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Jai Drinks (P.) Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Jaipur
Decided On
Judge
Reported in(1988)24ITD100(JP.)
AppellantJai Drinks (P.) Ltd.
Respondentincome-tax Officer
Excerpt:
1. all these four appeals arise out of the same order of the cit (appeals) and are disposed of by this single order.2. first we take up the assessee's appeals. the first ground taken in them is against the cit's decision allowing depreciation at 10% of the written down value of the bottles and shells. in the first instance, the ito did not allow any depreciation on the bottles and shells, on the ground that they merely represented the packing material and did not constitute plant and machinery. on appeal before the cit(a) it was argued that the tribunal in the assessee's own case had held that depreciation at 10% was allowable on bottles and shells, till the assessment year 1978-79. besides that reliance was placed upon a decision of the other benches of the tribunal for the proposition.....
Judgment:
1. All these four appeals arise out of the same order of the CIT (Appeals) and are disposed of by this single order.

2. First we take up the assessee's appeals. The first ground taken in them is against the CIT's decision allowing depreciation at 10% of the written down value of the bottles and shells. In the first instance, the ITO did not allow any depreciation on the bottles and shells, on the ground that they merely represented the packing material and did not constitute plant and machinery. On appeal before the CIT(A) it was argued that the Tribunal in the assessee's own case had held that depreciation at 10% was allowable on bottles and shells, till the assessment year 1978-79. Besides that reliance was placed upon a decision of the other Benches of the Tribunal for the proposition that 100% depreciation was allowable. The CIT(A) was doubtful as to whether the bottles and shells were at all part of plant and machinery and whether the assessee could be granted any depreciation. He, however, allowed the assessee's claim in view of the fact that the Tribunal had earlier held these bottles as plant and machinery but restricted it to 10%. Before us reference was made to a number of decisions wherein the Tribunal has allowed a similar claim of the assessee holding that the price of each bottle being less than Rs. 750, therefore, the assessee was entitled to full depreciation. Firstly reliance was placed on the decision of the C-Bench of the Tribunal in Premnath v. ITO [IT Appeal Nos. 248 and 532 to 534 (Delhi) of 1977-78 dated 12-7-1979]. Another decision relied upon was a decision of the A-Bench of the Tribunal at Hyderabad in ITO v. Shri Krishna Bottlers (P.) Ltd. [IT Appeal No. 208 dated 21-11-1981] and the third decision relied upon was of B-Bench of the Ahmedabad Bench of the Tribunal in ITO v. Pure Beverages Ltd. [IT Appeal No. 2276 (And.) of 1981 dated 19-11-1982]. The question whether the bottles are at all plant or machinery so as to enable the assessee to claim depreciation is a highly debatable issue and when the Tribunal had in the earlier years allowed the assessee's claim for the assessment years 1969-70, 1970-71 and 1971-72 and had refused to make a reference, the Hon'ble High Court in CIT v. Jai Drinks (P.) Ltd. [1980] 125 ITR 662 (Raj.) called for a statement of the case by observing that the point of law is substantial and requires a full dress debate and a survey of precedent based on analogies for coming to a correct conclusion. It needs be pointed out that at that time the assessee never made any claim for depreciation @ 100%. The CIT(A) has observed that the word 'plant' as normally understood and interpreted is a collective noun which conveys the meaning of a set of things which enable a person to carry on its business, profession or vocation. He has then referred to a large number of authorities for the proposition that 100% depreciation should not be allowed. Though it is a convention that the Tribunal should follow the decision of another Bench when once such a decision is taken by another Bench, but since the point in dispute is highly debatable and in the earlier years, the assessee has been allowed only 10% depreciation, to maintain uniformity in the case of this assessee, we would not choose to interfere and reject this ground raised by the assessee qua both the years.

3. The second ground relates to the assessee's claim for investment allowance. If the assessee were entitled to 100% depreciation, this ground would not subsist, but as we have upheld the decision of the CIT(A) holding that the assessee is entitled to only 10% depreciation and we have also held that they are part and parcel of the machinery, apparently, the assessee would be entitled to investment allowance in accordance with law. The CIT(A), however, rejected the assessee's contention on the ground that the products which the assessee was manufacturing, namely, aerated waters contain blended flavouring concentrates as are used in item No. 5 of the 11th Schedule to the Income-tax Act. The assessee's Representative has produced a letter purporting to have been issued by the Indian Beverage Co. on 30-4-1984 certifying that Beverage cases for the manufacture of Nova cola, Nova orange & Nova Lime which were being supplied to M/s Jai Drinks Pvt.

