THE COMMISSIONER OF INCOME TAX vs. LATE DAVID LOPES MENEZES and ANR.

J U D G M E N T : (Per D.G. KARNIK, J.)

2 1961 ( for short “the IT Act”) is directed against the judgment and order dated 28th September, 2001 of the Income Tax Appellate Tribunal (for short “the Tribunal”) allowing the appeal filed by the respondents assessee. (2) By an order dated June 10, 2002, this Court admitted the appeal on the following substantial question of law : “Whether on the facts and in the circumstances of the case, amount received by the Assessee is Revenue income within the meaning of section 2(24) and taxable under section 4 of the IT act 1961 ?”

BASIC FACTS : (3) The respondents are family members of Menezes family who own 58.88% of equity shares (10598 shares out of 18000 shares) in the capital Colfax Laboratories India Limited (for short “Colfax”). 7200 share i.e. 40% of the equity of Colfax was held by Shulton (GB) Ltd, United Kingdom. The remaining 202 shares were held by three other individuals. Shulton (GB) Ltd., U.K., a 100% subsidiary of Shulton Inc. USA, is the registered proprietor in India of a trade mark

3 “Old Spice”. By an agreement entered in the year 1967 Shulton (GB) granted to Colfax right to use and market products under the brand name “Old Spice”. In the year 1990-91, Procter and Gamble, Cincinatti, USA took over and acquired Shulton Inc. USA. Procter and Gamble USA thus became the holding company of Shulton (GB) Ltd., UK. On account of the aforesaid acquisition, Procter and Gamble (India) Ltd., (for short “PGI”) through Procter and Gamble USA became the owner of the trade mark “Old Spice” in India. PGI also appointed a director on the board of Colfax. On acquisition of Shulton Inc., the Procter and Gamble USA became interested in using the trade mark Old Spice by itself or through its Indian subsidiary the PGI. It appears that it was not interested in renewing the agreement with Colfax permitting it the use of the trade mark Old Spice. The arrangement/agreement was last renewed on 1st January, 1991 upto 31st December, 1993. After 1st January, 1994, PGI intended to market the products by itself under the brand name “Old Spice”. In order to avoid any dispute about use of the trade mark “Old Spice”, PGI wanted confirmation from Colfax about its right to exclusively use the trade mark “Old Spice”. It, therefore, started negotiations with Menezes family who were holding majority of equity in Colfax and majority of 4 directors on its board. It requested them to get a resolution passed in the General Meeting of Colfax giving up the right of marketing, selling and distribution of Old Spice range of products in favour of PGI. It offered to pay to the Menezes family a sum of Rs.3.5 crores in consideration of their casting affirmative vote in favour of the resolution of the transfer of business of marketing the products under the trade name “Old Spice” in favour of PGI. In addition to the said consideration which was to be paid to the members of the Menezes family, PGI also offered that it would grant Colfax exclusive manufacturing right of its products for 10 years under the arrangement. Colfax was to manufacture and sell and PGI was to purchase from Colfax on principal to principal basis several products. PGI was then free to market these products under the brand name Old Spice. In pursuance of the above, an agreement was entered into between PGI and Colfax on 21st October, 1993. An extraordinary general body meeting of Colfax was also convened on 11th February, 1994 wherein the resolution regarding giving up of the business of marketing of products under the trade mark “Old Spice” was passed. The members of Menezes family voted in favour of the resolution. As agreed, PGI paid Rs.3.5 crores to the members of Menezes family. The amount

5 was distributed amongst the members of Menezes family in the proportion agreed between them. The proportion agreed was not proportionate to the number of shares held by them in Colfax. (4) The members of Menezes family filed their return of income for the assessment year 1994-95. Notices under section 143(2) of the Income Tax Act, 1961 (for short “the I.T. Act”) were issued. In the inquiry before the Assessing Officer, the respondent-assessee claimed that the amount received from PGI was in the nature of capital receipt. In the alternative the respondent claimed that it was a lucky chance payment or windfall amount and did not amount to an income within the meaning of Section 2(14) of the I.T. Act. The contention was rejected and the Assessing Officer who hold that the amount received by each members of Menezes family from PGI as an income chargeable to tax. On appeal, the Commissioner of Income-tax (Appeals) Belgaum confirmed the decision of the Assessing Officer treating the amounts received by the members of Menezes family from PGI as an income. Aggrieved by the decision of the CIT (Appeals), the members of Menezes family filed separate appeals before the Tribunal. The Tribunal by an order dated 28th September, 2001

