TMI Blog1995 (3) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement shall be given within a period of five years from the date of agreement. It was also provided that if the assessee fails to fulfil the agreement, then it would pay Rs. 20,000 to S. Zoraster and Company. The case of the assessee-company is that subsequently they realised that the objects contained in the memorandum of association did not permit them to run a cinema and, therefore, the assessee could not go ahead with the said agreement and backed out. In view of the clause contained in the agreement an amount of Rs. 20,000 was paid to S. Zoraster and Company as compensation. The said amount was claimed as deduction in the income-tax assessment proceedings for the assessment year 1974-75. The Income-tax Officer was of the view that the expenditure is of capital nature and therefore, it cannot be allowed under section 37 of the Act. In the appeal before the Commissioner of Income-tax (Appeals), it was found that the compensation has been paid to a sister concern and is not in the course of money-lending business, but in the course of an agreement to purchase the picture hall which is not covered by the objects clause of the company and hence the compensation was not pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, the trading structure of the assessee is impaired or such cancellation results in the loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agreement is normally a capital receipt. In CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148, it was observed by the apex court that when once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period. In this respect it differs from an agency agreement. It was also observed that where a person who is carrying on business is prevented from doing so by an external authority in exercise of a paramount power and is awarded compensation therefor, whether the receipt is a capital receipt or a revenue receipt will depend upon whether it is compensation for injury inflicted on a capital asset or on a stock-in-trade. In the case of Glenboig Union Fireclay Co. Ltd. v. IRC [1922] 12 TC 427, it was held by the House of Lords that the amount received for compensation in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. The amount paid to mesne encumbrancers was debited to money-lending account. The shortfall after obtaining decree against mortgagors was claimed and allowed as bad debt. Subsequently, sale of plots in part of land purchased was considered to be the profit of the assessee's money-lending business. In Mallett v. Staveley Coal and Iron Co. Ltd. [1927] 13 TC 772, the King's Division Bench observed that the consideration paid to the lessor for surrender of seams of coal is an expenditure of capital nature and not an admissible deduction from profit for income-tax purposes. Justice Rowlatt observed that the expense of acquiring the lease is the expense of acquiring a capital asset and is a capital expenditure. All receipts and payments in connection with acquiring and disposing of leaseholds of minerals to be worked by collieries are capital transactions. The payment was not considered to get rid of the annual charge against revenue in future but was the payment to get rid of the loss in the business. The money was considered to be paid in order pro tanto to go out of business. The apex court in Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 65 has observed that w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous decisions which have been relied upon by learned counsel for the assessee show that if any property is acquired in the course of money-lending business for the satisfaction of the claim, then it will be considered to be the income from business. The authorities relied on are in a different context and the dispute in the present matter is as to whether the compensation, which has been paid by the assessee, of Rs. 20,000 to S. Zoraster and Company is allowable as business expenditure. Section 37 of the Act provides the expenditure which could be claimed as business expenditure. According to the said section, expenditure which is in the nature of capital expenditure cannot be allowed. It is no doubt true that in the present case the source of income is not destroyed. The Tribunal has proceeded on the fact that the intention of the assessee is clear that the transaction was entered into only with a view to clear the old outstandings. They realised that the company cannot run a cinema as the same was not provided as an object in its memorandum of association, the company had necessarily to withdraw from the agreement which led to payment of the compensation. For liquidating the liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale deed would be executed within a period of five years. It was at the end of the fifth year that the payment of Rs. 20,000 was paid as compensation as contemplated in the agreement because of non-fulfilment of the contract. The assessee might be intending to carry on the business of exhibiting films in the cinema hall and thus a capital asset was sought to be acquired. It was on account of the absence of an object clause in the memorandum and articles of association that the said agreement was not honoured. Whatever the circumstances might have been are not required to be considered regarding the possibility of change in the memorandum and articles of association and long lapse of more than four years the question remained that the said payment pertains to a capital asset which itself was capable of being exploited as a business asset and any payment of compensation in respect thereof for not executing the agreement could only be considered as a capital expenditure. If the liability of dues of Rs. 15 lakhs was to be satisfied with the purchase of that property it was possible, if the object clause of memorandum and articles of association had so provided, to consider that the sa ..... 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