TMI Blog2005 (12) TMI 227X X X X Extracts X X X X X X X X Extracts X X X X ..... y services in terms of license granted to the assessee-company by DoT. The said guarantees were, therefore, clearly related to the capital structure of the assessee-company or for that matter to its profit making apparatus and the amount received by the assessee company from Qualcomm as compensation for discharging the latter from the liabilities under the said guarantees was a receipt on capital account. Hon'ble Supreme Court in the case of Kettlewell Bullen Co. Ltd. [ 1964 (5) TMI 4 - SUPREME COURT] involving almost similar facts, is directly applicable to the present case wherein it was held that the compensation paid to the assessee for termination of managing agency was a loss of capital asset and it matters little whether the assessee did continue after the termination of the said managing agency. To the similar effect is the decision of Hon'ble Supreme Court in the case of Travancore Rubber Tea Co. Ltd. [ 2000 (3) TMI 5 - SUPREME COURT] cited by the learned counsel for the assessee wherein it was held that the, quality and nature of a receipt for income tax purposes are fixed once and for all when the subject of the receipt is received and no subsequent operation can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up a state of art broad-band network on convergence platform in Rajasthan telecom circle within twelve months from the date of the license agreement. In terms of the aforesaid agreements, Qualcomm sent some of the equipments to the assessee-company which failed to get necessary clearance from the Customs. In addition, there was a restructuring of Qualcomm's telecom business worldwide as a result of which it had agreed to sell its CDMA business worldwide to M/s. Ericsson. Consequently, Qualcomm could not execute the project agreements entered into with the assessee-company and finally, it was agreed between the assessee-company and Qualcomm to terminate the said agreements on the terms and conditions set out in a settlement agreement. As per the said terms and conditions, it was agreed inter alia that Qualcomm shall pay a total sum of Rs. 63.92 crores as compensation to the assessee-company on account the following:- (i) Waiver of loan taken by the company from ABN Anno Bank and guaranteed by M/s. Qualcomm by way of letter of credit in favour of ABN Amro Bank - Rs. 30.19 crores. (ii) Discharge of Qualcomm's obligation under the financial/performance bank guarantee given in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess and Cable TV services. In order to meet the above requirements as mentioned above, the company had, in 1996, tied up with M/s. Qualcomm Inc., USA and its subsidiaries which is one of the largest telecom companies of the World pioneer in CDMA technology. The company accordingly entered into contracts with Qualcomm for supply and related services for CDMA based wirelines equipments. In terms of the above said contracts, Qualcomm and its affiliates were required to supply most of the equipments, provide related services and undertake financial commitments and guarantees on behalf of the company's project in favour of DoT and banks. However on account of restricting of Qualcomm's telephone business worldwide as also the failure of its equipments to get necessary clearance from the customs, various contracts had to be terminated and settlement was reached between the company and Qualcomm and its affiliates. In terms of the above settlement arrived at, Qualcomm agreed to the following:- (a) Waiver of loan taken by the company from ABN Amro Bank and guarantee by way of Letter of Credit opened by Qualcomm in favour of ABN Amro Bank amounting to Rs. 30.19 crores. (b) Qualcomm al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our case shows that you credited an amount of Rs. 63.92 crores in capital reserve account following your settlement with Qualcomm and its subsidiaries and affiliates. 2. The Assessing Officer accepted this receipt as a capital receipt without proper enquiry. Neither copies of the original contracts with Qualcomm and its subsidiaries and affiliates nor of the settlement deed with them were called and examined to ascertain the true nature of the receipt of Rs. 63.92 crores i.e. whether it was capital receipt or revenue receipt. 3. Thus, it appears to me that the assessment framed was erroneous insofar as it was prejudicial to the interests of the revenue. 4. Therefore, I propose to pass appropriate orders in the matter in exercise of powers vested in me under section 263 of the Income-tax Act, 1961. 5. You are requested to show cause on 24-1-2005 at 11 AM as to why this should not be done. 6. In reply to the aforesaid notice, detailed written submissions were filed by the assessee pointing out, inter alia, that - (i) the operation of the company was not started till the last date of the previous year relevant to the year under consideration and no deduction of any expenditure in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the learned CIT. He required the assessee-company to file a copy of settlement agreement dated 9-10-1999 entered into by it with Qualcomm and after discussing the relevant terms and conditions of the said agreement in his impugned order, he observed that the cancellation of project contracts between the assessee and Qualcomm neither impaired its business nor did it result in loss of its source of income since he found that the assessee-company has entered into a fresh contract with M/s. Lucents Technology and continued to carry on the business of setting up and operating a telephone network in the Rajasthan telecom circle for which it had acquired a license from the Department of Telecommunications. He also observed that the cancellation of