Ltd. did not contain blended flavouring concentrate in any form. Now this letter is dated 30-4-1984 i.e. after the order in question had been passed by the CIT (Appeals). This claim was never made before the ITO and, in fact, it would not be necessary if the assessee's claim for depreciation at 100% is allowed. Since we have not allowed that claim, we admit this evidence and direct the ITO to consider the claim of the assessee made in this behalf on merits.

4. Another ground taken in relation to the first year relates to the amount of Rs. 2,75,000 received by the assessee company M/s Coca Cola Export Corporation which the authorities below have taxed as Revenue Receipts. The facts relating to this amount are mentioned at some length in our order in ITA No. 472/JP/84 and may be briefly summarised as under : The assessee was manufacturing Coca Cola and other soft drinks from concentrate obtained from Coca Cola Export Corporation. Import of such drinks was banned by the Govt. and since the bottles that were used were of exclusive pattern, the Corpn. did not want that other concentrate drinks should be filled in these bottles. So they became useless and has to be discarded.

5. We have already upheld the allowance of terminal loss in respect of most of these bottles to the assessee in the immediately preceding year. In Feb. 1978, the Coca Cola Export Corpn. offered the assessee compensation @ Rs. 10 per crate up to a maximum of 27,500 cases, if these bottles were destroyed and assessee accepted the offer. However, it was argued on behalf of the assessee that the amount paid by the corporation was voluntary ex gratia and out of mercy. It was neither the assessee's income nor could it be added under Section 41(2) or 43 of the IT Act. For this purpose reliance was placed upon the case of Mehboob Productions (P.) Ltd. v. CIT [1977] 106 ITR 758 (Bom.) where entertainment tax collected by the assessee but remitted by the Govt.

in relation to the exhibition of the film Mother India, was held not to be the income of the assessee. The CIT (Appeals) rejected this claim and it has been agitated before us.

6. After carefully considering all the facts and circumstances of the case we are not inclined to accept the assessee's contention. The letter of the Coca Cola Export Corpn. though it purports to say that the Corporation did not accept any obligation to purchase the stocks of Coca Cola and Fanta bottles, shows that they proposed that after being counted in the assessee's plant, the bottles would be destroyed by the assessee under the supervision of their personnel or appointed agents.

Further it has been mentioned that for each case of 24 Coca Cola and Fanta bottles thus destroyed, the Corporation would pay to the bottler a sum of Rs. 10 less income tax or other levy which may be applicable to the transaction. In other words, it is obvious that this was in the nature of a transaction and the payment was being made in accordance with the number of crates of bottles destroyed. The representative of the assessee urged that even apart from this letter, these bottles were useless and no other drinks could be filled in them. May be that is quite possible, but the bottles if not broken could be used to some other use. Moreover, the payment was to be made for the actual number of bottles destroyed. This was a transaction for which any tax also could be leviable. Suppose the assessee destroyed some lesser bottles, it would not get the same amount as compensation. What we mean to say is that this was payable on the quantity of bottles actually destroyed and could not be said to be ex gratia in that sense. Since we have already allowed deduction on account of terminal loss in respect of these very bottles, and the money recovered by the assessee was again with respect to these bottles within the meaning of Sub-section (2) of Section 41, the said amount is liable to be added to the assessee's income under that sub-section. We accordingly reject the assessee's ground raised in this behalf.

7. The last ground raised in the first year was an alternative ground that if the bottles and shells are treated as plant and depreciation is not allowed, then the assessee shall be allowed allowance of loss on breakage of bottles and shells. The CIT(A) has already allowed depreciation on the bottles. Therefore, this ground does not arise out of the order of CIT(A) and is hereby dismissed.

8. In the next year most of the grounds are the same except for a small difference in the figures regarding the amount received from Coca Cola Export Corpn. which in this year was only Rs. 38,500 and it is not necessary to discuss them again. There are, however, two more grounds.

One is the claim for investment allowance on cost of two power capacitators valued at Rs. 2,908. The details of these machineries were submitted before the ITO and also before the IAC in proceedings under Section 144B of the I.T. Act. The IAC observed that the depreciation had already been allowed by the ITO and the claim for investment allowance should be considered by him. It appears that this claim has not been allowed by the ITO. In the CIT(A)'s order, it has been mentioned that the ITO had observed that in spite of several opportunities the details of these items were not furnished and, therefore, the claim could not be allowed only because depreciation had been allowed. Since the matter has to be considered by the ITO for calculating the investment allowance on the bottles and shells. we direct that this claim shall also be considered afresh by him. If details are lacking, he may ask the assessee to furnish the same.

