2013 (10) TMI 518 - AT - Income Tax

Assessee's Compensation Deemed Capital, Not Taxable. Revenue Appeal Dismissed.

The Tribunal upheld the decision that the compensation received by the assessee is a capital receipt and not taxable. The addition on account of the ... Capital or Revenue receipt - Compensation received was for loss of 'source of income' - CIT held it as capital receipt - Held that:- 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 source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt - Decided against Revenue. Issues Involved:1. Nature of compensation received: Capital receipt or revenue receipt.2. Deletion of addition on account of receivable amount written off.Detailed Analysis:Issue 1: Nature of Compensation ReceivedThe primary issue in this case is whether the compensation of Rs. 12,80,00,000 received by the assessee from R. Charu Chandra is to be treated as a capital receipt or a revenue receipt. The assessee argued that the compensation was for the loss of 'source of income' and thus should be treated as a capital receipt. The Assessing Officer (AO) treated this compensation as a revenue receipt, relying on the cases of CIT vs. Eastern Book Co. and Kailashnath & Associates vs. ITO.The First Appellate Authority, after considering the terms of the Memorandum of Understanding (MOU) and relying on the decisions of the Hon'ble Supreme Court in the cases of Kettlewell Bullen & Co. vs. CIT and Oberoi Hotels P. Ltd. vs. CIT, held that the receipt in question is a capital receipt and hence not taxable.The Tribunal noted that the assessee entered into the MOU for developing mines and extracting ore, which was a new line of business for the assessee. The compensation was received due to the termination of this MOU, which impaired the business structure of the company. The Tribunal distinguished the case laws relied upon by the AO, stating that in cases where the compensation is for the loss of a capital asset or source of income, it is to be treated as a capital receipt.The Tribunal relied on the Supreme Court's decision in Oberoi Hotels P. Ltd. vs. CIT, where it was held that compensation received for giving up the right to purchase or operate a property is a capital receipt as it results in the loss of a source of income. The Tribunal also cited the case of CIT vs. Saurashtra Chemicals Ltd., where compensation for sterilization of a profit-earning source was considered a capital receipt.Issue 2: Deletion of Addition on Account of Receivable Amount Written OffThe second issue pertains to the deletion of an addition of Rs. 1,12,12,446, which was made on account of the fact that the amount receivable was written off without any reason. The Tribunal noted that this issue is consequential to the decision on the first issue. Since the compensation was treated as a capital receipt, the addition on account of the receivable amount written off was also deleted.ConclusionThe Tribunal upheld the First Appellate Authority's decision that the compensation received by the assessee is a capital receipt and thus not taxable. Consequently, the addition of Rs. 1,12,12,446 was also deleted. The appeal of the Revenue was dismissed.