The A.CI.T., Circle-4, Ahmedabad V. India Gelatine & Chemicals Ltd., Ahmedabad

ITA 2040/AHD/2004

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6702 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 10 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 22-03-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 10-06-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J P SHAH SR
• Assessee Lawyers: ALOK JOHRI
• Keywords: Capital asset; Gift; Depreciation; Additional depreciation; Earning of tax free income; Capital receipt
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI, JUDICIAL MEMBER, AND D.C. AGRAWAL, ACCOUNTANT MEMBER ITA NO.2040 & 2051/AHD/2004 ASSESSMENT YEAR :2002-03 ACIT, CIRCLE-4, NAVJIVAN TRUST BUILDING, OFF ASHRAM ROAD, AHMEDABAD INDIA GELATINE & CHEMICALS LTD. 703- 704, SHILP, C.G. ROAD, AHMEDABAD V/S. V/S . INDIA GELATINE & CHEMICALS LTD., 703- 704, SHILP, C.G. ROAD, AHMEDABAD PAN NO.AAACI3676F ACIT, CIRCLE-4, NAVJIVAN TRUST BUILDING OFF ASHRAM ROAD, AHMEDABAD (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI ALOK JOHRI, CIT-DR REVENUE BY:- SHRI J.P. SHAH, SR.AR O R D E R PER D.C. AGRAWAL, ACCOUNTANT MEMBER:- THERE ARE TWO CROSS-APPEALS ONE FILED BY REVENUE AND OTHER FILED BY ASSESSEE ARISING FROM THE ORDER OF LD. COMMISSIO NER OF INCOME-TAX (APPEALS)-VIII, AHMEDABAD DATED 31-03-2004. ITA NO.2040/AHD/2004 ASST. YEAR 2002-03 (REVENUES APPEAL) 2. IN REVENUES APPEAL FOLLOWING GROUNDS ARE RAISED AS UNDER:- 1. THE LD. CIT(A) HAS ERRED IN LAW AND AS ON FACTS ON OF THE CASE IN DIRECTING TO DELETE AN AMOUNT OF RS.3.38,000/- B EING THE CLAIM OF DEPRECIATION ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE. ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 2 2. THE LD. CIT(A) HAS ERRED IN LAW AND AS ON FACTS ON OF THE CASE IN DIRECTING TO DELETE AN AMOUNT OFRS.73,705/- OUT OF DISALLOWANCE MADE BY THE A.O FROM THE EXPENDITURE ON SALES PROMO TION EXPENSES. THE LD. CIT(A) DID NOT APPRECIATE THE FAC T THAT THE SAID EXPENDITURE INCLUDED EXPENDITURE ON FOOD AND BEVERA GES TO GUEST AND ALSO THE EXPENSES ON PRESENTATION ARTICLES AND GIFTS AND THAT THE DISALLOWANCE MADE BY THE A.O AT 20% OF THE TOTA L EXPENDITURE UNDER THIS HEAD IS JUSTIFIED ON THE FACTS. 3. THE LD. CIT(A) HAS ERRED IN LAW AND AS ON FACTS ON OF THE CASE IN DIRECTING TO INCLUDE THE EXCISE DUTY AND SALES TAX AGGREGATING TO RS.72,45,365/- IN THE FIGURE OF TOTAL TURNOVER FOR THE PURPOSE OF DEDUCTION U/S.80HHC. 4. THE LD. CIT(A) HAS ERRED IN LAW AND AS ON FACTS ON OF THE CASE IN DIRECTING TO INCLUDE INCOME BY WAY OF SALE OF EMPTY BAGS, INCOME BY WAY OF SALE OF C.B. DUST SINEWS AND INCOME BY WA Y OF SALE OF SCRAP AND WASTE CHEMICALS IN THE PROFITS OF THE BUS INESS FOR THE PURPOSE OF DEDUCTION U/S.80HHC, DISREGARDING THE FA CTS THAT THESE ITEMS OF INCOME ARE NOT DERIVED BY THE INDUSTRIAL U NDERTAKING FROM THE EXPORT BUSINESS. 3. THE FACTS OF THE CASE ARE THAT ASSESSEE-COMPANY IS INVOLVED IN THE MANUFACTURE OF OSSEIN AND GELATINE FROM ANIMAL BONES. THE FIRST ISSUE IN REVENUES APPEAL RELATES TO DELETION OF SUM OF R S.3.38 LAKH BEING THE DEPRECIATION ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE. THE FACTS RELATING TO THIS ISSUE ARE THAT ASSESSEE- COMPANY HAD PURCHASED PLANT AND MACHINERY. ITS COST INCREASED DUE TO ADVE RSE FLUCTUATION IN EXCHANGE RATE. THE ADDITIONAL BURDEN ON THIS COUNT AMOUNTED TO RS.3.38 LAKH. THE ASSESSING OFFICER HAD DISALLOWED THE CLAI M FOLLOWING HIS ORDER FOR ASSESSMENT YEAR 2001-02. THE ORDER OF LD. CIT(A ) THEREON WAS SUBJECT-MATTER OF APPEAL BEFORE TRIBUNAL. THE TRIBU NAL HAD ALLOWED THE CLAIM OF ASSESSEE FOR ADDITIONAL DEPRECIATION ON IN CREASED COST DUE TO ADVERSE EXCHANGE RATE FLUCTUATION AS UNDER:- ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 3 FROM THE ABOVE IT IS CLEAR THAT THE INCREASED LIAB ILITY WHICH IS ON REVENUE ACCOUNT IS NOT A NOTIONAL OR UNASCERTAINED LIABILITY BUT ACTUAL LIABILITY AND HENCE ALLOWABLE IN THE YEAR IN WHICH THE INCREASED LIABILITY AROSE DUE TO EXCHANGE RATE FLUC TUATION. SIMILARLY THE INCREASED LIABILITY WHICH WAS UTILIZED FOR ACQU ISITION OF CAPITAL ASSET IS TO BE ADDED AS COST OF CAPITAL ASSET. IT H AS ALSO BEEN CLARIFIED THAT AMENDMENT IN SECTION 43A BY FINANCE ACT, 2002 WITH EFFECT FROM 1.4.2003 IS PROSPECTIVE IN NATURE. THER EFORE, IN VIEW OF THE AUTHORITATIVE PRONOUNCEMENT OF THE HONBLE SUPR EME COURT, THE INCREASED LIABILITY ON ACCOUNT OF WORKING OPERA TION IS ALLOWABLE IN THE YEAR IN WHICH THE LIABILITY AROSE. THE INCREASED LIABILITY ON ACCOUNT OF FOREIGN EXCHANGE LOAN WHICH WAS UTILIZED FOR ACQUISITION OF CAPITAL ASSET IS TO BE ADDED TO THE COST OF ASSETS FOR PURPOSE OF CLAIMING DEPRECIATION IN THE YEAR IN WHI CH SUCH INCREASED LIABILITY AROSE. THE SAME IS TO BE HELD A S ASCERTAINED OR ACCRUED LIABILITY AND NOT NOTIONAL OR UNASCERTAINED LIABILITY. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED AND THAT BY THE REVENUE ARE DISMISSED. THE ISSUE IS ALSO COVERED BY THE DECISION OF HONBL E BOMBAY HIGH COURT IN THE CASE OF CIT V. SESA GOA INDIA LTD. (2006) 282 ITR 197 (BOM) AND BY THE DECISION OF HONBLE JURISDICTIONAL HIGH COUR T IN THE CASE OF GARDEN SILK MILLS LTD. V. DCIT (1996) 222 ITR 27 (GUJ). IN THAT CASE ALSO ASSESSEE HAD PURCHASED MACHINERY FROM A FOREIGN COU NTRY AND IT HAS TAKEN LOAN TO FINANCE THE MACHINERY. THE LIABILITY OF REP AYMENT INCREASED ON ACCOUNT OF FLUCTUATION IN THE EXCHANGE RATE. THE AS SESSEE CLAIMED DEPRECIATION ON SUCH INCREASED COST WHICH WAS ALLOW ED BY THE HONBLE HIGH COURT. 4. AS A RESULT CLAIM OF ASSESSEE FOR DEPRECIATION I S ALLOWABLE. THIS GROUND OF REVENUE IS ACCORDINGLY REJECTED. 5. NEXT ISSUE RELATES TO DISALLOWANCE OUT OF SALE P ROMOTION EXPENSES. THE ASSESSING OFFICER DISALLOWED A SUM OF RS.1,47,4 10/- OUT OF SALE PROMOTION EXPENSES. HE HAD RELIED ON THE FINDINGS G IVEN IN THE ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 4 ASSESSMENT ORDER FOR THE ASST. YEAR 2001-02. THIS O RDER OF LD. ASSESSING OFFICER AND ORDER OF LD. CIT(A) THEREON WAS CONSIDE RED BY TRIBUNAL. AFTER CONSIDERING THE FACTS THE TRIBUNAL RESTRICTED THE DISALLOWANCE TO 10% OF TOTAL EXPENDITURE. 6. WE HAVE HEARD THE PARTIES. FOLLOWING THE ORDER O F TRIBUNAL, WE REMIT THE MATTER BACK TO THE FILE OF ASSESSING OFFI CER FOR CONSIDERING DISALLOWANCE AT 10% OF THE TOTAL EXPENSES SUBJECT T O THE RIDER THAT SUCH DISALLOWANCE WILL NOT BE MORE THAN THE DISALLOWANCE ALREADY MADE BY THE ASSESSING OFFICER. WITH THIS OBSERVATION, THIS GROU ND OF REVENUES APPEAL IS ALLOWED BUT FOR STATISTICAL PURPOSES. 7. THE THIRD ISSUE RELATES TO INCLUDING EXCISE DUTY AND SALES TAX ACCRUED AMOUNTING TO RS.72,15,365/- IN THE TOTAL TU RNOVER FOR THE PURPOSE OF DEDUCTION U/S.80HHC. 8. WE HAVE HEARD THE PARTIES AND IN OUR CONSIDERED VIEW THE ISSUE IS NOW FULLY COVERED BY THE DECISION OF HONBLE SUPREM E COURT IN THE CASE OF CIT V. LAKSHMI MACHINE WORKS (2007) 290 ITR 667 (SC), WHEREIN IT IS HELD THAT THESE TWO ITEMS HAVE TO BE EXCLUDED FROM THE TURNOVER. FOLLOWING ABOVE DECISION THIS ISSUE IS DECIDED IN A CCORDINGLY. THIS GROUND OF REVENUES APPEAL IS ACCORDINGLY DISPOSED OF. 9. LAST ISSUE RELATES TO INCLUSION OF INCOME BY WA Y OF SALE OF EMPTY BAGS AND SCRAP AND WASTE IN THE PROFITS OF THE BUSI NESS FOR THE PURPOSE OF DEDUCTION U/S.80HHC. 10. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IALS ON RECORD. THIS ISSUE IS NOW COVERED BY THE DECISION OF HONBL E MADRAS HIGH COURT ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 5 IN THE CASE OF CIT V. SHIBA DISTILLERY LTD. (2007) 293 ITR 108 (MAD), WHEREIN IT IS HELD THAT SCRAP AND WASTE MATERIAL IF NOT RELATABLE TO EXPORT BUSINESS OF THE ASSESSEE, HAS TO BE EXCLUDED FROM T HE BUSINESS PROFIT FOR THE PURPOSE OF CALCULATION OF DEDUCTION U/S.80HHC. SIMILARLY, THE SAME WILL NOT FORM PART OF THE TOTAL TURNOVER. ACCORDING LY, THIS GROUND OF REVENUES APPEAL IS ALSO DECIDED IN ITS FAVOUR. AS A RESULT, APPEAL FILED BY REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.2051/AHD/2004 ASST. YEAR 2002-03 (ASSESSEES APPEAL) 11. IN ASSESSEES APPEAL DETAILED AND ARGUMENTATIVE GROUNDS HAVE BEEN RAISED BUT THE RELIEF, CLAIMED WITH RESPECT TO THES E GROUNDS ARE AS UNDER :- I. TO DELETE ADDITION OF RS.10,14,54,000/- BEING C APITAL COMPENSATION TREATED AS REVENUE INCOME II. TO DELETE DISALLOWANCE OF EXCHANGE FLUCTUATION LOSS OF RS.50.64 LACS. III. TO RECOMPUTED INCOME UNDER THE HEAD PROFITS & GAINS OF BUSINESS FOR COMPUTATION OF RELIEF U/S 80 HHC AS C ERTIFIED BY THE AUDITORS & STATED IN GROUNDS OF APPEAL. IV. TO DELETE LUMPSUM DISALLOWANCE OF RS.73,705/- O UT OF SALES PROMOTION EXPENSES. V. TO DELETE DISALLOWANCE OF RS.12,76,088/- AS EXPE NSES INCURRED U/S 14A OF THE ACT. 12. WE WILL TAKE UP FIRST, THE SECOND ISSUE WHICH R ELATES TO EXCHANGE FLUCTUATION LOSS OF RS.50.64 LACS. THE FACTS RELATI NG TO THIS GROUND ARE THAT THE ASSESSEE INCURRED AN ADDITIONAL LIABILITY OF RS .50.64 ON ACCOUNT OF EXCHANGE RATE FLUCTUATION ADVERSE TO THE ASSESSEE. THE AO DISALLOWED THE CLAIM FOLLOWING HIS ORDER FOR ASST. YEAR 2000-01. T HAT ISSUE IN THAT YEAR ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 6 HAD TRAVELLED TO THE TRIBUNAL WHICH HAS ALLOWED THE CLAIM. ON THE BASIS OF ABOVE ORDER, THE LD. AR CLAIMED THAT ONCE THE TRIBU NAL HAS BY FOLLOWING THE DECISION OF HON. SUPREME COURT IN CIT VS. WOODW ARD GOVERNOR INDIA (P) LTD. (2009) 312 ITR 254 (SC) HAS ALLOWED THE CLAIM TREATING IT AS ADDITIONAL LIABILITY OF CAPITAL, OR RATHER COST OF THE CAPITAL, THEN THE CLAIM OF THE ASSESSEE SHOULD HAVE BEEN ALLOWED. HE SUBMITTED THAT THE TRIBUNAL HAD, IN THAT ASST. YEAR IN THE CASE OF THE ASSESSEE ALLOWED THE CLAIM, AS UNDER :- FROM THE ABOVE IT IS CLEAR THAT THE INCREASED LIAB ILITY WHICH IS ON REVENUE ACCOUNT IS NOT A NOTIONAL OR UNASCERTAINED LIABILITY BUT ACTUAL LIABILITY AND HENCE ALLOWABLE IN THE YEAR IN WHICH THE INCREASED LIABILITY AROSE DUE TO EXCHANGE RATE FLUCTUATION. SIMILARLY T HE INCREASED LIABILITY WHICH WAS UTILIZED FOR ACQUISITION OF CAPITAL ASSET IS TO BE ADDED AS COST OF CAPITAL ASSET. IT HAS ALSO BEEN CLARIFIED THAT AMEN DMENT IN SECTION 43A BY FINANCE ACT, 2002 W.E.F. 1.4.2003 IS PROSPECTIVE IN NATURE. THEREFORE, IN VIEW OF THE AUTHORITATIVE PRONOUNCEMENT OF THE HON BLE SUPREME COURT, THE INCREASED LIABILITY ON ACCOUNT OF WORKING OPERA TION IS ALLOWABLE IN THE YEAR IN WHICH THE LIABILITY AROSE. THE INCREASE D LIABILITY ON ACCOUNT OF FOREIGN EXCHANGE LOAN WHICH WAS UTILIZED FOR ACQUIS ITION OF CAPITAL ASSET IS TO BE ADDED TO THE COST OF ASSETS FOR PURPOSE OF CLAIMING DEPRECIATION IN THE YEAR IN WHICH SUCH INCREASED LIABILITY AROSE. T HE SAME IS TO BE HELD AS ASCERTAINED OR ACCRUED LIABILITY AND NOT NOTIONAL O R UNASCERTAINED LIABILITY. ACCORDINGLY, THE GROUNDS RAISED BY THE A SSESSEE ARE ALLOWED AND THAT BY THE REVENUE ARE DISMISSED. THE LD. AR ALSO SUBMITTED THAT ASSESSEE HAD BORROWE D WORKING CAPITAL FROM A FOREIGN BANK TO THE EXTENT OF RS.7.35 CRORES AS CIRCULATING CAPITAL FOR JOINT CORPORATE OBJECTS. ONCE IT IS COST OF THE CAPITAL IT SHOULD HAVE BEEN ALLOWED AS DEDUCTION. 