Income Tax Appellate Tribunal - Kolkata
Shaw Wallace And Co. Ltd. vs Deputy Commissioner Of Income-Tax on 28 February, 2001
Equivalent citations: [2002]80ITD156(KOL)
ORDER
Pramod Kumar, Accountant Member
1.These cross appeals are directed against the order dated 10-12-1995 passed by the learned Commissioner of Income-tax (Appeals) - II, Calcutta, in the matter of assessment order under Section 143(3) for the assessment year 1978-79.
2. The assessee has taken up as many as five main grounds of appeal, and several sub-grounds under these five main grounds, but there are only two grievances which have been pressed before us - (i) first, against addition as income from other sources to the tune of Rs. 1,27,78,112, on account of receipt of £ 8,50,000 from Sime Derbing Holdings Limited, being compensation following company's claim in the matter of shares in RG Shaw & Co. Ltd. sold by assessee-company in 1971; and (ii) second, against disallowance of Rs. 50,000 under Rule 6D of the Income-tax Rules, on estimated basis, out of travelling expenses of Rs. 69,11,307. We will first take up assessee's main grievance which is against addition of Rs. 1,27,78,112 as income from other sources.
3. In order to properly appreciate the legal controversy requiring our adjudication, it is necessary to take a careful look at the developments leading to this appeal before us. The facts culled out from documents before us are that the assessee-company held 1,22,869 shares of face value of £ 1 each in M/s RG Shaw & Co. Ltd. (hereinafter referred to as RGS) - a company incorporated under the laws of United Kingdom. RGS and the assessee-company had some common directors and there were cross holdings in the sense that RGS also held about 38 per cent of shares in the assessee-company. In the accounting year 1971, relevant to the assessment year 1972-73, assessee-company was induced by some common directors in RGS to sell its entire holdings in the RGS. Apparently persuaded by this advice and after obtaining necessary approval of the Reserve Bank of India, the assessee-company sold its entire holdings in RGS which, through a series of transactions, ultimately found their way to Sime Derby Holdings Limited (hereinafter referred to as 'SDHL') which had some common directors with RGS. Shortly after sale of these shares, a news item appeared in British newspapers to the effect that RGS was being taken over by Sime Derby Holdings Limited - a multi divisional, war rich and high profile company incorporated in Malaysia. As a result of this news about take over, prices of RGS shares shot up to almost double the price. In the meantime, Chief Accountant of SDHL at Singapore died in unnatural circumstances leaving behind some notes accusing Mr. Finder and Mr. Scott, common directors of SDHL and RGS, of a large number of financial malpractices. The media glare that the company was then subjected to brought to light these financial malpractices in the company and as a consequence of malpractices coming to light, these two common directors were prosecuted inter alia for what is now commonly termed as 'insider trading'. Most of the allegations were established and Mr. Pinder was sentenced to imprisonment of eighteen months, besides being asked to pay £ 7,50,000 to SDHL. Similarly, Mr. Scott also had to pay £ 3,50,000 to SDHL. It was during trial of these persons that the assessee-company engaged a lawyer to keep watch over assessee's interest involved therein and the said lawyer later reported to the assessee that the assessee could make a definite claim for compensation from SDHL for being wrongfully induced to sell its RGS holdings at a much lower price than the price which emerged on amalgamation. The assessee then had a review of sales of RGS shares made earlier, from the point of view of disclosure obligations of the common directors who were aware of the amalgamation scheme of RGS and SDHL, as also from the point of view of claiming damages from the beneficiaries of sale of RGS shares at a low price. The assessee also obtained legal advice from Indian and British law firms and, based on such legal advice, assessee initiated legal proceedings against the SDHL for loss of benefit which would have otherwise accrued to the assessee, as shareholder of RGS, due to takeover and merger with SDHL. A legal notice was, accordingly, served on the SDHL in November 1976. Although initially SDHL repudiated claim of the assessee, a settlement was reached between lawyers representing two sides in 1977 whereunder the SDHL paid a sum of £ 8,50,000 in view of the claim of the assessee against SDHL that the two common directors at the time of sale transactions in question were guilty of breach of fiduciary duty towards the assessee-company. It is this amount of £ 8,50,000 which has been taxed by the revenue authorities in the present year as 'income from other sources' and aggrieved by which the assessee is in appeal before us. However, before we come to the core issue about taxability of this amount, it is necessary to complete narration of material facts.
