1. This is a bunch of seven appeals (six by the revenue in ITA Nos. 3 740/D/04 3759 to 3762/D/04 and, 4658/D/04 and one by assessee in ITA No. 1468/D/05) directed against the respective orders of Commissioner of Income-tax (Appeals) for. the assessment year 2001-02. These seven appeals arise from the respective orders passed by CIT (Appeals)-XXVI, CIT(Appeals)-VII and CIT(Appeals)-XIII. So far as the appeal by the assessee M/s Payal Kapur is concerned the same arises from the order of CIT (Appeals)-XXIII, who has taken a view contrary to the view taken by the other two CIT (Appeals). The latter has rejected the appeals of the assesses. However, the issue involved in all these appeals is identical and common. Accordingly these appeals were all heard together and are being disposed of by this consolidated order for the sake of convenience. Even learned representatives of parties addressed us with reference to appeal by Smt. Payal Kapur.
2. In the instant appeals, all the seven assessees' are members of Jain Group, which comprises of six individuals (D.K. Jain, Usha Jain, Priya Jain, Pankaj Jain, Pooja Jain and Payal Kapur) and, a company called JHPL Holdings (P) Ltd. 3. The relevant facts of the case are that in the year under consideration, the assesses collectively had shown an aggregate receipt of Rs. 69.50 crores as capital receipt from M/s Gillette Inc, USA. In a note annexed to their returns of income, it was claimed-that this amount was not "income" liable for taxation. In the said note, it was.
stated that on 19.3.1996, the members of Jain Group entered into a Joint Venture Agreement (JVA) with M/s Gillette India (P) Ltd. (GJJPL) to jointly pool their resources and strengths to carry on the business of manufacture and marketing of writing instruments and stationery products in India. It was stated that the mutual covenants entered into by the parties are contained in the joint venture agreement assuring cooperation and non-compete terms. It was further stated that, joint venture company M/s Luxor Writing Instruments. (P) Ltd. (LWIL) would be the exclusive vehicle through which the business of manufacture and sale of writing instruments would be carried on in India under the Luxor and Parker Trade Marks. It was further stated that as per the terms and conditions of the agreement, the two parties namely Jain Group and, GIPL agreed not to sell or transfer their respective interest in any of the shares of LWTL for the first seven years of Joint Venture Agreement without the prior consent of the other party.
3.1 It was further stated that in the year 2000, Jain Group learned about Gillette Group's intention to sell their world wide business of writing instruments including their shareholding in LWIL to another company in USA namely Newell Rubbermaid Inc. U.S.A (hereinafter referred to as "Newell"), without their consent. It is stated that the Jain Group brought this to the notice of the Gillette Group and, sought to resolve the dispute through mutual conciliation, failing, which they threatened to refer the matter for arbitration as provided under the Joint Venture Agreement. It was stated that thereafter the parties concerned negotiated the issue and vide the consent and waiver agreement. dated 17.1.2001, Jain Group agreed to withdraw all claims and disputes and agreed to give their consent and waiver to the Gillette Group allowing them to sell their interest in the joint venture to a third party. In lieu of this the Gillette Group agreed to pay USD 15 million to the Jain Group, which amount was remitted on 19.01.2.Q01. The. amount received by each of the member of Jain Group is as under:--------------------------------------------------------------------------------S1.
Name of the Joint Venture Amount RupeesNo. received USD (in1.
D.K. Jain 10 46,33,40,000--------------------------------------------------------------------------------2.
Usha Jain 2.50 11,58,35,000--------------------------------------------------------------------------------3.
Priya Jain 0.50 2,31,67,000--------------------------------------------------------------------------------4.
Pankaj Jain 0.50 2,31,67,000--------------------------------------------------------------------------------5.
Pooja Jain 0.50 2,31,67,000--------------------------------------------------------------------------------6.
Payal Kapur 0.50 2,31,67,000--------------------------------------------------------------------------------7.
M/s JHPL Holdings (P) Ltd. 0.50 2.31.67,000-------------------------------------------------------------------------------- 15.00 69,50,10,000 3.2 It was further stated that the aforesaid sum received from Gillette Co., USA was, for Jain Group consenting to the transfer of interest in the shareholding of LWIL to Newell by M/s Gillette Co., USA. It was stated that the joint venture company continued to carry and run its business, as it was hitherto doing.
3.3 It was, therefore, stated that amount so received by Jain Group was capital receipt. and not liable to tax. In the aforesaid note, it was stated that although the sum received by the assessee is a capital receipt, it is not to be treated as capital gains, as neither there was any capital asset and, nor there was a transfer of capital asset.
4. In the course of assessment proceedings, each of the assessee reiterated the stand taken in the return of income and, in support reliance was placed on six opinions of legal experts to the effect that the receipt under consideration is not exigible to tax, which we shall discuss later. It may be mentioned here that since the issue involved was identical, the cases of all the seven members of Jain Group were dealt in co-ordination by their respective three assessing officers and, a common text of the discussion 'and, determination was adopted for the purpose of assessments of all the assesses, Under Section 143(3) of the Act.
The Assessing Officer noted the features in the joint venture agreement in Paras 3.15 and 3.16 which are reproduced below from the order of the learned CIT (Appeals): 3.75 Article 2 of the JVA laid down the basic principles of the Joint Venture which were to be followed in the formation, management and operation of the Company. These basic principles, briefly stated are as follows: (a) That the parties desire to establish and develop a long term business alliance between the strengths of the Luxor Group and the world renowned heritage and strengths of the Parker Pen Group.
(b) That in implementing the joint venture, the Company shall strive to blend the respective cultures and strengths of the parties.
(c) That the Company shall be the exclusive vehicle through which the parties will undertake in India the business of writing instruments and stationary products. None of the parties shall undertake any activities in India in competition with the Company.
(d) That the Company shall have the full benefit, of the specified assets of the Luxor. Group (and of Shri D.K. Jain) including all contracts, rights licenses, privileges and facilities enjoyed by the Luxor Group in relation to the Indian market.
(e) That the Company -will continue to use, strengthen and enhance the LUXOR-and the PARKER brands.
(f) That the Company shall adopt and follow Gillette's management financial personnel, manufacturing, internal control and reporting systems, policies, practices and procedures and shall be guided by Gillette's Mission and Values Statement.
(g) That in order to maintain continuity and simplicity of dealing under the. Joint Venture Agreement between Jain Group on the one hand and GIPL on the other, Jain Group appoints their company JHPL as their sole authorized representative, for the purposes of the Joint Venture Agreement, so that the interests of the Jain Group shall be represented and their rights. and obligations, shall be exercised through the said JHPL and so that GIPL shall not have to entertain-any instructions from the individual members of the Jain Group, even though, they shall all remain jointly and severally liable for the fulfillment of all the obligations of the Jain Group.
(Refer paras 2.1 to 2.11 of Article 2 of the Joint Venture Agreement dated 19.3.1996).
3.16 Apart from the above stated Basic Principles governing the joint venture, other articles of the JVA provide for and bind the joint venture partners to various terms and conditions in respect of the financing of the joint venture business issuance of share capital, transfer of shares, constitution of the board of directors, management, accounting, technical know how and. assistance, implementation by the parties, and consequences of termination (of the agreement) and its material breach. The Agreement inter alia provides that: (a) The parties agree that if any resolution is proposed (by the Board of Directors of the Company) -which is contrary to the terms of the Joint Venture Agreement, the parties themselves shall vote against such resolution. (Refer clause 21.4 of Article 21 of the JVA).
(b) Each of the parties agree not to sell, transfer etc any of its shares in the Company in the first seven years -without the prior -written consent of the other party. (Refer Article 7.1 of the JVA).
(c) Any such sale or transfer etc of shares shall constitute material breach of the Joint Venture Agreement. (Refer Articles 20.10 and 20.11 of the JVA).
On the same date vide letter 19.3.1996, M/s Gillette Co., USA, holding company of GIPI had given an undertaking to Jain Group as stated in their letter.
In the order of assessment, the claim of the Jain Group was not accepted and it was,. held that the receipt in question was a revenue receipt taxable Under Section 28(i) of the Act. It was held that Jain Group had entered the joint venture agreement in the course of and for the purpose of carrying business or profession and, since receipt arose from the material breach of joint venture agreement, it was exigible to tax. Under Section 28(i) of the Act. It was. further held that members of Jain Group through the instrument of joint venture agreement, not only contributed to the formation, promotion and financing of joint venture company but also made substantial contribution on a continuous basis to the management, control, running and, future course of business of the company. Therefore, all this resulted into carrying on business or profession or vocation. It was held that, joint venture agreement cannot be held to be purely an investment agreement because the compensation received from M/s Gillette Co., USA was not in proportion to the investment by the various members of the Jain Group in LWIL. This fact further proved. that this group carried on business / vocation. It was further held that, profit motive-is not relevant to determine, whether the assessee has engaged in the business or vocation. In this connection, reliance had been placed on the following judgments:(SC) P. Krishna Menon v. CIT 5.1 It was also held that even assuming that amount was received as.
compensation, or. damages, it was a revenue receipt since it did not affect any capital asset or capital or trading structure of the assessee's business. In support, reliance was placed on., the judgments of the Apex Court in the case of Gillianders Arbuthnot & Co. Ltd. reported in 53 ITR 283 and, Calcutta High Court in the case of Siewart and Dholakia (P) Ltd reported in 95 ITR 573.
6. The assesses being aggrieved from the orders of assessment preferred appeals before their respective Commissioner of Income-tax (Appeals).