13. THE LD. DR ON THE OTHER HAND, SUPPORTED THE ORD ERS OF AUTHORITIES BELOW. ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 7 14. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE CONSIDERED VIEW THAT CLAIM HAS TO BE ALLOWED. THE TRIBUNAL ON SIMILAR CIRCUMSTANCES AND FACTS ALLOWED THE CLAIM IN ASST. YEAR 2000-01 A ND 2001-02 IN THE CASE REFERRED TO ABOVE BY FOLLOWING THE DECISION OF HON. SUPREME COURT IN WOODWARD GOVERNOR INDIA LTD. (SUPRA). ONCE LOAN IS TAKEN FOR REVENUE PURPOSES THEN LOSS SUFFERED BY IT ON ACCOUNT OF ADV ERSE EXCHANGE RATE FLUCTUATION HAS TO BE ALLOWED AS DEDUCTION U/S 37(1 ). EVEN ACCOUNTING STANDARD -11 PROVIDES THAT THE DIFFERENCE DUE TO FO REIGN EXCHANGE FLUCTUATION SHOULD BE RECOGNIZED AS INCOME OR EXPEN SES UNLESS IT RELATES TO FIXED ASSETS. THE DIFFERENCE IN FOREIGN EXCHANGE RATE IN RESPECT OF FOREIGN EXCHANGE LIABILITY BY WAY OF WORKING CAPITA L OR BY WAY OF TRADING TRANSACTION IS EITHER THE REVENUE LIABILITY OR REVE NUE INCOME FOR WHICH NECESSARY PROVISION SHOULD BE MADE. IN MERCANTILE S YSTEM OF ACCOUNTING A COMPANY IS REQUIRED TO PROVIDE TO SUCH ASCERTAINE D AND ACCRUED LIABILITY. THUS WHEN IT IS UNDISPUTED FACT THAT ASS ESSEE HAD TAKEN LOAN FOR CIRCULATING CAPITAL THEN AN ADVERSE EXCHANGE RATE FLUCTUATION CREATING FURTHER LIABILITY WOULD GO TO REVENUE ACCOUNT. ACCO RDINGLY THE CLAIM OF ASSESSEE IS ALLOWED. 15. THE SECOND ISSUE RAISED BY THE ASSESSEE IN GROU ND NO.3 IS GENERAL IN NATURE. THE LD. CIT(A) HAS DIRECTED THE AO TO RE COMPUTED THE RELIEF U/S 80HHC. NO FAULT CAN BE FOUND WITH IT AS EVEN AFTER THE ORDER OF THE TRIBUNAL AO IS REQUIRED TO RECOMPUTE SUCH RELIEF TO GIVE EFFECT TO THE DIRECTION OF THE TRIBUNAL WITH RESPECT TO THE ITEMS CONSTITUTING CALCULATION OF RELIEF U/S 80HHC. SINCE THIS GROUND IS GENERAL I N NATURE IT REQUIRES NO SPECIFIC ADJUDICATION. HENCE IT IS REJECTED. ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 8 16. GROUND NO.4 RELATES TO DISALLOWANCE OUT OF SALE S PROMOTION EXPENSES. SIMILAR GROUND WAS RAISED IN REVENUES AP PEAL. WHILE DISPOSING OF THE SAME, WE HAVE HELD THAT ONCE THE T RIBUNAL IN ASST. YEAR 2000-01 AND 2001-02 IN THE ORDER REFERRED TO ABOVE HAS RESTRICTED THE DISALLOWANCE TO 10% ON TOTAL CLAIM THE AO IS REQUIR ED TO CALCULATE SUCH DISALLOWANCE SUBJECT TO OVERALL LIMIT OF DISALLOWAN CES MADE BY HIM IN HIS ASSESSMENT ORDER AS OBSERVED BY US WHILE DISPOSING OF REVENUES APPEAL. THIS GROUND IS ACCORDINGLY ALLOWED BUT FOR STATISTICAL PURPOSES. 17. GROUND NO.5 RELATES TO DISALLOWANCE U/S 14A. TH E FACTS RELATING TO THIS ISSUE ARE THAT ASSESSEE COMPANY CLAIMED INCOME OF RS.88,77,869/- AS EXEMPT U/S 10(33) OF THE I.T. ACT., 1961. 18. AFTER CONSIDERING THE REPLY OF THE ASSESSEE AND HIS ORDER FOR ASST. YEAR 2000-01 THE AO WORKED OUT DISALLOWABLE U/S 14A AT RS.12,76,089/- AS UNDER :- A TOTAL INTEREST PAYMENT 7264572 B TOTAL FUNDS AVAILABLE 1068779664 C COST OF FUND (TAKING BOTH BORROWED FUND AND OWN FUND TOGETHER) A/B 0/01 D INVESTMENT IN SHARES 148517246 E COST OF FUND INVESTED IN SHARES (A/B) D 10099482 SALES 345863194 OTHER INCOME 49354673 F TOTAL RECEIPTS 395217867 G DIVIDEND BEING EXEMPT 4575869 H ADMINISTRATIVE AND OTHER EXPENSES 21609999 I AMOUNT OF DISALLOWANCE (H*G)/F 266606 ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 9 TOTAL DISALLOWANCE U/S 14A E+1 1276089 THE LD. CIT(A) CONFIRMED THE ADDITION BY FOLLOWING HIS DECISION FOR ASST. YEAR 2000-01. THE MATTER HAD TRAVELLED TO THE TRIBU NAL. IN ASST. YEAR 2000-01. THE TRIBUNAL DIRECTED THE AO TO WORK OUT T HE DISALLOWANCE AS PER SECTION 14A FOLLOWING RULE 8D. THE DIRECTIONS O F THE TRIBUNAL IN THIS REGARD ARE AS UNDER :- 29. GROUND NO.4 IN APPEAL BY THE REVENUE FOR ASST. YEAR 2001-02 IS AGAINST DELETION OF DISALLOWANCE OF INTEREST EXPENS ES ON PROPORTIONATE BASIS BY INVOKING PROVISION OF SECTION 14A OF THE A CT. 30. THE COMPUTATION OF DISALLOWANCE TO BE MADE BY I NVOKING SECTION 14A HAS TO BE MADE IN ACCORDANCE WITH RULE 8D PRESC RIBED IN THIS REGARD. ACCORDINGLY, FOR THIS PURPOSE THE MATTER IS RESTORED TO THE FILE OF THE AO. THE AO SHALL COMPUTE THE DISALLOWANCE, IF A NY, TO BE MADE IN TERMS OF RULE 8D AS PRESCRIBED IN THIS REGARD. 19. THE LD. AR SUBMITTED THAT IT HAS BEEN HELD BY H ON. BOMBAY HIGH COURT IN GODREJ AND BOYCE MFG. CO. LTD. VS. DCIT & ANR. (2010) 328 ITR 81 (BOM) THAT RULE 8-D WOULD BE APPLICABLE W.E. F. ASST. YEAR 2008- 09 AS IT IS NOT RETROSPECTIVE. THEREFORE, IN ASST. YEAR 2002-03 RULE 8-D CANNOT BE INVOKED. BUT HE FAIRLY ACCEPTED THE PROPO SITION AS LAID DOWN IN GODREJ AND BOYCE MFG. CO. LTD. VS. DCIT & ANR. (SU PRA) THAT REASONABLE AMOUNT OF DISALLOWANCE CAN BE MADE WHICH GOES TO EARN EXEMPT INCOME. WE ACCORDINGLY RESTORE THE MATTER TO THE FILE OF AO TO GIVE AN OPPORTUNITY TO THE ASSESSEE TO PRESENT HIS VIEWS ABOUT WHAT IS THE REASONABLE AMOUNT OF DISALLOWANCE. DISALLOWANCE AS PER RULE -8D CAN ALSO BE REASONABLE UNLESS ANY UNREASONABILITY IS PO INTED OUT IN THE CALCULATION SO MADE. THE AO, THEREFORE, WOULD CONSI DER REASONABLE AMOUNT OF DISALLOWANCE. ACCORDINGLY THIS ISSUE IS R ESTORED TO THE AO FOR ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 10 FRESH ADJUDICATION IN THE LIGHT OF DECISION OF HON. BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. VS. DCIT & ANR. (SUPRA). 20. THE MAIN ISSUE IN THIS APPEAL IS RAISED IN GROU ND NO.1. IT RELATES TO TREATING A SUM OF RS.10,14,54,000/- BEING COMPENSAT ION RECEIVED BY THE ASSESSEE COMPANY FROM M/S KONICA GELATINE CORPORATI ON, JAPAN, AS REVENUE RECEIPT BY THE AO AS AGAINST CLAIM OF CAPIT AL RECEIPT BY THE ASSESSEE. 21. THE FACTS RELATING TO THIS ISSUE AS NOTED BY TH E AO AND THE LD. CIT(A) ARE THAT THE ASSESSEE COMPANY IS INVOLVED IN THE MANUFACTURING OF OSSEIN AND GELATINE FROM BONES. M/S KONICA GELA TINE CORPORATION WHICH WAS PURCHASING OSSEIN FROM ASSESSEE COMPANY WAS A PROMOTER OF THE ASSESSEE COMPANY. THE OSSEIN PURCHASED BY M/S KONICA GELATINE WAS APPARENTLY USED FOR MANUFACTURING GELATINE WH ICH WAS FURTHER USED FOR MANUFACTURING PHOTOGRAPHIC FILMS. THE DETAILED FACTS FROM INCEPTION OF THE ASSESSEE COMPANY TILL THE TERMINATION OF AGR EEMENT WITH KONCA GELATINE WHICH LED TO THE AWARD OF COMPENSATION TO THE ASSESSEE COMPANY, ARE AS UNDER:- MIRANIS WERE PARTNERS IN M/S KHIMJI VISHRAM & SONS, MUMBAI. THIS CONCERN ENTERED INTO COLLABORATION WITH M/S KONICA GELATINE CORPORATION AND M/S NICHIMEN & CO., JAPAN, FOR MANUFACTURING O SSEIN IN INDIA. FOR THIS PURPOSE THEY ENTERED INTO A BASIC AGREEMENT AN D TECHNICAL AGREEMENT BOTH DATED 29.08.1972. IN PURSUANCE OF THESE AGREEM ENTS, ASSESSEE COMPANY NAMELY INDIA GELATINE & CHEMICALS LTD. (IGC L) WAS SET UP TO MANUFACTURE OSSEIN IN INDIA. THE BASIC AGREEMENT DATED 29.8.1972 WAS TO PROVIDE FINANCE, ADMINISTRATIVE, TECHNICAL AND C OMMERCIAL CONDITIONS FOR RUNNING THE COMPANY. THE THREE PARTNERS NAMELY KONICA GELATINE ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 11 CORPORATION, MICHIMEN & CO. AND THE MIRANIS CONTRIB UTED SHARE CAPITAL IN THE RATIO OF 1:2:3 BEING 60% OF THE TOTAL SHARE CAPITAL. THE BALANCE 40% WAS LEFT FOR GENERAL PUBLIC TO SUBSCRIBE. THE TECHN ICAL COLLABORATION AGREEMENT OF EVEN DATE PROVIDED THAT TECHNICAL KNOW -HOW WOULD BE PROVIDED BY KONICA GELATINE CORPORATION AND MICHIME N & CO. WOULD ARRANGE FOR SALES OF THE PRODUCT. KONICA GELATINE C ORPORATION WAS ALSO MADE TECHNICAL CONSULTANT TO THE ASSESSEE COMPANY. THE TWO AGREEMENTS PROVIDE CODE OF CONDUCT AMONG THE THREE PARTNERS AN D EACH WAS ASSIGNED SPECIFIC OBJECTIVE AND PARTICIPATION IN EQUITY AND TRANSFER OF INTEREST IN FUTURE. PAYMENT OF FEES FOR PROVIDING TECHNICAL KNO W-HOW WAS ALSO PRESCRIBED WHICH WAS TO BE PAID BY ASSESSEE COMPANY TO KONICA GELATINE CORPORATION. AS PER THESE AGREEMENTS KONICA GELATIN E CORPORATION WAS MADE MAIN PURCHASER OF THE OSSEIN TO BE MANUFACTU RED BY ASSESSEE COMPANY. THE ARRANGEMENTS CONTINUED AND OSSEIN MA NUFACTURED BY THE ASSESSEE COMPANY WAS SOLD TO M/S KONICA GELATINE CO RPORATION ON PRIORITY BASIS. SUBSEQUENTLY, M/S KONICA GELATINE C ORPN. ENTERED INTO TECHNICAL COLLABORATION AGREEMENT WITH THE ASSESSEE COMPANY ON 12.5.1995 FOR A PERIOD OF 10 YEARS ENDING ON 11.5.2 005 PROVIDING TECHNICAL GUIDANCE, TECHNOLOGY KNOW-HOW FOR ESTABLI SHING GELATINE MANUFACTURING PLANT AT VAPI. SEPARATE PAYMENTS FOR PROVIDING TECHNICAL KNOW-HOW/GUIDANCE WERE PROVIDED FOR IN THE SAID AGR EEMENT. IT SEEMS THAT THE GELATINE MANUFACTURED AT VAPI DID NOT COME UP TO THE STANDARD AND, THEREFORE, IT WAS THOUGHT TO SHELL