Zuxor Writing Instruments (P) Ltd, V. DCIT circle 4 (1),

ITA 1108/DEL/2007

• Counselvise Citation: 110820114 RSA 2007
• Duration Of Justice: 5 year(s) 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 25-06-2012
• Assessment Year: 2002-2003
• Appeal Filed On: 07-03-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DK MISHR A
• Assessee Lawyers: SALIL AGRAWAL G AUTAM JAIN
• Keywords: Capital asset; Business income; Opportunity of being heard; Source of fund; Capital receipt
• Section: 56(2); 234B; 27; 56; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: D : NEW DELHI BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT AND SHRI I. C. SUDHIR, JUDICIAL MEMBER ITA NO. 1108/DEL/2007 ASSESSMENT YEAR: 2002- 2003 M/S. LUXOR WRITING INSTRUMENTS PVT. LTD. V S. DCIT 5, OKHLA INDUSTRIAL ESTATE, PHASE-III, CIRCLE 4 (1), NEW DELHI NEW DELHI. (APPELLANT) (RESPONDENT) AND ITA NO. 2386/DEL/2007 ASSESSMENT YEAR : 2002-03 DCIT VS. M/ S. LUXOR WRITING INSTRUMENTS PVT. LTD. CIRCLE 4 (1), 5, OKHL A INDUSTRIAL ESTATE, PHASE-III, NEW DELHI NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SALIL AGRAWAL, G AUTAM JAIN, ADVOCATE RESPONDENT BY : SHRI D.K. MISHRA DATE OF HEARING : 23/07/2012 DATE OF PRONOUNCEMENT : /2012 ORDER PER I.C. SUDHIR, JUDICIAL MEMBER ITA NOS. 1108, 2386/DEL/2007 2 1. THE REVENUE IN THEIR GROUNDS TO THE APPEAL HAS RAIS ED FOLLOWING ISSUES: 1. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LEARNED CIT (APPEALS) WAS JUSTIFIED IN ALLOWING TH E RELIEF OF RS.108,49,67,917/- REMITTED BY GILLETTE USA FOR RE PAYMENT OF ITS DEBTS PURSUANT TO SALES OF ITS ENTIRE SHAREHOL DING IN THE ASSESSEE COMPANY TO NEWELL AS CAPITAL RECEIPT WITH OUT APPRECIATING THE FACT THAT GILLETTE WAS NEITHER IT S SHAREHOLDER NOR IT INCREASED THE SHAREHOLDING OF GILLETTE USA OR ITS SUBSIDIARIES IN THE ASSESSEE COMPANY. 2. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LEARNED CIT (APPEALS) WAS JUSTIFIED IN RESTRICTING THE ADDITION ON ACCOUNT OF SUM REMITTED BY M/S GILLETTE CO. USA TO THE ASSESSEE COMPANY FOR PAYMENT OF ITS DEBTS AT RS.118,09,00,129/- TO RS.9,59,32,212/- CRORES WHER EAS THE COMPONENT OF REMITTANCE TO BANK ACCOUNT OF THE ASS ESSEE COMPANY HAS BEEN TREATED AS REVENUE RECEIPT AND TH E ITA NOS. 1108, 2386/DEL/2007 3 COMPONENT REMITTED DIRECTLY TO BANK OF AMERICA FOR THE SAME PURPOSE HAS BEEN TREATED AS CAPITAL RECEIPT. 2. THE ASSESSEE HAS QUESTIONED FIRST APPELLATE ORDE R ON THE FOLLOWING GROUNDS:- I. THAT THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS) HAS GROSSLY ERRED BOTH IN LAW AND ON FACTS IN UPHOLDING THE ADDITION OF SUM OF ` 9,59,32,212.66 REPRESENTING THE AMOUNT REMITTED BY M/S. GILLETTE, USA FOR REPAYMENT OF LOANS OF THE AS SESSEE COMPANY. 1.1 THAT MERE FACT THAT THE AFORESAID SUM HAD BE EN CREDITED TO THE BANK ACCOUNT OF THE APPELLANT COMPANY COULD NOT IN LAW OR FACT BE HELD TO BE A VALID BASIS FOR CONCLUDING THAT SUC H SUM REPRESENTS INCOME OF THE APPELLANT COMPANY, PARTICU LARLY WHEN IT IS UNDISPUTED THAT THE AFORESAID SUM HAD BEEN UT ILIZED FOR REPAYMENT OF DEBTS BY THE APPELLANT COMPANY. 1.2 THAT THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS) HAS FAILED TO APPRECIATE THAT, SUMS REMITTED WERE VOLUN TARY PAYMENTS AND, WERE NOT RECEIVED BY THE ASSESSEE FOR ANY SERVICES RENDERED TO M/S. GILLETTE, USA, WHICH COUL D NOT BE TAXED AS INCOME OF THE APPELLANT COMPANY. IN FACT, THE LEARNED ASSESSING OFFICER HAS ADMITTED THAT SUM WAS REMITTE D WITHOUT ANY QUID PRO QUO AND, THEREFORE COULD NOT BE HELD A S INCOME UNDER THE ACT. 2. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS) HAS FURTHER ERRED BOTH IN LAW AND, ON FACTS IN CONFIRMI NG THE ADDITION OF SUM OF ` 3,34,85,700/- REPRESENTING THE AMOUNT OF LOAN WAIVED BY M/S. GILLETTE, USA. 2.1 THAT THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS) HAS CONFIRMED THE AFORESAID ADDITION BY ERRONEOUSLY AND , ITA NOS. 1108, 2386/DEL/2007 4 ARBITRARILY CONCLUDING THAT, IT WAS ALTHOUGH ORIGI NALLY A CAPITAL RECEIPT IN THE SHAPE OF LOAN, HOWEVER SINCE THE APPELLANT DOES NOT HAVE TO REPAY THE SUM RECEIVED, IT CHANGES THE CHARACTER OF RECEIPT TO REVENUE RECEIPT. 2.2 THAT THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS) HAS ALSO FAILED TO APPRECIATE THAT, THE JUDGMENT OF HON BLE DELHI HIGH COURT IN THE CASE OF CIT V. PHOOL CHAND JIWAN RAM REPORTED IN 131 ITR 37 WAS FULLY APPLICABLE TO THE FACTS OF THE CASE OF THE APPELLANT AND, THEREFORE, THERE WAS NO VALID JUSTIFICATION OR BASIS TO SUSTAIN THE AFORESAID ADD ITION. 3. THAT THE VARIOUS ADVERSE FINDINGS RECORDED BY T HE LEARNED CIT(APPEAL) ARE TOTALLY AND WHOLLY ARBITRARY IN AS MUCH AS HE HAS FILED TO APPRECIATE THE SUBMISSIONS AND EVIDENC E FILED BY THE APPELLANT DURING THE COURSE OF APPELLATE PROCEE DINGS. 4. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS) HAS FURTHER ERRED IN CONFIRMING THE LEVY OF INTEREST U/ S 234B AND 234C OF THE ACT. 3. THE RELEVANT FACTS ARE THAT ON 19.3.1996 A JOINT VENTURE AGREEMENT WAS DRAWN BETWEEN (1) GILLETTE INDIA (P) LTD. (GIPL), A ND (2) JAIN GROUP COMPRISING OF MEMBERS OF ONE MR. D.K. JAINS FAMILY (JAIN FAMILY) AND JHPL HOLDINGS (P) LTD. (JHPL). THE JOINT VENTURE WA S FORMED TO CARRY ON THE BUSINESS OF MANUFACTURE AND MARKETING OF WRITIN G INSTRUMENTS AND THE STATIONERY PRODUCTS IN INDIA THROUGH AN EXISTING CO MPANY, NAMELY THE ASSESSEE COMPANY, WHICH WAS INCORPORATED ON 8.3.95, WHOSE PROMOTER/SHAREHOLDERS WERE JAIN GROUP. BY A LETTER DATED 19.3.1996, M/S GILLETTE COMPANY USA, HOLDING COMPANY OF GIPL GAVE AN UNDERTAKING INTER ITA NOS. 1108, 2386/DEL/2007 5 ALIA THAT, ASSESSEE COMPANY WILL BE THE EXCLUSIVE V EHICLE THROUGH WHICH GILLETTE WILL UNDERTAKE IN INDIA THE BUSINESS IN TH E FIELD OF WRITING INSTRUMENTS AND STATIONERY PRODUCTS INCLUDING INTRO DUCTION OF NEW PRODUCTS AND / OR NEW BRAND IN THAT FIELD, AND THE GILLETTE WILL NOT UNDERTAKE DIRECTLY OR INDIRECTLY ANY ACTIVITIES IN COMPETITION WITH TH E ASSESSEE COMPANY IN INDIA. 4. AS A RESULT OF THE ABOVE ARRANGEMENT, THE ASSESS EE COMPANY HAS BEEN ENGAGED IN THE BUSINESS OF MANUFACTURE AND DISTRIBU TION OF WRITING INSTRUMENTS AND STATIONERY PRODUCTS. THE EQUITY SHA RE CAPITAL OF THE ASSESSEE COMPANY WAS HELD EQUALLY BY JAIN GROUP AND GIPL AND ITS AFFILIATES. 5. THE FUNDS REQUIRED BY THE ASSESSEE COMPANY FOR I TS BUSINESS WERE FINANCED OUT OF INTEREST BEARING LOANS RAISED FROM GILLETTE DIVERSIFIED OPERATIONS (P) LTD. AND AFFILIATE OF GIPL. 6. THE ASSESSEE COMPANY RAISED A LOAN OF RS.66 CROR ES FROM BANK OF AMERICA IN FINANCIAL YEAR 2000 2001, WHICH WAS PR IMARILY UTILIZED TO REPAY THE LOANS/DEBTS OF THE COMPANY AS PER DETAILS GIVEN BELOW. - GILLETTE DIVERSIFIED OPERATIONS PVT. LTD. - RS.4 7.25 CR - REPAYMENT OF ECB TO THE GILLETTE CO, USA - RS. 4 .78 CR - PAYMENT OF SUPPLIERS CREDIT TO THE GILLETTE CO. - RS.1.78 CR - REPAYMENT OF LOAN TO INDIA PROMOTERS - RS.9.50 CR. ITA NOS. 1108, 2386/DEL/2007 6 7. IN THE FINANCIAL YEAR 2001-02 THE ASSESSEE COMPA NY FURTHER BORROWED AN AMOUNT OF RS.20 CRORES FROM BANK OF AMERICA WHIC H WAS PRIMARILY UTILIZED TO FURTHER REPAY THE LOANS / DEBTS OF THE COMPANY AS PER DETAILS GIVEN BELOW. - GILLETTE DIVERSIFIED OPERATIONS PVT. LTD. - RS.7 .00 CR - REPAYMENT OF ECB TO THE GILLETTE CO, USA - RS.4.3 0 CR - REPAYMENT OF LOAN TO THE ANZ GRINDLAYS BANK- RS.8 .50 CR 8. THE FUNDS WERE RAISED FROM BANKS AGAINST THE COR PORATE GUARANTEE OF M/S GILLETTE COMPANY USA. 9. BESIDES, THE LOAN WAS RAISED OF USD 2.3 MILLION FROM M/S GILLETTE COMPANY USA UNDER THE EXTERNAL OF COMMERCIAL BORROW ING SCHEME OF RESERVE BANK OF INDIA. 