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2016 (12) TMI 606 - AT - Income TaxDisallowance of compensation received on termination of agreement of legal services claimed as capital receipts - Held that - As decided in Khanna and Annadhanam vs. CIT 2013 (1) TMI 681 - DELHI HIGH COURT when that source was unexpectedly terminated, it amounted to the impairment of the profit making structure or apparatus of the assessee firm. It is for that loss of the source of income that the compensation was calculated and paid to the assessee. The compensation was thus a substitute for the source. In opinion, the Tribunal was wrong in treating the receipt as being Revenue in nature. As in the present case as per the Resolution, ₹ 35 lacs was the amount of compensation paid to the assessee for termination of his services in accordance with the clause 5 of the agreement dated 14-06-2001 made between the assessee and Marut Nandan Educational Society and ₹ 15.00 lacs was paid towards arrears of his emoluments plus interest thereon. It is noted that the assessee had shown ₹ 15 lacs as professional income and paid due tax thereon and ₹ 35 lacs received on account of termination of employment as per clause 7 of the agreement was shown by the assessee as exempt being a capital receipt - Decided in favour of assessee.
Issues Involved:
1. Whether the compensation received by the assessee on termination of a legal services agreement should be treated as a capital receipt or revenue receipt. Detailed Analysis: 1. Background and Facts: The assessee filed an appeal against the order of the CIT(A)-3, Jaipur, which confirmed the addition of ?35.00 lacs as revenue receipt. The assessee argued that this amount was compensation received on termination of a legal services agreement and should be treated as a capital receipt. 2. Arguments by the Assessee: The assessee contended that the ?35.00 lacs received was due to the termination of a retainership agreement with Maruti Nandan Educational Society. The agreement, dated 14-06-2001, stipulated a retainership fee and a compensation clause in case of termination. The assessee claimed that this compensation was a capital receipt, as it represented the loss of employment and the main source of income. The assessee supported this claim with case law, particularly the decision in Khanna and Annadhanam vs. CIT by the Delhi High Court. 3. Arguments by the Revenue: The AO and CIT(A) treated the ?35.00 lacs as revenue receipt, arguing that the compensation was part of the consultancy fee. They emphasized that the assessee continued to have other sources of income and was not prevented from taking other assignments. The authorities relied on the rationale that the compensation did not result in genuine hardship or loss of income source. 4. Tribunal's Observations: The Tribunal noted the following: - The assessee had been in the employment of the Society since August 2001. - The agreement required the assessee to prioritize the Society's work, leading to a deterioration of other legal practices. - The compensation clause was included to address the potential loss of income due to termination. - The ?35.00 lacs was paid as per the agreement's compensation clause upon termination. 5. Legal Precedents and Analysis: The Tribunal referenced the Delhi High Court's decision in Khanna and Annadhanam vs. CIT, which held that compensation for the loss of a source of income is a capital receipt. The Tribunal also cited the Supreme Court's judgment in Oberoi Hotel (P) Ltd. vs. CIT, where compensation for the termination of an agreement was treated as capital receipt due to the loss of a source of income. 6. Conclusion: The Tribunal concluded that the ?35.00 lacs received by the assessee was indeed a capital receipt. The compensation was for the termination of a significant source of income, aligning with the principles established in the referenced case laws. Therefore, the Tribunal disagreed with the lower authorities' orders and allowed the appeal in favor of the assessee. 7. Result: The appeal of the assessee was allowed, and the ?35.00 lacs received as compensation was treated as a capital receipt, not assessable to income tax. Order Pronouncement: The order was pronounced in the open court on 23/11/2016.
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