OFF THE PRO JECTS. KONICA GELATINE CORPORATION ALSO FOUND THAT IT IS UNABLE TO SELL IT S PRODUCT TO THE SAME EXTENT AS EARLIER. HENCE IT FOUND DIFFICULT TO CONT INUE TO PURCHASE OSSEIN FROM ASSESSEE COMPANY. ACCORDINGLY KONICA GELATINE CORPORATION ISSUED LETTERS ON 28.3.2001 & 26.6.2001 WHEREIN KONICA GEL ATINE CORPORATION EXPRESSED ITS INTENTION TO TERMINATE THE CONTRACT F OR PURCHASE OF OSSEIN FROM THE ASSESSEE COMPANY W.E.F. 1.2.2003. THE TERM INATION AGREEMENT ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 12 WAS FINALLY SIGNED ON 16.11.2001 BY THE ASSESSEE CO MPANY. UNDER THIS AGREEMENT M/S KONICA GELATINE CORPORATION PAID US $ 2.1 MILLION TO THE ASSESSEE COMPANY IN FULL AND FINAL PAYMENT OF LOSS, LIABILITIES, EXPENSES, CLAIMS AND DEMANDS WHATSOEVER ARISING UNDER AND IN RELATION TO THE PROJECT DOCUMENTS. THE PROJECT DOCUMENTS WERE DEFIN ED IN THE TERMINATION AGREEMENT AS CONSISTING OF TWO AGREEMEN TS OF 1972 AND TECHNICAL AGREEMENT OF 1995. THE ASSESSEE HAD CLAIM ED THAT DUE TO THE STRUCTURAL DAMAGE TO THE PROJECT RESULTING FROM THE TERMINATION AGREEMENT THE COMPENSATION RECEIVED IS CAPITAL IN NATURE. THE TERMINATION AGREEMENT WOULD HAVE LEFT POSSIBLE CLOSING OF OSSEIN PLANT AND THUS DAMAGE TO THE PROFIT EARNING APPARATUS OF THE ASSESSEE COMPANY. ON THE OTHER HAND, THE CLAIM OF THE REVENUE IS THAT THE ABOVE RECEIPT IS REVENUE IN NATURE AS IT IS AWARDED AGAINST STOPPAGE OF PURCHASES OF OSSEIN FROM THE ASSESSEE COMPANY AND THAT ASSESSE E COMPANY HAS NOT STOPPED MANUFACTURING OF OSSEIN EVEN AFTER TERMIN ATION OF AGREEMENT. IN ORDER TO APPRECIATE THE ARGUMENTS OF THE ASSESSE E AND REVENUE WE CONSIDER IT APPROPRIATE TO DEAL WITH THE CONTENTS O F THE AGREEMENTS IN DETAIL. IN 1972 A BASIC AGREEMENT AND TECHNICAL COLLABORATI ON AGREEMENT WERE ENTERED INTO BETWEEN THREE PARTIES WHO WERE AS UNDE R :- A) KONICA GELATINE CORPORATION (KGC) (TECHNICAL PARTNE R) B) NICHIMEN CORPORATION LTD., JAPAN (NCL) (FIN & MAR. PARTNER) C) MIRANIS OF INDIA (EXECUTIVE PARTNER) ALL THE THREE PARTNERS CONTRIBUTED TO THE SHARE CAP ITAL: 10% BY KONICA GELATINE CORPORATION (KNOWN AT THAT TIME AS TAKARAZ UKA GELATINE ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 13 MANUFACTURING CO. LTD.): 30% BY M/S NICHIMEN & CO. AND 24% BY MIRANIS AND BALANCE 36% WAS LEFT FOR BEING OFFERED TO THE PUBLIC. THE THREE ALTOGETHER FLOATED THE PRESENT ASSESSEE COMPA NY I.E. INDIA GELATINE CHEMICALS LTD. TO MANUFACTURE AND DEAL IN OSSEIN AN D OTHER ALLIED CHEMICALS. THE ROLE OF EACH OF THE THREE PARTIES TO THE AGREEMENT WAS ASSIGNED. MIRANIS WOULD BE SOLELY RESPONSIBLE FOR T HE PROCUREMENT OF LAND, RAW MATERIALS, UTILITIES OF PERSONNEL, APPOIN TMENT OF PROJECT ENGINEERS AND PROCUREMENT OF MACHINERY EQUIPMENT TO IMPLEMENT BUSINESS WITH TAKARAZUKAS ASSISTANCE. THE MIRANIS WOULD ALSO PROCURE WORKING CAPITAL FOR THE ASSESSEE COMPANY. THE ROLE OF MICHIMEN WAS TO PROVIDE KNOWLEDGE AND WOULD UNDERTAKE THE TRADING O F OSSEIN. THIS PART HAS BEARING ON THIS ISSUE AND HENCE IT IS QUOTED AS UNDER :- NICHIMENS ROLE NICHIMEN SHALL SUPPLY ITS KNOWLEDGE AND EXPERIENC E IN REGARD TO TRADING BUSINESS AND SHALL UNDERTAKE THE BUSINESS OF EXPORT OF OSSEIN UNDER A SALES AGREEMENT TO BE CONCLUDED SEPARATELY WITH IGCL, AS WELL AS THE BUSINESS OF IMPORT OF MACHINER Y AND EQUIPMENT SUPPLIED BY TAKARAZUKA FROM JAPAN TO IGCL. NICHIMEN SHALL OBTAIN JAPANESE GOVERNMENTS SANCTIONS WITH REGARD TO THIS AGREEMENT. 22. THE ROLE OF M/S TAKARAZUKA WAS CONFINED TO PROV IDING TECHNICAL ASSISTANCE. ITS ROLE (I.E. THE ROLE OF KONICA GELAT INE CORPORATION) AS PER BASIC AGREEMENT WAS AS UNDER :- TAKARAZUKAS ROLE TAKARAZUKA SHALL BE WHOLLY RESPONSIBLE FOR SUPPL YING IGCL WITH TECHNICAL ASSISTANCE AND FOR HELPING IGCL FOR ITS NORMAL OPERATION AS PER THE SEPARATE TECHNICAL COLLABORATI ON AGREEMENT. TAKARAZUKA SHALL TAKE UP OSSEIN PRODUCED BY IGCL WH EN OSSEIN IS OFFERED IN PRIORITY AT REASONABLE PRICES THROUGH NI CHIMEN ALL THE MACHINERY AND EQUIPMENTS WHICH TAKARAZUKA CONSIDERS ESSENTIAL TO BE SUPPLIED FROM JAPAN. TAKARAZUKA SHALL OBTAIN JAPANE SE GOVERNMENTS SANCTIONS WITH REGARD TO AGREEMENT. ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 14 IN RESPECT OF PROVIDING TECHNICAL KNOW-HOW ASSESSEE COMPANY WOULD PAY 5 MILLION IN JAPANESE YEN TO TAKARAZUKA. ARTICLE 5 FROM BASIC AGREEMENT IN THIS REGARD READS AS UNDER :- ARTICLE-5: KNOW-HOW FEE THE COMPANY SHALL PAY TO TAKARAZUKA AS KNOW-HOW FEE , A SUM OF FIVE MILLION JAPANESE YENS SIMULTANEOUSLY WITH THE SUBSC RIPTION OF SHARES. THERE WERE RESTRICTIONS OF TRANSFER OF SHARES BY EA CH PARTY TO THE EFFECT THAT FOR SUCH TRANSFER FULL AGREEMENT WITH OTHER PA RTIES HAS TO TAKE PLACE AS THE OTHER REMAINING PARTIES WILL HAVE PREEMPTIVE RI GHTS TO PURCHASE THE SAME. TAKARAZUKA WAS APPOINTED TECHNICAL CONSULTANT TO THE ASSESSEE COMPANY AS PER TERMS AND CONDITIONS CONCLUDED WITH THE TWO. IT WAS FURTHER AGREED THAT TAKARAZUKA (NOW KONICA GELATINE CORPORATION) WOULD PURCHASE OSSEIN MANUFACTURED BY ASSESSEE COMPANY ON PRIORITY BASIS. ARTICLE 11 OF BASIC AGREEMENT IN THIS REGARD READS AS UNDER :- ARTICLE-11: IT IS AGREED THAT OSSEIN PRODUCED BY THE COMPANY S HALL BE TAKEN UP BY TAKARAZUKA TO WHOM IT SHALL BE OFFERED IN PRIORITY AT INTERNATIONAL PRICES. HOWEVER, THE COMPANY SHALL NO T BE PRECLUDED FROM SELLING OSSEIN TO ANY OTHER COUNTRIES. THE INTERNAT IONAL PRICE HERE MEANS THE PRICE OBTAINABLE BY THE OTHER MANUFACTURERS OF OSSEIN IN INDIA IN THE INTERNATIONAL MARKETS, ON EQUIVALENT FOB TERMS IN A GREED FOREIGN CURRENCIES, AS DETERMINED FROM TIME TO TIME. THIS W ILL BE SUBJECT TO THE POLICY AND/OR REGULATIONS OF GOVERNMENT OF INDIA FO R THE TIME BEING IN FORCE. THIS BASIC AGREEMENT WAS THUS EXECUTED ON 29 TH AUGUST, 1972. ON THE SAME DATE, A TECHNICAL COLLABORATION AGREEMENT BETW EEN TAKARAZUKA AND MIRANIS BEING ONE OF THE PROMOTERS OF ASSESSEE COMP ANY WAS EXECUTED. AS PER ARTICLE -1 THEREOF TAKARAZUKA WOULD PROVIDE APPROPRIATE ADVICE IN RESPECT OF FOLLOWING ITEMS :- (3) TAKARAZUKA SHALL GIVE TO IGCL APPROPRIATE ADVIC E ON THE FOLLOWING TECHNICAL MATTER WITHIN THE SCOPE OF TECHNICAL COLL ABORATION TERMS STIPULATED IN GLAUSES (2)(I), (II) & (III) ABOVE. ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 15 (I) ADVICE ON SELECTION AND PURCHASE OF EQUIPMENT A ND MACHINERY. (II) ADVICE ON INSTALLATION OF EQUIPMENT AND MACHIN ERY INCLUDING BUILT- IN ITEMS. (III) TECHNICAL GUIDANCE DURING THE TESTING AND PRE -OPERATION RUN OF THE PLANT. (IV) TECHNICAL TRAINING OF IGCL ENGINEERS AND OTHER PERSONNEL ENGAGED IN PLANT OPERATIONS. (V) SAMPLING AND TESTING OPERATIONS FOR QUALITY AND YIELD FROM RAW MATERIALS TO FINISHED PRODUCTS. TAKARAZUKA WOULD SEND ENGINEERS AND PERSONNEL FOR A SSISTANCE TO THE ASSESSEE COMPANY FOR WHICH SEPARATE PAYMENT WAS REQ UIRED TO BE MADE AS SALARY BY THE ASSESSEE COMPANY. ARTICLE-6 ALSO P ROVIDE PAYMENT OF KNOW-HOW FEES OF 5 MILLION JAPANESE YEN AS PROVIDED IN BASIC AGREEMENT. ARTICLE -6 READS AS UNDER :- ARTICLE-6: KNOW-HOW FEE IGCL SHALL PAY TO TAKARAZUKA AS KNOW-HOW FEE, A SUM OF FIVE MILLION JAPANESE YENS SIMULTANEOUSLY WITH THE SUBSCRIPTION OF SHARES. ARTICLE 9 PROVIDES FOR TERMINATION OF AGREEMENT AS UNDER :- ARTICLE-9: TERMINATION OF AGREEMENT 1) THE TERM OF VALIDITY OF THIS AGREEMENT SHALL BE FIVE YEARS FROM THE EFFECTIVE DATE AS SPECIFIED IN ARTICLE-8. WHEN ANY PAYMENT AS SPECIFIED IN THIS AGREEMENT OR IN ANY PORTION THERE OF IS NOT EFFECTED WITHIN 30 DAYS BEYOND THE SPECIFIED PERIOD OF PAYME NT, OR IF IGCL ENTERS INTO BANKRUPTCY PROCEEDINGS OR IS UNABLE TO EFFECT PAYMENT, TAKARAZUKA HOLDS THE LEGAL RIGHTS TO NOTIFY IGCL BY REGISTERED MAIL ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 16 THE CANCELLATION OF THIS AGREEMENT AND IN THAT EVEN T, TAKARAZUKA SHALL HOLD THE RIGHT TO CLAIM FROM IGCL ITS IMMEDIATE PERFORMANCE OF ALL ITS OBLIGATIONS UNDER THIS AGREE MENT AND TO CLAIM FROM IGCL ALL THE LOSSES SUSTAINED FROM THE CONSEQU ENCES OF SUCH CANCELLATION. THE ABOVE COLLABORATION CONTINUED AND ASSESSEE COMP ANY CONTINUED TO SELL OSSEIN TO TAKARAZUKA (KONICA GELATINE CORPOR ATION)ON PRIORITY BASIS. THEREAFTER IN MAY, 1995 ANOTHER TECHNICAL CO LLABORATION AGREEMENT WAS EXECUTED BETWEEN THE ASSESSEE COMPANY AND KONIC A GELATINE CORPORATION LTD. (KGCL) FOR ESTABLISHING A SEPARATE UNIT FOR MANUFACTURING GELATINE. KGCL WOULD PROVIDE ALL TECH NICAL ASSISTANCE FOR PRODUCTION OF GELATINE AS IT WAS ALREADY ENGAGED IN THIS PRODUCT FOR MANY YEARS. THIS NEW PLANT WAS TO BE ESTABLISH AT V API, GUJARAT EMPLOYING KGCLS TECHNOLOGY. THE KGCL WOULD HAVE PR OVIDED KNOW- HOW AND TECHNOLOGY TO THE ASSESSEE COMPANY FOR SETT ING UP AND RUNNING OF THIS NEW PLANT. IT WAS PROVIDED THAT GELATINE SO PRODUCED BY IGCL COULD BE EXPORTED, SOLD OR USED ANYWHERE IN THE WOR LD. SUCH RIGHT WAS GRANTED ON THE PAYMENT OF FEES. THE ARTICLE-3 OF TH IS AGREEMENT IN THIS REGARD READS AS UNDER :- 3.1 KGC HEREBY GRANTS TO IGCL SUBJECT TO THE PAYMEN TS OF THE FEES AGREED IN THIS AGREEMENT, THE EXCLUSIVE RIGHT - (A) TO EMPLOY KGCS TECHNOLOGY IN THE DESIGN, CONSTRUCT ION, IMPROVEMENT AND OPERATION OF THE CONTRACT PLANT. (B) TO SELL OR USE IN INDIA PRODUCTS SO MANUFACTURED IN THE CONTRACT PLANT, AND TO EXPORT, SELL OR USE THE SAME IN ANY OTHER COUNTRYOF THE WORLD. HOWEVER, IGCL SHALL COMM ENCE MANUFACTURE AND SALE OF PHOTOGRAPHIC GRADE OF GELAT INE ONLY AT A FUTURE DATE AFTER OBTAINING THE PRIOR WRITTEN CONSE NT OF KGC. ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 17 (C) TO PURCHASE, ACQUIRE, MAKE OR HAVE MADE EQUIPMENT, APPARATUS, CATALYSTS, CHEMICALS AND ANY OTHER MATER IAL NECESSARY FOR THE PRACTICE OF KGCS TECHNOLOGY IN THE CONTRAC T PLANT. IN CONSIDERATION OF PROVIDING TECHNICAL KNOW-HOW, S ELLING RIGHTS AND USE OF KGCL TECHNOLOGY CLAUSE 9.1 OF ARTICLE 9 PROVIDED PAYMENT OF FEES AS UNDER : ARTICLE-9 : PRICE AND TERMS OF PAYMENT 9.1 IN CONSIDERATION OF KGC TRANSFERRING AND SELLIN G ITS RIGHTS TO AND UNTO KGC TECHNOLOGY (INCLUDING FEEP) IN SO FAR AS T HEY PERTAIN TO THE TERRITORY OF INDIA ONLY. IGCL SHALL PAY TO KGC A TOTAL SUM OF JAPANESE YEN 65,000,000 NET OF INDIAN INCOME TAX AN D TAX (IF ANY) TO BE BORNE BY IGCL. THE PARTIES HAVE AGREED THAT THE AF ORESAID SUM IS INCLUSIVE OF THE PRICE ATTRIBUTABLE TO DESIGNS AND DRAWINGS PERTAINING TO KGC TECHNOLOGY WHICH IS OF JAPANESE YEN 32,50,000/- . THE FEES FOR DEPUTING TECHNICIANS WAS SEPARATE. ARTICLES 12 & 13 ARE RELEVANT FOR THE PURPOSE OF DECIDING THE ROLE OF TERMINATION OF THIS AGREEMENT IN WORKING OUT THE CO MPENSATION PAID TO THE ASSESSEE. THESE TWO ARTICLES READ AS UNDER :- ARTICLE-12 : TERM OF AGREEMENT SUBJECT TO ANY PRIOR TERMINATION OF THIS AGREEMENT AS PROVIDED FOR HEREINAFTER, THE TERM OF THIS AGREEMENT SHALL BE FO R A PERIOF OF TEN YEARS FROM THE EFFECTIVE DATE. THE RIGHTS GRANTED B Y KGC TO IGCL UNDER ARTICLES 2 AND 3 AND THE OBLIGATIONS UNDERTAK EN BY THE PARTIES UNDER ARTICLES 7 AND 14 SHALL SURVIVE THE EXPIRY OF THE T ERM OF THIS AGREEMENT. ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 18 23. THEREAFTER VIDE AGREEMENT DATED 16 TH NOVEMBER, 2001 ASSESSEE COMPANY AND KGCL TERMINATED THE AGREEMENT TO PURCHA SE OSSEIN FROM IGCL AND IN PURSUANT TO THIS AGREEMENT KGCL PAID US $ OF 21 LACS CONVERTIBLE TO RS.10,14,54,000/- WHICH WAS CLAIMED AS CAPITAL RECEIPT BY THE ASSESSEE. ARTICLE-13 : TERMINATION 13. EACH PARTY SHALL HAVE THE RIGHT TO TERMINATE TH IS AGREEMENT BY A NOTICE IN WRITING TO OPERATE ON A DATE SPECIFIED IN THE NOTICE, IF - (I) THE OTHER PARTY FAILS TO OBSERVE ANY OF THE TERMS H EREOF TO A MATERIAL AND SIGNIFICANT EXTEND AND TO REMEDY SUCH FAILURE (WHERE IT IS CAPABLE OF BEING REMEDIED) WITHIN THE PERIOD SPECIFIED IN THE NOTICE GIVEN TO IT BY THE AGGRIEVE D PARTY CALLING FOR THE REMEDY BEING A PERIOD OF NOT LESS THAN 60 D AYS. (II) THE OTHER PARTY BECOMES INSOLVENT OR HAS A RECEIVER APPOINTED OF ITS ASSETS OR EXECUTION OR DISTRESS LEVIED IS SU CH AS WOULD MATERIALLY AFFECT THE ABILITY OF THAT PARTY TO DISC HARGE ITS OBLIGATIONS UNDER THIS AGREEMENT. (III) AS ORDER IS MADE A RESOLUTION IS PASSED FOR WINDING UP OR LIQUIDATION OF THE OTHER PARTY EXCEPT WHERE IN SUCH AN EVENT IS ONLY FOR THE PURPOSE OF AMALGAMATION WITH ANOTHER O R RECONSTRUCTION AND THE RESULTANT COMPANY EMERGING I S OR AGREES TO BE BOUND BY THE TERMS HEREOF. 13.2 NO WAIVER OF ANY ANTECEDENT DEED AND NO GRANT OF TIME AND INDULGENCE SHALL PREJUDICE ANY SUBSEQUENT RIGHT TO TERMINATE THIS AGREEMENT. 24. BEFORE THE AO IT WAS CONTENDED AS UNDER :- THE SO CALLED TERMINATION HAS RESULTED IN THE DAMA GE TO THE PROFIT EARINING APPARATUS, ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 19 IT HAS LEAD TO THE STERILIZATION (AS TERMED BY THE ASSESSEE LIMBS ARE BROKEN AND IT HAS BECOME PERMANENTLY HANDICAPPED BA BY) OF THE SOURCE OF THE INCOME THE RECEIPT IS CAPITAL IN VIEW OF THE LOSS OF THE INFRASTRUCTURE OF THE COMPANY (SIC). VARIOUS CASES HAVE BEEN CITED SELECTIVELY TO BUTTR ESS ITS CLAIM AS THE CAPITAL RECEIPT. THE AO, HOWEVER, REJECTED THE CLAIM OF COMPENSATION AS CAPITAL RECEIPT. HE HELD THAT THE PROFIT MAKING APPARATUS OF THE ASS ESSEE COMPANY HAS NOT BEEN COMPROMISED OR HARMED IN ANY WAY. THE ASSESSEE COMPANY CAN STILL CONTINUE ITS BUSINESS WITH NEW BUYERS. THE PLANT HA S NOT BEEN CLOSED DOWN. THE REASONING ADVANCED BY THE LD. AO ARE (1) THE TERMINATION OF AGREEMENT FOR PURCHASE HAS N OT RESULTED IN ANY WAY CLOSURE OF THE MANUFACTURING FACILITIES. FOR TH E REVENUE SLIPPAGE ASSESSEE HAS BEEN COMPENSATED. (2) ASSESSEE COMPANY WAS FREE TO SUPPLY ENTIRE SPEC TRUM OF THE PRODUCT TO OTHER CUSTOMERS EXCEPT THAT KGCL WILL EN JOY PRIORITY PURCHASE STATUS. (3) THE BASIC AGREEMENT AND TECHNICAL AGREEMENT OF 1972 WERE FOR TECHNICAL SUPPORT AND GUIDANCE BY KGCL FOR PRODUCTI ON OF CERTAIN QUALITY GOODS AND FOR THIS SEPARATE PAYMENT OF TECH NICAL FEES HAS BEEN GIVEN. THOUGH REVENUE STREAM OF THE ASSESSEE IS AFF ECTED BUT NOT ITS CAPACITY TO CONTINUE ITS BUSINESS. ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 20 (4) MIRANIES AND IGCL WERE ACTIVE PARTNERS IN MANUF ACTURING THE PRODUCTS THOUGH IT CARRIED OUT CERTAIN RISKS. IT IS NOT THE CASE THAT THESE TWO WERE ONLY PASSIVE PARTNERS. (5) NO DATA LIKE CASH FLOW ANALYSIS, BREAK EVEN ANA LYSIS, RATIO ANALYSIS OR ANY OTHER BASIC DATA ETC. IS PROVIDED SO AS TO S HOW THAT THERE WAS LOSS TO THE CAPITAL PART OF THE PROJECT. THE ASSESSEE CO MPANY HAS STARTED NEW PRODUCT MIX AND STARTED LOOKING FOR NEW CUSTOMERS. THE PRODUCTION VOLUME HAS BEEN THE SAME THOUGH SALE REALIZATION HA S BEEN AFFECTED. 25. WHEN THE MATTER TRAVELLED TO THE LD. CIT(A) HE CONSIDERED THE REASONING OF AO AND ACCORDINGLY CONFIRMED THE ADDIT ION TREATING THE COMPENSATION AS REVENUE RECEIPT. HIS REASONS ARE SU MMARISED AS UNDER :- (1) ACCORDING TO THE LD. CIT(A) IF COMPENSATION IS PAID FOR STRUCTURAL DAMAGE OR DAMAGE TO THE INFRASTRUCTURE OR DAMAGE TO THE INCOME-EARNING APPARATUS, THE RECEIPT WILL BE CAPITAL IN NATURE WH EREAS IF COMPENSATION IS RECEIVED IN LIEU OF LOSS OF PROFIT OF THE BUSINESS IT WOULD BE REVENUE RECEIPT. (2) AS PER NOTICE GIVEN BY KGCL DATED 28.03.2001 TO THE ASSESSEE COMPANY THE HEADING IS TERMINATION OF PURCHASE OF OSSEIN FROM YOU. THE SECOND PART OF THAT LETTER CLEARLY INDICATES TH AT TERMINATION AGREEMENT DATED 16.11.2001 SPOKE OF ONLY TERMINATION OF PURCH ASES AS UNDER:- IN VIEW OF DISCONTINUATION OF PROCUREMENT OF GELAT INE FROM US AND THE LIKELY CLOSURE OF OUR BUSINESS, WE HAVE NO ALTERNAT IVE BUT TO TERMINATE OUR CONTRACT FOR PURCHASE OF OSSEIN FROM YOUR COMPANY. ACCORDINGLY, WE HEREBY SERVE YOU A FORMAL NOTICE FOR TERMINATION OF PURCHASE FROM YOU OF OSSEIN WITH YOUR DELIVERY OF OSSEIN TO US IN OCTOBE R THIS YEAR. WE HAVE ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 21 ENDEAVOURED TO PROVIDE THIS TO YOU AT THE EARLIEST POSSIBLE OPPORTUNITY AND HAVE PROVIDED YOU WITH TERMINATION NOTICE OF OVER 6 MONTHS, TO ALLOW YOU TO IDENTIFY ALTERNATIVE CUSTOMERS FOR PURCHASE OF O SSEIN FROM YOU, AND TO THEREBY MITIGATE YOUR LOSSES, IF ANY, ARISING FROM SUCH TERMINATION. ACCORDING TO THE LD. CIT(A) THIS LETTER CLEARLY STA TES THE INTENTION OF KGCL TO TERMINATE THE CONTRACT FOR THE PURCHASE OF OSSEIN. SIMILAR LETTER WAS WRITTEN ON 26.6.2001 WHICH ALSO INDICATE D THAT TERMINATION OF AGREEMENT DATED NOVEMBER, 2001 WAS FOR TERMINATING THE AGREEMENT FOR PURCHASE OF OSSEIN. THE LD. CIT(A) HAS REFERRED TO THE CONTENTS OF THIS LETTER AS UNDER : DEAR SIRS, WE REFER TO OUR LETTER OF MARCH 28, 2001 TO YOU AND THE SUBSEQUENT DISCUSSIONS ON APRIL 5, 2001, APRIL 9, 2001 AND MAY 21, 2001 REGARDING OUR DECISION TO TERMINATE THE AGREEMENT FOR PURCHAS E OF OSSEIN FROM YOU. AFTER DUE CONSIDERATION OF YOUR REQUEST TO EXTEND C ONCESSION AND THE CIRCUMSTANCES, WE HEREBY GIVE YOU NOTICE OF OUR INT ENTION TO TERMINATE PURCHASE OF OSSEIN FROM YOU AS OF JANUARY 31,2002 W HICH MEANS THAT WE INTEND TO ACCEPT DELIVERY OF OSSEIN FROM YOU TO US ONLY UNTIL JANUARY 31, 2002. AS ALREADY COMMUNICATED TO YOU DURING OUR DISCUSSIO NS MENTIONED ABOVE, WE WILL USE OUR BEST ENDEAVOURS TO PROVIDE Y OU TECHNICAL ASSISTANCE AT TERMS TO BE MUTUALLY AGREED UPON FOR MANUFACTURING PHOTOGRAPHIC GELATINE. HOWEVER, WE CANNOT GUARANTEE THAT YOU WILL BECOME AN ABLE MANUFACTURER OF PHOTOGRAPHIC GELATIN E WHICH IS SATISFACTORY TO POTENTIAL CUSTOMERS IN TERMS OF QUA LITY AND PRICE. PLEASE TREAT THIS AS OUR FINAL NOTICE FOR TERMINATI ON OF THE AGREEMENT FOR PURCHASE OF OSSEIN FROM YOU. (3) EVEN THE TERMINATION OF AGREEMENT DATED 16.11.2 001 SHOWED THE DISCONTINUITY OF PURCHASE OF THE PRODUCT BY KGCL FR OM IGCL. THIS PART OF THE AGREEMENT HAS BEEN REFERRED BY LD. CIT(A) AS UNDER :- ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 22 PURSUANT TO VARIOUS NEGOTIATION FROM TIME TO TIME, THE PARTIES HAVE ACCEPTED THE TERMINATION OF THE PROJECT DOCUMENTS I N SO FAR AS IT RELATES TO THE OBLIGATIONS OF KONICA ON THE TERMS OF THIS AGRE EMENT AND IN CONSIDERATION THEREOF AND IN CONSIDERATION OF DISCO NTINUING THE PURCHASE OF THE PRODUCTS BY KONICA FROM IGCL, KONICA HAS AGR EED TO MAKE A VOLUNTARY PAYMENT OF US$ 2,100,000 (UNITED STATES DOLLAR TWO MILLION ONE HUNDRED THOUSAND ONLY) TO IGCL (THE COMPENSATI ON). (4) REFERRING TO THESE LETTERS AND TERMINATION OF A GREEMENT AS ABOVE, LD. CIT(A) HELD THAT COMPENSATION IS PAID FOR THE L OSS WHICH THE ASSESSEE COMPANY WOULD INCUR AS A RESULT OF STOPPAGE OF PURC HASE OF OSSEIN BY KGCL FROM ASSESSEE COMPANY. THE LD.CIT(A) ALSO GAVE A FINDING THAT THERE IS NO INDICATION IN THE NOTICE, LETTER AND TE RMINATION AGREEMENT THAT COMPENSATION HAS BEEN GIVEN FOR ANY STRUCTURAL DAMA GE OR INFRASTRUCTURAL DAMAGE OR DAMAGE TO INCOME-EARNING APPARATUS. (5) THE BASIC AGREEMENT OF 1972 PROVIDED THAT IGCL WAS NOT BOUND TO SELL OSSEIN ONLY TO KGCL. THE ASSESSEE C OMPANY WAS NOT PRECLUDED FROM SELLING OSSEIN TO ANY OTHE R COUNTRY. THE TERMINATION SO MADE, RESULTED IN LOSS TO THE BU SINESS TRANSACTION BUT THAT DOES NOT MEAN A DAMAGE TO THE INFRASTRUCTURE OF THE ASSESSEE COMPANY OR TO THE IN COME EARNING APPARATUS. NO MATERIAL HAS BEEN PLACED BY THE ASSES SEE TO SHOW THAT THERE WAS ANY STRUCTURAL DAMAGE OR DAMAGE TO T HE INFRASTRUCTURE. THERE IS NO DECLINE IN THE OUTPUT B UT THERE IS ONLY A DECLINE IN SALES TRANSACTIONS AND THIS BY ITSELF CANNOT LEAD TO AN INFERENCE THAT COMPENSATION SO RECEIVED IS CAPITAL IN NATURE. 