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TMI Blog2018 (11) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... had entered into a Memorandum of Understanding (MOU) with another company namely "Lafarge India Pvt. Ltd" (LIPL in short) on 19.11.2001. Due to reasons beyond its control, only work relating to acquiring of land, that to partly, could be undertaken by it and other activities as defined in the MOU could not be carried out. Subsequently, disputes arose between both the parties and they entered in to a MOU executed on 31.01.2009, wherein compensation was determined for termination of earlier MOU dated 19.11.2001 on fulfillment of certain terms of the MOU dated 31.01.2009 for which a sum of Rs. 3,01,47,107/- was received by the assessee company during the assessment year under consideration. It was finally contended that the aforesaid compensation was determined and received on closure/ termination of its business activity resulting in to "loss of source of income" impairing its profit making structure or sterilization of profit making apparatus, therefore, the assessee company treated the same as "Capital receipt" not chargeable to tax and accordingly has shown the same under the head 'Reserve and Surplus'. In support of this claim, the assessee placed reliance on following citations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Lnd acquisition Act for the acquisition of the aforesaid land, extend requisite cooperation from the Land owners listed in Annexure-A : MOU dated 31.1.2009 by way of consent letters, sworn declarations, affidavits, documents and other connected papers as provided in Annexure-B giving no objection to the proposed acquisition. 4. He further noted that in case the land acquired by CSIDC is less than 150.91 acres enlisted in Annexure-A to the MOU dated 31.1.2009, the assessee company shall, extend requisite cooperation for lawful transfer of the land in favour of LIPL. 5. The Assessing Officer after analyzing the various clauses of the MOU noted that there is not even an iota of doubt that the payment received by the assessee company is in consideration of the efforts made by the assessee for facilitating the availability of land and for the services rendered by it although in the MOU the word used is "compensation" but in fact it has to be the word "consideration". 6. Therefore, he held that the impugned amount, although nomenclated as 'compensation' in the MOU dated 31.1.2009, is a normal business receipt which is clearly a Revenue receipt liable to tax. Its payment is dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer accordingly added the above amount to the taxable income of the assessee. 11. Before CIT(A) the assessee submitted that Lafarge India Private Limited engaged in the cement business, commissioned a Cement Plant at Sonadih, Raseda, Chhattisgarh and for the purpose of streamlining the transportation cost, planned to construct a Railway Siding from Nipania Railway Station to its Sonadih Cement Plant (Approximate Distance of about 20 Kms.) A meeting was held on 10th August 2000 and after meetings and deliberations and getting firm assurance from LIPL as regards construction of Railway Siding on Turnkey Basis, Mr. Pramod Chopda incorporated a new company M/s Rishabh Infrastructure Limited (later on converted into Rishabh Infrastructure Private Limited) viz. the assessee company on 27 September, 2000 with the sole objective of aforesaid infrastructure development activity for LIPL. It was submitted that a MOU was entered into between LIPL and the assessee company on 19th November, 2001 for construction of Railway Siding from Sonadih Cement Plant to Nipaniya Railway Station to facilitate transportation of Clinker and Cement; The assessee company continued with the acquis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eamline the transportation cost of Cement & Clinker in its Sonadih Plant. It transpires that the construction of Railway Track & Siding involved complex work right from procurement of land, Civil Work/Earth Work, Laying of Railway Tracks, Electrifications, Signaling Arrangement etc. I find from records that the appellant company had been formed with sole objective of undertaking the infrastructure development activity of construction of way Track & Siding on behalf of LIPL which fact is also recorded in the assessment order passed under section 143(3) of the Act for the A.Y.2003-04. I further find from records that the appellant had only 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". I further find from the correspondences filed on record between the appellant and LIPL, that LIPL was indecisive as to execution of the entire work of construction of Railway Track & Siding from the appellant on Turnkey or Build-Operate-Transfer basis and subsequently, owing to various constraints, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in unambiguous terms as 'M/s.RIPL started acquisition of lands for our company with other valued services for the aforesaid Railway Siding in terms of the aforesaid MOU and performed related works. Owing to various constraints, the construction of Railway Siding work remained suspended for a long period of time and ultimately, the work of M/s.RIPL discontinued. After various deliberations & meetings, which resulted into determination of final compensation for payment thereof and accordingly, another MOU was entered into on 31st January, 2009 to effectuate the said determination. We further confirm that the compensation had been determined and paid by us for stallins the execution of the asreed works as above in terms of the earlier MOU. " 9. In my considered opinion, such clarification is sufficient to draw an inference that LIPL has determined and paid the impugned amount necessarily as a measure to compensate the appellant in lieu of stalling/discontinuing the balance agreed works which could not be executed owing to various constraints however the AO, despite the said Clarification and other documentary evidences filed on record thereby constituting vital aid in constructi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of a coin would decide the matter almost as satisfactorily as an attempt to find reasons'." 