TMI Blog2018 (11) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... certified that the compensation had been determined and paid by them for stalling the execution of the agreed work as above in terms of the earlier MOU. The above clarification issued by LIPL clearly shows that the compensation received by the assessee is for sterilization of the profit making apparatus of the assessee company. The various decisions relied on by Ld. Counsel for the assessee also support its case that the impugned receipt is capital in nature. - decided against revenue - ITA No.157/RPR/2014 - - - Dated:- 23-10-2018 - SH. R.K. PANDA, ACCOUNTANT MEMBER AND MS. SUCHITRA KAMBLE, JUDICIAL MEMBER For The Appellant : Sh. R. K. Singh, CIT DR For The Respondent : Sh. Nikhilesh Begani, CA ORDER PER R.K. PANDA, AM: This appeal filed by the revenue is directed against the order dated 06.06.2014 of the CIT(A), Raipur (CG) relating to A. Y. 2011-12. 2. Facts of the case, in brief, are that the assessee is a company and filed its return of income on 24.09.2011 declaring total income of ₹ 23,33,570/-. During the year under consideration, the assessee derived income from interest chargeable under the head Income from Profit Gains o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pensation used therein is misleading. He observed that as mentioned in the MOU dated 31.1.2009, LIPL was in need of land from landowners listed in Annexure-A to the MOU dated 31.1.2009 for the proposed Railway track. For this purpose LIPL approached RIL[ the assessee company] to facilitate purchase/ transfer of land required for the railway track alignment alongwith the balance piece of land in lawful manner, as per section 165 of the CG Land Revenue Code, 1959, applicable for transfer of land enlisted in Annexure-A to the MOU dated 31.1.2009. The impugned amount received by the assessee company is, in fact, a taxable consideration received by it in lieu of the following: - the efforts made,/ to be made by RIL[ the assessee company] in facilitating the availability smooth transfer of land from Land owners listed in Annexure-A to the \ MOU dated 31.1.2009 and - the value added services rendered/ to be rendered by RIL[ the assessee company] required for LIPL s proposed Railway track. ensuring the withdrawal of all Writ petitions as well as Writ Appeals filed by the persons listed in Annexure-C to the MOU dated 31.1.2009 - extending all cooperation to LIPL i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But, it has entered in to MOU with Lafarge India (P) Ltd on 19.11.2001 i.e. almost 13 months after its incorporation. Thus, the claim of the assessee company that it was incorporated with the only object of execution of railway siding work for Lafarge India (P) Ltd is totally incorrect. 8. The Assessing Officer referred to the main objects of the company to be pursued on its incorporation which has multiple objects and that too a variety of objects agreement /arrangement /MOU with LIPL or during the continuance thereof or even after it, the company was and is free to undertake any activity of its choice enumerated in its Object Clause . That the assessee on its own sweet will did not take any other activity is another matter. 9. He observed that in the instant case, the assessee has not lost an earning asset and the compensation paid is not for the destruction of such an asset because even subsequent to the signing of the MOU dated 31.1.2009, the receipt- of consideration [so called compensation] is in lieu of and is dependent upon rendering of specific services by the assessee, performance of specific acts by the assessee providing value added services by the assessee to LI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, came to a standstill. Another MOU was entered on 31.01.2009 wherein in lieu of cancellation/termination of the MOU resulting into termination / closure of the business activity of the assessee company, compensation was determined by LIPL which was decided to be paid in tranches upon fulfillment of terms and conditions stipulated therein; Since the compensation has been determined as a result of termination/cancellation of the earlier MOU dated 19th November, 2001 thereby resulting into loss of permanent source of income, the assessee company treated the Compensation as a Capital Receipt not chargeable to tax. 12. Based on the arguments advanced by the assessee, the Ld. CIT(A) allowed the claim of the assessee treating the same as capital receipt by observing as under : - 7. I have carefully gone through the clauses of Memorandum of Understandings entered into between the appellant LIPL, Clarification issued by LIPL, correspondences between both the parties, return of income and financial statements of the appellant for the preceding assessment years assessment orders passed under section 143(3) of the Act for the preceding assessment years. On a thought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stalled by the appellant and accordingly, came to a standstill. Subsequently, after numerous rounds of deliberations meetings between LIPL and the appellant company, aforesaid MOU was executed on 31st January, 2009 leading to determination of compensation in lieu of cancellation/termination of the earlier MOU Dated 19th November, 2001 or in lieu of determination of its rights in the said MOU ultimately leading to loss of source of income. It is the construction of this MOU executed on 31st January, 2009 which ultimately decides the nature of receipt of the impugned amount termed as Compensation . After delving into the clauses of the said MOU, the AO has reached a conclusion that the impugned amount is infact consideration received by the appellant towards rendering of specific services by the appellant in the normal course of business and is accordingly, a revenue receipt chargeable to tax. It is a settled law that the construction of a particular document depends upon its pith and substance and the paramount test in this regard should be the predominant intention of the parties while executing that particular document. Such intention has to be inferred from the underlyi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 11. The distinction between capital and revenue is material and relevant both for taxation of income and for allowance of expenses and losses and therefore, determination of income from business or profession would necessarily include the ascertainment of the capital or the revenue nature of the receipt apart from determining whether the receipt is of a trading or nontrading nature. 