6 allowed all the 22 appeals filed by the members of Menezes family and held that the amount received by Menezes family from PGI could not be considered as an income within the meaning of Section 2(24) of the I.T. Act and was, therefore not chargeable to tax under Section 4 thereof. That decision is impugned in this appeal. Findings of the Tax Authorities: (5) Before we proceed to consider the rival submissions of the parties, it would be useful to refer to certain findings of fact recorded by the authorities below. The Assessing Officer has held that the money was paid by PGI to the members of Menezes family for supporting the resolution passed in the general body meeting of Colfax held on 11th February, 1994 and for casting affirmative vote in favour of the resolution. He has further held that the amount received from PGI by the members of Menezes family was not in proportion to the shares held by each shareholder. He has further held that the amount was allotted and paid to only 15 shareholders as per the negotiations held between the members of Menezes family and PGI. Other shareholders viz., Shri R.A. Shah, Dr. Amishi Sawlani, Amila R. Shah, and three members of Menezes family viz., F Ilda Menezes, Rashmi

7 Menezes and Divya Menezes were not paid any amount. Thus, the payment received was not related to the value nor proportionate to the shareholding. The Assessing Officer held this circumstance to be against the respondent-assessee who had claimed the amount as a capital receipt. In our view, this circumstance rather supports the claim of the assessee than the case of the Revenue for the reasons which we would indicate later in this judgment. (6) On appeal, the CIT(Appeals) quoted the substantial part of the correspondence that had ensued between the Menezes family, including their leader P.J. Menezes and PGI. The CIT (Appeals) confirmed the finding recorded by the Assessing Officer that the consideration which was received by the members of Menezes family was not proportionate to the number of shares held by them in Colfax and that three of the non-family members namely Shri R.A. Shah, Dr. Amishi Sawlani, and Amila R. Shah, who held 2, 100, 100 shares respectively in Colfax had not received any consideration. He also noted that three members of Menezes family namely Ms. F Ilda Menezes, Rashmi Menezes and Divya Menezes who held 450, 60 and 60 shares respectively in Colfax had not received any part of Rs.3.5

8 crores paid by PGI. He also noted that even earlier Colfax was manufacturing the products which were marketed under the trade name Old Spice and there was no surrender of manufacturing right. By an agreement dated 21st October, 1993, the manufacturing right was continued in Colfax for a period of 10 years. As regards the trade mark “Old Spice”, CIT (Appeals) held that the trade mark did not belong to Colfax and there was no surrender of the right in the trade mark which had expired on 31st December, 1993. He further held that the fact that Colfax entered into the manufacturing arrangement/ agreement with PGI on 21st October, 1993 showed that Colfax had full knowledge that the right to use the trade mark under the agreement dated 12th July, 1967, which was renewed from time to time upto 31st December, 1993, would not be renewed after 1st January, 1994. He, therefore, rejected the contention that Rs.3.5 crores were received on account of any diminution in the value of shares (in Colfax) held by the members of the Menezes family and, therefore, constituted a capital receipt. He, therefore, affirmed the decision of the Assessing Officer. (7) On a further appeal, the Tribunal held that the initial trade mark agreement of the year 1967 was last renewed on 1st January,

9 1991 upto 31st December, 1993. The agreement permitting the use of trade mark “Old Spice” by Colfax lapsed as on 31st December, 1993. Contentions of the Revenue : (8) Ms. Asha Dessai, Counsel appearing for the Revenue attacking the judgment of the Tribunal submitted that the decision of the Tribunal was contrary to law and not sustainable. She submitted that all the authorities below have concurrently recorded a finding of fact that the marketing agreement which entitled Colfax to use the trade mark “Old Spice” had come to an end on 31st December, 1993. Initially, Colfax had both rights - right to manufacture the products and a chunk of capacity shares to the extent of 40%. If there was any erosion in the value of the equity shares of Colfax, there was also an erosion on the value of the shares held by PGI in Colfax. PGI has not received any consideration and in fact PGI or its principal had made the payment and that shows that the payment was not on account of any erosion in the value of the shares held by the members of Menezes family in Colfax. The money received, therefore, cannot be regarded as a capital receipt on account of erosion in value of the equity shares in Colfax held by the members of Menezes family. Our Reasons : (10) We find substance in the submission of Ms. Dessai. The 13

