2025 (6) TMI 890 - AT - Income Tax

Nature of receipt - revenue or capital - amount received on settlement agreement - JV Agreement - as per AO amount received is in the nature of compensation against termination of business contract hence is taxable u/s. 28(ii)(e) - Assessee argued it is not a compensation received either for termination of contract or modification of terms and conditions of contract relating to assessee s business Whether the receipt falls within the ambit of either Section 28(ii)(e) of the Act or Section 28(va)(a) of the Act? - HELD THAT - A reading of the JV Agreement would further reveal that in the event of any dispute arising in connection with the agreement or otherwise with regard to relationship by virtue of the terms of the JV agreement it cannot be settled by compromise and the subject matter of dispute shall be submitted to arbitration according to the rules of international Chamber of Commerce. It further provided the seat of arbitration to be at Mumbai in India. There is nothing on record to suggest that either of the parties to the JV Agreement had invoked the arbitration clause in the JV Agreement at any point of time to resolve any dispute. In the aforesaid scenario it cannot be said that the payment/compensation received by assessee is on termination of contract or modifications of terms and condition of the contract relating to the business of the assessee. It is another matter that the assessee on his own did not carry out any business activity. Thus in our view the payment would not fall within the ambit of Section 28(ii)(e) of the Act. Whether the payment would fall within the ambit of Section 28(va)(a) of the Act? - Neither the terms of settlement agreement under which the assessee had received payment nor any other material on record suggest that the assessee had entered into any agreement with B.K. Parties for not carrying out any activity in relation to any business or profession for which it has been compensated. On the contrary the settlement agreement confer upon the parties unrestricted right to carry on business activities without interfering with each other. Thus in our view the payment received by the assessee would even come within the ambit of Section 28(va)(a) of the Act. There is nothing in the JV Agreement even to suggest that any of the parties can claim compensation on termination of JV agreement. There is nothing on record to suggest that at any point in time B.K. Parties were substituted in place of Paccess USA/Paccess LLC in the JV agreement. Therefore the compensation does not flow from the JV Agreement. On the contrary the compensation/payment arise out of the settlement agreement. The settlement agreement was basically reached by B.K. Parties to avoid the legal consequences arising out of the suit filed by the assessee in Delhi High Court to injunct the B.K. Parties from carrying on any business activity detrimental to the business activities carried out by the assessee. Therefore the payment made was for not exercising the right to sue. This in our view would fall in the category of capital receipt . In any case of the matter conditions of Section 28(ii)(e) and 28(va)(a) are not attracted to the receipts.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

- Whether the amount of Rs. 3,68,38,400 received pursuant to a settlement agreement with certain parties (B.K. Parties) is taxable as income under Section 28(ii)(e) of the Income-tax Act, 1961, which covers compensation received in connection with termination or modification of business contracts.

- Whether the said amount is taxable under Section 28(va)(a) of the Act, which pertains to sums received under an agreement for not carrying out any activity in relation to any business or profession.

- Whether the receipt should instead be treated as a capital receipt not chargeable to income tax.

- The applicability and interpretation of the Joint Venture (JV) agreement between the assessee and PACCESS USA/PACCESS LLC, and whether the B.K. Parties were bound by or substituted in that agreement.

- The relevance of the settlement agreement terms and their impact on the nature of the receipt.

- The principle of consistency in taxing similar receipts received by other family members of the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability under Section 28(ii)(e) - Compensation in connection with termination or modification of contract relating to business

Relevant legal framework and precedents: Section 28(ii)(e) of the Income-tax Act taxes any compensation or other payment received in connection with termination or modification of terms and conditions of any contract relating to business or profession.

Court's interpretation and reasoning: The Tribunal examined the JV agreement executed on 12.12.2000 between the assessee (Wadhwas) and PACCESS USA, which created PACCESS India as a joint venture company. The JV agreement granted PACCESS India exclusive rights to carry on packaging business in India and Sri Lanka during its subsistence. The agreement included provisions for termination, including upon dissolution or liquidation of PACCESS USA.

It was undisputed that PACCESS USA converted into PACCESS LLC and was subsequently wound up in August 2013, resulting in automatic termination of the JV agreement. The B.K. Parties were not parties to the JV agreement, nor did they substitute PACCESS USA or PACCESS LLC in the agreement. B.K. Parties expressly disowned the JV agreement in communications.

The payment of Rs. 3.68 crore was received pursuant to a settlement agreement in 2018 with B.K. Parties, who were interfering in the assessee's business by dealing directly with customers. The settlement was to avoid litigation initiated by the assessee.

