The Jtcit (Asstt) Sr-2, Baroda V. M/S M C Daver Aromatics Ltd, Baroda

ITA 1723/AHD/2001

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 6295 (ITAT-AHMEDABAD)
• Duration Of Justice: 8 year(s) 9 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-05-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 03-05-2010
• Assessment Year: 1997-1998
• Appeal Filed On: 31-07-2001
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C K MISHRA
• Assessee Lawyers: J P SHAH
• Keywords: Capital asset; Gift; Business income; Depreciation; Opportunity of being heard; Source of fund; Capital receipt
• Section: 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH AHMEDABAD (BEFORE S/SHRI BHAVNESH SAINI, JM AND N. S. SAINI, AM) ITA NO.1723/AHD/2001 A. Y.: 1997-98 THE J. C. I. T. (ASSTT.). SPECIAL RANGE-2, 6 TH FLOOR, AAYAKAR BHAVAN, RACE COURSE CIRCLE, BARODA 390 007 VS M. C. DAVER AROMATICS LTD., M/1, VENUS APARTRMENT, PRODUCTIVITY ROAD, BARODA 390 007 PA NO. -- (APPELLANT) (RESPONDENT) APPELLANT BY SHRI C. K. MISHRA, DR RESPONDENT BY SHRI J. P. SHAH, AR O R D E R PER BHAVNESH SAINI: THIS APPEAL BY REVENUE IS DIRECTED AGAINST ORDER OF THE CIT(A)-I, BARODA DATED 02-03-2 001 FOR ASSESSMENT YEAR 1997-98. 2. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOT H THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND C ONSIDERED THE MATERIAL AVAILABLE ON RECORD. 3. ON GROUND NO.1 (I) OF THE APPEAL, THE REVENUE CH ALLENGED THE ORDER OF THE LEARNED CIT(A) IN DELETING THE ADDITION MADE ON ACCOUNT OF COMPENSATION RECEIVED ON TERMINATION OF AGENCY AGRE EMENT OF RS.17,50,000/-. THE ASSESSEE COMPANY HAD ENTERED IN TO AN AGREEMENT WITH ITS TECHNICAL COLLABORATOR M/S. FIRMENICH S. A . (FSA IN SHORT) ON 16-06-1986. THE SAID AGREEMENT WAS TERMINATED WITH EFFECT FROM 01-04-1997 VIDE TERMINATION OF AGENCY AGREEMENT EFF ECTIVE FROM 31-10-1996. THE ASSESSEE RECEIVED COMPENSATION OF 7 0000 SWISS FRANCS (RS.17,50,000/-) FROM FSA ON TERMINATION OF THE SAI D AGREEMENT. THE ASSESSEE HAS SHOWN ENTIRE COMPENSATION OF RS.17,50, 000/- IN ITS PROFIT AND LOSS ACCOUNT AS EXTRA ORDINARY ITEMS AND IT WAS CLAIMED AS CAPITAL ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 2 RECEIPT NOT EXIGIBLE TO TAX. IT WAS SUBMITTED BEFOR E THE LEARNED CIT(A) THAT THE AO HAS OBSERVED THAT SUBMISSIONS OF THE ASSESSE E ARE NOT TENABLE AND HE RELIED ON THE PROVISIONS OF SECTION 28(II) ( C ) OF THE IT ACT. THE AO ALSO NOTED THAT AS PER THE PROVISIONS OF LAW AS ON DATE, THE ASSESSEE COMPANY FALLS UNDER SUB SECTION ( C ) TO CLAUSE (II ) OF SECTION 28 OF THE IT ACT AS A RECIPIENT OF THE COMPENSATION ON TERMINAT ION OF THE AGENCY. THE AO RELIED UPON JUDICIAL PRONOUNCEMENTS IN SUPPORT O F HIS FINDINGS INCLUDING DECISIONS OF THE HONBLE SUPREME COURT IN CASES OF BEST & CO. (P) LTD., 60 ITR 11 AND RAI BAHADUR JAI RAM 35 ITR 148. THE AO FOUND IT TO BE A NORMAL BUSINESS TRANSACTION AND TREATED IT AS REVENUE RECEIPT. THE FINDING OF THE AO WAS CHALLENGED BEFORE THE LEA RNED CIT(A) AND IT WAS SUBMITTED THAT THERE IS NO DISPUTE THAT THE IMPUGNE D TRANSACTION IS PRIMA FACIE NOT HIT BY SECTION 28 (II) ( C ) OF THE IT ACT. IT WAS SUBMITTED THAT THOUGH THE AGREEMENT IS DESCRIBED LOOSELY AS A GENCY AGREEMENT, IN FACT, IT IS NOT SO. IT WAS SUBMITTED THAT THIS SUB CLAUSE FIRST CREATES A FICTION UNDER WHICH A CAPITAL RECEIPT IS TREATED AS INCOME IN NATURE. IT IS TRITE LAW TO SAY THAT FICTION HAS TO BE CONSTRUED S TRICTLY AND CANNOT BE EXTENDED BEYOND THE LEGITIMATE FIELD AS HELD BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF BAI VINA 58 ITR 100. IT WAS AL SO SUBMITTED THAT THE CONCEPT OF AGENT AND THE PRINCIPAL, MASTER AND SERV ANT AND INDEPENDENT CONTRACTOR ARE GOVERNED BY THE PROVISIONS OF INDIAN CONTRACT ACT. THIS ASPECT OF THE MATTER HAS BEEN DEALT WITH IN DETAIL BY THE HONBLE ASSAM AND NAGALAND HIGH COURT IN THE CASE OF DWIJENDRA CH ANDRA CHOWDHURY 61 ITR 97. THE ASSESSEE RELYING ON THE SAME SUBMITT ED THAT AN AGENT IS TO BE DISTINGUISHED ON THE ONE HAND FROM A SERVANT AND ON THE OTHER HAND FROM AN INDEPENDENT CONTRACTOR. A SERVANT ACTS UNDER THE DIRECT CONTROL AND SUPERVISION OF HIS MASTER AND IS BOUND TO CONFORM TO ALL REASONABLE ORDERS GIVEN TO HIM IN THE COURSE OF HIS WORK AND INDEPENDENT CONTRACTOR ON THE OTHER HAND IS ENTIREL Y INDEPENDENT OF ANY CONTROL OR INTERFERENCE AND MERELY UNDERTAKES TO PR ODUCE A SPECIFIED RESULT, EMPLOYING HIS OWN MEANS AND METHOD. AN AGEN T THOUGH BOUND TO ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 3 EXERCISE HIS AUTHORITY IN ACCORDANCE WITH LAWFUL IN STRUCTIONS WHICH MAY BE GIVEN TO HIM FROM TIME TO TIME BY HIS PRINCIPAL, IS NOT SUBJECTED IN ITS EXERCISE TO THE DIRECT CONTROL OR SUPERVISION OF TH E PRINCIPAL. AN AGENT AS SUCH, IS NOT A SERVANT BUT A SERVANT IS GENERALLY F OR SOME PURPOSES, HIS MASTERS AGENT AND THE EXTENT OF THE AGENCY DEPENDS UPON THE DUTIES OR POSITION OF THE SERVANT, AND IN SOME CASES AN INDEP ENDENT CONTRACTOR MAY ALSO BE AN AGENT. THE ASSESSEE MADE DETAIL SUBM ISSION TO DISTINGUISH REAL CHARACTER OR ACTIVITIES OF AN AGEN T VIS- A- VIS ACTIVITIES OF A CONTRACTOR. IT WAS SUBMITTED THAT THE AGREEMENT E NTERED IN TO BETWEEN THE ASSESSEE AND FSA IS FOR TECHNICAL COLLABORATION UNDER WHICH THE ASSESSEE UNDERTAKEN MANUFACTURING AND DISTRIBUTION OF PRODUCTS OF FSA OR WHICH THE ASSESSEE WAS ENTITLED