TMI Blog2010 (11) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 24thSeptember, 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. Amount of Rs.4.25 crores was in the nature of trading receipt and the revenue authorities have rightly held it to be so - The appeal is dismissed - 183/2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctive areas. ITA No.183/2008 Page 4 of 31 4. By a notice dated 24th June, 1998, DCM unilaterally terminated the agreement dated 24th November, 1988 with KNA and the appellant. This led to disputes between the parties. A number of legal proceedings challenging the termination of the Agreement dated 24th November, 1988 were filed including the proceedings under the Arbitration and Conciliation Act, 1996. On 30th October, 2000, however, a settlement agreement was entered into amongst the parties. Clauses 2 and 3 of the said agreement which are apposite to the present controversy are reproduced herein: - " 2. That KNA and ANSALS have agreed to abandon/cessation of all their rights, claims, interests and activities whatsoever there might have been under the Principal Agreement, which stands annulled, in relation to the 66.53 acres of land owned by DCM at Bara Hindu Rao, Rohtak Road and Kishan Ganj, New Rohtak Road, Delhi, or construction already raised or to be raised thereon. DCM has agreed to acquire all such rights, claims, interests etc. of KNA and ANSALS. DCM shall hereafter take over from KNA and ANSALS the construction of flatted factory complex and residential group hous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n declaring income of Rs. 9,40,86,340/- was filed by the appellant on 31st October, 2001. In computing the taxable income, the amount of Rs. 4.25 crores received from DCM under the Agreement dated 30th October, 2000 was, however, not claimed as a "capital receipt". The said amount was credited to the profit and loss account under the head "other income". During the course of assessment proceedings, the appellant by a letter dated 24th September, 2003 claimed that the said sum of Rs. 4.25 crores was a "capital receipt'. 6. The Assessing Officer in computing the assessment at Rs. 25,87,98,377/- did not consider the above claim of the appellant and in the assessment order dated 26th March, 2004, this issue was not discussed and as a matter of fact, was not referred to at all. 7. Being aggrieved by the order of the Assessing Officer, the appellant preferred an appeal before the Commissioner of Income tax (Appeals) [for short 'CIT (A)'] . The CIT(A) by his order dated 18th June, 2004, after considering the claim of the appellant held that the amount of Rs. 4.25 crores was not in the nature of a trading receipt, held as follows: - "8.1 From the copy of settlement agreement filed wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) (iii) Hari Kailash Co. vs. CIT, 22 ITR 195 (All.) (iv) Gomti Credits (P) Ltd. vs. DCIT, 100 TTJ (Del) 1132; (v) CIT vs. Wazir Sultan 36 ITR 175." 10. We shall presently advert to the aforesaid decisions but before we do so, we may reproduce instructions - F.No.225/83/99-ITA-II dated 17th March, 1999 issued by the Board which are heavily relied upon by the learned counsel for the appellant: - "Where the capital asset transferred is in the nature of a right to manufacture, produce or process an article or thing recourse to section 55(2) can be made only from assessment year 1998-99 in respect of consideration received for the transfer thereof which includes extinguishments or curtailment of such right. In this connection, attention is invited to clause 19 of the Memorandum explaining the provisions of the Finance Bill 1997, wherein it has been pointed out that consideration received on extinguishments of such a right is in the nature of capital receipt and is not liable to tax under the 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te that it is for the Revenue to prove that the receipt is chargeable to tax under the provisions of the Income-tax Act, but once it is shown that the receipt is income under the Act, it is for the assessee to prove that the same is either exempt or that the assessee is eligible for deduction of the same. It is also well-known that the definition of 'income' in Section 2(24) of the Income Tax Act is an inclusive definition. It is a term of elastic import not confined by the use of the words "profits and gains". So in each case, the decision of the question as to whether any receipt is income or not must depend entirely upon the nature of the receipt and the scope of the relevant taxing provision. 15. The question of burden to prove is, therefore, of some importance. In Commissioner of Income Tax vs. Chari and Chari Ltd. (1965) 57 ITR 400, 407 (SC) , the Supreme Court observed: - " ..it must in the first instance be observed that it is for the Revenue to establish that a particular 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mical Industries (Exports) Ltd. paid for the first three years after the termination of the tenancy 2/5ths of the commission accrued on its sales in the territory of the appellant's agencies computed at the rates at which the appellant had formerly been paid and in addition in the third year full commission for the sale affected in that year at the same rates. The Imperial Chemical Industries (Exports) Ltd. had intended to take a formal undertaking from the appellant to refrain from selling or accepting any agency for explosives or other competitive commodities, but no such agreement in writing was taken or insisted upon. The question arose whether the amounts received by the appellant for those three years were of the nature of 'capital' or 'revenue receipt'. A three-Judge Bench of the Supreme Court held that the amounts paid were of the nature of income and, therefore, assessable to tax on the following reasoning: - "The appellant was conducting business as selling or distributing agent of numerous 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 busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated and fresh agencies may be taken. 