10. IN THE YEAR 2001 GILLETTE COMPANY USA SOLD ITS BUSINESS OF WRITING INSTRUMENTS TO NEWELL RUBBERMAID INC. USA (NEWELL). AS PART OF SUCH SALE OF BUSINESS TO NEWELL THE SHAREHOLDING OF GIPL IN A SSESSEE COMPANY WAS ALSO SOUGHT TO BE TRANSFERRED TO NEWELL. FOR THIS P URPOSE VARIOUS AGREEMENTS WERE EXECUTED BETWEEN GIPL, JAIN GROUP ON 17.1.2001 WHEREBY NEWELL WAS ALSO MADE A PARTY (ASSIGNMENT AGREEMENTS), WHEREIN THE JAIN GROUP HAD GIVEN CONSENT TO TRANSFER OF SHARES BY GIPL AND ITS AFFILIATES TO NEWELL. ITA NOS. 1108, 2386/DEL/2007 7 11. IN THE YEAR 2002 NEWELL EXPRESSED ITS UNWILLING NESS TO ACQUIRE THE SHAREHOLDING OF THE GILLETTE GROUP IN THE ASSESSEE COMPANY THOUGH AGREED UNDER THE ASSIGNMENT AGREEMENT. NEWELL HOWEVER, TOO K OVER THE WRITING INSTRUMENT BUSINESS OF THE GILLETTE COMPANY USA IN THE REST OF THE WORLD. SINCE THE ASSESSEE COMPANY WAS INCURRING LOSSES, GI LLETTE COMPANY USA CONSIDERED IT PRUDENT TO GET ITSELF DISCHARGED FROM THE SECURITY PROVIDED BY IT IN RESPECT OF LOAN TAKEN BY THE ASSESSEE COMPANY. I N FURTHERANCE THERETO IN MARCH, 2002 GILLETTE COMPANY USA, THE HOLDING COMPA NY, THUS REMITTED A SUM OF MONEY TO BANK OF AMERICA, NEW DELHI BRANCH T O LWIL ACCOUNT, SPECIFICALLY FOR THE BENEFIT OF THE BANKS INCLUDING BANKS OF AMERICA, STANDARD CHARTERED BANK,CANARA BANK ETC. FOR OBTAIN ING THE RELEASE OF ITS CORPORATE GUARANTEE. THE BANKERS AFTER RECEIPT OF M ONEY HAD RELEASED THE CORPORATE GUARANTEE OF GILLETTE COMPANY USA. PURSUA NT TO THE AFORESAID, TOTAL SUMS REMITTED BY GILLETTE USA AGGREGATED TO R S.120,08,40,830.47/- COMPRISING OF RS.97,06,00,000/- AS PER FIRC AND RS. 23,02,40,830.47/- AS PER FIRC. OUT OF THE AFORESAID SUMS OF RS.120,08,40 ,830.47/- SUMS AGGREGATING TO RS.108,49,67,916.81/- WAS DIRECTLY A PPROPRIATED FOR THE BENEFIT OF 3 BANKS, AS PER THE AMENDMENT TO THE MAS TER AGREEMENT DATED 26.03.2002, NAMELY : (A) BANK OF AMERICA RS.96,35,08,609.81/- ITA NOS. 1108, 2386/DEL/2007 8 (B) STANDARD CHARTERED BANK RS.2,14,59,307.00/- (C) CANARA BANK RS.10,00,00,000.00/- TOTAL RS.108,49,67,916.81/- 12. THE BALANCE AMOUNT OF RS.11,58,72,913.66/- I.E. DIF FERENCE BETWEEN RS. 120,08,40,830.47/- AND RS.108,49,67,916.81/- WA S CREDITED TO THE BANK ACCOUNT OF THE ASSESSEE IN THE FOLLOWING MANNER. (A) CA (LWIL) RS.70,91,390.19/- (B) CA (LWIL) RS.8,88,40,822.47/- (C) CC (LWIL) RS.1,99,40,701.00/- TOTAL RS.11,58,72,913.66/- 13. OUT OF THE AFORESAID A SUM OF RS.1,99,40,701.00/- W AS ALREADY CREDITED TO THE PROFIT AND LOSS ACCOUNT AND WAS OFF ERED AS INCOME. HOWEVER, THE BALANCE AMOUNT OF RS.9,59,32,212.66/- WAS UTILI ZED FOR REPAYMENT OF DEBTS. THUS OUT OF TOTAL SUM REMITTED OF RS. 120,08 ,40,830.47/- A SUM OF RS. 1,99,40,701.00/- WAS CREDITED TO THE PROFIT AND LOS S ACCOUNT AND THE BALANCE SUM OF RS.118,08,00,129.47/- WAS REMITTED FOR REPAY MENT OF DEBTS. OUT OF THIS SUM OF RS.118,08,00,129.47/- THE SAID SUM OF RS.108,49,67,916.81/- WAS DIRECTLY APPROPRIATED FOR THE BENEFIT OF 3 BANK S AND THE BALANCE AMOUNT ITA NOS. 1108, 2386/DEL/2007 9 OF RS.9,58,32,212.66/- WAS CREDITED TO THE BANK ACC OUNT OF THE ASSESSEE AND UTILIZED FOR REPAYMENT OF LOANS. 14. THE GILLETTE COMPANY USA WAIVED ITS CLAIM TO THE FO REIGN CURRENCY LOANS ADVANCED BY IT TO THE ASSESSEE COMPANY FOR WO RKING CAPITAL UNDER THE EXTERNAL COMMERCIAL BORROWINGS SCHEME. 15. ON 30.10.2002 THE ASSESSEE FILED RETURN OF INCOME D ECLARING A LOSS OF RS.34,58,93,385/-. ON 2.3.2005 ASSESSMENT U/S 143 ( 3) WAS FRAMED AT INCOME OF RS.54,95,90,790/- BY MAKING AN ADDITION O F RS.118,09,00,129/- REPRESENTING SUMS REMITTED BY M/S GILLETTE COMPANY, USA AS THEY WERE HELD IN THE NATURE OF SUBSIDY OR GRANT, AND WAS THU S A REVENUE RECEIPT. 16. THE LD. CIT (A) VIDE ITS ORDER DATED 24.1.2007 HEL D THAT THE SUM REMITTED BY M/S GILLETTE COMPANY, USA, TO THE EXTEN T OF RS.108.49 CRORES IS A CAPITAL RECEIPT NOT CHARGEABLE TO TAX BUT RS.11.5 8 CRORES WHICH HAS BEEN CREDITED TO THE BANK ACCOUNT OF THE ASSESSEE, IS TO BE TREATED AS BUSINESS INCOME OF THE ASSESSEE BUT THE SAME IS RESTRICTED B Y A SUM OF RS.9.59 CRORE AS RS.1.99 WAS ALREADY CREDITED BY THE ASSESSEE TO THE PROFIT AND LOSS ACCOUNT AND WAS OFFERED TO TAX. 17. NOW THE ISSUES INVOLVED IN THE CROSS-APPEALS ARE AS UNDER: 1. 'AS TO WHETHER IN A CASE WHERE A GUARANTOR WHO I S ALSO A HOLDING COMPANY OF THE SHAREHOLDER IN THE ASSESSEE COMPANY, ITA NOS. 1108, 2386/DEL/2007 10 REPAID THE LOAN OF RS.108.49 CRORES ADVANCED BY TH E BANK TO THE ASSESSEE COMPANY TO DISCHARGE ITSELF OF ITS LIABIL ITY UNDER THE CORPORATE GUARANTEE, COULD SUCH SUM BE REGARDED AS INCOME OF THE ASSESSEE COMPANY? 2. AS TO WHETHER FURTHER SUM OF RS.9.59 CRORES REMI TTED BY THE SAID GUARANTOR TO DISCHARGE THE LIABILITIES OF THE ASSESSEE COMPANY COULD BE TREATED AS INCOME AND DOES NOT RE PRESENT CAPITAL RECEIPT? 3. AS TO WHETHER THE FURTHER WAIVER OF LOAN OF RS.3 .43 CRORES BY THE SAID GUARANTOR COULD BE TREATED AS INCOME AND DOES NOT REPRESENT CAPITAL RECEIPT? ISSUE NOS.-1 & 2 18. THE ISSUES INVOLVED IN GROUND NOS. 1 AND 2 OF THE A PPEAL PREFERRED BY THE REVENUE AND THE GROUND NOS. 1, 1.1 AND 1.2 OF T HE APPEAL PREFERRED BY THE ASSESSEE ARE CONNECTED. WE HAVE ALREADY DISCUSSED T HE RELEVANT FACTS IN THE PREVIOUS PARAGRAPHS. THE AO MADE ADDITION OF RS.118 .09 CRORES REPRESENTING THE SUM REMITTED BY M/S GILLETTE COMPA NY, USA TO THE ASSESSEE COMPANY. THE LD. CIT (A) DELETED RS.108.49 CRORES OUT OF THE SAID ADDITION WHICH HAS BEEN QUESTIONED BY THE REVENUE I N THEIR APPEAL. THE REMAINING SUM OF RS.9.59 CRORES OUT OF THE SAID ADD ITION HAS BEEN SUSTAINED ITA NOS. 1108, 2386/DEL/2007 11 BY THE LD. CIT (A) ON THE GROUND THAT THE GILLETTE CO. USA, THE ASSESSEE COMPANY OF THE JOINT VENTURE, GIL PAID THE SAID SUM TO THE CREDIT OF THE ASSESSEES ACCOUNT REJECTING THE CLAIM THAT THE SAI D SUM WAS NOT IN THE NATURE OF THE INCOME AS IT DID NOT ARISE IN THE COURSE OF CARRYING ON ITS BUSINESS AND CANNOT BE TAXED U/S 28 (1) (IV) OF THE ACT. THIS AC TION OF THE LD. CIT (A) HAS BEEN QUESTIONED BY THE ASSESSEE IN GROUND NOS. 1, 1 .1 AND 1.2 OF THE APPEAL PREFERRED BY IT. 19. IN SUPPORT OF THE GROUNDS OF THE APPEAL OF THE REVE NUE THE LD. DR HAS BASICALLY PLACED RELIANCE ON THE ASSESSMENT ORDER. HE SUBMITTED THAT THERE WAS NO DISRUPTION IN THE BUSINESS OF ASSESSEE. THE COPY OF MEMORANDUM OF UNDERSTANDING (MOU), WAS NOT PRODUCED BEFORE THE AO . THE SAME WAS PRODUCED ONLY BEFORE THE LD. CIT (A). HE REFERRED P AGE NOS. 463 TO 465 OF PAPER BOOK VOLUME III I.E. COPY OF MEMORANDUM OF UN DERSTANDING (MOU) DATED 5.1.2002 IN SUPPORT. THE LD. DR SUBMITTED THA T THE SAID MOU CULMINATED INTO MASTER AGREEMENT DATED 4.3.2002 WHI CH WAS AMENDED ON 26.3.2002. THE LD. DR SUBMITTED THAT THE NATURE OF PAYMENT WAS REVENUE IN NATURE AS RIGHTLY HELD BY THE AO. HE SUBMITTED THAT NATURE OF THE INSTRUCTION RECEIVED BY THE BANK OF AMERICA USA BY FAX WAS TO B E SEEN. HE REFERRED PAGE NOS. 96, 97,.100 & 101 OF THE PAPER BOOK VOLUM E NO. 1 IN THIS REGARD. HE SUBMITTED THAT NEITHER THE AGREEMENT NOR PAYMENT TO THE BANK WERE ITA NOS. 1108, 2386/DEL/2007 12 VOLUNTARY. THE LOAN WAS FOR WORKING CAPITAL. HE REF ERRED PAGE NOS. 54 TO 61 & 62 TO 64 OF THE PAPER BOOK VOLUME NO. 1. I.E. COP IES OF LETTER DATED 13.06.1997 FROM RESERVE BANK OF INDIA, AND LETTERS FROM BANK OF AMERICA FOR CREDIT FACILITY. THERE WAS NO NECESSITY OF ENTE RING INTO THE GUARANTEE AND THE GUARANTOR COMES IN PICTURE WHEN LOANEE FAILS TO PAY. HE REFERRED PAGE NOS. 307 TO 309 OF THE PAPER BOOK VOLUME NO. II. I. E. QUERY RAISED BY THE LD. CIT (A). THE LD. DR SUBMITTED FURTHER THAT THE LD. CIT (A) SHOULD HAVE CONSIDERED THE CONTENTIONS OF THE AO INCLUDING THE REMAND REPORT IN ITS ENTIRETY. HE SUBMITTED FURTHER THAT NATURE OF DOCUM ENT IS REQUIRED TO BE CONSIDERED AND NOT THE NOMENCLATURE OF THE MATERIAL . LIKEWISE NATURE OF RECEIPT IS MORE IMPORTANT. EVERY RECEIPT IS INCOME UNLESS IT IS SPECIFICALLY EXCLUDED. HE PLACED RELIANCE ON THE FOLLOWING DECIS IONS: 1. S.B. SUGAR MILLS LTD. VS. CIT 166 ITR 783 A (SC) 2. KETTLEWELL BULLEN AND CO. LTD. VS. CIT 53 ITR 261(C AL) 3. S.KUMAR TYRES MFG. CO. LTD. VS. DCIT 61 ITD 326 (INDORE) 4. MAHINDRA & MAHINDRA LTD. VS. CIT 261 ITR 501 (BOM) 5. KILLICK NIXON & CO. VS. CIT 66 ITR 714 (S.C.) 6. CIT VS. NEW JEHANGIR VALEIL MILLS CO. LTD.37 ITR 15 1 (SC) 7. SRINIVASA PITTI & SONS VS. CIT 173 ITR 306 (MP) (F. B.) ITA NOS. 1108, 2386/DEL/2007 13 8. SAHNEY STEEL & PRESS WORKS LTD. (PB) P.1 VS. CIT 22 8 ITR 528 (SC) 9. CIT VS. H.H.MAHARANI SETHEE PARVATHI BAGI 232 ITR 6 78 (KER) 10. RAGHUNARAYAN RICE MILLS VS. CIT 75 ITR 682 (S.C.) 11. HOSHIARPUR ELECTRICT SUPPLY CO. VS. CIT 41 ITR 608 (S.C.) 12. MRS. SHEILA KAUSHIK VS. CIT 131 ITR 519 (S.C.) 13. DELHI STOCK EXCHANGE ASSN. LTD. VS. CIT 41 ITR 495 (S.C.) 14. CIT VS. NOVA PROMOTERS & FINLEASE (P) LTD. 342 ITR 169 (DEL) 15. BOMBAY OIL INDUSTRIES LTD. VS. DCIT 82 ITD 626 (MUM ) 16. KARANPURA DEVELOPMENT CO. LTD. VS. CIT 44 ITR 362 ( SC) 17. SENAIRAM DOONGARMALL VS. CIT 42 ITR 392 (SC) 18. CIT VS. G.R. KARTHIKEYAN 201 ITR 866 (SC) 19. CIT VS. SMT. SHANTI MEATTLE 90 ITR 385 (ALLD.) 20. CIT VS. AVINASH PARVICHA 251 ITR 360 (DEL) 21. LOGITRONICS P. LTD. VS. CIT & ORS. 333 ITR 386 (DEL ) 22. NATIONAL CEMENT MINES INDUSTRIES LTD. VS. CIT 42 IT R 69 (SC) ITA NOS. 1108, 2386/DEL/2007 14 20. THE LD. AR TRIED TO JUSTIFY THE FIRST APPELLATE ORD ER ON THE ISSUE RAISED IN THE GROUND OF APPEAL PREFERRED BY THE REVENUE. H E SUBMITTED THAT THE LD. CIT (A) SHOULD HAVE DELETED THE ENTIRE ADDITION OF RS.118,09,00,129/- MADE BY THE AO. HE REITERATED THE SUBMISSIONS MADE BEFOR E THE AUTHORITIES BELOW IN THIS REGARD. HE SUBMITTED THAT THE GILLETTE COMP ANY, USA HAD NO INTEREST IN THE ASSESSEE COMPANY. AS THE ASSESSEE COMPANY WA S INCURRING LOSSES, GILLETTE COMPANY, USA FOUND IT PRUDENT TO GET ITSEL F DISCHARGED FROM THE SECURITY PRODUCED BY IT IN RESPECT OF THE LOANS RAI SED BY THE ASSESSEE COMPANY. IN ORDER TO DO SO IN MARCH, 2002 GILLETTE COMPANY, USA, THE HOLDING COMPANY VOLUNTARILY REMITTED A SUM OF MONEY TO BANK OF AMERICA, NEW DELHI BRANCH TO LWIL ACCOUNT, ESPECIFICALLY FOR THE BENEFIT OF THE BANKS INCLUDING BANKS OF AMERICA, STANDARD CHARTERE D BANK, CANARA BANK ETC. FOR OBTAINING THE RELEASE OF ITS CORPORATE GUA RANTEE. THE BANKERS ON RECEIPT OF MONEY RELEASED THE CORPORATE GUARANTEE O F GILLETTE COMPANY, USA. THEREAFTER, GILLETTES GUARANTEE WAS NO MORE A VAILABLE TO THE ASSESSEE COMPANY AND THE BANK WITHDREW THE LOAN FACILITIES T O THE ASSESSEE COMPANY. PURSUANT TO THE AFORESAID, TOTAL SUMS REMITTED BY M /S GILLETTE COMPANY, USA AGGREGATED TO RS.120,08,40,830.47/- COMPRISING OF RS.97,06,00,000/- AS PER FIRC MADE AVAILABLE AT PAGE NO. 93 OF THE PA PER BOOK AND RS.23,02,40,830.47/- AS PER FIRC AT PAGE NO. 94 OF THE PAPER BOOK VOLUME ITA NOS. 1108, 2386/DEL/2007 15 I. OUT OF AFORESAID SUM OF RS.120,08,40,830.47/-, A SUM AGGREGATING TO RS.108,49,67,916.81/- WAS DIRECTLY APPROPRIATED FOR THE BENEFIT OF 3 BANKS AS PER THE AMENDMENT TO THE MASTER AGREEMENT DATED 26. 3.2002. THE BALANCE MOUNT OF RS.11,58,72,913.66/- I.E. DIFFERENCE BETWE EN RS.120,08,40,830.47/- AND RS.108,49,67,916.81/- WAS CREDITED TO THE BANK ACCOUNT OF THE ASSESSEE. OUT OF THE AFORESAID SUM RS.1,99,40,701/- WAS CREDI TED TO THE PROFIT AND LOSS ACCOUNT AND OFFERED AS INCOME. HOWEVER, THE BALANCE AMOUNT OF RS.9,59,32,212.66/- WAS UTILIZED FOR REPAYMENT OF D EBTS, DETAILS OF WHICH HAVE BEEN MADE AVAILABLE AT PAGE NO. 93 OF THE PAPE R BOOK. THE AO MADE ADDITION OF RS.118,09,00,129/- REPRESENTING SUMS RE MITTED BY GILLETTE COMPANY, USA, HOLDING IT IN THE NATURE OF SUBSIDY O R GRANT AND WAS THUS HELD AS A REVENUE RECEIPT. THE LD. CIT (A) HAS HELD THAT THE SUM REMITTED BY GILLETTE COMPANY, USA, TO THE EXTENT OF RS.108.49 C RORES IS A CAPITAL RECEIPT NOT CHARGEABLE TO TAX BUT RS.11.58 CRORES WHICH WAS CREDITED TO THE BANK ACCOUNT OF THE ASSESSEE HAS BEEN TREATED BY HIM AS BUSINESS INCOME OF THE ASSESSEE HOWEVER, SAME HAS BEEN RESTRICTED BY A SUM OF RS.9.59 CRORE AS RS.1.99 CRORE WAS ALREADY REMITTED BY THE ASSESSEE TO ITS PROFIT AND LOSS ACCOUNT. HE SUBMITTED THAT RETURN OF INCOME WAS FIL ED BY THE ASSESSEE DECLARING A LOSS OF RS.34,58,93,385/- AGAINST WHICH THE AO HAS ASSESSED AN INCOME OF RS.54,95,90,790/- BY MAKING THE SAID ADDI TION OF ITA NOS. 1108, 2386/DEL/2007 16 RS.118,09,00,129/-. THE LD. AR REFERRED PAGE NOS. 9 3 & 94 (COPIES OF FIRC) OF THE PAPER BOOK VOLUME 1, PAGE NOS. 185,293 (WRITTEN SUBMISSIONS BEFORE LD. CIT (A)) OF THE PAPER BOOK VOLUME NO. 2 AND PAGE NO. 392 TO 426 (AGREEMENTS) OF THE PAPER BOOK VOLUME NO. 3. HE ALS O REFERRED PAGE NOS. 62 TO 92 (LOAN AGREEMENTS) OF PAPER BOOK I, PAGE NO. 45 (LETTER OF OFFER FROM GILLETTE CO. USA DATED 4.12.1996) PAPER BOOK I, PAGE NOS. 46 TO 53 (APPLICATION FOR APPROVAL TO RBI DATED 4/11.3.1997) OF PAPER BOOK I, PAGE NOS. 54 TO 60 (APPROVAL DATED 13.6.1997 FROM RBI) P APER BOOK-I, PAGE NO. 61 (LETTER DATED 23.7.1998 FROM MINISTRY OF FINANCE ) PAPER BOOK- I, AND PAGE NOS. 72 TO 74 (LETTER DATED 24.4.2001 FROM MIN ISTRY OF COMMERCE & INDUSTRY) PAPER BOOK I ETC. HE PLACED RELIANCE ON THE FOLLOWING DECISIONS: 1. CIT VS. GENERAL ELECTRODES & EQUIPMENTS LTD. 155 IT R 78 (BOM) 2. MS. PAYAL KAPOOR VS. ACIT 98 ITD 19 (DEL) 3. SMARTALK (P) LTD. VS. ITO 313 ITR 96 (AT) (BOM) 4. SHYAM TELELINK LTD. VS. ITO 99 ITD 576 (DEL) 21. IN SUPPORT OF THE GROUNDS 1, 1.1 & 1.2 OF THE APPEA L PREFERRED BY THE ASSESSEE, THE LD. AR SUBMITTED THAT THE LD. CIT (A) HAS SUSTAINED THE ADDITION OF RS.9.59 CRORES ONLY ON THE BASIS THAT T HE AMOUNT OF RS.9.59 ITA NOS. 1108, 