TO CERTAIN COMMI SSIONS AGAINST ORDERS SECURED BY THE ASSESSEE. THEREFORE, IT IS CLEAR THA T RELATIONSHIP BETWEEN THE ASSESSEE AND FSA WAS NOT OF AN AGENT AND PRINCI PAL BUT OF AN INDEPENDENT CONTRACTOR. NOW, MERE GIVING UP OF DIST RIBUTION RIGHT AND THE COMPENSATION RECEIVED THEREUPON WOULD NOT FALL WITH IN THE MISCHIEF OF SAID SECTION 28 (II) ( C ) OF THE IT ACT. IT WAS SU BMITTED THAT WHEN THE ASSESSEE WAS GIVEN EXCLUSIVE RIGHT OF MANUFACTURING AND THEN DISTRIBUTING THE PRODUCT OF FSA, ON THE BASIS OF CO MMISSION, THE RELATIONSHIP BETWEEN THE ASSESSEE AND FSA CANNOT BE ONE OF THE AGENT AND PRINCIPAL. THEREFORE, AS A COROLLARY, THOUGH DE SCRIBED AS AN AGENT IN THE AGREEMENT, IN TRUTH AND SUBSTANCE, THE SAID AGR EEMENT WOULD NOT BRING INTO EXISTENCE OF THE RELATIONSHIP OF AGENT A ND PRINCIPAL BUT AN INDEPENDENT CONTRACTOR. IT WAS, THEREFORE, SUBMITTE D THAT THE CASE OF THE ASSESSEE DOES NOT FALL U/S 28 (II) ( C ) OF THE IT ACT. IT WAS FURTHER SUBMITTED THAT AFTER CLARIFYING THE IMPUGNED AMOUNT AS INCOME OR NOT, UNDER THE AFORESAID PROVISIONS OF THE IT ACT, THE O NLY ISSUE SURVIVES FOR CONSIDERATION IS THE NATURE AND CHARACTER OF THE RE CEIPTS FOR WHICH THE ASSESSEE SUBMITTED THAT THE IMPUGNED RECEIPT IS CLE ARLY A CAPITAL RECEIPT AS HELD BY THE DECISIONS RELIED UPON BEFORE THE AO. IT WAS FURTHER SUBMITTED THAT COMPENSATION RECEIVED FOR IMMOBILIZA TION, STERILIZATION, ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 4 DESTRUCTION OR LOSS, TOTAL OR PARTIAL OF CAPITAL AS SETS WOULD BE CAPITAL RECEIPT AND FOR THE REASONS GIVEN EARLIER, THE ADDI TION DESERVES TO BE DELETED. THE LEARNED CIT(A) CONSIDERING THE SUBMISS IONS OF THE ASSESSEE AND THE MATERIAL ON RECORD DELETED THE ENTIRE ADDIT ION. HIS FINDING IN PARA 2.9 OF THE IMPUGNED ORDER ARE REPRODUCED AS UN DER: 2.9 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS O F THE APPELLANTS COUNSEL AND THE OBSERVATIONS OF THE ASS ESSING OFFICER MADE IN THE ASSESSMENT ORDER. SO FAR THE IS SUE RELATING TO APPLICABILITY OF SECTION 28 (II) ( C ) R. W. S. 2 (24) OF THE ACT, I FEEL THE APPELLANTS SUBMISSIONS ARE ACCEPTABLE. ON GOING THROUGH THE TECHNICAL COLLABORATION AGREEMENT ENTER ED INTO BETWEEN THE APPELLANT AND FSA IT DOES NOT SPEAK OF THE RELATION BETWEEN THE AGENT AND PRINCIPAL. FINDING A VERY THIN LINE OF AGREEMENT, THE LANGUAGE USED IN THE AGREEME NT CONNOTES FOR ALL PRACTICAL PURPOSES THAT IT IS A CO NTRACTORS AGREEMENT, SO FAR APPELLANT HAS MANUFACTURED LOT OF ITEMS UNDER THE KNOWLEDGE PROVIDED BY FSA. IT MAY BE LOOS ELY HELD THAT THE COMPENSATION WAS ON TERMINATION OF AGENCY AGREEMENT BUT AT THE SAME TIME IT WILL NOT BE OUT O F PLACE TO MENTION THAT THE SAID COMPENSATION WAS ON TERMINATI ON OF THE TECHNICAL COLLABORATION AND THEREFORE, IT DOES NOT FALL WITHIN THE AMBIT OF SECTION 28 (II) ( C ) R. W. S. 2(24) (V) O F THE ACT. THE ASSESSING OFFICER AS WELL AS THE APPELLANT HAVE CIT ED VARIOUS JUDICIAL PRONOUNCEMENTS, BUT AFTER CAREFUL CONSIDER ATION OF THE SAID DECISIONS, I FEEL THAT THE MATERIAL ASPECT IN THE PRESENT CASE IS THAT THE APPELLANT ON TERMINATION OF AGENCY AGREEMENT WILL NOT BE ABLE TO MANUFACTURE OR TO DISTRIBUTE TH E PRODUCTS OF FSA. THE CANCELLATION OF THE AGENCY HAS CERTAINLY I MPAIRED THE TRADING STRUCTURE OR HAS RESULTED IN LOSS OF SOURCE OF INCOME. IN OTHER WORDS, THE COMPENSATION IS FOR STERILIZATION OR DESTRUCTION OF CAPITAL ASSET AND THEREFORE, IT IS A CAPITAL RECEIPT. IN VIEW THEREOF I FEEL THAT THE APPELLANT HAS CORRECTLY CLAIMED THE IMPUGNED AMOUNT OF COMPENSATION AS CAPI TAL RECEIPT AND THE ADDITION MADE THEREOF IS NOT JUSTIF IED AND THE SAME STANDS DELETED. 4. THE LEARNED DR RELIED UPON THE ORDER OF THE AO A ND SUBMITTED THAT PROVISIONS OF SECTION 28(II) ( C ) OF THE IT ACT AP PLIES IN THE CASE OF THE ASSESSEE. HE HAS SUBMITTED THAT THE ASSESSEE HAS RE CEIVED THE AMOUNT ON TERMINATION OF THE AGENCY AGREEMENT FROM FSA, TH EREFORE, IT IS A CLEAR CASE OF TERMINATION OF AGENCY AGREEMENT. THEREFORE, THE RECEIPT IS ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 5 REVENUE IN NATURE. THE LEARNED DR SUBMITTED THAT AS PER THE ORIGINAL AGREEMENT DATED 16-06-1986 THE ASSESSEE WAS NOT PRO VIDED ANY RIGHT TO COMPENSATION IN THE EVENT OF TERMINATION OF THE AGE NCY. THE LEARNED DR SUBMITTED THAT PB-1 IS THE AGENCY AGREEMENT, ACCORD ING TO WHICH THE ASSESSEE WAS ENTITLED FOR COMMISSION ON ALL THE TRA NSACTIONS WHETHER IT WAS FOR MARKETING OR PRODUCTION. THE LEARNED DR ALS O REFERRED TO PB-10 WHICH IS TERMINATION OF THE AGENCY AGREEMENT IN WHI CH THE ASSESSEE WAS PROVIDED WITH AMOUNT IN QUESTION ON ACCOUNT OF SEPA RATION PAY AFTER TERMINATION OF THE AGREEMENT IN QUESTION. THE LEARN ED DR THEREFORE, SUBMITTED THAT THE LEARNED CIT(A) WRONGLY ASSUMED C ERTAIN FACTS IN CONTRADICTION TO THE FINDING OF THE AO. THE LEARNED DR SUBMITTED THAT THE AGREEMENT IS TERMINATED WITH MUTUAL AGREEMENT OF BO TH THE PARTIES VIDE TERMINATION AGREEMENT WHICH WAS FOUND TO BE NORMAL BUSINESS TRANSACTION. THEREFORE, THE ENTIRE RECEIPT ON ACCOU NT OF TERMINATION OF SUCH AGREEMENT IS COVERED U/S 28 (II) (C) OF THE IT ACT AS REVENUE RECEIPT. THE LEARNED DR THEREFORE, SUBMITTED THAT THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THE ORDER OF THE AO MAY BE RES TORED. 5. