HC held Compensation received by Parle for breach of contract by Coca Cola as Capital Receipt

CIT Vs. M/s. Parle Soft Drinks (Bombay High Court)

1. The Revenue has filed Income Tax Appeal No. 978 of 2014 challenging the order dated 20th September, 2013 of the Income Tax Appellate Tribunal, Bench at Mumbai. The assessment year is 1998-99.

2. The facts in brief are that the respondent assessee is a private company and during the relevant assessment year, it had shown income from the hire charges of vehicles and interest. During scrutiny of the return for assessment year 1998-99, the Assessing Officer noted that the company had received a sum of Rs. 16.05 crores as compensation of a settlement for loss of its bottling rights with Coca Cola Company, USA. The company claimed the amount to be a capital receipt not liable to tax and was declared in the accounts  as a capital reserve after deducting Rs. 10 lakhs for professional fees paid.

3. The Assessing Officer, on scrutinising the agreement dated 18th September, 1993, noted that the payment was made for settlement of dispute between the Coca Cola Company, USA and the respondent assessee. Accordingly, the amount partakes the character of income in terms of section 2(24) of the Act and to be taxed as income from other sources. As an alternate argument canvassed by the assessee that the amount was received as surrender of the right of first refusal for giving up the rights of setting up a bottling plant, the Assessing Officer noted that this right was assigned to Limca Flavors and Fragrances Ltd. (LFFL) and the respondent assessee was not in a position to show how it had acquired the rights. That is how the assessee’s alternate argument was also rejected.

4. The aggrieved assessee went in appeal before the Commissioner and complained that the assessment order dated 13th March, 2013 be set aside. The Commissioner held that the receipt was taxable as capital gains since section 55(2)(a) covers such a situation as that of the respondent assessee. However, he held that the right of first refusal dated back to the 31st March, 1994, the date when the subsidiary company was formed for developing this new line of business or profit and hence the said receipt was taxable as long term capital gain. Since the receipt was held to be long term capital gain, it was not to be added to book profits as stipulated under section 115JA of the Act. This order was passed on 14th June, 2001 and the assessee, aggrieved by it, preferred a further appeal to the Tribunal. That was against part of the order of the Commissioner of Income Tax (Appeals). The Revenue also filed an appeal aggrieved by the other part of the order of the Commissioner of Income Tax (Appeals). The assessee filed cross objections. All these were heard together and the impugned order has been passed.

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