1996-VIL-17-MAD-DT

Equivalent Citation: [1998] 233 ITR 335, 138 CTR 68

MADRAS HIGH COURT

Date: 29.10.1996

EID. PARRY LIMITED

Vs

COMMISSIONER OF INCOME TAX

BENCH

Judge(s)  : K. A. THANIKKACHALAM., N. V. BALASUBRAMANIAN 

JUDGMENT

The judgment of the court was delivered by

K. A. THANIKKACHALAM J.---At the instance of the assessee, the Tribunal referred the following question for the opinion of this court, under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as the "Act") :

"Whether, on the facts and circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 9.5 lakhs received by the assessee was assessable as revenue receipt?"

The assessee-company manufactures sugar, chemicals, fertilisers, etc. It entered into an agreement with Mitsubishi on July 14, 1965, for the expansion of the assessee's fertiliser factory at Ennore. The agreement comprises two documents; (1) for importing plant and equipment from Japan called "the imported plant contract" of the value of US dollars 28,21,000; (2) for procuring plant, machinery and equipment in India and to provide engineering services and to erect and construct the works and put the same into operation called "Indian plant and work contract", of the value of Rs. 60,83,000. According to the above agreement, Mitsubishi undertook to complete the construction of the works within 673 days after the effective date of contract. In the execution of this contract, the contractor, viz., Mitsubishi, failed in two respects (1) delay in the completion of work, and (2) failure to produce the guaranteed results. The completion of the plant was delayed by 40 days and the guarantee tests were completed 128 days late. There was correspondence between the assessee and Mitsubishi. Finally, they agreed to settle the issue in terms of clause 52 of the agreement dated July 14, 1965. The settlement was incorporated in the memorandum of settlement dated July 25, 1968, under which Mitsubishi had to pay Rs. 9.5 lakhs to the assessee in full settlement of the assessee's claim for compensation arising out of the various clauses of the agreement between the assessee and Mitsubishi. The assessee contended before the Income-tax Officer that Rs. 9.5 lakhs represented compensation arising out of a settlement between the assessee and Mitsubishi, Japan, hereinafter referred to as Mitsubishi, was a capital receipt. The relevant accounting year ended on September 30, 1968. Before the Income-tax Officer, the assessee, by its letter dated February 14, 1972, submitted that the above sum was a capital receipt and non-taxable. The Income-tax Officer held, for the reasons stated by him, that the receipt of Rs. 9.5 lakhs was only for the loss of production occasioned by the delay in the completion of contract, being to compensate the consequent loss of profits. The Income-tax Officer, therefore, held that it was a revenue receipt. On appeal, before the Appellate Assistant Commissioner, the assessee submitted that the above sum was a capital receipt in its hands and even assuming that a portion of it was received for loss of production, only a reasonable proportion could be taxed as revenue receipt. The Appellate Assistant Commissioner referred to the relevant clauses 32, 34, 35, 36, 40 and 42 of the Indian plant and work contract. The Appellate Assistant Commissioner noted that the assessee had calculated that it was entitled to compensation of Rs. 82 lakhs as per clause 40 of the agreement and at last Rs. 16 lakhs was accepted while loss of production was taken into account. The entire issue was, however, finally settled at Rs. 9.5 lakhs. Considering the note signed by one Mr. C. P. Featheratons, Special Director, the Appellate Assistant Commissioner pointed out that it was clear from the above note that the sum of Rs. 9.5 lakhs received by the assessee on an ad hoc basis really represented the compensation for loss of production being damages recovered for an injury inflicted on the assessee's trading making a hole in the profits. The Appellate Assistant Commissioner further observed that in this case there was 100 per cent. loss of production and the assessee claimed compensation of Rs. 82 lakhs. The assessee proposed compensation at Rs. 16 lakhs based on the theory of loss of production, which was finally settled at Rs. 9.5 lakhs, presumably because according to clause 42 of the agreement dated July 14, 1965, Mitsubishi had to retain in India Rs. 9,75,800. The Appellate Assistant Commissioner concluded that the sum of Rs. 9.5 lakhs is taxable in the assessee's hands as revenue receipt.