assessee's contract with Qualcomm was a normal incidence of business caused on account of restricting of Qualcomm's telephone business worldwide as also the failure of its equipments to get necessary clearance from the customs authorities. He, therefore, held that the compensation received by the assessee on termination of contracts from Qualcomm was not a capital receipt but was a revenue receipt. For this conclusion, he derived sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 263 to set aside the assessment order passed by the Assessing Officer. He submitted that the documentary evidence running into more than thousand pages was produced on behalf of the assessee-company before the Assessing Officer in the present case along with the note explaining the nature of the amount in question credited to the capital reserve. He contended that this documentary evidence also included all the relevant agreements concerning the receipt of Rs. 63.92 crores by the assessee from Qualcomm and only after examining the same, the claim of the assessee that the said amount was a capital receipt had been accepted by the Assessing Officer. He submitted that since this documentary evidence was voluminous, the same was returned back by the Assessing Officer without keeping it on record. According to him, the fact, however, remains to be seen is that the said documentary evidence was produced by the assessee before the Assessing Officer and without disputing this factual position, the learned CIT proceeded to hold the order of the Assessing Officer to be erroneous on the ground that the relevant agreements were not examined by the Assessing Officer. He contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew and the learned CIT was not justified in substituting the same with his own view by assuming jurisdiction under section 263 since the same was not permissible in law. 12. As regards ground Nos. 8 to 13 challenging the impugned addition on merits, Shri Aggarwal submitted that the sum of Rs. 63.92 crores received by the assessee as compensation for termination of contracts/agreements was a capital receipt and the learned CIT held the same to be a revenue receipt chargeable to tax under the head income from other sources completely misappreciating the facts of the case and wrongly applying the provisions of law. In this regard, he took us through the relevant terms of the settlement agreement entered into by the assessee-company with Qualcomm to explain the nature of compensation received by the assessee-company in terms of the said agreement. He pointed out that for the execution of its project, a loan of Rs. 30.19 crores was taken by the assessee-company from ABN Amro Bank and in terms of the project agreements, Qualcomm had guaranteed the said loan by way of letter of credit in favour of ABN Amro Bank. He submitted that as per clause 2(B) of the settlement agreement, Qualcomm a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements but were agreements on capital account and secondly, the business of the assessee-company had not commenced during the year under consideration. He contended that even the finding recorded by the learned CIT that there was no loss of any profit earning apparatus or loss on capital account as a result of cancellation of project agreements with Qualcomm was factually incorrect. He submitted that all the project agreements entered into by the assessee-company with Qualcomm were on capital account and cancellation of the said agreements certainly resulted in a loss of profit making apparatus which in fact was a loss on capital account. He submitted that the assessee-company no doubt managed to make alternative arrangement with some other party subsequently and went ahead to complete its project, but these subsequent operations could not change the nature of the receipt for income-tax purposes which was to be fixed once and for all at the time of receipt as observed by Hon'ble Supreme Court in the case of Travancore Rubber Tea Co. Ltd. v. CIT [2000] 243 ITR 158 relying on the decision in the case of Morley (Inspector of Taxes) v. Tattersall [1939] 7 ITR 316 (CA). He submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as liable to tax under the head income from other sources thus was not sustainable. 15. Shri Aggarwal further submitted that the loan amount from ABN Amro Bank was taken by the assessee for the payment of license fees to the Department of Telecommunications which was payment on capital account. He also submitted that even all the project contracts and license agreements entered into by the assessee either with Qualcomm or with DoT were on capital account being related to the capital structure of the assessee and none of the said transaction was revenue in nature. He contended that having regard to the nature of these contracts as well as the fact that no business had commenced by the assessee during the year under consideration, there was no justification in the action of the learned CIT in holding the cancellation of its agreement by the assessee-company with Qualcomm as a normal incidence of business. He also contended that there was a clear contradiction in the impugned order of the learned CIT in holding the said cancellation as normal incidence of business on one hand and directing the Assessing Officer to charge the amount of compensation received on such termination to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us was not made by the Assessing Officer in the present case before accepting the amount in question as capital receipt as claimed by the assessee and, therefore, the assessment order completed by him accepting the said claim was erroneous as well as prejudicial to the interest of the Revenue as specifically pointed out by the learned CIT in the notice issued under section 263. 