Income Tax Appellate Tribunal - Pune
Serum Institute Of India Ltd. vs Dy. Commissioner Of Income Tax, Sr-3 on 31 August, 2005
Equivalent citations: [2008]111ITD259(PUNE)
ORDER
C.L. Sethi, Judicial Member
1. This appeal, filed by the assessee, is directed against the order of CIT(A) -- II, Pune, passed in the matter of an assessment made Under Section 143(3) by the AO for the A.Y. 1992-93.
2. The solitary issue involved in this appeal is with regard to the addition of compensation amounting to Rs. 1.50 crore as business income. In the grounds of appeal appended to the Memorandum of Appeal, the assessee has raised several contentions related to the issue in question. However, the assessee vide its letter dt. 21.06.2005, has raised a concise ground of appeal in as much as the grounds of appeal filed with the appeal memo were narrative, The concise ground of appeal raised by the assessee is as under:
The learned CIT (A) has erred in upholding the action of the AO in treating compensation of Rs. 1,50,00,000/- from Hoechst India Ltd. as a revenue receipt chargeable to tax in AY 1992-93 rejecting the Appellant's contention that the said receipt is of capital nature and not liable to tax under any of the provisions of the Income Tax Act, 1961.
3. The material facts related to the issue involved in this appeal may be summarized, in brief, as under:
3.1 The assessee company, is engaged in the manufacture of life saving drugs, which include Anti Sera Vaccine and various blood products. For manufacture of blood products, the assessee was securing plasma from the donors and carrying out tests to check the blood from Human Immuno Deficiency Virus and for Hepatitis B Antigen. In other words, the assessee secures blood from donors, and the blood secures from the donors were subjected to various tests before these were used for the manufacture of serum. One of the test is for detecting presence of Human Immuno Deficiency Virus (HIDV) which causes AIDS. For this purpose, the company was using, inter-alia, a type of Kit called ELISA test kits. These Elisa Test kits were manufactured by a German Company, namely, Behring Worke Ag., (hereinafter called the BWAG) and are marketed and sold in India by Hoechst (lndia) Ltd. In 1989, HIV anti bodies were found in the products manufactured by one M/s Bharat Serums and Vaccines Ltd., Mumbai. On this discovery, the Food & Drug Administration Authorities ordered the inspection of blood products manufactured by all the manufacturers to verify whether any of the products contained HIV anti bodies. As a result, the assessee's blood products were also inspected by the Food and Drug Administration authorities. The said authority took samples of batch No. 83 and found that the product of this batch so inspected tested HIV positive by Elisa test and also by Western Blot test. The company was ordered to withdraw and destroy all plasma and sera blood products manufactured by it as some of them had tested positive for HIV anti body. Accordingly, the assessee company had to withdraw and destroy all its blood products as called upon by the Commissioner, Food & Drug Administration. As a result of destroying the contaminated products, the assesses had incurred loss of about more than Rs. 2.00 crore which was written off in the books in the course of next three years and these loss were allowed as deduction for the purpose of assessment under the IT Act. The assessee stated that the German Company BWAG was fully aware that the kits supplied by it were defective, lost their strength and period and were completely useless. The assessee further stated that BWAG ought to have informed the assessee company that these kits were defective, but they deliberately withheld this information. It was further stated by the assessee that the testing kits were purchased from German Company through its marketing company in India, namely, Hoechst (India) Ltd., only on the conviction and representation that these kits were full proof and would not fail to test such contamination. The assessee company's Board took a serious view of this situation and ultimately decided to launch criminal proceedings against the supplier of the aforesaid kits. The assessee ultimately filed a criminal complaint against the supplier company for cheating, etc, under the provisions of Section 107, 109, 120, 120A, 120B, 269, 270415 and 420 of the Indian Penal Code read with relevant sections of the Drugs & Cosmetics Act, 1940. Subsequently, a settlement was arrived at between the assessee company and the German Company BWAG and its marketing company Hoechst(lndia) Ltd. in India, as a result of which an amount of Rs. 1.50 crore was paid to the assessee as full and final settlement of all claims of the assessee on account of damages suffered or to be suffered by the assessee company. The settlement was arrived at in writing vide compromise agreement dated 08.03.91. The assessee's case before the AO was that the amount of Rs. 1.5 crore received by the assessee is not in the nature of income but is a capital receipt not liable to tax in as much as the compensation of Rs. 1.5 crore received by the assessee was for discontinuance of assessee's business in certain blood products consequent upon appearance of HIV anti-bodies in some blood products, and compensation was against the loss of reputation and goodwill of the assessee and the fearful and horrendous consequences, for which the company had to go out of the business causing capital loss because of the suspension of this part of the business with a consequent loss of investment involved in the said business. It was also stated by the assessee that the receipt in question cannot be looked at from the point of view of compensation for loss of the stock that was destroyed because of appearance of anti-bodies in the blood products manufactured by the assessee company. The AO held that the compensation amount received by the assessee was not a capital receipt but business receipts liable to be taxed. The assessee's contentions were not found acceptable to the AO for the reasons as discussed by him as under:
Submissions given by the assessee company along with the citation quoted by them and the facts of the case have been closely examined and it is seen that the facts of the present case are totally different from the cases quoted by the assessee company in its support. The Bombay High Court case was in connection of cancellation of export licence for goods being landed at the prohibited port namely Durban. The case of Rajasthan High Court is on compensation given for taking over the right to levy excise duty by the Government. In the present case, no export licence or any right to levy excise duty has been taken away. In the present case, Government of India has not stopped the assessee company from manufacturing blood products. The only thing done by the Government was to ask the assessee company to destroy the blood products manufactured out of the defective kits used by the assessee company in various batches. There is no blanket ban nor any prosecution launched against the assessee company in its business of blood products carried on by them.
In the present case, the assessee company can still continue with business of blood products by importing fresh testing kits. There is no ban in continuing this business of the assessee company by the Government. It is thus seen that the manufacturing apparatus of the assessee company in the production of blood products are not at all destroyed. The only thing the Government has done is to ask the assessee company to destroy and withdraw the blood products made by it out of defective test kits imported by it. Assessee company has already been given deduction for this loss in earlier years. Details are as under:
Description A.Y. 89 -90 AY90-91 Total
Value of raw materials NIL 507116 507116
Semi-finished stock NIL 1069869 1069869
destroyed
Value of finished goods 1580787 5631040 7211836
destroyed
Goods returned and 4929232 6690642 1619874
destroyed
From the above, it may be seen that total sum of Rs. 2,04,08,695/-were debited to the Profit & Loss A/c during the AY 1989-90 and 1990-91 and has already been allowed. The compensation received on account of this loss should be in the nature of revenue receipt. Otherwise loss of Rs. 2,04,08,695/- should also have been taken as a capital loss and not revenue loss as done by the assessee company in the earlier assessments. Since the loss of Rs. 2,04,08,695 has already been taken as a revenue loss in the earlier assessment year, any compensation received out of this loss is also of the nature of revenue receipt.
As per Clause 7 of the Compromise dated 08.03.91, it is stated as under:
It is clearly understood by SIIL and Dr. Cycrus Poonawala, that in executing this deed neither bearing nor executing copy considered to have admitted whether expressly or implicitly the legitimacy or the maintainability of any of the claims made by SIIL on Behring and Hochest for the supply and use of the said Elisa Test Kits". From the above it is seen that after this compromise, assessee company has already withdrawn all its claims against Bhering or Hoechst in the compromise deed. There is no mention that the amount is paid for the loss of goodwill or the loss of name. This is apparently in the nature of compensation for various damages made. If the case of the assessee company was so strong, there was no need to withdraw the criminal proceedings. By giving a compromise with the defendant, assessee company has already made settlements and which is in the nature of civil suit proceedings and not criminal proceedings. The amount of compensation at Rs. 1.50,00,000/- is near the amount of direct loss of Rs. 2.04 crores made by the assessee company in these transactions.
It is further seen that since the goods were already destroyed. There was no damage to the reputation or the goodwill of the assessee company. In fact, reputation of the assessee company has been further enhanced in the market by destroying the complete batch of blood products manufactured in connection with defective test kits. No consumer nor any organization filed any civil suit or criminal suit against the assessee company for any substandard blood products manufactured by them over the years. By destroying these blood products, assessee company has in fact enhanced its prestige and the reputation in market as reliable supplier of blood products and other goods during the year. It is further seen that sales turnover of the assessee company is increasing year after year. There is no loss of the market nor any loss of the manufacturing apparatus pertaining to blood products of the assessee company.
It is seen that assessee company has taken pre-emptive action regarding its blood products by destroying its entire batch of blood products related to the defective kits. There is thus no loss of goodwill or reputation in the market. In fact, blood products were to be sold in the market in the name of M/s Serum Institute of India Ltd. In the market, consumer did not know that components used on manufacturing products were imported from Germany. Loss of reputation as reliable supplier has occurred in case of German Company M/s Behring Worke AG. So far as the ultimate consumer of assessee company is concerned, there is no loss of goodwill or reputation in the name of the assessee company. In fact, possible loss in goodwill and reputation has been totally stopped by the pre-emptive action taken by the assessee company in this connection. Since there is no loss of goodwill or reputation, compensation received in the compromise from the supplier of defective kits is in the nature of revenue receipt.