Aggrieved, the assessee filed a second appeal before the Appellate Tribunal. The Appellate Tribunal, considering clauses 32, 34(vi)(a) and 40 of the Indian plant contract and the ultimate settlement under which the Japanese company had agreed to pay Rs. 9.5 lakhs, held that a sum of Rs. 9.5 lakhs received by the assessee should be assessed as revenue receipt. In this respect, the Tribunal relying upon its earlier order in the case of the same assessee with regard to the compensation received from Simon Carves in the assessment year 1965-66, agreed with the view taken by the Appellate Assistant Commissioner in considering the sum of Rs. 9.5 lakhs received by the assessee as revenue receipt.

Before us, learned counsel appearing for the assessee submitted that the compensation of Rs. 9.5 lakhs received by the assessee was a capital receipt, since it related to the defect and delay in the installation of the plant and in effect related to the warranty of the quality of the plant, though the payment was measured in terms of loss of production. Counsel further submitted that the decision rendered by the Tribunal with regard to the compensation received from Simon Carves in I. T. A. No. 270/Mds. of 1977-78, dated October 15, 1979, against the assessee was not accepted by the assessee. According to learned counsel appearing for the assessee by way of final settlement, compensation was arrived at Rs. 9.5 lakhs. The demand for Rs. 16 lakhs, which was made earlier, which was calculated on the basis of loss of profit, was not accepted by the Japanese company and, therefore, it cannot be said that Rs. 9.5 lakhs was received on the basis of calculating the compensation as loss of profit. In order to support his contention, learned counsel appearing for the assessee relied upon the following decisions :

1. CIT v. Barium Chemicals Ltd. [1987] 168 ITR 164 (AP).

2. CIT v. Sirpur Paper Mills Ltd. [1978] 112 ITR 776, 785 (SC).

3. Associated Oil Mills Ltd. v. CIT [1960] 40 ITR 118 (Mad).

On the other hand, learned standing counsel appearing for the Department, submitted that inasmuch as the compensation was received not for any injury to the profit-making apparatus, it cannot be considered as capital in nature. It was submitted that Rs. 9.5 lakhs was paid by the Japanese company to the assessee since the assessee was prepared to receive this amount as a reduction from Rs. 16 lakhs, which was claimed on the basis of loss of profit due to the defects committed by the Japanese company in delivering the plant. According to learned standing counsel even though in the agreement under clause 32 for the breach of the contract, the Japanese company would pay 3 per cent. out of the total contract rate, it would represent only damages for loss of profit. According to learned standing counsel, the decision of the Andhra Pradesh High Court in CIT v. Barium Chemicals Ltd. [1987] 168 ITR 164 would not be applicable to the facts of this case, since there was total abandonment of the project by the foreign company according to the facts arising in that case. For these reasons, it was submitted that the Tribunal was correct in holding that Rs. 9.5 lakhs received by the assessee should be considered as revenue receipt.

We have heard the rival submissions. The recitals in the memorandum of settlement dated July 25, 1968, would make it clear that the assessee's claim for compensation arose out of clauses 32, 34(vi) and 40 of the Indian plant contract. The compensation payment was the result of Mitsubishi's failure to complete the work and to perform the test for guaranteed results. Clause 40 of the Indian plant contract agreement in terms refers to liquidated damages for failure to produce guaranteed results. The compensation was originally worked out at Rs. 16 lakhs with reference to the value of loss of production for 54 days. According to the Tribunal, the assessee agreed to receive Rs. 9.5 lakhs as a sort of reduction from Rs. 16 lakhs, which was calculated on the basis of loss of profit.

In this context, a reading of the finally settled settlement for Rs. 9.5 lakhs regarding which the note signed by Mr. Featheratons, Special Director, assumes importance and it is as follows :

"Work on the expansion of the Ennore factory has been satisfactorily concluded and the plant commissioned and guaranteed tests required under the contract fulfilled. The completion of the plant was, according to the strict reading of the contract, late by a matter of 40 days, which could have entitled us to a penalty of slightly less than Rs. 1 lakh, and on the same basis, the guarantee tests were completed 128 days late. There were, however, a number of delays due to strikes, etc., which were not attributable to the contractors. Nevertheless, on the strict reading of the contract, even one day's delay entitled us to damages of 30 per cent. of the contract value---approximately Rs. 70 lakhs. It was appreciated that in arbitration, we would not be successful in getting payment of anything approaching this amount and we were also strongly advised by Mr. A. D. Vickers not to press for this scale of compensation which might result in our acquiring a bad reputation with the comparatively small number of international chemical plant contractors thus prejudicing our position for future projects.