2386/DEL/2007 17 CRORES STOOD CREDITED IN THE ASSESSEES BANK ACCOU NT. INFACT THERE WAS NO DIFFERENCE WHEREIN THE CREDIT HAS BEEN MADE IN THE ASSESSEES BANK ACCOUNT OF RS.9.59 CRORES OR CREDIT MADE OF RS.108.49 CRORE S. IT APPEARS THAT THE LD. CIT (A) GAVE SUCH FINDING SINCE THE AFORESAID AMOUN T OF RS.108.49 CRORES WAS THE SUM REMITTED TO THE BANK ACCOUNT WITHOUT RE COURSE TO ASSESSEE WOULD HAVE A DIFFERENT CHARACTER. HE FAILS TO APPRE CIATE THAT SO FAR AS THE NATURE OF REMITTANCE IS CONCERNED THE SAME WOULD RE MAIN THE SAME, AS THE AMOUNT WAS REMITTED BY GILLETTE CO. USA FOR THE PUR POSE OF DISCHARGING OF THEIR OBLIGATIONS AS A GUARANTOR AND THE BALANCE SU M WAS PAID TO THE ASSESSEE SPECIFICALLY FOR THE PURPOSE OF REPAYMENT OF ITS DE BT. HE SUBMITTED WHETHER THE MODE OF REPAYMENT OF DEBTS WAS BY WAY OF DISCHA RGING OF THEIR LIABILITY AS GUARANTOR OR FOR REPAYMENT OF DEBTS, THE SAME WO ULD NOT AFFECT THE CAPITAL NATURE OF THE RECEIPT. BY NO STRETCH OF IMAGINATION IT COULD BE REGARDED THAT AN AMOUNT REMITTED TO THE ASSESSEE TO DISCHARGE ITS OBLIGATION TO THE CREDITORS, COULD BE REGARDED AS REVENUE RECEIPT SIN CE THE RECEIPT DID NOT ACCRUE OR ARISE OR STEM FROM ANY COMMERCIAL AND BUS INESS TRANSACTION. INFACT, THERE WAS NO BUSINESS RELATIONSHIP BETWEEN THE ASSESSEE COMPANY AND GILLETTE COMPANY, USA. HE CITED FOLLOWING DECISIONS IN SUPPORT: 1. HANDICRAFTS AND HANDLOOM EXPORT CORPORATION OF INDI A VS. CIT 140 ITR 532 (DEL) ITA NOS. 1108, 2386/DEL/2007 18 2. CIT VS. STEWART AND LLOYDS OF INDIA, LTD. ,165 ITR 416 (DEL) 3. ACIT VS. HANDICRAFTS AND HANDLOOM EXPORT CORPORATIO N 133 ITR 590 (DEL) 4. DCIT VS. LURGI INDIA LTD 114 ITD 1 (DEL) 22. THE LD. AR SUBMITTED FURTHER THAT WHEN AN ASSESSEE DISCHARGES ITS LIABILITY FROM SUMS RECEIVE BY IT, IT IS A CASE WHE RE THE AMOUNT RECEIVED BY IT IS APPLIED BY IT TO DISCHARGE ITS LIABILITY. THERE IS A DISTINCTION BETWEEN LIABILITY CEASING TO EXIST AND WHERE A LIABILITY IS DISCHARGED FROM THE AMOUNT AVAILABLE TO IT, WHICH IS THE APPLICATION OF RECEIP T AND AS SUCH SECTION 41 (1) OF THE ACT HAS NO APPLICATION. IN FACT, ASSESSEE CO MPANY HAD COMMITTED AN ERROR WHEN IT OFFERED A SUM OF RS.1.99 CRORES AS IN COME UNDER MISCONCEPTION OF LAW BY FAILING TO APPRECIATE THAT SUCH RECEIPT REPRESENTED CAPITAL AND WAS NOT LIABLE TO TAX. MERE FACT THAT S UM RECEIVED OF RS.1.99 CRORES WAS NOT UTILIZED FOR REPAYMENT OF LIABILITIE S COULD NOT BE A GROUND IN LAW TO REGARD THE SAME AS ITS INCOME AS IT IS A WEL L SETTLED POSITION OF LAW THAT EVERY RECEIPT IS NOT INCOME, SUBMITTED THE LD. AR W HILE PLACING RELIANCE ON THE FOLLOWING DECISIONS: 1. PARIMISETTI SEETHARAMAMMA VS. CIT 57 ITR 532 (S.C.) ITA NOS. 1108, 2386/DEL/2007 19 2. CIT VS. N. SWAMY 241 ITR 363 (MAD) 3. DILIP KUMAR ROY VS. CIT 94 ITR 1 (S.C.) 4. KISHNICHAND CHELLARAM VS. CIT, 125 ITR 713 (SC) 23. THE LD. AR SUBMITTED FURTHER THAT A DEBT WAVED OR F ORGONE CAN NOT PARTAKE THE CHARACTER OF INCOME EITHER UNDER SECTIO N 41 (1) OR SECTION 28 OF THE ACT. HE PLACED RELIANCE ON THE FOLLOWING DECISIONS: - CIT VS. PHOOL CHAND JIWAN RAM 131 ITR 37 (DEL) - DCIT VS. TOSHA INTERNATIONAL 116 TTJ 941 (DEL), CIT VS.TOSHA INTERNATIONAL 176 TAXMAN 187 (DEL) - CIT VS. GOYAL MG GASES LTD (DEL) IN ITA NO. 364,365,368,369,370 & 923/2007 - MAHINDRA & MAHINDRA MILLS LTD VS. CIT 261 ITR 501 ( BOM) - CIT VS. AVM LTD. 146 ITR 355 (MAD) - CIT VS. M/S P GANESA CHETTIAR 133 ITR 103 (MAD) - FIDELITY TEXTILES (P) LTD VS. ACIT 305 ITR 97 (AT) (CHENNAI) - COMFUND FINANCIAL SERVICES (P) LTD VS. DCIT 67 ITD 304 (BANG), CIT VS. COMFUND FINANCIAL SERVICES 245 ITR 143 (KAR) - ACCELERATED FREEZ AND DRYING CO. (P) LTD 31 SOT 442 (COCHIN) ITA NOS. 1108, 2386/DEL/2007 2 0 - DEEPAK FERTILISERS AND PETROCHEMICALS CORPN. LTD. V S. DCIT 117 TTJ 752 (MUM) - CIPLA INVESTMENTS LTD VS. ITO 33 SOT 317 (MUM) - HELIOS FOOD IMPROVERS (P) LTD. VS. DCIT 14 SOT 546 (MUM) - NIRMALA P. ATHAVALE VS. ITO 117 TTJ 353 (MUM) - MINDTECK INDIA LTD. VS. ITO 124 TTJ 830 (MUM) - PRISM CEMENT LTD. VS. JCIT 285 ITR 43 (MUM) - CIT VS. ARIES ADVERTISING (P) LTD. 171 TAXATION 969 (MUM) - ITO VS. AHUJA GRAPHITE MACHINERY (P) LTD. 109 ITD 7 1 (MUM) (TM) - SUNANDA CAPITAL SERVICES LTD VS. JCIT 28 SOT 484 (M UM) - CIT VS. CHETAN CHEMICALS (P) LTD. 139 TAXMAN 301 (G UJARAT) - VELOCIENT TECHNOLOGIES LTD. (DEL) ITA NO. 1690/D/07 - CIT VS. JINDAL EQUIPMENTS LEASING AND CONSULTANCY S ERVICES LTD. 37 DTR 172 (DEL) 24. LD. AR SUBMITTED THAT THERE HAVE BEEN SUBSTANTIAL A MENDMENTS IN SECTION 56 (2) OF THE ACT AND YET, EVEN AFTER THE I NSERTION OF SECTION 56(2) (VIIA) IN THE ACT BY FINANCE ACT 2010 W.E.F. 1.6.20 10, SUCH RECEIPTS ARE NOT ELIGIBLE TO TAX. UNDER THESE FACTS THE LD. CIT (A) WAS NOT JUSTIFIED IN ITA NOS. 1108, 2386/DEL/2007 21 SUSTAINING THE ADDITION OF RS.9,59,32,212.66/- REPR ESENTING THE AMOUNT REMITTED BY M/S GILLETTE COMPANY, USA FOR REPAYMENT OF LOANS OF THE ASSESSEE COMPANY. THE LD. AR ALSO ASSERTED THAT A S UBSIDY CAN ONLY BE GRANTED BY GOVERNMENT AND NOT BY PRIVATE INDIVIDUAL . SUBSIDY IS A GRANT OF MONEY FROM A GOVERNMENT TO A PRIVATE ENTERPRISE CON SIDERED AS A BENEFICIAL TO THE COMPANY. HE CITED FOLLOWING DECISIONS: - CIT VS. GRACE PAPER MILLS LTD. 183 ITR 591 (GUJ) AP PROVED BY SC IN P J CHEMICALS VS. CIT, 210 ITR 830 (SC) - SHRI AMBICA MILLS LTD VS. THE TEXTILE LABOUR ASSOCI ATION, 1972 (SCI.) GJX 648 (SC) 25. IN REJOINDER THE LD. DR SUBMITTED THAT ALL RECE IPT UNLESS EXEMPT IS INCOME AND PLACED RELIANCE ON THE DECISION OF HONB LE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. SMT. SHANTI MEATTLE 90 ITR 385 (ALL). HE SUBMITTED THAT THE PAYMENT IS IN THE NATURE OF SUBS IDY AND NOT SUBSIDY. HE ALSO POINTED OUT THAT WAIVER OF PAYMENT WAS MADE TO THE ASSESSEE THROUGH BANK AND NOT TO THE BANK AS HELD BY THE LD. CIT (A) . THE PAYMENT WAS MADE ONLY OUT OF THE AGREEMENT, SUBMITTED THE LD. D R. 26. WE HAVE CONSIDERED THE ABOVE SUBMISSIONS IN VIEW OF THE ORDERS OF THE AUTHORITIES BELOW, MATERIAL AVAILABLE ON RECORD AND THE DECISIONS RELIED UPON. AN UNDISPUTED FACT REMAINED THAT A TOTAL SUMS AGGREGATING TO ITA NOS. 1108, 2386/DEL/2007 22 RS.120,08,40,830.47/- WAS REMITTED BY M/S GILLETTE COMPANY, USA. THE SAID AMOUNT WAS COMPRISING OF RS.97,06,00,000/- AS PER FIRC MADE AVAILABLE AT PAGE NO. 93 OF THE PAPER BOOK VOLUME 1 AND RS.23,02,40,830.47/- AS PER FIRC, MADE AVAILABLE AT PAGE NO. 94 OF THE SAME PAPER BOOK VOLUME 1. OUT OF THE AFORESAID SUM OF RS . 