Considering all these facts, I am of the opinion that the compensation received via compromise dated 08.03.91 of Rs. 1.50 crore by the assessee company from M/s Hoechst (lndia) Ltd during the year is in the nature of capital receipts. This is thus added to the income of the assessee company during the year. It is to be further noted that the sum of Rs. 3,50,794/- credited to the capital reserved account pertaining to CCS has already been added by the assessee company vide its revised return dated 16.09.94. The revised return dated 16.09.94 is late and has been filed during the course of assessment proceedings. Since the CCS is part of income of the assessee company Under Section 28 of the IT Act, 1961, this should have been offered for taxation in the original return itself. In view of this, a penalty Under Section 271(1)(c) is initiated for not offering CCS amount of Rs. 3,50,794/- in the original return.
3.2. Being aggrieved with the AO's action in treating the sum of Rs. 1.50 crore as business income, the assessee preferred an appeal before the CIT(A). After considering the facts and circumstances of the case, and after considering the detailed submissions of the assessee, the CIT(A) confirmed the AO's action by observing and holding as under.
I have carefully considered the submissions of the appellant and facts in issue. The main issue for consideration is the nature of receipt of Rs. 1.50 crore by the appellant company. According to the appellant, the compensation amount is a capital receipt, as the amount had been paid on account of loss of goodwill, fame, name of business and other losses suffered due to presence of HIV antibodies, in some of the batches of product. It has been argued that the loss of reputation and goodwill has been to the extent that the company had to stop production of blood products permanently. In my view, the facts of the case did not show that the compensation paid is on account of loss of reputation and goodwill of the company. The criminal suit has been filed by the company under the provisions of Indian Penal Code and Drugs & Cosmetics Act, 1940 for the offence of cheating etc. In the application filed before the Judicial Magistrate, it is stated that the Serum Institute of India Ltd. suffered grievous loss of profits, trade, business, reputation and goodwill. It is also stated that the said company was compelled to completely stop the manufacture and sale of blood products. It is further stated that the accused had made false representation and unlawfully and willingly sold and supplied defective test kits to the appellant company. It is, thus, clear that when the suit was filed, the appellant was concerned with its loss of business in the line of blood products. It is interesting to note that even though the claim was for criminal liability, the company compromised the same for a monetary consideration of Rs. 1.50 crore and agreed to drop all claims made against Behring and Hoechst Co. In the compromise claim, it has also been said that no further claim would be made in case any claim is made against the appellant company by any persons or employees or former employees, etc. on account of alleged loss or damage caused to the appellant company by use of product, which had been subjected to or processed by Elisa Test Kit. This also goes on to show that the compensation is mainly for the loss of business or loss of profit and not for destruction of profit making apparatus. The company was not forced to close down its unit on account of defective test kit supplied to it. What it was asked was only to destroy the existing batches which were defective and the same was complied. After destroying the batches, the company had itself claimed its loss in the concerned years, as a revenue loss. The monetary settlement arrived at is clearly against defective goods and kits supplied to the assessee company and not for loss of reputation and goodwill in the business. The basis for arriving at the amount of compensation is unknown. Since the total loss of goods is of Rs. 2.04 corre, the agreed compensation of Rs. 1.50 crore can be said to be a re-compense for the loss which the company would have suffered on account of being out of market in manufacture of blood products. It is also noted that the suit filed by the company itself is not for damage to the reputation or goodwill, but for cheating etc., resulting form defective supply of test kits, which are used in the manufacture of blood products. It is also noted that none of the customers of the company had filed suits against the company for defective blood products, as these were redeemed from the market. Thus, the compromise amount can not be said to be payment for loss of goodwill or profit earning apparatus. The appellant company has relied on several cases to show that compensation amount was for loss of profit making apparatus. The facts and circumstances of the appellant's case are entirely different from the cases relied by the appellant company. In the case of Bombay Burmah Trading Corporation Ltd. 161 ITR 389, the compensation was paid, as lease rights were terminated by Burmah Government and compensation was paid for residuary rights. The Hon'ble Court held that the compensation received in the shape of logs for residuary rights was a capital receipt as it was for immobilization and destruction of capital asset. As already stated, in this case, the compensation is not for compulsory termination of business, but for supply of defective test kits. The decision to terminate the business is against a voluntary decision and not consequent to destruction or damage of the profit making apparatus as contended by the company. The other case relied is of Manilal Rajaram Mehta 30 ITR 53, wherein the damages were paid as licence for exporting goods was suspended and goods were illegally taken to Durban owing to negligence of the consignee. The decision in the said case would not apply, as the facts and circumstances are not par-material to the appellant's case. In the case of Barium Chemicals Ltd. 168 ITR 164, the contract was for erection of machinery and plant and machinery supplied was found to be defective. The work was abandoned by the supplier and the amount was received for non-fulfilment of contract. The court had held that the compensation amount was capital receipt, as the business of the company was in Barium Chemicals and compensation did not represent loss of profits. The ratio of this decision is not applicable, as the compensation claimed is not for defective supply of plant and machinery, but for test kits, which were used in the products manufactured by the company and which is an important input for production or manufacture of goods. The other cases relied by the appellant are also not at par with that of the appellant company. Having regard to all these facts and circumstances of the case, I am of the view that the compensation amount of Rs. 1.50 crore received by the company is in the nature of revenue receipt, as it is for defective supply of test kits, which are used by the appellant in manufacturing goods. The addition of Rs. 1.50 crore so made by the AO, is therefore, confirmed.
4. Still aggrieved, the assessee is in appeal before us.
4.1. The learned Counsel for the assessee, Shri B.K. Khare, C.A. has submitted that from the records and statements issued by Paul Ehrlics Institute, which approved Elisa Test kits supplied by the German Company BWAG through its marketing company In India, i.e. Hoechst (India) Ltd., it has discovered that BWAG were fully aware of the defect in Elisa test kits supplied by them to the assessee and the said kits had lost their quality, strength and period and, therefore, they have become completely useless, non-functional, un-reliable and lethal as much before the date of the recall of the defective kits by the Paul Ehrlich Institute. But, BWAG dishonestly, deliberately and fraudulently withheld from the assessee company these vital information regarding the defective nature of the kits supplied by them, Therefore, there was a dishonest and wrongful act on the part of the BWAG. Accordingly, a criminal complaint was filed by the assessee company against the BWAG and its associated persons and also against Hoechst(lndia) Ltd. for cheating the company by deliberately and dis-honestly supplied the defective kits knowing the real facts that the kits were defective. The supply of the test kits by BWAG to various people and the assessee company generated nation-wide controversy and the drug license granted to the Hoochst (lndia) Co. Ltd. was cancelled for the import of Elisa Test kits. It was further submitted that because of the defective test kits supplied by BWAG, the assessee's blood products sample covered by batch No. 83 detected HIV positive which resulted into the loss of assessee's reputation and goodwill in the eyes of the public. Since the company has landed in a very bad situation because of faulty kits, the assessee decided to stop manufacture and sale of blood related products as continuation of the same would be very risky affair for the assessee's business and that would have put the assessee into more danger that could effect the assessee company at the root of its business which might bring the company to extinction. The assessee, therefore, suffered a great grievous loss of profit, trade product, reputation and goodwill. It was further pointed out that in a criminal complaint filed by the assessee before the criminal court of law, it was stated that BWAG and Hoechst (India) Ltd. abetted conspiracy to commit an offence of cheating on the assessee company. He further submitted that in order to save the company's reputation and goodwill in the market, the company decided to file a criminal complaint against the BWAG and others rather than to seek compensation for monitory loss suffered by the assessee. He submitted that criminal action was necessary in order to avoid third party liability as also the rigor of the drug rules violations which constitute criminal act and the consequences such as punishment of imprisonment and other consequences are to be taken care off and hence the necessity of filing criminal complaint rather than going by civil suit as the assessee were not looking into at a monitory compensation as to stay off of great impounding peril. In other words, the learned Counsel for the assessee has put great emphasis on the point that the real issue for taking criminal action was to save the assessee company's name, reputation and goodwill and if this not averted, the entire business including manufacturing blood products of the assessee company could be in danger.
4.2. It was further pointed out that after filing the criminal complaint, BWAG and Hoechst (lndia) Ltd wanted to arrive at a settlement with the assessee. After deliberation, this was agreed to and a compromise petition was filed before the Court on 02.03.91. Some of the offences complained of were compoundable in nature being punishable under Sections 415 and 420, but some other offences arising under the Drugs and Cosmetics Act, 1940 could not be compounded. Thus, in the compromise petition, it was stated that the offences, which could be compounded could be taken as compromised and in respect of non-compoundable offences, it was stated that the assessee company would not like to lead any evidence. Accordingly, the court discharged the accused persons. He further submitted that the compromise agreement in writhing was also entered into vide compromise agreement dated 08.03.91. By referring to para 6 of the compromise agreement dated 08.03.91, the learned Counsel for the assessee contended that the compromise was entered into with a view to, i) to avoid prolonged litigation, ii) to prevent any damage to the good reputation of BWAG & Hoechst, iii) to maintain good business relationship with their clientele, iv) to compensate any damage suffered to the name and reputation of the assessee company and v) to persuade the assessee company to drop all claims against BWAG & Hoechst. He further submitted that the assessee company in para 1 at page 6 of the compromise agreement has confirmed that the amount of Rs. 1.50 crore is in full settlement of all claims against the aforesaid two companies and its associates. At this stage, he pointed out that no civil suit claiming damages was filed by the assessee against: these two companies. There was no monetary claim for any damages referred to in the criminal complaint, The learned Counsel for the assessee company by making a reference to the assurances given by the BWAG regarding the quality of the kits supplied and how the Government analyst found the kits defective, has submitted that the defective kits had led to serious loss of profit, trade, business reputation and goodwill. It had also led to complete stop of manufacture and sale of blood products. Therefore, the assessee's claim in the complaint petition was that these companies dis-honestly, deliberately cheated the assessee company by making false representation and as such, the amount paid by these two companies to the assessee were in respect of assessee's said claim made in the criminal complaint. The learned Counsel for the assessee, therefore summarized that BWAG and Hoechst had paid money to the assessee company more to save their skin from damages likely to result from the litigation, to avoid the prolonged litigation, to prevent the damage and reputation, to maintain their good business relationships and to persuade the assessee company to drop all proceedings. This receipt was, therefore, capital in nature.
