business of the assessee. We are, therefore, unable to agree with the contention of the appellant that it is carrying on the business of generation of electricity by merely installing a power generation plant in its factory at Thane to qualify for initial depreciation under Section 32(1)(vi).

13. Shri Roy Alphonso is further right in his submission that there is no scope for dividing a business into two parts so that each part of the activities carried by the assessee constituted a separate business.

This is clear from the decisions of the Bombay High Court in N.U.C.(P.) Ltd.'s case (supra) and Shah Construction Co. Ltd.'s case (supra).

Though these two decisions turned on the definition of an 'industrial company' in the Finance Act, yet they fully support the contentions of the revenue in the present case.

14. In the case of N.U.C. (P.) Ltd. (supra), their Lordships of the Bombay High Court held that the making of door and window frames and of concrete beams and slabs was, admittedly, in the process of the construction and repair of buildings and that there was no scope for dividing the business of the company into two parts, for neither the frames nor the slabs or beams were manufactured or prepared independently of the buildings or sold as such in the market.

Similarly, in the case of Shah Construction Co. Ltd. (supra), their Lordships of the Bombay High Court held that the construction activity is a very complex activity involving the application of technical know-how, material and skill of trained personnel for the purpose of construction of dams, bridges and so on and that a company which engages in such engineering activity cannot be said to be a company which is either wholly or mainly engaged in the manufacture or processing of goods. At page 701 of the reports in Shah Construction Co. Ltd.'s case (supra), their Lordships have pointed out that any activity which may be described as manufacturing of goods or processing of goods is ancillary to the construction activity of the asses-see and at the highest, it can be described as a feeding activity.

15. Respectfully following the ratio of these decisions discussed above, we hold that generation of electricity by the assessee by installing a power generation unit in its factory cannot be regarded as for the purpose of the business of generation of electricity as specified in Section 32(1)(W). Consequently, we have to hold that the departmental authorities were right in rejecting the assessee's claim for allowance of initial depreciation in respect of the new power generation unit. Accordingly, this ground is decided against the assessee.

16. The facts relating to the addition of Rs. 4 lakhs are the following: 17. The assessee-company represented Honeywell Inc., USA, since 1954 to 1972 in India. It appears the American company floated a new company in India known as Honeywell India Ltd., Bombay, to whom the assessee-company was asked to assign all its rights and responsibilities conferred on it by prior arrangement. A sum of $ 50,000 was paid by the American company as consideration for this assignment of its rights and responsibilities by the assessee-company to the Indian company. The assessee-company claimed that the amount of Rs. 4 lakhs ($ 50,000) included in its commission income in the profit and loss account, was not liable to tax under Section 28(ii)(c) of the Act.

18. The ITO examined in detail the assessee's letters dated 23-11-1977, 9-12-1977, 5-1-1978, 30-1-1978 and 26-3-1979, explaining the basis of its claim for exemption from tax of Rs. 4 lakhs received by the assessee from Honeywell, USA, and found that the said receipt of Rs. 4 lakhs comprised of three items: The ITO held that the first two items were trading receipts and that even the sum of Rs. 2,17,000 was not for goodwill. He pointed out that no document or correspondence had been produced to show, how or what for the amounts were received and that the entire amount of Rs. 4 lakhs was credited as commission in the accounts and included under that head. The ITO further pointed out that no part of goodwill in the name of Blue Star had been transferred to the newly floated company in India, that the amount of Rs. 4 lakhs was not paid by the newly floated Indian company but by the American company, which did not have to buy back any goodwill of the business of their products. The ITO held that the assessee was looking after the interest of Honeywell Inc., USA in regard to (i) distribution of their products in India, and (ii) servicing the equipments during the warranty period and thereafter ; and, therefore, concluded that they were representing Honeywell Inc., USA, as their sole distributors. The ITO further held that the amount of Rs. 4 lakhs (including Rs. 2,17,000) clearly represented income as referred to in Section 28(ii)(c) and that it was received in connection with the termination of agency, as the assessee was an agent as was normally understood in law and in business parlance. He, therefore, brought the said sum of Rs. 4 lakhs to charge.