26. AGAINST THIS THE LD. AR FOR THE ASSESSEE SUBMIT TED THAT ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 23 (1) THE TERMINATION OF AGREEMENT SHOULD BE READ AS A WHOLE. IT PROVIDED COMPENSATION FOR TERMINATION OF BASIC AGRE EMENT AND TECHNICAL AGREEMENT OF 1972; (II) FOR TERMINATION OF AGREEMEN T DATED 12 TH MAY, 1995 WHICH RELATED TO PROVIDING TECHNICAL KNOW-HOW; AND (III) FOR SETTING UP GELATINE PLANT. (2) ALL THE AGREEMENTS NAMELY MEMORANDUM, BASIC AGR EEMENT, TECHNICAL COLLABORATION AGREEMENT AND AGREEMENT OF 1995 WERE REFERRED TO AS PROJECT DOCUMENTS WHICH WERE FINALLY TERMINATED. (3) IN CONSIDERATION OF TERMINATION OF PROJECT DOCU MENTS AND IN CONSIDERATION OF DISCONTINUING THE PURCHASE OF PROD UCT BY KGCL FROM IGCL, ASSESSEE WAS PAID COMPENSATION. THEREFORE, IT IS INCORRECT ON THE PART OF THE REVENUE TO SAY THAT COMPENSATION WAS ON LY FOR TERMINATION OF PURCHASE FROM IGCL. (4) BY TERMINATING THE AGREEMENT AND PROJECT DOCUME NTS THERE IS A DAMAGE TO THE INFRASTRUCTURE. GELATINE PLANT WAS S ET UP AT THE COST OF RS.45 CRORES IN 1995-96 AND IT HARDLY ATTAINED COMM ERCIAL PRODUCTION BY THE END OF 2001. THE PRODUCTION REACHED ONLY UPTO 3 0-50% OF ITS CAPACITY. (5) GELATINE PRODUCED BY VAPI PLANT WAS BELOW THE S TANDARD AND NOT ACCEPTABLE. TECHNICAL IMPROVEMENT IN QUALITY WAS ST ILL TO BE ACHIEVED. THE PROFIT MAKING PHASE BEING PHOTOGRAPHIC GELATINE WAS STILL TO BE COMMENCED. (6) THE QUANTITY OF OSSEIN PRODUCED IN 2000-01, SOL D AND EXPORTED HAS GONE DOWN CONSIDERABLY I.E. FROM 3888 MT IN 2000-01 TO 2132 MT IN ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 24 2001-02 AND 580 MT IN 2002-03. THUS PERCENTAGE FALL OF OSSEIN PRODUCTION IS 45% IN THE YEAR OF TERMINATION AND 8 5% IN SUBSEQUENT YEARS. VOLUME OF TURNOVER HAS ALSO GONE DOWN FROM R S.60 CRORES TO RS.40 CRORES IN 2002 AND RS.30 CRORES IN 2003. THE AVERAGE OPERATING PROFIT HAS ALSO GONE DOWN FROM RS.4.4 CRORES IN THE LAST YEAR ENDING 2001 TO A LOSS OF RS.72 LACS AND 2001-02 AND A LOSS OF R S.170 LACS IN 2002-03. THE ASSESSEE COMPANY WAS NOT ABLE TO DISTRIBUTE DIV IDEND IN 2001-02 AND 2002-03. THERE IS SUBSTANTIAL CLOSING STOCK LYING W ITH THE FACTORY. THUS MID-STREAM TERMINATION BY A TECHNICAL PERSON WOULD CAUSE A STRUCTURAL DAMAGE TO THE PLANT AND THE VERY SOURCE OF INCOME H AS BEEN STERILIZED. (7) THUS THERE IS A DAMAGE TO THE STRUCTURE OF THE ASSESSEE COMPANY IN THE SENSE THAT THERE IS A DISASSOCIATION OF KGCL A WORLD-FAMOUS PARTNER. IT RESULTED INTO A LOSS OF REPUTATION. THROUGH LOSS HAVING BEEN INCURRED THE PROGRESS OF THE PLANT WOULD BE PERMANENTLY CRIPPLED WITHOUT TECHNICAL GUIDANCE AND SUPPORT OF KGCL. IN SUPPORT OF ITS ARGUMENT THAT COMPENSATION RECEIV ED ON TERMINATION OF AGREEMENT DATED NOVEMBER, 2001 WAS CAPITAL, LD. AR RELIED ON FOLLOWING THREE JUDGMENTS :- 1. KETTLEWELL & CO. LTD. VS. CIT (CAL) 53 ITR 261 (SC) 2. PH DIVECHA VS. CIT 48 ITR 222 (SC) 3. KARAMCHAND THAPER & BROS. (P) LTD. VS. CIT 80 ITR 1 67 (SC) IN ADDITION TO THIS, THE LD. AR ALSO REFERRED TO ON E MORE AUTHORITY AS UNDER:- (1) INTER GOLD (INDIA) (P) LTD. VS. JT. CIT (2010) 37 SOT 45 (MUMBAI) ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 25 27. IN RESPONSE TO ABOVE, THE LD. DR SUBMITTED THAT AS PER AGREEMENT OF 1972 TAKARAZUKA (KGCL) IS NOT INDEFINITELY SUPPLYIN G TECHNICAL KNOW- HOW TO THE ASSESSEE COMPANY. THE SUPPLY OF TECHNICA L KNOW-HOW WAS LIMITED TO INITIAL PERIOD OF 5 YEARS FOR WHICH SEPA RATE PAYMENT WAS MADE BY IGCL. FURTHER AS PER AGREEMENT OF 1972 TAKARAZUK A WAS TO PURCHASE ONLY OSSEIN AND NOT GELATINE. EVEN THE LETTER BEING A NOTICE FOR TERMINATION FOR PURCHASE REFERRED TO OSSEIN ONLY AND NOT GELA TINE. ONCE TERMINATION AGREEMENT OF NOVEMBER, 2001 REFERS TO PURCHASE AGRE EMENT THEN ASSESSEE COMPANY WAS TO SHOW WHAT WAS THE PURCHASE AGREEMENT WITH TAKARAZUKA OR KGCL. IF NOT THEN TERMS CONTAINED IN BASIC AGREE MENT AND TECHNICAL COLLABORATION AGREEMENT 1972 HAS TO BE CONSIDERED A S CONSTITUTING PURCHASE AGREEMENT WHICH WAS TERMINATED. FURTHER LD . DR SUBMITTED THAT OSSEIN PLANT AND GELATINE PLANTS ARE DIFFERENT. GEL ATINE PLANT WAS BEING SET UP BY VIRTUE OF AGREEMENT OF 1995 AND NOTICE FOR TE RMINATION WAS GIVEN ONLY IN RESPECT OF OSSEIN. HE SUBMITTED THAT ASSESS EE HAS NOT GIVEN ANY DATA HOW IT HAS SUFFERED STRUCTURAL DAMAGE. THE BAS IC WORKING PAPERS AS TO HOW THE COMPENSATION HAS BEEN CALCULATED HAS NOT BEEN GIVEN. THE KGCL HAD ONLY 10% HOLDING WHEREAS NICHIMEN HAD 30% HOLDING IN ASSESSEE COMPANY AND IT WAS REQUIRED TO MARKET THE PRODUCTS MADE BY THE ASSESSEE. THIS NICHIMEN IS RESPONSIBLE FOR SALE OF OSSEIN MANYFACTURED BY THE ASSESSEE. BY VIRTUE OF SEPARATE AGREEMENT CALLE D TECHNICAL COLLABORATION AGREEMENT TAKARAZUKA (IGCL) HAD PROVI DED TECHNICAL ASSISTANCE AND THIS TECHNICAL ASSISTANCE CONFINED F OR 5 YEARS ONLY. IT CANNOT BE THEREFORE SAID THAT BY TERMINATION AGREEM ENT THERE WAS ANY EFFECT ON TECHNICAL COLLABORATION BETWEEN ASSESSEE COMPANY AND KGCL. EVEN THOUGH TERMINATION AGREEMENT OF NOVEMBER, 2001 REFERS TO PROJECT DOCUMENTS WHICH IN TURN REFERS TO ALL THE DOCUMENTS EXECUTED IN 1972 AND 1995 BUT AGREEMENT OF 1995 RELATED TO MANUFACTURING OF GELATINE THROUGH A SEPARATE PLANT AT VAPI. IN FACT NO NOTICE OF TERM INATING THE AGREEMENT OF ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 26 1995 WAS GIVEN TO THE ASSESSEE COMPANY AS STIPULATE D IN THAT AGREEMENT ALSO. THEREFORE, IT CANNOT BE SAID THAT COMPENSATIO N PAID BY KGCL RELATED TO TERMINATION OF AGREEMENT FOR GELATINE PL ANT AT VAPI. IN FACT AS PER AGREEMENT OF 1995 RELATING TO SET UP OF GELATIN E PLANT AT VAPI, GUJARAT TECHNICAL SUPPORT WAS TO BE PROVIDED UPTO 5 YEARS B Y KGCL AND THEREAFTER FOR FURTHER TECHNICAL SUPPORT SEPARATE P AYMENT FOR ENGINEERS VISITING VAPI WAS TO BE MADE. THE ASSESSEE COMPANY HAD ALREADY MADE THE PAYMENTS TO KGCL FOR PROVIDING TECHNICAL ASSIST ANCE FOR GELATINE PLANT AT VAPI AND THE PERIOD FOR WHICH SUCH TECHNIC AL ASSISTANCE DID NOT SURVIVE AND HAD EXPIRED. THEREFORE, IT CANNOT BE SA ID THAT COMPENSATION AMOUNT PAID BY KGCL INCLUDED ANY PART FOR TERMINATI ON OF AGREEMENT RELATING TO VAPI PLANT. IN FACT WITHOUT GIVING ANY NOTICE TO ASSESSEE COMPANY AS STIPULATED IN 1995 AGREEMENT KGCL COULD NOT TERMINATE THE AGREEMENTS RELATING TO VAPI PLANT. EVEN IF, TERMINA TED IT WILL NOT BE LEGALLY VALID. EVEN OTHERWISE MAJOR PART OF TECHNIC AL COLLABORATION FOR VAPI PLANT WAS OVER BEFORE TERMINATION AGREEMENT OF NOVEMBER, 2001. EVEN THOUGH TERM OF 1995 AGREEMENT WAS FOR 10 YEARS BUT VARIOUS OBLIGATIONS CONTAINED THEREIN ARE ALREADY OVER. LD. DR SUBMITTED THAT LETTERS/NOTICES ISSUED BY KGCL TO ASSESSEE COMPANY FOR TERMINATION OF PURCHASE AGREEMENTS CONTAINED REFERENCE TO PURCHASE ONLY. EVEN THE LETTER FROM RAJNI & ASSOCIATES ATTORNEY FOR THE ASSESSEE C OMPANY MENTIONS THAT ERECTION, COMMISSIONING, PRODUCTION AND TRIAL WERE ALL OVER IN LAST 30 YEARS. IN NUT SHELL WHEN ALL THE LETTER ISSUED BY K GCL AND LETTER OF RAJNI ASSOCIATES IS CONSIDERED THEN PROJECT DOCUMENTS AR E CONFINED TO ONLY PURCHASE OF OSSEIN AND, THEREFORE, THE COMPENSATI ON PAID TO THE ASSESSEE COMPANY WAS FOR TERMINATION OF PURCHASE FROM ASSESS EE COMPANY. 28. THE LD. DR SUBMITTED THAT EVEN AS PER 1972 AGRE EMENT KGCL OR TAKARAZUKA WAS NOT THE SOLE PURCHASER OF OSSEIN FRO M THE ASSESSEE. THEY ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 27 REFER ONLY TO THE SALE TO TAKARAZUKA/KGCL ON PRIORI TY BASIS. IN OTHER WORDS ASSESSEE COMPANY WAS FREE TO MARKET ITS PRODU CTS IN ANY OTHER COUNTRY WHICH HAS BEEN CLEARLY SPECIFIED IN 1972 AG REEMENT. THE LD. DR SUBMITS THAT IF FOR THE SAKE OF ARGUMENT IT IS HELD THAT SOME COMPENSATION WAS PAID FOR TERMINATION OF 1995 AGREEMENT THEN THE RE WAS ALSO STIPULATION OF NON COMPETE FEE. KGCL HAD CLEARLY AG REED NOT TO COMPETE WITH THE ASSESSEE FOR SALE OF OSSEIN AFTER TERMINAT ION OF ITS RELATIONSHIP WITH THE ASSESSEE COMPANY. IN OTHER WORDS KGCL WOUL D HAVE CHARGED NON-COMPETE FEE FROM ASSESSEE COMPANY WHICH IS APPA RENTLY ADJUSTED AGAINST TOTAL COMPENSATION PAID TO THE ASSESSEE COM PANY. THUS APPARENTLY THERE ARE THREE ELEMENTS IN THE COMPENSATION ONE W HICH IS MAJOR, IS ABOUT TERMINATION OF PURCHASE OF OSSEIN FROM THE AS SESSEE COMPANY FOR WHICH KGCL WOULD MAKE PAYMENT TO ASSESSEE COMPANY F OR LOSS OF PROFIT ARISING ON SALE OF OSSEIN TO KGCL; SECONDLY PAYMENT BY KGCL TO ASSESSEE COMPANY FOR WITHDRAWING FROM VAPI PLANT; A ND THIRDLY PAYMENT BY ASSESSEE TO KGCL AS NON-COMPETE FEE. SINCE COMPE NSATION PAID WAS A NET RESULT AND KGCL HAS TERMINATED ALL THE RELATION WITH THE ASSESSEE COMPANY THEN NON-COMPETE FEE ELEMENT WOULD NEUTRA LIZE ANY PAYMENT FOR WITHDRAWING BY KGCL FROM VAPI PLANT. WHAT SURVI VES THEREAFTER IS ONLY COMPENSATION FOR TERMINATION OF PURCHASES OF OSSEIN FROM ASSESSEE COMPANY. HE FURTHER SUBMITTED THAT AFTER KGCL WITHD REW FROM IGCL IN RELATION TO PURCHASE OF OSSEIN FROM ASSESSEE COMPAN Y THE REST OF THE PRODUCTION AND MANUFACTURING PLANT OF THE ASSESSEE COMPANY CONTINUED INTACT AND, THEREFORE, WHATEVER IS RECEIVED BY THE ASSESSEE WOULD BE A REVENUE RECEIPT. HE REFERRED TO THE DECISION OF HON . SUPREME COURT IN CIT VS. BAIJNATH GANGADHAR 86 ITR 19 (SC) AND CIT V S. MANMARANJI & CO. (1972) 86 ITR 29 (SC) FOR THE PROPOSITION THAT WHERE COMPENSATION IS GIVEN FOR LOSS OF EARNING IT WOULD BE A REVENUE RECEIPT. HE THEN REFERRED TO THE DECISION OF HON. M.P. HIGH COURT IN EASTERN AIR PRODUCT (P)LTD. ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 28 VS. CIT (2007) 290 ITR 562 FOR THE PROPOSITION THAT WHERE PAYMENT IS MADE FOR COMPENSATING ANY SHORT FALL IN PURCHASE IT WOULD BE REVENUE RECEIPT. HE ALSO REFERRED TO THE DECISION IN CIT VS . WESTEND CO. (1996) 60 ITR 11 (SC) WHEREIN IT IS HELD THAT COMPENSATION RE CEIVED TOWARDS LOSS OF AGENCY WAS A REVENUE RECEIPT, AS A LOSS OF THE AGEN CY IS ONLY A NORMAL TRADING LOSS. 29. THE LD. DR ALSO SUBMITTED THAT AS PER 1995 AGRE EMENT GOOD-WILL OF THE ASSESSEE IS INTACT. HE IS CARRYING ON THE BUSIN ESS AS USUAL THOUGH WITH THE LOWER TURNOVER. THE TERMINATION AGREEMENT DID N OT PROVIDE FOR ANY PAYMENT FOR STRUCTURAL DAMAGE. THERE WAS NO COMPENS ATION OF LOSS OF REPUTATION OR GOOD-WILL. THEREFORE ENTIRE RECEIPT B Y THE ASSESSEE COMPANY AS COMPENSATION IS REVENUE RECEIPT. 