2. Negotiations have accordingly been held with MSK in which we pressed for compensation on the basis of actual losses sustained. On a reduced period of 54 days, after giving due allowance for the time lost not due to the fault of the contractors, a figure of Rs. 16 lakhs was proposed by us. This, however, was not acceptable to MSK and in view of the satisfactory conduct of the contract and the advisability to preserve good relations for the future, a final settlement has been made in a sum of Rs. 9.5 lakhs."

In clause 2 of the abovesaid note, it is clearly stated that the figure of Rs. 16 lakhs proposed by the assessee towards compensation was not accepted by the Japanese company. In view of the satisfactory conduct of the contract and the advisability to preserve good relations for the future, a final settlement has been made in a sum of Rs. 9.5 lakhs. This sum of Rs. 9.5 lakhs is not based upon the calculation made in respect of the loss of profit. In the final settlement, the Japanese company agreed to pay Rs. 9.5 lakhs as per the memorandum of settlement, dated July 25, 1968. The Japanese company agreed to pay compensation for delay in completion of the work and failure to produce the guaranteed results. Under clause 32 the compensation for the abovesaid delays was agreed to be compensated not exceeding 3 per cent. of the total contract price. "Contract price" means the price for procurement, erection and construction of the works and performance of all other duties to be performed by the contractor under the terms of the contract and the contract price shall be Rs. 60,83,000. Therefore, Rs. 9.5 lakhs paid by the Japanese company under clause 32 of the agreement dated July 25, 1968, would go towards compensation for procurement, erection and construction of the works and the performance of all other duties to be performed by the contractor under the terms of the contract. Therefore out of Rs. 9.5 lakhs, a portion would relate to delay in procurement of the capital assets. Delay in procurement of capital assets would lead to delay in coming into existence of the profit-making apparatus. Compensation paid for such delay in procurement of capital assets would amount to sterilisation of the capital assets of the assessee in that the Japanese company failed to erect the machinery and plant according to the agreement dated July 25, 1968. The sterilisation of assets need not be in toto in order to make a payment a capital receipt. In CIT v. Barium Chemicals Ltd. [1987] 168 ITR 164, the Andhra Pradesh High Court held that in order to decide whether or not a payment is a revenue receipt, its true nature and substance must be looked into. If the payment is received in the ordinary course of the business of the assessee for loss of stock-in-trade, it is a revenue receipt. If, on the other hand, the payment received is towards compensation for extinction or sterilisation, partly or fully, of a profit-earning source, such receipt, not being in the ordinary course of the assessee's business, is a capital receipt. Thus, considering the final settlement arrived at between the assessee and the Japanese company dated July 25, 1968, and clauses 28, 32, 34, 34(i), 34(vi) and 40, in the agreement dated July 14, 1965, and February 28, 1967, we are of the opinion that a portion of Rs. 9.5 lakhs paid by the Japanese company should be treated as capital in nature and such portion is determined by us as 1/3rd of Rs. 9.5 lakhs, which related to delay in procurement of capital assets. In so far as 2/3rds of Rs. 9.5 lakhs is concerned, we are not disturbing the order passed by the Tribunal holding that such quantum of compensation is revenue in nature, since the said sum relates to erection and construction of the works and the performance of all other duties.