9. Another ground taken is in relation to the charging of interest under Sections 139 and 215 of the I.T. Act. The original order of assessment does not contain any direction for charging such interest.

It was, however, added in the computation sheet and claimed in the demand notice. On appeal reference was made to some authorities for the proposition that since the assessment order did not contain any direction for charging interest, the charge thereof was of illegal. The CIT(A) was, however, referred to the decision of the Bombay High Court in [1982] 11 Taxman 149 (sic) following a decision of the Calcutta High Court in 117 ITR 633 (sic) for the proposition that it was not necessary that there must be a direction in the order itself for charging interest, if interest had been charged in the demand notice.

Further the language of Section 139 and 215 did not indicate that a separate order had to be passed for this purpose. The charging of interest under both these sections is mandatory. He also referred to some observations of the Karnataka High Court in CIT v. Shambulal Nathalal & Co. [1984] 145 ITR 329, for the proposition that where r statutory provision is capable of two constructions, the one which leads to avoidance to tax should be avoided. Accordingly, he rejected the assessee's claim. Before us, the argument of the assessee was two-fold. One was that since no mention of interest is made in the assessment order, it could not be claimed in the demand notice. If this contention were to be accepted, obviously the assessee's grievance would be against the demand notice and not against the assessment order and, therefore, no appeal would be competent. It is also a matter of common knowledge that the assessment orders do not mention the amount of tax payable by the assessee and on this analogy, no assessment order would be at all appealable. On behalf of the assessee, reliance was placed upon a decision of the Jaipur Bench of the Tribunal in ITO v.Khoobram Omprakash [IT Appeal No. 312 (Jp.) of 1982] reported at page 262 of the Tax World. The Bench itself has referred to a decision of the Allahabad High Court to the contrary and has only referred to the Supreme Court decision in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 that if two views are possible, the view in favour of the assessee should be adopted. But if we were to accept this proposition at its face value, all assessment orders would become bad in law. Such a view would not be reasonable. A notice of demand, in fact, is contemplated by Section 156 of the I.T. Act and it is in that notice that the amount demanded is normally specified. The other authorities that were relied upon by the assessee do not deal with this controversy. For example, in ITO v. Gaurishavkar Sitaram 18 TTJ Delhi, interest was sought to be remitted by the assessee by putting a petition under Section 154. Here the assessee did not put in any petition under Section 154 and the case has no bearing on the facts of this case. In Surendra Kumar Khenk v. ITO [1982] 5 Tax World 55, it was rather held that the assessee was not aware of interest, when order under Section 155 was passed by the ITO in the absence of a direction.

To our mind the more logical view which would lead to even handed justice would be to treat the notice of demand as part and parcel of the assessment order and to permit the hearing of an appeal against that. But if the ITO has not applied his mind as can be urged in the present case, the duty of the Appellate Authority is to apply his own mind in this behalf. While normal interest under Sections 215 & 217 has to be levied, in exceptional circumstances, it can be waived under Rule 117 of the I.T. Rules. Since the matter has to be considered by the ITO afresh in relation to the assessee's claim for investment allowance, we direct that he shall specifically consider this issue and then levy or waive interest under sees. 139 & 217 according to law.

10. In the Departmental appeal, the only ground taken is that the bottles and shells were not part of plant and machinery held by the assessee. We have already considered this issue while discussing the assessee's appeals and for the reasons mentioned therein at length, we reject the Department's ground raised in this behalf.

11. In the result the appeals of the assessee are partly allowed for statistical purposes while the Departmental Appeals are dismissed.

1. I have gone through the order passed by my learned brother. I have not been able to agree with the view expressed by my learned brother in respect of the compensation received from M/s. Coca Cola Export Corporation to the tune of Rs. 2,75,000 and Rs. 38,500 in the two years. The facts are as under.

The assessee is a manufacturer of soft drinks under licence issued by M/s. Coca Cola Export Corporation, USA. Under this licence the concentrate for Coca Cola and Fanta were supplied by the Coca Cola Export Corporation, USA to the assessee with which the assessee was producing the soft drinks and selling them in India. The admitted fact is that the assessee was manufacturing only two kinds of soft drinks mentioned above. The assessee, in view of the specific requirement by the principals viz., Coca Cola Export Corpn. had got manufactured the bottles in the earlier years and was using them, in which the drinks were filled and sold. In the year under review the Government by means of a Notification banned the import of the concentrate from USA for production of the two soft drinks. Consequent to such a ban order the company's manufacturing activity came to a standstill. The assessee-company informed the principals of the ban order and requested for compensating them as their entire business had to be closed down.