6.1 In the appellate proceedings, it was contended that the description of the, activities of the members of Jain Group was incorrect and Assessing Officer could not have justifiably held that Jain Group was engaged in manifold business activities It was staled that the entire business of manufacture and sale of writing instruments in India under the brand names of Luxor and Parker Pens was carried through the concern of D.K. Jain namely 'Luxor Pen Company'. It was stated that above business was discontinued and it ceased to exist since 19.3.1996.
It was stated that other entities carring on business of Jain Group were: a) Tech Ink Industries, a proprietary concern of Mrs. Usha Jain continuing to carry_ on business manufacturing since 1990.
b) Luxor Export, a partnership firm in export business since 1992 having. Mr. D.K. Jain, Usha Jain and, Pankaj Jain as partners.
c) Kakkar Bros., another partnership firm, engaged in manufacture and sale of metal pens since 1989-90, of which 50% shares were held by Pooja Jain and Payal Kapur.
d) Khanjia Industries Engineering (P) Ltd a private limited company owned by. Jain family running a SSI unit.
6.2 It was further stated that all the aforesaid, firms had. no connection with business of LWJTL, i.e. joint venture company and, the private limited company was subsequently merged with LWIL. It was contended that Jain. Group was not engaged in the business of setting up of joint ventures. It was argued that reliance of the A.O. on Gilliander Arbuthnot's case was misplaced since in that case the assessee was engaged in the business of several managing agencies and one of the agencies of business was cancelled. The case had no application in these cases. It was contended that the findings of the officer in the order of assessment are contradictory in as much as it has been held that the source of the receipt is both joint venture agreement and, the material breach of__ the terms and conditions of joint venture agreement. It was further submitted that joint venture agreement could be the source of impugned receipt only if the joint venture agreement had provided for compensation. It was, therefore,, argued that it is only when the right was exercised by the assessee by way of legal notice that a negotiated settlement took place and, therefore, it is this settlement, which is the real source of the impugned receipt. In view thereof, it was submitted that the learned officer failed to appreciate the true nature and purport of the joint venture agreement. It was contended that-joint venture agreement has not come into being in the course of carrying on of business by the Jain Group. In fact, it postulates setting up of new business. In this connection, reliance was placed on the opinion of Shri Ganeshan dated 25.12.2000, who on the basis of the judgment of Madras High Court in the case of CIT v. Madras Fertilizers Ltd. reported in 122 ITR 139 followed by Apex Court in the case of Tuticorin Alkali Chemical Fertilizers Ltd. reported in 227 ITR 172 opined that joint venture agreement is a preliminary step for formation of business but is not a business in itself. It was further submitted that judicial pronouncements relied by AO were inapplicable and, cannot be remotely linked with the facts of the assessee company. So far as the case of Ram Prasad (supra) was concerned, it was argued that in that case it was admitted position that payment was made in consideration for services rendered in connection with the formation and promotion of company, which was the business activity of the assessee. However, here neither formation of joint venture is business activity and, nor payment has been received for services rendered. In addition reliance was also placed on other opinions of legal experts forming part of the paper book. In view thereof, it was submitted that the impugned receipt is capital receipt and, not liable for tax.
6.3 The CIT (Appeals)-26 in his order held that on consideration of the facts of the assessee that it is too far fetched to say that assessee is engaged in the business of forming joint ventures. It was held that apart from handful of family concerns, the only other business in which members of Jain Group were partners is an old firm in Mumbai They have not entered into any joint venture other than joint venture with Gillette Group. It was held that, joint venture agreement by itself cannot be held to be business of the. assessee. It is an instrument to bind the parties to joint venture and, define their legally enforceable rights and obligations. It was held that it was a link to set up of business but not business in itself. It was held that, there, is a clear nexus between. compensation received and, breach of agreement and, it had no nexus with the business of LWIL as would be evident from the consent and waiver agreement and assignment and assumption agreement. It was held that, it would be ironic to say that, Gillette paid money to assessee in the year 2001 on account of formation of a company which it desperately wanted to exist. In so far as taxability of Section 28(i) of the Act, the learned CIT (Appeals) concluded that statutory provisions are inapplicable and, in. view thereof he proceeded to delete the additions made in the case of five of the appellants by holding that the receipt is a capital receipt.
6.4 The appeal in the case of JHPL Holdings Ltd came to be disposed, by an order dated 16.08.2004, wherein on examination and, interpretation of the joint venture agreement and, other relevant facts along-with various judicial pronouncements it was held that the impugned receipt is a capital receipt.
6.5 The learned CIT (Appeals) XXXII in her order dated 18.2.2005 in the appeal of Ms Payal Kapur took a different view and upheld the assessment. She noted various findings recorded by the Assessing Officer as also the objection of the. assesses and held that view taken by the Assessing Officer was correct. Paras 3.15 and 3.16 of the Assessing Officer relating to basic features of joint, venture agreement noted by. the learned CIT (Appeals) have already been reproduced above. The learned CIT (Appeals) accepted the basic findings of A.O. that amount in question was paid by Gillete Company to Jain Group as Jain Group had declined to give their consent to the proposed transfer of Gillette Company's interest to Newell Rubbermaid and for obtaining consent amount was paid and this was clear from consent and waiver agreement permitting Gillette Group to withdraw from the JVA.The learned CIT (Appeals) did not find-force in the expert opinion rendered by S/Shri P. Chitambaram, R. Ganesan, CA and Shri Sharad Kapila, Advocate. She did not find any force in the opinion of Shri Kapila that the company LWIL was distinct from its shareholder and that shareholder could not be treated as partners of JVA. The business was.
carried on by LWIL and not by the shareholder.
The other submission advanced on behalf of the assessee that JVA was a single isolated and unique transaction and therefore, could not constitute business was also rejected. While agreeing with the A.O., the learned CIT (Appeals) held that Jain Group had entered into JVA in the course of, or for the purposes of, or in pursuit of, or for the furtherance of, any one or more of their activities enumerated in para 21 of the. assessment order. These activities singly as well as in conjunction with one or more of them, clearly tantamounted to carrying on of a business, profession or vocation.. The contention that JVA was purely an investment agreement, according to learned CIT (Appeals) was rightly rejected by the A.O. This contention had no force as distribution of compensation bore no relation whatsoever to the share capital contributed by the parties. This fact further proved that parties to JVA did carry on business, profession or vocation and, therefore, received compensation different from their contribution. It followed-that compensation was received by parties to the JVA for formation, promotion, management control and running of the joint venture. The learned CIT (A) agreed that even, the activity of formation and promotion of a company could be termed as carrying on of a. business, profession or vocation and motive of earning profit was not essential and did not make any difference that parties to JVA could not derive any profit except dividend on their share held in the companies.
6.6 Further, the CIT(Appeals) held that the determination whether the sum received constituted the capital receipt or business income has to be decided, on the basis of two considerations, namely by determining the nature of the joint venture agreement which has to be ascertained from its object and purpose, and from the activities carried on by the parties as joint venture partners. She held that, it was very clear that the joint venture agreement was not entered into by the parties to entertain themselves, or to pursue any religious, charitable, political or social object. She held that joint venture agreement was a commercial agreement entered with the object and purpose of carrying on a joint venture business by promoting and managing joint venture entities for profit. _ The second consideration is to determine the nature of activities of the parties to the joint venture, agreement.
She held that joint venture agreement entered in the course, of carrying on of business, profession or vocation since a plain reading of the agreement would show that it was not an agreement which merely defined the relationship between two sets of investors, as has been sought to be made out on behalf of the assessee. It was a business agreement, which included within it a large number of sub-agreements, and covered all aspects of the promotion, setting-up, management,, operation and control of the joint venture business through the vehicle of one or more joint venture entities. It. was not a mere investment agreement which defined the relationship between the parties, then in, that case the compensation received by the Jain Group for the breach of agreement would have been divided among the members of Group in the ratio of their respective shares in the joint venture company (LWIL).
She also held that, in the present case, profit motive indisputably exists, but there is no provision in the joint venture agreement for any direct remuneration to the parties to the joint venture agreement.
Alternatively, she concluded that, even though there was no provision in the joint, venture agreement for any remuneration to the parties for the services rendered by them in connection with the joint venture agreement, yet the parties to the joint venture agreement had a direct,, substantial and beneficial interest in the joint venture business being carried on through the vehicle of one or more joint venture entities, and would admittedly be compensated for their services through profits and accretion of wealth derived by them from the joint venture business in the normal course.
6.7 The learned CIT (A) further observed that decision of Hon'ble Delhi High Court in the case of CIT v. Ram Prasad 113 ITR 462, of Hon'ble Supreme Court in the cases of P. Krishna Menon v. CIT 35 ITR 48; and of Dr. K. George Thomas, 156 ITR 412 and 159 ITR 851 relied upon by the AO were clearly applicable to the facts of the case and the assessees before her could be said to have carried on vocation, if it is held that she did not carry on business or profession. She observed that there was close link between activities of assessee as a party to the JVA and the receipt in question and, therefore, concluded that provisions of Section 28(i) were applicable in this case.
6.8 The learned CIT (A) also agreed with the A.O. that receipt in question was not of a capital nature being compensation for an injury to the trading structure of the assesses. The joint venture agreement and joint venture company formed and prompted there under remained unaffected in all respects because of substitution of Gillette Company by Newell. There was no loss of capital to the structure of the company or their capacity to earn.