4. On receipt of the above-mentioned amount of £ 8,50,000, which worked out to Indian Rs. 1,27,78,112, it was directly credited to a special reserve under "Reserves and Surplus". Though the receipt was not offered for taxation, the income-tax return filed by the assessee had a suitable disclosure about the facts of having received this sum as compensation, as also about the assessee's stand that this receipt is not taxable in nature. During the subsequent proceedings before the Assessing Officer, it was submitted by the assessee that since this amount represented compensation received by the assessee on account of breach of fiduciary duty of the two common directors of the assessee in not keeping the assessee informed about impending amalgamation between RGS and SDHL, the compensation sum received is really for damages caused by such breach and the same cannot be considered as one giving rise to any capital gains chargeable under the Income-tax Act. It was further submitted that the receipt, being capital receipt in nature, cannot be said to be within the ambit of expression 'income' and, accordingly, there is no question of the same being treated as 'income from other sources'. Elaborate submissions were made in support of non-taxability of this receipt, but the learned Assessing Officer did not yield to these submissions. The Assessing Officer observed that primary thing to be decided was 'whether the receipt was income or not - the choice of head under which it is to be taxed is a subsequent requirement'. It was then further observed that the expression 'income' includes whatever is income construed in its natural or ordinary sense and that what is actually to be seen for taxing the income is the fact that whether income has been earned in reality. The Assessing Officer then formed an opinion that "in the light of the facts and circumstances of the case, as explained above, it can be reasonably be said that the receipt of Rs. 1,27,78,112 unmistakably falls within the ambit of word 'income' and the same is taxable as has been held by various courts that anything which can be properly described as income is taxable under the Act, unless it is exempted under one or the other provisions of the Act". In conclusion, the amount of Rs. 1,27,78,112 was treated as income of the assessee under the head 'Income from other sources'. Aggrieved, the assessee carried the matter in appeal before the learned Commissioner (Appeals) who, after elaborately surveying legal precedents on definition of 'income' and erudite discussions in this regard, observed that the amount received by the assessee-company had nothing to do with the sales of shares and that this amount was paid to save "the international reputation of Sime Derby Holding and to prevent publication of some embarrassing details". It was further observed that the payment was not in the nature of making good the loss of profit making apparatus or the sterilisation of a capital asset so as to have the ingredients of a capital receipt. The learned CIT (Appeals) then noted that it was a lump sum receipt, not related to any capital asset, obtained by way of out of court settlement by the appellant in lieu of withdrawing the suit threatened to be filed for a criminal breach of trust on the part of some common directors who committed breach of fiduciary duty. The learned CIT (Appeals) then rejected the contention of the assessee that the receipt in question is a capital receipt and observed that, "the compensation received can neither be a part of sale consideration of shares...nor in any way be a receipt relating to sale of shares so as to be a capital receipt". Coming to the question as to whether this receipt can be considered as income or not, the learned CIT (Appeals) observed various judicial decisions have favoured the view that income is a word of broad connotations and should be given its natural and grammatical meaning. Leaning on Hon'ble Supreme Court's judgment in the case of Navinchandra Mafatlal v. CIT[1954] 26 ITR 758, in which dictionary meaning of income is said to be given as 'it is a thing that comes in', the CIT (Appeals) observed that "in the present case the amount of Rs. 1,27,78,112 definitely comes in to the appellant" and that "it is a gain which the appellant has realised and over which it had full control". Learned CIT (Appeals) also referred to Hon'ble Supreme Court's observations, in the case of Emil Webber v. CIT [1993] 200 ITR 483 : 67 Taxman 532, to the effect that though the inclusive definition of income adds several sub-categories to the concept of income, but, on that account, the expression 'income' does not loose its natural connotations. Therefore, anything, which can be properly described as income, is taxable under the Act, unless it is exempted under one or the other provisions of the Act. On the strength of this reasoning, the learned CIT (Appeals) also concluded that "it can be stated that the receipt of Rs. 1,27,78,112 can be properly described as income in the hands of the appellant" and that "since there is no provision which specifically exempts it, it is taxable under the Act [vide Maharajkumar Gopal Saran Narain Singh v. CIT[1935] 3 ITR 237 (PC)]." The CIT (Appeals) also observed that this receipt is taxable in the year in which it reached the assessee, and that since it is not chargeable under any other head of income, this receipt is taxable under the head 'income from other sources'. The learned CIT (Appeals) then also made observation that alternatively the receipt of Rs. 1,27,78,112 is chargeable to tax considering Hon'ble Allahabad High Court's judgment in the case of CIT v. Gidab Chand [1991] 192 ITR 495 : [1992] 60 Taxman 7 because the receipt is casual and non-recurring in nature which was accidental, fortuitous, unanticipated and unforeseen and there was no expectation of being repeated. It was further observed that it was not a capital gain chargeable under the head capital gains; neither it is a receipt arising from business or exercise of a profession or occupation or a receipt by way of addition to remuneration. Therefore, in learned CIT (Appeal)'s views, impugned receipt constituted taxable income (minus statutory deduction) within the meanings of Section 10(3) of the Income-tax Act. The learned CIT (Appeals) also observed that considering the decision of Gulab Chand's case (supra) it was immaterial whether the receipt was capital or was revenue in nature. In conclusion, the learned CIT (Appeals) upheld, and in fact fortified, the addition of Rs. 1,27,78,112 made by the Assessing Officer. Aggrieved by even the stand taken by the learned CIT (Appeals), the assessee is yet again in appeal - this time before us.