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE A SSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW A ND SUBMITTED THAT PB-1 IS THE AGENCY AGREEMENT THROUGH WHICH THE ASSE SSEE WAS ENTITLED FOR COMMISSION TO BE CALCULATED ON ALL THE TRANSACT IONS MADE THROUGH THE ASSESSEE IN A PRESCRIBED PERCENTAGE. THE LEARNED CO UNSEL FOR THE ASSESSEE REFERRED TO PB-4 WHICH IS ADDENDUM I TO T HE BASIC AGREEMENT DATED 16-06-1986 THROUGH WHICH THE ASSESSEE WAS REF ERRED TO AS ELABORATORS WHO SHALL DILUTE FLAVOURS, PREPARE EMUL SIONS OR SPM AND COMPOUND LOCALLY ACCORDING TO TECHNICAL INSTRUCTION GIVEN BY FSA ONLY. HE HAS REFERRED TO PB-10 WHICH IS TERMINATION OF TH E MAIN AGREEMENT THROUGH WHICH THE ASSESSEE WAS PAID SEPARATION FEE OF CHF 70,000 (EQUIVALENT TO RS.17,50,000/-). THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE CANCELLATION OF THE AGREEMENT WA S BOTH FOR ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 6 MANUFACTURING/PRODUCTION AND MARKETING. HE HAS SUBM ITTED THAT THE LEARNED CIT(A) WAS, THEREFORE, JUSTIFIED IN HOLDING THE RECEIPT TO BE CAPITAL TO IN NATURE AND RIGHTLY DELETED THE ADDITION. THE LEARNED COUNSEL FOR THE ASSESSEE FAIRLY ADMITTED THAT PART OF THE RECEIPT I S TAXABLE AND FILED A CHART TO SHOW THAT ONLY FOR COMMISSION INCOME THE S UM OF RS.1,19,489/- IS COVERED U/S 28 (II) ( C ) OF THE IT ACT AND SUBM ITTED THAT THE REST IS CAPITAL RECEIPT AS ABOVE. HE HAS, THEREFORE, SUBMIT TED THAT ADDITION TO THE ABOVE EXTENT COULD BE MADE AGAINST THE ASSESSEE. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSION AND THE MATERIAL AVAILABLE ON RECORD. SECTION 28(II) ( C ) OF THE IT ACT PROVI DES THE FOLLOWING INCOME SHALL BE CHARGEABLE TO INCOME TAX UNDER THE HEAD PR OFITS AND GAINS OF BUSINESS OR PROFESSION: (II) ANY COMPENSATION OR ANY OTHER PAYMENT DUE OR RECEIVED BY; ( C) ANY PERSON, BY WHATEVER NAME CALLED, HOLDIN G AN AGENCY IN INDIA FOR ANY PART OF THE ACTIVITIES RELA TING TO THE BUSINESS OF ANY OTHER PERSON AT OR IN CONNECTIO N WITH THE TERMINATION OF THE AGENCY OR THE MODIFICAT ION OF THE TERMS AND CONDITIONS RELATING THERETO. 6.1 PB-1 IS THE AGENCY AGREEMENT DATED 16-6-1986. I T PROVIDES THAT THE ASSESSEE IS REFERRED IN THE AGREEMENT AS AN AGENT A ND FSA IS TO BE TREATED AS PRINCIPAL. DURING THE AGREEMENT THE AGEN T SHALL REFRAIN FROM REPRESENTING ANY OTHER FIRM DEALING IN GOODS COMPET ING OR LIKELY TO COMPETE WITH FSA. ON THE TRANSACTIONS MADE THROUGH THE ASSESSEE BEING THE AGENT, THE ASSESSEE SHALL BE ENTITLED TO COMMIS SION CALCULATED AT 3% TO 7% OF THE ANNUAL TURNOVER PRESCRIBED IN PARA 4 O F THE AGREEMENT. THE COMMISSION SHALL BE SAME FOR ALL THE PRODUCTS SOLD BY FSA. THE COMMISSION SHALL BE CALCULATED ON INVOICE VALUE AND SHALL BE PAID EVERY 3 MONTHS I.E. AT THE END OF SEPTEMBER, DECEMBER, MARC H AND JUNE EACH ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 7 YEAR. THE COMMISSION IS PAYABLE ONLY ON FULLY PAID INVOICES. CLAUSE 9 OF THIS AGREEMENT PROVIDES AS UNDER: 9) THIS CONTRACT COMES INTO FORCE AS FROM JULY 1, 1986. ITS DURATION IS THREE YEARS AND IT SHALL CONTINUE AUTOMATICALLY FOR SUBSEQUENT PERIODS OF THREE YEARS, UNLESS ONE OF THE PARTIES EXPRESS THE WISH TO TERMINATE IT. MOREOVER, BOTH PARTIES RESERVE THE RIGHT TO TERMINATE THE AGREEMENT BY MEANS OF A REGISTERED AIRMAIL LETTER, GIVING THREE MONTHS NOTICE, AT ANY TIME. PB-4 IS THE ADDENDUM-I TO THIS AGREEMENT IN WHICH T HE ASSESSEE IS REFERRED TO AS ELABORATOR WHO SHALL DILUTE, PREPARE , EMULSION AND SMPS AND COMPOUND LEGALLY ACCORDING TO TECHNICAL INSTRUC TIONS GIVEN BY FSA ONLY. IN THIS ADDENDUM NO COMMISSION IS PROVIDED, W HICH WOULD THEREFORE, PROVE THAT ON ALL THE TRANSACTIONS AS PE R THE MAIN AGREEMENT THE ASSESSEE WOULD BE ENTITLED TO COMMISSION ON THE TRANSACTIONS WHICH ARE ROUTED THROUGH HIM. PB-10 IS THE TERMINATION OF THE AGENCY AGREEMENT WHICH IS REPRODUCED AS UNDER: CONCERN: TERMINATION OF AGENCY AGREEMENT DATED JUN E 16,1986 DEAR MR. PATEL, FURTHER TO RECENT DISCUSSIONS HELD WITH BOTH MICHE L BONGI AND GERARD MAUNEE, WE WOULD LIKE TO REITERATE YOU T HE STRONG AND GROWING PRESSURES RECEIVED FROM OUR MAJOR AND T ARGETED CUSTOMERS TO HAVE FIRMENICH AS A TRUE AND CLOSE PAR TNER IN INDIA, I.E. TO HAVE FERMENICH REINFORCE ITS OWN SAL ES AND MARKETING ORGANIZATION. INDEED, THE PRESENT AND CLE AR TRENDS OBSERVED ON THE FRAGRANCE SIDE TOWARDS A STRONGER P RODUCT GLOBALISATION, A CLOSE PARTNERSHIP AS PART OF THE T OTAL QUALITY PROGRAM, WHICH HAS ALSO CONFIDENTIALITY AND EXCLUSI VELY IMPLICATIONS, AND PRICE HARMONISATION WITH ITS CONS EQUENT PRICE PRESSURES ARE THE FUNDAMENTAL, TRULY MARKET D RIVEN ELEMENTS WHICH ARE COMPELLING US TO REVIEW OUR PRES ENT MODUS OPERANDI. THIS IS THE REASON WHY WE CAME TO T HE CONCLUSION THAT THE CURRENT AGENCY CONTRACT BETWEEN FIRMENICH AND M. C. DAVAR SHOULD BE REPLACED BY A NEW ORGANIZ ATION. ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 8 FOR THE PREVIOUSLY MENTIONED REASONS, WE FORMALLY N OTIFY YOU OF OUR DECISION TO TERMINATE THE AGENCY AGREEMENT B ETWEEN FIRMENICH AND M. C. DAVAR AND ADDENDUM I, DATED JUN E 16, 1986 EFFECTIVE OCTOBER 31, 1996, OR SUCH OTHER DATE MUTUALLY AGREED FOR THE START UP OF THE NEW ORGANISATION. ALL COMMISSIONS ON INVOICES FOR ORDERS TRANSMITTED TO FIRMENICH UP TO THIS DATE WILL OBVIOUSLY BE PAID TO YOU, WHEN DULY PAID FOR. WE WOULD LIKE TO TELL YOU HOW MUCH WE APPRECIATE YO UR COLLABORATION DURING THESE LEARNING YEARS OF WHICH WE WILL KEEP A STRONG IMPRESSION IN OUR MINDS. CONSIDERING THE DEDICATION TO OUR BUSINESS AND YOUR CONTRIBUTION OV ER THE PAST YEARS WE ARE PLEASED TO CONFIRM AS AGREED UPON, A SEPARATION PAY OF CHF 70000 (SEVENTY THOUSAND SWISS FRANCS) AS FINAL SETTLEMENT OF OUR BUSINESS RELATIO NSHIP. THIS PAYMENT WILL BE MADE NEXT NOVEMBER 30, 1996. AS FAR AS THE COMING WEEKS ARE CONCERNED, WE WOULD ALREADY LIKE TO THANK YOU FOR EVERY EFFORT YOU WILL MAKE SO AS TO MAKE THE TRANSITION PERIOD AS SMOOTH AS POSSIBLE IN THE INTEREST OF ALL PARTIES CONCERNED. ONCE AGAIN, WE THANK YOU FOR YOUR SUPPORT AND ARE C ONFIDENT THAT WE WILL KEEP A CLOSE CONTACT UNDER DIFFERENT S CHEMES. FOR OUR RECORDS, WE WOULD VERY MUCH APPRECIATE YOUR RETURNING THE ENCLOSED COPY OF THIS LETTER DULY SIG NED FOR APPROVAL. 6.2 CONSIDERING THE BASIC AGENCY AGREEMENT AND THE CANCELLATION OF THE AGREEMENT, IT IS CLEAR THAT THE ASSESSEE WOULD BE ENTITLED FOR COMMISSION ON ALL THE TRANSACTIONS ROUTED THROUGH I T AND COMMISSION IS PAYABLE ON ALL THE PRODUCTS SOLD BY FSA AND THE COM MISSION SHALL BE CALCULATED AS PER THE INVOICE. CLAUSE 9 OF THE AGEN CY AGREEMENT PROVIDES THAT IT WOULD BE APPLICABLE FOR 3 YEARS AND SHALL A UTOMATICALLY CONTINUE FOR FURTHER 3 YEARS UNLESS ONE OF THE PARTIES EXPRE SSES THE WISH TO TERMINATE IT AND SUCH TERMINATION COULD BE DONE BY GIVING 3 MONTHS NOTICE AT ANY TIME. IT WOULD, THEREFORE PROVIDE THA T ORIGINAL AGENCY AGREEMENT WAS IN FORCE UP TO 30-06-1989 AND IF AUTO MATICALLY CONTINUE ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 9 FOR SUBSEQUENT PERIOD IT WOULD HAVE CONTINUED UP TO 30-06-1992. NO FURTHER MATERIAL IS PRODUCED BEFORE US AS TO WHAT H APPENED TO FURTHER CONTINUATION OF THIS AGREEMENT FOR A LATER DATE. NO THING IS PROVIDED IN THIS AGENCY AGREEMENT IF THE ASSESSEE WOULD BE DEBA RRED FROM DOING SIMILAR BUSINESS ON TERMINATION OF THE AGREEMENT. N O COMPENSATION OR DAMAGES ARE PROVIDED FOR TERMINATING THE AGENCY AGR EEMENT. THE LANGUAGE EMPLOYED IN CLAUSE 9 OF THE AGENCY AGREEME NT (SUPRA), THE AGREEMENT COULD BE TERMINATED BY GIVING 3 MONTHS NO TICE AT ANY TIME. IT IS ALSO PROVIDED THAT ANY POINT NOT COVERED BY THIS AGREEMENT SHALL BE DEFINED IN ADDENDUM. IT IS ALSO PROVIDED THAT THE T ERMINATION OF THE AGENCY AGREEMENT SHALL AUTOMATICALLY TERMINATE ALSO THEIR VALIDITY. IN THE ADDENDUM, THE ASSESSEE SHALL HAVE TO DILUTE, PREPAR E, EMULSION OR SMPS OR COMPOUND LOCALLY ACCORDING TO TECHNICAL INSTRUCT IONS GIVEN BY FSA ONLY. SECTION 182 OF THE INDIA CONTRACT ACT PROVIDE S THE DEFINITION OF AGENT AND PRINCIPAL AND IT PROVIDES THAT AN AGE NT IS A PERSON EMPLOYED TO DO ANY ACT FOR OTHERS OR TO REPRESENT A NOTHER IN DEALINGS WITH THIRD PERSON. THE PERSON FOR WHOM SUCH ACT IS DONE OR WHO IS SO REPRESENTED IS CALLED THE PRINCIPAL. IT WOULD, TH EREFORE, PROVIDE THAT AN AGENT IS A PERSON EMPLOYED TO DO ANY ACT FOR OTHERS I. E. ON BEHALF OF THE PRINCIPAL. ANY ACT PROVIDED IN THIS DEFINITION WO ULD NOT RESTRICT TO THE MARKETING OR THE PRODUCTION. IT IS ALSO NOT PROVIDE D UNDER THE AGREEMENT AS TO WHAT PRODUCTION THE ASSESSEE SHALL HAVE TO PR OVIDE. IT WOULD, THEREFORE, SHOW THAT PB-1 IS THE AGENCY AGREEMENT A ND THE ASSESSEE IS DEFINED AS AN AGENT AND AS AN AGENT THE ASSESSEE SH ALL HAVE TO CARRY OUT CERTAIN TRANSACTIONS AND ON ALL SUCH TRANSACTIONS C ARRIED OUT THROUGH THE ASSESSEE AS AN AGENT, THE ASSESSEE SHALL BE ENTITLE D TO COMMISSION. IT IS NOT SPECIFICALLY PROVIDED IF COMMISSION IS TO BE PA ID SEPARATELY FOR MARKETING OR FOR PRODUCTION. IT WOULD, THEREFORE, P ROVE ON RECORD THAT THE ASSESSEE WAS APPOINTED AS AN AGENT THROUGH THE AGEN CY AGREEMENT ON BEHALF OF THE PRINCIPAL I.E. FSA AND THE ASSESSEE W AS REQUIRED TO DO ALL THE ACTS ON BEHALF OF THE PRINCIPAL. THE LEARNED CI T(A) WAS, THEREFORE, NOT ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 10 JUSTIFIED IN CONSIDERING THE SUBMISSIONS OF THE ASS ESSEE THAT THERE WAS NO RELATIONSHIP OF AGENT AND PRINCIPAL BETWEEN THE ASSESSEE AND FSA. THE LEARNED CIT(A) WAS, THEREFORE, NOT JUSTIFIED IN CONSIDERING THAT THE ASSESSEE ACTED AS AN INDEPENDENT CONTRACTOR. WE HAV E REPRODUCED THE RELEVANT TERMINATION AGREEMENT. ACCORDING TO THE SA ME THE PRINCIPAL (FSA) NOTIFIED THEIR DECISION TO TERMINATE THE AGEN CY AGREEMENT WITH THE ASSESSEE EFFECTIVE FROM 31-10-1996 OR SUCH OTHER DA TE MUTUALLY AGREED BETWEEN THEM. THE REASONS ARE GIVEN FOR TERMINATING THE AGENCY AGREEMENT BECAUSE OF CERTAIN MARKETING COMPELLING R EASONS. IT IS ALSO PROVIDED IN THE CANCELLATION AGREEMENT THAT THE PRI NCIPAL HAS APPRECIATED THE ASSESSEES COLLABORATION DURING THESE LEARNING YEARS WHICH ARE KEPT IN MIND. CONSIDERING THE DEDICATION TO THE BUSINESS OF THE PRINCIPAL, CONTRIBUTION OF THE ASSESSEE OVER THE PAST YEARS, T HE PRINCIPAL (FSA) WAS PLEASED TO CONFIRM AS AGREED UPON TO PAY CHF 70000 AS SEPARATION PAY AS FINAL SETTLEMENT OF THEIR BUSINESS RELATION WITH THE ASSESSEE. IT IS ALSO PROVIDED IN THIS TERMINATION AGREEMENT THAT ALL COM MISSION AMOUNTS IN THIS CONNECTION FOR ORDERS TRANSMITTED TO THE PRINC IPAL SHALL BE PAID. THE ABOVE FACTS NOTED IN THE TERMINATION AGREEMENT CLEA RLY PROVIDE THAT THE PRINCIPAL VOLUNTARILY PAID SEPARATION PAY ON TERMIN ATION OF THE AGENCY AGREEMENT. THE ABOVE SUM MENTIONED IN THE TERMINATI ON AGREEMENT WAS NOWHERE NOTIFIED IN THE BASIC AGENCY