6.9 The learned CIT (Appeals) noted in details the views of learned professionals. In. respect of the submission that assesses were not engaged in business of setting up of joint ventures and had entered in one and single joint venture, the learned CIT. (A) as under: 6.1 There is no such proposition of law that a person entering into only one partnership or joint venture would not be treated as carrying on business profession or vocation. It is well established that partners and the partnership (or the joint venture) are not distinct entities, and business carried on by the partnership (or joint venture) is a business carried on by the partners. Refer CIT v. Ramnklal Kothari 74 ITR 57 (SC) and Malabar Fisheries Co Ltd v. CIT 120 ITR 49 (SC).
6.10 She further supported her view that the receipt was taxable as business income with the following observations: 7.4. Similarly, if a receipt is from the breach of an agreement., inquiry cannot stop there, because breach of agreement is not an effective source of income. The source of breach of agreement is the agreement. The inquiry cannot stop even. there, because agreement is also not an effective source of income. Further inquiry has to be made as to the nature and purpose of the agreement and the activity, if any, in the course of which it was entered into. If the nature, purposed and the activity in the course of which the agreement was entered into was business, profession or vocation, then the income from the breach of-the agreement would be income from business, profession or vocation, as the case may be, unless damages were to compensate for a capital loss. If, however,, the agreement was for the acquisition of any capital asset, the damages from the breach of the agreement would be a capital receipt.
6.11 The other submission of Shri Kapila that joint venture agreement was not a trading contract and that it did not refer to any business, profession or vocation was also rejected. According to learned CIT (Appeals) JVA was a commercial agreement entered with the object and purpose of carrying on of a joint venture business by promoting and.
managing joint venture entities for profit and this is a clear statement of fact. Further compensation received by various members of Jain Group under the consent and waiver agreement dated 17.1.2000 bore no relationship whatsoever to their share in the joint venture company.
This clearly showed that JVA was not an investment agreement but a business agreement. In the end the learned CIT (Appeals) relied upon certain cases to support her conclusion which was that JVA was entered into by the Jain-Group in. the course of and for the purposes of business and compensation was received for breach of a business agreement and not for any loss to profit earning apparatus of Jain Group. The disputed amount was liable to be taxed as receipt from business, profession and vocation. Accordingly assessment made by the Assessing Officer was confirmed.
6.12 It is thus evident that the orders dated 02.06.2004 and, 16.08.2004 by CIT(A)-26 and, CIT(A)-7 respectively are in respect of all the members of Jain Group other than Payal Kapoor and it has held that the impugned receipt of Rs. 69.50 crores is not taxable. However, in the case of Payal Kapoor, CIT(A)-23 in her order dated 18.02.2H05 did not agree with the view taken by the other two CIT(A) and, for reasons stated in the order and, as noted above has held that assessing officer was correct in holding that receipt is a business receipt taxable Under Section 28(i) of the Act. In view thereof, six appeals are by revenue and, one appeal in the case of Smt. Payal Kapoor is by assessee.
7. During the course of hearing, both assessee and, revenue have filed detailed written synopsis. The assessee has also filed paper book comprising of 258 documents along-with an application for admission of additional evidence. Shri C.S. Aggarwal, Senior Advocate appeared for the assessee and Smt Rani S Nair learned Commissioner of Income Tax (DR) appeared on behalf of the revenue.
8. In the course of hearing before us, the learned counsel for the assessee, at the outset submitted that assessee's are not engaged in the business of formation, promotion, management and control of Joint Ventures. It was submitted that, apart from the Joint Venture with GIPL, the assessee's did not enter into any other Joint Venture and as such the findings recorded by the learned CIT(Appeals) in para 5.1 page 18 are incorrect. He stated JHPL Holdings (P) Ltd. was incorporated in November, 1995 and did not carry on any business. Other Members of Jain Group though were carrying on business but had never in past either promoted or formed any Joint Venture. Shri D.K. Jain was proprietor of a business of manufacturing of writing instruments, which business was discontinued on formation of joint venture.
8.1 The learned counsel therefore submitted that the JVA was entered by the Jain Group for the formation of Joint Venture with GIPL to jointly pool their respective sources and strengths to any on the business of manufacture and marketing of writing instruments and stationery products in India. He drew our attention to various clause of the joint venture agreement dated 19.03.96, copy of which is placed at pages 141 to 240 of the PB. He submitted that this was merely a memorandum of understanding, which was recorded to regulate inter-se relationship between the two promoter groups on how the business of joint venture company would be conducted on the formation of the joint venture company. In support of his contentions, he placed-reliance on preamble of the agreement, clause 2.1 to 2.6 & 2.8, clause 3.1, 3.4.1(a), 7 and 8. He specifically brought to our notice page 236 & 238 of paper book, which contains Article 27 and Article 32, of, the joint venture agreement. He contended that all what had been done was that certain investments had been made in the "Joint Venture Company" i.e. LWIL by assessee's in, accordance with the joint venture agreement and Joint investment in share capital cannot be called a business. It was submitted that joint venture agreement was a preliminary step to form a Joint Venture Company and, such a step could not tantamount to carrying on of business. In this connection, support was dawn from the judgement of Madras High Court in the case of Madras Fertilizers Ltd reported in 122 ITR 139 at page 144 that, setting up a factory may be a preliminary step and, an essential step but it cannot be said to be carrying on of the business itself, which principle stands affirmed by the Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd v. CIT reported in 227 ITR 172.
8.2 He submitted that the Joint Venture is not a firm or body of individual or association of person, a Private Limited Company, incorporated under the Companies Act to carry any business. The business was admittedly carried by LWTL. He submitted that, it is other-wise settled law that a shareholder in a company does not derive income from the business of the company and, any dividend received by him does not partake the. _ character of income assessed in the hands of the company. He placed reliance on the judgement of Apex Court in the case of Mrs. Bacha E. Guzdar v. CIT reported in 27 ITR 1 8.3 He argued that the observation and the findings recorded in para 9 page 29 in the case of Payal Kapoor, "it was admitted that to compensate the Jain Group, M/s Gillette USA paid the consideration for loss of future profit was also incorrect". He contended that no opportunity what-so-ever was granted to the appellant before. recording such an adverse finding. In view thereof, he sought to place on record orders of assessment of the ' LWIL from A.Y. 1996-97 to AY. 2001-02, under Rule 29 of the Income Tax Appeallate Tribunal Rules, 1963. It was submitted that, the orders of assessments would show that LWIL suffered losses and, therefore there could not have been any compensation for loss or future profits.
8.4 Further, on the basis of the judgement of Apex Court hi the case, of CIT v. Distributors (Baroda) (P) Ltd reported in 83 ITR 377 and, Ramnarain & Sons Ltd. reported in 41 ITR 535 (SC). He further argued that finding that joint venture agreement cannot be construed to be investment agreement since the compensation received by the Jain Group for the breach of the agreement was not in accordance with the ratio of their shareholding in LWIL was misconceived. It was submitted that there was a claim made by the members of the Jain Group that breach of contract was committed by Gillette Co-2 USA. He also drew our attention to the undertaking given by Gillette USA on 19.03.96 and, the notices issued by the Jain Group dated 15.12.2000 He submitted that on being notified of such breach, M/s Gillette Co, USA, had negotiations with the members of the Jam Group who individually and separately agreed to be provided some monetary consideration, which was duly received by them. The joint venture agreement was never entered in the course business of the members of Jain Group. Had that been the case, the consideration received would have been in accordance with the shares held, by. the, members of Jain Group in LWIL. Thus, it was submitted that, joint venture-agreement was an agreement to define the relationship of the Joint Venturer's, which also could not be construed to be "Adventure in the Nature of Trade." 8.5 He contended that the amount paid by Gillette USA had nothing to do either with Joint Venture Agreement or their shareholding but represented payment made to ward of nuisance value, which was being attempted by Jain Group. He contended that the amount paid was a fortuitous payment and was paid to buy peace and was settled through a negotiated settlement. He further submitted that mere formation of joint venture company cannot be construed to be business or an adventure in the nature of trade. He submitted that cases relied upon by the lower authorities in the case of CIT v. Ram Prasad 113 ITR 462 (Del) a and, Krishna Menon reported in 35 ITR 48 (SC) re inapplicable.
He placed great emphasis on the judgement of Apex Court in the case of 236 ITR 903 in the case of, Oberoi Hotels (P) Ltd and, the decision of ITAT in the case of "Sak Inds, copy placed in paper book at pages 202 to 230. He submitted that facts of the two cases are identical and, therefore on the basis thereof, it cannot be held that receipt is a business receipt taxable Under Section 28(i) of the Act. Amount received was a capital receipt not liable to tax.
9. The learned DR on the other hand contended that the orders passed by two CIT (A)-7 and, CIT (A)-26 are erroneous since they have been made in haste without granting fair and proper opportunity and, without application of mind. However, she contended that revenue strongly relies on the order of learned CIT(A)-23 in the case of Smt. Payal Kapoor, whose facts are identical to the six cases above.
9.1 She further contended that that the contention of the assessee that amount had been received as a result of a 'Bluff is beyond the realms of credibility since it is not so easy to bluff and fool multinational corporations.
9.2 She submitted that in absence of full facts of the commercial arrangements and negotiations which took place between the parties namely Gillette, Jain Group and Newell speculations can only be made and, conclusions drawn which are reasonable and commercially prudent and, which have credibility, in a business sense. She further submitted that joint venture agreement was not an instrument of investment but is a-part of complex business arrangement between Gillette and Jain Group She submitted that proprietor ship concern of D.K. Jain ceased to exist from formation of LWIL on 7.11.95 ' and, this was the time when the Jain Group consolidated their business activities. She submitted that at this time another company of Jain Group became subsidiary of LWIL.