5. We may first briefly summarise pleadings before us. Shri R.N. Bajoria, learned Senior Advocate for the assessee, submitted that Assessing Officer was correct in observing that primary thing to be decided was 'whether the receipt was income or not - the choice of head under which it is to be taxed is a subsequent requirement' but the learned Assessing Officer did not proceed to the next logical step i.e., objectively determining whether or not receipt in question was a revenue receipt and as such actually capable for crossing this first bridge. Instead of carrying out this exercise, the learned Assessing Officer has merely observed that the expression 'income' is wide and vague in its scope, that it's a word of elastic import and that it includes whatever is 'income' in natural or ordinary sense. It gives an impression as if anything, which is receipt by the assessee and which, in Assessing Officer's unquestioned wisdom, can be treated as 'income', falls within the definition of income. The learned senior counsel then assailed CIT (Appeal)'s findings that since the receipt in question was not in connection with the sale of shares but to "save the international reputation of Sime Derby Holding and to prevent publication of some embarrassing details", it was revenue receipt in nature. It was submitted that it cannot be the case of the tax authorities that the assessee-company, like blackmailers or some yellow journalists, makes its living out of saving reputation of other companies or by preventing publication of embarrassing details about them and that if that be so, as indeed is the case, these facts cannot have anything to do with the receipt being of revenue in nature. Our attention was drawn to the fact that the compensation was paid for damage caused to assessee's capital asset, i.e., shares which were all along held as investments by the assessee, and that there was a real loss on account of lower realisation of assessee's shares. We were also taken through the assessment and appellate orders in assessee's own case for the assessment year 1971 -72, i.e., the year in which the capital gains on sale of RGS shares were brought to the tax, to demonstrate to us that tax authorities' case all along has been that this compensation of £ 8,50,000 was directly attributable to sale of RGS shares and that the same was capital receipt in nature. It was submitted that, in the present situation, the tax authorities have abandoned that stand and taken a diametrically opposed view that the compensation amount is a revenue receipt in nature. Such a change of heart, apart from being inherently contradictory, is not in harmony with the settled law on the tests laid down to ascertain whether a receipt is capital receipt or revenue receipt. Our attention was invited to the judgment of Hon'ble Bombay High Court in the case of Bombay Burmah Trading Corpn. Ltd. v. CIT [1971] 81 ITR 777 which, according to the learned counsel, has laid down somewhat conclusive test on whether a compensation receipt will be capital receipt or revenue receipt. In this case, it was held that "where compensation is recovered for an injury inflicted on a man's trading, so to speak, a hole in the profits, the compensation would go to fill that hole and would be a trading receipt" and that "when injury is inflicted on capital asset of the trading, making, so to speak, a hole in them, the compensation recovered is meant to fill that hole and is a capital receipt". We were also informed that the aforesaid judgment has been upheld by the Hon'ble Supreme Court, in the case of CIT v. Bombay Burmah Trading Corpn. Ltd. [1986] 161 ITR 386 : 27 Taxman 314. The learned counsel, in support of the submissions that the receipt in question is a capital receipt in nature, also placed his reliance on the judgment of Hon'ble Calcutta High Court in the case of CIT v. Ashoka Mktg. Ltd. [1987] 164 ITR 664 : [1986] 26 Taxman 215 judgment of Hon'ble Andhra Pradesh High Court in the case of CIT v. Barium Chemicals Ltd. [1987] 168 ITR 164 : 31 Taxman 471 and judgment of Hon'ble Madras High Court in the case of CIT v. Seshasayee Bros. (P.) Ltd. [1996] 222 ITR 818 : 89 Taxman 13. Regarding Gulab Chand's case (supra), referred to by the learned CIT(A), our attention was invited to the fact that Hon'ble jurisdictional High Court has, in the recent case of CIT v. B.K. Roy (P.) Ltd. [2001] 248 ITR 245 (Cal.) dissented from the views expressed by the Hon'ble Allahabad High Court in that case. In the backdrop of these submissions, we were urged to quash the impugned addition made by the Assessing Officer and to hold that the CIT(A) erred in law, and on facts, in sustaining the same. On the other hand, Shri D.K. Ghosh, distinguished Departmental Representative strongly supported the orders of the authorities below. It was submitted that determination of the nature of receipt, i.e., whether it is capital in nature or revenue in nature, is essentially a question of fact which will vary from case to case on its own merits and there cannot be a single infallible test in this regard. The action of the lower authorities in treating the receipt as in the nature of income was justified by the learned DR and it was submitted that expression 'income' is of such a wide