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Commissioner of Income-tax (Central) Vs. Rohtas Industries Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 26 of 1970
Judge
Reported in[1978]112ITR798(Cal)
ActsIncome Tax Act, 1961 - Sections 147 and 256(1);Sale of Goods Act, 1930
AppellantCommissioner of Income-tax (Central)
RespondentRohtas Industries Ltd.
Appellant AdvocateAjit Sengupta and ;Prabir Majumdar, Advs.
Respondent AdvocateD. Pal, ;Pranab Pal and ;M. Seal, Advs.
Cases ReferredShanti Prasad Jain v. Director of Enforcement
Excerpt:
- .....was below the guaranteed figure. 2. thereupon, correspondence ensued between the assessee and the german firm. by its letter dated the 17th december, 1953, the assessee complained that the machine in its best condition was not producing more than 12 tons in 24 hours though the guaranteed production was 20 tons in 24 hours. this letter was followed by a telegram from the assessee reiterating the complaint. the assessee also asked for free and immediate supply of parts of the machine. the german firm by their letter dated the 10th january, 1955, undertook to supply free certain parts of a specified value. in spite of the replacement of the parts, the output of the machine did not increase. by their letter dated the 17th september, 1956, the german firm admitted that there was complaint of.....
Judgment:

Sen, J.

1. The facts found and/or admitted in this reference are of short compass. Some time in 1951, Messrs. Rohtas Industries Ltd. of Dalmia-nagar, the assessee, purchased from M/s. Escher Wyss of West Germany, a paper making machine. On installation it was discovered that the machine was defective and that its output was below the guaranteed figure.

2. Thereupon, correspondence ensued between the assessee and the German firm. By its letter dated the 17th December, 1953, the assessee complained that the machine in its best condition was not producing more than 12 tons in 24 hours though the guaranteed production was 20 tons in 24 hours. This letter was followed by a telegram from the assessee reiterating the complaint. The assessee also asked for free and immediate supply of parts of the machine. The German firm by their letter dated the 10th January, 1955, undertook to supply free certain parts of a specified value. In spite of the replacement of the parts, the output of the machine did not increase. By their letter dated the 17th September, 1956, the German firm admitted that there was complaint of low output. Finally, by its letter dated the 7th July, 1958, the German firm recorded that by way of settlement of the assessee's claim it had agreed to pay an amount of DM 205,000 to a German bank to be held by them for being utilised in future for purchase of other machinery by the assessee.

3. In terms of the aforesaid, the said amount of DM 205,000 was transferred to the Deutsche Bank on account of the assessee on the 11th July, 1958.

4. This amount was utilised by the assessee in the accounting year ended March, 1968, and shown in the profit and loss account under the head 'Machinery Purchase Claims Received'.

5. The Income-tax Officer initiated reassessment proceedings by issuing notice under Section 147 of the Income-tax Act, 1961, on the ground thatdepreciation had been allowed in excess. The Income-tax Officer held that the assessee had earned rebate from the West German firm which related to the supply of the machine and this must be deducted from the purchase price of the machine. In the assessment years 1955-56, 1956-57 and 1957-58, the Income-tax Officer reduced the depreciation allowed adding back the amount to the profits.

6. Being aggrieved by the order of the Income-tax Officer the assessee preferred appeals to the Appellate Assistant Commissioner. It was contended in the appeals that the assessee had paid full price of the machine and the rebate which was allowed was contingent on the future purchase of other machinery and should not be adjusted against the original price on which the depreciation had already been allowed. The Appellate Assistant Commissioner did not accept the contentions of the assessee and confirmed the order of the Income-tax Officer. He held that the effective price of the machine had been reduced by the amount received back from the German firm and the rebate earned was solely related to the purchase price of the machine. This rebate was allowed because the machine supplied was not up to the standard.

7. The assessee preferred further appeals to the Income-tax Appellate Tribunal. Before the Tribunal the assessee produced the correspondence it had with the West German firm and relied on the judgment of the Supreme Court in S.P. Jain v. Directorate of Enforcement, New Delhi; Union of India v. S.P. Jain [1963] 33 Comp Cas 231, where the very same transaction was, inter alia, considered by the Supreme Court. The Tribunal held that the amount received by the assessee from the West German firm represented payment by way of compensation for low output and was in the nature of a revenue receipt and had already been offered for taxation by the assessee in the assessment year 1968-69. This revenue receipt was referable to loss of production or loss of profit. Accordingly, the Tribunal allowed the appeals.

8. The Commissioner of Income-tax thereafter initiated this reference and the Tribunal has drawn up a statement of case and referred the following question under Section 256(1) of the Income-tax Act, 1961 :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 2,44,922 was a payment for low output, and as such a revenue receipt, and not a rebate on the actual price of the machinery originally supplied by M/s. Escher Wyss affecting the written down value of the machinery for income-tax purposes ?'

9. Mr. Ajit Sengupta, learned counsel for the revenue, has contended at the hearing that it has been found by the Income-tax Officer and the Appellate Assistant Commissioner that the amount received by the assesseefrom the West German firm was in the nature of a rebate. This rebate, he submitted, must be a rebate in price and in the nature of a capital receipt and could not be anything else but a refund of the price which was originally paid by the assessee.

10. Mr. Pranab Pal, learned counsel for the assessee, has contended on the other hand that the Tribunal has found :

(a) that this amount was received as compensation for low output of the machinery leading to loss of production and loss of profits, and

(b) this amount was a revenue receipt. These two findings of the Tribunal have not been challenged and, therefore, the question must be answered in favour of the assessee.

11. In support of his contentions Mr. Patel cited Commissioner of Income-tax v. Shamsher Printing Press : [1960]39ITR90(SC) . In this case the facts were that a premises containing a printing press was requisitioned by the Government and the business had to be shifted. The Government paid various sums by way of compensation, one of the amounts paid being on account of the compulsory vacation of the premises, disturbance and loss of business. The Supreme Court held that this amount was received as compensation for loss of profits and was a revenue receipt liable to tax.

12. Mr. Pal also cited Vadilal Soda Ice Factory v. Commissioner of Income-tax : [1971]80ITR711(Guj) . In this case the Gujarat High Court following the decision of the Supreme Court in the case of Shamsher Printing Press : [1960]39ITR90(SC) held that sums received as compensation for loss of contracts and loss of profits must be held to be revenue receipts.

13. The admitted position appears to us to be that the assessee had paid the full price of the machine to the German firm. From the correspondence it is seen that the complaint of the assessee was not that the German firm had overcharged the price but that the machine was not producing enough. The dispute was in respect of the low output and this dispute was finally settled by payment of an agreed amount long after the purchase. The Supreme Court in its judgment in the case of Shanti Prasad Jain v. Director of Enforcement : [1963]2SCR297 held that the amount paid in, this case was by way of compensation.' This observation appears at page 1771 of the report. The finding of the Tribunal that the payment was made on account of loss of production and loss of profits have also not been challenged. Under the provisions of the Sale of Goods Act, 1930, a buyer if supplied with defective goods can, if he has not paid the price thereof, treat the defects as breach of warranty and claim diminution of the price. If price has been paid, he can sue for damages on account of such breach. In the instant case it cannot be said that at any stage the assessee preferred any claim for diminution of price. The judgment of the Supreme Court also confirms the stand of the assessee.

14. For the reasons given above we answer the question in the affirmative and in favour of the assessee. In the facts and circumstances of the case, there will be no order as to costs.

Banerji, J.

15. I agree.


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