1982 (7) TMI 98 - AT - Income Tax

Issues Involved:
1. Taxability of amounts received by the assessee from M/s X Industries.
2. Classification of receipts as capital gains or revenue receipts.
3. Determination of the assessment year for the taxable amounts.
4. Applicability of arbitration award in determining taxable income.
5. Inclusion of goodwill in the taxable amount.
6. Assessment of depreciation reserve and retirement adjustments.

Detailed Analysis:

1. Taxability of amounts received by the assessee from M/s X Industries:
The primary issue revolves around the taxability of Rs. 3,02,169 received by the assessee from M/s X Industries. The Income Tax Officer (ITO) initially considered Rs. 1,04,861 as liable to be taxed as capital gain. The Appellate Assistant Commissioner (AAC) set aside this assessment and directed a reassessment. Upon reconsideration, the ITO proposed an addition of Rs. 2,15,806 for the assessment year 1972-73 as compensation money received on retirement, treated as business receipt. This was also brought to tax for the assessment year 1973-74.

2. Classification of receipts as capital gains or revenue receipts:
The CIT (A) held that the extra amount of Rs. 21,363 was liable to be assessed as business profit for the assessment year 1973-74 due to the arbitration award. However, the CIT (A) also concluded that the amount of Rs. 2,15,806 was not of revenue nature and could not be assessed as such, agreeing with the assessee's contention that it was not a revenue receipt. The CIT (A) further held that the surrender of rights in the partnership was covered by the definition of 'transfer' under Section 2(47) of the Act and was thus taxable under 'capital gains,' except for the portion attributable to goodwill.

3. Determination of the assessment year for the taxable amounts:
The CIT (A) decided that the profit for the previous year ending 31st Dec., 1971, should be included in the assessment for the assessment year 1972-73. The extra profit resulting from the arbitration award was to be included as business profit for the assessment year 1973-74. The Tribunal disagreed with this, stating that the source of income (business) had ended on 31st Dec., 1971, and thus, the receipt could not be taxed as business income for the assessment year 1973-74.

4. Applicability of arbitration award in determining taxable income:
The arbitration award played a crucial role in determining the amounts payable to the assessee. The Tribunal noted that the right to receive the extra amount of Rs. 21,163 accrued only after the arbitration award, making it non-assessable for the assessment year 1972-73. The Tribunal rejected the CIT (A)'s approach to tax this amount as business income for the assessment year 1973-74, as the business had already discontinued.

5. Inclusion of goodwill in the taxable amount:
The CIT (A) held that Rs. 26,856 attributable to goodwill was not exigible to capital gains as it was a self-generated asset, following the Supreme Court's decision in CIT vs. B.C. Srinivasa Setty. This amount was to be deducted from the total payment of Rs. 2,15,806.

6. Assessment of depreciation reserve and retirement adjustments:
The CIT (A) included Rs. 44,244 related to the share of depreciation reserve in the taxable amount. The Tribunal, however, reversed the CIT (A)'s decision on the assessability of the compensation received on retirement as capital gains, following the Gujarat High Court's decision in CIT vs. Dilip Engg. Works, which stated that such compensation was not taxable as capital gains.

Conclusion:
The Tribunal dismissed the appeals filed by the assessee for the assessment year 1972-73 and by the Department for the assessment year 1973-74. The appeal for the assessment year 1973-74 filed by the assessee was allowed, concluding that the compensation received on retirement was not exigible to tax as capital gains. The Tribunal emphasized that the receipts were of a capital nature and not business income, aligning with the Supreme Court's decision in Nalinikant Ambalal Mody.

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