2004 (3) TMI 37 - HC - Income Tax

Capital / revenue receipt - sum received by the assessee was in consideration of the premature termination of the selling agency and also of the restrictive covenants - Tribunal has rightly not accepted the plea that as the agencies continued only for a limited period on ad hoc basis, the assessee ceased to have any right to compensation on termination. As rightly held by the Tribunal, the parties viewed it as a case of premature termination of selling agency for which the assessee was required to be compensated. The Tribunal fixed 20% of the total compensation amount as attributable to the restrictive covenant and obligations, taking note of the fact that the restrictive covenants were in force for a short period of two years - Tribunal is right in its finding that only a part of sum is a capital receipt and not liable to tax as income under section 28(ii)(c) assessee s appeals are dismissed.

Summary

Issues:
Interpretation of whether the sum received by the assessee pursuant to an agreement represents a capital receipt or a revenue receipt.

Analysis:

The judgment of the court involved a case where the assessee was appointed as a selling agent by a company engaged in manufacturing food products and toiletries. The selling agency agreements were due to expire, and the company decided to review the agreements but did not want an immediate disassociation due to market competition. An agreement was reached in 1985 to renew the agreements for a further period. Subsequently, in 1986, an agreement was made for the premature termination of the selling agency agreements, with the company agreeing to pay the assessee a total of Rs. 40,00,000 in two installments subject to certain conditions. The dispute arose regarding the tax treatment of these amounts received by the assessee.

In the assessment orders, the amounts received were treated as revenue receipts by the Assessing Officers, leading to appeals by the assessee before the Commissioner of Income-tax and then the Income-tax Appellate Tribunal. The Tribunal, in two separate appeals for the assessment years 1988-89 and 1989-90, took differing views on the taxability of the received amounts. The "B" Bench of the Tribunal considered 20% of the total compensation amount as attributable to a restrictive covenant and treated it as a capital receipt not liable to tax. On the other hand, the "A" Bench upheld the revenue nature of the amounts except for a portion of Rs. 5,00,000 as capital receipt.

The court referred to previous judgments where compensation for loss of agency along with accepting a restrictive covenant was considered a capital receipt. The Supreme Court's decision in CIT v. Best and Co. P. Ltd. highlighted the distinction between capital and revenue receipts in such cases. The court emphasized the need for a reasonable apportionment of compensation between capital and revenue aspects, as supported by legal precedents.

The court agreed with the Tribunal's reasoning that a substantial portion of the compensation was for the loss of a lucrative agency, and the restrictive covenants were in force for a limited period. By considering the entire agreement and the circumstances, the court affirmed the Tribunal's decision to treat only a portion of the received amounts as capital receipts not subject to tax under the relevant income tax section.

In conclusion, the court dismissed the tax case appeals, upholding the Tribunal's decision on the tax treatment of the received amounts based on a reasonable apportionment between capital and revenue aspects as per legal principles and precedents.