20. In Kettlewell Bullen and Co. vs. Commissioner of Income-tax, Calcutta (1964) 53 ITR 261, the Supreme Court after analysis of a large number of cases falling on the two sides of the dividing line came to the conclusion that a satisfactory measure of consistency in principle is disclosed therefrom and laid down the following test:- "Where on a consideration of the circumstances, payment is made to compensate 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 (freed from the contract terminated) the receipt is revenue : Where by the cancellation of an agency 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 agency agreement is normally a capital receipt. In the present case, on a review of all the circumstances, we have no doubt that what the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancellation of a contract entered into by a person in the ordinary course of business. Emphasizing the distinction between an agency agreement and a contract made in the usual course of business, the Court pointed out that once it was found that the contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts, spread over a period. In this context, the court also made the following observations: - "30. Therefore, when a question arises whether a payment of compensation for termination of an agency is a capital or a revenue receipt, it would have to be considered whether the agency was in the nature of capital asset in the hands of the assesses, or whether it was only part of his stock-in-trade. Thus, in Barr Crombie Sons Ltd. v. Commissioners of Inland Revenue the agency was found to be practically the sole 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a receipt what has to be seen is whether the venture in which an assessee is giving up its rights was by itself the profit earning apparatus and such an action would disrupt the entire profit earning structure of the assessee. If that be so, anything received would partake of the character of a capital receipt. But, where, however, the venture is only for the purpose of carrying on the existing business by taking the help of another, compensation received for relinquishing a right in such a venture would be a revenue receipt." 24. On the above conspectus of law, the Tribunal, as noted above, opined that the compensation was for the loss of future profits and for the development already undertaken by the assessee, the expenses in relation to such development having already been claimed and allowed as revenue expenditure. Thus, the Tribunal held that what was paid was for the deprivation of the potential income. 25. We concur with the findings of the Tribunal for the 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 Settleme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spective buyers and under the said provisional bookings/agreements/arrangements made with them) and to indemnify KNA and ANSALS against the proceedings, claims, demands, damages and compensation in respect thereof and the amounts towards the basic price as aforesaid." 28. Thus, what was agreed to be paid by the DCM was for the deprivation of potential income and loss of future profit. 29. As regards the restrictive covenant, it cannot be lost sight of that what was prohibited was not to undertake similar project anywhere in or around Delhi, but not to undertake a similar project in the vicinity and that too for the limited duration of 3 years. This was subject to another rider. The restrictive clause was not to undertake a similar project in the vicinity of the existing project for a period of three years, without the written consent of the DCM. To be noted that with the approval of the DCM, it was open to the appellant to undertake a similar project, assuming 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 claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant in the instant case by the DCM was not on account of the restrictive covenant which was treated as an incidental matter, but on account of the dispute between the parties relating to the termination of the agreement dated 24th November, 1988. 32. In any case, the restriction placed was far from absolute in that it was to remain operative for a limited duration of time and pertained to a limited geographical area within the contours of Delhi. This apart, it was left open to the appellant to approach DCM for its written approval to the appellant carrying on a similar project in the vicinity (assuming such a project was available in the vicinity). Since all disputes were being set at rest, this undertaking appears to have been incorporated in an incidental manner so as to avoid any conflict of interest amongst the erstwhile partners in the project. Viewed from any angle, we see it as a safety valve for the DCM rather than an absolute restriction 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 appara ..... X X X X Extracts X X X X X X X X Extracts X X X X
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