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2009 (10) TMI 637 - AT - Income TaxTaxability of receipt - compensation/damages received by way of appropriation of liability - capital receipt or revenue receipt - Whether the amount received from Saumya Construction (P.) Ltd. on account of development rights is business income u/s 28(va) or the same is assessable u/s 41 (1) or a non-taxable capital receipt - assessee has received an amount from Saumya Construction (P.) Ltd. and shown the same as liability in balance-sheet for assessment year 1997-98. The assessee has not shown the same as trading liability and nor claimed any deduction or expense in that assessment year. During the relevant assessment year 2005-06, the liability standing in assessee’s books was written off towards the compensation/damages for relinquishment of right to sue in the court of law and the liability was credited as capital receipt in the assessee’s capital account - AO has treated it taxable and has added it back in the assessment order, treating it as a revenue receipt - HELD THAT:- A liability created for purchase of stock-in-trade on credit is certainly a trading liability. Where A purchases his stock-in-trade from B on credit, the liability of A to B is a trading liability. But if A borrows money from C in order to pay off his liability to B, A’s liability to C on such borrowing is not a trading liability. It is thus clear that section 41(1) cannot be invoked if C remits a part or whole of his loan to A. Where the assessee had not claimed nor obtained a deduction in respect of a security deposit treating it as a trading liability, section 41(1) cannot be invoked when such security deposit is refunded to the assessee. In the present case, none of the above probabilities existed and this is a case of amount received from assessee-firm shown as a liability in the shape of cash credit in assessment year 1997-98. The assessee has not claimed the same as deduction or expenses in any of the years till date. The assessee has written off the same as compensation/damages for relinquishment of right to sue in court of law and credited the same in the capital account as capital receipt. In view of the above, we are of the considered view that the provisions of section 41(1) or section 68 of the Act will not apply to the writing off this liability in the capital account and the liability has not been credited in the profit and loss account but the same has been taken as capital basis in the capital account in the books of account of the assessee. We find that, exactly on similar facts, the Hon’ble jurisdictional High Court in the case of Baroda Cement & Chemicals Ltd.[1985 (12) TMI 55 - GUJARAT HIGH COURT] has stated that the compensation received by the assessee was not for consideration for the transfer of capital assets, however, the damages are in capital in nature. The provisions of section 28(va) provides that any sum whether received or receivable in cash or kind under an agreement for not carrying out any activity in relation to any business or not to share any know-how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services, shall be chargeable to income-tax under the head "Profits and gains of business or professions". In view of the above facts and discussions, the compensation received in lieu of foregoing a right to sue does not fall under provisions of section 28(va). We further find from the facts of the case that the assessee has not received this amount under an agreement for not carrying out activity in relation to any business or not to share any know-how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services, under the head "Profit & gains of business or profession". This provision is for taxing the receipt by the assessee in the nature of non-compete fee and exclusivity rights and not the receipt as received by the assessee. The receipt received by the assessee has written off the same as compensation/damages for relinquishment of right to sue in court of law and credited the same in the capital account as capital receipt. Accordingly, we are of the considered view that this provision of section 28(va) will not apply to the facts of the present case. Accordingly, this appeal of the assessee is allowed. In the result, assessee’s appeal is allowed.
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