17. Shri Rajnish Kumar, the learned CIT DR invited our attention to a copy of the notice issued by the learned CIT under section 263 placed at page No. 26 of the assessee's paper book and pointed out that the proper enquiries which ought to have made by the Assessing Officer before accepting the amount in question as capital receipt were specifically pointed out by the learned CIT. He contended that the assessment thus was made by the Assessing Officer in the assessee's case without proper enquiry and the same was erroneous as well as prejudicial to the interest of the Revenue as held by Hon'ble Karnataka High Court in the case of Thalibai F. Jain v. ITO [1975] 101 ITR 1 and Hon'ble Delhi High Court in the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375. Reliance was also placed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received by the assessee-company from Qualcomm as a result of cancellation of agreements and settlement of dispute through the process of arbitration. He contended that the project agreements originally entered into by the assessee-company with Qualcomm, therefore, need to be brought on record and perused to ascertain the exact nature of amount received by the assessee-company as compensation. He pointed out that since the said agreements were not produced by the assessee-company before the learned CIT during the course of proceedings under section 263 despite specific opportunity, the matter may be sent back to the learned CIT for deciding the same afresh by passing a fresh order under section 263 after taking into consideration the contents of the said agreements. Reliance was placed by him on the decision of Hon'ble Calcutta High Court in the case of Martin Burn Ltd v. CIT [1978] 114 ITR 939 to contend that the Tribunal is empowered to remand the matter to the learned CIT for passing a fresh order under section 263 after making proper and adequate enquiries. He submitted that the principles to ascertain the nature of receipt, whether capital or revenue, have been laid down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount in question received by the assessee is held to be a revenue receipt chargeable to tax, the same has to be included in the total income of the assessee under one of the heads of income which is to be decided from the nature of income by applying the practical notions. In this regard, his contention was that income of every kind, which is not to be excluded from total income under the Act, shall be chargeable to tax under the head income from other sources and the learned CIT, therefore, was fully justified in directing the Assessing Officer to charge the amount in question to tax in the hands of the assessee under that head. 21. In the rejoinder, the learned counsel for the assessee Shri Aggarwal submitted that the learned CIT after having considered the detailed submissions made before him on behalf of the assessee during the course of proceedings under section 263, has decided the issue under consideration mainly on the basis of settlement agreement between the assessee-company and Qualcomm and therefore, it is not permissible now for the learned DR to contend at this stage that fresh enquiries need to be conducted by bringing the project agreements on record. Relying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istinguishable on facts and none of them is directly applicable to the facts of the present case. 22. We have considered the rival submissions in the light of material available on record and the various judicial pronouncements cited at the bar. As regards the issue relating to validity of assumption of jurisdiction by the learned CIT under section 263 raised in ground Nos. 2 to 7 by the assessee, we may at the outset observe that the order passed by the Assessing Officer under section 143(3) in this case was held to be erroneous and prejudicial to the interest of the Revenue by the learned CIT on the ground that proper enquiries as required to be made in the facts and circumstances of the case were not made by the Assessing Officer while accepting the claim of the assessee that the amount in question was a capital receipt not liable to tax as is evident from the notice issued by him under section 263. It was, thus, not a case where the view taken by the Assessing Officer on the said issue was held to be erroneous by the learned CIT for assuming jurisdiction under section 263 in order to substitute the same with his own view by exercising the powers conferred on him under section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngwith other enhanced services like Phoneplus, Voice Mail, ISDN lines, leased lines, Virtual Private Network Centre, Internet Access and Cable TV services. In order to meet the above requirements as mentioned above, the company had, in 1996, tied up with M/s. Qualcomm Inc., USA and its subsidiaries which is one of the largest telecom companies of the World and pioneer in CDMA technology. The company accordingly entered into contracts with Qualcomm for supply and related services for CDMA based wirelines equipments. In terms of the above said contracts, Qualcomm and its affiliates were required to supply most of the equipments, provide related services and undertake financial commitments and guarantees on behalf of the company's project in favour of DoT and banks. However on account of restricting of Qualcomm's telephone business worldwide as also the failure of its equipments to get necessary clearance from the customs, various contracts had to be terminated and settlement was reached between the company and Qualcomm and its affiliates. In terms of the above settlement arrived at, Qualcomm agreed to the following: (a) Waiver of loan taken by the company from ABN Amro Bank