120,08,40,830.47/-, SUMS AGGREGATING TO RS.108,49,67,916.81/- WAS DIREC TLY APPROPRIATED FOR THE BENEFIT OF 3 BANKS I.E. BANK OF AMERICA (RS.96,35,0 8,609.81/-, - PAGE NO. 93 ), STANDARD CHARTERED BANK (RS.2,14,59,307.00/- -, PAGE NO. 94), AND CANARA BANK (RS.10,00,00,000.00/-, PAGE NO. 94) AS PER THE AMENDMENT TO THE MASTER AGREEMENT DATED 26.3.2002. THE BALANCE AMOUN T OF RS.11,58,72,913.66/- I.E. DIFFERENCE BETWEEN RS.120 ,08,40,830.47/- AND RS.108,49,67,916.81/- WAS CREDITED TO THE BANK ACCO UNT OF THE ASSESSEE IN FOLLOWING MANNER: (A) CA (LWIL) RS.70,91,390.19/- (PAGE NO.93) (B) CA (LWIL) RS.8,88,40,822.47/- (PAGE NO. 94) (C) CC (LWIL) RS.1,99,40,701.00/-(PAGE NO. 94) TOTAL RS.11,58,72,913.66/- 27. OUT OF THE AFORESAID SUM RS.1,99,40,701.00/- HAD BE EN CREDITED TO THE PROFIT AND LOSS ACCOUNT AND OFFERED AS INCOME. HOWE VER THE BALANCE AMOUNT ITA NOS. 1108, 2386/DEL/2007 23 OF RS.9,59,32,212.66/- WAS UTILIZED FOR REPAYMENT O F DEBTS FOR WHICH DETAILS WERE FURNISHED BY THE ASSESSEE BEFORE THE LD. CIT ( A). THE RAISING OF LOANS FOR ITS BUSINESS BY THE ASSESSEE FROM BANKS AGAINST THE CORPORATE GUARANTEE OF M/S GILLETTE COMPANY, USA IS WELL SUPPORTED BY T HE SANCTION LETTER OF BANK OF AMERICA, NEW DELHI, DATED 6.11.2001, A REFE RENCE OF WHICH HAS BEEN MADE BY THE LD. CIT (A) AT PAGE NO. 30 OF THE FIRST APPELLATE ORDER WITH THIS OBSERVATION THAT BANK OF AMERICA, USA HAD EXTE NDED CREDIT TO BANK OF AMERICA, NEW DELHI ON THE BASIS OF CORPORATE GUARAN TEE PROVIDED TO IT BY M/S GILLETTE COMPANY USA. A COPY OF THIS LETTER HAS BEEN MADE AVAILABLE AT PAGE NOS. 88 AND 89 OF THE PB-I. THE BANK OF AMERIC A, NEW DELHI HAD EXTENDED SHORT-TERM LOANS TO THE ASSESSEE ONLY AFTE R RECEIVING THE DEBIT AUTHORITY FROM BANK OF AMERICA, NEW YORK FAVOURING BANK OF AMERICA, NEW DELHI. THE BANK OF AMERICA, NEW DELHI HAD EXTEN DED THE LOAN TO LWIL ON THE BASIS OF THE CREDIT PROVIDED BY THE BAN K OF AMERICA, NEW YORK. SIMILARLY LOANS FROM OTHER BANKS NAMELY STAND ARD CHARTERED BANK AND CANARA BANK WERE PROVIDED. BESIDES, A LOAN OF USD 2.3 MILLION WAS ALSO RAISED FROM M/S GILLETTE COMPANY USA UNDER THE EXTERNAL COMMERCIAL BORROWING SCHEME OF RESERVE BANK OF INDIA. THE GILL ETTE CO. USA LATER ON WAIVED ITS CLAIM TO THIS FOREIGN CURRENCY LOANS ADV ANCED BY IT TO THE ASSESSEE. ITA NOS. 1108, 2386/DEL/2007 24 28. AS STATED HEREINABOVE THAT ON MARCH 19 TH , 1996 A JOINT VENTURE AGREEMENT WAS ENTERED BETWEEN M/S GILLETTE INDIA PV T. LTD. (GIPL) A SUBSIDIARY OF M/S GILLETTE COMPANY USA, MEMBERS OF ONE MR. D.K.JAIN FAMILY (JAIN FAMILY) AND JHPL HOLDINGS PVT. LTD. (J HPL) TO INCORPORATE THE ASSESSEE COMPANY FOR CARRYING ON THE BUSINESS OF MA NUFACTURE AND DISTRIBUTION OF WRITING INSTRUMENTS AND STATIONERY PRODUCTS IN INDIA. THE SHARE CAPITAL OF ASSESSEE COMPANY WAS THUS ALLOTTED TO JAIN FAMILY, JHPL, JIPL AND ITS AFFILIATES. IN THE YEAR 2001 GILLETTE COMPANY USA, SOLD ITS BUSINESS OF WRITING INSTRUMENTS TO NEWELL, USA. THE SHARE HOLDING OF THE GIPL IN LWIL WAS ALSO SOUGHT TO BE TRANSFERRED TO N EWELL. FOR THIS PURPOSE VARIOUS AGREEMENTS WERE EXECUTED BETWEEN GIPL, AND JAIN FAMILY ON 17.1.2001, WHEREBY NEWELL WAS ALSO MADE A PARTY (AS SIGNMENT AGREEMENT ) AND WHEREIN THE JAIN FAMILY HAD GIVEN CONSENT TO TR ANSFER OF SHARES BY GIPL AND ITS AFFILIATES TO NEWELL AND NEWELL HAD ALSO BE EN GRANTED AN APPROVAL BY THE MINISTRY OF COMMERCE AND INDUSTRY, DEPARTMENT O F INDUSTRIAL POLICY AND PROMOTION VIDE LETTER DATED 24.4.2001 FOR ACQUISITI ON OF SHARES OF THE ASSESSEE COMPANY FROM GILLETTE GROUP. IN THE YEAR 2 002 NEWELL EXPRESSED ITS UNWILLINGNESS TO ACQUIRE THE SHARE HOLDING OF T HE GILLETTE GROUP IN THE ASSESSEE COMPANY. IN OTHER WORDS NEWELL, DESIRED NO T TO JOIN OR BECOME A PART TO THE JOINT VENTURE AGREEMENT. IN FURTHERANCE TO ITS DECISION OF NEWELL A ITA NOS. 1108, 2386/DEL/2007 25 MEMORANDUM OF UNDERSTANDING DATED 5.1.2002 WAS EXEC UTED BETWEEN M/S GILLETTE COMPANY USA, NEWELL, JAIN FAMILY AND THE A SSESSEE COMPANY. THIS MEMORANDUM OF UNDERSTANDING CULMINATED INTO A MASTER AGREEMENT DATED 4.3.2002. A COPY OF THE SAID MASTER AGREEMENT DATED 4.3.2002 HAS BEEN MADE AVAILABLE AT PAGE NO. 392 TO 416 OF THE P APER BOOK VOLUME III. THE CONTENTS OF CLAUSE NO. 4 THEREOF ARE RELEVANT F OR ADJUDICATING THE ISSUE INVOLVED. THE SAID CLAUSE IS BEING REPRODUCED HEREI N FOR A READY REFERENCE: 4 FURTHER CONSIDERATION 4.1 M/S GILLETTE AND NEWELL AGREE TO PAY THE SUMS AS SE T FORT BELOW: (A) NEWELL SHALL PAY TO THE JAIN FAMILY (AS PER DETAILS PREVIOUSLY NOTIFIED BY MR.D.K. JAIN), AT CLOSING THE CONSIDERA TION AND COMPENSATION OF USD 10,000,000: (B) AT THE CLOSING M/S GILLETTE SHALL DEPOSIT INTO AN E SCROW ACCOUNT THE SUM OF USD 25,000,000, A PORTION OF WHICH SUM S HALL BE RELEASED TO PAY INDEBTEDNESS OWED BY LWIL TO THE BA NK OF AMERICA, BARAKHAMBA ROAD, NEW DELHI, AND THEREBY SE CURE THE RELEASE AND DISCHARGE OF THE CORPORATE GUARANTE E (S) GIVEN BY M/S. GILLETTE TO THE SAID BANK TO GUARANTEE CRED IT FACILITIES EXTENDED BY THE SAID BANK TO LWIL. THE REMAINDER OF THE ESCROWED FUNDS SHALL BE RELEASED TO WLIL. SATISFACT ION OF THE ITA NOS. 1108, 2386/DEL/2007 26 LWIL INDEBTEDNESS TO BANK OF AMERICA SHALL BE WITHO UT RECOURSE TO LWIL OR TO THE JAIN GROUP; AND (C) M/S. GILLETTE SHALL PREVIOUS YEAR TO MS. POOJA JAIN , AT CLOSING, A SUM OF USD 1,000,000, BY WAY OF COMPENSATION. 29. THE ABOVE CLAUSE NO. 4 OF THE MASTER AGREEMENT DATE D 4.2.2002 WAS FURTHER AMENDED VIDE AMENDMENT TO THE MASTER AGREEM ENT DATED 26.3.2002, WHICH READS AS UNDER: 4 FURTHER CONSIDERATION 4.1 ON THE CLOSING DATE, M/S GILLETTE, NEWELL AND / OR LWIL AGREE TO PAY THE SUMS AS SET FORTH BELOW: (A) NEWELL SHALL PAY TO THE JAIN FAMILY (AS PER DETAILS PREVIOUSLY NOTIFIED BY MR. D.K. JAIN), AT CLOSING, THE CONSIDE RATION AND COMPENSATION OF USD 10,000,000; (B) M/S GILLETTE SHALL CAUSE TO BE REMITTED A SUM OF RS . USD 24,744,299.00 TO THE BANK OF AMERICA, BARAKHAMBA RO AD, NEW DELHI TO BE DISBURSED AS FOLLOWS: (I) RUPEE EQUIVALENT OF USD 20,000,000.00 (UNITED S TATES DOLLARS TWENTY MILLION ONLY) TO BE PAID TO THE BANK OF AME RICA, BARAKHAMBA ROAD, NEW DELHI IN FULL AND FINAL SETTL EMENT OF THE AMOUNTS OWING AT CLOSING TO THE SAID BANK BY LWIL AND THEREBY ITA NOS. 1108, 2386/DEL/2007 27 SECURE THE RELEASE AND DISCHARGE OF THE CORPORATE GUARANTEE(S) GIVEN BY M/S GILLETTE TO THE SAID BANK TO GUARANTE E CREDIT FACILITIES EXTENDED BY THE SAID BANK TO LWIL; (II) UNITED TATES DOLLAR EQUIVALENT TO INDIAN RUPEE S 21,459,307.00 (RUPEES TWENTY MILLION FOUR HUNDRED FIFTY NINE THO USAND THREE HUNDRED AND SEVEN ONLY) TO BE PAID TO STANDARD CHA RTERED GRINDLAYS BANK IN FULL AND FINAL SETTLEMENT OF THE AMOUNTS OWING AT CLOSING TO THE SAID BANK BY LWIL; (III) UNITED STATES DOLLAR EQUIVALENT TO INDIAN RU PEES 100,000,000, (RUPEES ONE HUNDRED MILLION ONLY) TO BE PAID TO C ANARA BANK IN FULL AND FINAL SETTLEMENT OF THE AMOUNTS OWING AT CLOSING TO THE SAID BANK BY LWIL; (IV) UNITED STATES DOLLAR EQUIVALENT TO INDIAN RUPEES 19 ,940,701 (RUPEES NINETEEN MILLION NINE HUNDRED FORTY THOUSA ND SEVEN HUNDRED ONLY) TOWARDS SETTLEMENT OF CLAIMS MADE BY LWIL AGAINST SUPPLIES MADE BY M/S. GILLETTE; AND (V) THE BALANCE AMOUNT, IF ANY, SHALL BE CREDITED TO LW ILS ACCOUNT MAINTAINED WITH BANK OF AMERICA, NEW DELHI. (C) M/S GILLETTE SHALL PREVIOUS YEAR TO MS. POOJA JAIN, AT CLOSING, A SUM OF USD 1,000,000, BY WAY OF COMPENSATION. ITA NOS. 1108, 2386/DEL/2007 28 30. IN PURSUANT TO THE AFORESAID TERMS OF THE AGREEMENT A TOTAL SUM OF RS. 120,08,40,830.47/- WAS REMITTED BY M/S GILLETTE COM PANY USA, IN THE MANNER DISCUSSED ABOVE. A COPY OF MASTER AGREEMENT DATED 26.3.2002 HAS BEEN