12. As the Hon ble Supreme Court has observed, in the context of determining the capital or revenue nature of an expenditure, in Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC), the capital or revenue nature of an expenditure and similarly the capital or revenue nature of a receipt had been a vexed question and this question has always presented a difficult problem and continually baffled the Courts, because it has not been possible, despite occasional judicial valour, to formulate a test for distinguishing between capital and revenue expenditure which will provide an infallible answer in all situations. There have been numerous decisions where this question has been debated but it is not possible to reconcile the reasons given in all of them, since each decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttle consequence. It is not the nature of the receipt under the general law but in commerce that is material. Referring to the above observations, the Bombay High Court has held in the case of CIT vs. Scindia Workshop Ltd. (1979) 119 ITR 526 (Bom) that the Revenue authorities must examine the transaction and arrive at a conclusion having regard to the nature of the receipt from the commercial point of view with particular reference to the relevant provisions of the IT Act. 15. Where the receipt in question is such that it is associated with the sterilisation or injury to the capital asset or that the source of income ceases to exist, it would be a capital receipt [Glenboig Union Fire Clay Co. Ltd. vs. IRC (1922) 12 Tax Cases 427, P.L.M. Firm vs. CIT (1968) 68 ITR 856 (Mad) : TC38R.682 and CIT vs. South India Flour Mills Pvt. Ltd. (1970) 75 ITR 147 (Mad) : TC38R.863], In CIT vs. A.S. Wardekar (2005) 199 CTR (Cal) 255 it was held that amount received by assessee for entering into restrictive covenant which restrained the assessee from undertaking any activity, economic, industrial or otherwise, which in any way came in conflict with the activities of the payer company, was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to operate a hotel before it is transferred or let out to other persons constituted capital receipt, reversing the judgment of Calcutta High Court in CIT vs. Oberoi Hotesl (P) Ltd. (1994) 122 CTR (Cal) 347 : (1994) 209 ITR 732 (Cal) : TC13PS.62. 20. In CIT vs. T.I. M. Sales Ltd. (2003) 259 ITR 116 (Mad) in which principle laid down in P.H. Divecha vs. CIT (1963) 48 ITR 222 (SC) and CIT vs. Seshasavee Bros. (P) Ltd. (1999) 151 CTR (Mad) 598 : (1999) 239 ITR 471 (Mad) was applied, it was held that distributorship agreement on principal to principal basis was not an agency agreement and did not fall within the ambit of s. 28(ii)(c) of the Act and that merely because compensation was quantified on different counts, it could not be said that assessee had been reimbursed the expenses incurred in the past or the profit that was not available as a result of termination of distribution agreement and that compensation represented capital receipt. 21. The case of the appellant also finds support from the decision in A.K.T.K.M. Vishnudatta Antharjanam vs. Commissioner of Agricultural Income Tax (1970) 78 ITR 58 (SC) wherein it was held that It seems to us that the well-known ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant attached to the said MOU whereby the entire work of Construction of Railway Track Siding was awarded to the appellant and accordingly, the said determination which represents compensation for the loss of source of income (business of the appellant, in the instant case, itself was eliminated) leading to impairment or sterilization of the profit making structure itself would certainly constitute a Capital Receipt not chargeable to tax. This principle of law has been enunciated by the Hon ble Supreme Court various High Courts and Tribunals in their judgments time and again. 23. Looking to the facts and circumstances of the case as also decisions cited above, I am of the considered opinion that receipt of Compensation by the appellant towards loss of source of income clearly constitutes a Capital Receipt not chargeable to tax and hence, the addition made by the AO treating the same as revenue receipt chargeable to tax cannot be sustained. Hence, the addition made by the A.O. is deleted. 13. Aggrieved with such order of the CIT (A), the revenue is in appeal before the Tribunal by raising the following grounds :- 1. Whether in law and on facts circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld for a consideration of ₹ 19426716/-. Referring to page No. 36 of the paper book he drew the attention of the Bench to the profit and loss account for the year ending 31.03.2005 and submitted that the assessee has shown profit on sale of agricultural land and other income only. Referring to page 38 of the paper book he submitted that the assessee has not acquired any land during the year and the process of acquisition of land came to a stand still. Referring to various pages of the paper book he submitted that numerous rounds of discussions took place and in 2009 the assessee was forced to sign the MOU as there was no other business activity of the company. He submitted that the Assessing Officer ignored the entire surrounding