1983 (9) TMI 129 - AT - Income Tax

Summary

Issues Involved
1. Taxability of compensation received by the assessee under section 28(ii)(c) of the Income-tax Act, 1961.
2. Nature of compensation received: whether it is a capital receipt or a revenue receipt.
3. Applicability of capital gains tax on the compensation received.

Detailed Analysis

1. Taxability of Compensation Under Section 28(ii)(c)
The primary issue was whether the compensation received by the assessee from MICO for the termination of the distributorship agreement was taxable under section 28(ii)(c) of the Income-tax Act, 1961. The Income-tax Officer (IAC) argued that the compensation was taxable as business income, contending that the assessee acted as an agent of MICO. The Commissioner (Appeals) disagreed, stating that the relationship between the assessee and MICO was that of two principals and not principal-agent. The Commissioner (Appeals) relied on the definition of 'agent' under section 182 of the Indian Contract Act, 1872, and held that the assessee was not an agent as it did not act on behalf of MICO or represent MICO in dealings with third parties. The Tribunal upheld this view, noting that the agreements between the parties specified that the assessee was not to act as an agent of MICO. Therefore, the provisions of section 28(ii)(c) were not applicable.

2. Nature of Compensation: Capital Receipt or Revenue Receipt
The IAC held that the compensation was a revenue receipt, taxable as business income, arguing that it was paid for the loss of profits. The Commissioner (Appeals) and the Tribunal, however, concluded that the compensation was a capital receipt. The Tribunal noted that the compensation was paid for the termination of the entire framework of the assessee's business as a sole distributor, which constituted a capital asset. The Tribunal relied on the reduction in the assessee's turnover following the termination and the restrictive covenants in the agreement, which indicated that the compensation was for the loss of a source of income, not merely a loss of profit. Thus, the compensation was held to be a capital receipt.

3. Applicability of Capital Gains Tax
The IAC alternatively argued that if the compensation was not taxable as business income, it should be taxed as capital gains, contending that the termination of the distributorship agreement resulted in the transfer of a capital asset. The Commissioner (Appeals) did not consider this aspect, stating that the IAC had not established that the provisions of section 2(47) read with section 45 of the Act were attracted. The Tribunal agreed with the departmental representative that this issue should be examined. It remanded the matter to the Assessing Officer to determine whether there was a transfer of a capital asset and whether such transfer resulted in a capital gain, after hearing the assessee.

Conclusion
The Tribunal concluded that the compensation of Rs. 99,00,000 received by the assessee could not be taxed under section 28(ii)(c) as it was not holding an agency for MICO. The compensation was considered a capital receipt, not taxable as business income under general principles of tax. However, the issue of capital gains tax was remanded to the Assessing Officer for further examination.