import that all kinds of receipts, unless specifically exempted under the Income-tax Act, are covered by the expression 'income'. The learned DR further submitted that once a receipt is held to be in the nature of income, as has been held in the case before us, the onus is on the assessee to prove that this income is exempt from tax. It was also pointed out that at best assessee-company had a grievance against the two common directors for the breach of fiduciaries duties but it is strange that out of court settlement has been reached between the assessee and SDHL which only goes on to prove that the payment has been made for considerations other than what is disclosed by the assessee. According to the learned DR, since the assessee has not disclosed the true consideration for these receipts, revenue authorities are justified in taking an adverse inference against the assessee. Regarding revenue's stand in the assessment year 1971-72 that the same receipt is in the nature of capital receipt, the learned DR stated that there is no res judicata in the income-tax proceedings and that in any event, revenue's claim was negated by the Tribunal and such a claim cannot constitute estoppel against the revenue. In support of his submissions, the learned DR placed reliance on the reported judgments in the cases of Emil Webber (supra), CIT v. G.R. Karthikeyan[1993] 201 ITR 866 (SC) and Dr. K. George Thomas v. CIT [1985] 156 ITR 412 : 23 Taxman 46 (SC), apart from reiterating support from the judgment of Allahabad High Court in the case of Gulab Chand (supra). The learned DR also took us through the order of the authorities below, read out certain passages from these orders and placed his strong reliance on the orders of the authorities below. On the strength of these submissions, learned DR urged us to confirm the action of the authorities below and reject the contentions of the assessee.
6. We have conscientiously heard the rival contentions of Shri R.N. Bajoria, learned senior counsel for the assessee, and Shri D.K. Ghosh, learned Departmental Representative. We have also carefully perused the orders of the authorities below, as well as paper book filed by the assessee, and have deliberated upon the authorities cited at the bar. We find that, as far as assessee's first grievance is concerned, the neatly identified issue for our adjudication is whether the receipt of £ 8,50,000 from Sime Derby Holdings Limited can be described to be in the nature of income and be thereby assessed to tax in the hands of the assessee company.
7. We will first take up the revenue's stand that, for the purpose of a receipt being classified as 'casual income' within meanings of Section 10(3), 'it is immaterial whether the receipt is capital or revenue in nature'. This view is said to be fortified by the judgment of Hon'ble Allahabad High Court in Gulab Chand's case (supra). Hon'ble Allahabad High Court, in this case, were dealing with a situation wherein assessee had received a sum of Rs. 55,000 by way of consideration for surrender of tenancy rights and the law, as then in force, did not specifically provide for treating such an amount as exigible for capital gains tax. It was in this context that Their Lordships of Hon'ble Allahabad High Court, after noticing that Section 10 deals with exemption of particular types of income being included in the total income of the assessee and that Sub-section (3) deals with 'any receipts', preferred to treat "the expression 'receipts' as synonymous with 'income' since that is the dominant theme and purpose of Section 10". In taking this view of the matter, Their Lordships undoubtedly rejected the argument that a receipt must first be the income, i.e. it must be revenue receipt in order to attract the provisions of Section 10(3). However, it appears that this school of thought has not found favour with the jurisdictional High Court. In the case of B.K. Roy (P.) Ltd. v. CIT[1995] 211 ITR 500 (Cal.), the only basic and fundamental issue involved in that matter was whether a capital receipt, which is not assessable as a capital gain, can be assessed as a non recurring and casual income. The case of the assessee was that "decision of the Allahabad High Court in Gulab Chand's case (supra) is erroneous and contrary to well settled principles of law". In this background, and after taking due cognizance of Gulab Chand's case (supra), a single judge bench of the Hon'ble Calcutta High Court made the following observations :
Proviso (i) to Sub-section (3) of Section 10 clearly recognises that capital gain chargeable under Section 45 will not come within its ambit. Moreover, Section 10 lays down that certain categories of income will not be included in the computation of total income of a person. A casual and non-recurring receipt not exceeding Rs. 1,000 will not be taxed. From these, it does not follow that any capital receipt over and above Rs. 1,000 will have to be taxed. If a person receives Rs. 10,000 by way of legacy, the amount cannot be brought to tax on the ground that it is a casual and non-recurring receipt above Rs. 1,000. Section 10 is not a charging Section. It merely specifically excludes certain types of income from the ambit of 'total income' as defined under the Act....