4.3. He further submitted that if any receipt, is sought to be taxed as income by the revenue, the burden lies on the department to prove that it is within the taxing provision. In support thereof, he referred lo the decision of Hon'ble Supreme Court in the case of Parimisetti Seetaramamma reported at 57 ITR 532.
4.4. The learned Counsel for the assessee further contended that in order to decide as to whether the receipt is in the nature of income liable to tax, it is to be seen as to why the payment was made. It has already been explained that the payment was made to the assessee company to save the reputation of BWAG and Hoechst and to persuade the assessee company not to lead any evidence to prove their guilty. He, therefore, submitted that the payment made to persuade a person not to do certain things cannot have any characteristics of income. In this connection, he referred to the observation made by the Hon'ble Supreme Court in the case of Gillandere Arbuthnot & Co. Ltd. 53 ITR 283. At this stage, he again pointed out that the covenent in the compromise agreement was not to pursue the complaint filed by the assessee company which would otherwise result in loosing all the good reputation of BWAG and Hoechst in the market. It was further argued that the assessee company suffered a loss of about Rs. 2.00 crore on account of stock that was destroyed because of appearance of antibodies in the blood products manufactured by the assessee company, but that loss was never asked by the assessee company to be compensated by BWAG and Hoechst. The complaint was not filed for seeking compensation for the loss sustained by the assessee on account of stock destroyed. In other words, he staled that compensation paid by these two companies was in the real sense of term was the compensation for the loss of goodwill, reputation and source of business and was on account of loss caused in the basic structure and substratum of the assessee company. The compensation was for the loss of source of income and not of the loss of income itself. He referred to the decision of Hon'ble Delhi High Court in the case of CIT v. D.R. Sondhi 248 ITR 695 and also in the case of Oberoi Hotel Pvt. Ltd. v. CIT 236 ITR 903.
4.5. He further pointed out that the defective kits supplied to the assessee company were not a part of stock-in-trade but they were part of the equipment with which the assessee was manufacturing its products. It was used for testing the products. So it is a part of the assesee's p|ant and machinery. When kits were found defective, its defect effected entire products and thus there was impairment of capital structure itself. The assessee company had to completely stop the production of their blood products. Apart from that, the reputation in the market was ruined. He further stated that these medicinal products, unlike other mercantile products, are highly sensitive products and any rumour that the products are not reliable by itself enough to ruin ones business. Thus, the assessee's capital structure was badly effected. In that sense of the case, this compensation for loss i$ In the field of capital structure and so it is a capital receipt.
4.6. As the question as to why the assessee agreed to a compromise, it was submitted by the learned Counsel for the assessee that BWAG and Hoechst were eager for compromise in as much as the Hoechst import license was already cancelled, Hoechst's business would have to be otherwise winded up, and as because of the fact that this would be a costly and prolonged litigation, and in order to maintain good relationship, the assessee agreed for compromise. He further submitted that nothing further should be read in to this. At this stage, he pointed out that the authorities below was overlooked the fact that the assessee company had to stop completely the production of blood serum and that to that extent there was impairment of capital structure. He further stated that the destruction of stock and the loss resulted out there from was not a subject matter of the criminal complaint nor was BWAG has to compensate to It not the compromise deed makes any reference to it and, therefore, by making a reference that the compensation received by the assessee, were against the loss incurred by the assessee as a result of destruction of stock is not at all warranted. He further submitted that the authorities bellow had failed to understand the correct import of the compromise of the deed under which the payment was made.
4.7. Reasons for withdrawing the complaint as given by the assessee is that the strength of the criminal complaint can not be premised in Court of Law on perceived beliefs and assertions of the complainant, but on the availability of concrete clinching evidence that cah be demonstrated before the Court. It was further submitted that the offence is not decided unlike in a civil case on the principle of probabilities. There were obvious weaknesses in proving to the hilt in the court of Law the guilt on the part of BWAG and Hoechst. He further submitted that It was brought, to the notice of the department that it is very difficult to pin point out the real cause for appearance of anti-bodies. The degree of proof in the criminal case is so demanding that unless the case is fool-prof success In the prosecution is impossible.
4.8. The learned Counsel for the assessee in support of various arguments and contentions had relied on the following decisions.
i) Parimisetti Seetharamamma v. CIT (1086) 57 ITR 532 (AP)
ii) ITO v. Haryana Cement Sales Corporation and Ors. (1093) 202 ITR 849 (P&H)
iii) CIT v. Manilal Rayaram Mehta (1960) 30 ITR 53 (Bom)
iv) CIT v Shamsher Printing Press, Bombay
v) Bombay Burmah Trading Corporation Ltd v. CIT
vi) CIT v. Vazir Sultan and Sons (1959) 30 ITR 175 (SC)
vii) Kettlewell Bullen & Go Ltd v CIT
viii) CIT v. Chart & Chari Ltd
ix) CIT v. Automobile Products of India Ltd.
x) CIT v. Lakhdhir Lalji
xi) Controller of Estate Duty v. Maharani Raj Laxmi Devi
xii) Oberoi Hotel P Ltd. v CIT
5. The learned DR, on the other hand, relied on the orders of the authorities below. He submitted that the assessee's Iicense to manufacture and sale various products were never cancelled by the Food and Drug Administration Authority. The assessee company was never stopped form doing its business. The only direction given by the aforesaid authority was to destroy the blood products available at that material point of time when the product of one batch No. 83 was found HIDV positive. He further submitted that the assessee has not been able to prove that the defect in its blood product manufactured by the assessee company was only due to the defective kits supplied by the BWAG and Hoechst. He further submitted that there were various reasons for appearance of antibodies In the blood products made by the assessee. It was pointed out that the enti bodies found in the product cannot always and solely be attributed defective kits. Anti bodies could result because of absence of observation of good manufacturing practice which has pre-dominant role in the pharmacy Industry in general. It could be due to negligence of the staff in scientifically using the kits. Anti bodies could be also seen in the manufactured products even they were not present in the plasma at the time of test. He, therefore, contended that no direct link or nexus between the kits supplied by BWAG and Hoechst and the defects found in the blood products could be established by the assessee. In other words, he submitted that the defect found in the blood products were notthe direct result of kits used by the assessee company in testing the plasma. He further submitted that the criminal complaint Is by itself is not a determining factor to say that the compensation received by the assessee is of capital in nature. In this connection, the learned DR had invited our attention to the various terms and conditions of the compromise agreement entered into by the assesses with BWAG and Hoechst to demonstrate that whatever compensation paid to the assessee were on account of damages caused to the assessee's products which has also caused loss of business profit. He further submitted that as per Clause 6 of the compromise agreement the payment of Rs. 1.50 crore was in full and final settlement of the claims made by the assessee company in respept of damages alleged to have been suffered by the assessee Including the alleged damage to its fame and name and reputation and also in consideration of the assessee company agreeing to drop all claims against the BWAG and Hoechst and of their directors, former directors, and employees & former employees and agreeing not to institute any further proceedings in respect of all pr any of the claim or any other claims arising in future out of the use by the assessee company of Elisa Test Kits. He further contended that the assessee had suffered a loss by way of destruction of the goods to the extent of more than 2 crore which had been allowed as business loss in earlier years, and the amount received by the assessee from BWAG to compensate the assessee against the said loss of goods or products. He therefore submitted that the compensation was not on account of loss of source of income but was far the loss of income or profit and, thus, it was rightly brought to tax by the authorities below. It was further contended that the decision to discontinue the business of manufacturing and selling certain blood products was of assessee's company's own decision having regard to the inherent risk involved in the very nature of the said business. The assessee was not ready and willing to take very risk which is always present in the said line of business pf dealing in blood products. Therefore, the amount paid to the assessee company cannot be looked at from the point of view of compensation for loss pf source of assessee's income. The damages/compensation paid by the BWAG or Hoechst have nothing to do with the discontinuance of assessee's business in certain blood products. He, further, reiterated the AO's and CIT(A)'s contentions and reasons given by them in support of their conclusion.
6. We have considered the rival contentions of poth the parties and have carefully gone through the orders of the authorities below. We have deliberated upon the various decisions cited at the Bar. The only issue arises for our consideration is as to whether the amount of Rs. 1,150 crore received by the assessee from BWAG and Hoechst is subjected to tax under the provisions of Income Tax Act, 1961.
