2004 (9) TMI 573 - AT - Income Tax

Taxability of the payment - Income - breach of the Promotion Agreement - Nature of the payment of DM 10.5 million to the assessee-company - HELD THAT - A perusal of the Settlement Agreement dated 20th December, 1994, between Fried Krupp Essen, Krupp Widia GmbH, Meturit AG, the assessee-company and the group of persons represented by Mr. Autar Krishna, it is seen that the settlement was of the dispute arising between the assessee-company and Fried Krupp Essen because the assessee-company had alleged that Fried Krupp had breached the Promotion Agreement by the proposed sale by Fried Krupp of all quotas of Krupp Widia (including all of the capital stock/quotas of Meturit). On fried Krupp Essen agreeing to pay to the assessee-company a sum of DM 10.5 million, the assessee-company agreed and consented to the transfer by Fried Krupp Essen, termination of Promotion Agreement of 1963, full and final settlement of all claims, demands, causes of action, arising under or in connection with the Promotion Agreement or in breach thereof. In other words, the assessee-company received DM 10.5 million in satisfaction of its claims against Fried Krupp Essen, Krupp widia GmbH and Meturit AG. We, therefore, hold that whatever may have been the legal position prior to 20th December, 1994, as on 20th December, 1994, the assessee-company received the sum of DM 10.5 million in lieu of surrender of its rights and claims against the parties above-mentioned in terms of Promotion agreement. In substance, the assessee-company gave up its right of first purchase of shares held by Meturit AG in Widia (India) Ltd. on account of perceived/alleged violation or Promotion Agreement in view of the transfer of ownership of Krupp Widia GmbH. In our considered opinion, the taxability or otherwise of DM 10.5 million in the hands of the assessee-company is to be viewed and determined on this basis. We, therefore, hold that the learned CIT(A) erred in arriving at the finding that the money received by the assessee-company was a fortuitous receipt. We are, however, unable to understand as to how the money received by the assessee-company can be treated as income arising to the assessee for assessment year 1995-96. During the course of hearing before us the learned DR devoted a considerable time to argue that the concept of income under the Income-tax Act has a very wide scope and amplitude. However, the fact remains that it is not every monetary receipt which could properly be called or understood as income . We have already held with reference to Settlement Agreement dated 20th December, 1994, that whatever may be the conflicting stands of the parties and the legal position prior to 20th December, 1994, the sum of DM 10.5 million received by the assessee, has to be viewed as the amount received in lieu of surrender of his rights and claims against Fried Krupp Essen; Krupp Widia GmbH and Meturit AG. In other words, the amount received by the assessee was in the nature of compensation for loss of the assessee s perceived/alleged rights. It is now well-settled legal position in this regard that if compensation is received for loss/detriment to the amounts of profits, the same would constitute revenue receipt, but if the compensation is received for loss/detriment to profit-making structure, such receipt would not be on the revenue account and constitute capital receipt in the hands of the recipient. We find the facts of the case of the assessee before us on stronger footing. In the case before us the first right of purchase was acquired by the assessee by way of Promotion Agreement and Articles of Association of Widia (India) Ltd. even before the commencement of business by Widia (India) Ltd. Hence by no stretch of logic the receipt can be viewed as receipt of the business carried on by the assessee. Thus, we hold that the receipt in question in the hands of the assessee constituted a capital receipt. The Assessing Officer erred in assessing it under the head Income from other sources . We, therefore, uphold the deletion of the addition as made by the Assessing Officer by the impugned order of the learned CIT(A), though for different reasons. In the result, revenue s appeal is dismissed.

Summary

Issues Involved:
1. Whether the receipt of Rs. 20.86 crores was a capital receipt not chargeable to tax.
2. Whether the receipt was a revenue receipt.
3. Whether the amount received by the assessee in lieu of a breach of contract was taxable under the head 'Income from other sources'.

Summary:

Issue 1: Capital Receipt Not Chargeable to Tax
The Tribunal analyzed the facts and determined that the receipt of Rs. 20.86 crores by the assessee was indeed a capital receipt. The assessee had entered into a Promotion Agreement in 1963, which included a clause giving the assessee the first option to purchase shares in the event of a sale by Meturit AG. In 1994, Fried Krupp Essen decided to sell its subsidiary, Krupp Widia GmbH, which indirectly affected the shareholding of Widia (India) Ltd. The assessee received the amount as compensation for surrendering its rights under the Promotion Agreement. The Tribunal held that the receipt was a capital receipt as it was compensation for the loss of a profit-making source, not for loss of profits.

Issue 2: Revenue Receipt
The Tribunal rejected the Assessing Officer's contention that the receipt was a revenue receipt. The Assessing Officer had argued that the payment was for breach of trust and should be considered income from other sources. However, the Tribunal found that the payment was for surrendering the right of first purchase of shares, which is a capital asset. Therefore, the receipt could not be treated as a revenue receipt.

Issue 3: Taxable Under 'Income from Other Sources'
The Tribunal also dismissed the argument that the amount should be taxed under the head 'Income from other sources'. The receipt was not a fortuitous or voluntary payment but was made to settle a dispute regarding the Promotion Agreement. The Tribunal emphasized that not all receipts constitute income; the receipt must be periodic and from a definite source. The payment in question was a one-time capital receipt and did not meet these criteria.

Conclusion
The Tribunal upheld the Commissioner (Appeals)'s decision to delete the assessment of Rs. 20.86 crores as 'Income from other sources', though for different reasons. The receipt was deemed a capital receipt, not chargeable to tax under the Income Tax Act. The revenue's appeal was dismissed.