a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, the entry recorded by the Assessing Officer on 20-3-2003 in his order sheet clearly shows that only books of account were produced on behalf of the assessee-company as against the specific requirement of the Assessing Officer to produce books of account alongwith complete set of documentary evidence as mentioned in his order sheet entries made on 26-12-2002 and 13-1-2003. Having regard to these order sheet entries as well as the absence of any discussion whatsoever in the Assessing Officer's order on this issue, the onus was on the assessee to establish on evidence that the documentary evidence including especially the settlement agreement was produced by it before the Assessing Officer and having failed to discharge this onus, it leads to an inevitable conclusion that no such documentary evidence in the form of copy of settlement agreement was produced by the assessee before the Assessing Officer and the same was not examined by him. 26. Before us, the learned counsel for the assessee has submitted that the submissions made on behalf of the assessee-company before the learned CIT during the course of proceedings under section 263 pointing out that the documentary evidence r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ati Singhal v. CIT [1997] 226 ITR 527 that an assessment made on income surrendered by the assessee without making any enquiry whether the same was in fact taxable in the hands of the assessee was erroneous and prejudicial to the interests of the Revenue. Further, as held by Hon'ble Delhi High Court in the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 and Duggal Co. v. CIT [1996] 220 ITR 456, it is incumbent on the Assessing Officer to further investigate the facts stated in the return when circumstances would make such an enquiry prudent and his order becomes erroneous if such an enquiry has not been made. Moreover, as held by Hon'ble Gujarat High Court in the case of Addl CIT v. Mukur Corpn. [1978] 111 ITR 312, an order of assessment passed by the ITO without making necessary enquiries on certain important points connected with the assessment would be erroneous and prejudicial to the interests of the Revenue. To the similar effect is the decision of Hon'ble Calcutta High Court in. the case of CWT v. Ramnarayan Bhojnagarwala [1992] 194 ITR 489 wherein it was held that whenever a question arises as to whether a correct and proper assessment has been made up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his appeal. 29. As regards ground Nos. 8 to 13 relating to the issue of taxability of the amount in question on merits, we may, at the outset, deal with the contention raised by the learned CIT-DR before us seeking remand of the matter to the learned CIT for deciding the same afresh on merits after making proper and adequate enquiries. His contention in this regard is that the project agreements initially entered by the assessee-company with Qualcomm were not produced by the assessee-company before the learned CIT during the course of proceedings under section 263 despite specific opportunity and in the absence of the same, the learned CIT had no occasion to bring on record and appreciate all the facts which were relevant and material for deciding the exact nature of the amount in question received by the assessee company from Qualcomm as compensation. In this regard, it is observed that although it was mentioned by the learned CIT in the notice issued under section 263 that neither the copies of the original contracts with Qualcomm nor that of the settlement deed with them were called and examined by the Assessing Officer to ascertain the true nature of the amount in question, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT in coming to the conclusion that the order of ITO was erroneous, however, had ignored this aspect of the matter and the Tribunal, therefore, thought it fit to direct him to consider this matter in the light of the view of the Tribunal that section 90 of the Companies Act would be applicable in order to decide whether the order of the ITO was erroneous in that sense. These facts of that case clearly show that a very relevant and material issue going to the very root of the matter was not considered by the Additional CIT while passing an order under section 263 holding the assessment completed by the Assessing Officer to be erroneous and since the same had a direct bearing on the assumption of jurisdiction by the Additional CIT under section 263, the order of remand by the Tribunal was upheld by the Hon'ble Calcutta High Court. 31. The facts involved in the present case, however, are different inasmuch as the assessment made by the Assessing Officer under section 143(3) was held to be erroneous and prejudicial to the interest of the Revenue by the learned CIT on the ground that the same was completed by the Assessing Officer without conducting proper enquiry whereas the furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is not warranted under the Act. It was also held that at the time of hearing of the appeal against CIT's order under section 263, if the assessee can satisfy the Tribunal that the grounds for decision given in the order by the CIT are wrong on facts or are not tenable in law, the Tribunal has no option but to accept the appeal and to set aside the order of the CIT. The Tribunal cannot uphold the order of the CIT on any other ground which, in its opinion, was available to the CIT as well but was not relied upon by him in his order under section 263. 