conclusion reached by the Tribunal that money received on account of erosion of value of the equity shares held by the members of Menezes family is so erroneous as to be called as perverse. It is reached on wrong application of law to the proved facts. The decision in the case of Sirpur Paper Mills (supra) was wrongly applied by the Tribunal to the facts at hand. In that case, there were two fire accidents in the assessee's factory during the assessment year. A part of the plant and machinery owned by the assessee was affected in those fire accidents. The plant and machinery was covered by fire insurance. The assessee received a sum of Rs.13,12,772/- as compensation for the loss occurred on accent of the two fire accidents. The assessee carried out repairs to the machinery damaged in fire at fraction of the cost/money received from the insurance company and claimed that the balance amount of Rs.7,83,207/- left with it after incurring the expenditure on repairs of the machinery as capital receipt. The Income Tax Officer regarded the sum of Rs.7,83,207/- as having merely gone to reduce the cost of the capital assets of the company and reduced the written down value of the plant and machinery. The Appellate Assistant Commissioner held that the surplus in the hands of the assessee was not the capital receipt and was liable to tax. The Tribunal held that the amount received by 14 the assessee was to compensate it for the loss or damage to its stock in trade and the fixed assets. The compensation received was not a revenue receipt and hence not liable to tax. The High Court held that the question whether a receipt was in the nature of a capital receipt or revenue receipt it would depend upon the facts and circumstances of each case and no rigid test for determination of it could be laid down. On the facts of the case, the High Court held that the compensation was received to replace the assets and substitute for the part of the assets damaged. The money which was received by way of a compensation for the damaged or the destroyed assets and consequently would not be a profit or gain in the business. Merely because some amount was saved out of the compensation by adopting a device to repair the machinery instead of substituting it, that would not alter the nature of the compensation. While confirming the decision of the High Court, the Supreme Court observed “So far the first question is concerned, it was not disputed on behalf of the revenue that the sum of Rs.7,83,207/- received by the assessee represented capital receipt in its hand and this question must accordingly be held to have been rightly answered by the High Court against the revenue.” Thereafter, amount whatsoever; even for the members who were paid the money it was not paid proportionately. Some shareholders got a larger cake while few others got smaller amounts. The contention of the respondent that the money was received by way of diminution of the value of the shares has therefore to be rejected. Alternative submission of the respondent. (11) Learned Counsel for the respondents, however, submitted that it was the case of the respondents all along and in the alternative that the amount received was a lucky chance payment and paid to the members of Menezes family for voting in favour of the resolution and, therefore, this did not amount to an income within the meaning of Section 2(24) of the I.T. Act. The Counsel invited our attention to 17 the assessment order wherein this contention raised by the assessee has been specifically noted at the very beginning of the assessment order. The contention was also repeated before the CIT (Appeals) and has been noted by him in paragraph No.7 of the order. Before the Tribunal, the assessee had raised the same contention which had been noted and accepted by the Tribunal in paragraphs 39 & 40 of its decision which read as follows :

“ 39. The appellants are not engaged in the business of charging fees for voting ion resolutions on the strength of their shareholdings. The act of affirmatively supporting a resolution is not an event, which has happened regularly or is expected to so happen. The impugned receipt was the only receipt of such nature ever received by the appellants, and neither before nor afterwards, the appellants have received any sums on such an account. .......

18 it was a casual receipt and windfall, it could not be treated as an income in the hands of the members of Menezes family. The Tribunal has, therefore, rightly held that the amounts so received, if not capital receipts, where not in the nature of an income and hence, not liable to tax. We find considerable force in the submission. It is true that the marketing agreement had come to an end by 31st December, 1993, but one must look to the entire background. Colfax was manufacturing as well marketing the products in the name of Old Spice since the year 1967. In the year 1967 trade mark belonged to Shulton (GB) and acquisition of it by Procter and Gamble USA, it came in the hands of Procter and Gamble (India) and/or PGI. During the period of more than 25 years (between 1967-1993) Colfax had not only used the trade mark Old Spice in India, but had developed the market for that brand. PGI wanted to use that brand and trade mark Old Spice after 1st January, 1994. It wanted to take an advantage of the goodwill built up by Colfax over several years of time. A possibility of a litigation between Colfax and PGI regarding the future use of brand Old Spice could not be ruled out. PGI wanted to buy peace and to avoid any litigation as that could have harmed the brand itself. Any injunction from any Court operating even for a period of time howsoever small