MADE AVAILABLE AT PAGE NOS. 417 TO 426 OF PAPE R BOOK VOLUME 2. THE CLAIM OF THE ASSESSEE REMAINED THAT REMITTANCE OF RS.118.09 CRORES AND WAIVER OF LOAN OF RS.3.40 CRORES BY M/S GILLETTE CO MPANY USA, CONSTITUTE CAPITAL RECEIPT. THE AO DID NOT AGREE AND CONCLUDED THAT THE REMITTANCE OF RS.118.09 CRORES IS A REVENUE RECEIPT SINCE THE SAM E IS IN THE NATURE OF SUBSIDY OR GRANT- IN- AID AND THE WAIVER OF LOAN IS INCOME OF THE ASSESSEE COMPANY, SINCE THE LOAN HAD BEEN UTILIZED FOR WORKI NG CAPITAL PURPOSE. THE AMOUNT OF REMITTANCE OF RS.118.09 CRORES CONSISTED OF (A) RS.108.49 CRORES REMITTED BY M/S GILLETTE COMPANY USA, AND PROPORTIO NATELY DIRECTED FOR THE BENEFIT OF 3 BANKS AND (B) RS.11.58 CRORES WAS REMI TTED BY M/S GILLETTE COMPANY USA AND CREDITED TO THE BANK ACCOUNT OF THE ASSESSEE. THE LD. CIT (A) HELD THAT BOTH THE AFORESAID SUMS CANNOT BE HELD TO BE SUBSIDY. IN HIS VIEW THE SUBSIDY IS ONLY IN CONNECTION WITH THE PAYMENT OF INCENTIVES WHICH ARE GRANTED BY THE GOVERNMENT AND NOT BY A PR IVATE INDIVIDUAL. IN THIS REGARD HE HAS TAKEN STRENGTH FROM THE DECISION OF H ONBLE SUPREME COURT IN THE CASE OF SH. AMBIKA MILLS LTD. VS. TEXTILE LABOU R ASSOCIATION, 1972 SC- 2 GGX 648. IN THIS REGARD HE HAS ALSO RELIED UPON T HE DECISION OF HONBLE ITA NOS. 1108, 2386/DEL/2007 29 DELHI HIGH COURT IN THE CASE OF HANDICRAFTS AND HAN DLOOM EXPORT CORPORATION OF INDIA VS. CIT 140 ITR 532 (DEL) HOLD ING THAT THERE IS A BASIC DIFFERENCE IN GRANT MADE BY THE GOVERNMENT OR FROM PUBLIC GENERALLY TO THE ASSESSEE IN A PARTICULAR LINE OF BUSINESS BUT IN A CASE WHERE PRIVATE PARTY AGREEING TO MAKE GOOD THE LOSS INCURRED BY AN ASSES SEE ON ACCOUNT OF MUTUAL RELATIONSHIP THAT SUBSIDIZED BETWEEN THEM IT WAS HE LD THAT SUCH PAYMENTS BY PRIVATE PARTY ARE IN THE NATURE OF VOLUNTARY PAYMEN T AND DO NOT STEM FROM ANY BUSINESS CIRCUMSTANCES AND HENCE, CANNOT BE TER MED AS SUBSIDY. WE FIND THAT THERE IS NO SCOPE OF ANY DEBATE ON THE FI NDING OF THE LD. CIT (A) THAT THE AMOUNT REMITTED WAS NOT SUBSIDY. THE LD. C IT (A) HAS ALSO TRIED TO DISTINGUISH THE DECISION OF HONBLE SUPREME COURT I N THE CASE OF SAHNEY STEEL AND PRESS WORKS LTD. VS. CIT, 228 ITR 253 (SC ) AND RIGHTLY SO, THAT THE DECISION RELIED UPON BY THE AO IS NOT APPLICABL E SINCE IN THE PRESENT CASE NO SUBSIDY WAS RECEIVED BY THE ASSESSEE. IN THE PRE SENT CASE EXCEPT THE AMOUNT TO THE EXTENT OF RS.11.58 CRORES, THE REMITT ED AMOUNT HAVE NOT BEEN RECEIVED BY THE ASSESSEE AND WAS DIRECTLY APPROPRIA TED FOR THE 3 BANKS. THE UNDISPUTED FACT ALSO REMAINED THAT M/S GILLETTE COM PANY USA HAD PROVIDED PRIMARY SECURITY IN THE SHAPE OF CORPORATE GUARANTE E FOR THE GRANT OF LOAN TO THE ASSESSEE COMPANY AND THE AMOUNT HAD BEEN PAID T O THE BANKERS FOR DISCHARGE OF SUCH CORPORATE GUARANTEE DIRECTLY. ONL Y DISPUTE REMAINED THAT ITA NOS. 1108, 2386/DEL/2007 30 AS TO WHETHER THE REMITTANCE WAS IN RESPECT OF ANY INTEREST HELD BY THE ASSESSEE. THE FACT THAT THE AMOUNT HAD BEEN PAID TO THE BANK FOR DISCHARGE OF THE STATED CORPORATE GUARANTEE ITSELF SUGGESTS THAT THE SUM REMITTED WAS NOT IN THE NATURE OF PROFIT BUT A CAPITAL RECEIPT. THER E IS NO MATERIAL TO SUPPORT THE FINDING OF THE AO THAT THE AMOUNT WAS PAID TO I MPROVE THE FINANCIAL POSITION OF THE ASSESSEE COMPANY BY DISCHARGING ITS LIABILITIES AND ENABLING THE ASSESSEE TO EARN INCOME. WE FIND THAT THE AMOUN T OF RS.108.49 CRORES WAS REMITTED BY GILLETTE COMPANY USA, DIRECTLY TO T HE BANKERS AS PER THE MASTER AGREEMENT AMENDED AND TO DISCHARGE ITS OWN L IABILITY. AS WE HAVE DISCUSSED ABOVE ABOUT THE MASTER AGREEMENT AND HAVE REPRODUCED RELEVANT CLAUSE OF THE AGREEMENT HEREINABOVE IN THE PREVIOUS PARAGRAPHS, THERE IS NOTHING TO SUGGEST THAT THE AMOUNT RS.108.49 CRORES WAS REMITTED TO THE ASSESSEE TO IMPROVE THE FINANCIAL POSITION OF THE A SSESSEE COMPANY BY DISCHARGING LIABILITY AND ENABLING THE ASSESSEE TO EARN INCOME. THUS SUCH FINDING OF THE AO IS CONTRARY TO THE MATERIAL ON RE CORD. THE AO HAS FURTHER HELD THAT THE SUM HAS BEEN RECEIVED AS A RESULT OF BREACH OF CONTRACT HENCE IT WAS A REVENUE RECEIPT. NO SUCH FACT IS EMERGING FRO M THE RECORD OF THE PRESENT CASE THAT THE AMOUNT IN QUESTION WAS REMITT ED DUE TO BREACH OF CONTRACT BETWEEN M/S GILLETTE COMPANY USA, AND THE ASSESSEE COMPANY. THE REMITTANCE WAS MADE IN FURTHERANCE TO FULFILLME NT OF THE CONTRACT WITH ITA NOS. 1108, 2386/DEL/2007 31 BANK OF AMERICA WITH M/S GILLETTE COMPANY USA. THE SUM PAID WAS ALSO NOT IN THE NATURE OF COMPENSATION BECAUSE THERE WAS NO OBLIGATION ON M/S GILLETTE COMPANY USA, UNDER ANY CONTRACT TO COMPENS ATE THE ASSESSEE. UNDER THESE FACTS WE DO NOT FIND INFIRMITY IN THE D ECISION OF THE FIRST APPELLATE AUTHORITY IN TREATING THE AMOUNT OF RS.10 8.49 CRORES OUT OF AN AGGREGATE ADDITION OF RS.118.49 CRORES MADE BY THE AO AS CAPITAL RECEIPT AND HENCE NOT CHARGEABLE TO TAX. IN THIS REGARD WE ALSO FIND SUPPORT FROM THE DECISIONS RELIED UPON BY THE LD. AR IN THE CASES OF SMARTALK (P) LTD. VS. ITO (SUPRA) AND CIT VS. GENERAL ELECTRODES AND EQUI PMENT LTD. (SUPRA) WHEREIN UNDER ALMOST IDENTICAL CIRCUMSTANCES ADDITI ON MADE HAS BEEN DELETED. IN THE CASE OF SMARTALK (P) LTD. BEFORE IT AT BOMBAY BENCH, THE ASSESSEE HAD RECEIVED CERTAIN LOAN FROM A FOREIGN B ANK. THE SHARES WERE TRANSFERRED SUBJECT TO FULFILLING GUARANTEE OBLIGAT ION OF THE TRANSFEREE. THE AMOUNT OF LOAN PAID BY SHAREHOLDER TO DISCHARGE GUA RANTEE OBLIGATION WAS NOT ASSESSABLE AS INCOME OR AS REMISSION OF LIABILI TY OR AS BENEFIT DERIVED FROM BUSINESS, HELD THE TRIBUNAL. LIKEWISE IN THE C ASE OF GENERAL ELECTRODES AND EQUIPMENTS LTD. BEFORE HONBLE BOMBAY HIGH COUR T, COLLABORATION AGREEMENT BETWEEN ASSESSEE CO. ARRANGED THROUGH FOR EIGN BANK FOR BANK GUARANTEE FOR RS.10 LAKHS TO ENABLE ASSESSEE TO OBT AIN LOAN OF LIKE AMOUNT FROM AN INDIAN BANK. SUBSEQUENTLY FOREIGN CO. PAID RS.5 LAKHS TO FOREIGN ITA NOS. 1108, 2386/DEL/2007 32 BANK IN PART EXTINCTION OF LIABILITY. ITO HELD THAT PAYMENT WAS IN COURSE OF CARRYING ON OF ASSESSEES BUSINESS AND ASSESSABLE A S INCOME. THE TRIBUNAL HELD THAT THE PAYMENT WAS MADE BY FOREIGN CO. TO FO REIGN BANK AND NOT TO ASSESSEE, THE PAYMENT AMOUNTED TO DISCHARGE FOREIGN CO.S LIABILITY, FOREIGN CO. WAS TO BE RELEASED OF ALL FINANCIAL OBLIGATIONS IN RELATION TO AFFAIRS OF ASSESSEE, BENEFIT OBTAINED BY THE ASSESSEE WAS NOT IN THE COURSE OF CARRYING ON OF BUSINESS AND THUS VALUE OF BENEFIT WAS NOT AS SESSABLE AS INCOME. THE HONBLE HIGH COURT DISMISSED THE APPEAL PREFERRED B Y THE REVENUE AGAINST THE ORDER OF THE TRIBUNAL. ALMOST SIMILAR FACTS OF THE CASE BEFORE US IN THE PRESENT CASE ARE THESE AS THE ASSESSEE CO. WAS INCU RRING LOSSES AND WAS UNABLE TO PAY OF THE LOANS IT HAD OBTAINED FROM THE BANKERS, THE GILLETTE CO. U.S.A. CONSIDERED IT PRUDENT TO SATISFY ITS OWN LIA BILITY AS A GUARANTOR FOR THE LOANS. IT WAS ONLY IN SUCH CIRCUMSTANCES, GILLETTE CO. U.S.A. REMITTED THE SUM TO DISCHARGE OF ITS OWN LIABILITY AND HENCE IT IS NOT CORRECT THAT THE ASSESSEE CO. OBTAINED ANY SUBSIDY OR GRANTS IN AID OR COMPENSATION AS A RESULT