TMI Blog1985 (9) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... aying a sum of Rs. 1,51,000 to the assessee. On the culmination of the negotiations, the company paid an amount of Rs. 1,51,000 to the assessee for which a receipt in the following words came to be executed: "Received with thanks Rs. 1,51,000 (Rupees one lakh fifty-one thousand only) from M/s. Bata Shoe Company Private limited, Sales Office, 6-A, S.H. Banerjee Road, Calcutta-13, as compensation for loss of business sustained for winding up the business of the firm which was hithertobefore running its business in the premises bearing Municipal Holding Nos. 2635/4242 and 2636/4243 in Jamalpur, Ward No. 2, Gandhi Road, in the town of Ahmedabad and for arranging a lease in favour of the said M/s. Bata Shoe Company Private limited from the owners of the premises under whose direction the vacant possession of the said premises has this day been delivered to M/s. Bata Shoe Company Private limited acting through their representative, Mr. M. C. Mittra, District Controller." The question which arises for consideration is whether the aforesaid amount of Rs. 1,51,000 received by the assessee in the year of account relevant to the assessment year 1968-69 can be brought to tax as a revenue r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer holding the same to be a trading receipt, brought it to tax. The assessee carried the matter in appeal before the Appellate Assistant Commissioner who held that on the assessee having vacated the shop in question, even though the business in that shop came to be wound up, there was no total cessation of business as the assessee continued to carry on business in the other shop. In other words, the Appellate Assistant Commissioner was of the view that the assessee's business had not come to a standstill but at the most it stood reduced on the transfer of the premises in question to the Bata Shoe Company. There was, therefore, a reduction in the volume of the assessee's business, the profit-making apparatus in the form of the other shop continuing to remain in the possession of the assessee. He held that the compensation received by the assessee was for loss of earnings and, therefore, assumed the character of revenue receipt. This view of the Appellate Assistant Commissioner was assailed by the assessee before the Income-tax Appellate Tribunal, A Bench, Ahmedabad. The Tribunal also took the view that the payment of Rs. 1,51,000 was by way of compensation for loss of business/ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent was by way of compensation for loss of business to which the assessee could be held bound; at least a presumption arose against the assessee which could be rebutted if strong facts exist to suggest to the contrary. Since the profit-making apparatus was not totally destroyed by the transfer of the shop to Bata Shoe Company, as the assessee carried on business in the other shop, Mr. Shah submitted that there was merely a reduction in the volume of business for which the assessee was compensated by the payment of Rs. 1,51,000 by Bata Shoe Company and, therefore, the receipt was clearly a revenue receipt. Before we proceed to consider whether the payment was by way of revenue or towards the transfer of a capital asset, it is necessary to state that one must look to the substance of the transaction and not to the mere form. It must also be kept in mind that the provisions of section 19 of the Bombay Rent Act would weigh with the concerned parties while drafting the receipt evidencing the payment of Rs. 1,51,000 for the transfer of possession of the shop in question. Section 19 of the Bombay Rent Act makes it unlawful for a tenant to claim or receive any sum or any consideration as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch leasehold rights can only be held to be payment on capital account there being no revenue quality attributable to the same. Therefore, any payment received, whether by way of compensation or under any other nomenclature, for parting with the capital asset, namely, the demised premises, can only be described as a capital receipt and not a trading receipt. If we turn to the receipt, we find on a reading of the said document as a whole that the assessee agreed to wind up its business in the shop in question and arranged to transfer the possession thereof to Bata Shoe Company with the consent of the landlord. The receipt speaks of three things, namely, (i) winding up of the business in the shop in question; (ii) arranging of a lease in favour of Bata Shoe Company with the owners ; and (iii) delivery of vacant possession of the said premises to the agent of Bata Shoe Company. The Bata Shoe Company paid an amount of Rs. 1,51,000 directly to the assessee for this transaction whereunder the assessee stopped its business in the shop in question and delivered vacant possession thereof to the representative of the Bata Shoe Company with the consent and under the directions of the landlord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was immediately adjacent to the shop occupied by Bata Shoe Company; (iii) the accommodation in the possession of the company was not sufficient; (iv) the company, therefore, negotiated with the assessee-firm to secure possession of the shop to expand its business apparatus ; (v) the assessee after securing the consent of the landlord agreed to wind up its business and deliver possession of the shop to the said company; (vi) in consideration of being put in possession as tenant, the company paid a sum of Rs. 1,51,000 to the assessee ; (vii) no part of the stock-in-trade was sold or delivered to the company ; and (viii) the assessee continued to carry on the same business in the other shop. On these and the fact that in the subsequent letter of January 21, 1970, the assessee contended that the compensation was received for injury to business, the Revenue contended, relying on CIT v. Manna Ramji Co. [1972] 86 ITR 29 (SC), that the receipt of Rs. 1,51,000 had a direct nexus with the assessee's business and was, therefore, a trading receipt. The assessee refuted this argument by pointing out that the real nature of the transaction revealed that the payment was for surrendering the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same, the receipt in the hands of the assessee would be a capital receipt In other words, the Supreme Court was of the view that compensation paid for withdrawing the agency in respect of the area outside Hyderabad State amounted to destruction or sterilisation of part of the capital asset and, therefore, the receipt was a capital receipt and not revenue receipt. It also pointed out that the compensation paid to the assessee was for the destruction of a part of the capital asset and was not referable to injury inflicted on the stock-in-trade to make it a revenue receipt. In Godrej Company [1959] 37 ITR 381 (SC), a sum of Rs. 7,50,000 was paid as compensation for releasing the company from the onerous term as to remuneration. In consideration thereof, the assessee agreed to accept commission at 10 per cent. of the net profits instead of 20 per cent under the extant agreement The Supreme Court held that no matter what was stated in the resolution, the payment was for securing immunity from liability to pay higher remuneration and was, therefore, a capital expenditure. In the case of Panbari Tea Co. Ltd [1965] 57 ITR 422 (SC), the balance of the premium was to be paid in 16 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and held that the compensation was in the nature of a capital receipt. The Supreme Court, reversing the decision of the High Court, held that the amount of compensation was a revenue receipt in the hands of the assessee inasmuch as it was for loss of earnings. In our view, the decision turned on its own facts and has no application to the facts of the present case. The award made by the learned Civil Judge in the sum of Rs. 1,25,500 was for loss of earnings. The compensation was awarded in lieu of the profit which the assessee would have earned had the premises not been requisitioned. In other words, the amount of compensation was determined on the basis of the estimated loss of profits. Besides, since the case was one of requisition, unlike acquisition, the assessee was deprived of the income yielding apparatus for temporary period only and not permanently. The case is not an authority for the proposition that if only a part of the income yielding apparatus is lost, the compensation paid for the loss thereof would be in the nature of a revenue receipt. Two facts clearly stand out, namely, (i) the assessee was only temporarily deprived of his business apparatus, since the premis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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