19. On appeal, the Commissioner (Appeals) held that the ITO had given detailed reasons for taxing the amount of Rs. 4 lakhs under Section 28(ii)(c), that even at the appellate stage, no details had been filed as regards the working of the payment, and that in view of the clear wording of Section 28(ii)(c), the ITO was amply justified in taxing the receipt. This is being challenged by the assessee before us.

20. Shri Vyas, the learned counsel for the assessee, relied on the letter, dated 26-3-1979, written by the assessee to the ITO, in the course of the assessment proceedings (at page 8 of the assessee's papers), and submitted that the Commissioner (Appeals) had completely ignored this letter, which gave the working of the payment of Rs. 4 lakhs to the assessee by Honeywell Inc., USA. Shri Vyas fairly conceded before us that the two amounts of Rs. 1,03,000 and Rs. 80,000, for inventories and business in the pipeline, were business receipts and were, therefore, taxable. However, for the balance of Rs. 2,17,000, Shri Vyas vehemently contended that it was received for the transfer of goodwill, as explained in this letter, and was, therefore, not taxable at all, in view of the decision of the Supreme Court in CIT v. B.C.Srinivasa Setty [1981] 128 ITR 294. According to the learned counsel, the assessee-company had created a goodwill in 'Honeywell' in India by its marketing process, that this goodwill was distinct from trade mark or trade name as held in Jagdev Singh Mumick v. CIT [1971] 81 ITR 500 (Delhi), and that this amount of Rs. 2,17,000 was received by the assessee for assigning this goodwill built up by it in favour of the new Indian company of Honeywell. The counsel pointed out that the arrangement between the assessee-company and the US company was terminated with effect from 31-12-1972, as could be seen from the copy of the letter, dated 15-11-1972, at page 10 of the assessee's papers, which is a letter written by Honeywell Inc. to the assessee-company.

Shri Vyas argued that there was no agency agreement in favour of the assessee-company, as the assessee was buying and dealing on its own account and did not receive any commission or remuneration as an agent from Honeywell Inc., USA, and that, therefore, the receipt of Rs. 2,17,000 would not fall within the mischief of Section 28(ii)(C).

21. Shri Roy Alphonso, the learned departmental representative, met these arguments of the assessee, by pointing out at the outset that the assessee did not produce the letters at pages 10 to 19 of the assessee's papers before the departmental authorities in spite of number of opportunities allowed to them by the ITO, but. was producing the same for the first time before the Tribunal and that, therefore, they should not be admitted, as they amounted to fresh and additional evidence. His alternative submission on this aspect of the case was that if we decide to admit these letters, the ITO should be given an opportunity to examine the same and that for this purpose, the case might have to be sent back to the ITO.22. On the merits of the case, Shri Roy Alphonso contended that there was really no distinction between the two amounts totalling Rs. 1,83,000, which have now been accepted as taxable business receipts by the assessee's learned counsel and the sum of Rs. 2,17,000, which was claimed to be a receipt for an alleged goodwill. He pointed out that there were three parties involved in the transaction, namely, Honeywell Inc., USA, Honeywell India Ltd. and the assessee-company and that the following three questions arose for our consideration: (ii) Whether the assessee-company had really parted with any 'goodwill', and if so, in whose favour (iii) Whether the sum of Rs. 2,17,000 did represent the value of goodwill owned by the assessee-company and transferred by it to anyone else? 23. Shri Roy Alphonso referred to the assessee's letter dated 9-12-1977, addressed to the ITO, at page 3 of the assessee's papers and pointed out that what was built up by the assessee-company was goodwill for Honeywell Inc., USA, and its products, that it was built up for nothing but was purely a business transaction and that the sum of Rs. 2,17,000 represented the remuneration paid to the assessee by Honeywell Inc., USA, for building up a goodwill for the products of Honeywell in the Indian market. He submitted that the assessee did not part with any asset, much less a 'capital asset', either in favour of the American company or its Indian counterpart and, therefore, there was no question of capital gains arising to the assessee-company. He, therefore, contended that the reliance placed on the Supreme Court decision in B.C. Srimvasa Setty's case (supra) was misconceived.