6.1 It is not in dispute that the assessee has a business, inter-alia, of producing and sale of various blood products. The assessee secured blood from donors and these were subjected to various tests before these were used for the manufacture of serum and one of the test is for detecting presence of H|V. For the purpose of various tests carried out for detecting HIV, the assessee company was using certain kits Including the kit called Elisa Test Kit. The assessee used kits manufactured by various companies which were available in the Indian market, The imported test kits which were available in the market at the relevant point of time are as under as stated by the assessee company in its "written note" on blood products manufactured by the assessee:
i) Abbott GMBH
ii) Wellcome Boroughs
iii) Behring
iv) ENI It was stated by the assessee in the note that the assesses used kits from all the above four manufacturers. However, Behring Kits were used mostly as they were comparatively cheap and also easy to handle and use while performing the test. It is also not in dispute that one particular batch of Elisa Test kits manufactured by Behring was withdrawn form market in Europe, It is also not in dispute that blood product of batch No. 83, amongst others, manufactured by the assessee was found containing HIV positive. On reading the letter dated 01.03,1989 of Food & Drug Administration, Mumbai it reveals that following Blood Products of the assessee company were found to be 'HIV Positive' for Anti-bodies:
1) Anti - D (RHO Immunoglo bulin B.B. Batch No. 83, Date of manufacturing - Oct. 88, and
2) S 11 Gama Globalin - Batch No. 19, date of manufacturing-Oct. 88.
In this letter, it was also slated that while manufacturing the Blood products from the blood donated by the donors, 31 blood donors Was found to be positive for antibodies as per the investigation/analysis from the National Institute of Virology, Pune, and so the donated blood collected by the assessee which is 'HIV positive' and used While manufacturing Blood products will not be appropriate from view point of public health. Further, it was also stated in the said letter that drugs manufactured by the assessee and checked by the National Institute of Virology were found to be anti-bodies positive as per list/details enclosed thereto vide Annexure "B". As a result thereof, the assessee had to destroy its blood products as directed by the Food and Drug Administration Authority and the assessee had to suffer loss of more than 2 crore, which were written off in the books from time to time, and which were allowed as deduction In the assessment for the relevant years. When it was noticed by the assessee company that its blood product was found defective, the assessee company took a view that the assessee could not trace out the HIV in the blood because of defective kits supplied by BWAG and Hoechst and, therefore, the assessee company, after making due deliberation and consultation, has taken a view that the said BWAG had falsely and deliberately misled the assessee company to purchase the Elisa test kits knowingly that the kits were defective and were already withdrawn form the market of Europe. The assessee company, therefore, filed a criminal compliant in the court of law some time In the month of July'90. However, ultimately, this complaint was withdrawn by the assessee company vide its petition dated 02.03.91 filed with the Judicial Magistrate, I class, Pune. In the withdrawal application, the assessee has stated that the assessee company had settled and compromised the disputes between it and the accused i.e. BWAG and Hoechst out of court and as such, the assessee company does not want to proceed with the prosecution of that complaint. It was also stated there that it has been agreed, decided and settled by and between the assessee company and the accused that neither of the parties would file any prosecution or suit against each other in respect of the aforesaid supply of defective Elisa Test Kit manufactured and supplied by the accused to the assessee company. This withdrawal petition was allowed by the learned Judicial Magistrate by saying that the offences Under Section 415 and 420 of IPC read with Section 34 of IPC are allowed to be compounded and the other offences under Drugs and Cosmetics Act, 1940 and offences Under Section 269, 270 of IPC are to be dropped as the assessee company i.e. the complainant did not wish to lead any evidence for the aforesaid non-compoundable offences, The learned Judicial Magistrate, therefore, acquitted the accused for the offences Under Section 415, 420 read with Section 34 IPC read with Sections 107, 109, 120, 120B IPC and the accused were discharged for the offences Under Section 260, 270 read with 107, 109, 120, 120B of IPC and the offences under Drugs & Cosmetics Act, 1940. Thereafter, the assessee entered into a written compromise for claims and damages vide agreement dated 08.03,91. The compliant filed by the assessee company was withdrawn on 02.03.91 as per the order of the Judicial Magistrate, passed on 02.03.91. However, this agreement of compromise for claims and damages was made In writing on 08.03.91 between the assessee and the BWAG & Hoechst. It Is, thus, clear that the compromise agreemet for claims and damages awarding a sum of Rs. 1.50 crore to the assessee was made or executed subsequent to the withdrawal of the criminal complaint.
6.2. At this juncture, we may state that in order to decide the true nature and character of the receipt of Rs. 1.50 crore and as to whether the amount received by the assessee partakes the character of a trade receipt or capital, it is necessary to have a look at the covenants or stipulations contained in the application filed by the assessee before the Judicial Magistrate seeking permission for withdrawing the criminal complaint and as well to the compromise agreement dated 08.03.91 entered Into by and between the assessee and the BWAG & Hoechst, 6.3 The application for withdrawing the complaint filed by the assessee before the Judicial Magistrate reads as under:
Application on behalf of the complainant is as follows:
1. The complainant has filed this complaint under Section 107, 109, 120, 120A, 120B, 269, 270, 415 and 420 of the Indian Penal Code read with Sections 10, 10A, 11, 13, 14 and 34 of the Drugs and Cosmetics Act, 1940 against the Accused, The court was pleased to issue process against all the accused,
2. The Complainant says and submits that he has settled and compromised the disputes between the Complainant and Accused out of Court as such the Complainant does not want to proceed with the prosecution of this complaint.
3. The Complainant seeks permission to compound offences under Section 415/420 of the Indian Penal Code in view of the fact and the circumstances mentioned above. As regards offences under Sections 269, 270 and offences under the Drugs & Cosmetics Act, 1940 in view of the discussions held with the Accused, the Complainant does not wish to lead any evidence.
4. In the circumstances, the Accused may be acquitted in respect of compoundable offences and complaint be dismissed for want of the prosecution in respect of other offences.
5. It is further submitted that it has been agreed, decided and settled by and between the complainant and accused that neither of the parlies shall file any prosecution/suit agains each other in respect of the cause of action for this complaint i.e. the supply of defective ELISA test kits manufactured and supplied by the Accused to the Complainant.
It is therefore prayed that the offices be compounded and permission be granted to the Complainant to withdraw the complaint and/or the complaint be dismissed for want of prosecution.
Pune 02.03.91 Sd/-
Sd/-
Complainant Advocated for Complainant ORDER OF THE JUDICIAL MAGISTRATE Readover to the complainant in the presence of his advocate. Accused No. 24 and advocate of accused No. 18 to 20 and 22 to 25 are present. Accused No. 1 to 17 and accused No. 21 are not served. Permission is granted and compounds the offence Under Section 415/40 Under Section 34 of IPC which is compoundable with permission. The offences Under Section 269, 270 IPC and offences under the Drugs * Cosmetics Act, 1940 are not compoundable. The Complainant does not wish to lead any evidence for the above non-compoundable offences, Hence, accused No. 18 to 20 and 22 to 25 are acquitted Under Section 320(8) Cr. PC for the offences Under Section 415/420 Under Section 34 IPC r/w. 107,109, 120, 120B IPC and they are discharged Under Section 245(2) Cr.PC for the offences Under Section 269, 270 r/w 107, 109, 120, 120B IPC and offences under Drugs & Cosmetics Act, 1940. The other accused No. 1to 17 and 21 are also discharged for all the offences alleged against them Under Section 245(2) Cr. PC. The case is dismissed for want of prosecution. The interim orders passed time to time are vacated. The bail-bounds of accused Nos. 19 and 25 stand cancelled.
Sd/-
(R.S. BHANDURGE) judicial Magistrate, Pune Cantonment Court, Dt. 02.03.91 6.4. The compromise agreement for claims of damages dated 08.03.91 entered into by and between the assessee and BWAC & Hoechst reads as under:
COMPROMISE FOR CLAIMS OF DAMAGES This deed made this Eighth day of March'91 between Behring Worke AG, a company registered under the laws relating to the companies in West Germany having its registered office at PO Box 1140 D-3550, Marburg (Lahn) 1, West Germany (hereinafter referred to as "Behring") Hoechst India Ltd., a company incorporated under the Companies Act, 1956, and having its registorod office at Hoechst House, Nariman Point, Bombay-400 021 (hereinafter referred to as "Hoechst" of the One Part and Serum Institute of India Limited, a company incorporated under the companies Act, 1956 and having its Registered office at 212/2, Hadapsar, Puna 411 028 (hereinafter referred to as "SIIL" which expression shall, unless repugnant to the context be deemed to mean and and include its successors and assigns) and Dr. Cyrus Ponnawala who represents and who has been authorized to represent all companion and entities controlled by him by him and by every member of his family and who has been authorized to sign this agreement of the other patt.
Whereas Behring is a renowned and reputed manufacturer of pharmaceutical products all over the world, and is in particular a manufacturer and distributor of Enzygnost Anti HIV micro for detection of HIV antibodies in plasma and sera (hereinafter referred to as Elisa Test Kits).
2. Hoechst has been appointed by Behring as the distributor of, among other, the said ELISA test kits in the territory of India.
3. Hoechst has imported the said ELISA Test Kits into India and has supplied them to various users of the said ELISA test kits including among them SIIL.
4. SIIL alleges that the said ELISA lest Kits were defective and that the use of the said ELISA test kits has caused damage to its products and that it has, as a consequerice, also caused a loss of business.
5. Behring and Hoechst deny each and every allegation made by the SIIL that the said ELISA tost kits supplied to SIIL wore in any way defective.
