1997 (2) TMI 24 - HC - Income Tax

Summary

Issues Involved:
1. Inclusion of additional remuneration in the assessment year 1970-71.
2. Nature of compensation received from Southern Asbestos Limited and its taxability.
3. Applicability of section 28(ii)(c) of the Income-tax Act, 1961, to the compensation received.

Summary:

Issue 1: Inclusion of Additional Remuneration in the Assessment Year 1970-71

The Tribunal was justified in holding that the additional remuneration received by the assessee should not be included in the assessment for the year 1970-71. The assessee maintained accounts on a mercantile basis, and the additional remuneration was approved only after the audited balance-sheet and profit and loss account were placed before and approved by the general body meeting. The Tribunal found that the terms of the agreements were similar to those in the case of CIT v. South Madras Industrial Development Co. (Pvt.) Ltd. [1979] 120 ITR 913, where it was held that additional remuneration accrued only when it became payable. Therefore, the additional remuneration did not accrue on or before March 31, 1970, and was not liable to be included for the assessment year 1970-71. The court answered the first question in the affirmative and against the Department.

Issue 2: Nature of Compensation Received from Southern Asbestos Limited

The compensation received from Southern Asbestos Limited was held to be a capital receipt. The Tribunal found that the termination of the agreement affected the business structure of the assessee's business. The agreement was for a period of ten years, and the compensation was paid for the unexpired portion of the contract. The Tribunal concluded that the compensation was not for past services but for the termination of the agreement, which impaired the trading structure of the assessee. Therefore, the compensation was rightly held to be a capital receipt. The court answered the second question in the affirmative and against the Department.

Issue 3: Applicability of Section 28(ii)(c) of the Income-tax Act, 1961

Section 28(ii)(c) of the Act was not applicable to the compensation received by the assessee. The Tribunal found that the agreement with Southern Asbestos Limited was not an agency agreement but a consultancy service agreement between principal and principal. The Tribunal's finding that there was no agency relationship was not challenged by the Revenue. Therefore, the compensation received was not taxable under section 28(ii)(c) of the Act. The court answered the third question in the affirmative and against the Department.

Conclusion:

All three questions were answered in the affirmative and against the Department. No order as to costs.