24. The next argument of the revenue was that the facts of the case showed that the transaction was consistent with the position of a commission agent or representative, who, worked for a remuneration. In support of this, Shri Roy Alphonso relied on para 2 of the assessee's letter, dated 30-1-1978, at page 6 and last para on page 7 which showed that there was an agency held by the assessee from Honeywell Inc., USA.Referring to para 4 of this letter, which spoke of goodwill, the learned departmental representative contended that there could be no goodwill for the assessee but it could be only Honeywell's goodwill and that there could not be a transfer of an asset which already belonged to Honeywell Inc., USA, by the assessee, who was, admittedly, not the owner of this alleged goodwill. He, therefore, argued that there was no question of transfer of goodwill by the assessee-company to Honeywell Inc., USA, or to its Indian company. Adverting to the assessee's letter dated 26-3-1979, at page 8, the learned departmental representative argued that it did not advance the assessee's case any further but, on the contrary, fully supported the revenue's contention that it was a case of termination of agency agreement between the assessee-company and Honeywell Inc., USA, which squarely came within the provisions of Section 28(ii)(c), as what was earned by the assessee on Honeywell products was accepted by the assessee as its commission and not as its profits. Shri Roy Alphonso, therefore, argued that the decision of the departmental officers deserved to be upheld as correct, both on facts and in law.

25. The dispute now before us is only in respect of the balance of Rs. 2,17,000 out of the sum of Rs. 4 lakhs received by the assessee from Honeywell Inc., USA, as the assessee's learned counsel accepted before us that the two amounts of Rs. 1,03,000 and Rs. 80,000 for inventories and business in the pipeline, respectively, were taxable business receipts. The appellant's contention is that this amount of Rs. 2,17,000 was received by it for goodwill and was, therefore, not taxable in view of the decision of the Supreme Court in B.C. Srinivasa Setty's case (supra), while the revenue contends to the contrary.

26. The entire case of the appellant is based on its correspondence with the ITO, which we have referred to in the earlier paragraphs. A perusal of these five letters dated 23-11-1977, 9-12-1977, 5-1-1978, 30-1-1978 and 26-3-1979, shows that the assessee was representing the American company in India for a period of nearly 19 years from April 1954 to 31-12-1972, when this arrangement was terminated by mutual agreement between the parties. The assessee has not produced any written agreement before the department, which would establish that this amount of Rs. 2,17,000 was paid for goodwill to the assessee-company by the American company. Before us, however, the learned counsel sought to produce certain letters, dated 15-11-1972 and 16-11-1972, at pages 10 to 19 of the assessee's papers. The learned departmental representative objected to the admission of these papers, as they were fresh evidence which were not produced before the departmental authorities, but were being produced for the first time before the Tribunal. We find that this objection of the revenue is valid and has to be upheld. The appellant has not stated any valid reason for not producing these papers before the departmental authorities, but contented itself by merely writing letters to the ITO which we have already referred to. In this view of the matter, we confine ourselves to the five letters written by the assessee to the ITO in the course of the assessment proceedings and on which both sides relied in the course of the arguments.

