2009 (6) TMI 116 - AT - Income Tax

Summary

Issues Involved:
1. Classification of the receipt of Rs. 50,00,000 from M/s Trent Ltd. as capital or revenue receipt.
2. Taxability of the receipt under the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of the Receipt:
The primary issue in this appeal is whether the receipt of Rs. 50,00,000 from M/s Trent Ltd. should be classified as a capital receipt or a revenue receipt. The assessee claimed it as a capital receipt, arguing that it was compensation for the sterilization of a profit-earning source, specifically the use of premises previously used as a showroom/service center. The Assessing Officer (AO) treated it as a revenue receipt, stating that it was a business receipt arising from a business agreement with M/s Trent Ltd. The CIT(A) concurred with the assessee, holding that the receipt was on account of agreeing to forego the use of the premises for its previous business purpose and thus should be treated as a capital receipt. The Tribunal examined the clauses of the agreement and concluded that the Rs. 50,00,000 was not connected with the rendering of services but was for the use of the premises by M/s Trent Ltd. Therefore, it was not a business receipt but related to the capital asset.

2. Taxability Under the Income Tax Act:
The Tribunal analyzed the taxability of the receipt under the Income Tax Act. The AO included the receipt as business income under Section 28(i), which pertains to profits and gains of any business or profession carried on by the assessee. However, the Tribunal found that the Rs. 50,00,000 was a one-time non-refundable amount for allowing M/s Trent Ltd. to use the premises and had no relation to the actual business carried out by the assessee. The Tribunal further examined the nature of the receipt and concluded that it was compensation for the extinguishment of the assessee's right to use the premises, which constituted a capital asset. As such, the receipt should be considered under the provisions of capital gains tax.

Conclusion:
The Tribunal set aside the order of the CIT(A) and directed the AO to compute the capital gain as per law, considering the Rs. 50,00,000 as a capital receipt arising from the transfer of a capital asset. The appeal was allowed for statistical purposes, and the matter was remanded to the AO for proper computation of capital gains.