The Tribunal noted that the payment was not received from PACCESS USA or PACCESS LLC, nor was it linked to termination or modification of the JV agreement. The JV agreement contained an arbitration clause for dispute resolution, which was not invoked. Therefore, the payment was not in connection with termination or modification of any contract relating to the assessee's business.

Key evidence and findings: Documentary evidence included the JV agreement, certificate of cancellation of PACCESS LLC, settlement agreement, and lawyer communications disowning the JV agreement by B.K. Parties.

Application of law to facts: Since the payment was not linked to termination or modification of the JV agreement or any business contract of the assessee, the conditions of Section 28(ii)(e) were not satisfied.

Treatment of competing arguments: The Department argued the amount was compensation for termination of business contract and hence taxable. The assessee argued the JV agreement terminated in 2013 and B.K. Parties were not parties to it, so the payment was not compensation under Section 28(ii)(e). The Tribunal found the assessee's argument persuasive and noted contradictions in the Department's reasoning.

Conclusion: The payment does not fall within the ambit of Section 28(ii)(e) of the Income-tax Act.

Issue 2: Taxability under Section 28(va)(a) - Payment for not carrying out any activity in relation to business or profession

Relevant legal framework: Section 28(va)(a) taxes sums received under an agreement for not carrying out any activity in relation to any business or profession.

Court's interpretation and reasoning: The Tribunal analyzed the settlement agreement terms, which provided mutual releases and covenants not to sue, and undertook that neither party would interfere with the business activities of the other in India, Sri Lanka, or elsewhere.

The settlement did not restrict the assessee from carrying on any business or profession. Instead, it ensured that neither party would hinder the other's business activities. The payment was for giving up the 'right to sue' rather than for abstaining from business activities.

Key evidence and findings: The settlement agreement clauses emphasized mutual non-interference and freedom to conduct business, with no undertaking by the assessee to cease business activities.

Application of law to facts: Since the assessee did not agree to refrain from carrying out any business or professional activity, Section 28(va)(a) was not attracted.

Treatment of competing arguments: The Department contended the payment was for giving up business rights and hence taxable under Section 28(va)(a). The Tribunal rejected this, highlighting that the settlement explicitly allowed business activities to continue unhindered.

Conclusion: The payment does not fall within the scope of Section 28(va)(a) of the Act.

Issue 3: Nature of receipt - Capital receipt or revenue receipt

Court's reasoning: The Tribunal noted that the payment arose from a settlement to avoid litigation over interference in business, effectively compensation for giving up the right to sue rather than for business income or restriction on business activities.

The payment was not linked to any contract termination or modification, nor was it for abstaining from business. The settlement agreement granted freedom to carry on business and prevented interference by either party.

The Tribunal also observed that other family members of the assessee had received similar payments treated as capital receipts and not taxed, with their returns accepted under Section 143(1) without reopening assessments.

Application of law to facts: The payment constituted a capital receipt arising from settlement of a legal dispute, not a revenue receipt from business operations.

Treatment of competing arguments: The Department's attempt to treat the amount as revenue income was found to be based on a misreading of facts and contradictory findings by the First Appellate Authority.

Conclusion: The receipt is a capital receipt and not taxable as business income under the Act.

Issue 4: Consistency in taxation among family members

The Tribunal emphasized the principle of consistency, noting that other family members received similar payments treated as capital receipts and not subjected to tax assessments or reassessments. It held that a consistent view must be taken in the assessee's case.

3. SIGNIFICANT HOLDINGS

- "As could be seen from the aforesaid facts, the payment received was not on account of termination of contract relating to any business carried on by the assessee or modification in terms with contract relating to any such business."

- "Neither the terms of settlement agreement under which the assessee had received payment nor any other material on record suggest that the assessee had entered into any agreement with B.K. Parties for not carrying out any activity in relation to any business or profession for which it has been compensated."

- "The payment made was for not exercising the right to sue. This, in our view, would fall in the category of capital receipt."

- "The conditions of Section 28(ii)(e) and 28(va)(a) are not attracted to the receipts."

- The Tribunal established the principle that compensation received pursuant to a settlement agreement resolving a legal dispute over interference in business, where no contract termination or modification is involved, and no restriction on business activities is undertaken, constitutes a capital receipt not taxable under Sections 28(ii)(e) or 28(va)(a).

- The Tribunal directed deletion of the addition made by the Assessing Officer and allowed the appeal.