OF REMITTANCE OF A SUM TO THE BANKS. THE DEL HI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. LURGI INDIA LTD. (SUPRA) RE LIED UPON BY THE LD. AR HAS HELD THAT THE RECEIPT OF RS.13.00 CRORES BY AN ASSESSEE AS A NON- REFUNDABLE GRANT FROM ITS PARENT COMPANY WAS A CAPI TAL RECEIPT, DESPITE THE FACT THAT THE PAYMENT WAS MADE TO COMPENSATE THE AS SESSEE FOR TRADING LOSS ITA NOS. 1108, 2386/DEL/2007 33 SINCE IT DID NOT STEM FROM ANY BUSINESS CONSIDERATI ON. THE FINDING OF THE LD. CIT (A) ON THE ISSUE IS THUS UPHELD. THE DECISIONS RELIED UPON BY THE LD. DR ARE HAVING DISTINGUISHABLE FACTS, HENCE ARE NOT HELPFUL TO THE REVENUE. IN THE CASE O F S.B. SUGAR MILLS LTD. VS. CIT (SUPRA) THE ASSESSEE WAS PAID FOR RELINQUISHMEN T OF HIS INTEREST IN THE PROPERTY OUT OF A MUTUAL SETTLEMENTS AND THE RECEIP T WAS HELD ASSESSABLE. IN THE PRESENT CASE BEFORE US ASSESSEE HAS NOT BEEN PA ID DUE TO ITS RELINQUISHMENT OF INTEREST IN THE BUSINESS OR OTHER WISE. IN THE CASE OF KETTLEWELL BULLEN & CO. VS. CIT (SUPRA) IT WAS HELD THAT WHAT THE ASSESSEE WAS PAID WAS TO COMPENSATE IT FOR LOSS OF A CAPITAL ASSET AND WAS NOT, THEREFORE, IN THE NATURE OF A REVENUE RECEIPT. IN T HE PRESENT CASE BEFORE US AMOUNT REMITTED WAS NOT COMPENSATION. IN THE CASE O F S.KUMAR TYRES MANUFACTURING CO. LTD. VS. DCIT (SUPRA) THE COMPENS ATION WAS RECEIVED CONSEQUENT TO PREMATURE TERMINATION OF AGREEMENT WH ICH WAS HELD REVENUE RECEIPT LIABLE TO BE ASSESSED AS SUCH. IN THE CASE OF CIT VS. INDONIPPON CHEMICALS CO. LTD. (SUPRA) IT WAS HELD THAT BEING T HE FINAL AUTHORITY ON QUESTION OF FACT, THE TRIBUNAL WAS BOUND TO CONSIDE R ALL THE EVIDENCE AND THE ARGUMENTS RAISED BY THE PARTIES. SIMILAR VIEW HAS B EEN EXPRESSED IN THE CASES OF SRINIVASA PITTI & SONS VS. CIT (SUPRA) AND CIT V S. H.H. MAHARANI SETHU PARVATI BAI (SUPRA). IN THE CASE OF CIT VS. NOVA PR OMOTERS & FINLEASE (P) ITA NOS. 1108, 2386/DEL/2007 34 LTD. (SUPRA) THE HONBLE DELHI HIGH COURT HAS BEEN PLEASED TO HOLD THAT THE TRIBUNAL OUGHT TO HAVE SEEN THE MODUS OPERANDI BEHI ND THE ENTRY PROVIDER. IN THE CASE OF CIT VS. CHUHARMAL MANGHANDAS (SUPRA) THE ISSUE WAS REGARDING CHANGE IN THE CONSTITUTION OF FIRM ON THE DEATH OF THE PARTNER AND THE INCLUSION OF HIS WIFE. IN THE CASE OF RAGHUNARA IN RICE MILLS VS. CIT (SUPRA) THE ISSUE RAISED WAS ALLOWABILITY OF BUSINE SS EXPENDITURE IN THE CASE OF PAYMENTS AMOUNTED TO SETTLEMENT OF THE CONTRACT OTHERWISE THAN OF ACTUAL DELIVERY WITHIN THE MEANING OF EXPLANATION -2 TO SE CTION 24 OF THE INDIAN INCOME TAX ACT 1922. IN THE CASE OF DELHI STOCK EXC HANGE ASSOCIATION LTD. VS. CIT (SUPRA) THE QUESTION WAS WHERE THE ADMISSIO N FEES RECEIVED BY THE COMPANY FROM THE MEMBERS AND THE AUTHORIZED ASSISTA NTS WERE TAXABLE IN THE HANDS OF THE COMPANY. IN THE CASE OF MRS. SHEILA KA USHISH VS. CIT (SUPRA) THE ISSUE WAS REGARDING ANNUAL VALUE OF WAREHOUSE B ASED ON STANDARD RENT. IN THE CASE OF KARANPURA DEVELOPMENT CO. LTD. VS. CIT (SUPRA) THE ISSUE WAS AS TO WHETHER SALAMI RECEIVED FROM SUBLESSEE WAS IN COME OR CAPITAL. IN THE CASE OF BOMBAY OIL INDUSTRIES LTD. VS. DCIT (SUPRA) THE ISSUE WAS AS TO WHETHER ON FACTS IT WAS CLEARED THAT ENTIRE TRANSAC TION WAS GIVEN A FACEDE OF SALE/PURCHASE WHEREIN NO ACTUAL TRANSFER OF FUNDS T OOK PLACE. IN THE CASE OF CIT VS. G.R. KARTIKEYAN (SUPRA) THE ISSUE WAS TAXAB ILITY OF PRIZE RECEIVED IN CAR RACE FOR TESTING SKILL AND ENDURANCE. SIMILAR V IEW HAS BEEN EXPRESSED BY ITA NOS. 1108, 2386/DEL/2007 35 THE HONBLE HIGH COURT OF DELHI IN THE CASE OF CIT VS. AVINASH PASRICHA (SUPRA). IN THE CASE OF CIT VS. SMT. SHANTI MEATTLE Y (SUPRA) THE ISSUE WAS THE TAXABILITY OF PAYMENTS RECEIVED BY WIFE AND CHI LDREN UNDER AGREEMENT TO LIVE APART FROM HUSBAND. WE HOWEVER, FIND THAT THE RATIO LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT OF DELHI IN THE C ASE OF LOGITRONICS (P) LTD. VS. CIT AND ORS. (SUPRA) IS APPLICABLE IN THE PRESENT CASE. IN THAT CASE IT WAS HELD BY THE HONBLE HIGH COURT THAT IF A LOAN W AS TAKEN FOR ACQUIRING A CAPITAL ASSET, WAIVER THEREOF WOULD NOT AMOUNT TO A NY INCOME ASSESSABLE TO TAX. ON THE OTHER HAND, IF THE LOAN WAS FOR TRADING PURPOSE AND WAS TREATED AS SUCH FROM THE VERY BEGINNING IN THE BOOKS OF ACCOUN T WAIVER THEREOF MAY RESULT IN INCOME MORE SO WHEN IT WAS TRANSFERRED TO THE PROFIT OR LOSS ACCOUNT. WE FIND THAT THE LD. CIT (A) IN THE PRESEN T CASE HAS DECIDED THE TAXABILITY OF THE AMOUNT REMITTED BY GILLETTE CO. U SA KEEPING IN MIND AS TO WHETHER THOSE AMOUNT HAS BEEN TRANSFERRED TO THE PR OFIT OR LOSS ACCOUNT OF THE ASSESSEE OR NOT. GROUND NOS. 1 & 2 OF THE APPEAL PREFERRED BY THE R EVENUE ARE ACCORDINGLY REJECTED. 31. WE ALSO DO NOT FIND INFIRMITY IN THE FINDING OF THE LD. CIT (A) REGARDING SUSTAINING THE ADDITION OF RS.9.58 CRORES QUESTIONED BY THE ASSESSEE BEFORE US. THE LD. CIT (A) HAS SUSTAINED T HIS ADDITION OUT OF THE ITA NOS. 1108, 2386/DEL/2007 36 ADDITION OF RS.118.09 CRORES ON THE BASIS THAT M/S GILLETTE COMPANY USA, HAD PAID THE SAID AMOUNT TO THE CREDIT OF THE ASSES SEES ACCOUNT. THE CONTENTION OF THE ASSESSEE QUESTIONING THE ADDITION IN GROUND NOS. 1, 1.1 & 1.2 OF THE APPEAL PREFERRED BY IT REMAINED THAT THE LD. CIT (A) WHILE SUSTAINING THE ADDITION HAS FAILED TO APPRECIATE TH E CLAIM OF THE ASSESSEE THAT THE SAID SUM WAS NOT IN THE NATURE OF THE INCOME AS IT DID NOT ARISE IN THE COURSE OF CARRYING ON ITS BUSINESS HENCE, CANNOT BE TAXED U/S 28 (1) (IV) OF THE ACT. IT WAS ALSO CONTENDED THAT THE SUM RECEIVE D IS BEYOND THE SCOPE OF SECTION 5 OF THE IT ACT. THERE IS NO DISPUTE THAT A N AMOUNT OF RS.11.58 CRORES OUT OF RS.118.09 CRORES WAS CREDITED TO THE BANK ACCOUNT OF THE ASSESSEE. SINCE THE ASSESSEE HAD ALREADY CREDITED A SUM OF RS.1.99 CRORES TO ITS PROFIT AND LOSS ACCOUNT, AND OFFERED TO TAX, TH E LD. CIT (A) RESTRICTED THE ADDITION TO RS.9.58 CRORES. SINCE THE AMOUNT WAS CR EDITED TO THE BANK ACCOUNT OF THE ASSESSEE HENCE, IN ABSENCE OF ANY CO NTRARY AND SATISFACTORY EXPLANATION BY THE ASSESSEE, WE ARE OF THE VIEW THA T LD. CIT (A) HAS RIGHTLY TREATED THIS AMOUNT AS INCOME OF THE ASSESSEE. THE SAME IS UPHELD. THE GROUND NOS. 1, 1.1 & 1.2 OF THE APPEAL OF THE ASSES SEE ARE THUS REJECTED ISSUE NO. 3 (GROUND NOS. 2, 2.1 & 2.2 (ASSESSEE) 32. WE HAVE ALREADY DISCUSSED THE RELEVANT FACTS RELATI NG TO THE ISSUE HEREIN ABOVE IN PREVIOUS PARAGRAPHS. IN BRIEF THE A O DID NOT AGREE WITH THE ITA NOS. 1108, 2386/DEL/2007 37 EXPLANATION OF THE ASSESSEE THAT THE WAIVER OF LOAN OF RS.3.34 CRORES BY M/S GILLETTE COMPANY USA, CONSTITUTES CAPITAL RECEIPT A ND HE MADE ADDITION OF THIS AMOUNT OF RS.3.34 CRORES IN THE INCOME OF THE ASSESSEE. THE LD. CIT (A) HAS UPHELD THIS ACTION OF THE AO WITH THIS OBSERVAT ION THAT ALTHOUGH ORIGINALLY THE AMOUNT WAS RECEIVED AS A CAPITAL REC EIPT IN THE SHAPE OF LOAN HOWEVER, SINCE THE ASSESSEE NOW DOES NOT HAVE TO RE PAY THE SUM RECEIVED, IT CHARGES THE CHARACTER OF THE RECEIPT TO REVENUE REC EIPT. IN THIS REGARD THE LD. CIT (A) HAS PLACED RELIANCE ON THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF CIT