In February 1978 the principals agreed to compensate the assessee-company and paid the compensation at the rate of Rs. 10 per crate for 27,500 crates in the first year and 3,850 crates in the second year. Since the bottles were not used for bottling any other soft drinks, the principals mentioned that the bottles should not be used but be broken in the presence of one of their officers.

2. The question that has been raised is whether the amount of Rs. 2,75,000 i.e. 27,500 crates x Rs. 10 per crate and Rs. 38,500 i.e.

3,850 crates x Rs. 10 per crate is in the nature of capital or in the nature of income Under Section 41(2). According to the assessee, this is in the nature of capital, while according to the department it is in the nature of revenue as the amount was received on the basis of breakage of bottles.

3. The department does not deny the fact that the assessee had a large quantity of crates and that 27,500 crates and 3,850 crates were only a portion. According to my learned brother, since the compensation was paid by relating to the breaking of the bottles and calculating the compensation on the basis of number of bottles broken, it is directly relatable to the broken bottles and since the assessee was given terminal allowance, the receipt is clearly a revenue receipt Under Section 41(2).

4. In my opinion, the receipt has to be seen from the point of view of the businessman in the following manner :- The accepted fact is that the assessee-company was manufacturing only two kinds of soft drinks for which it was issued the licence by the Coca Cola Export Corporation. By virtue of the Govt. order banning the manufacture of the soft drinks, the company was deprived what in substance was its source of income. By introducing the ban order the very substratum of the assessee has been affected from which it was earning its living. The Coca Cola Export Corpn. was under no obligation at all to compensate the assessee due to such a ban order, but however it agreed to pay a certain compensation. In order to arrive at the compensation amount it came out with a formula of a particular number of crates and stating that the compensation would be given at Rs. 10 per crate, though the crates with the assessee was much larger in number. Merely for the reason that the compensation has been calculated on the basis of the number of crates it does not automatically mean that it is in the nature of revenue. Such an issue was considered by their Lordships of the Supreme Court in the case of Kettlewell Bullen & Co. Ltd. v. CIT [1964] 53 ITR 261. Their Lordships were considering a case where there was cancellation of a managing agency. The observations of their Lordships were : It cannot be said as general rule that what is determinative of the nature of a receipt on the cancellation of a contract of agency or office is extinction or compulsory cessation of the agency or office. Where payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business or depriving of 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 a capital receipt.

In the case of Gillanders Arbuthnot & Co. Ltd. v. CIT [1964] 53 ITR 283 their Lordships of the Supreme Court were considering a case of termination of one of the agencies. Their Lordships observed that: Compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of the agency-terminated, or for loss of goodwill, is prima facie of the nature of a capital receipt.

5. In the instant case the compensation was followed by a Govt. order refraining the assessee to carry on the manufacture which was the only business of the assessee-company. Since the very business has come to a stand-still, the amount of compensation received though calculated on the basis of number of bottles destroyed which, in my opinion, is only a method of arriving at a reasonable amount of compensation by the principals is clearly in the nature of a capital receipt and, therefore, not taxable.

It does not fall under the category of Section 41(2) under any circumstances. The asset viz., the bottles were no doubt destroyed under the supervision of the principal, but the principals were under no obligation to compensate for such destruction, as the destruction was necessary consequent to the Govt. order. Section 41(2) envisages only those situations where monies are received by an assessee consequent to a sale, discarding of the machinery, demolishing of the machinery and destruction of the machinery from a person who takes such machinery after destruction. In the instant case there is no such happening, as the principal is under no obligation at all to take back the bottles. I am, therefore, of the view that the income is a capital receipt and is not liable to tax.

6. In the result, the appeals of the assessee are partly allowed. Per Shri H.S. Ahluwalia, Judicial Member - I have carefully gone through the order proposed by my learned brother and I am afraid, I have not been able to agree with his conclusion. When the assessee has been allowed terminal loss in respect of price of coca cola bottles in question, obviously if he gets any compensation for destruction of part of these bottles, the amount would squarely fall within Section 41(2) of the IT Act. In any case, this is the receipt of the assessee as a result of its carrying on business and, therefore, liable to be taxed as its income because it is income in the commercial sense of the term.

The argument of the assessee which appears to carry weight with my learned brother is "Heads I win tails you lose". Such a contention cannot be allowed in view of the views expressed by the Hon'ble Supreme Court in Wood Polymer Ltd. v. Bengal Hotels Ltd. (sic), Mc Dowell & Co.

Ltd. v. CTO [1985] 154 ITR 148 and Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77.