6. With a view to avoiding prolonged litigation and controversy and with a view to preventing any damage to the long established and impeccable reputation of Behring and Hoechst and of all of their associated or affiliated companies and their officers and with a view to maintaining good business relations with other manufacturers and consumers Behring and Hoechst have agreed to pay to SIIL the sum of Rs. 1,50,00,000/- in full and final settlement of all the claims made by the SIIL in respect of damages alleged to have been suffered by them including the alleged damage to its fair name and reputation and also in consideration of SIIL agreeing to drop all claims against Behring and Hoechst and all of their directors, former directors, employees and former employees and agreeing not to institute any further proceedings in respect of all or any of the claims or any other claims arising in future out of the use by it of the said ELISA test kits,
7. It is clearly understood by SIIL and Dr. Cyrus Poonawala, that in executing this deed neither Behring nor Hoechst can be considered to have admitted whether expressly or impliedly the legitimacy or the maintainability of any Of the claims made by SIIL on Behring and Hoechst for the supply and use of the said ELISA test Kits.
Now this deed made in consideration of the said sum of Rs. 1,50,00,000/- paid by Hoechst to SIIL, the receipt whereof SIIL hereby acknowledges, and in consideration of the covenants and release hereinafter contained Witnesseth as follows:
1. SIIL hereby confirms that the said payment is in full and final settlement of all claims and demands of any nature whatsoever made by SIIL against Behring, Hoechst and their associated or affiliated companies and their directors, former directors, employees and former employees and that no claim or demand of any nature whatsoever remains outstanding against any one or more of them as a result of the use by SIIL of the said ELISA test kits or otherwise.
2. Without prejudice to the generality of the language used in Clause 1 hereinabove, SIIL and Dr. Cyrus Poonawalla hereby confirm that they shall not at any time In the future insitute, or provoke the institution of, whether directly or indirectly, any proceeding of any manner whatsoever, whether by themselves or by association with any other person, against Behring, Hoechst and any one or more of their directors, former directors employees and former employees, in respect of any damage that they have allegedly suffered or that they may suffer at any time in the future by the use of the said ELISA process and in respect of any claims for dameges which third parties may prefer against SIIL or Dr. Cyrus Poonawella in respect of the use by them of any of the products of SIIL
3. In consideration of the said sum SIILL, and Dr. Cyrus Poonawalla hereby release and discharge Behring, Hoechst all of their directors, former directors, employees and former employees from all claims, actions, demands and other proceedings whatsoever in respect of the alleged damage caused to SIIL and Dr. Cyrus Poonawalla.
4 In the event of a claim being made against SIIL by any person/s by employee or former employees, govemment at any time in the future on account of any alleged loss or damage alleged to have been caused by the use of any product of SIIL which has been subjected to or processed by the said ELISA Test Kit SllL hereby indemnifies Behring and Hoechst that SIIL shall not claim from Behring or Hoechst or any of their directors, former directors, employees, former employees and compensation that the court may ask SIIL to pay and SIIL shall not directly or indirectly make Hoechst or Behring or any of their directors, former directors, employees or fermer employees as defendants in such proceedings in any court of law Signed and delivered by and on be and on behalf of Behring Worke AG. By Dr. E Baltin in the presence of Signed and delivered by and on behelf of Hoechst India Limited in pursuance of the Board Resolution dated 19th January, 1991 by Dr. E. Baltin.
Signed and delivered by Dr. Cyrus Poonawata on behalf of Serum Institute of India Limited in pursuance of the Board Resolution dated 25 th January, 1991 in the presence of Signed and delivered by Dr, Cyrus Poonawalla on his own behalf and on behalf of all companies and entitles controlled by him. In the presence of 6.5. The application for withdrawing the complaint and the compromise agreement for claims and damages were made y the assessee out of his free will and desire after understanding and deliberating upon the contents thereof as is clear from the assessee company Board's resolution dated 25th January, 1991 which reads as under:
Resolved that the Board of Directors of Serum institute of India Ltd. have duly considered today the draft agreement pertaining to the out of court settlement between the company and M/s Behnngwerke AG, Marburg, Germany and M/s Hoechst India Ltd., Bombay, vide Complaint No. 303 of 1990 filed in the Court of Judicial Magistrate, First Class, at Pune (Cantonment Court) filed by the Company's duly authorized Principal Officer and Director Quality Assurance, Dr. SS Jadhav, and have duly approved the said settlement;
Resolved further that Dr. CS Poonawalla, Chairman of the Company, be and is hereby authorized to sign the agreement on behalf of the Company;
Resolved further that Dr. SS Jadhav, duly authorized Principal Officer and Director Quality Assurance, be and Is hereby authorized to withdraw the said Complaint No. 303 of 1990 filed in the Court of Judicial Magistrate, First Class, at Pune aginst M/s Behringwerke AG, Marburg, Germany and M/s Hoechst india Ltd. Bombay, subject to the settlement finally arrived at.
6.6. On reading Clause 5 of the application seeking permission to withdraw the complaint, it is seen that it was agreed, decided and settled by and between the assessee company and BWAG & Hoechst that neither of the parties shall file any prosecution/suit against each other in respect of the cause of action for that complaint i.e. the supply of defective ELISA Test Kits manufactured and supplied by the BWAG & Hoechst to the assessee company. In other words, both the parties have agreed not to file any prosecution as well as the suit against each other In respect of the matter related to the supply of defective ELISA Test Kits manufactured and supplied by the BWAG and Hoechst to the assessee company, it is thus clear that no civil suit was also agreed to be not filed against each other in respect of the cause of action arising from supply of defective ELISA Test Kits. This condition of mutual agreement contained in para 6 of the application of withdrawing the complaint clearly establishes that both the parties were prohibited from filing any prosecution or suit in respect, of the cause of action arising from supply of ELISA Test Kits. Therefore, besides any prpsecution, both the parties have also specifically agreed not to file any suit against each other in respect of the said cause of action related to the supply of defective ELISA Test Kits The cause of action for supply of defective ELISA Test Kits may be of criminal or civil in nature or both as it depends on the facts and circumstances of a given case. Mere because a criminal prosecution has been instituted in respect of a given cause of action, it does not debar the complainant from filing any civil suit also if it |s otherwise permissible or maintainable in the eyes of law contained in that behalf. It is also not in dispute that under the law of the land, the assessee company was also entitled to seek compensation for damages of stocks destroyed by the assessee as a result of appearance of anti bodies HIV in the blood products manufactured by the assessee company. There was no bar under the eyes of law to file such suit for compensation, but by this agreement entered into by and between the assessee company and BWAG and Hoechst, the assessee itself had agreed not to file any suit against these parties in respect of the cause of action arising from supply of defective ELISA Test Kits. Therefore, not filing any suit for recovery of damages on account of stocks destroyed by the assessee was also a consideration for a compromise entered into by and between the assessee and BWAG and Hoechst.
6.7. Further, on reading of Clauses 4 & 5 of the compromise agreement for claims of damages dated 08.03.91, it is seen that the assessee company alleged that the ELISA Test Kits were defective and the use of the same has caused damages to its products and as a consequence thereof, it has also caused a loss of business. In other words, the assessee company alleged that use of the defective ELISA Test Kits caused damaged to its products and loss of its business. Therefore, the damage to the assessee's products was due to defective ELISA Test Kits as alleged by the assessee itself as evident from Clause 4 of the said agreement. However, on the other hand, BWAG & Hoechst at the same time had denied each and every allegation made by the assessee company that the ELISA Test Kits supplied by them to the assessee company were in any way defective as would be appearing from the Clause 5 of the said agreement. It is not in dispute that this agreement is a mutual agreement executed and made by the both the parties. Though the BWAG & Hoechst denied that the said ELISA Test Kits supplied to the assessee company were in any way defective, but with a view to avoid prolonged litigation and controversy and with a view to prevent any damage to the long established and impeachable reputation of BWAG & Hoechst and all of their associated or affiliated companies and their officers and with a view to maintain good business relationship with other manufacturers and consumers, BWAG & Hoechst had agreed to pay to the assessee company the sum of Rs. 1.50 crore in full and final settlement of all the claims made by the assessee company in respect of the damages alleged to have been suffered by them including alleged damaged to its fair name and reputation and also in consideration of assessee company agreeing to drop all claims against the BWAG & Hoechst and all of their directors, former directors, employees and former employees and agreeing not to institute any further proceedings in respect of all or any of the claims or any other claims arising in future out of the use by the assessee company of the Elisa Test Kits as it is clear from the Clause 6 of the mutual compromise agreement dated 08.03.91. On reading the said clause, it is, thus, clear that the sum of Rs. 1.50 crore was paid to the assessee company in full and final settlement of the following claims:
i) All the claims, actions and demands made by the assessee company in respect of the damages alleged to have been suffered by the assessee company by use of the Elisa Test Kits.
ii) All the claims include the claim in respect of damages to the assessee's fame, name and reputation.
iii) The amount is also paid in consideration of the assessee company agreeing to drop all claims whatsoever against the BWAG & Hoechst and all of their directors, former directors, employees and former employees.
iv) The amount is also paid in consideration of the assessee company agreeing not to institute any further proceedings in respect of all or any of the claims or any other claims of any nature whatsoever arising in future out of the use of the said Elisa Test Kits by the assessee company.