circumstances and literally interpreted the MOU ignoring all the evidences placed before him. The Ld. AR submitted that on 19.11.2009 the compensation was received after terminating the MOU and the entire profit making apparatus was sterilized. There is no cogent material to show that the assessee has rendered any service to Lafarge. Referring to the certificate issued by Lafarge India, copy of which is placed at paper book page I, he submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly acquired a part of the lands (including some development works) required for the said railway track and siding which were subsequently transferred to LIPL and income arising thereof was shown under the head Profits Gains of Business or Profession . We find from the correspondences filed on record between the assessee and LIPL, that LIPL was indecisive as to execution of the entire work of construction of Railway Track Siding from the assessee on Turnkey or Build-Operate-Transfer basis and subsequently, owing to various constraints, the balance works assigned to the assessee as per the scope of work as stipulated in the aforesaid MOU were not got executed by LIPL. After a considerable amount of time, another MOU was executed on 31st January, 2009 between LIPL assessee and in pursuance of the said MOU, the aforesaid Compensation has been determined by LIPL. We find merit from the submission of Ld. Counsel for the assessee that the entire work of construction of the Railway Track and Siding was its sole business and the isolated activity of acquisition of land for such Railway Siding was never visualized by it and further, that since LIPL continued to remain indecisive as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis of the said agreement the assessee has received a sum of ₹ 29,47,500/- from the Receiver after the sale of the hotel. The question which was considered by the IT authorities was whether the receipt of the said amount is capital receipt or revenue receipt. The ITO arrived at a conclusion that it was a revenue receipt, CIT(A) held that it was a capital receipt, the Tribunal confirmed the said finding, on reference to the High Court, the High Court arrived at a conclusion that it was a revenue receipt assessable to income-tax as business income for the asst. yr. 1979-80. On appeal by the assessee the Hon ble Supreme Court held as under :- 3. The question whether the receipt is capital or revenue is to be determined by drawing the conclusion of law ultimately from the facts of the particular case and it is not possible to lay down any single test as infallible or any single criterion as decisive. This Court in the case of Karam Chand Thapar Bros. (P) Ltd. vs. CIT (1971) 80 ITR 167 (SC) : TC 13R.1235 discussed and held that in CIT vs. Chari Chari Ltd. (1965) 57 ITR 400 (SC) : TC 38R.878 it was held that ordinarily compensation for loss of an office or agency is reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the amount which is received by him is for the termination of first contract which was executed in 1970 and, therefore, it should be considered his revenue receipt. In that case the Court was dealing with a trading contract and held that compensation paid in respect of the rights arising under the trading contract would be a revenue receipt and must be referred to the profits which would be made in carrying out of that contract. The Court has also observed : Whether a payment of compensation or termination of an agency is a capital or revenue receipt, it would have to be considered whether the agency was in the nature of capital asset in the hands of the assessee, or whether it was only part of nis stock-in-trade. 6. The aforesaid judgment was considered in the case of Kettlewell Bullen Co. Ltd. vs. CIT (1964) 53 ITR 261 (SC) : TC 13R.1226 wherein the Court has held as under : Whether a particular receipt is capital or income from business, has frequently 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 a trading transaction is taxable income. But t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court is set aside and the appeal is allowed. The question is answered in favour of the assessee and against the Revenue by holding that receipt in the hands of the assessee was capital receipt. 19. We find in the case of Kettlewell Bullen Co. Ltd. Vs. CIT (1964) 53 ITR 261 (SC), the assessee therein was appointed as a Managing Agent upon certain terms and conditions. The assessee and its successors in business, whether under the same or any other style or firm, unless they resigned their office were entitled to continue as managing agent until they ceased to hold shares in the capital of the company of the aggregate nominal value of ₹ 1,00,000 and were on that account removed by a special resolution of the company passed at an extraordinary meeting of the company, or until the managing agent's tenure was determined by the winding up of the company. In the event of termination of agency in the contingencies specified, the managing agent was to receive such reasonable compensation for deprivation of office, as may be agreed upon between the managing agent and the company and in case of dispute, as may be determined by two arbitrators. By another clause, the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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. 20. We find the Hon ble Supreme Court in the case of Karam Chand Thapar Brokers (P) Ltd. Vs. CIT reported in 80 167 has held as under :- 9. In the determination of the question whether a receipt is capital or income, it is not possible to lay down any single test as infallible or any single criterion as decisive. The question 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. That, however, is not to say that the question is one of f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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