Accordingly I do not propose to change my earlier order in this behalf.

As there has been a difference of opinion between us, the following question is referred to the Third Member for his opinion under Section 255(4) of the I.T. Act, 1961 : Whether on the facts and in the circumstances of the case the amounts of Rs. 2,75,000 and Rs. 38,500 received by the assessee from M/s Coca Cola Export Corporation are liable to be included in the total income of the assessee for the two years in question 1. This is a matter in which the learned Members of the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur had a difference of opinion on the following point: Whether on the facts and in the circumstances of the case, the amounts of Rs. 2,75,000 and Rs. 38,500 received by the assessee from M/s Coca Cola Export Corporation are liable to be included in the total income of the assessee for the two years in question The matter has been assigned to the President as a Third Member. I have heard the learned counsel for the assessee S/Sri N.M. Ranka and A.K.Mahamwal and the learned Departmental Representative Shri Sudhir Chandra at great length and I express my opinion on the above point after stating the relevant facts.

2. The assessee is a manufacturer of soft drinks under a licence issued by M/s Coca Cola Export Corporation, USA. Under this licence the concentrate for Coca Cola and Fanta were supplied by the Coca Cola Export Corporation, USA to the assessee with which the assessee was manufacturing the soft drinks and selling them in the assigned territories. The asseesee-company was manufacturing only these two kinds of soft drinks. According to the terms of the agreement the assessee got manufactured the bottles to fill up the drinks according to the specifications provided in the earlier years and was using them.

In the years under appeal the Government of India by a notification banned the import of concentrate from USA for the production of these two soft drinks. The consequence of this ban was the company's manufacturing activities came to a standstill. Pursuant to some representations made by several bottlers like the assessee company, the principals, Coca Cola Export Corporation, by letter dated 2-2-1978 informed the assessee-company that they would not accept any legal obligation to purchase stocks of Coca Cola and Fanta bottles in the possession of the assessee-company. The letter further pointed out : 2. However, in response to appeals from several of the Bottlers who find themselves in dire financial straits as a result of the non-availability of Coca Cola. The Corporation is prepared to make an ex gratia offer of compensation to assist the Bottlers through this difficult period treating all bottlers on an equal basis. ' 3. As your Coca Cola and Fanta bottles are not usable and now have no commercial value in India, and in order to prohibit their misuse (which will be resisted, in any event, by vigorous action through the courts), it is proposed that after being counted in your plant, the bottles will be destroyed by your staff under the supervision of our personnel or appointed agents. The Corporation will not accept responsibility for the resultant outlet which the Bottlers will be free to dispose of as they wish.

4. The compensation to be paid to each Bottler on destruction as mentioned above, would be on a basis pro-rata to sales reported throughout 1976, the last full year of operation in India. In respect of your plant in Jaipur, the maximum quantity of " Coca-Cola"/ "Fanta" bottles to which this offer of compensation will apply is 27,500 cases.

5. For each case of 24 "Coca-Cola"/"Fanta" bottles thus destroyed in the presence of our appointee, and up to the maximum quantity calculated under this pro-ration plan (as mentioned in para 4 above) the Corporation will pay to the Bottler the sum of ten rupees less any tax or other levy which may be applicable to the transaction in law.

6. As it is in our mutual interest to complete this exercise with the minimum of delay, this offer is open for acceptance until 15-2-1978, and if no response is received by the Corporation by 5.00 P.M. on that date it will be assumed that the offer is not acceptable to you. In token of your acceptance please sign the duplicate copy of this letter enclosed herewith and return the same by registered post or hand delivery so as to reach this office before 5.00 P.M. on 15-2-1978.

On the assessee agreeing to these terms the principals paid a sum of Rs. 2,75,000, which was received by the assessee in the assessment year 1979-80 and Rs. 38,500 in the next assessment year 1980-81. The assessee company claimed that these two sums were not taxable as income of the assessee on the ground that they represented ex gratia compensation paid by Coca-Cola Export Corporation to meet the capital loss incurred by the assessee company. It was in the nature of bounty unrelated to the business considerations other than as a compassionate payment. There was no provision in the Income-tax Act to tax these sums. The Income-tax Officer, who made the assessments was, however, of the opinion that the amounts received by the assessee though as compensation were far less on account of breakage of Coca-Cola bottles.