6.8. It is, thus, clear that the said sum of Rs. 1.50 crore was not paid only on account of damages to the assessee company's fame, name and reputation, but it covers all types of claims either in presentia or may arise in future out of the use of the Elisa Test Kits. In other words, it includes all claims whether maintainable under civil or criminal law or tort or under any other provisions of law for time being in-force. The assessee's contention that the said amount of Rs. 1.50 crore was paid to the assessee wholly and exclusively to compensate the damages suffered to the name and reputation of the assessee company and to the source of its income is not found to be supported by the terms and conditions embodied in the compromise agreement and in the application for withdrawing the criminal complaint. The compensation for damages suffered to the name and reputation of the assessee company is one of the item included in the total or all the claims made or to be made by the assessee company in respect of the damages that might have been suffered by the assessee company. The language of Clause 6 is very clear so as to one can say that the sum of Rs. 1.50 crore was paid to the assessee company in full and final settlement of all the claims whatsoever arising out of the use of the Elisa Test Kits. The claim paid to the assessee company was not only for the purpose of withdrawing the alleged criminal complaint by the assessee company against the BWAG & Hoechst but it is in connection to or related to all the claims that may arise from the use of the said Elisa Test Kits. Whatever stated in Clause 6 of the Preamble to the agreement is further strengthened by the condition No. 1 which states that the assessee company thereby confirmed that the payment of Rs. 1.50 crore was in full and final settlement of all claims and demands of any nature whatsoever made by the assessee company against the BWAG & Hoechst and their associated or affiliated companies and their directors, former directors, employees and former employees and that no claim or demand of any nature whatsoever remains outstanding against any one or more of them as a result of the use by the assessee company of the Elisa Test Kits or otherwise. It is, thus, clear that the payment was made in full and final settlement of all claims and demands of any nature whatsoever. All claims and demands of any nature whatsoever undoubtedly includes the claim for the damages caused to the products of the assessee company and a consequence thereof a loss to the assessee's business or profit. The intention of both the parties that the payment is being made in full and final settlement of all claims and damages of any nature whatsoever suffered by the assessee company is very much clear and explicit from the stipulations and covenants agreed to by the assessee and BWAG & Hoechst as found embodied in the withdrawal application as well as in the compromise agreement dated 08.03.91. On reading condition No. 2 of the mutual agreement, it is also clear that the assessee company had confirmed that it shall not at any time in the future institute, or provoke the institution, whether directly or indirectly of any proceeding of any manner whatsoever, whether by themselves or by association with any other person, against the BWAG & Hoechst, and any one or more of their directors, former directors, employees and former employees in respect of any damage that the assessee company have allegedly suffered or that the company may suffer at any time in the future by the use of the Elisa Test Kits and in respect of any claim for. damages which third parties may prefer against the assessee company or its directors in respect of the use by third parties of any of the products of the assessee company. This stipulation also clearly establishes and proves that the settlement was arrived at to settle all claims whatsoever and not to institute any proceedings of any manner whatsoever in respect of any damage. Therefore, all or any damage as well as all or any proceedings in any manner are covered by the settlement. The payment of Rs. 1.50 crore is, thus, in full and final settlement of all claims and demands of any nature whatsoever that may arise at any time in any proceedings of any manner whatsoever. The condition 3 also speaks of releasing and discharging BWAG & Hoechst and all of their directors, former directors, employees and former employees from all claims, actions, demands and other proceedings whatsoever in respect of the alleged damage caused to the assessee company and its directors. Condition No. 4 further states that in the event of a claim being made against the assessee company by any person or persons whomsoever or the Government at any time in future on account of alleged loss or damages alleged to have been caused by the use of any product of the assessee company which were subjected to or processed by the Elisa Test Kits, the assessee company had agreed to indemnify by BWAG & Hoechst that the assessee company shall not claim from BWAG & Hoechstand any of their directors, former directors, employees and former employees any compensation that the court may ask the assessee company to pay and the assessee company shall not directly or indirectly make BWAG & Hoechst or any of their directors, former directors, employees and former employees as defendants in such proceedings in any court of law. It is, thus, clear that the payment of Rs. 1.50 crore was made in full and final settlement of all sorts of claims whatsoever that may arise by use of Elisa Test Kits. At this stage, we may take note of the assessee company's Board's resolution dated 2nd April, 1990 (page 32 of the paper book filed by the assessee) where it is stated that the Chairman informed the Board that company was contemplating a legal action against M/s Hoechst(lndia) Ltd., and their principal, M/s Behring Werke AG, West Germany, for having willfully, deliberately and maliciously supplied to the assessee company defective test kits used for the detection of antibodies to HIV, resulting in substantial pecuniary losses coupled with loss of good will and reputation. It makes clear that the assessee company was also of the view that the use of defective test kits has resulted in substantial pecuniary losses coupled with loss of good will and reputation. Therefore, the pecuniary losses suffered by the asses see was also a factor for initiating a legal action against BWAG and Hoechst.
6.9 It is well settled that the term "income" under the IT Act is very wide and varied in its import. It is an expression of elastic ambit. It has been held by the courts times and again that the term "income" defined under the IT Act is not an exhaustive but inclusive. It has also been held times and again that basically, in order to decide whether the receipt is capital or income, what has to be examined is the character of the receipt in the hands of the receiver. It is also well settled that in order to decide whether the receipt is capital or income, the receipt has to be examined from a commercial point of view. The capital receipts in the hands of one may be income in the hands of another. In the case of CIT v. Sindhia Works Ltd , the Hon'ble jurisdictional Mumbai High Court has held that so far as fiscal provisions of the Income Tax are concerned, whenever there is a receipt of an amount by an assessee, it is not the nature of the receipt under the general law that determines its nature for the purpose of IT Act but the receipt would have to be considered under the provisions of IT Act from the commercial point of view. In this connection, we may refer to another decision of the jurisdictional High Court reported in 216 ITR 321 at page 325 in the case of CIT v. Presidency Co-operative Housing Society.
6.10 It is also well settled that whether, in a particular case, payments were capital receipts or not would depend upon the facts and circumstances of the case. It is not possible to lay down any single test as infallible or any single criterion as decisive in determination of the question which must ultimately depend on the facts of the particular case and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision.
6.11 The Hon'ble Supreme Court in the case of CIT v. Bombay Burmah Trading Corporation affirming the decision of the Hon'ble Bombay High Court in Bombay Burmah Trading Corporation Ltd. v. CIT has held as under:
Extracted from Head Notes -
If there was any capital asset, and if there was any payment made for the acquisition of that capital asset, such payment would amount to a capital payment in the ands of the payee. Secondly, if any payment was made for sterilization of the very source of profit-making apparatus of the assessee, or of a capital asset, then that would also amount to a capital receipt in the hands of the recipient. On the other hand, if forest leases were merely stock-in-trade and payments were made for taking over the stock-in-trade, then no question of capital receipt arises. The sum would represent payments of revenue nature or trading receipts. Whether, in a particular case, payments were capital receipts or not would depend upon the facts and circumstances of the case.
Normally in trade, there are two types of capital, one circulating capital and the other fixed capital. Fixed capital is what the owner turns to profit by keeping it in his own possession; circulating capital is what he makes profit of by parting with it and letting it change hands. Therefore, circulating capital is capital which is turned over and in the process of being turned over, yields profits or loss.
What are capital assets in the hands of one person maybe trading assts in the ands of another. The determining factor is the nature of the trade in which the asset is employed. Compensation received for immobilization, sterilisation, destruction or loss, total or partial, of a capital asset would be capital receipt. If a sum represented profit in a new form, then that would be income but where the agreement relates to the structure of the assessee's profit making apparatus and affects the conduct of the business, the sums received for cancellation or variation of such agreement would be capital receipt.
6.12 In the case of Kettlewell Bullen & Co. Ltd. v. CIT , the Hon'ble Supreme Court has held as under:
Whether, a particular receipt is capital or income from business, has frequently engaged the attention of the courts. It may be broadly stated that what is received for loss of capital is a capital receipt: what is received as profit in a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction.
After considering various decisions, it was further held as under (page 272):
These cases illustrate the principle that compensation for injury to trading operations, arising from breach of contract or in consequence of exercise of sovereign rights, is revenue. These cases must, however, be distinguished from another class of cases where compensation is paid as a solatium for loss of office. Such compensation maybe regarded as capital or revenue : it would be regarded as capital, if it is for loss of an assert of enduring value to the assessee, but not where payment is received in settlement of loss in a trading transaction.
After analyzing a number of cases, the court observed that the following satisfactory measure of consistency in the principle is disclosed (page 282):
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 his 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 he 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.
6.13 Further, the Hon'ble Supreme Court in the case of Gillanders Arbuthnot & Co Ltd v. CIT held:
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 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.
There is no immutable principle that compensation received on cancellation of an agency must always be regarded as capital.
Compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of the agency terminated, or for loss of goodwill, is prima facie of the nature of a capital receipt.
6.14 We may also refer to a decision of the Hon'ble Supreme Court in the case of CIT v. Best & Co. P Ltd. , where it was held and observed as under:
Held, (i) that the compensation agreed to be paid was not only in lieu of the loss of the agency but also for the respondent accepting a restrictive covenant for a specified period;
(ii) that the restrictive covenant was an independent obligation which came into operation only when the agency was terminated and that part of the compensation which was attributable to the restrictive covenant was a capital receipt and hence not taxable.
Break v. Robson (1942) 25 Tax Cas. 33 and Gillanders Arbuthnot & Co Ltd v. CIT followed.
(iii) That, on the facts, that part of the compensation received towards loss of the agency was a revenue receipt, as the loss of the agency was only a normal trading loss.
Gillanders Arbuthnot & Co Ltd v. CIT relied on
(iv) That, if compensation was paid in respect of two distinct matters, one taking the character of a capital receipt and the other of a revenue receipt, there was no principle which prevented its apportionment between the two matters. Difficulty in apportionment was not a ground for rejecting the claim either of the revenue or of the assessee. Therefore, apportionment had to be made of the compensation in this case on a reasonable basis between the loss of the agency in the usual course of business and the restrictive covenant.