19 would have discontinued the usage of that brand and could have harmed the brand itself. Marketing experts believe that the consumer memory is short and people easily change the brand loyalty especially if it is not available on demand. If a particular product is not available even for a short time and the consumer buys similar product of another brand and the possibility of such consumer shifting to the alternative brand at the time of next purchase cannot be ruled out. Therefore, PGI must be wanting to avoid litigation and any interruption in the use of Old Spice brand. It did not even want to wait for creating its own manufacturing facilities and that is why it entered into a manufacturing agreement with Colfax for a period of 10 years. In order to avoid any possibility of litigation and any interruption in the use of the brand, it desired to have a resolution to be passed in the general body meeting of Colfax with a twin fold arrangement, one of extension of manufacturing right in Colfax for a period of 10 years and the other recognition of its marketing right and use of the brand name Old Spice. PGI, a subsidiary of a multinational company, offered to pay the money of Rs.3.5 crores to the members of Menezes family not by way of charity, but as a condition to ensure that they vote in favour of the resolution at the general body meeting of Colfax and support the 20 resolution. The money was paid for casting an affirmative vote by the members of Menezes family for one resolution namely the resolution recognizing extinction of the marketing rights of Colfax. The Tribunal has recorded a finding of fact that the voting on the resolutions in a particular manner was not a business of the members of the of Menezes family. The money which was received by them was not a business receipt, but received as bounty or windfall for voting affirmatively and supporting the resolution. Similar money was not to be paid to them at any time in part and never intended to be paid in future. Thus it was a receipt which was by way of a windfall and not an income within the meaning of section 2(14) of the I.T. Act. Consequently, the Tribunal was right in holding that the money received by the members of Menezes family was not liable to tax as an income within the meaning of Section 2(14) of the I.T. Act. (13) Learned Counsel for the appellant referred to and relied upon the following decisions : (i) Commissioner of Income Tax vs. Diners Club India Ltd., (2001) 248 ITR 0679 and (ii) Commissioner of Income Tax, Bombay City v. Bombay Burmah Trading Corporation, (1986) 161

21 ITR 0386. They are on the point as to when a receipt is to be regarded as capital receipt and when it is to be regarded as revenue receipt. In the view that we have taken that the receipt in the present case was a casual receipt in the nature of windfall, they are of no assistance. Similarly, the decisions in the cases of Commissioner of Income Tax, Bombay City-I vs. Scindia Workshop Ltd., (1979) 119 ITR 0526 and National Cement Mines Industries Ltd. vs. Commissioner of Income-Tax, (1961) 042 ITR 69 cited by the revenue about the true character of a of Income-tax, Ernakulam, AIR 1986 SC 98 cited by the learned Counsel for the respondents Menezes family, it is observed in para 17 as follows :

“17. From all these decisions, two facts emerge. The burden is on the revenue to establish that the receipt is of a revenue character. Once receipt is found to be of a revenue character whether it comes

22 under exemption or not, it is for the assessee to establish. Facts must be found by the Tribunal and the High Court must proceed on the basis of the facts found by the Tribunal. The High Court cannot afresh go to the facts overruling the facts found by the Tribunal unless there is a question to that effect challenging the facts found by the Tribunal. These propositions are well-settled and in this case in the decision of the High Court, these principles, in our opinion, have not been breached.” In this case it has been held that the burden of proving that a receipt is of revenue character initially rests on the revenue. The revenue was required to initially establish that the amount of Rs.3.5 crores received by the members of Menezes family was of a revenue character. They have not discharged that burden. On the other had, we are of the view that the receipt was a casual receipt in the nature of windfall arising out of one time event of affirmative voting on a resolution. It was not of repetitive character and was not likely to happen again. We, accordingly, answer the question framed in the negative and in favour of the respondent.

23 (15) For all these reasons, the appeal is dismissed, but in the facts and circumstances of the case, without any order as to costs.

D.G. KARNIK, J. F.M. REIS, J. ssm