He also referred to the fact that for the assessment year 1977-78, a sum of Rs. 7,75,902 was allowed to the assessee on account of breakage and had it known that such a decision was taken by the principals, the amount that could have been allowed towards breakage would have been reduced by that amount. Since the entire amount of Rs. 7,75,902 was allowed towards breakage in the assessment year 1977-78, the sum now received as a compensation on account of breakage should be taxed as terminal allowance. On that view, he rejected the assessee's claim for exemption and brought these sums to tax in these two assessment years 1979-80 and 1980-81. This was also the direction given by the Inspecting Asstt. Commissioner Under Section 144-B of the Income-tax Act to whom a reference was made according to law. In the appeal filed against this order before the Commissioner (A), he agreed with the view taken by the department and confirmed the inclusion of these sums as Revenue receipts. He referred to a finding given by him in the earlier assessment year 1978-79 that there was intimate connection between the payment of Rs. 2,75,000 made by the Coca-Cola Export Corporation and the bottles destroyed in respect of which the assessee got allowance of breakage in an earlier assessment year. Aggrieved the assessee came in further appeal before the Tribunal.

3. After hearing the parties the Members of the Jaipur Bench differed on the opinion. The learned Judicial Member held agreeing with the view of the Revenue that the whole amount was taxable as income. He held that the provisions of Section 41(2) of the Income-tax Act were clearly attracted to this case and since terminal allowance was allowed by the Tribunal in respect of these very bottles, the money recovered by the assessee with respect to those bottles was a revenue receipt within the meaning of Sub-section (2) of Section 41. But the learned Accountant Member was of a different opinion. He held that the amount received by the assessee was by way of a compensation on the closure of business and any amount received by way of compensation on the closure of business was not to be treated as a revenue receipt but only as a capital receipt following the judgment of the Supreme Court in the cases of Kettlewell Bullen & Co. Ltd. (supra) and Gillanders Arbuthnot & Co. Ltd. (supra). Following these two Supreme Court decisions, the learned Accountant Member held that the compensation received by the assessee for closure of business was not income liable to tax. He further held that the method of arriving at the amount of compensation with reference to the bottles destroyed was only a measure to arrive at the compensation and by that it could not be held that there was intimate connection between the compensation received and the bottles destroyed to hold that Section 41(2) would become applicable. He also held that Section 41(2) would apply only to those moneys which are received by an assessee consequent to a sale, discarding of the machinery, demolishing of the machinery and destruction of the machinery from a person who takes such machinery after destruction and as no such thing had happened in this case the provisions of Section 41(2) were wrongly invoked.

4. I have carefully considered the matter and it is my considered view that the sums in question are liable to be taxed as the income of the assessee within the meaning of Section 41(2) of the Income-tax Act. I have already quoted the letter written by the Coca-Cola Export Corporation dated 2-2-1978 whereby they agreed to compensate the assessee for the destruction of the bottles. It is no doubt true that Coca-Cola Export Corporation did not accept any legal obligation to purchase the stocks of Coca-Cola and Fanta bottles in the possession of the assessee. It is also true that it was only in response to appeals from several bottlers in dire financial straits that the Corporation took a decision to compensate the bottlers by making an ex gratia offer of compensation. It is also true that the Coca-Cola and Fanta bottles were not to be used and have no commercial value in India and there was a responsibility upon the Coca-Cola Export Corporation to ensure that these bottles were not misused. This obligation on the part of the Coca-Cola Export Corporation to prohibit the misuse of the bottles could be one of the reasons that influenced it to make the ex gratia offer of compensation. If the bottlers in India had any use for these bottles, there would have been some misuse to prevent which the Coca-Cola Export Corporation would have had to initiate rigours action through the court of law in India as they have apprehended in that letter. Therefore there is also a certain amount of compulsion on the part of Coca-Cola Export Corporation to come out in their own self-interest with an offer of compensation. Viewed from this angle, which was also one of the influencing factors for the offer of compensation, it is perhaps difficult to agree with the contention advanced on behalf of the assessee that the offer made by the Coca-Cola Export Corporation was purely compassionate, bounty unrelated to the bottles or its destruction, gift or a donation and in any case not prompted by any legal obligation. The anxiety exhibited by Coca-Cola Export Corporation in their letter to prohibit the misuse of these bottles is the consideration which prompted them to agree to the request. It is this that made me feel that the offer made by Coca-Cola Export Corporation was not so bountiful made out of altruistic considerations. Secondly they have to protect their fair name of the business. If the bottles were not destroyed the alternative open to the Coca-Cola Export Corporation was only to go to a Court of law, which means expenditure of money, loss of time and diversion of attention which could be otherwise used for the promotation of the other activities of the business not only this, this action was coupled with hazards of litigation. This is also a factor which has to be borne in mind while considering the claim put up on behalf of the assessee that the amount received by it was purely out of compassion and not out of business considerations. While the assessee company was trying to get compensation for the loss of bottles, Coca-Cola Export Corporation was ensuring destruction of bottles for which it came out with an offer, by not going to a Court of Law, by a simple expression of agreeing to pay some money based upon the bottles destroyed. While the assessee would not get under this formula full cost of the bottles destroyed, the Coca-Cola Export Corporation would be parting only with a small amount of money for protecting its fair name of the business. Thus in this bargain both the parties stood to gain in their own way according to their own calculations, in which each party saw some benefit. The co-relation of this sum with the bottles destroyed is a clear indication that the amount paid was for destruction of bottles although in a smaller degree. The amount paid was not dehors the bottles. I therefore find it difficult to agree with the plea that the quantity of bottles destroyed has no relation to the computation and payment of compensation. There is thus a close nexus between the bottles destroyed and the compensation paid. It is also very significant to note that in para 5 of the letter referred to above dated 2-2-1978 the compensation payable was fixed at Rs. 10 less any tax or levy which may be applicable to the transaction in law. This shows that it was in the contemplation of the Coca-Cola Export Corporation that this transaction would attract the payment of some tax and that has to be borne only by the bottlers. Further it is very significant to note that these very bottles were considered for the purpose of grant of terminal allowance in the earlier assessment year referred to above and it is these very bottles in respect of which the assessee got a benefit. I therefore find it very difficult to keep this amount of compensation beyond the scope of Section 41(2). Section 41(2) provides : 41. (2) Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due : This section to my mind clearly provides that if any money is payable in respect of a building, machinery, plant or furniture on.