She further stated that from 7.11.95 till the signing of JVA on 19.03.96, on business was carried on by LWIL since there was a expression of interest from M/s Gillette to enter Indian market.
9.3 She further submitted that it is the own case of the assessee that Joint Venture Agreement was for the purpose of managing the business of LWIL and, it had been signed between the members of Jain Group and Gillette, in view thereof, it cannot be claimed that shareholders and LWIL were distinct and separate entities, particularly since Jain Group was closely involved in carrying out of business of LWIL.
9.4 She further stated that the payment was made to compensate the Jain Group for losing the benefits of future profits of LWIL or being exposed to enhanced losses of LWIL through the introduction of Newell, for which emphasis has been laid on page-245 of the PB, which is part of notice dated 15.12.2000 to Gillette UK by Jain Group. She submitted that as per the amended agreement with Newell, clause regarding exclusivity was withdrawn and, it also contemplated exit of D.K. Jain.
In view thereof, it was. argued that payment for deleting clause regarding competition and exclusivity. It was submitted that payment was made to allow the new shareholder to introduce new products and hence it was a pure business transaction and, payment was business receipt. Further, it has been stated that, it is not the case of the revenue that the assessee's were engaged in the business of formation, management and control of joint ventures but the stand is that through this particular joint venture agreement, Jain Group and GIPL were conducting the the business of LWIL and that joint venture agreement was entered in the course of the and business for purposes of business.
Compensation received on facts of the case was a business receipt. - 9.5 The learned DR has further placed reliance on the judgements reported in. 201 ITR 866 (SC), 157 ITR 77 (SC) and, 73 ITR 702(SC) that, in order to see whether this receipt of US $ 15 million was a taxable income, we have to lift the corporate veil, and see the real intention of the parties to the JVA and, the real reason why a multinational company has parted with USD 15 million. It has been submitted that, there is no document on record to show and support the premise that LWIL was distinct from the shareholders, though under the law it was distinct but in actual conduct of affairs the shareholders were managing the affairs of the company. Hence, it was submitted that the receipt for compensating the Jain Group from the threat of reduced profits in the future or enhancement of losses of LWIL was a business receipt and, was therefore taxable in the hands of each and every recipient.
10. In rejoinder, the learned counsel of the assessee has at the outset stated. that perusal of order of Assessing officer would clearly show that, he had held that, in the instant case, receipt is taxable because assessee's are engaged in the business of formation, management and control of joint ventures; whereas learned DR has held it is no one's case that assessee is not engaged in the business of formation of joint ventures. Secondly, it was submitted that the contention regarding the clause of non-competition and exclusivity was withdrawn is misplaced since reasons for payment are clearly given in Consent and Waiver Agreement and admitted by the Assessing Officer. Also, the contention that LWIL and shareholders were not distinct and separate entities and therefore the corporate veil should be lifted, is a fresh submission made without any basis. Further, it was submitted that the allegation that the assessee has not submitted complete documents is vague and, made without any basis. On the basis of the aforesaid, it was suggested that an altogether new case is being attempted to be set up by the revenue, which is based on completely misconceived facts, arbitrary assumptions and, subjective conclusions.
10.1 It was further submitted that, contention that amount was received to compensate the Jain Group for losing the future profits of LWTL or being exposes to enhanced losses of LWEL is based on no material and, totally unsubstantiated and, imaginative, for the reason, that, if it was so, so far as assessee's were concerned, it was a case of mere receipt of money by application of receipt, which accrued to LWIL in view of the judgement of Apex Court in the case of ITO v. Ch. Atchiah reported in 218 ITR 239. It was submitted that in such a situation the receipt represented the business profits of LWTL and the same should be taxed in the hands of LWIL. On the contrary, he contended that the sums have been received under Consent and Waiver Agreement dated.
17.01.2001, for the assessee's agreeing to withdraw their claims and disputes and, to give their consent to transfer of shares by Gillette to Newell. It was submitted that, learned DR has misread the Assignment and Assumption Agreement dated 17.01.2001. The payment made was independent of the said agreement. It was submitted that it cannot be contended that the clause regarding non-competition and exclusivity was withdrawn. It was submitted that the learned DR has also factually erred in contending that, on incorporation of LWIL i.e. on 7^th November 1995, the proprietorship business of Sh. D.K. Jain, M/s Luxor Pen Company ceased to exist whereas the fact is that business of M/s Luxor Pen Company ceased to exist only on signing of JVA on 19.03.1996 and, not on 7.11.95. Therefore, the inference drawn that, business in normal course should have been carried on by LWIL from 07.11.95 i.e.
date of incorporation is also incorrect.
10.2 It was submitted that no submissions have been made on the judgement of the Apex Court in the case of Oberoi Hotel (P) Ltd reported in 236 ITR 903 and-decision of IT AT in the case of Sak Inds (Del) heavily relied upon by the assessee in support of the claim that the impugned receipt is a capital receipt. Further, judgements cited by DR are inapplicable and, have no relevance to the facts of the case 10.3 In view thereof, it was submitted that, it be held that amount received by assessee's was merely a capital receipt and, not assessable to tax as business income Under Section 28(1) of the Act.
11. We have heard the rival contentions, carefully considered the submissions made by both the parties and perused the material on record. We first deal with the preliminary objection before dealing with the main issue involved in the instant appeals. In the appeals filed by the revenue against the order of CIT(A)-26, a specific ground in Ground No. 1 to 1.5 has been raised by revenue that the orders have been disposed with undue haste and, without proper application of mind.
However, at the time of hearing and in the, note filed by the revenue, the learned Departmental Representative strongly relied on the order of CIT(A)-23 in the case of Smt. Payal Kapoor. It has been stated that this order has been framed after due application of mind and, due appreciation of facts, and, accordingly it deserves to be confirmed.
Since undisputedly facts in case of six other assessee's are identical to the case of Smt. Payal Kapoor and, sufficient opportunity was granted to the revenue by CIT(A)-23 in the case of Eayal Kapoor. We would take appeal of Mrs. Payal Kapoor as the lead appeal. Both the parties also addressed us with reference to detailed findings recorded by the learned CIT (Appeals) in the above case of Payal Kapoor which we shall hereinafter discuss. Therefore, no useful purpose would be served by setting the order for the purpose of grant of opportunity. In fact, even in the course of hearing, the learned DR fairly made no prayer for setting aside the order of the CIT(A)-26 for a fresh opportunity. She agreed that all the appeals be decided in, the light of impugned order in the case of Mrs. Payal Kapoor. Accordingly, we find no merit in this contention raised by the revenue and, hence Ground Nos. 1.1 to 1.5 are rejected.
12. Another argument of the learned D.R. that true facts of commercial arrangement negotiated between the parties under which payment was made by the Gillette. Company to Jain Group have not been brought on record.
According to her it was not possible to believe that a multi national company would part with huge sum of 15 millions, merely on receipt of a notice. There was something more to it. Another submission connected with this was the submission that corporate veil is required to be lifted in this case as profit belonged to and have been shared between members of Jain Group and Gillette. These two groups were owner of everything and managing the companies as provided in the JVA. LWIL and other companies were merely paper companies. We do not find any reason to accept and entertain these submissions. The A.O. and on appeal CIT (AL. decided the issue after considering provisions of JVA. notices issued on behalf of Jain Group, consent and waiver agreement and other documents placed by the assessee on record. Genuineness, validity and veracity of documents referred to above, was not disputed and doubted at any stage of the proceedings. It was not even alleged that payment in dispute was made not under the documents as claimed but under some other arrangement not brought on record. The learned D.R. was also vague and did not spell out what was the other arrangement. Suggestion _ is to imagine some arrangement,, which, on facts is not possible.
There is no justification why company should not be taken a legal entity different from shareholders in this case. We would take apparent as real. We reject above arguments.
13. The AO and on appeal, the learned CIT (A) have observed that Jain Group was carrying on activities of promoting, financing, setting up, controlling, managing and running various group firms and company and drawing and implementing their expansion and diversification plans and strategies. Exact source of above observations is not are revealed in the order. No instances of such activities It given. It appears, that observations are inspired from memorandum and association of companies under the management or Jain Group. However, in the case of Kishan Prasad and Co. Ltd. v. CIT 27 ITR 49, it was dated as under: The circumstance whether a transaction is or is not within its powers has. no bearing on the nature of the transaction, or on the question whether the profits arising therefrom are capital accretion or revenue income.
It is, therefore, clear that for deciding the question whether receipt is capital accretion or revenue income, the memorandum and object of companies of Jain Group has no relevance. Otherwise too we are unable to find substance in the above approach of the revenue authorities.
Leaving these side issues, we move to facts material to the controversy.
14. We find that under JVA dated 19.3.1996, Jain Group and GIPL decided to carry the business of manufacture and sale of writing instruments in India under the Luxor and Parker trade marks through the exclusive vehicles of a joint venture company LWIL The said agreement is very big and voluminous document. The salient features thereof have been noted by the revenue authorities in the assessment order and reproduced in para 4 above. We shall hereinafter recapitulate important terms and conditions of joint agreement, its legal implications and events that followed JVA. It is an agreed, position that business of manufacture and sale of writing instruments was carried by the Joint venture companies following JVA for some time.
