TMI Blog2010 (11) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... s also decided on the fact of the case that the said sum is in the nature of revenue receipt and the case is dismissed - 183/2008 - - - Dated:- 19-11-2010 - A . K. SIKRI , REVA KHETRAPAL,JJ. Appellant represented by:Mr. Satyen Sethi,Mr. Johnson Bara, Respondent represented by:Ms. Prem Lata Bansal ,Ms. Anshul Sharma,Mr. Paras Chaudhry REVA KHETRAPAL, J. 1. In this appeal the appellant seeks to assail the order of the Income Tax Appellate Tribunal dated 3rd August, 2007 whereby the Tribunal held that the amount of ₹ 4.25 crores received by the appellant from the Delhi Cloth General Mills Co. Ltd. (briefly "DCM") in terms of the Agreement dated 30th October, 2000 was not a capital receipt but a revenue receipt. 2. The facts may be briefly delineated as follows: - M/s. DCM and Kailash Nath Associates (briefly KNA) entered into a Collaboration Agreement dated 17th July, 1986 inter alia with respect to the development of 66.53 acres of land owned by DCM situated at Bara Hindu Rao, New Rohtak Road, Delhi. Under this Agreement, the KNA was to develop and construct multistoried residential flats, flatted factories, shopping complex, schools etc. on the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd ANSALS the construction of flatted factory complex and residential group housing complex on the said land hitherto carried on by KNA and ANSALS under the annulled Principal Agreement, and all the assets, excluding Security Deposit, relating to the Project including any construction carried out at the Project site respectively belonging to KNA and ANSALS. KNA and ANSALS have further agreed that they shall not undertake without prior written consent of DCM similar project in the vicinity of the project for a period of three years from the date of signing of this agreement. 3. That in consideration of the above, DCM has agreed to take over all the liabilities/obligations of both KNA and ANSALS respectively under the provisional bookings made and/or arrangements/agreements entered into by them with their respective prospective buyers, as per particulars in the Annexures C‟ and D‟ hereto, including the amounts towards basic price and which amounts on the execution hereof stand transferred to the books of accounts of DCM and DCM is now in its books showing the said amounts to the credit of the said prospective buyers. DCM undertakes with KNA and ANSALS to pay, satisfy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant held that the amount of ₹ 4.25 crores was not in the nature of a trading receipt, held as follows: - "8.1 From the copy of settlement agreement filed with the written submission, it is seen that the appellant had agreed that they shall not undertake, without prior written consent of DCM, similar project in the vicinity of the project for a period of three years from the date of signing of this agreement. It has not been clarified as to what will constitute a similar project and which are will be treated as "in the vicinity of the project". Moreover, it was not a absolute prohibition as with the consent of DCM any project could be undertaken. Therefore, claim of the appellant that the cessation agreement was not in the nature of trading transaction, but was the one by which the appellant had parted with or extinguished one of its important sources of income either fully or partly, is not acceptable. In view of the above, this ground of the appeal is dismissed." 8. The appellant preferred a second appeal before the Income-Tax Appellate Tribunal (for short ITAT‟). The ITAT after hearing both the parties at considerable length and running through the gamut of case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head "Capital Gains" upto assessment year 1997-98. It is clarified that even where such transfer, extinguishments or curtailment of such a right is complete or in part, the taxability of this consideration will remain un-affected i.e. the same will not be taxable under the head capital gains only upto assessment year 1997-98 and will become taxable from the assessment year 1998-99 and subsequent year." 11. The learned counsel for the appellant, Mr. Satyen Sethi, in the above context relied upon the judgment of this Court in the case of Commissioner of Income tax vs. Milk Food Ltd. (2006)280 ITR 331 (Delhi) . He contended that this Court had settled this issue by holding that once the Board has issued instructions that receipts on account of restrictive covenant were not liable to tax, the Revenue was not entitled to raise a contention to the contrary. 12. Ms. Prem Lata Bansal, the learned counsel for the Department sought to counter the contentions of the learned counsel for the appellant by urging that the Settlement Agreement dated 30th October, 2000 clearly depicted an unequivocal understanding between the parties that the compensation was for annulment of the rights of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icular receipt is income liable to tax .." 16. The same three-Judge Bench in the case of Commissioner of Income Tax, Madras vs. Best Co. Private Ltd., (1966) LX ITR 11, 18 clarified that in its earlier judgment in Chari and Chari Ltd. (supra), it did not lay down that the burden to establish that an income was taxable was on the Revenue was immutable in the sense that it never shifted to the assessee. The expression "in the first instance" clearly indicated that the onus was a shifting one. It said : - "While the Income tax authorities have to gather the relevant material to establish that the compensation given for the loss of agency was a taxable income, adverse inference could be drawn against the assessee if he had suppressed documents and evidence, which were exclusively within his knowledge and keeping." 