Andhra HC (Pre-Telangana)
Cit vs Srikrishna Bottlers (P) Ltd. on 5 November, 2004
Equivalent citations: [2005]144TAXMAN23(AP)
Author: Bilal Nazki
Bench: Bilal Nazki
ORDER
Bilal Nazki J.
The following questions have been referred by the Tribunal, Hyderabad :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the bottles and shells constitute plant and depreciation is admissible thereon under section 32(1)(ii) of the Income Tax Act, 1961, for assessment year 1979-80 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the amount of Rs. 5,46,000 received by the assessee from M/s. Coca-Cola Export Corporation does not constitute a revenue receipt in the assessees hands ?
(3) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that no value can be attributed to the stock of Coca-Cola and Fanta bottles lying with the retailers and also lying in the assessees factory premises is correct ?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have upheld the disallowance of Rs. 36,404 made by the Income Tax Officer in respect of bonus paid in excess of 8.33 per cent of the salaries paid ?"
2. It is submitted that the question No. 1 is covered against the revenue and in favour of assessee by a judgment of this court reported in CIT v. Sh Krishna Bottlers (P) Ltd. (1989) 175 ITR 154 (AP). Question No. 3 is a question of fact which needs no answer.
3. Questions 2 and 4 only remain to be answered. According to the statement of case submitted, by the Tribunal, the assessee is a private limited company. During the accounting year, the assessee imported Coca-Cola concentrate from the foreign country and soft drinks were manufactured therefrom. For this purpose, the assessee had to arrange bottles which bore the trademark embossed on them. The expenditure incurred on bottles was treated differently for different accounting years. In the earlier assessment year, the assessee was writing off only breakages in respect of the bottles and this was being claimed as business expenditure. This method was followed from the assessment year 1967-68 to the assessment year 1975-76. However, for the assessment year 1976-77, for the first time the assessee changed the method of accounting for the bottles. During this year, the assessee claimed entire expenses on the purchase of bottles and, therefore, they claimed that this deduction was allowable under the proviso to section 32(1)(ii) of the Income Tax Act (hereinafter referred to as "the Act"). The department, however, did not allow this claim in the initial stage, but the Tribunal finally held in favour of the assessee. For the subsequent assessment years 1977-78 and 1978-79, there was a claim for deduction under section 32(1)(ii) of the Act. The reference pertains to the assessment year 1979-80. During this year some unforeseen circumstances happened, as the Government prohibited use of concentrates prepared by Coca-Cola Corporation. Since the bottles were embossed with the trademark, they could not be utilized for bottling of any other soft drinks. Thus, all the bottles of the assessee became useless. The assessee claimed deduction under section 32(1)(iii) of the Act. Such useless bottles amounted to Rs. 17,14,341. The CIT(A) held that the bottles purchased would be entitled to deduction of 100 per cent since such transaction was covered by section 32(1)(ii) of the Act and proviso thereto. The appellate authority also accepted the contention that the bottles had become useless and could not be used for any purpose. Therefore, he allowed the deduction under section 32(1)(ii) of the Act. He fixed the value of such useless bottles at Rs. 17,14,341, which was the valuation given by the assessee himself. On appeal, the Tribunal also accepted the contention of the assessee that the bottles had become useless. There is no difficulty in accepting such contention because of the ban imposed by the Government on preparation of concentrates of Coca-Cola, but what created the difficulty was that the Coca-Cola Corporation wrote a letter on 2-2-1978, to the assessee. In that letter, the Coca-Cola Corporation, realizing the financial difficulties created by the ban on production of Coca-Cola, made an ex gratia offer of compensation to assist the bottlers through the difficult period. As the bottles had no commercial value in India and in order to prohibit their misuse, it was proposed that after counting the bottles in the factory, the bottles should be destroyed under the supervision of the Coca-Cola Corporation. For destruction of bottles, compensation would be paid and this compensation had to be paid on pro rata basis on the sales reported throughout 1976. The assessee having sold 54,600 cases was held entitled to Rs. 5,46,000. The assessee claimed that this amount was not taxable as it was a capital receipt. The Income Tax Officer had accepted his contention. However, the CIT(A) felt otherwise. He gave a finding that the payment of Rs. 5,46,000 was directly related to the bottles which were destroyed under the supervision of the Corporation. Therefore, the CIT held that the deduction under section 32(1)(iii) amounting to Rs. 17,14,341 should be set off against the compensation amount and only the balance could be treated as allowable. Section 32(1)(iii) of the Act lays down :
"(iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause (i) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof :"
In the light of this provision, it becomes important to have a glimpse over the letter dated 2-2-1978, written by Coca-Cola Corporation by which the assessee was offered compensation. In para 13 of the letter it stated :
"As your Coca-Cola and Fanta bottles are not usable and now have no commercial value in India, and in order to prohibit their misuse (which will be resisted, in any event, by vigorous action through the Courts), it is proposed that after being counted in your plant, the bottles will be destroyed by your staff under the supervision of our personnel or appointed agents. The Corporation will not accept responsibility for the resultant cullet which the bottlers will be free to dispose of as they wish."