Whether compensation received by an assessee for loss of agency is a capital or a revenue receipt depends upon the circumstances of each case. But before coming to the conclusion one way or the other, many questions have to be asked and answered: What was the scope of the earning apparatus or structure, from physical, financial, commercial and administrative standpoints? If it was a business of taking agencies, how many agencies had it, what was their nature and variety, how were they acquired, how were one or some of them lost and what was the total income they were yielding? If one of them was given up, what was the average income of the agency lost? What was its proportion in relation to the total income of the company? What was the impact of giving it up on the structure of the entire business? Did it amount to a loss of an enduring asset causing an unabsorbed shock dislocating the entire or a part o earning apparatus or structure? Or, was the loss an ordinary incident in the course of the business? But these questions can only be answered satisfactorily if the relevant material is available to the income-tax authorities. The evidence of witnesses in charge of the business, the relevant accounts and balance-sheets of the assessee before and after the loss, other evidence disclosing the previous history of the total business and the relative importance of the agency lost and the present position of the business after the loss of the said agency have to be scrutinized by the department.
The Supreme Court did not lay down in CIT v. Chari & Chari Ltd that the burden on the revenue to establish that an income was taxable was immutable in the sense that it never shifted to the assessee : When sufficient evidence, either director circumstantial, in respect if its contention was disclosed by the revenue, an adverse inference could be drawn against the assessee if he failed to put before the department material which was in his exclusive possession.
While the incomer-tax authorities have to gather the relevant material to establish that the compensation given for the loss of agency was a taxable income, adverse inference could be drawn against the assessee if he had suppressed documents and evidence, which were exclusively within his knowledge or keeping.
6.15 In the case of Oberoi Hotels P Ltd v. CIT reported in 236 ITR 903 (SC), after considering the judgment in the case of Kettlewell Bullen & Co Ltd v. CIT , it is laid down by the Hon'ble Supreme Court as under:
It may be broadly stated that what is received for loss of capital is a capital receipt : what is received as profit in a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. Whereon 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 his 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.
In this case, it was further observed that:
The question whether the receipt is capital or revenue is to be determined by drawing a conclusion of law ultimately from the facts of the particular case and it is not possible to lay down any single test as infallible or any single criterion as decisive. This Court in the case of Karam Chand Thapar & Bros P Ltd v. CIT , discussed and held that in CIT v. Chari & Chari Ltd. , it was held that ordinarily compensation for loss of an office or agency is regarded 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 a 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 maybe terminated and fresh agencies may be taken. Thereafter the Court held that it was difficult to lay down a precise principle of universal application but various workable rule's have been evolved for guidance.
6.16 Similar analogy or proposition has also been laid down in other cases relied on by the Id counsel for the assessee and hence we feel no need to discuss those cases separately.
6.17 Keeping in mind the above-stated legal position, we revert to the facts and circumstances of the present case to find out the true and correct nature and character of the payment amounting to Rs. 1.50 Crore paid by BWAG and Hoechst to the assessee company. The complaint withdrawal application and compromise agreement was made by the assessee company after considering and agreeing to the terms and stipulations contained therein, which have already been reproduced above herein, and have been carefully perused by us. In the withdrawal petition, it has been stated by the assessee company that the assessee company has settled and compromised the disputes between it and BWAG and Hoechst etc. out of Court. The out of Court compromise Agreement made on 8.3.1991 shows that the BWAG and Hoechst has denied each and every allegation made by the assessee company that the ELISA test kits supplied to the assessee company were in any way defective as is clear from Clause (5) of the Preamble to the said compromise agreement. On the other hand, the assessee company has alleged in the said agreement that the ELISA test Kits were defective and that the use of the ELISA test Kits has caused damages to its products and that it has, as a consequence, also caused a loss of business as is revealed from Clause (4) of the Preamble to the said Compromise agreement. Therefore, the question as to whether ELISA test Kits supplied by BWAG and Hoechst to the assessee were defective or not was not decided in either way. The presence of anti-bodies HIV in the blood products of the assessee company was not solely due to ELISA test Kits as the assessee company has itself given some other reasons or causes for the same, which are reproduced as under:
Anti bodies found in the production not always be attributed to defective kits. Anti-bodies could result because of absence of observations of GNP (Good Manufacturing Practice) which has a predominant role in the Pharma industry in general.
Serum Institute of India Ltd. has not carried a validating test before the kit was used.
Negligence of the staff in scientifically using the kits could also be responsible for appearance of anti-bodies.
Anti-bodies could be seen also in manufactured products even though they were not present in the Plasma at the time of test.
6.18 Therefore, Anti bodies found in the product Can not always be attributed to ELISA TEST KITS supplied by BWAG and Hoechst. Some other cause/s could also be responsible for appearance of anti - bodies. However, it is pertinent to note that though BWAG and Hoechst denied and disputed the allegation that ELISA Test Kits were in any way defective, they had still agreed to pay the assessee company the sum of Rs. 1.50 crore as compensation for losses referred to in the Compromise Agreement. The reason for entering into Compromise and agreeing to pay the said sum are described in the said Agreement as under:
i) To avoid prolonged litigation and controversy;
ii) To prevent any damage to the long established and impeachable reputation of BWAG and Hoechst and of all of their associated or affiliated companies and their offices;
iii) To maintain good business relations with other manufacturers and consumers 6.19 Thus, it is clear that the reason for entering into compromise and agreeing to pay the assessee company the aforesaid sum of Rs. 1.50 crore was not that the Kits supplied were defective, but was to avoid prolonged litigation and controversy, to prevent any damage to their reputation and to maintain good business relations with other manufacturers and consumers. It was a wise business decision of a business man. It has to be looked upon from the commercial point of view. The decision of BWAG and Hoechst to pay the said sum has nothing to do with the assessee's ultimate own decision to discontinue the business of dealing in blood products, which was taken by the assessee due to inherent risk involved in the very nature of the said business. The assessee company was not restrained for all times to come from carrying on business in blood products. It was altogether a different matter that one has to observe and comply with the rules and regulations of a given licence or permit. Mere because one has to observe, comply with and abide by the rules and regulations of a given licence and/or permit, a violation thereof may lead to a prosecution, is by itself not a sufficient and determining criteria to say that one has been restrained from doing business. Business enterprises have to abide by the rules and regulations of a given licence or permit granted to carry on any business. Business enterprises have to accept all these as part of the game of doing business. They are in no way to be treated as hardships or restraints. Business involves assumption and absorption of risks, challenges, threats and obligations, windfalls and economic power. Legal obligations are part of the package within the frame-work of which business enterprises have to function. To comply with the terms and conditions of a given licence or permit is a normal incidence of a business being carried on by anybody else. It is also of a common knowledge that some kind of risk, more or less, is always present in all the business. The nature of risk varies from case to case. If one does not like to take a risk inherently involved in one line of business and thus decide not to carry on said business can not be regarded a basis to conclude that he has been compelled by others to go out of the said business. It is stated by the assessee company that appearance of antibodies HIV in blood products has shocked the assessee company and thereby the assessee has decided not to continue the said line of business any more, otherwise, it might affect the assessee's other products and in long run may cause extinction of business. As already stated above, the appearance of anti-bodies HIV in the blood products could be for several reasons. Even anti-bodies HIV was found in blood collected by the assessee company from the donors as is clear from the Food and Drug Administration Department's letter dated 01.03.89. Therefore, the risk of HIV-anti-bodies to be found in the blood products is normal incidence of this line of business. It is inherent in it. The assessee has itself admitted the position that Anti-bodies found in the product cannot always be attributed to defective Kits and antibodies could result because of absence of observation of Good Manufacturing Practice which has a predominant role in the Pharma Industry in general. The assessee has also stated that it has not carried a validating test before the Kit was used. Negligence of the staff in scientifically using the Kits would also be responsible for appearance of anti-bodies. Anti-bodies could be seen also in manufactured products even though they were not present in the Plasma at the time of test. In this connection, the comment of P K Sholapurwalla on the views expressed by Mr Phiroze Vakil and Mr Ram Jethmalani, as desired by the assessee company for the purpose of complaint against Hoechst are also relevant, which are reproduced as under:
Name of the company: Serum Institute of India Ltd., Bombay Inter-office communication From: P K Sholapurwala To :Dr CS Poonawalla Date: 23rd April 1990 Copy to: Dr JM Mehta/Dr S.V. Kapre/Dr SS Jadhav Subject: Complaint against Hoechst Confidential As desired by you, my comments on the views expressed by Mr Phiroze Vakil and Mr Ram Jethmalani are as follows:
Length of the complaint: Mr Phiroze Vakil (PV) felt that it should be reduced to 5/6 pages. Mr Ram Jethmalani (RJ) felt that lit should be reduced to 4 pages.
Conspiracy: Neither PV nor RJ felt that there is any good evidence for sustaining a theory of conspiracy. I have also not come across any hard evidence in this connection. A Judicial Court has no use for suspicions and assumptions. As a matter of fact, in this case, the tables could be turned on us. Hoechst (H) can maintain that they had imported the product at the request of Drugs Controller of India (DCI) to help out the country. DCI will firmly support H by placing its right hand on the heart and stating that Indian Manufacturers through their criminal negligence had placed the country in a sudden and grave danger of an AIDS epidemic. Since the Indian products were not at all good enough for the country, terrible vacuum of life saving Blood Products had developed and he had no option but to get the products imported immediately to alleviate the sufferings of the Indian community. The DCI wouldl further maintain that not only Hoechst was allowed to import but half a dozen other people also were allowed to import and this would show conclusively that neither H nor DCI had any ulterior motive in the transaction. In fact before the Court, both of them would pass off knights in shining armour come to the rescue of the country.
