TaxTMI 
TaxTMI 
2008 (1) TMI 435
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble in its hand as it is capital receipt. The Assessing Officer held the same as revenue receipt. 4. The facts of this case are that Deloitte Touche Tohmatu International (DTTI) is said to be one of the leading accounting firms in the world established under Swiss Verein engaged in the practice of public accountancy in various countries. The Verein consists of members that are professional firms and are engaged in public accountancy. In other words, DTTI is a conglomeration of member firms, not individuals, which is being managed and run by a board of directors selected by member firms. DTTI has a member firm in India by the name of Deloitte Raskins & Sells (DHS) which is an association of four Indian accounting firms namely Khanna & Annadhanam, (the assessee firm) (KA), Fraser & Ross (FR), Gupta Choudhary and Ghosh (GCG) and PC. Hansotia & Co. (PCH). Each of these four firms nominated three to four partners to DHS to represent the firms. 5. By virtue of an agreement dated January 1, 1978, between Deloitte Haskins & Sells International and Gupta Choudhary & Ghosh, Calcutta, the partners of Gupta Choudhary & Ghosh were allowed to practice in the name of Deloitte Haskins & Sell....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of M/s. Fraser & Ross, the firms agreed that the DHS clients should be serviced by the local firms as DHS did not have necessary infrastructure in the various cities. The billing of the clients was done by DHS through the services rendered by the constituent firms. It was agreed between the firms that for the services rendered by the respective firms to DHS clients, the firm will be entitled to fee commensurate with the work done as may be mutually agreed to between the firms. In view of this, 80 to 90 per cent. of the fees collected by the DHS was passed on to the constituent firms for their services. The balance was left in DHS for certain common expenses like training course, secretarial services, indemnity insurances, etc. 10. In view of the increased activities of DHS in India, the apex bodies, i.e., DTTI was keen that all the firms constituting DHS should merge into one firm and practice only in the name of DHS. It has been submitted by the assessee that as this arrangement was time consuming, DTTI, in the mean-time, decided to grant concurrent membership to the four constituent firms of DHS. Accordingly concurrent membership agreement dated September 1, 1992, was execute....
X X X X Extracts X X X X
X X X X Extracts X X X X
....use its current practice names and logos during the period of concurrent member ship. In addition, the firm consents to your firm' s public identification of itself as a member firm of the firm during that period of time. This letter agreement does not create any new or modified name or logo ownership or use rights, beyond what rights may now exist, if any. If your firm and the counterpart firms wish to begin practicing under a new name before the national merger becomes legally effective, please contact the firm' s chief operating officer, in order to make arrangements for signing the appropriate additional documents. 4. Clause 5-Budgetary contribution-For 1991 and subsequent fiscal year, your firm shall continue to make a budgetary contribution to the firm determined in the same manner as for member firms generally subject to waiver at the discretion of the firm' s executive committee. 5. Clause 6-Compensation on withdrawal-Your firm will not be obliged to make a compensation payment to the firm (under section 6 of the firm' s supplemental agreement) in the event of your firm' s departure from the firm as a result of the failure to complete t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....with professional services, and that it will not provide any services to any referred client without the con sent of the DTTI which shall not unreasonably be withheld. Similarly, DTTI agrees that its designee will not solicit any non referred client specified in the list referred to in clause 11 hereof with a view to providing it with professional services and that it will not provide any services to any such non referred client without the consent of Khanna, which shall not be unreasonably withheld. 6. Clause 13-On the withdrawal date the parties shall take the following actions : (a) To facilitate the transfer of all referred clients and to compensate Khanna for the consequent loss and prejudice, DTTI will pay to Khanna the sum of US$ 3.25 lakhs by bankers cheque. (b) . . . 7. Clause 14-Fees earned in servicing referred clients by Khanna upto the date of withdrawal will accrue to Khanna under the normal DHS arrangements. 8. Clause 16-Khanna hereby surrenders, releases, assigns and transfers to DTTI as on the withdrawal date, all rights, title and inter est or claim of right, title and interest, if any in and to the DTTI names. . . " ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bay Burmah Trading Corporation Ltd. v. CIT [1971] 81 ITR 777 (Bom) ; (3) CIT v. Vazir Sultan and Sons [1959] 36 ITR 175 (SC) ; (4) Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261 (SC) ; (5) Gillanders Arbuthnot and Co. Ltd. v. CIT [1964] 53 ITR 283 (SC) ; (6) CIT v. Best and Co. P. Ltd. [1966] 60 ITR 11 (SC) ; (7) CIT v. Prabhu Dayal [1971] 82 ITR 804 (SC) ; and (8) CIT v. Barium Chemicals Ltd. [1987] 168 ITR 164 (AP). 17. On the basis of the above decisions and the agreement with DTTI the assessee contended that the receipt is in lieu of profit-making apparatus and hence to be treated as capital receipt not chargeable to tax. The Assessing Officer held that when the assessee originally entered into contract with DTTI for grant of concurrent membership, it was a contract like any other contract in the course of profession. The assessee-firm had certain rights and obligations in DTTI. The assessee could remain a member of DTTI at the pleasure of DTTI and as long as it acted in accordance with the terms of contract. Thus the contract between the assessee and DTTI was nothing different from other contracts. The Assessing....