TMI Blog1984 (7) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of Rs. 40,000 shall be returned to the lessee one week before the date of termination of the agreement. If the assessee fails to repay the same, the lessee shall be entitled to continue the agreement till the amount of Rs. 40,000 is repaid. Clause 4 of the agreement provided that the lessee shall pay the weekly hire for each week in advance of the running week. Clause 18 of the agreement, which is relevant for the purpose of this reference, provides that, if the lessee should fail to pay the weekly hire, as agreed, for any week, the agreement shall stand cancelled and the advance (security deposit) of Rs. 40,000 shall be forfeited. It appears, the lessee committed a default in payment of the weekly lease amount for three weeks continuously commencing from February 7, 1969. The assessee served a notice on the lessee calling for payment of the weekly rent in arrear. The assessee also gave a notice to the lessee that, pursuant to the default committed in the payment of the weekly rent, the agreement stood cancelled and the security deposit of Rs. 40,000 was forfeited. It appears, later on, the assessee filed a suit before the Fourth Additional judge, City Civil Court, Hyderabad, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AAC and accepting the assessee's contention that the sum of Rs. 40,000 was not income liable to be taxed under the Act. The learned Accountant Member observed that the security deposit of Rs. 40,000 has no relevance to the income which the assessee was receiving week after week in the form of lease hire. He observed that the security deposit was made with the assessee with the sole idea of compelling the lessee to pay the weekly hire charges in time. Referring to the lease deed as well as the subsequent compromise between the assessee and the lessee, the learned Accountant Member held that there was no element of profit on account of loss of profit included in the sum of Rs. 40,000 forfeited by the assessee. It was, therefore, held that the sum of Rs. 40,000 representing the security deposit forfeited was not in the nature of income in the hands of the assessee liable to tax. The learned judicial Member held that the forfeiture of the security deposit cannot be said to be compensation received by the assessee for loss of profit. In that view, it was held that the sum of Rs. 40,000 received by the assessee by forfeiting the security deposit did not partake the nature of income li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount in reaching a decision. The observations of the Supreme Court in the above case indicate that generally payments are made in settlement of right sunder a trading contract or trading receipts and are assessable as revenue. Where the circumstances of any case indicate that compensation is paid to a person for cancellation of a contract which does not affect the trading structure of his business nor deprive him of what, in substance, is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade, the receipt is revenue. Where, however, by the cancellation of an agreement, the trading structure of the assessee is impaired or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agreement is normally a capital receipt (please see the decision of the Supreme Court in Kettlewell Bullen Co. Ltd. v. CIT [1964] 53 ITR 261. Obviously realising this clear distinction, learned counsel for the assessee, Sri M. J. Swamy, contended that the agreement dated August 25, 1968, entered into by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal asset. As we observed earlier, the capital asset is the cinema theatre itself which continued to exist as it was prior to the termination of the contract and also continued to produce income even after the termination of the agreement. Basically, therefore, we are unable to appreciate the contention of the learned counsel that the agreement itself constituted the source of the profit-making apparatus and it must, therefore, be held that the sum of Rs. 40,000 appropriated by the assessee by forfeiting the security deposit was capital in nature. We shall briefly refer to the decisions relied on by the learned counsel for the assessee. Our attention has been invited to a decision of this court in Kimtee Sons v. CIT [1978] 115 ITR 190. That was a case of managing agency agreement. On account of the premature resignation of the managing agent which was demanded, the arbitrators determined that the assessee in that case should be paid damages of Rs. 93,515 towards compensation for the loss of managing agency commission. This court held that the sum of Rs. 93,515 was not income in character but was capital and all the same held that the provisions of s. 28(ii) of the Act applied and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm and the company. The assessee did not accept the suggestions of the company for variation of the contracts with regard to payment of interest, etc., and consequently the company filed a suit for certain reliefs. Ultimately, a consent decree was passed whereunder the company paid the assessee as and by way of compensation for termination of the agreements a sum of Rs. 3,00,000. The question was whether the sum of Rs. 3,00,000 was income or not. The Bombay High Court held that it was a capital receipt, because compensation was paid for the loss of source producing the income. We do not see how the above decision could be of any assistance to the present case. Learned counsel also relied on the decisions in Gooptu Estates Limited v. CIT [1929] 4 ITC 146, Sabine (H. Al. Inspector of Taxes) v. Lookers Ltd. [1956-60] 38 Tax Cases 120, Burmah Steam Ship Company Limited v. IRC [1930] 16 Tax Cases 67, CIT v. Motiram Nandram [1940] 8 ITR 132 (PC) and Ukhara Estate Zamindaries (P.) Ltd. v. CIT [1979] 120 ITR 549 (SC). We do not consider it necessary to deal with those cases in detail as, in our opinion, the facts of those cases were clearly distinguishable from the facts of the present cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termination of such a contract. The amount forfeited by the assessee has reference only to its business and did not represent any compensation for loss of source producing income or any injury to or destruction of the profit-making apparatus. We may also refer to the decision of the Supreme Court in CIT EPT v. South India Pictures Ltd. [1956] 29 ITR 910 (SC). That was a case of an assessee, who was carrying on business of distribution of films. He entered into three agreements for advancing monies to certain motion picture producers towards the production of three films and acquiring the rights of distribution thereof. The agreements, inter alia, provided that the assessee would advance certain sums of money in instalments for the production of the films, the assessee acquiring the sole right to distribute the films for a period of five years from the date of release of each film. After the assessee had exploited to a certain extent its right of distribution of the three films, the agreements were cancelled and the producers paid an aggregate sum of Rs. 26,000 to the assessee towards compensation as a result of the termination of the contracts. The Supreme Court held that the sum ..... X X X X Extracts X X X X X X X X Extracts X X X X
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