2009 (1) TMI 767 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of compensation received by the assessee.
2. Nature of the compensation received (capital receipt vs. revenue receipt).
3. Applicability of section 28(ii)(c) of the Income Tax Act.
4. Impact of termination of custodial services on the assessee's business structure.

Issue-wise Detailed Analysis:

1. Taxability of Compensation Received:
The core dispute centers on whether the compensation received by the assessee from Duetsche Bank AG (DBA) for shifting major clients is taxable. The assessee declared these sums as capital receipts and non-taxable, while the Assessing Officer (AO) treated them as revenue receipts and taxable income. The AO's stance was based on the view that the compensation was for the termination of managing agency contracts and thus taxable under section 28(ii)(c) of the Income Tax Act.

2. Nature of the Compensation Received:
The assessee argued that the compensation was a capital receipt as it impaired the trading structure of the business. The AO, however, concluded that the trading structure was not affected since the assessee could continue other business activities. The AO referenced the judgment in Blue Star Ltd. v. CIT [1996] 217 ITR 514 and other judicial pronouncements to support this view. The Tribunal held that the compensation received was for parting with rights in custodial agreements, which were not of enduring value, thus classifying it as a revenue receipt.

3. Applicability of Section 28(ii)(c):
The AO and the Commissioner of Income-tax (Appeals) (CIT(A)) both held that the compensation fell under section 28(ii)(c), which taxes amounts received for termination of an agency as business income. The Tribunal noted that this section applies only if there is a principal-agent relationship in the strict legal sense. The assessee contended that it dealt with clients on a principal-to-principal basis, not as an agent, thus section 28(ii)(c) was not applicable. However, the Tribunal found that the compensation was for services rendered in facilitating the transfer of clients to DBA, reinforcing its revenue nature.

4. Impact of Termination of Custodial Services:
The assessee claimed that custodial services were a major part of its business, and their termination impaired the profit-earning apparatus, making the compensation a capital receipt. The Tribunal, however, observed that the termination did not destroy the business structure as the assessee continued other activities and could potentially restart custodial services upon meeting SEBI's net worth criteria. The Tribunal emphasized that the compensation was for the loss of income rather than the loss of a capital asset.

Conclusion:
The Tribunal concluded that the compensation received by the assessee for parting with rights in custodial agreements and ensuring clients' transfer to DBA was a revenue receipt and taxable as income. The Tribunal upheld the orders of the AO and CIT(A), dismissing the appeals of the assessee. The judgment was pronounced in open court on January 30, 2009.