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the appellant held as under : "29. I have considered the submission of the authorised representative of the appellant. I have also examined carefully the arguments taken by the Assessing Officer and case laws relied upon by both the sides. On the totality of the facts and entirety of the circumstances of the case and in the light of the case laws relied upon by the assessee, unlike the one relied by the Assessing Officer, which are distinguish able, I am of the considered opinion that the stand of the assessee has great force. In this view of the matter, I hold that the assessee' s claims that the amount received from DTTI is a capital receipt, and hence not taxable. Accordingly the addition made by the Assessing Officer of Rs. 1,15,70,000 is deleted." 19. The Revenue is now in further appeal before us. 20. We have heard Shri K. C. Jain, the learned Commissioner of Income-tax-Departmental representative for the Revenue and Shri Anoop Sharma, the learned advocate on behalf of the respondent assessee. At the outset both counsels agreed that the order impugned in this appeal, of the learned Commissioner of Income-tax (Appeals) is cryptic, non-speaking and without....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icial to terminate its professional venture with DTTI/DHS with effect from November 14, 1996, except a reasonable safeguard they have kept to protect each others professional interest. Not only this, KA can still provide services to the referred clients and vice-versa. 22. On the basis of the above facts Shri Jain made detailed submission. The gist of his arguments is as under : 1. All the facts mentioned above clearly carves out a proposition that it is a usual practice for multinational professional firms to form a con glomerate. This conglomerate will help them in furtherance of their pro fessional objectives, area of services, geographical presence, control over the quality of assignment etc. All the constituents of conglomerate are the entrepreneurs. They join the conglomerate with an object to have a professional venture with a multinational body to further their professional interests. 2. As the facts discussed above professional firms have usual practice of merger/demerger, forming a conglomerate etc. Each constituent as well as the governing body of conglomerate have option to be a member of conglomerate till their professional interest are being fulfi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uch sum is capital receipt or revenue receipt. The Tribunal in both these cases have extensively referred to various case laws cited by both the parties. The Tribunal have concluded that the amount received for termination of the contract which was entered into in the ordinary course of business is chargeable to tax as revenue receipt. 26. He also submitted that whether the amount is capital receipt or revenue receipt depends upon the facts and circumstances of each case. What is to be seen is whether the amount received is in lieu of source of income or whether the amount is received in the course of carrying on the business. Though the line is thin but is very demarkable which will shift the case on either side. Since in the present case the assessee as part of carrying on profession was admitted as concurrent member of DTTI conglomeration and upon its restructuring in Indian operation was asked to move out but was not prohibited from carrying on the profession as such, the amount received is in the course of carrying on profession and hence taxable as such. 27. Shri Anoop Sharma, the learned advocate for the assessee also made detailed submissions. He reiterated the submis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as not acceptable to KA as it was not keen on losing its identity or to transfer its clients to DHS. DTTI therefore, informed KA that due to merger problems in India arising out of KA not being keen to merge, KA should withdraw from concurrent membership with DTTI. Thus for withdrawing from the membership of DTTI, KA was paid compensation towards loss of business consisting of its earning arising from serving foreign clients. The withdrawal agreement was between DTTI and KA. DHS was not in anywhere in picture. If KA had continued its membership of DTTI, its professional earnings would have been many times of its earning after withdrawing from DTTI. Summarizing his arguments Shri Sharma submitted that the payment received from DTTI was voluntary payment on which there was no vested legal right. The same was for the assessee' s exit from concurrent membership of DTTI at the instance of DTTI. The assessee in the past was servicing international/ foreign clients referred to by DTTI by virtue of its concurrent membership in DTTI. This was a separate, distinct and a definite source of income. The said source having dried up or partially ceased to exist, any receipt in lieu thereof ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ever, the assessee was not keen to lose its identity and to transfer its clients to DHS and merge into one big firm since there was no understanding in this regard. DTTI therefore, wrote to the assessee to withdraw from DHS partnership. The letter issued in this regard is extracted hereunder : "1. To facilitate the orderly transfer of DTTI clients, files, etc., DTTI is willing to pay Khanna & Annadhanam (' Khanna' ) a sum equal to (i) three times the net profit that Khanna realized for the fiscal year ended March 31, 1995, in connection with DTTI referred international work (more precisely, the profit from that portion of the work which is recurring and will be lost due to your withdrawal from DTTI), less (ii) the amounts owing to DTTI by Khanna for unpaid subscription fees, professional indemnity insurance premiums and unpaid balances in its DTTI current account. As indicated in the draft agree ment and release given to you on Friday, this sum will be paid out over two years. Please supply us with the figures for the fiscal year ended March 31, 1995, along with appropriate documentation. We will let you know in due course the amounts recorded on our books as owing....