30. LD. AR IN REJOINDER SUBMITTED THAT JUDGMENT OF HON. SUPREME COURT IN DEVECHAS CASE WAS GIVEN BY FIVE JUDGES OF THE APEX COURT WHICH WILL STILL HOLD THE FIELDS AND JUDGMENTS GIVE N BY OTHER BENCHES OF THE APEX COURT SUBSEQUENTLY CANNOT OVER-RULE THE JU DGMENT OF APEX COURT IN DEPACHAS CASE. ACCORDING TO HIM IN DEVEC HAS CASE IF MONOPOLY CONTRACT HAS COME TO AN END THEN IT IS A L OSS OF ENDURING BENEFIT, THERE IS A DAMAGE TO PROFIT EARNING APPARA TUS, A WORLD FAMOUS ORGANIZATION HAS WITHDRAWN WHICH HAD SEVERELY AFFEC TED THE GOOD-WILL AND REPUTATION OF THE ASSESSEE COMPANY AND HENCE IT HAS AFFECTED THE CARRYING ON OF BUSINESS IN THE SAME WAY AND TO THE SAME EXTENT AS IT WAS EARLIER DONE. IN THE PRESENT CASE 100% PRODUCTION G OES TO THE KGCL HENCE IT IS A MONOPOLY SALE. ITS WITHDRAWAL HAS RAN SACKED THE STRUCTURE OF THE ASSESSEE COMPANY. THE 1995 AGREEMENTS ARE PROJE CT DOCUMENT. IT WAS FOR 10 YEARS WHICH ARE YET TO EXPIRE AND, THEREFORE , ON BOTH THE COUNTS I.E. ON ACCOUNT OF STRUCTURAL DAMAGE TO THE ASSESSEE COM PANY AND TERMINATION ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 29 OF PROJECT DOCUMENT IN RESPECT OF VAPI PLANT COMPEN SATION RECEIVED BY IT WOULD BE CAPITAL IN NATURE. HE SUBMITTED THAT THE P RODUCTION OF THE ASSESSEE COMPANY HAS SUBSTANTIALLY FALLEN BECAUSE O F WITHDRAWAL OF KGCL, AS PROVIDED EARLIER. 31. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIAL ON RECORD. THE UNDISPUTED FACTS ARE THAT BASIC AGRE EMENT AND TECHNICAL COLLABORATION OF 1972 PROVIDE THE CREATION OF ASSES SEE COMPANY FOR MANUFACTURING OSSEIN WHICH WOULD BE PURCHASED ON PR IORITY BASIS BY M/S TAKARAZUKA (KONICA GELATINE CORPORATION NOW), NO TI ME LIMIT AS SUCH FOR CONTINUATION OF THIS AGREEMENT WAS PROVIDED. FOR TE CHNICAL COLLABORATION ASSESSEE COMPANY WAS TO PROVIDE A TOTAL SUM OF 5 MI LLION JAPANESE YENS. ARTICLE-11 PROVIDED THAT OSSEIN PRODUCED BY THE ASSESSEE COMP ANY SHALL BE TAKEN UP BY TAKARAZUKA ON PRIORITY BASIS AT INTE RNATIONAL PRICE AND ASSESSEE COMPANY WAS NOT PRECLUDED FROM SELLING OSS EIN TO ANY OTHER COUNTRIES. THE TECHNICAL COLLABORATION AGREEMENT PR OVIDED THAT TAKARAZUKA WILL GIVE TO IGCL NECESSARY TECHNICAL S UPPORT AND KNOW- HOW FOR INSTALLATION OF EQUIPMENT OR MACHINERY, TEC HNICAL GUIDANCE AND PROVIDING THE SUPPORTING TECHNICAL STAFF IN ADDITIO N TO SAMPLING AND TESTING OPERATIONS FOR QUALITY YIELD FROM RAW MATER IAL TO FINISHED GOODS. TAKARAZUKA WOULD SEND ENGINEERS FOR ASSISTING ASSES SEE COMPANY FOR WHICH SEPARATE PAYMENT WOULD BE PROVIDED BY THE ASS ESSEE COMPANY. THE TERMS OF THE TWO AGREEMENTS WERE KEPT AT 5 YEAR S. IN THE EVENT OF ASSESSEE COMPANY FAILING TO MAKE THE PAYMENT AS PER THE AGREEMENT WITHIN 30 DAYS OR IGCL ENTERS INTO BANKRUPTCY PROCE EDINGS OR UNABLE TO EFFECT PAYMENT, TAKARAZUKA WILL HOLD THE LEGAL RIGH T TO CANCEL THESE AGREEMENTS AND IN ADDITION TAKARAZUKA KEPT RIGHT TO CLAIM FROM ASSESSEE COMPANY ITS IMMEDIATE PERFORMANCE OF ALL OBLIGATION S UNDER THESE ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 30 AGREEMENTS. THUS INSPITE OF VALIDITY OF AGREEMENT K EPT AT 5 YEARS THE PERFORMANCE AS PER AGREEMENT CONTINUED TILL THE TER MINATION OF THE AGREEMENT IN THE YEAR 2001. 32. IN ADDITION TO MANUFACTURING OF OSSEIN AND IT S SALES TO KGCL ON PRIORITY BASIS THE ASSESSEE COMPANY ENTERED INTO AN OTHER AGREEMENT WITH KGCL TO ESTABLISH A GENATINE MANUFACTURING PLANT AT VAPI, GUJARAT FOR WHICH SEPARATE AGREEMENT WAS EXECUTED IN 1995. THIS AGREEMENT PROVIDED THAT GELATINE SO PRODUCED BY THE ASSESSE E COMPANY CAN BE EXPORTED, SOLD OR USED ANYWHERE IN THE WORLD. SUCH RIGHT WAS GRANTED ON THE PAYMENT OF FEES. THE ONLY RIDER PUT WAS THAT MA NUFACTURING AND SALE OF PHOTOGRAPHIC GELATINE WOULD COMMENCE AT THE FU TURE DATE AFTER OBTAINING THE PRIOR WRITTEN CONSENT OF KGCL. FOR TH E PURPOSE OF TRANSFER AND SELLING ITS RIGHTS IN KGCL, THE ASSESSEE COMPAN Y WAS REQUIRED TO PAY TO KGCL A TOTAL JAPANESE YEAR OF SIX CRORES FIFTY L ACS WHICH INCLUDED PRICE ATTRIBUTABLE TO DESIGNS AND DRAWING PERTAININ G TO KGCL TECHNOLOGY WHOSE PRICE WAS ESTIMATED AT JAPANESE YENS 32,50,0 00. THE FEES FOR DEPUTING TECHNICIANS WAS SEPARATE. THE TERMS OF THI S AGREEMENT WAS FOR 10 YEARS EXCEPT THE SECRECY CLAUSE WHICH WOULD SURV IVE EVEN THEREAFTER. ARTICLE -13 OF 1995 AGREEMENT PROVIDES A RIGHT TO BOTH THE PART IES TO TERMINATE THIS AGREEMENT BY A NOTICE IN WRITING TO OPERATE ON A DATE SPECIFIED IN THE NOTICE IF ANY OF THE PARTIES FAIL TO OBSERVE ANY TERMS OF THE AGREEMENT OR OTHER PARTY BECOMES INSOLVENT OR A PAR TY IS IN THE PROCESS OF WINDING UP. THE TERMINATION AGREEMENT DATED NOVEMBE R, 2001 EXECUTED BETWEEN THE ASSESSEE COMPANY IGCL, KGCL AND NICHIME N & CO. AND KHIMJI VISHRAM & SONS (MIRANIS) PROVIDED BY VIRTUE OF CLAUSE (F) THE DEFINITION OF PROJECT DOCUMENTS WHICH WERE TERMINAT ED BY CLAUSE (G). THE TWO CLAUSES (F) & (G) IN THIS REGARD ARE AS FOL LOWS:- ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 31 (F) THE MEMORANDUM, THE BASIC AGREEMENT, THE TECHN ICAL COLLABORATION AGREEMENT AND THE AGREEMENTS DATED MA Y 12,1995 AND OCTOBER 15, 1998 EXECUTED BETWEEN IGCL AND KONICA S HALL, HEREINAFTER, FOR THE SAKE OF BREVITY WHEREVER THE CONTEXT SO PER MITS, BE COLLECTIVELY REFERRED TO AS THE PROJECT DOCUMENTS. (G) BY ITS LETTERS DATED MARCH 28, 2001 AND JUNE 2 6, 2001, KONICA FORMALLY TERMINATED THE PROJECT DOCUMENTS AND ITS C ONTRACT TO PURCHASE THE PRODUCT FROM IGCL. CLAUSE (I) PROVIDES THAT KONICA HAS REDUCED THE PRO DUCTION CAPACITY OF PHOTOGRAPHIC GELATINE AND DESIRES TO DISCONTINUE TH E PURCHASE OF PRODUCTS FROM IGCL. CLAUSE (I) OF THIS TERMINATION AGREEMENT STATES AS UNDER :- (I) FOR CERTAIN REASONS, KONICA HAS REDUCED THE PR ODUCTION CAPACITY OF PHOTOGRAPHIC GELATINE AND THEREFORE DESIRES TO DISC ONTINUE THE PURCHASE OF THE PRODUCTS FROM IGCL WITH EFFECT FROM FEBRUARY 1, 2002. CLAUSE (K) PROVIDES THE PAYMENT OF COMPENSATION REL ATING TO THE OBLIGATION OF KONICA AND FOR DISCONTINUING THE PURC HASE OF PRODUCT OF KONICA. CLAUSE (K) IN THIS REGARD READS AS UNDER :- (K) PURSUANT TO VARIOUS NEGOTIATION FROM TIME TO T IME, THE PARTIES HAVE ACCEPTED THE TERMINATION OF THE PROJECT DOCUMENTS I N SO FAR AS IT RELATES TO THE OBLIGATIONS OF KONICA ON THE TERMS OF THIS AGRE EMENT AND IN CONSIDERATION THEREOF AND IN CONSIDERATION OF DISCO NTINUING THE PURCHASE OF THE PRODUCTS BY KONIA FROM IGCL, KONICA HAS AGRE ED TO MAKE A VOLUNTARY PAYMENT OF US $ 2,100,000 (UNITED STATES DOLLAR TWO MILLION ONE HUNDRED THOUSAND ONLY) TO IGCL (THE COMPENSATIO N). CLAUSE 1.1 AND 1.2 RELATE TO PROVIDING RELEASE AND DISCHARGE TO KONIKA AND ITS GROUP COMPANY FROM ALL OBLIGATIONS AND LIAB ILITIES EXCEPT SECRECY CLAUSE CONTAINED IN ARTICLE-8 OF THE BASIC AGREEMEN T DATED AUGUST 29,1972. ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 32 CLAUSE 2.1 OF SETTLEMENT TERMS PROVIDES A PAYMENT O F U.S. $ 2,100,000 AS COMPENSATION TO THE ASSESSEE. CLAUSE 2.1 (A) OF THE TERMINATION AGREEMENT READS AS UNDER :- 2.1 THE PARTIES HAVE AGREED TO THE FOLLOWING TERM S (THE SETTLEMENT TERMS) - (A) UPON VALIDATION OF THIS AGREEMENT WHICH IS AUTO MATICALLY VALIDATED BY SATISFYING CLAUSE 7.2, KONICA SHALL IM MEDIATELY PAY IGCL AN AMOUNT OF US $ 2,100,000 (UNITED STATES DOLLARS TWO MILLION ONE HUNDRED THOUSAND ONLY) TO THE ACCOUNT OF IGCL AT SM BC MUMBAI BRANCH BY TELEGRAPHIC TRANSFER (THE COMPENSATION) I N FULL AND FINAL SETTLEMENT OF ALL LOSSES, LIABILITIES, EXPENSES, CL AIMS AND DEMANDS WHATSOEVER ARISING UNDER OR IN RELATION TO THE PROJ ECT DOCUMENTS OR IN VIEW OF THE TERMINATION OF THE PROJECT DOCUMENTS IN SOFAR AS IT RELATES TO KONICA OR OTHERWISE HOWSOEVER. CLAUSE 4 PROVIDED THAT KONICA WILL NOT ENTER OR PAR TICIPATE IN THE BUSINESS OF MANUFACTURING, MARKETING, SALE, PURCHASE AND DIS TRIBUTION OF THE PRODUCT MANUFACTURED BY THE IGCL WITHIN TERRITORY O F INDIA. THIS NON- COMPETITION CLAUSE READS AS UNDER :- 4. NON-COMPETITION KONICA AGREES THAT FOR A PERIOD OF THREE (3) YEARS FROM THE RECEIPT OF THE COMPENSATION BY IGCL FROM KONICA, IT SHALL NOT, DIR ECTLY OR INDIRECTLY, WITHOUT THE PRIOR WRITTEN CONSENT OF IGCL, ENTER OR PARTICIPATE IN THE BUSINESS OF MANUFACTURE, MARKETING, SALE, PURCHASE AND DISTRIBUTION OF THE PRODUCT WITHIN THE TERRITORY OF INDIA. FOR A PERIOD OF THREE (3) YEARS FROM THE DATE OF RECEIPT OF THE COMPENSATION BY IGCL, KO NICA SHALL NOT IN ANY MANNER, DIRECTLY OR INDIRECTLY, PURCHASE AND/OR PRO CURE THE PRODUCTS FROM ANY THIRD PARTY WITHIN THE TERRITORY OF INDIA. KONI CA ACKNOWLEDGES THAT THE TERMS AND CONDITIONS OF THIS AGREEMENT AND THE NON -OBJECTION GRANTED BY IGCL IS A COMPOSITE, REASONABLE AND SUFFICIENT C ONSIDERATION FOR UNDERTAKING THE NON-COMPETE COVENANT UNDER THIS ART ICLE, WHICH HAS BEEN ARRIVED AT AFTER TAKING INTO ACCOUNT THE COMMERCIAL VALUE OF THE COVENANT. ACCORDINGLY, NO SEPARATE CONSIDERATION IS PAYABLE F OR THIS NON-COMPETE ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 33 COVENANT, AND KONICA ADMITS AND ACKNOWLEDGES THE SA ME AND FOREOVER RELEASES AND DISCHARGES IGCL FROM MAKING ANY PAYMEN T AND/OR PAYING ANY FURTHER CONSIDERATION. THUS FROM THE TERMINATION AGREEMENT WE NOTICE THAT COMPENSATION WAS PAID BY KONICA TO IGCL IN RESPECT OF THREE SEPARATE LIABILITIES AND OBLIGATIONS :- (1) OBLIGATION OF KONICA WAS TO PURCHASE OSSEIN FRO M ASSESSEE COMPANY WHICH WAS STOPPED BY KGCL ON ACCOUNT OF RED UCTION IN THE PRODUCTION CAPACITY OF PHOTOGRAPHIC GELATINE AND AC CORDINGLY IT DESIRED TO DISCONTINUE THE PURCHASE OF THE PRODUCT FROM IGCL W .E.F. FEBRUARY 1, 2002. (2) DISCHARGING