27. A perusal of these letters written by the assessee to the ITO establishes that the appellant-company was representing the American company in India for a period of nearly 19 years and looking after the interests of the said company in India. In fact, in the letter dated 30-1-1978, the appellant claims that the goodwill was created by Blue Star over the years by their aggressive marketing techniques establishing Blue Star as top instrument engineers and also created customers' confidence in the name of Blue Star. According to the assessee, it was this goodwill, which belonged to Blue Star, that was assigned in favour of the newly floated Indian company in consideration of this sum of Rs. 2,17,000, paid by the American company. Actually, the revenue requires us to infer an agency in favour of Blue Star from paragraph No. 2 of this letter. In our view, when we read all the four letters together, the totality of the impression created in our minds is that the appellant-company was representing the American company in India, though it might not have been called by the name of an agent, but for all practical purposes it was acting as the sole distributors of Honeywell in India looking after their interests. This is also clear from page 9 of the papers of the assessee, wherein the last but one paragraph in the letter dated 26-3-1979, the appellant accepts that it had earned commission income on the sale of Honeywell's products in the years 1969 to 1972, on the basis of which figures, it has given a working of the value of the goodwill to the ITO. This shows that there was some sort of an arrangement of distributorship between the appellant-company and the American company for a period of nearly 19 years, even though the two companies were dealing on principal to principal basis in all these years and not as a principal and an agent.

28. If this is the correct position on facts, then the next question is whether there was any goodwill created in favour of the appellant in all these years. It is not the case of the appellant that it was marketing the products of Honeywell Inc., USA, under its trade name of Blue Star, though it was marketing them as their, i.e., US company's representative. It is also not the case of the appellant that it had transferred any portion of its right to use the name of Blue Star to the Indian company in consideration of this sum of Rs. 2,17,000 received from the American company. On the contrary, it seems to us that the goodwill alleged to have been built up by the appellant in favour of the American company belonged to the American company itself, right from the beginning because the products of the American company were marketed in their name only and not at the name of Blue Star. It, therefore, follows that the goodwill, if any, built up on account of the aggressive marketing techniques of the appellant would belong only to Honeywell Inc., USA, and not to the appellant-company. The sum of Rs. 2,17,000 paid to the appellant-company seems to be for these services rendered in building up this goodwill over the years in favour of the American company and not for transferring any such goodwill, since the said goodwill already belonged to the American company. We are, therefore, inclined to agree with the contentions of the revenue.

29. Since we have reached the conclusion that there was no transfer of goodwill, as claimed by the assessee, we need not consider the applicability of the decision of the Supreme Court in B.C. Srinivasa Setty's case (supra) to the facts of the present case.

30. In our view, the amount of Rs. 2,17,000 is of the same nature and character, as the other two amounts totalling Rs. 1,83,000 mentioned in the letter dated 26-3-1979. Even otherwise, this amount represents the compensation paid by the American company for the termination of the arrangements, which had evolved over the years of association between the appellant-company and Honeywell Inc., USA. It is not disputed that as a result of the termination of this arrangement, the assessee has stopped receiving commission from the marketing of the products of Honeywell Inc., USA. This payment of Rs. 2,17,000 is the compensation for the loss of such profits, which the assessee was earning in the earlier years. Therefore, this amount has been rightly brought to charge as a business receipt under Section 28(ii)(c).

31. Even if we assume for the sake of argument, that we should have looked into the papers at pages 10 to 19 of the assessee's papers, in our view, they do not advance the case of the assessee any further. In fact, a perusal of the said papers established that there was an original letter agreement between the appellant-company and the American company written on 12-3-1954 and that it was a distribution arrangement, which was terminated on 31-12-1972. Though there is a reference to the goodwill in these letters, the calculation and the basis for arriving at this amount of goodwill has not been disclosed.

Further, the mere fact that the parties have used the term 'goodwill', would not be decisive of the nature of the receipt in the hands of the appellant particularly in the light of the facts brought out by these letters. On the contrary, they do establish that this amount was received only for the termination of agency of the distributorship in favour of Blue Star with effect from 31-12-1972. Therefore, this amount would squarely fall within the scope of Section 28((ii))(C).

32. Looked at from any point of view, we find ourselves unable to accept the contentions of the learned counsel for the appellant.

Accordingly, we confirm the orders of the authorities below on this point.


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