17. On facts, the Court, however, held that the compensation agreed to be paid to the respondent by its Principal, M/s. Imperial Chemical Industries (Exports) Ltd., Glasgow, was not only in lieu of giving up of the agency but also for the assessee accepting the restrictive covenant for a specific period. The Court, therefore, held that a part of the compensation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us principals .It may reasonably be held, having regard to the vast array of business done by the appellant as agents, that the acquisition of agencies was in the normal course of business and determination of individual agencies, a normal incident, not affecting or impairing the trading structure of the appellant. The appellant was compensated by payment to it, the loss of profit it suffered by the cancellation of its agency, leaving it free to conduct its remaining business." It further held :- 19. There is, in our judgment, no immutable principle that compensation received on cancellation of an agency must always be regarded as capital. In each case the question has to be determined in the light of the attendant circumstances. In the judgment in Kettlewall Bullen and Co.case [1964] 53 ITR 261 (SC) we have explained that the judgment of the Judicial Committee in the Commissioner of Income-tax v. Shaw Wallace and Co. L.R. 59 IndAp 206 was not intended to, and did not lay down that in every case, cancellation of an agency resulted in loss of a source of revenue or that amounts paid to compensate for loss of agency must be regarded as capital loss. 20. On a careful consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. 41. In the present case, on a review of all the circumstances, we have no doubt that what the assessee was paid was to compensate him for loss of a capital asset. It matters little whether the assessee did continue after the determination of its agency with the Fort William Jute Co. Ltd. to conduct the remaining agencies. The transaction was not in the nature of a trading transaction, but was one in which the assessee parted with an asset of an enduring value. We are, therefore, unable to agree with the High Court that the amount received by the appellant was in the nature of a revenue receipt." 21. In Commissioner of Income-tax vs. Rai Bahadur Jairam Valji [(1959) Supp. 1 S.C.R. 110, 113] , it was laid down as follows: - "The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business of the assesses, and the receipt of compensation on account of it was accordingly held to be a capital receipt, while in Kelsall's case the agency which was terminated was one of several agencies held by the assesses and the compensation amount received therefore was held to be a revenue receipt, and that was also the case in Commissioner of Income-tax v. South India Pictures Ltd. 31. We may in this context also note the further observations made by this court :- "But apart from these and similar instances it might, in general, be stated that payments made in settlement of rights under a trading contract are trading receipts and are assessable to revenue. But where a person who is carrying on business is prevented from doing so by an external authority in the exercise of a paramount power and is awarded compensation therefore, whether that receipt is a capital receipt or a revenue receipt will depend upon whether it is compensation for injury inflicted on a capital asset or on a stock-in-trade. The decision in Glenboig Union Fireclay Co., Ltd. v. Commissioners of Inland Revenue applies to this category of cases. There, the assesses was carrying on business in the man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reason that we find that the Tribunal rightly noted that there was not even a mention in the Agreement that the amount paid was towards the restrictive covenant and on the other hand a reading of the Settlement Agreement entered into between the parties clearly shows that the DCM had agreed to pay compensation for the "annulment of the very rights of KNA and ANSALS to carry on business of completing the project under the Principal Agreement and for being deprived of the potential income which could have arisen from carrying on such business, a sum of ₹ 6.75 crores to KNA, which is inclusive of refund of Security Deposit of ₹ 3.90 crores and a sum of ₹ 8.25 crores to ANSALS, which is inclusive of refund of security deposit of 4 crores respectively " 26. Undoubtedly, in the preceding clause, i.e. Clause 2, it is mentioned that KNA and ANSALS had agreed that they shall not undertake, without prior written consent of the DCM, similar projects in the vicinity of the said project for a period of 3 years from the date of the signing of the Agreement, but the sum of ₹ 8.25 crores, as is clear from a cumulative reading of clauses 2 and 3 of the Agreement, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssuming the site for such a project to be available. 29. Further, in our view, the scope and ambit of the restrictive covenant must be examined in the backdrop of the entire fact situation. Thus examined, we find that the clause has limited significance, being to save the interest of the DCM which was to develop the property as an absolute owner. By no stretch of imagination, such a clause was intended to divest the appellant of its income earning apparatus. Had the clause resulted in depriving the appellant of its income earning apparatus, and prohibited it from taking up a similar project anywhere in Delhi, there might have been some strength in the contention of the appellant that it had lost a capital asset and the amount which accrued to it for the loss of the capital asset must be viewed as a capital receipt not assessable to tax. This was not so; the Agreement between the parties was in the normal course of business. In other words, the normal incidence of business. Prohibition to carry on a similar project in the vicinity was on account of the nature of the business and was more by way of affording a safety valve to DCM. 30. The learned counsel for the appellant has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iction on the appellant from carrying on its business. Even otherwise, it could hardly be said that given the nature of the restrictive covenant in the Agreement, the appellant was hampered from operating its profit making apparatus in other spheres and even in the very same sphere. Apparently for this reason it did not even strike the appellant at the time of filing of its return, to claim that the sum of ₹ 4.25 crores was a capital receipt. Subsequently, it appears that on account of legal advice received by the appellant during the course of the assessment proceedings and about two years after the filing of its return, the appellant, by a letter dated 24th September, 2003 staked the claim that the sum in question was a capital receipt. Even thereafter, the claim does not appear to have been seriously pressed as is quite obvious from the fact that it was not even dealt with by the Assessing Officer and the CIT (A) also while dealing with this aspect of the matter dealt with it incidentally. It was only when the matter reached the Tribunal that this claim of the appellant appears to have been seriously pressed. 33. Be that as it may, we are of the considered view that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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