Compensation received for low output of machinery is a revenue receipt and not a rebate on the actual price of the machinery.

( 1 ) THE facts found and/or admitted in this reference are of short compass. Some time in 1951, Messrs. Rohtas Industries Ltd. of Dalmia-nagar, the assessee, purchased from M/s. Escher Wyss of West Germany, a paper making machine. On installation it was discovered that the machine was defective and that its output was below the guaranteed figure.

( 2 ) THEREUPON, correspondence ensued between the assessee and the German firm. By its letter dated the 17th December, 1953, the assessee complained that the machine in its best condition was not producing more than 12 tons in 24 hours though the guaranteed production was 20 tons in 24 hours. This letter was followed by a telegram from the assessee reiterating the complaint. The assessee also asked for free and immediate supply of parts of the machine. The German firm by their letter dated the 10th January, 1955, undertook to supply free certain parts of a specified value. In spite of the replacement of the parts, the output of the machine did not increase. By their letter dated the 17th September, 1956, the German firm admitted that there was complaint of low output. Finally, by its letter dated the 7th July, 1958, the German firm recorded that by way of settlement of the assessee's claim it had agreed to pay an amount of DM 205,000 to a German bank to be held by them for being utilised in future for purchase of other machinery by the assessee.

( 3 ) IN terms of the aforesaid, the said amount of DM 205,000 was transferred to the Deutsche Bank on account of the assessee on the 11th July, 1958.

( 4 ) THIS amount was utilised by the assessee in the accounting year ended March, 1968, and shown in the profit and loss account under the head "machinery Purchase Claims Received".

( 5 ) THE Income-tax Officer initiated reassessment proceedings by issuing notice under Section 147 of the Income-tax Act, 1961, on the ground that depreciation had been allowed in excess. The Income-tax Officer held that the assessee had earned rebate from the West German firm which related to the supply of the machine and this must be deducted from the purchase price of the machine. In the assessment years 1955-56, 1956-57 and 1957-58, the Income-tax Officer reduced the depreciation allowed adding back the amount to the profits.

( 6 ) BEING aggrieved by the order of the Income-tax Officer the assessee preferred appeals to the Appellate Assistant Commissioner. It was contended in the appeals that the assessee had paid full price of the machine and the rebate which was allowed was contingent on the future purchase of other machinery and should not be adjusted against the original price on which the depreciation had already been allowed. The Appellate Assistant Commissioner did not accept the contentions of the assessee and confirmed the order of the Income-tax Officer. He held that the effective price of the machine had been reduced by the amount received back from the German firm and the rebate earned was solely related to the purchase price of the machine. This rebate was allowed because the machine supplied was not up to the standard.

( 7 ) THE assessee preferred further appeals to the Income-tax Appellate Tribunal. Before the Tribunal the assessee produced the correspondence it had with the West German firm and relied on the judgment of the Supreme Court in S. P. Jain v. Directorate of Enforcement, New Delhi; Union of India v. S. P. Jain [1963] 33 Comp Cas 231, where the very same transaction was, inter alia, considered by the Supreme Court. The Tribunal held that the amount received by the assessee from the West German firm represented payment by way of compensation for low output and was in the nature of a revenue receipt and had already been offered for taxation by the assessee in the assessment year 1968-69. This revenue receipt was referable to loss of production or loss of profit. Accordingly, the Tribunal allowed the appeals.

( 8 ) THE Commissioner of Income-tax thereafter initiated this