TMI Blog2016 (1) TMI 504X X X X Extracts X X X X X X X X Extracts X X X X ..... as business income. - ITA No. 24 of 2014 - - - Dated:- 4-1-2016 - Mr. Sanjay Karol and Mr. P.S. Rana, JJ. For the Appellant: M/s Chythanaya K.K. and Vijay Kumar Verma, Advocates. For the Respondent: Mr. Vinay Kuthiala, Sr. Advocate with Ms. Vandana Kuthiala, Advocate. JUDGEMENT Per: Sanjay Karol: The present appeal stands admitted on the following substantial questions of law:- Whether in the facts and circumstances of the case and in law, the ITAT was correct in holding that the compensation of ₹ 2,25,99,964 representing compensation received by the appellant towards cancellation of the SPA was a revenue receipt taxable in the hands of the appellant? 2. In relation to the assessment year 2008-09, M/s RFCL Limited (hereinafter referred to as the assessee), filed return with the Income Tax Department. The case was selected for scrutiny through CASS and notices issued under the provisions of Sections 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act). 3. Vide order dated 28.12.2010 (Annexure P-1), the Assessing Officer, reassessed the income by disallowing (i) the depreciation of goodwill and (ii) claim of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. [Vide Van Den Berghs Ltd. (Inspector of Taxes) vs. Clark, (1935) 3 ITR (Eng Cas) 17 (HL)]. That, however, is not to say that the question is one of fact, for, as observed in Davies (Inspector of Taxes) vs. Shell Company of China Ltd. (1952) 22 ITR Supp 1 (CA): these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend no doubt to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts . (Emphasis supplied) 7. Further in Shri P.H. Divecha (deceased) through LRs Another Versus The Commissioner of Income-tax, Bombay City I, Bombay, AIR 1964 SC 758, the Apex Court held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly engaged the attention of the courts. It may be broadly stated that what is received for loss of capital is a capital receipt: what is received as profit in trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. 21. But payment of compensation for loss of office is not always regarded as capital receipt. Where compensation is payable under the terms of the contract which is determined, payment is in the nature of revenue and therefore taxable. 36. 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 lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rminated) 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 . 11. Applying the aforesaid principles to the given facts, which we clarify we are not reappreciating, we do not find any justification to interfere with the order passed by the authorities below, as by no stretch of imagination can it be said to be perverse, illegal or founded on incorrect or incomplete appreciation of provisions of law, much less facts. 12. Assessee is a Company duly registered under the Companies Act, 1961, having its office at 1201 to 1206, 12th Floor, Pinnacle Business Tower, Shooting Range Road, Surajkund, Faridabad 121 009, Haryana. Its aim and object being diagnostic, laboratory solutions and chemical research. 13. M/s Sarabhai Zydus Animal Health Limited (hereinafter referred to as Zydus) was incorporated in the year 2000. The equity participation of the said company was in the following manner: (i) 50% with M/s Cadila He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial than the terms as set out in this Agreement, then the Purchaser shall forthwith terminate this Agreement by a written notice to the Vendors. (iv) In the event any litigation / proceedings is initiated which impacts the ability of the Parties to achieve Closing under this Agreement, then the Purchaser shall be entitled to forthwith terminate this Agreement by a written notice to the Vendors. (Emphasis supplied) 16. Agreement contemplated consequence of termination in the following manner:- 7.7 Consequences of termination: (i) In the event of termination of this Agreement by the Purchaser, the Vendors shall repay the Earnest Deposit Amount and separately, pay a penalty equivalent to 25% annualized return on pro rata basis on the Earnest Deposit Amount or 5% of the Earnest Deposit Amount, whichever is higher, to the Purchaser, as follows: (a) where the Agreement is terminated in accordance with the provisions of Article 7.6(ii) above, then within 30 days of the date of such termination; (b) where the Agreement is terminated in accordance with the provisions of Article 7.6(iii) above, then within the 60-day period referred to in clause 14.2.2 of the sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 both days inclusive) on the amount specified in para (i) above, calculated @ 14% p.a. Rs.59,96,833/- Less: TDS on interest @ 22.44% (One TDS certificate for interest upto 31.03.07 and another TDS certificate from 01.04.07 to 10.05.07 will be provided within 7 days) Rs.13,45,689/- Net Interest payable now Rs.46,51,144/- (iii) Payment of Penalty as per the SPA Rs.1,24,08,413/- (iv) Compensation for Termination of SPA Rs.2,25,91,587/- Aggregate amount payable Rs.28,78,19,407/ 20. This amount of ₹ 2,25,91,587/-, received as compensation by the assessee for termination of the SPA, was so claimed as a capital receipt, but assessed by the revenue as revenue receipt and subjected to payment of tax. 21. Now SPA provided for the consequences of the termination of the agreement and in terms thereof, assessee did receive the amounts towards payment of interest and penalty. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the company is not a relevant circumstance. What we have to see is what it was in the hands of the assessee. 25. If a receipt is a capital receipt in the hands of a recipient, it does not necessarily follow that expenditure is capital expenditure in the hand of a payer. Whether it is capital expenditure or revenue expenditure would have to be determined having regard to the nature of the transaction and other relevant factors. [M/s Empire Jute Co. Ltd. Versus Commissioner of Income Tax, (1980) 4 SCC 25]. 26. The assessee knew from the very beginning the conditionality Clause. He was conscious that no injury would be caused to his business in the event of SPA not being materialized and its non execution would in no manner impair its revenue. 27. In the aforesaid factual background, in our considered view, the authorities below have rightly held the amount of compensation to be a revenue receipt. Income earned from such sources was to be taxed as business income. 28. Now in the instant case as already observed, it is not the case of the assessee that his business had come to a halt or impaired the source of income. Hence applying the principle of law laid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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