Reliance was placed upon the decision of the Supreme Court in CIT v. Sirpur Paper Mills Ltd. [1978] 112 ITR 776 (SC). According to the facts arising in that case, the building, plant and machinery belonging to the respondent, were covered by insurance against loss by fire. They were partly damaged by fire and the respondent received a sum of Rs. 9,41,070 as compensation in respect of the loss. The respondent spent only a sum of Rs. 1,57,813 and restored the building, plant and machinery to working condition. The question was, whether the balance of Rs. 7,03,207 was assessable to tax either as a revenue receipt or under section 41(2) of the Income-tax Act. While answering this question, the Supreme Court held that since the plant and machinery was only partly damaged by fire and after repairing the damage, the plant and machinery were recommissioned, there was no scope for the applicability of section 41(2). In the absence of specific provision in the Act, the amount received by the respondent in respect of damage to the plant and machinery could not be brought to tax and the Revenue could not seek to tax the amount by resorting to the analogy of section 41(2). This decision was cited by learned counsel appearing for the assessee in order to support his contention that the compensation received in the present case should also be considered as capital in nature. However, learned standing counsel appearing for the Department pointed out that in CIT v. Sirpur Paper Mills Ltd. [1978] 112 ITR 776 (SC), the compensation was paid for the loss of a part of building, plant and machinery. Therefore, the compensation would be in the nature of capital. But to the present case the abovesaid decision would render no assistance to the assessee, since compensation was not paid for loss of capital goods.

In order to support his contention, learned standing counsel appearing for the Department, relied upon the decision in Shree Digvijay Cement Co. Ltd. v. CIT [1982] 138 ITR 45 (Guj), wherein the Gujarat High Court held that the actual cost or price of the machinery and compensation payable to the assessee-company were two different and distinct things. Compensation was paid to set off or reduce the loss which the assessee suffered as a result of delay in supply of machinery. It had nothing to do with the cost of machinery. Though adjusted against the cost of machinery, it was none the less compensation. The actual cost of machinery could not be reduced by Rs. 5,72,216 and depreciation and development rebate had to be allowed on the entire cost of machinery as per the agreement.

On the facts available in this case, this court came to the conclusion that a portion of the compensation paid related to delay in bringing into existence the profit-making apparatus. Therefore, a portion of the compensation paid should be considered as capital in nature. Accordingly, this court also kept in mind while deciding the issue arising in this case that actual cost or price of the machinery and compensation payable to the assessee-company were two different and distinct things.

Learned standing counsel also relied upon the decision of the Supreme Court in CIT v. Manna Ramji and Co. [1972] 86 ITR 29 wherein it was held that it is for the Tribunal to find facts and it is for the High Court and the Supreme Court to lay down the law applicable to the facts found. Neither the High Court nor the Supreme Court has jurisdiction to go behind or to question the statement of facts made by the Tribunal. The statement of case is binding on the parties and they are not entitled to go behind the facts of the Tribunal in the statement. When the question referred to the High Court speaks of "on the facts and circumstances of the case", it means on the facts and circumstances found by the Tribunal and not on the facts and circumstances as may be found by the High Court. In the present case, the decision was rendered on the facts recorded by the Tribunal, considering the several clauses in the agreement, dated July 25, 1968, and the subsequent understanding between the parties recorded in the note of Mr. C. P. Featheratons.

Learned standing counsel also placed reliance upon the decision of the Court of Appeal in London and Thames Haven Oil Wharves Ltd. v. Attwooll (Inspector of Taxes) [1968] 70 ITR 460 (CA); [1967] Ch.D. 772 wherein the Court of Appeal held that the amount received in respect of the sterilisation of a capital asset would be capital in nature and not a trading receipt.

The attention of this court was also drawn to the decision of the Calcutta High Court in CIT v. Rohtas Industries Ltd. [1978] 112 ITR 798. In the abovesaid decision, a question arose whether, on the facts and circumstances of the case, the Tribunal was right in holding that a sum of Rs. 2,44,922 was a payment for low output and as such a revenue receipt, and not a rebate on the actual price of the machinery originally supplied by Escher Wyss, affecting the written down value of the machinery for income-tax purposes? While answering this question, the Calcutta High Court held that payment for low output as such is a revenue receipt and not a rebate on the actual price of the machinery originally supplied by the German firm to the assessee. In the present case, on the facts, it was held that a part of the compensation paid related to sterilisation of profit-making apparatus, which was paid as a contract price. Payment for low output as such was not separately taken into consideration in the instant case. In view of the foregoing reasons, we answer the question referred to us in the negative in so far as that part of the question which related to payment made for sterilisation of the profit-making apparatus, viz., 1/3rd of Rs. 9.5 lakhs. Accordingly, we answer this part of the question in the negative and in favour of the assessee. In respect of the rest of the portion of the amount paid by the Japanese company, we are answering that portion of the question in the affirmative and against the assessee. No costs.

 

 

 

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