the sale, discarding, demolishing or destruction of the building, machinery plant or furniture, the moneys payable which is in excess of the written down value shall be the income of the business or profession of the previous year in which the moneys payable became due. Bottles were claimed by the assessee as plant in respect of which it got the full allowance. This section does not speak of the circumstances under which the plant or furniture or machinery or building is sold, discarded, demolished or destroyed. If in respect of the plant, which was used for the purpose of the business and owned by the assessee is sold, discarded, demolished or destroyed and in that process any money became payable, that money which is in excess of the written down value would be deemed as income. The fact that the money was payable on the closure of business was also taken note of by this section by adding an Explanation which says that for the purpose of this section the provisions would apply as if the business or profession is in existence in that previous year. Thus the fact of the closure of the business in the previous year or the fact that the amount became payable on the closure of business to my mind become insignificant because by this Explanation the business or profession is supposed to be in existence in the previous year notwithstanding the fact that the building, machinery or plant or furniture was no longer in existence prior to the previous year.

Here in this case the bottles which were treated as plant in respect of which full allowance was given were definitely destroyed and the moneys became payable to the assessee only on the destruction of the bottles. A bottler, who has no bottles would not get any compensation according to the letter of Coca-Cola Export Corporation. For this reason I find it difficult to agree with the contention advanced on behalf of the assessee that to this amount provisions of Section 41(2) would have no application. It is no doubt true that the learned representative of the assessee relied on a plethora of cases like CIT v. Bombay Burmah Trading Corporation [1986] 161 ITR 386 (SC), CIT v. Motors & General Stores (P.) Ltd. [1967] 66 ITR 692 (SC), Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC), Eklingji Trust v. CIT [1986] 158 ITR 810 (Raj.), CIT v. Stewarts & Lloyds of India Ltd. [1987] 165 ITR 416 (Cal.) and Arvind Singh v. CIT [1986] 160 ITR 908 (Raj.). The principles laid down by the High Courts in these decisions will have any application only if a conclusion is reached on the facts that the amount paid to the assessee was not in connection with the situation where the provisions of Section 41(2) would have no application.

5. The learned counsel for the assessee placed somewhat great reliance upon the decision of the Rajasthan High Court in the case of Eklingji Trust (supra). The Rajasthan High Court in the case of Eklingji Trust (supra) laid down the principles that in determining whether a particular amount received by the assessee is capital or revenue, the fact that certain payment is measured by the estimated annual yield or profits does not make the payment an income receipt. The fact that the receipt is a periodic receipt or a single receipt is immaterial for the purpose of determining its nature, an income receipt is not necessarily recurring, nor a capital receipt necessarily single ; the name given to the transaction by the parties concerned does not necessarily decide the nature of the transaction. In such a situation, the question always is what is the real character of the receipt, not what the parties call it. I am unable to see how the principles laid down by the Rajasthan High Court in this case are in any manner applicable to the facts present before me. The only point that could be said to be relevant in this case is the principle that certain payment made if measured by the estimated annual yield or profits does not make the payment an income receipt. That is not so here. Here the case is where for a particular number of bottles destroyed in respect of which full allowance was made while computing the income of the earlier year, a benefit was received which the Legislature regarded it as income receipt in the previous year in which the money was received. Either the provisions of Section 41(2) would apply to the facts of this case or not. If the provisions of Section 41(2) are applicable, then the amount received by whatever name call, howsoever computed, but if it was related to the plant destroyed which are bottles in this case, that amount would become an income receipt. I am therefore not able to see the relevance of this case.