On this count, there is also a possibility of H hitting us back on ground of false and vexatious prosecution and even defamation. Since we have no evidence in this connection, our defence could be quite embarrassing.
Damages: According to Dr Kapre, we have not used the Elisa Kits of H in the proper way. According to International Good Manufacturing Practice, we should have validated the Kits before using them. This we have not done. In view of this, if anything goes wrong, we cannot hold H or anybody else responsible excepting our on selves. Under the circumstances, any future claim for damages, will not be sustainable.
Cheating: As per both P V and RJ, H is responsible for cheating. This view is also borne out completely by the evidence. In my view also, for whatever it counts, we are here on a sound wicket. The offence of cheating can be analysed into three parts.
1) Supply of sub-standard kit. (If this has happened after announcement of sub-standard nature by the German Drug Controller).
2) Not to inform us about the sub-standard nature of the kit when it came to the notice of H.
3) When on our own, we inquired of H, Bombay (Dr Schick), h cheated us by suppressing the subsequent inconvenient protocol and supplying an earlier good protocol which was no more valid. (Here also, it may be added that Dr Schick appears to be operating on deputation from Behring for H. If this is so, then whatever liability DR S has created goes to the account of H and not Behring).
In addition to Section 415 IPC dealing with cheating, RJ recommended two more Sections 269 and 270 which deal with negligence and malignant Acts likely to spread infection of disease dangerous to life. This appears to be also in order. RJ also recommended Section 304-A - causing death by negligence. Though this section is justified in our own interest, I would ponder before utilizing the same. It could have a backlash on us also.
Drugs Act: RJ pointed out that offence under Drugs Act cannot be utilized since the particular 'drug' Elisa Kit has not been included in a particular schedule where it should be included before offence connection with this 'drug' can be cognized. As RJ was rather rapid in dealing with this matter, I would like to hear further from Dr Jadhav on this issue before I could give any definite opinion of my own (again for whatever it is worth).
Action: We should go ahead with the limited objective of established cheating by H without spoiling the case by uncalled for exaggerations. Action under the Drugs Act can also be taken if ultimately some suitable section under this Act is identified.
Sd/-
(P.K. Sholapurwala) 6.20 In the light of the foregoing facts and discussion, one can safely say that supply of ELISA TEST KITS by BWAG and Hoechst to the assessee company is not proved or established to be a factor or cause for assessee's running out of its business of dealing in blood products. The tests carried out by Food and Drug Administration Department revealed in almost all cases of blood manufacturing companies that there was contamination. The assessee company could have continued to deal in blood products by using other brands of Kits available in the market. There was no complete restraint on the assessee in carrying the said line of business of blood products. The sterlisation, if any, of the very source of profit making apparatus, here source of blood product, is not attributable to the use of ELISA Test Kits supplied by BWAG and Hoechst nor the intention of both the parties while making the settlement at Rs. 1.50 crores was to compensate the assessee for sterilization of the very source of profit making apparatus of the assessee company. Having regard to the cumulative effect of the terms and conditions of compromise agreement and other surrounding circumstances as discussed or pointed out in foregoing paras, it is clear that the payment of Rs. 1.50 crore to the assessee is on account of injury or damages to the trading transaction or operations or activities including loss of reputation and goodwill of the assessee company. The payment is not found to be on account of depriving the assessee from its very source of income. The appearance of anti-bodies HIV in the blood products was a normal incident of the Pharma business inasmuch as anti-bodies HIV was found in the blood collected from the donors. The damages resulted out there-from is thus a normal incident of the business of dealing in blood products. The discontinuance of this line of business by the assessee was due to assessee's unwillingness to take any risk inherently involved in the said line of business as the assessee was of the opinion that contamination to be found in blood products, which might be present for various reasons, might mean cessation of the assessee company's operations not only in blood products but also in non blood products, i.e. operation in vaccines which has continuously been carried on by the assessee till date. In these facts and circumstances of the present case, the discontinuance of one line of business of blood products by the assessee can not be treated as a loss of capital or very source of profit making apparatus and more so can not be solely attributed to the Kits used for testing HIV anti-bbdies. Thus, the payment of Rs. 1.50 crore either in whole or in part can not be appropriated or allocated towards the compensation for loss or sterilization, if any, of the very source of profit making apparatus.
6.21 But, at the same time, it is to be borne in mind that the terms and conditions of the mutual agreement dated 8.3.1991 suggest that the payment of Rs. 1.50 crore by BWAG and Hoechst to the assessee includes also the claim in respect of damages to the assessee's fame, name and reputation as clearly evident from Clause (6) of the Compromise Agreement and as discussed and pointed out in foregoing paras 6.5 to 6.8 hereto. It is not in dispute that the payment for damages to one's fame, name, reputation and goodwill is of capital in nature. The Hon'ble Supreme Court in the case of Gillanders Arbuthnot & Co. Ltd v. CIT (supra) has held that compensation paid for loss of goodwill is prima facie of the nature of a capital receipt. The Hon'ble Supreme Cpurt in the case of CIT v. Best & Co P Ltd (supra) has held that, "if compensation was paid in respect of two distinct matters, one taking the character of a capital receipt and the other of a revenue receipt, there was no principle which prevented its apportionment between the two matters. Difficulty in apportionment was not a ground for rejecting the claim either of the revenue or of the assessee. Therefore, apportionment had to be made of the compensation in this case on a reasonable basis between the loss of the agency in the usual course of business and the restrictive covenant". The case before us is also of the nature where we have taken a view that the compensation paid is in respect of two distinct matters, one taking the character of revenue receipts being damages for loss of stock, profit or business on revenue account and the other of a capital receipt being compensation for loss of assessee's name, fame, reputation and goodwill. It is an admitted position that the assessee has destroyed the stock of blood products worth Rs. 2,04,08,695/-, which was allowed as a business loss in the assessment years 89-90 and 90-91. The stock of blood products was destroyed because part of it contained HIV positive anti-bodies. The reasons given by the assessee itself for appearance of anti-bodies in the blood products are as under:
Anti bodies found in the production not always be attributed to defective kits. Anti-bodies could result because of absence of observations of GNP (Good Manufacturing Practice) which has a predominant role in the Pharma industry in general.
Serum Institute of India Ltd. has not carried a validating test before the kit was used.
Negligence of the staff in scientifically using the kits could also be responsible for appearance of anti-bodies.
Anti-bodies could be seen also in manufactured products even though they were not present in the Plasma at the time of test.
The allegation that Anti-bodies found in the blood products manufactured by the assessee was solely attributed to the Kits supplied by BWAG and Hoechst has not been proved and established. The BWAG and Hoechst has denied this allegation as clearly stated in the Compromise Agreement. But, on the other hand, the assessee has been maintaining a stand that the Test Kits supplied by BWAG and Hoechst was defective though the same could not be proved and established beyond any doubt by adequate, positive and sufficient evidences. But, the fact remains that BWAG and Hoechst have at the same time agreed to pay and has actually paid the damages amounting to Rs. 1.50 Crore. The situation is 50 : 50 on either way. In these circumstances and in the light of the fact that there could be various reasons for appearance of antibodies in the blood products as set out above, we reasonably and fairly take a logical and rational view that 50% of the total damages on account of destroy of stock worth Rs. 2,04,08,695/- may be adjusted against compensation received by the assessee on account of loss of stock, profit or business sustained in the usual course of business. We, therefore, allocate the sum of Rs. 1.02 crore (rounded off) out of total compensation of Rs. 1.50 crore towards the compensation for the loss of stock, profit or business on revenue account, and the rest sum of Rs. 48 lakhs is consequently to be allocated towards compensation for the loss of assessee's name, fame, reputation and goodwill. In other words, the sum of Rs. 1.02 crore shall be treated as revenue receipts and the balance Rs. 48 lakhs shall be treated as capital receipts. We order accordingly.
6.22 In the course of hearing of this appeal, a reference to the dates of compromise agreement and withdrawing the criminal complaint was made, in the course of which the Id counsel made an observation that the income might be assessable in the assessment year 91-92 and not in the present assessment year 92-93, which is under consideration. However, no substantive arguments or submissions were advanced by the Id counsel for the assessee in support of the point that even if the disputed receipt is treated as taxable, it is to be assessed in the assessment year 91-92. No reasons were advanced as to why the income should be assessed in the assessment year 91-92. This issue was never raised by the assessee either before the AO or before the CIT (A); neither it is raised in the grounds of appeal filed before us. After hearing of this appeal was closed on 30.06.2005, the assessee forwarded one letter dt 6.7.2005 to the Tribunal wherein it is stated as under:
It will be recalled, it was observed by the undersigned that the impugned disputed receipt even otherwise taxable only in the assessment year 1991-92 and not 1992-93 of which the undersigned never wanted to make capital out of though howsoever the point is very valid and relevant.
No reasons or basis were given at the time of hearing in support of the contention that the disputed receipt received during the year under appeal even otherwise taxable is to be assessed only in assessment year 91-92 and not 92-93. Since this issue was not argued and contested nor any argument or submissions or facts were placed in support of this, we do not find any merit in this issue. This point, therefore, stands rejected.
7. In the result, this appeal filed by the assessee is partly allowed in the manner as indicated above.