X X X X Extracts X X X X
X X X X Extracts X X X X
....receipt is income or not will depend on the nature of the receipt and the true scope and effect of the relevant taxing provision. It is for the Revenue to prove that the receipt is chargeable to tax under the provision of the Income-tax Act. Once it is shown that the receipt is income under the Income-tax Act, it is for the assessee to prove that the same is either exempt or the assessee is eligible for deduction of the same. 33. The definition of "income" in section 2(24) is an inclusive definition. It adds several artificial categories to the concept of income but on that account the expression "income" does not lose its natural connotation. Anything which can properly be described as income is taxable under the Act. Even if a receipt does not fall within the ambit of any of the sub-clauses in section 2(24), it may still be income if it partakes of the nature of the income. The idea behind providing inclusive definition in section 2(24) is not to limit its meaning but to widen its net. The word "income" is of widest amplitude, and it must be given its natural and grammatical meaning. The scheme of section 2(24) read with sections 4 and 10, seems to be that given its ordinary n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd gratuitous payments which are connected with the office, profession, vocation or occupation may constitute ' income' although if the payments were not made the enforcement thereof can not be insisted upon. These payments constitute ' income' because they are referable to a definite source which is the office, profession, vocation or occupation. It could, therefore, be said that such a voluntary payment is taxable as having an origin in the office, profession or vocation of the payee, which constitutes a definite source for the income. What is taxed under the Indian Income-tax Act is income from every source (barring the exceptions provided in the Act itself) and even a voluntary payment, which can be regarded as having an origin, which a practical man can regard as a real source of income, will fall in the category of ' income', which is taxable under the Act. Where, however, a voluntary payment is made entirely without con sideration and is not traceable to any source which a practical man may regard as a real source of his income, but depends entirely on the whim of the donor, cannot fall in the category of ' income' . (emphasis supplied) 36.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er must always, and as a matter of law, be held to be a capital receipt. An agency contract which has the character of a capital asset in the hands of one person may assume the character of a trading receipt in the hands of another as, for example, when the agent is found to make a trade of acquiring agencies and dealing with them. Therefore, when the question arises whether the payment of compensation for the termination of an agency is a capital or a revenue receipt, it would have to be considered whether the agency was in the nature of a capital asset in the hands of the agent, or whether it was only part of his stock-in-trade. Generally, payments made in settlement of rights under a trading contract are trading receipts and are assessable to revenue. But where a person who is carrying on business is prevented from doing so by 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."(emphasis supplied) 38. In the case of Vazir Sultan and Sons [1959] 36 ITR 175 it has b....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Ltd. v. CIT [1964] 53 ITR 283 (SC) followed. (iii) That, on the facts, that part of the compensation received towards loss of the agency was a revenue receipt, as the loss of the agency was only a normal trading loss. Gillanders Arbuthnot and Co. Ltd. v. CIT [1964] 53 ITR 283 (SC) relied on. (iv) That, if compensation was paid in respect of two distinct matters, one taking the character of a capital receipt and the other of a revenue receipt, there was no principle which prevented its apportionment between the two matters. Difficulty in apportionment was not a ground for rejecting the claim either of the Revenue or of the assessee. Therefore, apportionment had to be made of the compensation in this case on a reasonable basis between the loss of the agency in the usual course of business and the restrictive covenant. Whether compensation received by an assessee for loss of agency is a capital or a revenue receipt depends upon the circumstances of each case. But before coming to the conclusion one way or the other, many questions have to be asked and answered : What was the scope of the earning apparatus or structure, from physical, financial, commercial ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was not, therefore, in the nature of a revenue receipt. It mattered little that the appellant did continue to conduct the remaining managing agencies after the determination of its agency with the Fort William Jute Co. It cannot be said as general rule what is determinative of the nature of a receipt on the cancellation of a contract of agency or office is extinction or compulsory cessation of the agency or office. Where payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business or 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 the trading structure of the assessee is impaired or such cancellation results in loss of what may be regarded as the source of the assessee' s income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt."(empha sis supplied) 43. In the case of Bombay Burmah Trading Corporation Ltd. [1971] 81 ITR....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... existing agencies may be terminated and fresh agencies may be taken. But it is for the income-tax department to clearly establish that the case fell within the exception to the ordinary rule. CIT v. Chari and Chari Ltd. [1965] 57 ITR 400 (SC) followed. The question whether a receipt is capital or income is not one of fact. Questions between capital and income, trading profit or no trading profit, are questions which, though they may depend to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from these facts." 