15. On 21.08.2000, M/s Gillette Co. USA entered into an agreement with Newell to sell their worldwide business of writing instruments and stationery products, including its shareholding in LWIL. According to Jain Group that the decision so taken by Gillette did not conform to the undertaking and commitment given by Gillette. Therefore, Jain.
Group notified Gillette Co., USA vide notices dated 15.12.2000 that the aforesaid decision constituted material breach of the terms and conditions of JVA and, the undertaking dated 19.03.96. It therefore called upon them to resolve the disputes through mutual conciliation, failing which Jain Group would refer the dispute to Arbitration under, the Rules of International Chamber of Commerce, Paris as provided under JVA and seek suitable relief including the relief of specific performance of the rights and obligation of the parties in JVA as well as various undertakings given by the M/s Gillette Co., USA. The material portion of the said notice is as under: We wish to express our deep concern and anxiety and to lodge our protest against the proposed sale of Gillette Stationery products business to Newell Rubbermaid in the present circumstances. At the outset, we wish to record that no such sale can take place without our prior written consent and a settlement with the Jain Family, JHPL Holdings Pvt. Ltd and Luxor Writing Instruments Ltd. Any such sale by the Gillette Company and its Stationery products business including trade marks and the Parker Pen Group writing material breach of the commitments and representations made under the JV Agreement dated 19.03.1996 and the undertakings given by you vide your letter of March 19,1996 (Appendix-I).
The JV Agreement was signed on the commitment and the understanding that the Jain Group and the Gillette Company through GIPL will establish a long term alliance and will pool their respective resources and strengths including partners Luxor Assets, the Luxor Trade Marks and the Parker Trade Marks and to develop the JV with the objective to. maintain a leading position in the Writting Instruments. and Stationery Products business in India and introducing world class management, marketing, manufacturing and quality standards.
Both parties i.e. The Gillette Company (and its subsidiaries) and the Jain Group agreed and undertook that neither of us shall undertake directly or indirectly any activities in competition with the JV Company (subject to the exclusion of certain business of the Jain Group). Accordingly you, the Gillette Company gave us your' further undertaking in terms of your letter of March 19,1996 agreeing and undertaking that during the life of the JV Agreement: We find it most unreasonable and unfair that Gillette should consider imposing a new partner on us in place of itself -without giving us a full and proper opportunity to know the third party who is not of our company to discuss matters with men and negotiate reasonable terms as may be necessary with consent to you to this business. No doubt, Newell Rubbermaid is an internationally well known corporation, but they are total strongers to. us. Furthermore they are already our competitors in the Indian market as they are selling Reynolds branded Writing Instruments and Stationery Products through a company called M/s G.M. Pens International Ltd. The Reynolds branded products have been our major competitors in the Indian market and therefore the sale, of your Writing Instruments and Stationery Products business to Newell Rubbermaid would be direct and material breach of your commitments made not only under the JV Agreement but also under your letter of March 19,1996.
We agreed to enter into the JV in acceptance of the Gillette umbrella We were assured of Gillette's expertise, management, skills, new products and / or new brands and all these are sought to be denied to us in future without any cause.
We were however -willing to enter into a good faith discussion for exploring the possibilities of releasing Gillette from its commitments and obligations.
We, therefore, attended a meeting organized by Gillette with Mr.
Thomas H. Beyer, the President of Sanford International in August to get introduced Thereafter, meetings were arranged on 31st October and 1st November, 2000 in London with Mr. Steve Issacs, Ms. Andrea Home and Mr. Thomas H. Beyer of Newell Rubbermaid. During these meetings, Mr. Beyer categorically stated that the terms of the JV Agreement as signed between Gillette and the Jain Group were unacceptable to Newell.
Nothing material was discussed and no Agreement was reached. Infact we are now informed that Mr. Beyer has since resigned.
The JV Agreement between the Jain Group and Gillette was negotiated, aver a period of approx, 18 months. During this period, we held a very large number of meetings both in India and overseas and with a large number of Gillette executives from its various international divisions. The business plans were discussed and substantial time was spent in coming to know and under stand one another. It is only after both the parties had satisfied themselves and established a level of comfort and confidence in one another that we proceeded to sign the JV Agreement. How does Gillette expect the Jain Group to accept Newell ' Rubbermaid or for that matter any other Company as its JV partner without any meaningful meetings or discussions and without first establishing any level of comfort or confidence? At our meeting yesterday we were informed by Ms Michelle Viotty that Newell was willing to accept our JV agreement but on condition that we agree to delete the clauses of exclusivity and non-competition as Newell intends to carry on its sale of Reynolds branded products in India in competition with the Joint Venture. This situation is totally unacceptable to us.
In the present circumstances, we have therefore no option but to request you as follows: 1. That you arrange necessary meetings between the concerned executives of Newell Rubbermaid and members of the Jain Group both in India at our offices and at ' the concerned offices of Newell to enable us both to come to know one another and discuss our respective business plans for the present and the future of the J Company retaining the existing clauses of exclusivity and non-competition.
2. That Gillette Company enters into good faith discussions with us for negotiating reasonable terms including compensation to be paid to the Jain Group for the. release of the Gillette Company from its Agreements and undertakings -as contained in the JV Agreement and the letter of March 19,1996 (Appendix-I) 3. That pending the aforesaid discussions and negotiations and the conclusion of, a revised agreement if possible on mutually acceptable terms, the Gillette Company, should not proceed with the proposed sale and should not do or permit anything to be done which may directly or indirect to be a breach of any of the terms or the spirit of the JV Agreement and your agreement and undertaking of March 19,1996.
Please confirm that you are arranging to do the needful in respect of each of the above within seven days.
(For and on behalf of Mr. D.K Jain and D.K, Jain Family / Jain Group.) After discussion and negotiations, the parties on. 17.1.2001 arrived at an agreement called Consent and Waiver Agreement which is as under: This Agreement is made on this 17^th day of January, 2001 between-The Gillette-Company, a Delaware Corporation, U.S.A. together with its affiliates (Gillette".) Mr. D.K. Jain, Ms Usha Jain, Mr. Pankaj Jain, Ms Payal Kapoor, Ms.
Pooja Jain Ms Priya Jain and JHPL Holdings Pvt. Ltd (all hereinafter collectively referred. to as the ('Jain Group ").
WHEREAS Gillette and the Jain Group had agreed to carry on the.
business in India of Writing Instruments and Stationery Products in a joint venture company " and accordingly signed the Joint Venture Agreement dated 19.03.1996.
AND WHEREAS, Gillette on 21.08.2000 signed a Sale and Purchase Agreement-with Newell Rubbermaid Inc. (together-with its affiliates "Newell") and agreed to. transfer to Newell Gillette's entire business and interest in the Writing Instruments and Stationery Products business internationally including Gillette 's interest in the Joint Venture with the Jain Group.
AND WHEREAS the Jain Group had declined to give their consent to the, proposed sale and vide their letter of (December 15,2000) gave notice to Gillette of disputes having arisen between the parties and notified Gillette of its intentions to refer the disputes to Arbitration unless the matter is resolved amicably in terms of Article 32 of the Joint Venture Agreement.
AND WHEREAS pursuant to the negotiations and discussions between the parties it was agreed that the said disputes be resolved and the parties wish to record the terms of the said settlement. Hence this Agreement.
1. In appreciation of the Jain Group agreeing to withdraw all claims and disputes and in particular the disputes raised vide the letter of (December 15,2000) and agreeing to give their consent and waiver to Gillette transferring by way of sale its Writing Instruments and Stationery Products business internationally to Newell including Gillette's interest in the Joint Venture and in reciprocation of the gesture of the Jain Group, Gillette agrees and undertakes to make payment to the Jain Group in the manner stipulated in Article 3 below of.
2. The payment as aforesaid shall be made by Gillette on or before 19^th January, 2001 subject to the Jain Group delivering to Gillette such documents, as may be necessary to effect the transfer of all Gillette Group India Ltd. 's right, title and interest in and to the Joint Venture to Newell Provided always that even after the payment as agreed shall have been made, at the request of Gillette, Jain Group shall provide and deliver to Gillette such further or additional documents that Gillette may reasonably require for the purposes aforesaid.
3. Gillette shall pay to the Jain Group members and to the credit of their respective bank accounts as follows:------------------------------------------------------------------------------Sl Name of the Joint Venture Amount RupeesNo. received USD (in1. D.K. Jain 10 46,33,40,000------------------------------------------------------------------------------2. Usha Jain 2.50 11,58,35,000------------------------------------------------------------------------------3. Priya Jain 0.50 2,31,67,000------------------------------------------------------------------------------4. Pankaj Jain 0.50 2,31,67,000------------------------------------------------------------------------------5. Pooja Jain 0.50 2,31,67,000------------------------------------------------------------------------------6. Payal Kapur 0.50 2,31,67,000------------------------------------------------------------------------------7. M/s JHPL Holdings (P) Ltd. 0.50 2.31,67,000------------------------------------------------------------------------------ 15.00 69,50,10,000 4. The Parties hereto agree that this Agreement and all matters covered herein shall be kept strictly confidential and the same shall not be disclosed directory or indirectly to any third party and for any reasons -whatsoever provided however, nothing herein shall prohibit any Party from disclosing this Agreement and its contents to authorities pursuant to any law on condition that such disclosures shall be to such an extent as necessary.The Gillette Company D.K. Jain for himself and on Behalf of Jain Family andBy: By:Name: Peter Mee Name:Title: Asst. General Counsel Title: Under the aforesaid arrangement, the payments in dispute were made on the same date i.e. 17.1.2001. GIPL (later called Gillette Group India Limited) transferred and assigned all its interest in the joint ventures with Jain Group to M/s Newell Rubbermaid as per tripartite agreement between three parties referred to above. The payment of Rs. 69.50 crores received in the above circumstances is claimed by the assesses as a non taxable receipt whereas according to the department it is a revenue receipt liable to be. taxed under Section 28(i) of the Income-tax Act. The payment is documented and genuineness, validity and veracity of documents has not been challenged at any stage of the proceedings. This fact is to be emphasized as parties to the dispute are conversing different reasons for making payment. In our opinion there is no need to put and stress on imagination when reasons for demand and payment of compensation are clearly stated in writing. We see no justification for not taking the writing on its face value.