[Emphasis supplied] The aforesaid views of a single Judge bench of Hon'ble Calcutta High Court have been, in the judgment reported as B.K. Roy (P.) Ltd. (supra) confirmed by a Division Bench of the same High Court. Once jurisdictional High Court has consciously dissented from views of another High Court, this Tribunal cannot have the liberty of following the views of such other High Court and, therefore, we are unable to uphold CIT(A)'s reliance on the same. We are of the considered view that the provisions of Section 10(3), being non-charging provisions, cannot be pressed to service by the revenue to support their stand that, notwithstanding the nature of receipt i.e. capital or revenue, a casual and non recurring receipt is taxable save to the extent of being exempt under Section 10(3) of the Income-tax Act. Section 10 merely enumerates incomes which are exempt from tax but, in the process, it cannot broaden the connotations of the expression 'income' itself. If a receipt is not in the nature of income, there cannot be an occasion to examine whether or not it will qualify to be exempt under one of the categories covered by Section 10, but then if we have to approve the stand of the revenue in this regard, we have to hold that the provisions of Section 10(3) will eventually determine as to what constitutes 'income' in the first place. We feel that such an approach is putting the cart before the horse. In the light of these discussions, we reject revenue's stand that irrespective of the nature of receipt, i.e. whether or not it is a capital receipt or revenue receipt, this receipt can be brought to tax as a 'casual and nonrecurring income'.
8. Hon'ble Supreme Court has, in the case of Padmaraje R. Kadambande v. CIT[1992] 195 ITR 877 : 62 Taxman 456, observed that, "...we hold that the amounts received by the assessee during the financial years in question have to be regarded as capital receipts and, therefore,are not income within meaning of Section 2(24) of the Income-tax Act." [Emphasis supplied]. This clearly implies, as is the settled law, that a capital receipt, in principle, is outside the scope of 'income' chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of a revenue receipt or is specifically brought within ambit of 'income' by way of specific provisions of the Income-tax Act. We are, therefore, of the considered view that the receipt in question cannot be brought to tax unless the same is held to be a revenue receipt in nature or unless, in case it is held to be a capital receipt, there are specific provision to artificially treat this capital receipt as income. It is not the case of the revenue that there are any specific provisions to artificially treat this receipt as an income and, therefore, taxability of this receipt solely hinges on the nature of receipt i.e. whether the receipt is capital receipt or revenue receipt.
9. We now come to learned CIT(A)'s observation that the amount in question cannot be treated as a 'capital receipt' since the amount received by the assessee-company had nothing to do with the sales of shares and that this amount was paid to save "the international reputation of Sime Derby Holding and to prevent publication of some embarrassing details". As observed by Hon'ble Supreme Court, in the case of CIT v. Kamal Behari Lal Singha [1971] 82 ITR 460, "it is now well settled that, in order to find out whether a receipt is capital receipt or revenue receipt, one has to see what it is in the hands of the receiver and not what it is in the hands of the payer". In other words, the nature of receipt is determined entirely by its character in the hands of the receiver and the source from which the payment is made has no bearing on that question. In the case before us, the learned CIT(A) has been persuaded to hold that the receipt in question is not a capital receipt inter alia on the question as to what were the considerations of payment being made by Sime Derby Holding Limited a factor which, in our opinion, cannot influence the character of receipt in the hands of the assessee-company. We agree with the learned counsel that it cannot be the case of the tax authorities that the assessee-company makes its living out of saving reputation of other companies or by preventing publication of embarrassing details about other companies and, therefore, considerations of payment by Sime Derby Holding Limited cannot have anything to do with receipt being held to be revenue in nature. In this view of the matter, we hold that learned CIT(A)'s aforesaid observations are based on the considerations which are not germane to the context, and, accordingly, we are not persuaded to fall in line with the same.
