2017 (12) TMI 410 - HC - Income Tax

Addition on account of amount received by the assessee towards settlement compensation - revenue or capital receipt - Held that - Compensation in question was meant, intended and paid for withdrawal of aforesaid litigation instituted by assessee which could have resulted in many adverse consequences for the reputation of Coca Cola/Atlantic besides entailing huge cost and efforts of litigation. Relinquishment of right to sue is neither a capital asset nor taxable u/s 28 which provides specific types of receipt to be held taxable as business income. Relinquishment of right to sue does not find any mention therein. In this eventuality we have no hesitation to hold that the impugned amount of ₹ 8,16,22,040/- is a capital receipt not liable to Income Tax. When the party has compromised and withdraw the litigation, if that compensation is received, it is always to be treated compensation. In our considered opinion, the Tribunal has not committed any error in allowing the appeal and we are in complete agreement with the view taken by the Tribunal. Decided in favour of assessee and against the Department.

Summary

Issues:
1. Taxability of compensation received towards settlement.
2. Deletion of penalty under section 271(1)(c) of the Income Tax Act.

Issue 1: Taxability of compensation received towards settlement:
The High Court addressed the question of whether the compensation received by the assessee towards settlement should be taxed. The Tribunal reversed the view of the CIT (A) and AO, allowing the appeal by the assessee. The Court framed substantial questions of law related to the tax treatment of the amount received. The Tribunal observed that the intent of the settlement agreement was to resolve disputes and settle demands fully and finally. The compensation was paid for withdrawing pending litigation, not in lieu of any agency or non-competition agreement. The Court analyzed various clauses of the settlement agreement to determine the real intent behind the compensation. It was concluded that the amount received was a capital receipt, not taxable under the Income Tax Act. The Court agreed with the Tribunal's decision, stating that when a party compromises and withdraws litigation, the compensation received should be treated as such. The appeal was dismissed in favor of the assessee.

Issue 2: Deletion of penalty under section 271(1)(c) of the Income Tax Act:
Regarding the deletion of penalty under section 271(1)(c) of the Income Tax Act, the Court considered the findings of all authorities involved. The Court noted the concurrent factual findings and reasons provided in the judgment related to the first appeal. Based on the reasons mentioned in deciding the first appeal, the Court also dismissed the second appeal. The Court found no grounds for interference and upheld the decision to delete the penalty levied under section 271(1)(c) of the Income Tax Act. The second appeal was dismissed in line with the decision on the first appeal.

In conclusion, the High Court of Rajasthan addressed the taxability of compensation received towards settlement and the deletion of penalty under section 271(1)(c) of the Income Tax Act. The Court analyzed the clauses of the settlement agreement to determine the nature of the compensation and concluded that it was a capital receipt not subject to income tax. The Court upheld the Tribunal's decision in favor of the assessee, dismissing the appeals.