16. Having seen the background under which payment was made, we move to some of the important decisions which have bearing on the case and on which reliance has been placed by parties:- In the case of CIT(A) v. Ram Parshad 113 ITR 462 (Delhi) their Lordships of Delhi High Court had held that "amount in dispute was stipulated for and in-fact had been promising remuneration for services rendered in promoting and forming the company and the promised remuneration was allowed to the assessee in recognition of services in promoting the company." It was held to be a taxable receipt for carrying "occupation" or "vocation". apparent gift if it possess an element of reward fore services or work done assumes the character of income, their Lordships further held.P. Krishna Menon v. CIT 35 ITR 48 (S.C.) the teaching of Vedanta was held to be a vocation and-their-Lordships of the Supreme Court held that "it was impossible to hold that the payments made to the assessee have not been made in consideration of the teaching imparted by him and therefore payments were income arising from vocation of the assessee. Payments were not casual or non-recurring receipts." In the case of Dr. K. George Thomas v. CIT 156 ITR 412 (S.C) their Lordships of Supreme Court held that "the assessee -carried on a vocation of practicing against atheism and in the course of such vocation and for the purpose of the same, he received the amounts -in -question-as -donations for the furtherance of the objects of his vocation. There was a link between the activities of the appellant and the payments received by-him and -the link was close enough. The receipts arose to the appellant from the carrying on of his vocation and they were not casual and non-recurring receipts and were taxable.
Further held that the burden is on the Revenue to establish that a particular receipt is of a -revenue-character, Once a receipt is found to be of a revenue character, that it comes under an exemption is for the assessee to establish.
It is evident from above that any payment received for services rendered whether in the formation of a company or in teaching Vedanta or practicing vocation is liable, to be taxed as income from business or vocation. But it cannot follow as a general proposition that the formation of a company in every case is "business" and if an activity does not tantamount to carrying on a business it must be taken as an vocation are taxed as a return from occupation. The aforesaid decisions in our considered opinion, have. no application to the facts or controversy involved in the present case.
In the case of Gillanders Arbuthnot and Co. Ltd v. CIT, 53 ITR 283 (S.C) the assessee was carrying on business in veracity of agencies and dealing in diverse commodities. Compensation was paid to the assessee for termination of one, of distributing agencies and was worked out on the basis of 3 successive years of passed' commission. The assessee claimed that receipt was a capital receipt. Their Lordship of Supreme Court held that having regard to the vast array of business done by the appellant as agents, the acquisition of agencies was in the normal course business, done by the appellant as agents, the acquisition of agencies was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. The amounts received by the appellant for the cancellation of the explosives agency therefore did not represent the price paid for the loss of a capital asset: they were of the nature of income.
Their Lordships of Supreme Court further held and observed that "it cannot seriously be disputed that compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of which the agency was terminated, or for loss of goodwill would, prima-facie, be of the nature of a capital receipt. But there is no evidence that compensation was paid to the appellant as consideration for giving the undertaking not to carry on a competitive business, or as compensation for loss of goodwill." "The Tribunal again observed that it had not been supplied, with any.
material regarding the basis of the value of the goodwill, "nor anything to indicate as to what the written down value of the goodwill was, due to the termination of the agency". It therefore held that the inference sought to be drawn by the appellant that compensation was referable to the loss of goodwill was based on no evidence and the High Court agreed with that conclusion. We are unable to hold that the High Court was, in so holding, in error.
The appellant -was conducting business as selling or distributory agent of numerous principals. The agency which was terminated -was one of many such agencies in which the appellant functioned as distributing agent of a foreign principal There, is not even a suggestion, that by the determination of the agency held by the appellant in explosives from the principal company, the trading structure of the assessee's business was impaired. It is manifest that the agencies of the companies conducted by the appellant must have been obtained at different times. There is no evidence that these agencies were of any fixed duration. It would be reasonable to infer that some of the agencies may be cancelled and fresh agencies obtained.
On a careful consideration of all the circumstances we agree with the High Court that cancellation of the contract of agency did not affect the profit-making structure of the appellant, nor did it involve a loss of an enduring trading asset: it merely deprived the appellant of a trading avenue, leaving it free to devote its energies after the cancellation to carry on the rest of the business, and to replace the contract lost by a similar contract." The case is important for determining whether a compensation in a given case is capital receipt or a Revenue receipt.
In the case of CIT v. Rai Bahadur Jairam Valji 35 ITR 148 (S.C) the assessee was paid compensation for termination of agency which was held to be a trading receipt by their Lordships of Supreme Court. Their Lordships laid down important test for determining whether business in a given case is Revenue receipt or a capital receipt.
In both the cases noted above it was held that if assessee is receiving, commission by holding various agencies which are assessee's trading assets then compensation receipt for termination of agency would be a trading receipt. It is evident from above that in the case of Gillanders Arbuthnot & Co. Ltd. the assessee was not able to produce evidence to show that distributory agency cancelled was not one in which the assessee functioned as distributing agent. It was not even suggested that in the determination of the agency, trading structure of the assessee 's business was impaired.
In the other case their Lordships of the Apex. Court-drew a distinction between agency contract and a trading contract. Agency contract was held to be apparatus which leads to business rather than business itself. Agency contract was thus held-to be a capital asset invested in the business but trading contract entered in the ordinary course of business was held to be business itself. Their Lordships also emphasized -that for determining the question it has to be seen whether compensation is for a capital asset or for stock in trade. If it is for stock in trade then it was a revenue receipt otherwise it is capital.
In the case of Gangadhar Baijnath v. CIT, U.P. 86 ITR 19 (S.C.), their Lordships of Supreme Court held that compensation received for relinquishment of interest in partnership was a revenue receipt. "Such contracts are liable in the ordinary course of business, to be altered or terminated on terms and any payment received in settlement of the rights as a result of the termination of the contract, really represents the profits which the assessee would have made had the contract been performed. As observed by this court in Jairam Valjils case, "when once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period, and in this respect, it differs from an agency agreement."Karam Chand Thapar and Bros. P. Ltd. v. CIT 80 ITR 167 (S.C.) the assessee, a private company functioned as managing agent of 27 companies, including G.C. and Co. Ltd. which later on became a public company. On April 3, 1951 G.C. & Co. decided to terminate the managing agency of the assessee. and paid Rs. 18, Lakhs as compensation for such termination. The question arose whether receipt, of Rs. 18 Lakhs was capital or income of the assessee. The Assessing Officer treated receipt as a capital receipt. The appellate Tribunal found as under:- (i) that the transactions whereby the managing, agency was terminated were genuine and real transactions, (ii) that the managing agencies held by the appellant represented sources from which it received its income by way of commission and the termination of the managing agency represented destruction of a source of income, and (iii) that, therefore, the receipt was a capital receipt.
On a reference High Court reversed the decision of the Tribunal but on further appeal their Lordships of Supreme Court agreed with the Tribunal and held as under :-Commissioner of Income-tax v. Chari and Chari Ltd., that ordinarily compensation for loss of office or agency is regained, as. a capital receipt, but this rule is subject to an exception that payment received even for termination of an agency agreement would be revenue and not capital in, the case where the agency was one of many which the assessee held and its termination did not impair the profit-making structure of the assessee, but was within the framework of the business, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken. But it, is for the income-tax department to clearly establish that the case fell within the exception to the ordinary rule. In the present case, according to the findings of the Tribunal the termination of the agency in question had resulted in the destruction of a source of income of the company. The Tribunal had arrived at the conclusion that that managing agencies held by the company represented the source from which it received its income by way of commission.
"Where, on a consideration of the circumstances, payment is made, to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is Ms. source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue: where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to. compensate for cancellation of the agency agreement is normally a capital receipt.
17. It is clearly evident from above that even when you are managing agent for 27 companies and managing agency of a one of the company is cancelled and compensation is paid for such cancellation, the receipt may yet be capital. What is to be seen is whether cancellation of the agency has resulted in impairing trading structure of the assessee or such cancellation results in loss of source of income. If capital assets are impaired or there is loss of source of income, the compensation received was taken as a capital receipt.