33. In the present case, the learned CIT was well aware of the project agreements between the assessee-company and Qualcomm and even a reference was made to the said agreements in his notice issued under section 263. However, he finally did not insist for the examination of the said evidence observing that the same was not relevant for deciding the issue relating to the nature of amount received by the assessee-company as compensation for the termination of the said agreements. In this situation, remanding the matter to the learned CIT for examining the said evidence will clearly amount to allowing him to substitute a ground that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as income of the assessee by any stretch of imagination. 35. As regards the remaining amounts of Rs. 30.19 crores and Rs. 33.33 crores received by the assessee-company from Qualcomm, it would be pertinent to refer to the Settlement agreement entered into between the assessee-company and Qualcomm to ascertain the exact nature and character of the said receipts. The preamble of the said agreement, being relevant in this context, is reproduced below:- This Settlement Agreement is dated as of 9-10-1999, and is between the following parties: Qualcomm incorporated a Delaware Corporation with its Registered Offices at 5775 Morehouse Drive, San Dieogo, CA 92121, including its subsidiaries and affiliates Qualcomm International Wireless Technology, Inc., a California Corporation with its Registered Office at the same location and Qualcomm India Private Limited ( QIPL ), a company registered under the laws of India with offices at 1st floor, Universal Chambers, 48, Community Centre, New Friends Colony, New Delhi - 110 065, India (hereinafter jointly and severally referred to as QUALCOMM ); and Shyam Telelink Ltd. (Formerly known as Telelink Network (India) Limited), a company incorporated und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re and financing and/or financing commitment and guarantees as per the various project agreements entered into with the assessee-company. This supply of equipments and related services was required for the purpose of setting up a broad-band network on the Convergence platform in the Rajasthan Telecom Circle in order to facilitate the assessee-company to provide basic telephony services in the said circle during the course of its business. The said agreements entered into between the assessee company and Qualcomm were thus related to the capital structure of the assessee-company representing its profit making apparatus inasmuch as the broad-band network was being set up in order to facilitate the assessee-company to carry out its business of providing the basic telecom services in terms of license obtained by it from DoT for Rajasthan Telecom Circle. M/s Qualcomm, however, breached the terms of the said agreement and could not perform its obligations for one reason or the other which, as stated on behalf of the assessee-company before the learned CIT as well as before us, were the failure of their equipment to get clearance from the Indian custom authorities and also restructuring o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount drawn by Telelink and requested by ABN-AMRO in the demand notice, per instructions in the stand by Letter of Credit, issued by Bank of America. Per the Agreement to Provide Loan Guarantee in Form of Letter of Credit, upon the drawn down on the letter of credit Telelink is obligated to repay such sums drawn to Qualcomm, together with interest accrued. Qualcomm hereby releases Shyam from its obligations to repay Qualcomm the amount drawn under the letter of credit and also hereby releases Shyam from its obligations to repay Qualcomm any outstanding letter of credit fees under this facility. Qualcomm also hereby indemnifies Shyam against all claims for additional interest or fees under the ABN AMRO Loan Facility that have been asserted against Shyam by ABN AMRO and, within 45 days of the signing of this Settlement Agreement, shall secure by agreement or appropriate judicial or other proceedings a release or discharge of Shyam's liability for such additional interest or fees. Shyam agrees to cooperate with Qualcomm in all matters relating to the Loan Facility and will take all steps (including assignments of rights and other interests in favour of QIPL or another nominee o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout having been called, or on other terms with the consequence that QUALCOMM would have no liability to make any payment thereunder, QUALCOMM will pay Shyam INR 83,333,333. If despite Shyam's diligent best efforts the 2/2001 Guarantee is called, Shyam shall immediately deliver to QUALCOMM a promissory note in the form of Appendix 3 hereto payable in US dollars equivalent to INR 166,666,667 at the exchange rate listed by the Reserve Bank of India on the day the Guarantee is called. E. As an alternative to paragraphs 4(C) and 4(D), Shyam may elect, upon giving 10 days' prior written notice to QUALCOMM, to provide for the replacement or cancellation of both the 2/2000 and 2/2001 Guarantees effective on or before January 31, 2000, in either of the following ways: (i) If Shyam secures the replacement or cancellation of both Guarantees on or before January 31, 2000, or on other terms protects QUALCOMM from liability to make any payments thereunder, QUALCOMM shall immediately communicate with Bank of America (USA) to secure at the earliest possible time the cancellation of the letters of credit issued by it and upon their cancellation shall immediately pay Telelink INR 333,333, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan to the assessee for ten years. Later on, K.J.C. was taken over by A.M.C. and the latter agreed to waive the principal amount of loan. In these facts and circumstances, it was held by the Hon'ble Bombay High Court that the waiver of loan would not constitute business income of the assessee. In the present case also, loan from ABN Amro Bank was taken by the assessee on capital account and the discharge of the liability towards the said loan by Qualcomm resulted in waiver of the said loan, which, in our considered opinion, did not constitute income in the hands of the assessee-company. 