10. The next things to be examined by us is revenue's reliance on Hon'ble Supreme Court's judgment in Emil Webber's case (supra). There can hardly be any doubt about the proposition, as reiterated by the Hon'ble Supreme Court in this case, that anything which can be properly described as income is taxable under the Income-tax Act unless, of course, it is exempted under one or the other provisions of the Act. However, it cannot be overlooked that any receipt being described as income cannot be at the unfettered discretion of the revenue authorities; such a receipt has to meet well-settled criterion such as, for example, criterion of nature of receipt being revenue receipt in nature. As discussed earlier in the order, law is fairly well settled that it is only a revenue receipt which can be brought to tax, unless, of course, there are specific provision to artificially treat such a non revenue receipt also as income. We may also mention that, in Emil Webber's case (supra), Hon'ble Supreme Court's conclusion that payments made by a non employer, towards tax obligations for the assessee, will also be included in 'income' was persuaded by factors including inter alia the fact that (i) said amount is nothing but a tax upon the salary received by the assessee; (ii) such a non employer had undertaken legal obligation to pay tax on salary received by the assessee, and, as such, the payment was made for and on behalf of the assessee; and (iii) it cannot be said that the said payment had no integral connection with the salary received by the assessee. These factors will make it clear that it was not even assessee's case before the Hon'ble Supreme Court that the receipt in question is not a revenue receipt. On the contrary, Hon'ble Supreme Court itself observed that impugned receipt's integral nexus with a revenue receipt i.e. salary cannot be ruled out. In the case before us, however, facts are altogether different and there is no nexus, direct or indirect, between receipt impugned in this appeal and any revenue receipts of the assessee. On the contrary, there is a clear nexus between receipt impugned in appeal before us, on one hand, and capital assets of the assessee-company. Therefore, there is little support that revenue can derive from Emil Webber's case (supra).
11. As regards Hon'ble Supreme Court's judgment in the case of G.R. Karthikeyan (supra), this also deals with the connotations of the expression 'income' which Their Lordships have construed as of widest amplitude so as this expression may be given its natural and grammatical meaning. Howsoever, liberal or narrow be the interpretation of expression 'income', it cannot alter character of a receipt i.e. convert a capital receipt into a revenue receipt or vice versa. There is no warrant for inference that even the most liberal interpretation of 'income' can nullify or blur the all-important distinction between capital receipt or revenue receipt. In this view of the matter, and considering that primary issue before us is to examine true nature of receipt, we see no help to revenue's case even by this Supreme Court judgment. Similarly, there are other judgments relied upon by the revenue, which only deal with the scope of expression 'income' but do not touch upon the question of capital receipts being outside the ambit of income. These judgments also, for the same reasons, cannot be of any assistance to revenue's case.
12. We find that, as observed by Hon'ble Supreme Court in the case of Dr. K. George Thomas (supra) "the burden is on the revenue to establish that the receipt is of a revenue nature" though "once the a receipt is found to be of revenue character, whether it comes under exemption or not, it is for the assessee to establish". No doubt that the Income-tax Act imposes a general liability to tax upon all income, but it does not provide that whatever is received by a person must be regarded as income liable to tax. In all cases in which a receipt is sought to be taxed as income, the burden lies upon the department to prove that it is within the taxing provisions. However, where a receipt is proved to be in the nature of income, the burden of proving that it is not taxable because it falls within an exemption provided by the Act lies upon the assessee. In the case before us, revenue has not sufficiently discharged its onus of proving that the receipt in question is a revenue receipt in nature. The revenue has at best made efforts to demonstrate that the receipt in question is not taxable as a capital gain and, therefore, it can only be in nature of revenue receipt. However, there is a glaring fallacy in this argument, since merely the fact that a receipt is not taxable as a capital gain would not imply, or even suggest, that such a receipt is revenue receipt. There can always be, and have been, cases in which receipts are held to be capital receipts in nature and yet not chargeable to tax as a capital gain.
