1977 (10) TMI 21 - HC - Income Tax

Assessment Year, Capital Or Revenue Receipt, Capital Receipt, Income Tax Act, Mercantile System

Issues Involved:
1. Whether the amount of Rs. 93,515 was a revenue receipt liable to tax for the assessment year 1963-64.
2. Whether the amount of Rs. 93,515 can be treated as profits and gains of a business under section 28 of the Income-tax Act, 1961.
3. Whether the entire amount of Rs. 93,515 was assessable in the assessment year 1963-64, despite the assessee employing the mercantile system of accountancy.

Detailed Analysis:

Issue 1: Revenue Receipt vs. Capital Receipt
The primary question was whether the Rs. 93,515 awarded to the assessee-firm was a revenue receipt liable to tax or a capital receipt. The court noted that determining whether a receipt is capital or income depends on the specific facts of each case. It was highlighted that compensation for the loss of a business itself is generally treated as a capital receipt. The court referenced several precedents, including Commissioner of Income-tax v. Rai Bahadur Jairam Valji and Godrej & Co. v. Commissioner of Income-tax, to illustrate the distinction between compensation for loss of business (capital receipt) and compensation for non-performance of a contract in the ordinary course of business (revenue receipt).

The court concluded that since the assessee-firm was formed solely for managing the company and had no other business, the compensation received for the loss of managing agency was a capital receipt. Thus, the amount of Rs. 93,515 awarded to the assessee-firm was determined to be a capital receipt and not a revenue receipt liable to tax.

Issue 2: Profits and Gains of Business under Section 28
Despite the amount being classified as a capital receipt, the court examined whether it could still be treated as "profits and gains of business" under section 28(ii) of the Income-tax Act, 1961, which states that any compensation received by a managing agent at or in connection with the termination of their managing agency agreement shall be deemed to be profits and gains of business. The court cited Chidambaram Mulraj & Co. P. Ltd. v. Commissioner of Income-tax, which held that such compensation, though a capital receipt, is deemed as profits and gains of business by legal fiction.

The court rejected the assessee-firm's argument that section 28(ii) was not applicable because the compensation was awarded due to a breach of the agreement with I.T.F. and not directly with the managed company. The court emphasized that what matters is whether the compensation was for the termination of the managing agency agreement, regardless of who paid it. Thus, the amount of Rs. 93,515 was deemed as profits and gains of business and liable to tax.

Issue 3: Assessment Year and Mercantile System of Accountancy
The final issue was whether the entire amount of Rs. 93,515 was assessable in the assessment year 1963-64, given that the assessee employed the mercantile system of accountancy. The court examined when the amount could be said to have accrued to the assessee-firm. The court referenced Commissioner of Income-tax v. Chunilal V. Mehta & Sons P. Ltd., where it was held that the right to compensation accrued when the managing agency was terminated, not when the amount was actually received.

In this case, since the compensation was awarded based on the remuneration the assessee-firm would have received for the years 1955-60, it was concluded that the relevant amounts must be deemed to have accrued during those years. Therefore, the entire amount of Rs. 93,515 could not be assessed in the assessment year 1963-64.

Conclusion:
1. The amount of Rs. 93,515 was a capital receipt and not a revenue receipt liable to tax.
2. The amount of Rs. 93,515 was deemed as profits and gains of business under section 28(ii) of the Income-tax Act, 1961, and thus liable to tax.
3. The entire amount of Rs. 93,515 was not assessable in the assessment year 1963-64, given the mercantile system of accountancy employed by the assessee-firm.

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