6. Strong emphasis was also laid on another decision of the Rajasthan High Court in the case of Arvind Singh (supra). This is a case where the Rajasthan High Court was required to find out whether there was any diversion of income by overriding title. In this case the assessee received a Privy Purse out of which some amount was paid by way of maintenance to a member of the family. The question arose whether the amount paid could be deducted on the ground of diversion by overriding title. The High Court having found that the payment of allowance of maintenance wholly rested on the discretion of the Maharaja it was in the nature of an obligation and therefore it was only an application of a portion of the income to discharge the personal obligation and not a payment made by way of an overriding title. I am also unable to see the relevance of this decision to the facts before me.

7. Strong reliance was also placed upon a decision of the Supreme Court in the case of Bombay Burmah Trading Corpn. (supra). In this case the assessee-company took forest leases from the Government of Burma. At the relevant time the company held about 15 forest leases for a period of 15 years. Under these leases the respondent company was entitled to fell the trees, convert them into logs and remove them for sale after payment of royalty to the Government. The leases permitted the respondent company to remove the felled logs within a period of 3 years only after payment of royalty. Before the period of lease expired, Second World War started and the Government extended the leases for indefinite period to enable their renewals. After the hostilities terminated, there were some provisional arrangements. The Union of Burma came into existence and the new Government nationalised forest exploitation. A new agreement was entered into according to which the respondent was to make over to the Government its residuary rights under the leases together with the assets pertaining to the forest leases like headquarters, elephants, cattle, stores, buildings, dwelling houses, motor transport, tractors, launches etc. The Government was to hand over to the respondent company 50,000 tons of teak logs of specified qualities. Pursuant to the agreement the Government handed over in all 43,860 tons of logs to the company of which 2,946 tons were against depreciable assets and 12,067 tons against livestock. These logs were sold from time to time. The question arose in relation to the assessment years 1950-51 and 1951-52 whether the sale proceeds were revenue receipts and whether any balancing charge was attracted in relation to sale proceeds referable to depreciable assets. On the High Court answering the questions in favour of the respondent company, the matter came to the Supreme Court. The Supreme Court held that on the facts that the forest leases affected the very structure of the operations of the respondent company and, therefore, constituted capital assets of the company and the payments made for cancellation of sterilisation of the rights under the leases would be capital receipts. The Supreme Court also found that the respondent company not having paid any money by way of price in respect of the assets delivered to it by the Government, there was only a barter and therefore the transaction did not attract the second proviso to Section 10(2)(vii) of the Income-tax Act, 1922 and no balancing charge was payable in relation to sale proceeds referable to depreciable assets made over by the respondent to the Government. This decision of the Supreme Court on the proposition of law whether a barter would amount to a sale. The Supreme Court held following its earlier judgment in Motors & General Stores (P.) Ltd.'s case (supra) that the barter is equal to exchange and therefore there was no sale of the assets. Since there should be a sale to attract the provisions of Section 10(2)(vii) and since barter was not held to be a sale, the Supreme Court laid down the law that in such a case the provisions of Section 10(2)(vii) would not be applicable. Other than this there was no relevance of the citation of this case before me. Even here the facts are so different that they would not apply to the facts before me. Here the question was not of sale. Here the question is one of destruction of plant. That there was a destruction of plant was not in dispute ; that the moneys were received as a consequence of destruction and related to the bottles destroyed was also not in dispute. In my humble opinion the decision of the Supreme Court in the case of Bombay Burmah Trading Corpn. (supra) which followed the decision in Motors & General Stores (P.) Ltd.'s case (supra) in so far as the applicability of Section 10(2)(vii) was concerned, has no application. Nor did it appear to me that this is a case where the entire business came to a complete closure, closure of this activity may not mean closure of business.

8. For these reasons and for the reasons given by the learned Judicial Member, I am inclined to agree with the view expressed by the learned Judicial Member and hold that the sums in question are taxable receipts within the meaning of Section 41(2) of the Income-tax Act, 1961.

9. The matter will now go before the regular Bench for disposal of the appeals in accordance with the opinion of the majority.


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