TMI Blog1997 (2) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... was right in holding that the provisions of section 28(ii)(c) of the Income-tax Act, 1961. are not attracted in regard to the sum of Rs. 60,000 received by the assessee from Southern Asbestos Limited?" The second and third questions are interconnected in the sense that the contention of the Revenue is that if the receipt is held to be not a revenue receipt it is still assessable under the provisions of section 28(ii)(c) of the Act. We clarify that in the third question referred to us, though there is a reference to the provisions of section 28(ii)(c) of the Income-tax Act, 1961, the provisions of law ought to be section 28(ii)(c) of the Income-tax Act, 1961. The assessee is a private limited company and during the previous year relevant to the assessment year 1970-71, the assessee acted as managing agents for Mettur Chemicals and Industrial Corporation Limited and also South Madras Electric Supply Corporation. The assessee entered into an agreement on March 1, 1965, with Mettur Chemicals and Industrial Corporation Limited and under the agreement, the assessee was entitled to claim remuneration at a certain percentage, on a sliding scale, from the profit of the company as compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the decision of this court in the case of CIT v. South Madras Industrial Development Co. (Private) Ltd. [1979] 120 ITR 913 found that the terms of the agreements entered into by the assessee with the said companies were similar to the agreement which was the subject-matter of consideration of this court in South Madras Industrial Development Co. (Pvt.) Ltd.'s case [1979] 120 ITR 913. According to the Appellate Tribunal, the additional remuneration was approved only after the audited balance-sheet and profit and loss accounts were placed before the general body meeting of the managing company and approved in the said annual general body meeting. The Tribunal also noticed that the method adopted by the assessee was also accepted and followed by the Department consistently in the earlier years and there is no justification to depart from the practice that has been adopted hitherto. In this view of the matter, the Appellate Tribunal allowed the appeal of the assessee and the Department has come before us by way of reference with reference to the first question. Mr. S. V. Subramaniam, learned senior standing counsel appearing for the Revenue submitted that in so far as the first qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrue to the assessee on or before March 31, 1970, and the additional remuneration received by the assessee is not liable to be included for the assessment year 1970-71 appears to us, to be in order. In the result, we answer the first question in the affirmative and against the Department. The facts leading to the second and third questions are as under : The assessee-company received a compensation from one Southern Asbestos Cements Limited for the termination of its agreement with the assessee. The assessee-company was holding some industrial licence for manufacturing cement from the Government of India and it was subsequently transferred to Southern Asbestos Cements Limited with the concurrence of the Government of India for the utilisation of the licence. Southern Asbestos Cements Limited appointed the assessee as its business consultant in the matter of securing foreign collaboration and for rendering technical assistance to assist in export, foreign publicity, etc., under the agreement entered into by the assessee with Southern Asbestos Cements Limited, the assessee was entitled to a remuneration of Rs. 20,000 per annum from January 1, 1965, to the date of commencement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but an agreement entered into purely for rendering consultancy services and the arrangement is between principal and principal. In this view of the matter, the Appellate Tribunal held that the amount is not taxable even under the provisions of section 28(ii)(c) of the Act. This order of the Appellate Tribunal is the subject-matter of the reference before this court. Mr. S. V. Subramaniam, learned senior standing counsel appearing for the Revenue, submitted that a sum of Rs. 60,000 received by the assessee from Southern Asbestos Cements Limited cannot be regarded as a capital receipt and it is purely a revenue receipt and hence it is taxable under the provisions of section 28(ii)(c) of the Act. The further submission of learned counsel for the Revenue is that even if this court holds that it is a capital receipt, the amount would be taxable under the provisions of section 28(ii)(c) of the Act, as the consultancy agreement is also an agency agreement and the Tribunal was not correct in holding that the provisions of section 28(ii)(c) of the Act are not applicable to the facts of the case. The second and third questions are interconnected. The second question challenges the findi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not represent the remuneration for the past services rendered by the assessee. According to us, it is not permissible to draw an inference that the amount paid represented the remuneration that would be payable for the unexpired period of the agreement. The clause was previously inserted as in terrorem to provide against the breach of the contract and the compensation received cannot be regarded as a revenue receipt. As a matter of fact, the Assessing Officer as well as the first appellate authority have proceeded on the basis that the amount received was a capital receipt and it was only before the Tribunal, that a contention was raised by the Revenue that the amount was a revenue receipt which was rightly negatived by the Tribunal. The finding of the Appellate Tribunal is that by termination of the contract, the profit making structure of the assessee was affected and that the termination of the contract involved loss to the assessee of an enduring trading asset. In other words, the finding of the Tribunal is that by virtue of the cancellation or the extinction of the contract the trading structure of the assessee was impaired and it is not the case of the Revenue that the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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