COMMISSIONER OF INCOME TAX Vs. SAPTHAGIRI DISTILLERIES LTD.

JUDGEMENT

(1.) The Revenue has preferred this appeal under Section 260-A of the Income-Tax Act, 1961 (for short 'the Act') challenging the order dated 31-05-2007 made in ITA No.1091/Bang/2002, by the Income Tax Appellate Tribunal, Bangalore Bench 'A' (for short 'the Tribunal') confirming the order passed by the Commissioner of Income-Tax (Appeals) VI, Bangalore (for short 'the First Appellate Authority') dated 22-05-2002 setting aside the assessment order dated 27-3-2002 passed by the Assessing Authority holding that the amount received by the assessee as compensation for termination of the lease agreement is capital in nature for the assessment year 1999-2000.

(2.) The respondent-assessee is a company registered under the Companies Act, 1956 carrying on business in the manufacture of Indian Made Foreign Liquor (for short 'IMFL') in the brand name of UB Products at Kumbalgodu. It has filed income-tax returns for the assessment year 1999-2000 on 31-12-1999 declaring a net loss from business of Rs.45,579/-. The return was processed and taken up for scrutiny after issuing notice under Section 143(2) of the Act. The authorized representative of the assessee appeared and produced necessary documents inter alia contending that the company has discontinued the manufacturing business from the financial year 1994-95 and as such, losses claimed on account of administration expenses were not allowed to be carried forward. No business operations in the nature of distillery are undertaken from that year.

(3.) While assessing the returns of M/s. Mc Dowell and Co. Ltd., it was noticed that M/s.Mc Dowell had claimed a revenue expenditure of Rs.5.31 crores on account of lease foreclosure payment made to the assessee. The assessee has not declared the said transaction resulting in gain of Rs.5.31 crores in its return of income filed. A notice under Section 142(1) of the Act was issued on 11-2-2002 calling for necessary particulars regarding receipt of the said amount. In response to the said notice, the assessee by its letter dated 14-3-2002 filed detailed facts of the case contending that they were running the business of distillery manufacturing IMFL of various brands of UB products on the basis of the lease agreement entered into with the Mc Dowell from the year 1986. In view of sudden foreclosure of the lease agreement and taking over of the said running business, as per the agreement dated 25-3-1993, the assessee company agreed to transfer the business of distillery to M/s. Mc Dowell and Co. Ltd., and Mc Dowell agreed to pay compensation as consideration towards loss to the company's source of income. Further, in view of the dispute between the parties, the matter was referred to the sole Arbitrator and the Arbitrator passed an award fixing the quantum of compensation as Rs.5.31 Crores and to prevent the assessee from carrying on similar business. The said amount cannot be treated as revenue which was received towards the compensation for termination of the business and to prevent the assessee to carry on competitive business. Hence, it is capital in nature. The Assessing Authority after considering the matter and taking into consideration the agreement and other relevant records held that the sum of Rs.5.31 crores received is revenue in nature. However, the assessee has lost the right that he had to manufacture the Mc Dowell products. The entire amount of Rs.5.31 crores was taken as a long term capital gain and taxed accordingly and also imposed penalty and interest thereon by an order dated 27-3-2002.