VS. KARAM CHAND THAPAR 1996 222 ITR 112 (SC) HOLDING THAT SUBSEQUENT EVEN MUST BE AS SUCH THAT A DIFFERENT QU ALITY IS IMPRINTED ON THE RECEIPT. THE LD. CIT (A) ACCORDINGLY HELD THAT THE ACT OF WAIVER OF LOAN IS A SUBSEQUENT EVENT, WHICH IMPRINTS A DIFFERENT QUALIT Y ON RECEIPT. THE LD. CIT (A) HELD THAT THE DECISION OF HONBLE DELHI HIGH CO URT IN THE CASE OF CIT VS. PHOOL CHAND JIWAN RAM 131 ITR 37 (DEL) RELIED U PON BY THE LD. AR IS INAPPLICABLE TO THE FACTS OF THE PRESENT CASE AS IN THE PRESENT CASE WAIVER HAS NOT BEEN MADE FOR DISCHARGING ITS OWN LIABILITY BY GILLETTE COMPANY USA. 33. THE LD. AR REITERATED THE SUBMISSIONS OF ASSESSEE M ADE BEFORE THE AUTHORITIES BELOW ON THE ISSUE. HE SUBMITTED THAT T HE WAIVER WAS BY THE HOLDING COMPANY OF THE SHAREHOLDER, HENCE SECTION 4 1 (1) OF THE ACT IS INAPPLICABLE IRRESPECTIVE OF THE MANNER OF THE UTIL IZATION OF THE LOAN. HE ITA NOS. 1108, 2386/DEL/2007 38 SUBMITTED THAT THE AUTHORITIES BELOW HAVE ERRED IN HOLDING THAT THE SUM WAS UTILIZED FOR THE PURPOSE OF BUSINESS. HE SUBMITTED THAT THE AMOUNT WAS NOT TRANSFERRED IN THE PROFIT AND LOSS ACCOUNT OF THE A SSESSEE. HE PLACED RELIANCE ON THE FOLLOWING DECISIONS: A. CIT VS. PHOOL CHAND JIWAN RAM 131 ITR 37 (DEL) B. CIT VS. JAGATJIT INDUSTRIES LTD. ITA NO. 364 OF 200 7 (DEL. H.C.) C. MAHINDRA & MAHINDRA MILLS LTD. VS. CIT 261 ITR 501 (BOM) D. DCIT VS. TOSHA INTERNATIONAL LTD. 167 TAXMANN 187 (DEL)(SLP-DISMISSED) E. CIT VS. JINDAL EQUIPMENTS LEASING AND CONSULTANCY S ERVICES LTD. 37 DTR 172 (DEL) 34. THE LD. AR WHILE CONCLUDING HIS ARGUMENTS SUBMITTED THAT DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF JAGATJIT INDUSTRIES LTD. (SUPRA) IS FULLY APPLICABLE IN THE PRESENT CASE. 35. THE LD. DR ON THE OTHER HAND TRIED TO JUSTIFY THE O RDERS OF THE AUTHORITIES BELOW ON THE ISSUE. HE PLACED RELIANCE ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF LOGITRONICS P. LTD. VS. CIT & ORS. 333 ITR 386 (DEL) ITA NOS. 1108, 2386/DEL/2007 39 36. HAVING GONE THROUGH THE DECISIONS RELIED UPON BY TH E PARTIES ESPECIALLY THE DECISION OF HONBLE JURISDICTIONAL H IGH COURT OF DELHI, IN THE CASE OF CIT VS. JAGATJIT INDUSTRIES LTD. (SUPRA) WE FIND THAT THE FACTS IN THE CASE OF JAGATJIT INDUSTRIES LTD. (SUPRA) ARE MORE O R LESS SIMILAR TO THE FACTS OF THE PRESENT ASSESSEE BEFORE US. IN THAT CASE THE IS SUE WAS AS TO WHETHER 21% OF THE SAID GAIN SHOULD BE TREATED AS REVENUE RECEI PT BECAUSE OF THE REASON THAT 21% OF THE CAPITAL WAS TO BE UTILIZED FOR GENE RAL CORPORATE USES. THE HONBLE HIGH COURT OBSERVED THAT UNDISPUTEDLY THE E NTIRE MONEY COLLECTED IN FOREIGN EXCHANGE REPRESENTED SHARE CAPITAL. EVE N USE OF THE SHARE CAPITAL RAISED I.E. HOW THIS MONEY IS TO BE UTILIZED, WOULD BE OF NO CONSEQUENCE. EVEN IF MONEY IS RAISED BY ISSUANCE OF EQUITY SHARE DOMESTICALLY, THE MONEY THUS COLLECTED AS SHARE CAPITAL IS TREATED AS SHARE CAPITAL RECEIPT. OBVIOUSLY, FOR SETTING UP OR FOR EXPANSION OF BUSINESS, PART O F THE SAID SHARE CAPITAL RAISED CAN BE UTILIZED FOR ACQUIRING ASSETS AND FRO M OTHER PART, THE OTHER EXPENSES CAN BE MADE TREATING THE SAME AS WORKING C APITAL. IT WAS HELD BY THE HONBLE HIGH COURT THAT MERELY BECAUSE THE PART OF THE SHARE CAPITAL IS USED AS WORKING CAPITAL THAT HAS NEVER BEEN TREATED AS REVENUE RECEIPT, THE SAME CANNOT BE TREATED AS REVENUE RECEIPT. THE HON BLE HIGH COURT HAS BEEN PLEASED TO AFFIRM THE ORDER OF THE TRIBUNAL HOLDING THAT RELEVANT CONSIDERATION WOULD BE TO SEE THE SOURCE OF FUNDS U NDER WHICH IT WAS HELD ITA NOS. 1108, 2386/DEL/2007 40 AND NOT THE ULTIMATE UTILIZATION OF THE FUNDS. SIMI LAR VIEW HAS BEEN EXPRESSED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF MAH ENDRA & MAHENDRA LTD. VS. CIT (SUPRA). THERE THE LOAN WAS GRANTED B Y FOREIGN COMPANY AND INTEREST ON LOAN WAS DEDUCTED U/S 36 OF THE ACT. TH E PRINCIPAL AMOUNT OF LOAN WAS SUBSEQUENTLY WAIVED. IT WAS HELD THAT THE AMOUNT IS NOT ASSESSABLE U/S 28 (IV) OF THE ACT. IT WAS NOT REMISSION OF LIA BILITY, HENCE AMOUNT WAS NOT ASSESSABLE U/S 41 (1) OF THE ACT. THE ASSESSEE HAD PAID INTEREST AT 6% OVER A PERIOD OF 10 YEARS ON RS.57,74,064/-. IN RESPECT OF THAT INTEREST, THE ASSESSEE NEVER GOT DEDUCTION U/S 36 (1) (III) OR SECTION 37. IT WAS HELD THAT IN ORDER TO APPLY SECTION 41 (1), AN ASSESSEE SHOULD HAVE OBTAI NED A DEDUCTION IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS EXPENDIT URE OR TRADING LIABILITY INCURRED BY THE ASSESSEE. IN ABSENCE OF THAT SECTIO N 41 (1) OF THE ACT WAS NOT APPLICABLE. SECONDLY, EVEN ASSUMING THAT THE ASSESS EE HAD GOT DEDUCTION ON LOANS SECTION 41 (1) WAS NOT APPLICABLE BECAUSE SUC H DEDUCTION WAS NOT IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY. LASTLY, IT WAS HELD THAT THE TOOLING CONSTITUTES CAPITAL ASSETS AND NOT STOCK IN TRADE, THEREFORE, SECTION 41 (1) OF THE ACT WAS NOT APPLICABLE. LIKEWISE THE RAT IO LAID DOWN BY THE HONBLE DELHI HIGH COURT IN THE CASE OF LOGITRONICS P. LTD. VS. CIT & ORS (SUPRA) RELIED UPON BY THE LD. DR IS FULLY APPLICAB LE IN THE PRESENT CASE BEFORE US. IN THAT CASE THE HONBLE HIGH COURT HAS BEEN PLEASED TO HOLD THAT ITA NOS. 1108, 2386/DEL/2007 41 IF A LOAN WAS TAKEN FOR ACQUIRING A CAPITAL ASSET, WAIVER THEREOF WOULD NOT AMOUNT TO ANY INCOME EXIGIBLE TO TAX. ON THE OTHER HAND, IF THE LOAN WAS FOR TRADING PURPOSE AND WAS TREATED AS SUCH FROM THE VE RY BEGINNING IN THE BOOKS OF ACCOUNT THE WAIVER THEREOF MAY RESULT IN I NCOME MORE SO WHEN IT WAS TRANSFERRED TO THE PROFIT AND LOSS ACCOUNTS, HE LD THE HONBLE HIGH COURT. WHILE HOLDING SO THE HONBLE DELHI HIGH COURT HAS B EEN PLEASED TO REFER SEVERAL DECISIONS INCLUDING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. KARAM CHAND THAPAR (SUPRA) RELIED U PON BY THE LD. CIT (A) IN THE PRESENT CASE. WE THUS REACH TO THE CONCL USION THAT UNLESS IT IS EXAMINED IN THE PRESENT CASE AS TO WHAT WAS THE PUR POSE OF TAKING THE LOAN AMOUNT WHICH WAS WAIVED, THE TAXABILITY OF THE WAIV ED AMOUNT AS INCOME CAN NOT BE ADJUDICATED UPON. SINCE THIS MATERIAL AS PECT OF THE FACTS HAS REMAINED TO BE EXAMINED BY THE AUTHORITIES BELOW BE FORE HOLDING THE WAIVED AMOUNT AS INCOME EXIGIBLE TO TAX, WE TO MEET THE EN D OF JUSTICE, WHILE SETTING ASIDE THE ORDERS OF THE AUTHORITIES BELOW R EMAND THE MATTER TO THE FILE OF THE A.O. WITH DIRECTION TO ADJUDICATE UPON THE I SSUE AFRESH IN VIEW OF THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF LOGITRONICS P. LTD. VS. CIT AND OTHERS (SUPRA) AS DISCUSSED ABOVE AFTER AFFORDING PROPER OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IN RESU LT THE GROUND NOS. 2, 2.1 & ITA NOS. 1108, 2386/DEL/2007 42 2.2 ARE ALLOWED FOR STATISTICAL PURPOSE. THE ISSUE INVOLVED THEREIN IS NOW TO BE DECIDED BY THE AO. 37. CONSEQUENTLY APPEAL PREFERRED BY THE REVENUE IS DIS MISSED AND THAT PREFERRED BY THE ASSESSEE IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 21/09/201 2. SD/- SD/- ( G.D. AGRAWAL) ( I. C. SUDHIR ) VICE PRESIDENT JUDICIAL MEMBER *A.K.VERMA COPY OF ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR BY ORDER DEPUTY REGISTRAR, ITAT