AGREEMENT. IT MAY BE NOTED THAT IN NONE OF THE AGREEMENTS HAVE ANY CLAUSE FOR PAYMENT OF COMPENSATION ON TERMINATION OF THE CONTRACT. AS PER THE TERMINATION OF THE AGREEMENT PAYMENT WAS MADE TO THE ASSESSEE FOR PAST YEARS SER VICES AND THAT IT WAS MADE AS COMPENSATION FOR TERMINATION OF THE AGENCY AGREEMENT. EVEN WITH THE TERMINATION OF THE AGENCY AGREEMENT, THE A SSESSEE WAS LEFT FREE TO CARRY ON ITS NORMAL TRADING ACTIVITIES. BY CANCE LLATION OF THE AGENCY AGREEMENT, THE TRADING STRUCTURE OF THE ASSESSEE WA S NOT IMPAIRED. ACCORDING TO SECTION 28 (II) ( C ) OF THE IT ACT AN Y COMPENSATION OR AMOUNT RECEIVED BY THE ASSESSEE BY WHATEVER NAME CALLED, H OLDING AN AGENCY IN INDIA FOR ANY PART OF THE ACTIVITIES RELATING TO TH E BUSINESS OF ANY OTHER ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 11 PERSON OR WITH CONNECTION WITH TERMINATION OF THE A GENCY SHALL BE TAXABLE AS INCOME CHARGEABLE TO TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. IT IS UNDISPUTED FACT THAT THE AMOUN T IN QUESTION WAS RECEIVED BY THE ASSESSEE IN THE NAME OF SEPARATION PAY ON ACCOUNT OF HOLDING AN AGENCY IN INDIA RELATING TO THE BUSINESS ACTIVITIES OF THE PRINCIPAL (FSA) IN CONNECTION WITH THE TERMINATION OF THE AGENCY. THEREFORE, PROVISIONS OF SECTION 28 (II) ( C ) OF T HE IT ACT CLEARLY APPLIES TO THE CASE OF THE ASSESSEE. THE LEARNED COUNSEL FOR T HE ASSESSEE ALSO ADMITTED DURING THE COURSE OF ARGUMENT THAT A SUM O F RS.1,19,489/- IS COVERED U/S 28 (II) ( C ) OF THE IT ACT. IN THE FAC TS AND CIRCUMSTANCES OF THE CASE, THE AMOUNT RECEIVED BY THE ASSESSEE WAS, THEREFORE, NOT IN THE NATURE OF CAPITAL RECEIPT. IT WAS IN THE NATURE OF REVENUE RECEIPT. THE LEARNED CIT(A) WAS, THEREFORE, NOT JUSTIFIED IN TRE ATING THE SEPARATION FEE AS PAR THE TERMINATION OF THE AGENCY AGREEMENT AS C OMPENSATION FOR STERILIZATION OR DESTRUCTION OF CAPITAL ASSET AS SU BMITTED BY THE ASSESSEE AT THE FIRST APPELLATE STAGE. 7. WE MAY ALSO ADD HERE THAT THE ASSESSEE IN THE NO TES FILED WITH THE COMPUTATION OF INCOME FILED WITH THE RETURN OF INCO ME STATED THAT THE TECHNICAL COLLABORATOR HAS TERMINATED THE AGENCY AG REEMENT WITH EFFECT FROM 01-04-1997 AGAINST WHICH THE ASSESSEE COMPANY IS ENTITLED TO RECEIVED A SEPARATION AMOUNT OF RS.17,50,000/- (C HF 70000) AS AGAINST LOSS OF SOURCE OF INCOME ON ACCOUNT OF TERM INATION OF SUCH AGREEMENT. THE LEARNED CIT(A), THEREFORE, GAVE CONT RADICTORY FINDINGS IN THE IMPUGNED ORDER. THE ASSESSEE FURTHER MENTIONED IN THE NOTES THAT THE ASSESSEE HAS ALSO ENTERED INTO AGREEMENT WITH F SA TO COMPENSATE ITSELF BY RESTRICTING COVENANT NOT TO TAKE UP THE A DVISORY ASSIGNMENT, NOT TO COMPETE WITH FOR A PERIOD OF 3 YEARS FOR WHICH T HE ASSESSEE HAS RECEIVED LUMP SUM AMOUNT OF RS.50 LACS WHICH WERE T REATED AS CAPITAL RECEIPT. THE NOTES GIVEN WITH THE COMPUTATION OF IN COME WOULD SHOW THAT THE ASSESSEE RECEIVED AN AMOUNT OF RS.17,50,000/- A S SEPARATION FEE ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 12 WHICH IS CONNECTED WITH THE MATTER IN ISSUE AND ALS O RECEIVED SEPARATELY RS.50 LACS FOR RESTRICTIVE COVENANT WHICH HAS NOTHI NG TO DO WITH THE MATTER IN ISSUE. 8. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS BEST AND CO. (PRIVATE) LTD. 60 ITR 11 (SC) HELD THAT HELD, (I) THAT THE COMPENSATION AGREED TO BE PAID WAS NOT ONLY IN LIEU OF THE LOSS OF THE AGENCY BUT ALSO FOR RESPONDENT ACCEPTING A RESTRICTIVE COVENAN T FOR A SPECIFIED PERIOD; (II) THAT THE RESTRICTIVE COVENANT WAS AN I NDEPENDENT OBLIGATION WHICH CAME INTO OPERATION ONLY WHEN THE AGENCY WAS TERMINATED AND THAT PART OF THE COMPENSATION WHICH WAS ATTRIBUTABLE TO THE RESTRICTIVE COVENANT WAS A CAPI TAL RECEIPT AND HENCE NOT TAXABLE. BANK V. ROBINSON (1942) 25 TAX CAS. 33 AND GILLANDERS ARBUTHNOT AND CO. LTD. V. COMMISSIONER O F INCOME-TAX (1964) 53 I.T.R. 283 (S.C.) FOLLOWED. , (III) THAT, ON THE FACTS, THAT PART OF THE COMPENSATION RECEIVED T OWARDS LOSS OF THE AGENCY WAS A REVENUE RECEIPT, AS THE LOSS OF TH E AGENCY WAS ONLY A NORMAL TRADING LOSS. THE HONBLE SUPREME COURT IN THE CASE OF KARAM CHAND THAPAR AND BROS. P. LTD. VS. CIT 80 ITR 167 (SC) HELD THAT ORDINARILY, COMPENSATION FOR LOSS OF OFFICE OR AGE NCY IS REGARDED AS CAPITAL RECEIPT, BUT THIS RULE IS SUBJE CT TO AN EXCEPTION THAT PAYMENT RECEIVED EVEN FOR TERMINATION OF AN AG ENCY AGREEMENT WOULD BE REVENUE AND NOT CAPITAL IN THE C ASE WHERE THE AGENCY WAS ONE OF MANY WHICH THE ASSESSEE HELD AND ITS TERMINATION DID NOT IMPAIR THE PROFIT-MAKING STRUCT URE OF THE ASSESSEE, BUT WAS WITHIN THE FRAMEWORK OF THE BUSIN ESS, IT BEING A NECESSARY INCIDENT OF THE BUSINESS THAT EXISTING AG ENCIES MAY BE TERMINATED AND FRESH AGENCIES MAY BE TAKEN. BUT IT IS FOR THE INCOME-TAX DEPARTMENT TO CLEARLY ESTABLISH THAT THE CASE FELL WITHIN THE EXCEPTION TO THE ORDINARY RULE. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS RAI BAHADUR JAIRAM VALJI AND OTH ERS 35 ITR 148 (SC) ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 13 HELD THAT HELD, (I) THAT THE SUM OF RS.2,50,000/- WAS NOT PA ID TO THE RESPONDENT AS COMPENSATION FOR EXPENSES LAID OUT FO R WORKS AT THE QUARRY OF A CAPITAL NATURE AND COULD NOT BE HELD TO BE A CAPITAL RECEIPT ON THAT ACCOUNT; (II) THAT THE AGREEMENTS OF 1940 AND 1941 WERE MERELY ADJUSTMENTS MADE IN THE ORDINARY COURSE OF BUSINESS; (III) THAT THERE WAS NO PROFIT-MAKING APPARATUS SET UP BY THE AGREEMENT OF 1941 APART FROM THE BUSINESS WHICH WAS TO BE CARRIED ON UNDER IT; (IV) THAT AT NO TIME WAS THERE ANY AGREEMENT WHICH OPERATED AS A BAR TO THE CARRYING OF THE BUSI NESS OF THE RESPONDENT (V) THAT, THEREFORE, THE RECEIPT OF RS. 2,50,000 BY THE RESPONDENT WAS A REVENUE RECEIPT AND WAS CHARGEABLE TO TAX. