2010 (11) TMI 107 - HC - Income Tax

Capital or Revenue receipt - In computing the taxable income, the amount of Rs. 4.25 crores received from DCM under the Agreement dated 30th October, 2000 was, however, not claimed as a capital receipt . The said amount was credited to the profit and loss account under the head other income . During the course of assessment proceedings, the appellant by a letter dated 24th September, 2003 claimed that the said sum of Rs. 4.25 crores was a capital receipt . the Supreme Court held that the compensation agreed to be paid was not only in lieu of the giving up of the agency but was also for the assessee accepting the restrictive covenant for the specific period of five years. In the present case, a reading of the agreement makes it abundantly clear that the compensation paid to the appellant in the instant case by the DCM was not on account of the restrictive covenant which was treated as an incidental matter, but on account of the dispute between the parties relating to the termination of the agreement dated 24th November, 1988 it could hardly be said that given the nature of the restrictive covenant in the Agreement, the appellant was hampered from operating its profit making apparatus in other spheres and even in the very same sphere. Apparently for this reason it did not even strike the appellant at the time of filing of its return, to claim that the sum of Rs. 4.25 crores was a capital receipt. Subsequently, it appears that on account of legal advice received by the appellant during the course of the assessment proceedings and about two years after the filing of its return, the appellant, by a letter dated 24thSeptember, 2003 staked the claim that the sum in question was a capital receipt. Even thereafter, the claim does not appear to have been seriously pressed as is quite obvious from the fact that it was not even dealt with by the Assessing Officer and the CIT (A) also while dealing with this aspect of the matter dealt with it incidentally. It was only when the matter reached the Tribunal that this claim of the appellant appears to have been seriously pressed. Amount of Rs.4.25 crores was in the nature of trading receipt and the revenue authorities have rightly held it to be so - The appeal is dismissed

Summary

Issues Involved:
1. Nature of the receipt: Whether the amount of Rs. 4.25 crores received by the appellant from DCM is a capital receipt or a revenue receipt.
2. Applicability of restrictive covenant: Whether the sum received is attributable to the restrictive covenant.
3. Burden of proof: Determination of who bears the burden of proof regarding the nature of the receipt.
4. Interpretation of the Settlement Agreement: Analysis of the clauses in the Settlement Agreement to determine the intention of the parties.

Detailed Analysis:

1. Nature of the Receipt:
The primary issue in this case is whether the amount of Rs. 4.25 crores received by the appellant from DCM should be classified as a capital receipt or a revenue receipt. The Tribunal held that the amount was a revenue receipt, as it compensated for the loss of future profits and the development already undertaken by the appellant. The Tribunal noted that the compensation was for the deprivation of potential income, which aligns with the definition of revenue receipt.

2. Applicability of Restrictive Covenant:
The appellant argued that the sum received was towards the restrictive covenant incorporated in clause 3 of the Settlement Agreement, which restrained the appellant from undertaking any similar project in the vicinity for three years. However, the Tribunal found no specific mention in the Agreement that the amount paid was towards the restrictive covenant. The compensation was primarily for the annulment of the rights to carry on the business and the deprivation of potential income. The restrictive covenant was considered incidental and not the primary reason for the compensation.

3. Burden of Proof:
The judgment emphasizes that the burden of proof lies with the Revenue to establish that a particular receipt is income liable to tax. However, once it is shown that the receipt is income, the burden shifts to the assessee to prove that it is exempt or eligible for deduction. The Tribunal found that the appellant failed to prove that the amount was a capital receipt, as the compensation was for the loss of future profits and not for the loss of a capital asset.

4. Interpretation of the Settlement Agreement:
The interpretation of the Settlement Agreement was crucial in determining the nature of the receipt. Clauses 2 and 3 of the Agreement were analyzed to understand the intention of the parties. Clause 2 mentioned the abandonment of rights by KNA and ANSALS and the prohibition on undertaking similar projects in the vicinity for three years. Clause 3 detailed the compensation for the annulment of the rights to carry on the business and the deprivation of potential income. The Tribunal concluded that the compensation was for the termination of the Agreement and the loss of future profits, not for the restrictive covenant.

Conclusion:
The Tribunal upheld that the amount of Rs. 4.25 crores was a revenue receipt, as it compensated for the loss of future profits and the development already undertaken. The restrictive covenant was incidental and not the primary reason for the compensation. The burden of proof shifted to the appellant, who failed to establish that the amount was a capital receipt. The appeal was dismissed, and the Tribunal's findings were affirmed. No substantial question of law was found to be determined in the present appeal.