13. While determining the nature of a receipt as being a trading receipt taxable as income from business or profession or otherwise, one should be guided by the terms of the agreement genuinely entered into between the parties. The Revenue authorities cannot ignore the genuine agreements between the assessee and the party from whom the amount is received. In the absence of any suggestion or allegation of collusion, fraud or camouflage, the Revenue cannot resort to any attempt to rewrite the agreement with a view to imposing the levy of tax especially when the transactions between the parties are at arms length. This has been made clear by the Delhi High Court in D.S. Bist & Sons vs. CIT (1984) 149 ITR 276 (Del) : TC14R.573 therein it was observed that " the Act does not clothe the taxing authority with any power or jurisdiction to rewrite the terms of agreement entered into, particularly in view of the finding of the Tribunal that there is nothing to suggest that the parties were not dealing with each other at arms length and there is no suggestion of any collusion ; the commercial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 73 ITR 702 (SC) : TC13R.1230 affirming the decision of the Allahabad High Court in Juggilal Kamlapat vs. CIT (1963) 49 ITR 458 (All) : TC13R.1231, Kettlewell Bullen & Co. Ltd. vs. CIT (1964) 53 ITR 261 (SC) : (1964) TAX 18(3) 163 : TC13R.1226, reversing the decision of the Calcutta High Court in CIT vs. Kettlewell Bullen & Co. Ltd. (1962) 46 ITR 39 (Cal) : (1962) TAX 15(3) 594 : TC13R.1227. Also Anglo French Exploration Co. Ltd. vs. Clayton (1956) 30 ITR 309 (CA) : TC13R.1234 which was a case relating to resignation from secretaryship of a company. 17. On the other hand, where the answer was in the affirmative, the source of income itself being destroyed or severely impaired, the receipt was held to be capital in nature. fCIT vs. Chari & Chari Ltd. (1965) 57 ITR 400 (SC) : (1965) TAX 20(3) 106 : TC13R.1229, Karamchand Thapar & Bros. P. Ltd. vs. CIT (1971) 80 ITR 167 (SC) : TC13R.1235A reversing the decision of the Calcutta High Court in CIT vs. Karamchand Thapar & Bros. P. Ltd. (1968) 67 ITR 705 (Cal): TC13R.1236]. 18. Relying on the proposition of law laid down by the Supreme Court in CIT vs. Chari & Chari (1965) 57 ITR 400 (SC) : (1965) TAX 20(3) 106 : TC13R.1229 and Karam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... production of a definite return excluding anything in the nature of a mere windfall. Once the teak trees were removed together with their roots and there was no prospect of regeneration or of any production of a return therefrom, it could well be said that the source ceased to be one which could produce any income. The Bombay High Court in CIT vs. N.T. Patwardhan (1961) 41 ITR 313 (Bom), said that from the point of view of a person engaging himself in the business of sale of trees the capital structure would be not only the land on which the trees stood but also the roots of the trees from which the wood yielded income. If the trees were sold off with the roots the capital structure would be affected. The High Court in the judgment under appeal was particularly impressed with the profit motive of the assessee in planting teak trees although that was done several years ago. But it was overlooked that profit motive is not decisive of the question whether a particular receipt is capital or income. An accretion to capital does not become taxable income merely because an asset is acquired in the hope that it may be sold at a profit. It must also be remembered that trees so long as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made by Lafarge India (P) Ltd. is for the efforts/ services rendered by the assessee and it has to be refunded/ returned in case of any failure on the part of the assessee. Hence, there is no fetter on the assessee to undertake any others project. In fact in subsequent years the assessee has shown very good income. The MOU entered into by the assessee is a make believe arrangement and the income generating apparatus of the assessee company is not sterilized. He submitted that the dominant object has to be seen. Relying on various decision he submitted that the order of CIT(A) be reversed and that of the Assessing Officer be restored. He also relied on the following decisions :- 1) Mcdowell & Co. (S/C) 154 ITR 148 2) Durga Prasad More Vs.CIT (SC) 82 ITR 540 3) Sumati Dayal Vs. CIT (SC) 214 ITR 801 4) CIT Vs. Amrit Lal 212 ITR 514 (Bombay) 5) DIT Vs. Bharat Diamond 259 ITR 280 (S/C) 6) ACIT Vs. Concord Communication 95 ITD 117 (SB) 15. The Ld. Counsel for the assessee on the other hand heavily relied on the order of the CIT (A). Referring to the copy of the assessment order passed u/s 143 (3) for A. Y. 2003-04, copy of which is placed at paper book page No. 27, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Karam Chand Thapar & Sons Bros. P. Ltd. Vs. CIT (1971) 80 ITR 167 (SC) 5. CIT Vs. