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TMI Blog2013 (2) TMI 552X X X X Extracts X X X X X X X X Extracts X X X X ..... rporate services such as D.P.operation, acting as registrar to public issues, custodial services, data entry operation etc. In regard to custodial services, the assessee had service contract with several clients such as Tata Mutual Fund etc. 5. As per the Regulations 7 of the SEBI (Custodian of Securities) Regulation, 1996, all custodians were required to fulfill net worth norm of Rs.50 crore. The entities which were not fulfilling the net worth norm but were operating as custodian on the date of notification of the Regulation, could be granted a time period up to five years to fulfill such requirement. The assessee in terms of the said Regulations 7 have been granted extension of five years in meeting the requirement by 15.05.2001. 6. The assessee in the year 2000 started the process of shifting major clients and reached memorandum of agreement dated 19.07.2000 with Duetsche Bank AG (DBA) for shifting of major clients. In terms of the said agreement, the assessee had received compensation of Rs.3,69,17,881 for assessment year 2001-2002 and Rs.1,40,86,453 for assessment year 2002-2003. During the course of assessment proceedings of the aforesaid assessment years, the dispute aros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount was capital receipt, it was taxable under the specific provisions of s. 28(ii)(c) as per which amounts received for termination of an agency were taxable as business income. In appeal CIT(A) has confirmed the decision of the AO. 4.2 The case of the assessee is that custodial service was one of the major activities of the assessee. It has been pointed out that out of the total business receipts of Rs. 8.35 crores in 200001, from custodial services was Rs. 3.30 crores. The assessee had closed these services from 15th May, 2001 as SEBI did not allow any further extension of time. The closure of such major activity had impaired the profit earning apparatus and the compensation received was therefore capital receipt and was not taxable. Reference has been made to judgment of Hon'ble Supreme Court in the case of Kettlewell Bullen & Co. Ltd. (supra). The learned Authorised Representative has also argued that the assessee was not an agent of the clients in the strict legal sense of the term. He was dealing with the clients on principal-to-principal basis and therefore provisions of s. 28(ii)(c) were not applicable in respect of compensation received. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A copy of a sample agreement with the client Tata Mutual Fund has been filed by the assessee perusal of which shows that the agreement with the clients is not for a fixed period. Article VI(3) provides that the agreement shall be in force till it is terminated and any of the parties to the agreement may terminate the agreement at any time upon 90 days prior notice. Further, in case the termination is at the instance of the assessee, the custodial arrangement with the assessee will continue till a new custodian is appointed which is to be done with the consent of the SEBI. In case of termination, the client is required to reimburse to the assessee of its reasonable cost of expenses and disbursements as custodian. There is no provision for any compensation to be paid by clients nor any compensation has been paid as the agreement in this case has not been terminated by the clients. What has happened in this case is that the assessee sensing that the agreement with the clients may come to end on 15th May, 2001 due to non-fulfilment of net worth criteria of Rs. 50 crores as per SEBI regulations, the assessee has entered into an agreement with DBA as per which the assessee would surrend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgments relating to the treatment of receipt arising out of termination of agency or agreement will not be applicable. It is a case of voluntary surrender of the right of the assessee in the agreement with the clients and simultaneous efforts made by the assessee for obtaining consent of the clients for joining the services of DBA by entering into custodial service agreement with the latter. In other words, payment received by the assessee is for a service arrangement as per which the assessee surrenders its rights in the custodial agreement with the clients and ensures that these rights are transferred to DBA by convincing the clients. The cl. (6) of Part B of the memorandum of association with DBA also refers to the transaction price as payment for service arrangement with the selected clients. The net effect of the entire arrangement was that the assessee parted with its rights in the custodial agreement with selected clients in favour of DBA. The right of the assessee in the custodial agreement is, no doubt, an asset to the assessee. But in this case, the asset is not of enduring value because right of the assessee was to come to an end shortly on 15th May, 2001 due to SEBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the taxability of the compensation in its return of income filed for the relevant assessment years." On a perusal of the audited statement of account of the assessee for the year ended 31.03.2001, we find that under Schedule K, which is Notes of account at point no.5, the Auditor has made the following remarks :- "Due to need for complying with the requirement of maintaining high net worth (minimum Rs.50 crores net worth) under SEBI (Custodian of Securities) Regulations, 1996 to continue the business of providing Custodial Services, the company is in process of effectively transferring the said business of Custodial Services by shifting its major custodian clients to a third party for an agreed compensation. During the year, a compensation amounting to Rs.3.69 crores (net) has accrued to the Company on account of this arrangement. The Company is advised that such compensation, being in the nature of Capital Receipt, can be directly credited to Capital Reserve. Accordingly, the amount of such compensation has been directly credited to Capital Reserve Account." 10. Similarly, in Directors' Report at point no.3, the Directors have remarked as under :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... physical forms, computation of income, being part of the return of income was the only document in which the assessee demonstrated how it has computed its income under various taxable heads of income and paid taxes accordingly. Therefore, we cannot accept the contention of the assessee that there was a proper disclosure. As the assessee has failed to disclose the compensation received from DBA, it is a fit case for the levy of penalty for concealment of income and also for filing of inaccurate particulars of its income. 14. It is clear that the assessee had failed to mention in the return filed the details of income which was claimed as exempt. Even if the assessee had decided to treat the compensation as a capital receipt, the assessee should have computed capital gain liability on it, or at least shown it as exempt from tax under the head " Income Claimed to be exempt from tax " which he has not done. The assessee, therefore, furnished inaccurate particulars of its income and grossly failed to substantiate the basis on which the said claim of exemption of compensation received from DBA. The assessee has, therefore, concealed its income and also furnished inaccurate particulars o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no variance in the initiation and the levy of penalty . Though the CIT [A] at para 5.1 page 4 of his appellate order has mentioned "the appellant is deemed to have concealed the particulars of income". The CIT [ A] has the power of enhancement of income and so equally he can also modify the findings of the AO. (ii) Vanaik Investors Ltd. v. ITO [(2006) 5 SOT 591 (Del.)] - In that case the assessee has claimed bonus shares sold as exempt from capital gain tax. The claim was based on Supreme Court decision in B.C.Srinivasa Setty v. CIT [(1981) 128 ITR 294 (SC)]. This decision also do not favour the facts of the instant case as the assessee has nowhere given the basis for claiming the exemption of compensation received as capital receipt, whereas in the case relied upon by the assessee the basis for claiming the exemption was the decision of the Hon'ble Supreme Court. (iii) Walter Saldhana v. DCIT [(2011) 44 SOT 26 (Mum.)] - A perusal of the said decision show that in that case the assessee violated the provisions of section 94(7) by not ignoring losses while computing short term capital gain on transactions related to section 94(7). Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tails supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars." (emphasis given by us) The ratio of the afore-mentioned case also goes against the appellant as the Hon'ble Supreme Court has clearly held that the return of income is the only document where the assessee can furnish his particulars of income, whereas in the instant appeal, the appellant company has not disclosed the receipt of compensation received from DBA in its return of income nor in the computation of income accompanied with the return of income. Even in the audit report, we find that the auditor's have not given any basis for treating the compensation received as exempt from tax . 15. After considering the facts and circumstances of the appeal under consideration and also distinguishing the facts of the cases relied upon by the Counsel for the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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