2011 (5) TMI 278 - AT - Income Tax

Capital or revenue receipt - Circular No. 573,F.No. 200/115/90-IT(A-I), dated 21-8-1990 - whether the amount received by the assessee, after the death of her husband from the firm M/s. K.S. Aiyer & Co., in which he was a partner, is a capital or revenue receipt - it is quite manifest from the facts of the case that the payment made to the assessee did not relate to any business done by her for the firm. In the like manner it was not to compensate the assessee for any loss of profits suffered by her because of the firm - The fact that, under clauses (i), (ii) and (iii) of section 15(1), the compensation is paid as of right and in cases falling under clauses (d) of the proviso, it is a discretionary payment, would not stamp the payment with the character of revenue - Held that amount received will be treated as capital receipt - Appeal is dismissed

Summary

Issues:
1. Whether the amount received by the assessee is a capital or revenue receipt?

Detailed Analysis:
The appeal raised by the Revenue challenged the order passed by the CIT(A) for the assessment year 2005-06. The main issue was whether the amount received by the assessee, a widow entitled to a specified amount from the firm after her partner's death, should be treated as a capital or revenue receipt. The Assessing Officer considered the payment as a revenue receipt, citing the partnership deed's clause and Circular No. 573, dated 29-8-1990. The CIT(A) disagreed, stating that the payment was in the nature of a capital receipt, not related to business activity or loss of profits, relying on legal precedents like P.H. Divecha v. CIT [1963] 48 ITR 222 (SC) and CIT v. Mrs. Jaya Bhaskaran [1987] 168 ITR 256/33 Taxman 170 (Pat.).

The Revenue appealed to the Tribunal, arguing that the payment was not a capital receipt, unlike the case of Mrs. Jaya Bhaskaran. The Counsel for the assessee contended that the payment was similar to the case of Mrs. Jaya Bhaskaran, emphasizing that it was an assurance given to support legal heirs. The Tribunal analyzed the factual matrix and legal precedents, including the decision in Mrs. Jaya Bhaskaran's case and P.H. Divecha's case. The Tribunal highlighted the nature of the payment, emphasizing that it was not related to business activities, loss of profits, or compensation for services rendered. The Tribunal upheld the CIT(A)'s decision, stating that the payment was a capital receipt and not taxable, aligning with the principles laid down in legal judgments and circulars.

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming that the payment received by the assessee was a capital receipt and not subject to taxation. The decision was based on the nature of the payment, legal precedents, and the purpose of the payment as outlined in the partnership deed. The Tribunal emphasized that the payment was a recognition of valued services rendered by the deceased partner and a form of relief to the family, thus not constituting revenue income. The judgment aligned with the principles established in relevant legal cases and circulars, supporting the non-taxability of such capital receipts.