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC)' 6. Khanna & Annadhanam Vs. CIT (2013) 351 ITR 110 (Del.HC) affirmed by the Hon'ble Supreme Court: SLP filed by the Department Dismissed on 31st March, 2014 SLP (Civil) 18904/2013 7. CIT Vs. Sharda Sinha 92016) 237 Taxman 111 (Delhi HC) 8. ACIT Vs. Tirupati Udyog Ltd. 92013) 36 CCH 157 (ITAT. Del) 9. Parle Soft Drinks Pvt. Ltd. Vs. JCIT (2013) 37 CCH 099 (ITAT. Mum) 10. 3I Infotech Limited Vs. Addl. CIT (2013) 37 CCH 058 (ITAT Mum.) 11. Satyam Food Specialties (P) ltd. Vs. DCIT (2015) 57 taxmann. Com 194 (ITAT Jaipur) 12. CIT Vs. Parle Soft Drinks (Bangalore) P. Ltd. 92017) 88 taxmann. Com 24 (Bom.HC) 16. We have considered the rival arguments made by both the sides, perused the orders of the authorities below and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find a MOU was executed on 19.11.2001 between the assessee and LIPL with an object of construction of railway track and siding by the assessee for LIPL from Nipaniya Railway Station to the Sonadih Plant of LIPL for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this MOU executed on 31st January, 2009 which ultimately decides the nature of receipt of the impugned amount termed as "Compensation". We find the assessee claimed such compensation as capital receipt being loss of source of income where as the Assessing Officer treated the same as revenue receipt. We find the Ld. CIT(A) allowed the claim of the assessee the reasons of which have already been reproduced in the preceding paragraph. 17. We do not find any infirmity in the order of the Ld. CIT (A) on this issue. We find the assessee during the course of appeal proceedings had filed a certificate issued by LIPL where in they have 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. 18. We find Hon'ble Supreme Court in the case of Oberoi Hotel (P) Ltd. Vs. CIT (1999) 236 ITR 903 (SC) has decided somewhat similar case. In that case, the assessee there in was operating, managing & administering many hotels belon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le rules have been evolved for guidance. 4. Applying the aforesaid test laid down by this Court in the present case, in our view the Tribunal was right in arriving at a conclusion that it was a capital receipt. Reason is that as provided in art. XVIII of the first agreement assessee was having an opt on or right or lien, if owner desired to transfer the hotel or lease or part of the hotel to any other person, the same was required to be offered first to the assessee (operator) or its nominee. This right to exercise its option was given up by a supplementary agreement which was executed in Sept., 1975, between the Receiver and assessee. It was agreed that Receiver would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under any obligation requiring the purchaser thereof to enter Into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise and in its return, agreed consideration was as stated above in cl. X. the basis of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garded as capital, if it is for loss of an asset of enduring value to the assessee, but not where payment is received m settlement loss in a trading transaction." After analysing number of cases, the Court observed that following satisfactory measure of consistency In the principle is disclosed : 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 leave 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 no- icily a capital receipt." 7. The aforesaid principle is relied upon in the case of Karam Chand Thapar & Bros's case (supra). Consideration the aforesaid principles laid down as per art. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addressed to the members of the company. The managing agency was not, except in the circumstances set out in cl.2 of the agreement, liable to be determined at the instance of the company before the expiry of specified period and in the event of voluntary resignation, the principal company was not obliged to pay any compensation however, only to facilitate the appointment of the other party as managing agent, who made available the compensation for loss of agency/office to principal company, the agency was terminated prematurely. The High Court held that it was a voluntary resignation for which under the agency agreement, the assessee was not entitled to compensation and this transaction was in the nature and character of a trading or a business deal and hence, income. On further appeal, the Hon'ble Supreme Court held as under :- "21. "On an analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. 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 subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a capital receipt or a revenue receipt is undoubtedly a difficult question to be answered. The difficulty is inherent in the problem itself. Decisions on this question are numerous. But none of them have laid down a precise principle of universal application, but various workable rules have been evolved for guidance. One of us, speaking for the Court in Kettlewell Bullen & Co.'s case (supra), has laid down the following guidelines for finding out the true nature of such a receipt. The relevant observations read thus : "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 can ..... X X X X Extracts X X X X X X X X Extracts X X X X
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