KONICA FROM ITS OBLIGATION CONTAINE D IN AN AGREEMENT OF 1995 WHEREIN GELATINE MANUFACTURED BY IGCL AT VA PI PLANT WOULD BE PURCHASED BY KGCL. (3) KONICA IS IN OBLIGATION NOT TO COMPETE WITH IGC L IN INDIAN TERRITORY IN RESPECT OF MANUFACTURING, MARKETING, S ALE AND PURCHASE AND DISTRIBUTION OF THE PRODUCT (OSSEIN/GELATINE) IN IN DIA. THIS NON-COMPETE PERIOD WAS FOR THREE YEARS. THE ASSESSEE COMPANY IS APPARENTLY REQUIRED TO MAKE THE PAYMENT TO KONICA FOR THIS NON-COMPETE CLAUSE. HOWEVER CLAUSE- 4 OF TERMINATION AGREEMENT STATES THAT NO SEPARATE CONSIDERATION IS PAYABLE FOR THIS NON- COMPETE COVENANT AND IT HAS RELEASED AND DISCHARGE D IGCL FROM MAKING ANY PAYMENT OR PAYING ANY FURTHER CONSIDERATION. TH US WHERE FULL COMPENSATION IS DETERMINED AFTER TAKING INTO ACCOUN T NON-COMPETE FEE, THEN A CLEAR INFERENCE IS THAT TOTAL COMPENSATION P AID BY THE KGCL TO ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 34 ASSESSEE COMPANY IS ARRIVED AT AFTER ADJUSTING ANY PAYMENT REQUIRED TO BE MADE BY ASSESSEE COMPANY TO KGCL AS NON-COMPETE FEE . IN ANY CASE NO SEPARATE WORKING HOW THE COMPENSATION SO PAID HAS B EEN WORKED OUT HAS BEEN GIVEN TO US IN SPITE OF OUR ASKING FOR IT ON T HE GROUND THAT THE MATTER IS OLD AND SUCH WORKING PAPERS MAY NOT BE AVAILABLE . THE SECOND PART OF THE COMPENSATION AS STATED ABOVE RELATED TO DISCHARGE KGCL FROM ITS OBLIGATION TOWARDS - (1) GUARANTEE GIVEN BY KGCL FOR PRODUCTION OF 166 K G PER HOUR OF THE GELATINE AS PROVIDED IN ARTICLE 6.1 OF THE AGREEMEN T OF 1995. (2) TRANSFER AND CONTINUING TRANSFER FOR RUNNING AN D IMPROVING THE VAPI PLANT FOR THE PERIOD OF 10 YEARS AS PROVIDED I N THE AGREEMENT. (3) PROVIDING TECHNICAL PERSONAL FOR IMPROVING AND OPERATION OF THE PLANT AND OTHER GUARANTEES GIVEN AS PER ARTICLE -6 OF THAT AGREEMENT. NOW THE QUESTION ARISES IS WHETHER THE SUM OF US $ 2.1 MILLION (EQUIVALENT TO INDIAN RS.10,14,54,000/-) IS CAPITAL RECEIPT IN ENTIRETY OR REVENUE RECEIPT IN ENTIRETY OR A MIXED CAPITAL-CUM- REVENUE RECEIPT. IN THIS REGARD WE REFER TO VARIOUS AUTHORITIES FOR COMING T O APPROPRIATE INFERENCES. (1) IN PH DIVECHA VS. CIT (1963) 48 ITR 222 (SC), D ECIDED BY FIVE JUDGES OF THE HON. SUPREME COURT, IT WAS HELD THAT COMPENSATION PAID BY PHILLIP ELECTRICAL COMPANY TO THE ASSESSEE BEING A PARTNER IN THE FIRM WHICH HAD ENTERED INTO AN AGREEMENT WITH PHILLIP EL ECTRICAL CO., AND SUCH ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 35 AGREEMENT WAS TERMINATED, WAS HELD AS CAPITAL RECEI PT. THE FACTS RELATING TO THAT CASE ARE THE ASSESSEE WAS CONDUCTING THE BU SINESS AS A PARTNER IN THE FIRM IN ELECTRICAL GOODS INCLUDING ELECTRICAL L AMPS. IN 1938 IT ENTERED INTO AN AGREEMENT WITH PHILLIP ELECTRIC CO. FOR THE EXCLUSIVE RIGHT TO PURCHASE AND SALE ELECTRICAL LAMPS MANUFACTURED BY PHILLIP ELECTRICAL CO. IN CERTAIN AREAS OF INDIAN TERRITORY. THIS ARRANGEM ENT CONTINUED FOR 16 YEARS AND THEREAFTER PHILLIP ELECTRICAL CO. DECIDED TO TAKE OVER THE DISTRIBUTION OF LAMP IN CERTAIN AREAS IN WHICH THE FIRM OF THE ASSESSEE HAD A RIGHT. AFTER SERVING A TERMINATION NOTICE AND AFT ER SOME DELIBERATION WITH THE PARTNERS IT WAS AGREED THAT A SUM OF RS.20 ,000/- WOULD BE PAID TO SHRI P.H. DIVECHA AND OTHER PARTNERS OF THE FIRM AS THREE YEARS REMUNERATION. THIS AMOUNT WAS HELD AS CAPITAL RECEI PT IN THE HANDS OF SHRI PH DIVECHA FOR SEVERAL REASONS AS UNDER :- (I) THE AGREEMENT BETWEEN THE FIRM OF PH DIVECHA AN D PHILLIP ELECTRICAL COMPANY CREATED A MONOPOLY RIGHT OF PURC HASE AND MONOPOLY RIGHT OF SALE IN THE PRODUCTS OF PHILLIP ELECTRICAL CO. IN CERTAIN AREAS. IT SECURED ALL THE FORMS AND ADVANTAGE OF AN ENDURING NATURE AND WAS NOT AN ORDINARY TRADING AGREEMENT. (II) IT COULD NOT BE PROVED THAT AMOUNT PAYABLE TO THE PARTNERS REPRESENTED THE LIKELY PROFITS OF THE FIRM THAT WOU LD HAVE ARISEN IF THE AGREEMENT IS NOT TERMINATED. THUS THE COMPENSATION DID NOT REPLACE THOSE PROFITS. (III) THE PAYMENT WAS NOT MADE FOR ANY SERVICE REND ERED BY THE PARTNERS. THE PAYMENT WAS MADE FOR QUALITIES OF THR EE PARTNERS WHO HAD BUILT UP A VAST NET WORK OF SALES ORGANIZATION OF W HICH PHILLIP ELECTRICAL CO. WOULD OBTAIN THE BENEFIT WHEN IT ENTERED FOR SE LLING BY ITSELF. ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 36 (IV) THE PAYMENT WAS NOT RELATED TO ANY BUSINESS DO NE OR LOSS TO THE PROFIT AND NOT TO RECOMPENSATE FOR SERVICES PAST OR FUTURE. (V) IT DID NOT BEAR THE CHARACTER OF INCOME OR PROF IT OR GAINS CHARGEABLE TO ANY INCOME-TAX. IT WAS HELD BY THE HON. APEX COU RT THAT TO CONSTITUTE INCOME PROFIT OR GAINS THERE MUST BE A SOURCE FROM WHICH THE PARTICULAR RECEIPT HAS ARISEN AND A CONNECTION MUST EXIST BETW EEN THE RECEIPT AND THE SOURCE. THE RELEVANT ASPECT IS THE NATURE OF RECEIP T IN THE HANDS OF THE PERSONS WHO RECEIVE IT, THOUGH THE MOTIVE OF THE PE RSONS MAKING THE PAYMENT IS ALSO RELEVANT. THE LARGENESS OF AMOUNT O R PERIODICITY OF PAYMENT IS NOT DECISIVE FACTOR ON THIS ISSUE. EVEN THE NOMENCLATURE IS NOT DECISIVE. (2) IN CIT VS. K K ROY (1967) 67 ITR 179 (CAL) HON. CALCUTTA HIGH COURT HELD THAT A PAYMENT RECEIVED ON ACCOUNT OF GR ATITUDE OR VALUABLE AND LEGAL SERVICES RENDERED BY THE ASSESSEE ESTABLI SHED A CAPITAL RECEIPT. THE FACTS IN THAT CASE WERE THAT ASSESSEE WAS ACTIN G AS A MANAGING DIRECTOR OF AIRWAYS INDIA LTD. THE BUSINESS OF THE COMPANY INCLUDING AIRWAYS INDIA LTD. WAS ACQUIRED W.E.F. AUGUST 1, 19 53. THE BOARD OF DIRECTORS OF AIRWAYS INDIA LTD. RECOMMENDED THE PAY MENT OF RS.50,000/- TO THE ASSESSEE IN VIEW OF THE TERMINAT ION OF ASSESSEES ASSOCIATION WITH THAT COMPANY DUE TO SCHEME OF NATI ONALIZATION. IT WAS HELD THAT PAYMENT WAS FOR LOSS OF EMPLOYMENT AND HE NCE A CAPITAL RECEIPT. (3) IN INDIAN ENGG. & COMMERCIAL CORPORATION (P) LT D. VS. CIT (1994) 205 ITR 001 (BOM) THE ASSESSEE COMPANY HAD RECEIVED A PAYMENT ON TERMINATION OF AGREEMENT TO SALE TRACTORS OF A POLI SH COMPANY AND IT WAS HELD AS REVENUE RECEIPT. THE FACTS IN THAT CASE WER E THAT BY AGREEMENT OF ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 37 1958 ASSESSEE WAS APPOINTED AS SOLE DISTRIBUTOR IN INDIA FOR CERTAIN TYPES OF WHEELED TRACTORS MANUFACTURED BY POLISH COMPANY. THE AGREEMENT PROVIDED THAT THE ASSESSEE WOULD BE ACTING AS SOLE DISTRIBUTOR, ACT ON ITS OWN ACCOUNT AND ORDERS WOULD BE ISSUED AND EXECUTED IN ITS OWN NAME. HOWEVER, SELLING PRICE WOULD BE FIXED BY MUTUAL CON SULTATION WITH POLISH COMPANY. THE CLAUSE 15 OF THE AGREEMENT PROVIDED TH AT PERIOD OF THE AGREEMENT WOULD BE 5 YEARS BUT POLISH COMPANY RETAI NED THE RIGHT TO TERMINATE THE AGREEMENT BY GIVING 45 DAYS NOTICE IF ANY CONDITION OF THE AGREEMENT ARE INFRINGED BUT IT ALSO PROVIDED THAT T ERMINATION OF AGREEMENT WOULD NOT AFFECT IN ANY RESPECT, THE FULFILLMENT OF CONTRACT BETWEEN THE PARTIES IN EXECUTION OF THE AGREEMENT. IN OTHER WOR DS THE ASSESSEE WOULD CONTINUE TO SELL TRACTORS IN ITS POSSESSION IF AGRE EMENT WITH THE PURCHASER WERE EXECUTED PRIOR TO TERMINATION. THE ASSESSEE PU RCHASED TRACTORS FROM POLISH COMPANY BUT IN BETWEEN SERIOUS TROUBLE DEVEL OPED ON ACCOUNT OF TECHNICAL PROBLEMS IN THE TRACTORS. BY MUTUAL SETTL EMENT DISTRIBUTION AGREEMENT WAS TERMINATED AND ASSESSEE RECEIVED A SU M OF RS.93,450/- IN ALL. IT WAS CLAIMED AS CAPITAL RECEIPT. IT WAS HELD BY HON. BOMBAY HIGH COURT THAT THE SUM RECEIVED BY THE ASSESSEE COMPANY WAS IN THE COURSE OF ITS BUSINESS AND THERE WAS NO DAMAGE TO ITS PROFIT MAKING APPARATUS. HON. BOMBAY HIGH COURT DISTINGUISHED THE DECISION OF HON . SUPREME COURT IN PH DEVICHAS CASE (SUPRA) AND HELD THAT SUM OF RS.9 3,450/- WAS A REVENUE RECEIPT UNDER THE FACTS AND CIRCUMSTANCES O F THAT CASE. THE TRACTORS WERE ASSESSEES STOCK-IN-TRADE AND BY ARRI VING AT THE ARRANGEMENT WITH THE POLISH COMPANY ASSESSEE WAS ABLE TO DISPOS E OF THE TRACTORS. (4) IN THE CASE OF CIT VS. AUTOMOBILE PRODUCTS OF I NDIA LTD. (1983) 140 ITR 159 (BOM) ASSESSEE WAS CARRYING ON THE BUSI NESS IN ASSEMBLING CARS WHICH WERE SUBSEQUENTLY DISCONTINUED IN 1953. THE LICENCE GIVEN UNDER INDUSTRIAL DEVELOPMENT ACT WAS CANCELLED. IN 1955 IT OBTAINED AN ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 38 INDUSTRIAL LICENCE TO MANUFACTURE DIESEL ENGINES IN COLLABORATION WITH A FOREIGN COMPANY. ONE OF THE CONDITIONS OF THE AGREE MENT PROVIDED THAT ASSESSEE SHOULD HAVE CAPACITY TO MANUFACTURE 3000 D IESEL ENGINES. THE AGREEMENT ALSO PROVIDED THAT ASSESSEE WOULD PAY A R OYALTY OF 5% ON SELLING PRICES OF SUCH ENGINES OR SPARE PARTS. DUE TO CHANGE IN POLICY OF THE GOVERNMENT LICENCES WERE GRANTED TO THE AUTOMOB ILE INDUSTRY TO MANUFACTURE BOTH ENGINES AS WELL AS TRACTORS. DUE T O LACK OF MANUFACTURING FACILITIES OF CAR THE ASSESSEE COULD NOT SECURE SUCH LICENCE. THEREFORE, UNDER AN AGREEMENT WITH PREMIER AUTOMOBI LE LTD. IT TRANSFERRED THE UNDERTAKING OF MANUFACTURING OF ENG INES TO THAT COMPANY. THUS ASSESSEE STOPPED ITS BUSINESS AND AMOUNTS SO R ECEIVED FROM PREMIER AUTOMOBILES WAS HELD AS CAPITAL RECEIPT. (5) IN CIT VS. T.I. & M. SALES LTD. (2003) 259 ITR 116 (MAD) THE ASSESSEE WAS A DISTRIBUTOR ON PRINCIPAL TO PRINCIPA L BASIS. THERE WAS TERMINATION OF DISTRIBUTION. UNDER THIS AGREEMENT A SSESSEE WAS TO TRANSFER TRAINED STAFF, DEALERSHIP NET WORK, BRAND IMAGE AND OTHER MARKET INFRASTRUCTURE. COVENANT IN THE AGREEMENT RESTRICTE D THE ASSESSEE FROM ACTING AS DISTRIBUTOR OF STOCK OF ANY OTHER MANUFAC TURER FOR THREE YEARS. THE COMPENSATION SO RECEIVED EVEN THOUGH PAYABLE IN QUARTERLY INSTALMENT WAS HELD AS CAPITAL NATURE. IT WAS HELD THAT AMOUNT PAID TO THE ASSESSEE WAS COMPENSATION FOR IMPAIRMENT OF PROFIT MAKING APPARATUS AND FOR STERILIZATION OF VERY SOURCE OF ITS INCOME. (6) IN EASTERN AIR PRODUCTS (P) LTD. VS. CIT (2007) 290 ITR 562 (M.P.) IT WAS HELD THAT WHEN A PAYMENT IS PAID TO C OMPENSATE A PERSON FOR CANCELLATION OF CONTRACT WHICH DOES NOT AFFECT THE TRADING STRUCTURE OF ITS BUSINESS NOR CAUSE A DEPRIVATION OF WHAT IN SUBSTAN CE IS A SOURCE OF INCOME AND IS A NORMAL INCIDENCE OF ITS BUSINESS, A ND THEN SUCH ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 39 TERMINATION LEAVES HIM FREE TO CARRY ON HIS TRADE I .E. FREED FROM THE CONTRACT TERMINATED, THE RECEIPT IS REVENUE IN NATU RE. WHERE BY THE CANCELLATION OF AN AGENCY THE TRADING STRUCTURE OF THE ASSESSEE IS IMPAIRED OR SUCH CANCELLATION RESULT IN LOSS OF WHAT MAY BE REGARDED AS THE SOURCE OF INCOME OF THE ASSESSEE, THE PAYMENT MADE FOR CAN CELLATION AGREEMENT IS NORMALLY A CAPITAL RECEIPT. IN THAT CASE ASSESSE E COMPANY CARRIED ON THE BUSINESS OF MANUFACTURING INDUSTRIAL GASES. IT ENTE RED INTO AN AGREEMENT WITH UNION CARBIDE INDIA LTD., BHOPAL. THE AGREEMEN T WAS INITIALLY FOR 5 YEARS WITH THE OPTION OF FURTHER RENEWAL. UNION CAR BIDE INDIA LTD.