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF P. H. DIVE CHA AND ANOTHER VS CIT 38 ITR 309 (BOM.) HELD THAT HELD, (I) THAT AS THE FIRMS ORIGINAL BUSINESS BEFORE 1938 WAS IN ELECTRICAL GOODS INCLUD ING ELECTRIC LAMPS AND THE CAME BUSINESS WAS CONTINUED EVEN AFTE R THE AGREEMENT IN 1938, THE AGREEMENT OF 1938 AND THE TE RMINATION WERE MADE IN THE ORDINARY COURSE OF BUSINESS OF THE ASSESSEES AS DEALERS IN ELECTRICAL GOODS AND FOR THE PURPOSE OF CARRYING ON THEIR BUSINESS, THE BENEFIT CONFERRED BY THE AGREEMENT DI D NOT CONSTITUTE A TRADING ASSET AND ITS TERMINATION DID NOT EXTINGU ISH THE WHOLE OR ANY PART OF ANY TRADING ASSET, THE AMOUNT RECEIVED BY THE ASSESSEES WAS A TAXABLE RECEIPT FOR THE PURPOSE OF INDIAN INCOME- TAX ACT. THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. ALL INDIA FILMS CORPORATION 297 ITR 358 (DELHI) HELD THAT HELD, (I) THAT THE COMPENSATION RECEIVED BY THE ASSESSEE WAS NOT SO MU CH FOR THE LOSS OF THE PREMISES BUT FOR THE BUSINESS LOSS BECAUSE T HE ASSESSEE WAS EXHIBITING FILMS IN OTHER CINEMA HALLS AND THEREFOR E THERE WAS NO PERMANENT CESSATION OF ITS BUSINESS. NO PART OF THE PROFIT-MAKING APPARATUS OF THE ASSESSEE HAD BEEN EXTINGUISHED SO AS TO RENDER THE AMOUNT OF COMPENSATION RECEIVED FOR THE SAID PU RPOSE A CAPITAL RECEIPT. THUS, THE SUM OF RS.1,24,000 RECEI VED BY THE ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 14 ASSESSEE IN THE ASSESSMENT YEAR 1975-76 WAS A REVEN UE RECEIPT AND NOT A CAPITAL RECEIPT; (II) THAT THE CORRESPONDENCE BETWEEN THE LANDLORD AND THE ASSESSEE UNAMBIGUOUSLY STATED THAT A SUM OF RS.1,24,000 HAD BEEN PAID TOWARDS HIS LOSS OF BUSIN ESS. THE FURTHER SUM OF RS.2 LAKHS DID NOT BEAR ANY SUCH PAR TICULAR DESCRIPTION IN ORDER TO DETERMINE WHETHER SUCH SUM ACCRUED IN THAT VERY ASSESSMENT YEAR 1975-76. THIS COUPLED WIT H THE FACT THAT THE ASSESSEE HAD IN FACT OFFERED TO TAX THE SUM OF RS.40,000 IN EVERY SUCCEEDING ASSESSMENT YEAR INCLUDING THE YEAR 1980-81 INDICATED THAT THERE WAS NO ATTEMPT BY THE ASSESSEE TO AVOID PAYMENT OF TAX IN THOSE ASSESSMENT YEARS. IF THE SU M OF RS.2 LAKHS WAS BROUGHT TO TAX IN THE YEAR 1975-76 IT WOULD DOU BTLESS AMOUNT TO DOUBLE TAXATION OF THE SAME AMOUNT SINCE ADMITTE DLY A SUM OF RS.40,000 HAD BEEN OFFERED TO TAX BY THE ASSESSEE I N EACH OF THE SUCCEEDING ASSESSMENT YEARS AS A REVENUE RECEIPT. THE HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF EASTERN AI R PRODUCTS VS. CIT 290 ITR 562 (MP) HELD THAT HELD, THAT THE ASSESSEE HAD ISSUED A DEBIT NOTE FOR THE DIFFERENTIAL SUM. THERE WAS CANC ELLATION OF THE EARLIER AGREEMENT. A FRESH AGREEMENT WAS ENTERED IN TO FOR A SHORT TERM. NEITHER OF THE AGREEMENTS HAD ANY CLAUSE FOR PAYMENT OF COMPENSATION ON TERMINATING OF THE CONTRACT. AFTER THE DISASTER THE ASSESSEE HAD NOT CLAIMED ANY AMOUNT AS COMPENSATION FOR DEPRIVATION OF ITS SOURCES OF INCOME. THE DEBIT NOT E WAS ISSUED CLAIMING THE DIFFERENTIAL SUM. IT WAS ENTERED IN TH E BOOKS OF ACCOUNT AS A REVENUE RECEIPT. THE AMOUNT WAS ASSESS ABLE AS A REVENUE RECEIPT. THE HONBLE MADRAS HIGH COURT IN THE CASE OF INDO FOREIGN TRADERS (P) LTD. VS. CIT 166 ITR 308 (MAD) HELD THAT HELD, THAT THE TERMINATION OF AGREEMENT DATED JULY 2, 194 9, WAS ONE DETERMINING THE RIGHTS OF THE PARTIES IN CONSEQUENC E OF THEIR AGREEING TO TERMINATE THEIR ORIGINAL AGREEMENT. THE ORIGINAL AGREEMENT DID NOT PROVIDE FOR ANY LIQUIDATED DAMAGE S FOR BREACH ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 15 OF CONTRACT AND THE TERMINATION AGREEMENT ALSO DID PROVIDE FOR ANY LUMP SUM PAYMENT FOR TERMINATION OF THE AGREEMENT. AS THE COMPENSATION PAYABLE WAS LINKED TO THE TURNOVER OF THE DRUG COMPANY IN EACH YEAR AND THE RIGHT TO RECEIVE THE M ONEY ITSELF DEPENDED UPON SUCH TURNOVER, THE COMPENSATION PAYAB LE COULD NOT BE CONSIDERED TO BE IN THE NATURE OF LIQUIDATED DAM AGES FOR BREACH OF CONTRACT. THE RIGHT TO RECEIVE COMPENSATION, THE REFORE, AROSE ONLY AS AND WHEN THE DRUG COMPANY EFFECTED SALES AN D THAT WOULD ONLY BE IN THE RELEVANT YEARS WHEN THE SALES WERE E FFECTED AND, CONSEQUENTLY, THE INCOME AROSE TO THE ASSESSEE ONLY DURING THE YEAR IN WHICH THE SALES WERE EFFECTED BY THE DRUG C OMPANY. THE TRIBUNAL WAS, THEREFORE, RIGHT IN ITS VIEW THAT THE AMOUNT RECEIVED UNDER THE COMPROMISE DECREE DATED AUGUST 23, 1957, WAS ASSESSABLE UNDER SECTION 10(5A) OF THE INDIAN INCOM E-TAX ACT, 1922. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF BLUE S TAR LTD. VS CIT 217 ITR 514 (BOM.) HELD HELD THAT THE AGENCY AGREEMENT WAS ENTERED INTO BY THE ASSESSEE IN THE NORMAL COURSE W ITHIN THE FRAMEWORK OF THE NORMAL BUSINESS OF THE ASSESSEE AN D THE TERMINATION THEREOF COULD BE TREATED AS A NORMAL IN CIDENT OF BUSINESS. EVEN WITH THE TERMINATION OF THE AGREEMEN T, THE ASSESSEE WAS LEFT FREE TO CARRY ON ITS NORMAL TRADING ACTIVI TIES. BY CANCELLATION OF THE AGENCY, THE TRADING STRUCTURE O F THE ASSESSEE WAS NOT IMPAIRED. THE COMPENSATION AMOUNT OF RS.5 L AKHS RECEIVED BY THE ASSESSEE WAS NOT IN THE NATURE OF A CAPITAL RECEIPT. IT WAS IN THE NATURE OF A REVENUE RECEIPT. 