TaxTMI 
TaxTMI 
2007 (8) TMI 383
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....s received as compensation from Delhi Cloth & General Mills Co. Ltd. pursuant to a settlement agreement entered into between the assessee herein and DCM Ltd. and Kailashnath Associates. It is the claim of the assessee that the sum of Rs. 4.25 crores is capital receipt not chargeable to tax whereas the Assessing Officer has held the same as revenue receipt chargeable to tax. In the return of income, the amount was not claimed as capital receipt. However, claim was made in the assessment proceedings to exclude the same from the taxable income. The Assessing Officer did not consider the request and no discussion in this regard is found in the assessment order. 5. Before the learned Commissioner it was contended that the amount received is not to carryon similar project in the vicinity of the project abandoned. This being a restrictive covenant to carryon trade, should be treated as capital receipt. The learned Commissioner held that it was not an absolute prohibition as with the consent of DCM any project could be undertaken. Therefore, the claim of the appellant that cessation agreement was not in the nature of trading transaction but was the one by which the appellant had parted ....
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....cluding any construction carried out at the project site respectively belonging to KNA and Ansals. KNA and Ansals have further agreed that they shall not undertake without prior written consent of DCM similar project in the vicinity of the project for a period of three years from the date of signing of this agreement. In consideration of the above, DCM has agreed to take over all the liabilities/obligations of both KNA and Ansals respectively under the provisional bookings made and/or arrangements/agreements entered into by them with their respective prospective buyers, as per particulars in the Annexures 'C' and 'D' to settlement agreement, including the amounts towards basic price and which amounts on the execution of stand transferred to the books of account of DCM and DCM is now in its books showing the said amounts to the credit of the said prospective buyers. DCM undertakes with KNA and Ansals to pay, satisfy and fulfil all the duties, liabilities, obligations, contracts and engagements of KNA and Ansals in relation to their respective prospective buyers as under the said provisional bookings/agreements/arrangements made with them and to indemnify KNA and Ansals against all p....
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....outh Extension., Gurgaon, Noida etc. It was for this reason that the agreement only refrained Ansals from not to take up any similar project in the vicinity where DCM project proposed to come up. In the context of the business which the appellant was carrying on as also the purpose for which DCM insisted on and imposed the restrictive covenant, it cannot be said that since Ansals was free to undertake projects in other areas, therefore, the consideration was not towards refraining from undertaking business activity. The restrictive covenant has another limb, i.e., that Ansals shall not take similar project. This again was necessitated on account of nature of business. Had Ansals developed a theatre, shopping mall, educational institute etc., in Bara Hindu Rao area, the same would have not adversely affected DCM's project. Therefore, the expression 'similar project' was used so that Ansals may be able to construct/develop other projects having no adverse affect on business interest of DCM. He accordingly pleaded that the amount received being towards restrictive convenience whereby the appellant undertook to restrain from undertaking any similar project in the vicinity of the afo....
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....non-compete fee received by assessee on account of restrictive covenant was not taxable under the Act. Finance Act, 2002, with effect from 1-4-2003 has inserted clause (va) to provide that following receipt (income) shall be chargeable under the head 'Profits and gains of business': "(Va) any sum, whether received or receivable, in cash or kind, under an agreement for- (a) not carrying out any activity in relation to any business; or (b) not sharing any know-how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services." The definition does not require total prohibition of carrying on the business but refers to any activity relating to business. The legal position that emerges from the decisions of Courts/Tribunal, instruction of the Board and amendment of provisions of Income-tax Act is that- (a) Prima facie compensation/consideration for agreeing to refrain from carrying on competitive business is a capital receipt. (b) Restrictive covenant need not be forever. Even if t....
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....sed is transferred to DCM. The expenses incurred by the assessee in partial development is claimed as expense. The deposit received from prospective buyers is also retained by the assessee. There is clear understanding that the compensation is for annulment of the rights of Ansals to carryon the business of completing the project and for depriving the potential income, which could have arisen from carrying on such business, the amount is paid. Thus what is compensated is the loss of income itself and not the loss of profit earning apparatus. In the case of former it will be revenue receipt and in the case of later it will be capital receipt. The learned DR also relied upon the various case laws in this regard. (i) Parry & Co. Ltd. v. Dy. CIT [2004] 269 ITR 177 (Mad.); (ii) Matheson Bosanquet Co. Ltd. v. CIT [1988] 171 ITR 359 (Mad.); (iii) Bishambhar Nath Swaroop Narain v. CIT [1979] 119 ITR 681 (All.); (iv) CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 48 (SC); (v) Bombay Burmah Trading Corpn. Ltd. v. CIT [1971] 81 ITR 777 (Bom.); and (vi) Kettlewell Bullen & Co. Ltd. v. CIT [1964] 53 ITR 261 (SC). 9. We have carefully co....
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....ing from some exercise or operation by the appellant and in ordinary parlance, which can be considered as income. To constitute income, the receipt need not necessarily have their origin in business activity or investment or under an enforceable obligation. The conclusion in construing the word 'income', one has to ask whether having regard to all the circumstances surrounding the particular payment and receipt in question, what is relevant is of the character of income according to the ordinary meaning of that word in the common language or whether it is merely a casual receipt. The word 'income' is of elastic import and it is extended meaning are not controlled or limited by the use of the words 'profit and gains'. The diverse forms which income may assume cannot exhaustively be enumerated and so in each case the decision of the question as to whether any number of receipt is income or not must depend upon the nature of the receipt and the scope of relevant taxing provision. Hon'ble Bombay High Court in the case of H.H. Maharani Shri Vijaykuverba Saheb of Morvi v. CIT [1963] 49 ITR 594 held thus: "There is no doubt that under the Indian Income-tax Act even payments, w....
