YOMMSSR.OF INCOME TAX. V. FOODS FATS ANDFERTILIZERS LTD.

ITTA/26/2003

AI Insights

The case revolves around the classification of a financial settlement received by the respondent, Cadbury India Limited, from Hindustan Cocoa Products Limited, under an agreement for processing, packing, and manufacturing malted food products. The agreement was prematurely terminated, leading the respondent to claim damages. A settlement was reached for Rs.55,00,000, which the respondent argued should be treated as a capital receipt for tax purposes, contrary to the assessing authority's view of it as a revenue receipt. The Income Tax Appellate Tribunal ruled in favor of the respondent, a decision which the Revenue appealed against under section 260-A of the Income Tax Act, 1961.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 718824 (HC-MISC)
• Appeal Type: Others
• Pronouncement Date: 27-08-2014
• Assessment Year: misc
• Other Referred Cases: Addl. CIT vs. Dr.A.P.Karanth, Godrej & Co. vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Keywords: Arbitration clause; Capital receipt; Revenue receipt; Settlement; Tax levied
• Section: 260-A

Judgement Text

"THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.26 of 2003 ORDER: (Per LNR,J) The respondent entered into an agreement on 02.02.1989 with M/s.Hindustan Cocoa Products Limited (which later on became Cadbury India Limited), for processing, packing and manufacturing malted food products, to be in force for a period of eight years. The agreement however was pre-maturely terminated unilaterally by the said agency on 05.11.1992. As a result, the respondent laid a claim for Rs.2,07,25,024/- against the agency, under several heads. However, on account of the various factors, such as existence of arbitration clause in the agreement and the place of arbitration being at Bombay, it agreed for a settlement to receive a sum of Rs.55,00,000/- in lieu of all its claims. The said amount was reflected in the returns filed for the relevant assessment year. The assessing authority took the view that the amount received by the respondent must be treated as revenue receipt and accordingly tax was levied. The respondent insisted that the amount must be treated as capital receipt. The appeal preferred against the order of assessing authority was rejected by the Commissioner (Appeals). Thereupon, the respondent filed I.T.A.No.2109/H/96 before the Visakhapatnam Bench of the Income Tax Appellate Tribunal. The appeal was allowed, through order, dated 15.06.2001. Hence, this further appeal under section 260-A of the Income Tax Act, 1961 (for short ‘the Act’) by the Revenue. Heard Sri S.R.Ashok, learned senior counsel for the appellant and Sri M.V.Durga Prasad, learned counsel for the respondent. The only question that arises for consideration is as to whether the amount of Rs.55,00,000/- received by the respondent must be treated as ‘revenue receipt’ or ‘capital receipt’. One of the areas of uncertainty and source of quite a considerable litigation is the absence of precise definition of the two expressions referred to above. The Courts also took the view that the expressions are not susceptible of any precise definition and the matters are being dealt with mostly on the facts of the relevant cases, of course duly applying the known principles. It may be true that the respondent did not acquire any capital asset as such. However, if one goes by the law laid down by the Courts, over the past several decades, it is evident that if an assessee receives any lumpsum amount, in lieu of losing source of income of enduring nature, it deserves to be treated as ‘capital receipt’. The Tribunal has referred to quite large number of precedents that had a bearing on this question. For example, the judgments in Addl. CIT vs. Dr.A.P.Karanth[1] and Godrej & Co. vs. CIT[2] are the precedents, in which it was held that the receipt of lumpsum in lieu of loss of remuneration is a capital receipt. We do not find any basis to interfere with the well-considered order passed by the Tribunal. Therefore, the appeal is dismissed. The miscellaneous petition filed in this appeal shall also stand disposed of. There shall be no order as to costs. ______________________ L.NARASIMHA REDDY, J ______________________ CHALLA KODANDA RAM, J 27.08.2014 JSU THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.26 of 2003 Date: 27.08.2014 JSU [1] 139 ITR 479 (AP) [2] 37 ITR 381 (SC) "