13. In the case of Ashoka Mktg. Ltd. (supra), this assessee had entered into an agreement with a vendor for purchase of certain property belonging to the vendor. The vendor, having failed to complete the transaction because title of the property was not marketable as there was a prior mortgage of the property with the Government, paid liquidated damages of Rs. 1 lakh to the assessee. Hon'ble jurisdictional High Court, dealing with taxability of such liquidated damages received by the assessee, observed that such liquidated damages are neither in the nature of capital gain nor in the nature of a revenue receipt, and, therefore, outside the ambit of taxable income. We may, in this regard, quote following observations of the Hon'ble High Court:
2. It may be recalled that on the failure on the part of vendor to complete the agreement, because of the title being not marketable and there having been a prior mortgage with the U.P. Government, it was not possible on the part of the assessee to purchase the property. For this transaction, the assessee did not have to part with any money or stock in trade. There was no cost involved in acquisition of the sum of Rs. 1 lakh. Hence, it could not be deemed to be a capital gain at all. The liability of the assessee could arise only if there would have been a transfer of capital asset and since there was no element of cost in the acquisition of Rs. 1 lakh, it could not answer the description of either a capital gain or revenue receipt.
3. We have scrutinized the facts as also the reasoning given by the Tribunal. We are in accord with the findings of the Tribunal that the amount of Rs. 1 lakh is not in the nature of capital gain or in the nature of the revenue receipt. There is no transfer in relation to a capital asset within the meanings of Section 2(47) of the Income-tax Act, 1961 and the amount of Rs. 1 lakh also does not confirm to the concept of a capital asset....
The Hon'ble High Court then formed a view that on the facts and in the circumstances of the case, the Tribunal was right in holding that sum of Rs. 1 lakh received by the assessee is neither a revenue receipt nor a capital gain. In relying upon this judgment, we are only concerned with the proposition that a receipt which is neither a capital gain nor a revenue receipt will be outside the ambit of income chargeable to tax. We can also safely infer that merely because a receipt is not a capital gain chargeable to tax, it would not mean that such a receipt is revenue receipt in nature.
14. We now come to Hon'ble Madras High Court's judgment in the case of Seshasayee Bros. (P.) Ltd. (supra). Their Lordships of Hon'ble Madras High Court, after elaborately surveying the legal precedents on the characteristics of capital receipts and revenue receipts, came to the following conclusion :
Thus, a combined reading of the abovesaid judicial pronouncements would go to show that when a receipt is referable to fixed capital, it is not taxable, and it is taxable as a revenue item when it is referable to circulating capital or stock in trade.
In our considered view, the connotations of expression 'referable' are very wide in scope and these cannot be confined to clear nexus between the receipt in question on one hand, and extinction or sterlisation of a capital asset, on the other hand. Even if there is no extinction or sterilisation of a capital asset and yet the receipt can be reasonably attributed to, or linked with, a capital asset, the same will be capital receipt in nature and, accordingly, outside the tax net. In our considered view, therefore, once a receipt is referable to a capital asset, the presumption has to be that the nature of receipt being non revenue receipt, the same is outside the ambit of 'income' within meanings of Section. However, it is open to the department to rebut, on any plausible basis, the inference that the receipt in question is not a revenue receipt.
15. Let us recall the circumstances in which the assessee had made a claim against Sime Derby Holdings Limited. As the unscrupulous manner in which some directors of Sime Derby Holdings Limited enriched the company was being debated in the international press and as prosecution of these directors, i.e. Mr. Pinder and Mr. Scott, was in progress, the assessee apparently realised that it has been taken for a ride and the advice it had received, for sale of shares in RGS Ltd., was not a bona fide advice. The assessee then had a review of sales of RGS shares, from the point of view of disclosure obligations of the common directors who were aware of the amalgamation scheme of RGS and SDHL, as also from the point of view of claiming damages from the beneficiaries of sale of RGS shares at a low price. We have also noticed that this compensation was paid by Sime Derby Holdings Limited which was beneficiary of the shares being sold by the assessee at a low price, since all the shares sold by the assessee had ultimately found way to this company. Therefore, although this compensation may not have been held to be part of sale consideration of shares and therefore not exigible to tax as capital gains, the compensation is definitely 'referable' to shares which were held as investments by the assessee. The fact that this compensation was not taxable as capital gains, in the year in which transfer of related shares took place, cannot alter the basic character of receipt. We also find that in view of Bombay Burmah Trading Corpn. Ltd. 's case (supra), it is evident that "when injury is inflicted on capital asset of the trading, making, so to speak, a hole in them, the compensation recovered is meant to fill that hole and is a capital receipt". As injury was inflicted on realisable value of shares which were held as investments by the assessee-company, applying the test laid down in Bombay Burmah Trading Corpn. Ltd.'s case (supra), we can only deduce that this compensation is a capital receipt in nature. In any event, the revenue has not effectively discharged its onus of demonstrating that the impugned receipt is a revenue receipt. Keeping in view all these factors and entirety of this case, we are unable to uphold taxability of this receipt. We, therefore, direct the Assessing Officer to delete the addition of Rs. 1,27,78,112, on account of receipt of compensation from Sime Derby Holdings Limited. The appellant, thus, succeeds in appeal so far as this grievance of the assessee is concerned.
