2010 (11) TMI 92 - HC - Income Tax

Tribunal Decision Upheld: Rs. 4.25 Crores Revenue Receipt vs. Capital Receipt

The High Court upheld the Tribunal's decision that the amount of Rs. 4.25 crores received by the appellant was considered a revenue receipt rather than a ... Capital or Revenue Receipt – DCM and KNA comes into an agreement with respect to development of land owned by DCM – Agreement terminated by the DCM unilaterally – The return filed by the appellant and showing the sum of Rs. 4.25 crore received from the DCM as other income - During the course of assessment proceedings, the appellant by a letter dated 24th September, 2003 claimed that the said sum of ₹ 4.25 crores was a „capital receipt – AO did not consider the said sum in assessment – Being aggrieved by the order of AO appellant filed an appeal to Commissioner(A) and the same is dismissed by the CIT(A) - The appellant preferred a second appeal before the Income-Tax Appellate Tribunal and the same is dismissed by the ITAT on the ground that what had been paid was towards the liabilities taken over and for the deprivation of the potential income – Appeal to High Court – Based on the precedent judgement High Court decided to dismiss the case – Appeal to Supreme Court – Supreme Court is also decided on the fact of the case that the said sum is in the nature of revenue receipt and the case is dismissed Issues Involved:1. Nature of the receipt (capital or revenue).2. Validity of the restrictive covenant claim.3. Applicability of precedents and Board instructions.4. Determination of compensation for annulment of rights.Issue-wise Detailed Analysis:1. Nature of the Receipt (Capital or Revenue):The primary issue in this case was whether the sum of Rs. 4.25 crores received by the appellant from DCM was a capital receipt or a revenue receipt. The Tribunal held that the amount was a revenue receipt, and this decision was challenged by the appellant. The appellant initially did not claim the amount as a capital receipt in their return but later argued it was a capital receipt during assessment proceedings. The Tribunal concluded that the compensation was for loss of future profit and development already undertaken, thus treating it as a revenue receipt.2. Validity of the Restrictive Covenant Claim:The appellant argued that the sum received was towards a restrictive covenant, as per clause 3 of the Agreement, which restrained them from undertaking similar projects in the vicinity for three years. However, the Tribunal found no mention in the Agreement that the amount paid was specifically for the restrictive covenant. The compensation was instead for the annulment of rights to carry on the business and for deprivation of potential income. The restrictive covenant was considered incidental and not the primary reason for the compensation.3. Applicability of Precedents and Board Instructions:The appellant relied on various precedents and Board instructions to support their claim that the receipt was a capital receipt. They cited cases like CIT vs. Best & Co., Gillanders Arbuthnot & Co. Ltd., and instructions from the Board indicating that compensation for restrictive covenants could be considered a capital receipt. However, the Tribunal and the High Court found that these precedents were not applicable to the facts of the present case. The restrictive covenant in this case was not absolute and had limited significance, unlike the cases cited by the appellant.4. Determination of Compensation for Annulment of Rights:The High Court agreed with the Tribunal's finding that the compensation was for the annulment of the appellant's rights to complete the project and for the potential income loss. The Agreement explicitly stated that the compensation was for the deprivation of potential income and not for the restrictive covenant. The High Court noted that the restrictive covenant was limited in scope and duration and did not significantly impact the appellant's ability to carry on their business. The compensation was thus determined to be a trading receipt.Conclusion:The High Court upheld the Tribunal's decision that the sum of Rs. 4.25 crores received by the appellant was a revenue receipt and not a capital receipt. The restrictive covenant was deemed incidental, and the compensation was primarily for the annulment of business rights and potential income loss. The appeal was dismissed, and no substantial question of law was found to be determined.