45. In the case of CIT v. Prabhu Dayal [1971] 82 ITR 804 the hon'ble Supreme Court held (headnote of 82 ITR) : "The assessee discovered by chance the existence of kankar in the Jind State and brought about an agreement in 1938 between the State and S for the acquisition of sole and exclusive monopoly rights for manufacturing cement. S transferred his rights under the agreement to a company of which the assessee was one of the promoters. For the services rendered by him, the company agreed to pay him a commission of 1 per cent., on the yearly net profits earned by the company. The agreement w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. 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 the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee' s income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt." 47. In the case of CIT v. Barium Chemicals Ltd. [1987] 168 ITR 164 the hon' ble Andhra Pradesh High Court held (headnote of 168 ITR) : "In order to decide whether or not a payment is a revenue receipt, its true nature and substance must be looked into. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion into deficiencies of the various production units, and (2) Rs. 42,212 paid to C for advising the assessee regarding rectification of the defects. On appeal, the Appellate Assistant Commissioner held that only Rs. 47,20,939 should be treated as revenue receipt and the balance was capital receipt. The Tribunal held that the amount of Rs. 47,20,939 constituted a capital receipt, that it could not be assessed as capital gains and that the payments to A and C constituted capital expenditure. On a reference : Held, (i) that neither on the findings of the Tribunal, nor on an examination of the terms of the settlement dated February 22, 1967, could it be said that the amount in question represented loss of pro fits. The business the assessee carried on was in barium chemicals. The settlement dated February 22, 1967, concluded between the assessee and the English company could not be treated as one in the ordinary course of the business carried on by the assessee. Installation of machinery and parts was not the business of the assessee. It was the business of the English company. There had been a sterilization of capital assets of the assessee in that the English company faile....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a capital receipt. The Appellate Assistant Commissioner however, took the view that the provisions of section 28(ii)(c) would apply and not section 28(ii)(b) and consequently confirmed the assessment. The Tribunal, however held that both sub-clauses (b) and (c) of section 28(ii) would apply and accordingly confirmed the assessment. On a reference : Held, that as the definition of ' person' found in section 2(31) of the Income-tax Act, 1961, included a company, the amount in question fell under sub-clause (c) of section 28(ii) and it was not necessary to consider whether sub-clause (b) of section 28(ii) would apply or not. The Tribunal was right in its conclusion that the amount of Rs. 3,40,000 could not be regarded as a capital receipt but was income liable to tax." 49. In the case of Bishambhar Nath Swaroop Narain v. CIT [1979] 119 ITR 681 the hon'ble Allahabad High Court held as under (headnote of 119 ITR): "Held that the termination of the agreement took place on August 31, 1958, that the compensation related to the period from April, 1957, to August 31, 1958, that credit notes for commission had been assessed on accrual basis and that i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rade enterprise, BME, under which the assessee was appointed as the agent of BME for marketing and selling their products in India. The said agreement stated that it was, in the first instance, valid up to December 31, 1976, and thereafter it was to be considered as automatically renewed for one calendar year at a time unless one or the other party thereto gave notice of its wish to terminate the same. By a letter dated June 4, 1976, BME intimated to the assessee that BME was agreeable to extension of the agreement for a further period of one year and accordingly the said agreement stood renewed up to June 10, 1977. But, in the meanwhile, the Government of India sponsored a company C and on October 6, 1976, BME wrote a letter to the assessee stating that since a lot of technical know-how and organization potentialities were needed to handle the data process plan made by BME, the assessee might assign its rights under the said agreement to C which was specializing in the particular line, BME agreed to pay to the assessee a lump sum as consideration for the assessee assigning its rights in favour of C. The agreement between the assessee and BME stood terminated on a payment of Rs. 5 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re termination of the selling agency could not be ignored. The Tribunal rightly did not accept the plea that as the agencies continued only for a limited period on an ad hoc basis the assessee ceased to have any right to compensation on termination. It was rightly held by the Tribunal that the parties viewed it as a case of premature termination of selling agency for which the asses see was required to be compensated. The Tribunal fixed twenty per cent. of the total compensation amount as attributable to the restrictive covenants were in force for a short period of two years. The Tribunal was right in its finding that out of the sum of Rs. 25 lakhs received by the assessee during the year 1988-89 and again Rs. 15 lakhs during the year 1989-90 only a sum of Rs. 5 lakhs was a capital receipt and not liable to tax as income under section 28(ii)(c) of the Income-tax Act, 1961." 53. Applying the principle laid down above and also on the basis of various judicial pronouncements we analyse facts of the present case. The assessee received the payment to facilitate orderly transfer of DTTI' s clients, files etc., to the DHS firm to be reconstituted. The same was measured in form of t....