(UCIL) WAS TO PURCHASE A MINIMUM QUANTITY OF GASES PER YEA R WORTH RS.20 LACS INCLUSIVE OF SALES-TAX AND DUTY AND IN THE EVENT OF UCIL FAILING TO TAKE SUCH QUANTITY OF GASES IN A YEAR THEN UCIL WOULD PA Y TO THE ASSESSEE A SUM OF MONEY MAKING TO THE ASSESSEE DIFFERENCE TO R S.20 LACS. THE AGREEMENT WAS TERMINATED BY MUTUAL CONSENT W.E.F. F EBRUARY 5, 1985 AFTER BHOPAL GAS TRAGEDY, AND THE FACTORY OF UCIL W AS CLOSED. HOWEVER, ANOTHER AGREEMENT ENTERED INTO BY THE ASSESSEE WITH UCIL PROVIDED FOR SUPPLY OF GASES AND SUPPLY BEING LESS THE UCIL PAID THE DIFFERENTIAL TO THE ASSESSEE. THE COMPENSATION SO PAID WAS TREATED AS REVENUE RECEIPT. AFTER THE BHOPAL GAS TRAGEDY ASSESSEE HAS NOT CLAIM ED ANY AMOUNT AS COMPENSATION FOR DEPRIVATION OF ITS SOURCE OF INCOM E AND UNDER DEBIT NOTE ISSUED IT HAD CLAIMED THE DIFFERENTIAL SUM AS REVEN UE RECEIPT. (7) IN PARY & CO. LTD. VS. DCIT (2004) 269 ITR 177 (MAD) THE ASSESSEE WAS ONE OF THE SELLING AGENTS FOR A COMPAN Y HMM MANUFACTURING DIVERSE ITEMS OF FOOD PRODUCTS AND TO ILETRIES. HMM AGREED TO PAY THE ASSESSEE A SUM OF RS.40 LACS IN TWO INST ALMENTS, ONE IN CONSIDERATION OF PREMATURE TERMINATION OF THE SELLI NG AGENCY RELATING TO FOOD PRODUCTS ETC. AND THE OTHER IN CONSIDERATION O F THE RESTRICTED COVENANT AS CONTAINED IN THE RELEVANT CLAUSE. THE A SSESSEE RECEIVED RS.25 ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 40 LACS IN THE YEAR 1989 AND RS.15 LACS DURING 1989-90 . THE TRIBUNAL ALLOWED 20% OF THE TOTAL COMPENSATION AS RELATING T O RESTRICTED TO COVENANT AND THUS OUT OF RS/40 LACS RS.5 LACS REPRE SENTED CAPITAL RECEIPT AND BALANCE RS.35 LACS AS REVENUE RECEIPT. THIS VIE W OF THE TRIBUNAL WAS UPHELD BY HON. MADRAS HIGH COURT. (8) IN CIT VS. AMBADI ENTERPRISES LTD. (2004) 267 I TR 702 (MAD), THE AMOUNT RECEIVED ON TERMINATION OF THE DISTRIBUTORSH IP WAS HELD AS CAPITAL RECEIPT. IT WAS HELD BY HON. MADRAS HIGH COURT THAT ONE TEST FOR ASCERTAINING AS TO WHETHER WHAT WAS RECEIVED WAS A CAPITAL RECEIPT OR A REVENUE RECEIPT IS TO FIND OUT WHETHER THE TERMINAT ION IS LINKED WITH PROFIT MAKING APPARATUS. IF IN PURSUANCE OF TERMINATION AG REEMENT THE SOURCE OF INCOME IS TOTALLY SEVERED WHEREBY THE PROFIT EARNIN G PURPOSES COULD NEVER BE UTILIZED BY THE ASSESSEE THEN COMPENSATION SO RE CEIVED WOULD BE CAPITAL IN NATURE. HON. HIGH COURT HAD FOUND THAT E NTIRE TRAINED MAN POWER AND CUSTOMERS WERE HANDED OVER TO THE OTHER P ARTY OF THE AGREEMENT AND, THEREFORE, THE PAYMENT RECEIVED HAD AN IMPRINT OF A CAPITAL RECEIPT. 33. THUS FROM THE ABOVE AUTHORITIES, THE PRINCIPLES ALREADY ESTABLISHED CAN BE SUMMARISED AS UNDER :- (1) WHERE COMPENSATION IS RECEIVED FOR TERMINATION OF DISTRIBUTORSHIP IF SUCH DISTRIBUTORSHIP IS A SOURCE OF INCOME, THEN SUCH COMPENSATION WOULD BE CAPITAL IN NATURE. (2) WHERE SOURCE OF INCOME IS STERILIZED OR COMES T O AN END, THE COMPENSATION SO RECEIVED WOULD BE CAPITAL IN NATURE . ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 41 (3) WHERE ASSESSEE TRANSFERS ITS NET WORK AND ALL C USTOMERS TRAINED MAN POWER ARE HANDED OVER ALONG WITH THE AREA OF SA LES, NET WORK, UNDER AN AGREEMENT, AND THUS CRIPPLED OR PARALYZED ONE OF THE SOURCES, THEN COMPENSATION SO RECEIVED WOULD BE CAPITAL IN NATURE . (4) WHERE ASSESSEE IS CONTINUING TO REMAIN IN BUSIN ESS, SOURCE OF INCOME IS NOT PARALYZED OR DOES NOT COME TO AN END AND ASSESSEE IS COMPENSATED FOR LOSS OF PROFIT ON ACCOUNT OF OTHER PARTY NOT PURCHASING GOODS AS AGREED EARLIER, THEN COMPENSATION SO RECEI VED WOULD BE REVENUE IN NATURE. THE DISTINCTION IS WHETHER ASSESSEES SO URCE OF INCOME CONTINUES TO SURVIVE OR COMES TO AN END. IN PH DIVE CHAS CASE (SUPRA) THE SOURCE OF INCOME OF ASSESSEE CAME TO AN END INASMUC H AS THE DISTRIBUTORSHIP WAS TAKEN OVER BY PHILLIP ELECTRICA L COMPANY AND IT STARTED SELLING PRODUCTS AT ITS OWN. WHEN WE APPLY ABOVE PRINCIPLES TO THE FACTS OF THE PRESENT CASE WE FIND THAT - (I) KGCL WAS CONTINUING TO PURCHASE OSSEIN FROM THE ASSESSEE. IT HAD STOPPED PURCHASING OSSEIN ON ACCOUNT OF ITS BEING N OT ABLE TO SELL GELATINE MANUFACTURED BY IT FROM OSSEIN. IT ALLOWED THE ASSE SSEE TO OPERATE IN INDIA IN RESPECT OF OSSEIN BY NOT ENTERING INTO INDIAN TE RRITORY FOR SALE OF THE PRODUCT OF THE LIKE MANUFACTURED BY THE ASSESSEE CO MPANY. IN OTHER WORDS KGCL ALLOWED THE ASSESSEE COMPANY TO OPERATE, MANUF ACTURE AND SALE OF OSSEIN OR EVEN GELATINE IN INDIA AND FOR THREE YEAR S KGCL WILL NOT ENTER INTO INDIAN TERRITORY FOR MANUFACTURING OR MARKETIN G THE TWO PRODUCTS. IT CLEARLY SHOWS THAT KGCL DID NOT HAVE ANY INTENTION TO TAKE OVER THE ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 42 PRODUCTION OR MARKETING OF OSSEIN OR GELATINE IN IN DIA. IT HAD IN FACT ALREADY AGREED TO ALLOW THE ASSESSEE COMPANY TO SEL L GELATINE ANYWHERE IN THE WORLD BY VIRTUE OF ITS 1995 AGREEMENT. THE TERM INATION AGREEMENT OF 2001 ONLY PROVIDED THAT KGCL WOULD CEASE TO PROVIDE TECHNICAL SUPPORT TO ASSESSEE COMPANY FOR MANUFACTURING AND OPERATION OF GELATINE PLANT AT VAPI. THUS NEITHER THE OSSEIN MANUFACTURING PLANT N OR GELATINE MANUFACTURING PLANT BEING THE SOURCE OF THE INCOME OF THE ASSESSEE COMPANY WERE IMPAIRED. THE ASSESSEE WAS LEFT AT ITS OWN TO MANUFACTURE AND MARKET ITS PRODUCT NAMELY OSSEIN AND GELATINE. SINCE THERE WAS AN OBLIGATION WITH KGCL TO PURCHASE OSSEIN FROM ASSESS EE COMPANY AND KGCL DESIRED TO FORGO ALL THESE OBLIGATIONS, IT PAI D COMPENSATION TO THE ASSESSEE. THIS WILL CERTAINLY BE IN THE NATURE OF R EVENUE RECEIPT. (II) THE ARGUMENT OF THE LD. AR THAT KGCL WAS ITS M AIN PURCHASER AND RATHER WHOLE-SALE PURCHASER OF OSSEIN AND KGCL HAVI NG WITHDRAWN FROM ITS VERY SUCH OBLIGATION, THEN ITS MAJOR SOURCE OF INCOME IS IMPAIRED CANNOT BE ACCEPTED BECAUSE SOURCE OF INCOME IS NOT KGCL BUT ITS OSSEIN MANUFACTURING PLANT. THEREFORE, THE DECISION OF HON . SUPREME COURT IN PH DIVECHA (SUPRA) CANNOT BE APPLIED AS IN OUR CONS IDERED VIEW THE SOURCE OF INCOME OF THE ASSESSEE IS NOT IMPAIRED. I T CONTINUES TO PRODUCE OSSEIN THOUGH IT IS FINDING IT DIFFICULT TO GET NEW CUSTOMERS IN PLACE OF KGCL BUT FOR THAT MATTER IT CANNOT BE SAID THAT SOU RCE OF INCOME OF THE ASSESSEE COMPANY HAS BEEN IMPAIRED OR IT IS OUT OF BUSINESS BECAUSE OF TERMINATION OF AGREEMENT OR ITS MANUFACTURING PLANT HAS BEEN TAKEN OVER OR SURRENDERED. UNDER THE CONDITIONS WHERE OSSEIN I S CONTINUED TO BE MANUFACTURED EVEN AFTER THE TERMINATION OF THE AGRE EMENT, THE SOURCE OF INCOME REMAINS INTACT. THEREFORE, THE COMPENSATION PAID BY KGCL CANNOT BE RELATED TO IMPAIRING OF SOURCE OF INCOME. THE NOTICES ISSUED BY KGCL CLEARLY REFLECTED THAT IT INTENDED TO STOP PUR CHASING OSSEIN FROM ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 43 THE ASSESSEE COMPANY. WHATEVER NOTICES ASSESSEE COM PANY HAS PRODUCED BEFORE US AND WHICH HAVE BEEN ISSUED BY KGCL TO ASS ESSEE COMPANY RELATED TO INTENTION OF KGCL WHEREBY KGCL DID NOT D ESIRE TO CONTINUE TO PURCHASE OSSEIN FROM ASSESSEE COMPANY. IN VIEW O F THIS, THE COMPENSATION RECEIVED BY THE ASSESSEE COMPANY FROM KGCL WOULD BE IN LIEU OF STOPPAGE OF OSSEIN PURCHASES FROM ASSESSEE COMPANY AND HENCE WOULD BE A REVENUE RECEIPT. THERE ARE COVENANTS IN TERMINATION AGREEMENT ACCORDING TO WHICH KGCL RELEASED ITSELF FROM OTHER OBLIGATIONS. ONE OF THESE OBLIGATIONS WAS TO PROVIDE TECHNICAL SUPPORT IN RESPECT OF VAPI PLANT. HOWEVER, NO AMOUNT IF ANY PAYABLE TO IGCL HA S BEEN WORKED OUT IN RESPECT OF THIS PART OF COMPENSATION WHICH WAS S UPPOSED TO BE PAID BY KGCL BY ASSESSEE COMPANY. SIMILARLY, THE COMPENSATI ON, IF ANY, TO BE PAID BY ASSESSEE COMPANY TO KGCL ON ACCOUNT OF NON- COMPETE CLAUSE IN THE TERMINATION AGREEMENT HAS ALSO NOT BEEN WORKED OUT EXCEPT STATING IN THE RELEVANT COVENANT THAT NO SEPARATE WORKING FOR SUCH COMPENSATION HAS BEEN MADE. IN OUR CONSIDERED VIEW THE COMPENSATION, IF ANY, TO BE PAID BY KGCL FOR WITHDRAWING ITSELF FROM OBLIGATION IN R ESPECT OF VAPI PLANT WOULD APPARENTLY NEUTRALIZE THE COMPENSATION TO BE PAID, IF ANY, BY ASSESSEE COMPANY TO KGCL FOR NON-COMPETE COVENANT A ND THEREFORE, WHAT IS ACTUALLY PAID IS CLEARLY THE COMPENSATION F OR STOPPING PURCHASE OF OSSEIN FROM ASSESSEE COMPANY. WE HAVE ALREADY OBSER VED ABOVE THAT IT IS A REVENUE RECEIPT. AS A RESULT, WE HOLD THAT SUM OF RS.10,14,54,000/- IS A REVENUE RECEIPT AND HAS BEEN RIGHTLY TAXED BY THE R EVENUE AUTHORITIES. THE APPEAL OF THE ASSESSEE IN THIS REGARD IS DISMIS SED. ITA NOS.2040 & 2051/AHD/2004 ASST. YEAR 2002-03 44 35. IN THE RESULT, THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER WAS PRONOUNCED IN OPEN COURT ON 29/04/11. SD/- SD/- (BHAVNESH SAINI) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMB ER AHMEDABAD, DATED : 29/04/11. MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD 1.DATE OF DICTATION 28/3/2011 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 27/4/ 2011 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..