According to the assessee, these bottles were destroyed during the accounting year itself. The letter further reads in para 4 :
"The compensation to be paid to each bottler on destruction as mentioned above, would be on a basis pro rata to sales reported throughout 1976, the last full year of operation in India. In respect of your plant in Hyderabad, the maximum quantity of Coca-Cola/Fanta bottles to which this offer of compensation will apply is 54,600 cases."
In para 5 it states :
"For each case of 24 Coca-Cola/Fanta bottles thus destroyed m the presence of our appointee, and up to the maximum quantity calculated under the pro rata plan (as mentioned in para 4 above) the Corporation will pay to the bottler the sum of ten rupees less any tax or other levy which may be applicable to the transaction in law."
This letter leaves no room to doubt that this payment of Rs. 5,46,000 was on account of revenue on calculation of bottles and their costs, therefore, it constitutes revenue receipt. The Tribunal was of the view that, in fact, what was given by the American company to the. Assessee was compensation for closure of his business and not the price of the bottles. That question may not detain us further in view of the submission made by the learned senior counsel appearing for the revenue that under section 28 of the Act that even if it was a compensation, it was chargeable to income-tax. Section 28 of the Act reads as under :
"Section 28 Profits and gains of business or profession-The following income shall be chargeable to income-tax under the head Profits and gains of business or profession,
(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;
(ii) any compensation or other payment due to or received by,
(a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;
(b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto;
(c) any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto;
(d) any person, for or in connection with vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business;"
4. There is no doubt that the assessee was doing. business on behalf of the American company in India and, therefore, the compensation received by it, was exigible to income-tax and it had to be treated as revenue receipt and not as capital.
5. Question No. 4, in our view, is covered by a judgment of the Supreme Court reported in The Mumbai Kamgar Sabha, Bombay v. Abdulbhai Faizullabhai & Ors. AIR 1976 SC 1455. There is a finding of fact in the order of the Tribunal which, in turn, is based on the finding of the CIT that the expenditure was not bonus under the Payment of Bonus Act, 1965, but was payment made on festive occasions. The Supreme Court in the judgment referred to above held :
"A discerning and concrete analysis of the scheme of the Act and the reasoning of the court leaves us in no doubt that it leaves untouched customary bonus."
6. In the present case, there is no dispute that the bonus that was paid was customary bonus. Therefore, it could not be said that the bonus paid in excess of 8.33 per cent of the salaries had to be included in the income. This question is also answered against the revenue and in favour of assessee.
7. Accordingly, we answer the question No. 2 in favour of revenue and against the assessee and question No. 4 against the revenue and in favour of assessee. Question No. 1 is covered by the judgment of this court in CIT v. Sri Krishna Bottlers (P) Ltd. (supra), and we refrain from answering the question No. 3 as it involves a question of fact.