8.1 CONSIDERING THE ABOVE DISCUSSIONS, WE ARE OF TH E VIEW THAT THE AMOUNT RECEIVED BY THE ASSESSEE ON ACCOUNT OF SEPAR ATION PAY IS IN THE NATURE OF REVENUE RECEIPT. THE LEARNED CIT(A) WAS, THEREFORE, UNJUSTIFIED IN TREATING IT TO BE CAPITAL RECEIPT. THE AMOUNT IN QUESTION IS RECEIVED AS NORMAL BUSINESS TRANSACTIONS, THEREFORE, ENTIRE REC EIPT ON ACCOUNT OF ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 16 TERMINATION OF AGENCY AGREEMENT IS COVERED U/S 28 ( II) ( C ) OF THE IT ACT AND IS OF REVENUE RECEIPT. WE ACCORDINGLY SET ASIDE THE ORDER OF THE LEARNED CIT(A) AND RESTORE THE ORDER OF THE AO AND ALLOW THIS GROUND OF APPEAL OF THE REVENUE. 9. ON GROUNDS NO.1 (II), (III) AND (IV) OF THE APPE AL, THE REVENUE CHALLENGED THE ADDITION ON ACCOUNT OF TELEPHONE EXP ENSES RS.67,421/-, SALES PROMOTION EXPENSES RS.3,29,458/- AND ON ACCOU NT OF VEHICLE REPAIR AND DEPRECIATION RS.1,05,242/-. 10. THE ASSESSEE IS A COMPANY. THE AO NOTED THAT TE LEPHONE LINES HAVE BEEN INSTALLED AT THE DIRECTORS RESIDENCE. TH EREFORE, THE SAME ARE USED BY THE DIRECTORS AND THEIR AND THEIR FAMILY ME MBERS FOR THEIR PERSONAL PURPOSE FOR WHICH NO SEPARATE DETAILS ARE MAINTAINED. 50% OF THE CLAIM OF TELEPHONE EXPENSES WAS DISALLOWED. THE AO ON FURTHER SCRUTINY OF SALE PROMOTION EXPENSES NOTICED THAT TH E EXPENSES ARE INCURRED MOSTLY FOR TEA AND SNACKS ETC. AND THAT TH ERE IS NO CHECK ON THESE EXPENSES NOT THE POSSIBILITY OF SERVING THE V ISITORS CAN BE RULED OUT. ACCORDINGLY, 50% OF THE EXPENSES WERE DISALLOWED U/ S 37(2) OF THE IT ACT. AS REGARDS VEHICLE EXPENSES AND DEPRECIATION THE AO NOTED THAT AS NO LOG BOOK HAS BEEN MAINTAINED FOR THE CARS PROVIDED BY T HE COMPANY TO THE DIRECTORS AND THE DIRECTORS DO NOT HAVE ANY PERSONA L CAR, PERSONAL USER OF THE COMPANY CARS BY THE DIRECTORS AND THEIR FAMILY MEMBERS CANNOT BE RULED OUT. ONE FIFTH OF THE SAID EXPENSES WERE ACCO RDINGLY DISALLOWED. IT WAS SUBMITTED BEFORE THE LEARNED CIT(A) THAT THE AS SESSEE BEING A COMPANY IS ARTIFICIAL JUDICIAL PERSON AND THEREFORE , CANNOT HAVE PERSONAL USER OF THESE FACILITIES. IT WAS SUBMITTED THAT THE DIRECTORS USED THE ABOVE FACILITIES ONLY FOR THE PURPOSE OF BUSINESS. THE OR DER OF THE TRIBUNAL IN THE CASE OF VIKSHARA TRADING & INVESTMENTS LTD. VS CIT WAS RELIED UPON. IT WAS FURTHER CONTENDED THAT THE DETAILS OF SALE P ROMOTION EXPENSES WERE FILED BEFORE THE AO WHICH ARE GENUINE EXPENSES INCU RRED FOR THE PURPOSE ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 17 OF BUSINESS IN THE ORDINARY COURSE OF THE BUSINESS. LIST OF THE EXPENSES WAS ALSO PROVIDED TO SHOW THAT SMALL GIFTS ITEMS WE RE PROVIDED TO THE CUSTOMERS FOR KEEPING BETTER RELATION WITH THEM WHI CH WAS FOR THE BUSINESS PURPOSE. THE DECISION OF THE TRIBUNAL WAS RELIED IN WHICH ON IDENTICAL ISSUES ADDITIONS HAVE BEEN DELETED. THE L EARNED CIT(A) ACCEPTED THE CONTENTIONS OF THE ASSESSEE THAT THE ABOVE ITEM S WERE GIVEN TO THE CUSTOMERS BEING SMALL GIFT ITEMS FOR BUSINESS PURPO SE. THEREFORE, THERE WAS NO JUSTIFICATION TO MAKE THE ADDITION. 11. THE LEARNED DR RELIED UPON THE ORDER OF THE AO. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE REITERAT ED THE SUBMISSIONS MADE BEFORE THE LEARNED CIT(A). 12. ON CONSIDERATION OF THE RIVAL SUBMISSIONS WE AR E OF THE VIEW THAT THE LEARNED CIT(A) WAS JUSTIFIED IN DELETING THE AB OVE ADDITIONS. THE ASSESSEE IS A COMPANY AND HAS A JURISTIC LEGAL PERS ON. IT CANNOT HAVE ANY PERSONAL USER OF THE ABOVE FACILITIES. IF THE DIREC TORS USED THESE FACILITIES UNAUTHORIZEDLY THE ADDITIONS MAY BE MADE IN THEIR I NDIVIDUAL HANDS, BUT NO DISALLOWANCE CAN BE MADE IN THE CASE OF THE ASSE SSEE COMPANY. THE AO MERELY ON PRESUMPTION THAT THE DIRECTORS DO NOT HAVE CARS AND TELEPHONES HAVE BEEN INSTALLED AT THEIR RESIDENCE P RESUMED THAT CAR AND TELEPHONE HAVE BEEN USED FOR PERSONAL PURPOSE BY TH E DIRECTORS. NO MATERIAL HAS BEEN BROUGHT ON RECORD TO SUPPORT SUCH A FINDING. SIMILARLY, FOR SALES PROMOTION EXPENSES, THE LEARNED CIT(A) FO UND THAT THE AMOUNTS HAVE BEEN SPENT FOR BUSINESS PURPOSE ON ACCOUNT OF SMALL GIFT ITEMS GIVEN TO THE CUSTOMERS FOR BUSINESS PURPOSES. SIMIL ARLY, TEA, COFFEE ETC. PROVIDED TO THE STAFF AND CUSTOMERS ARE MERE CUSTOM ARY IN NATURE WHICH ARE GENERALLY SPENT FOR SALE PROMOTION ETC. WE, THE REFORE, DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT(A) IN DEL ETING THE ADDITIONS. AS A RESULT, THESE GROUNDS OF APPEAL OF THE REVENUE ARE DISMISSED. 13. GROUND NO.1 (V) OF THE APPEAL OF THE REVENUE RE ADS AS UNDER: ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 18 1 (V) REDUCING NET INCOME FROM OTHER SOURCES AS PE R THE FORMULA GIVEN BY HIS PREDECESSOR IN THE ASSESSEES OWN CASE FOR A. Y.90-91 TO WORK OUT THE DEDUCTION UNDER SECTION 80I/80IA OF THE ACT. FURTHER DIRECTED TO AL LOCATE THE EXPENSES (EXCEPT SELLING AND DISTRIBUTION EXPEN SES) IN EQUAL PROPORTION IN ALL THE THREE UNITS IRRESPEC TIVE OF THEIR TURNOVER. 