16. Next grievances of the assessee is against disallowance of Rs. 50,000 under Rule 6D of the Income-tax Rules, on estimated basis, out of travelling expenses of Rs. 69,11,307. It is observed by the Assessing Officer that the assessee has failed to furnish the requisitioned particulars of travelling expenses with regard to the compliance with Rule 6D and therefore a disallowance of Rs. 50,000 is made on estimate basis. Before the first appellate authority also, the assessee did not file requistioned particulars of travelling expenses and merely argued that the expenditure incurred was incidental to business. We have heard the rival contentions and perused the orders of the not inclined to interfere in the matter and we confirm the findings of the authorities below. The appellant, thus, fails in this set of grounds of appeal.
17. In the result, assessee's appeal is partly allowed.
18. We now turn to revenue's appeal. The solitary ground of cross objection is that the learned CIT(A) erred in holding that deduction under Section 80M is to be allowed without allowing any expenditure to the dividend receipt.
19. Briefly stated the facts relevant to this appeal are that the assessee, during the year under appeal before us, earned dividends to the tune of Rs. 18,57,904 and claimed that no expenditure has been incurred in connection with earning of dividend income and, therefore, deduction under Section 80M should be allowed on the dividend without any deduction for expenditure. The Assessing Officer rejected this plea and took Rs. 80,000, on estimate basis, as expenditure allocable to earning of dividend. The assessee being aggrieved, matter was carried in appeal and the learned CIT(A), following appellate orders for other assessment years in assessee's own case, directed the Assessing Officer not to allocate any expenditure against the dividend income, for the purpose of giving deduction under Section 80M. Aggrieved by the directions of the learned CIT(A), revenue is in appeal before us.
20. The learned Departmental Representative has placed his reliance on Hon'ble Supreme Court's judgment in the case of CIT v. United General Trust Ltd. [1993] 200 ITR 488, in support of the proposition that proportionate management expenses are required to be deducted from gross dividends, for the purpose of allowing deduction under Section 80M of the Income-tax Act. The learned counsel for the assessee, on the other hand, referred to Hon'ble Calcutta High Court's judgment in the case of CIT v. United Collieries Ltd. [1993] 203 ITR 857 and submitted that the special deduction under Section 80M is allowable only on the net dividend which is arrived at after taking into account the expenditure, if any, incurred for the purpose of earning such dividend. It was submitted that only the actual expenditure incurred by the assessee in earning dividend income can be deducted and that there is no scope for any estimate of expenditure being made and no notional expenditure can be allocated for the purpose of earning such income unless the facts of a particular case warrant such allocation. The learned counsel submitted that since the deduction is made on estimate basis, the same has been rightly deleted by the first appellate authority.
21. Having considered the rival submissions and deliberated upon the judicial precedents on the issue before us, we are of the considered view that the deduction of expenditure incurred in earning dividend income, merely on notional or estimate basis and for the purpose of computing admissible deduction under Section 80M, is not sustainable in law. In case an expenditure is really incurred in earning the dividend income, such an expenditure should undoubtedly be deducted from gross dividends to arrive at the allowable deduction under Section 80M. However, in the case before us the deduction for expenditure has been made on purely estimate basis. We are of the considered view that such an allocation of expenditure, as made by the Assessing Officer in this case, is devoid of legally sustainable basis in the light of jurisdictional High Court's judgment referred to earlier. In the case of Distributors (Baroda) (P.) Ltd. v. Union of India[1985] 155 ITR 120, which has been solely relied upon by the Hon'ble Supreme Court in the case of United General Trust Ltd. (supra), there was no reference to deduction from dividend income on estimate basis or on ad hoc basis and, therefore, we do not see help to revenue's stand by United General Trust Limited's case. Accordingly, we uphold the deletion of this deduction by the learned Commissioner (Appeals) and decline to interfere in the matter.
22. In the result, while assessee's appeal is partly allowed, the appeal filed by the revenue is dismissed.