18. The facts in the case of Oberoi Hotel (P) Ltd. 263 ITR 903 (S.C) are quite parallel to facts before us. In the said case the facts were that the assessee-company was operating, managing and administering many hotels at different places belonging to others for a fee. As per the Memorandum of Association of the company, it was authorised to run hotels on its own account and also to operate, manage and administer hotels belonging to others for a fee. In terms of an agreement dated November 2, 1970, the company agreed to operate the hotel known as Hotel Oberoi Imperial, Singapore for which the assessee-company was to receive a certain fee called management fee. Under article X of the agreement, the agreement was to run for an initial period of ten years the assessee had the option to ask for renewal of the said agreement for two further, periods of ten years each by mutual agreement. Article XVIII of the said agreement gave the assessee a right to exercise the option of purchasing the hotel in case its owners desire to transfer the same during the currency of the agreement. Thereafter on September 14, 1975, a supplementary agreement was executed between the appellant and the receiver of the Hotel and the property of Imperial Securities International ( ISI ) Limited, which, inter alia, provided that on September 6, 1975, a receiver was appointed of the undertaking and property of ISI pursuant to the terms of the debenture dated January 7, 1974, made between ISI on one part and Common Wealth Development Finance Company Limited on the other part. On the basis of the said appointment of the receiver, the receiver executed the supplemental agreement in favour of the appellant where by the assessee had received a sum of Rs. 29,47,500 from the receiver after the sale of the hotel.
The question, which was considered by the income-tax authorities,, was whether the receipt of the said amount is capital receipt or revenue receipt. The Income-tax Officer arrived at a conclusion that it was a revenue receipt, the Commissioner of Income-tax (Appeals) held that it was a capital receipt, the Tribunal confirmed the said finding, on a reference to the High Court, the High Court arrived at a conclusion that it was a revenue receipt assessable to income-tax as business income for the assessment year 1979-80. Their lordships of the Apex Court after considering its earlier judgements had held "Applying the aforesaid test laid down by this court in the present case, in our view, the Tribunal "was right in arriving at a conclusion that it was a capital receipt. The reason is that as provided in article XV1II of the-first agreement the assessee -was having an option or right or lien, if the owner desired to transfer, the hotel or lease all or part of the hotel to any other person, the same -was required to be offered ' first to the assessee (operator) or its nominee. This right to exercise its option -was given up by a supplementary agreement, which -was executed in September, 1975, between the receiver and the assessee. It -was agreed that the receiver 'would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under any obligation requiring the purchaser thereof to enter into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise, and in its return, agreed ' consideration -was as stated above in clause X. On the basis of the said agreement, the assessee has received the amount in question. The amount -was received because the assessee had given up its right to purchase and/or to operate the property.
Further it is loss of source of income to the assessee and that right is determined for consideration. Obviously, therefore, it is a capital receipt and not a revenue receipt" The principle that emerge from above is that question whether.
particular compensation received is a revenue receipt or a capital receipt is some time a.-very complicated question. Although it more turns on facts of each case yet decided cases are consulted to resolve the problem. Each case has its peculiar facts and no infallible criterion is available. Nevertheless the decisions are useful illustration and afford indications and consideration which might be borne in mind in approaching the problem.
19. There is no dispute in the cases before us that members of Jain group were carrying on business of sale and purchase of writing material as per details noted above. The facts relating to the business carried have been correctly stated, by the learned representative of the assessee. The learned D.R. did not raise much dispute on them.
There is further no dispute that on 19.3.1996, Jain Group entered into JVA with GIPL According to Jain group, the JVA was an isolated agreement of unique type never entered into by Jain group earlier with any body. Revenue has contested this proposition and accordingly it has been held that JVA was a business and commercial agreement and, therefore, compensation flowing from breach of such agreement is also a business / revenue receipt liable to be taxed. In our considered opinion, it has to be accepted that JVA was an isolated agreement entered into by Jain Group for the first time and it cannot be accepted that Jain group was carrying on business of entering into such JVAs. It is not possible to accept on facts that Jain group were entering, into agreements with world, renowned companies like Gillete in the ordinary course of their business. It was an agreement entered into by Jain Group for purposes of business. JVA was a commercial deal providing respective rights and liabilities of parties relating to business agreed to be carried but it was not a "business". JVA may not merely be a memorandum of agreement not connected with the business as contended by the assessee. It was a commercial agreement. But it was not "business". We hold accordingly.
20. The revenue authorities for holding that compensation in question was a revenue receipt has held that JVA was entered in the course of business carried on by Jain Group. The phrase "in the course of business" has not been mis-applied by the revenue authorities on the facts of the case. Every right / asset acquired or every transaction.
entered or carried in the course of business cannot give rise, to a revenue gain or revenue asset. There is no doubt that the Apex Court in some of the cases quoted above has held that compensation paid on termination of agencies were business receipts as agencies were acquired in the normal course of business carried by the assessee. The aforesaid observation has to be read in the context and on peculiar facts of the cases the Apex court, had to decide. In the case of Karam Chand Thapar & Bros, (supra) and in the case of Oberoi Hotel Pvt. Ltd. (supra) the compensation received was held to be capital receipt. Even in the above two cases, the compensation received was on termination of agreements which were "entered into by the assessee in the normal course of business!! In fact an entrepreneur, for purposes of business, has to acquire for business use, machinery, plant, factory building and several other assets through transactions. entered the course of the business. But it cannot follow that machinery, plant or factory building so acquired are not capital assets and gain if any arising on sale, transfer or damages received on loss of such assets would not be a capital receipt. Therefore, even a transaction "entered into in normal course of business" can give, rise to captial receipt What is important is the nature of asset involved. In case of compensation, what is the asset damaged for which compensation is being paid? 21. In the case of Rai Bahadur Jaiwalji (supra) their Lordship of Supreme Court drew a distinction between agency contract and trading contracts. Agency contract was held to be apparatus which led to the business, rather than business itself. Thus Agency contract was treated as an apparatus with which business is carried. Compensation received on termination of such Agency contract is a capital receipt as it is for damages caused to the business structure. Trading Agency, on the other hand, is one which relates to an item in which the aseessee is dealing. For example, if an assessee has Distributing Cement Agency from ACC for indefinite or for a long period, the contract under which it is obtained is Agency contract and not "business". It leads to business but not business. It is a structure to carry on the business.
However, if the same assessee enter into-contract for supply of 100 bags daily for a period of one month, such contract would be a trading contract entered into by the assessee in the normal course of business.
Any compensation paid for loss caused to above trading contract would be a trading or revenue receipt. The compensation in the latter case is paid for an item which is stock in trade. So normally when an item is dealt with or is part of stock in trade, any receipt or compensation connected with such deal is a revenue receipt. But a trader or a manufacturer also has structure to carry on the trade like shop, factory, car, distribution agencies etc. etc. The. structure - machinery mechanism or structure with which trade is carried, are all capital assets and may be called business assets but cannot be taken to be "business". If above, distinction and principles involved there in are kept in view, it is easier to resolve the controversy before us.
22. We have first to find whether JVA here is a capital asset or a revenue asset What is the nature of JVA? It is admitted even by the AO and CIT (A) that parties, as per the JVA agreed to establish, develop, long term business alliances to strengthen Luxor group and world renowned Gillette group. Under the agreement, business of manufacture and sale of writing instrument and stationeries was to be carried by exclusive vehicle of joint venture (LWIL etc.) companies. The joint venture companies in business was to follow "Gillette's management, financial, personal manufacturing, internal control, reporting system, policies, practices, procedures and were to be guided by Gillette's mission and value statement." Products. of Gillette were to be manufactured and sold exclusively by Joint venture company. Gillette could not sell its products in competition. The parties under the agreement could not agree to sell, transfer any of shares in company for first seven years without prior written consent of the other party and any such salt or transfer of shares would constitute material breach of JVA.23. The joint venture agreement further provided for blending of two concerns and stated terms and conditions in respect of financing of joint venture business, insurance of shares, constitution of Boards, management, accounting, technical know assistance consequences of termination of agreement, material breach etc. etc. Admittedly, it is very voluminous and lengthy document. Revenue also admits that it is very comprehensive 24. The letter of Jain group dated 15.12.2000 also throws light as to what was the joint understanding of two groups as per JVA. Jain group complaints that JVA was commitment and understanding that Jain group and Gillette company through GIPL will establish long term alliance and will pool their respective finances and strengthen then-assets and trade marks like Luxor and Parker to obtain leading position in writing instrument and stationery business in India through the introduction of world class management, marketing, manufacturing and quality standard.
The business was. to be carried in India by the exclusive vehicle of joint venture company set up as per understanding in TV A. Both parties had agreed not to undertake directly or indirectly any activity in competition with Joint venture company. Gillette USA had given undertaking as per letter dated March 19,1996. Detailed terms and conditions recorded in JVA have been referred to earlier.
25. The aforesaid quoted terms and conditions are sufficient to give us an. idea as to what sort of asset flowed as per JVA. In our considered opinion, the terms and conditions leave no amount of doubt that JVA was a structure or foundation on which the joint business was to be built and carried. It provided mechanism or blue prints and defined role of the parties to the agreement and their commitment and also the manner in which business would be carried. The JVA could not be treated as "business" as admittedly business agreed to be carried was that of manufacture and sale of writing material and, stationery. As noted in the case of Rai Bahadur Jai Ram walji (supra), it was capital asset invested in the business but not business itself. It was clearly a capital structure having two shades, one of Jain group and other of Gillette both having committed to provide not only finances but also management skill and even culture etc. etc. It could not be treated as stock in trade or a revenue asset. It was a capital asset....
26. Having reached the conclusion that JVA gave rise to rights which were capital in nature now the question whether compensation received for breach of above rights or waiver of such rights is revenue receipt or capital receipt is not difficult to decide. It is an admitted position that compensation was paid to Jain group for breach of commitment provided in JVA.27. As per notice dated 15.12.2000 Jain group lodged protest and complaint with Gillette group of breach of contract and how they have failed to fulfil their elaborate and long term commitments. Newell was a competitor and it was difficult to align with such competitors. For the breach of commitments and for leaving joint venture, the Jain group demanded compensation apart from other things. Para 2 of the notice quoted above is relevant.