14. THE AO HAS DISALLOWED CLAIM OF DEDUCTION U/S 80 IA OF THE IT ACT ON THE INCOME EARNED FROM OTHER SOURCES ON THE PLEA THAT THE SAID INCOME HAS NOT BEEN DERIVED FROM THE INDUSTRIAL ACT IVITY. THE AO ALLOWED 5% OF ADMINISTRATIVE EXPENDITURE ON THE SAID INCOME . THE SAID ISSUE IS COVERED THE ORDER OF PREDECESSOR OF THE AO IN ASSES SEES OWN CASE FOR AY 1996-97 AND FOLLOWING THE SAME, THE AO NOTED THAT T HE INCOME FROM OTHER SOURCES SHOULD BE EXCLUDED AND SUCH NET INCOM E WOULD HAVE TO BE WORKED OUT AS PER FORMULA GIVEN BY HIS PREDECESSOR IN AY 1990-91 AND FOLLOWED BY HIS PREDECESSOR IN AY 1993-904. THE AO WAS THUS DIRECTED TO WORK OUT THE INCOME ACCORDINGLY. THE AO VIDE PARA 1 3.1 OF THE ASSESSMENT ORDER POINTED OUT THAT THE ASSESSEE HAD WORKED OUT BUSINESS PROFIT IN RESPECT OF ALL THE THREE UNITS SEPARATELY . IN RESPECT OF UNIT I, DAMAN, THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 80 I OF THE IT ACT AT THE RATE OF 25%, IN RESPECT OF UNIT-II, DAMAN, THE ASSE SSEE IS ENTITLED TO DEDUCTION U/S 80 IA AT THE RATE OF 100%, WHILE THE BUSINESS INCOME IN RESPECT OF BARODA UNIT IS WHOLLY TAXABLE. THE AO NO TED THAT THE ASSESSEE HAD WORKED OUT THE UNIT-WISE BUSINESS PROFIT CONSID ERING THAT ALL DIRECT TAXES ARE ALLOCATED UNIT WISE ON THE GROUND THAT TH E ASSESSEE IS MAINTAINING SEPARATE SETS OF BOOKS OF ACCOUNT IN RE SPECT OF ALL THE THREE UNITS. THE AO HAD ADMITTED THAT THE ASSESSEES CONT ENTION WAS ACCEPTED IN THE PRECEDING ASSESSMENT YEARS. HOWEVER, QUA IND IRECT EXPENSES THE AO FOUND THAT THE SAME WERE FOUND TO BE COMMON FOR THE ENTIRE BUSINESS AND THE SAME WERE ALLOCATED EQUALLY IN RESPECT OF A LL THE THREE UNITS. THE TOTAL INDIRECT EXPENSES WAS WORKED OUT TO RS.2,09,2 4,646/-. THE AO ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 19 FOUND THAT THE ALLOCATION ON THE BASIS OF EQUAL DIS TRIBUTION OF THE SAID EXPENSES WAS IMPROPER BECAUSE ACCORDING TO HIM THE TURNOVER IN RESPECT OF BARODA UNIT WAS ONLY FOR RS.1,51,01,305/- I.E. 2 .94% WHILE IN RESPECT OF DAMAN UNIT-I IT WAS FOR RS.4,24,21,759/- ( I.E. 8.26%) AND FOR DAMAN UNIT II, IT WAS FOR RS.45,59,95,161/- ( I.E. 88.8 0%) AND IN VIEW THEREOF THE AO REALLOCATED THE INDIRECT EXPENSES ON THE BAS IS OF TURNOVER RATIO AS PER THE DETAILS SET OUT IN ANNEXURE-I OF THE ASS ESSMENT ORDER AND HE REDUCED THE RELIEF ACCORDINGLY. 15. IT WAS PLEADED BEFORE THE LEARNED CIT(A) THAT T HE ASSESSEE MAINTAINED SAME SYSTEM OF ACCOUNTING. ALTHOUGH, RES JUDICATA DOES NOT APPLY IN INCOME TAX CASES, BUT THE INCOME TAX AUTHO RITIES SHOULD TAKE CONSISTENT VIEW. THE DECISION OF THE HONBLE SUPREM E COURT IN THE CASE OF RADHASOAMI SATSANG 193 ITR 321 WAS RELIED UPON. THE ASSESSEE ALSO MADE SUBMISSION ON MERIT TO SHOW THAT THE FINDINGS OF THE AO ARE CLEARLY UNJUSTIFIED. THE LEARNED CIT(A) ACCEPTED THE CONTEN TIONS OF THE ASSESSEE ON MERIT AND ALSO HELD THAT THERE IS NO REASON TO D ISAGREE AND DEVIATE FROM THE METHOD ADOPTED BY THE ASSESSEE IN ALLOCATI ON OF THE EXPENSES. THE LEARNED CIT(A) ACCORDINGLY, DIRECTED THE AO TO ACCEPT THE ALLOCATION OF THE EXPENDITURE AS CLAIMED BY THE ASSESSEE AND A LLOWED THE APPEAL OF THE ASSESSEE. 16. THE LEARNED DR RELIED UPON THE ORDER OF THE AO. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE VERY FAI RLY CONCEDED THAT THE MATTER MAY BE RESTORED TO THE FILE OF THE AO FOR RE CONSIDERATION. THE LEARNED COUNSEL FOR THE ASSESSEE FILED THE COPY OF THE ORDER OF THE ITAT AHMEDABAD BENCH IN THE CASE OF THE SAME ASSESSEE IN ITA NO.240/AHD/1999 DATED 20-05-2005 FOR ASSESSMENT YEA R 1996-97 IN WHICH THE AO WAS DIRECTED TO CALCULATE THE RELIEF U /S 80 IA OF THE IT ACT ON TOTAL OUTCOME FOR ASSESSMENT YEAR 1993-94. THE L EARNED COUNSEL FOR THE ASSESSEE ALSO REFERRED TO THE ORDER OF THE TRIB UNAL IN THE CASE OF THE ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 20 SAME ASSESSEE IN ITA NO.2186/AHD/1998 FOR ASSESSMEN T YEAR 1995-96 DATED 19-07-2005 IN WHICH THE TRIBUNAL FOLLOWED THE ORDER FOR ASSESSMENT YEAR 1993-94 AND RESTORED THE MATTER BAC K TO THE FILE OF THE AO FOR RE-CONSIDERATION. THE LEARNED COUNSEL FOR TH E ASSESSEE SUBMITTED THAT SINCE THE AUTHORITIES BELOW FOLLOWED THE ORDER S OF THE EARLIER YEARS IN WHICH THE MATTER HAS BEEN RESTORED TO THE FILE OF T HE AO, THEREFORE, THE MATTER MAY BE RESTORED TO THE FILE OF THE AO AS IS DIRECTED BY THE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT HE IS NOT AWARE ABOUT AS TO WHAT ORDER THE AO PASSED AS P ER THE DIRECTION OF THE TRIBUNAL. THE AO MAY BE DIRECTED TO FOLLOW ORDE R OF EARLIER YEARS. 17. ON CONSIDERATION OF THE RIVAL SUBMISSIONS, WE A RE OF THE VIEW THAT THE MATTER REQUIRES RECONSIDERATION BY THE AO BECAU SE ON IDENTICAL ISSUE THE TRIBUNAL HAS EARLIER RESTORED THE MATTER TO THE AO FOR RECONSIDERATION AS PER SUBMISSIONS OF THE LEARNED COUNSEL FOR THE A SSESSEE. BY FOLLOWING THE EARLIER ORDERS OF THE TRIBUNAL AS POINTED OUT B Y THE LEARNED COUNSEL OF THE ASSESSEE, WE SET ASIDE THE ORDERS OF THE AUT HORITIES BELOW AND RESTORE THE ISSUE TO THE FILE OF THE AO FOR RECONSI DERATION AS PER DECISION TAKEN IN THE EARLIER YEARS AS PER DIRECTION OF THE TRIBUNAL IN EARLIER YEARS REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE . THE AO WILL GIVE REASONABLE SUFFICIENT OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. AS A RESULT, THIS GROUND OF APPEAL OF THE REVENUE IS ALL OWED FOR STATISTICAL PURPOSES. 18. AS A RESULT, THE APPEAL OF THE REVENUE IS PARTL Y ALLOWED. ORDER PRONOUNCED ON 14-05-2010 SD/- SD/- (N. S. SAINI) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 14- 05-2010 LAKSHMIKANT/- ITA NO.1723/AHD/2001 M. C. DAVER AROMATICS LTD. 21 COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR, ITAT, AHMEDABAD