40. As is evident from the relevant clause, of the settlement agreement reproduced above, different performance and financial guarantees were given by Qualcomm on behalf of the assessee-company. In order to get itself discharged of the obligations under the said guarantees, it was agreed by Qualcomm that it would pay Rs. 33.33 crores to the assessee-company and in turn, the assessee-company shall indemnify Qualcomm from any liability that may arise under the said guarantees during the period in which they were in force. It is pertinent to note here that all these guarantees were given in conne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble Supreme Court in the case of Rai Bahadur Jairam Valji relied by the learned CIT. The said decision of Hon'ble Supreme Court thus does not support the Revenue's case. On the other hand, the same helps the assessee's case. 42. Similar is the position as regards the decision of Hon'ble Calcutta High Court in the case of CIT v. Siewart Dholakia (P.) Ltd. [1974] 95 ITR 573 wherein J was one amongst very many foreign customers in the normal course of the assessee's business and the amount received by the assessee-company for losing the said customer was held to be a trading receipt liable to tax by the Hon'ble Calcutta High Court observing that the true character of the said receipt represents compensation for loss to the assessee in its trade and not for any loss of any capital asset. In the said decision, Hon'ble Calcutta High Court further clarified that if any amount is received as compensation for an injury which affects c the capital asset of the assessee or the capital structure of the assessee's business, such amount may normally be considered to be a capital receipt. In the present case, the project agreements between the assessee-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racted negotiations and a settlement was reached whereby a lump sum payment was agreed to be paid by the English company to the assessee as compensation. The issue thereafter arose as to whether the said compensation was a capital receipt or a revenue receipt liable to tax and when the matter reached to the Hon'ble Andhra Pradesh High Court, their Lordships observed that there is no infallible test to draw a clear cut demarcation between a capital receipt and a revenue receipt. The Hon'ble A.P. High Court then proceeded to discuss the various case laws relied upon by both the sides in support of their stands on this issue before finally deciding the same in the light of legal position emanating therefrom in paragraph Nos. 57 and 58 as under:- 57. From the foregoing decisional law, it is reasonably clear that in order to decide whether or not a payment is a revenue receipt, its true nature and substance must be looked into. The form in which it is expressed is not decisive. How the assessee treated the payment is not conclusive of its nature. If the assessee himself has treated the payment in his account books as compensation or consideration received for loss of earnings or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pounded by the Hon'ble AP High Court are applied to the facts of the present case, it would not be difficult to hold that the amount in question received by the assessee-company was a capital receipt and not a revenue receipt as alleged by the learned CIT. As already observed, the said amount was not received as compensation for loss of earnings or profits because the project agreements between the assessee-company and Qualcomm were on capital account and termination thereof resulted in injury to the capital structure of the assessee-company. Such compensation, therefore, was not for a loss of any earnings or profits suffered by the assessee-company and the receipt thereof could not be said to be received in the ordinary course of business of the assessee for loss of stock-in-trade because the business of the assessee-company had not even commenced in the year under consideration. The amount in question thus was received by the assessee-company towards compensation for extinction of capital asset and such receipt not being in the ordinary course of the assessee's business, the same was a capital receipt. It is pertinent to note here that setting up a broad-band network on c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court in that case was whether the amount received initially as trading receipt could eventually be regarded as business income as a result of subsequent event. Moreover, as held by the Hon'ble Supreme Court in that case, the subsequent event should be such that a different quality is imprinted on the receipt. In the present case, the fresh agreement entered into by the assessee-company with M/s. Lucents Technology in order to continue the setting up of the broad-band network was not such an event to imprint a different quality on the amount received by the assessee-company from Qualcomm so as to make this capital receipt a revenue receipt. This decision of the Hon'ble Supreme Court in the case of Karam Chand Thapar is therefore, not applicable to the facts of the present case and the reliance of the learned CIT-DR on the same is clearly misplaced. On the other hand, the decision of Hon'ble Supreme Court in the case of Kettlewell Bullen Co. Ltd. involving almost similar facts, is directly applicable to the present case wherein it was held that the compensation paid to the assessee for termination of managing agency was a loss of capital asset and it matters little ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