28. Thereafter after mutual discussion and consultation, Gillette agreed to pay compensation to Jain group, as per details noted above for giving consent and for waiving their rights to object to transfer of shares by Gillette to Newell.
29. The revenue authorities did not accept that above compensation was a capital receipt. According to the revenue no injury was caused to trading (capital) structure. The pertinent observations of CIT (Appeals) are as under: 3.33 The Assessing Officer further noted that it had been suggested, by the AR of the assessee in the course of the discussions that the JVA was merely a contract of investment in the joint venture company, and that the amount received by the members of the Jain Group was to compensate them for loss of value or injury caused to their share capital in the joint venture company on account of the better known Gillette withdrawing from the joint venture and lesser known Newell Rubbermaid entering in its place. This, the assessing officer observed could not be a serious argument because it was totally falsified by the fact that amount in question was not at all distributed amongst the members of the Jain group in the ratio of their respective share capitals in the joint venture. Therefore, the assessing officer said, the argument that the receipt in question was a capital receipt which compensated the assessee for any capital loss held no water....
30. It is very difficult to subscribe to above view of the revenue authorities. The finding recorded is contrary to the agreement between the parties. The Jain group raised a claim and served notice that on account of breach of agreement and on account of departure of Gillette group out of joint venture, heavy loss had been caused to the assessee.
The claim was accepted by the Gillette and compensation was paid. We do not know on what basis and on what material the revenue authorities could say that no loss was caused to the assessee. According to them it did not make any difference whether Gillette was a partner in the joint venture or Newell Rubbermaid. We. are unable to agree.
The revenue authorities have themselves admitted that they (Gillette) were world renowned companies with world renowned trade, marks and trade brands. Their, management, culture, Gillette Umbrella introduced in the joint venture and made available as per commitment was withdrawn contrary to the agreement. It is difficult to accept that no loss to the structure referred to above was caused on account of departure of Gillette group. This inference does not conform to the Notice issued by Jain group. AS. observed earlier, both the parties have accepted that loss was caused and one party paid compensation to the other party for the loss, breach and or for giving consent and waiving rights under the JVA. Notice and waiver agreement have been extensively quoted and if is not necessary to repeat them here. However, it is not possible to ignore them, (written agreements). Further there is no evidence to support the stand of the revenue. On facts it is not possible to argue that no loss was caused to Jain Group on account of departura of Gillette. Observations of revenue being against record cannot be accepted.
31. It has also been observed that compensation was paid for loss of future profit or to reduce the future losses which the joint venture companies suffered or were likely to suffer. Documents referred to above make no reference to future profit or future losses and, therefore, it is not possible to enter into realm of actual losses or actual profit suffered in the joint venture. Parties to JVA or even revenue authorities did not take, actual assessments of joint venture companies into account in the impugned orders. There is no such indication on record. Even compensation paid has no reference to profit or gain actually earned by the parties.
32. The revenue's contention that compensation was also paid for certain., changes made in JVA on account of replacement of Gillette by Newell Rubbermaid and in this connection, reference was made to amended clause 2.2 and new products were introduced alter Newell joined in joint venture. We are unable to find any substance in this contention.
In the notice dated 15.12.2000, Jain Group demanded "compensation to be paid to Jain Group for release of the Gillette company from its agreement and undertaking" and Gillette Group paid compensation to.
Jain Group for "agreeement to give their consent and waiver to Gillette transferring by way of sale its writing, instrument and stationery product business internationally to Newell including Gillette's interest in the joint venture and in reciprocating the gesture of Jain group, the Gillette group agrees and undertakes to make payment to the Jain Group in the manner stipulated in Article 3 below." It is neither permissible nor possible to rewrite above written agreement.
Compensation is admittedly paid-to Jain Group by Gillette USA and not by Newell Rubbermaid. At any rate, even if it is assumed that compensation is paid for some changes made in the JVA, the said changes were in capital asset and, therefore, receipt a capital receipt. It was open to the revenue to show that written agreements placed by the assessee on record were not reliable or acted upon and that compensation was paid for something else. But no case on lines above has been made out. No statement of parties to agreement was recorded nor any other material was collected to show that compensation was for any revenue loss caused to the assesses. In this background we see no reason to admit additional evidence filed on behalf of the assesses.
We, further see no reason for holding that compensation received was a capital receipt not liable to tax.
It is further clear from notice and waiver agreement that compensation was paid to Jain group for waiving their rights and for permitting Gillette to leave joint venture in breach of JVA. In the light of above, it is not possible to attribute compensation to anything else.
There is direct reference to loss or damage caused to the trading structure on account of departure of Gillette. In the above circumstances, we see no reason, to admit additional evidence filed by the assessee.
33. It is rather difficult to find decided cases having identical facts but in put considered opinion, the decision of House of Lords in the case of Van Den Berghs Ltd v. Clark (H.M. Inspector of Taxes) (1935) 3 I.T.R. 17, the facts were quite identical. In the said case, the assessee like Jain Group had entered into an agreement to pool their resources to avoid business competition. JVA here and agreement involved in-the, cited case are quite identical. One agreement might be more extensive than the other butthalon our considered opinion does not make any difference to the character of agreement involved and nature of compensation received on its breach or termination. Ultimately compensation of 450,000 pounds were paid to the assessee. The said sum was held to be a capital receipt. The House of Lords further elaborated on what is "in the course of carrying on the business (trade)" The facts of the case and the decision gjven is as under: "A Dutch company and the appellants, who were competitors in the manufacture and dealing in margarine, in order to end the competition, entered into an agreement in 1908, by which they bound themselves to -work in friendly alliance and to share their profits and losses in accordance with an elaborate scheme therein specified; further, that they would promote the commercial, pecuniary, buying and selling and other interests of the two companies. In 1913 another agreement was entered into modifying the original basis of ascertaining and sharing profits, and, subject thereto, the provisions of the agreement of 1908 were to remain in force until December, 1940. During the war the agreement were not operated, but in 1920 a third agreement-was made modifying the two previous agreements as to the basis of profit-sharing, extending the branches of the business, and again continuing the principal agreement of 1908 till December, 1940. In 1927 three agreements were made, under which the appellants agreed to determine the agreements of 1908, 1913 and 1920 in consideration of the payments to them of 450,000.
The ' Special Commissioners held that that sum was paid in respect of the pooling agreements, and must be brought in for the purposes of arriving at the balance of the profits of the appellants for the year ending December, 1927, and consequently that the sum was an income receipt. FINLAY, J., held that the cancelled agreements were a capital asset of the appellants, and that the 450,000 was not an income receipt at all. The COURT OF APPEAL restored the decision of the Commissioners who had held that the sum was not received by the appellants in consideration of the surrender of a fixed capital asset, but arose from a transaction attributable to circulating capital, and therefore an income receipt: On further appeal house of Lords noted about the agreement between the parties as under :- The circumstances in which the appellants received the payment which has now to be examined are set out in the Stated Case, from which I select the salient facts. The appellants were incorporated as a limited, company in this country in 1895 and have since carried on the business of manufacturing and dealing in margarine and similar products on a very extensive scale both here and abroad. They, had as their keenest competitors the Dutch Company, -which was engaged in the same business in Holland. On February 13, 1908, the two companies entered into an agreement -whereby they bound themselves for the future to "-work in friendly alliance " and to share their profits and losses in conformity with an elaborate scheme detailed in the agreement. Each of the two companies had a controlling interest in a number of other companies and they undertook that, if either of them or any of the companies which they controlled should acquire an interest in any other margarine concern, the fact should be communicated to the other party, who should have an option to require such interest to be brought within the operation of the agreement. Both companies further undertook on behalf of themselves and of their controlled companies not to enter into any pooling or price, arrangements with their parties which might be deemed inimical to the interests of the two companies under the agreement.
The directors and managers of the respective companies were parties to the agreement and bound themselves for twenty years not to engage in any margarine business other than that of the two companies.
Provision was also made for the setting up of a representative joint committee which was empowered make arrangements with outside companies and firms as to the selling and buying prices of margarine and the limitation of areas of supply. It was farther comprehensively agreed that "each of the two companies shall be true and loyal to the other of them and shall do. all in the power of such company to promote the commercial, technical, pecuniary, buying and selling and other interests of the parties hereto in relation to the margarine business." It is not necessary to set out the detailed provisions of the agreement, but its elaborate character is sufficiently indicated by the fact that it consists of thirty-five articles (with numerous sub-heads) and five schedules and extends to twenty-two pages of print in the case before your Lordships.
Their Lordships after review of a relevant case law held that compensation was capital receipt with the following observation:- The three agreements which the appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade; they were not contracts for the disposal of their products, or for the engagement of agents or other employees necessary for the conduct of their business: nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the appellant's profit-making apparatus. They regulated the appellant's activities, defined what they might and what they might not do, and affected the whole conduct of their business. I have difficulty in seeing haw. money laid out to secure, or money received for the cancellation of, so fundamental as organization of a trader's activities can be regarded as an income disbursement or an income receipt.
We may state that the matter is fully covered by the decision of House of Lords and by the decision in the case of "Hotel Oberoi". In the light of above discussion, we hold that compensation paid to the assesses was a capital receipt not liable to tax.
34. Accordingly, the appeal filed by the assessee is allowed, whereas those of the revenue are dismissed.