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....e facts. 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. There is difference between a payment made as compensation for the termination of an agency contract and an amount paid as Solatium for the cancellation of a contract entered into by a businessman in the ordinary course of business. In any agency contract the actual business consists in the dealings between the principal and his customers, and the work of the agent is only to bring about the business. What he does is not the business itself but something which is intimately and directly linked up with it. The agency may, therefore, be viewed as the apparatus which leads to the business rather than the business itself. Considered in this light the agency right can be held to be a nature of a capital asset invested in business. But this cannot be said of a contract entered into in the ordinary course of business. Such a contract is part of the business itself, not anything outside it as is the ag....
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....ss done by the appellant as agents, the acquisition of agencies was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. The amounts received by the appellant for the cancellation of the explosives agency therefore did not represent the price paid for the loss of a capital asset: they were of the nature of income. There is no immutable principle that compensation received on cancellation of an agency must always be regarded as capital Compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of the agency terminated, or for loss of goodwill, is prima facie of the nature of a capital receipt. In the case of Best & Co. (P.) Ltd., the Hon'ble Supreme Court has held that (i) that the compensation agreed to be paid was not only in lieu of the loss of the agency but also for the respondent accepting a restrictive covenant for a specified period; (ii) That the restrictive covenant was an independent obligation which came into operation only when the agency was terminated and that part of the compensation which was attributable to the restrictive c....
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....aid agency have to be scrutinized by the department. The Supreme Court did not lay down in CIT v. Chari & Chari Ltd. [1965] 57 ITR 400 that the burden on the revenue to establish that an income was taxable was immutable in the sense that it never shifted to the assessee. When sufficient evidence, either direct or circumstantial. in respect of its contention was disclosed by the revenue, an adverse inference could be drawn against the assessee if he failed to put before the department material which was in his exclusive possession. While the income-tax authorities have to gather the relevant material to establish that the compensation given for the loss of agency was a taxable income, adverse inference could be drawn against the assessee if he had suppressed documents and evidence, which were exclusively within his knowledge or keeping. In the case of Kettle Well Bullen & Co. Ltd., it has been held by the Hon'ble Supreme Court that on the facts, that the arrangement with Mugneeram Bangur and Co. was not in the nature of a trading transaction, but was one in which the appellant parted with an asset of an enduring value. What the assessee was paid was to compensate it for loss o....
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....e or are entered into in the course of business. If a sum represents profits in a new form, then that is income. But, where the agreement relates to the structure of an assessee's profit-making apparatus and affects the conduct of the business, the money received for the cancellation or variation of such an agreement would be capital receipt. The question is a question of fact and must be decided by ascertaining the true nature and object of the transaction made between the parties. In the case of Matheson Bosanquet Co. Ltd. it has been held as under:- "The assessee entered into an agreement with a foreign company owning estates in India under which the assessee was appointed as the sole agent of the foreign company in India in regard to the management of the estates for a stated remuneration payable in respect of each financial year. The agency was, however, terminated by the foreign company in 1970-71 and it was agreed that the Indian company would be paid a sum of Rs. 3,40,000/- as and by way of compensation, the payment to be made in three instalments. Apart from the said compensation, the assessee was also paid a sum of Rs. 40,000/- as consultation fee. Th....
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.... of the Income-tax Act, 1961." In the case of Blue Star Ltd. v. CIT [1996] 217 ITR 514 (Bom.), the Head Note read as under:- "The question whether a particular income arising from termination of a contract is a capital receipt or revenue receipt is a difficult question to answer. Where, on a consideration of the circumstances, a payment is made to compensate a person for cancellation of a contract, which does not affect the trading structure of the recipient's business nor deprive the recipient of what in substance is the source of income, termination of the contract being a normal incident of the business, and such cancellation leaving the recipient of the amount free to carry on his trade, the receipt is revenue. However, where by cancellation of agency 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, payment made to compensate for such cancellation of agency is normally a capital receipt. During the accounting year relevant to the assessment year 1977-78, the assessee was engaged in manufacture of air-conditioning products and was undertaking job contrac....
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....n nature. Broadly stated, to determine the character of a receipt what has to be seen is whether the venture in which an assessee is giving up its rights was by itself the profit-earning apparatus and such an action would disrupt the entire profit earning structure of the assessee. If that be so, anything received would partake of the character of a capital receipt. But, where, however, the venture is only for the purpose of carrying on the existing business by taking the help of another, compensation received for relinquishing a right in such a venture would be a revenue receipt." Hon'ble Madras High Court in the case of Parry & Co. Ltd. v. Dy. CIT, 269 ITR 177 (Mad.) held thus: "The Tribunal took note of the fact that when the compensation was determined the parties concerned must have definitely considered the very old agency, which the assessee had lost and came to the conclusion that a substantial portion of the compensation became payable on account of the loss to the assessee of a lucrative agency. The Tribunal rightly pointed out that for a proper understanding of the intentions of the parties concerned, it was necessary to read the agreement as a whole and that....
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....compensation for loss of profit itself. Whatever was the right of the assessee pursuant to the principal agreement to develop land which was to yield certain profit now stands quantified by way of compensation for loss of such future profit. Thus the amount received is in the course of business. Such a contract is part of the business itself and any receipt on account of such contract being terminated can only be a trading receipt. The payment having been made in settlement of right under a trading contract are trading receipts and are assessable as revenue receipt. 12. Much reliance is placed on the terms of the contract whereby the assessee was prevented to carryon similar project in the vicinity of project for a period of three years so as to hold the receipt as capital receipt. We are unable to agree. The compensation is for the loss of future profit that it would have earned had the contract not been cancelled. The contract was entered into in the ordinary course of business which would have given the assessee certain profit by way of development of the property. The restrictive clause is only not to undertake without prior written consent of DCM similar project in the vici....