2007 (8) TMI 383 - AT - Income Tax

Transfer of development rights - Nature of receipt - Capital Or Revenue receipt - Chargeable to tax Or Not - whether any particular receipt is income or not will depend on the nature of the receipt - compensation received pursuant to a settlement agreement - 'income' in section 2(24) - compensation attributable to the restriction covenant - HELD THAT - Anything which can properly be described as income is taxable under the Act unless of course it is exempted under one or the other provisions of the Act. Even if a receipt does not fall within the ambit of any of the sub-clauses in section 2(24), it may still be income if it partakes of the nature of the income. The idea behind providing inclusive definition in section 2(24) is not to limit its meaning but to widen its net. The word 'income' is of widest amplitude, and it must be given its natural and grammatical meaning. The scheme of section 2(24) read with sections 4 and 10, seems to be that given its ordinary natural meaning the word 'income' will take in any monetary return 'coming in'. The construction already raised thereon now stands acquired by DCM. The amount was thus paid for rights to develop the said land, the development had already undertaken by the assessee and for being deprived of the potential income which could have arisen from carrying on the said development business generally. The liability of the assessee towards provisional booking made by the assessee was taken over by DCM. Thus the compensation to put in words of the Hon'ble Supreme Court in the case of Rai Bahadur Jairam Valji 1958 (10) TMI 6 - SUPREME COURT is compensation received for termination of the contract which was entered into in the ordinary course of business and hence revenue receipt chargeable to tax. The compensation was paid for termination of the contract in the ordinary course of business. Thus there is no loss to the profit-making apparatus rather it is compensation for loss of profit itself. Whatever was the right of the assessee pursuant to the principal agreement to develop land which was to yield certain profit now stands quantified by way of compensation for loss of such future profit. Thus the amount received is in the course of business. Such a contract is part of the business itself and any receipt on account of such contract being terminated can only be a trading receipt. The payment having been made in settlement of right under a trading contract are trading receipts and are assessable as revenue receipt. The compensation is for the loss of future profit that it would have earned had the contract not been cancelled. The contract was entered into in the ordinary course of business which would have given the assessee certain profit by way of development of the property. The restrictive clause is only not to undertake without prior written consent of DCM similar project in the vicinity of the project for a period of three years. It is to be noted that with the approval of DCM, similar projects can be undertaken. The restriction is only not to undertake similar project, it is understood that the existing project was on a huge land of 66.5 acres and that too in the heart of New Delhi wherein such a huge land is not available for development. Further what is prohibited is not to undertake similar project anywhere or in and around Delhi. This clause has limited significance as only to save the interest of DCM who was to develop the property as absolute owner. However, by such restriction the assessee was not to go out of business or its profit-making apparatus is not taken away. Based on the principles laid down by us as well as by various courts, we find that the receipt is revenue in nature and chargeable to tax as such. Accordingly ground No. 2 is to be dismissed. Compensation attributable to the restriction covenant - We are unable to carve out any amount as towards restrictive covenant. The compensation was for the loss of future profit and also for the development already undertaken by the assessee. The expenses in relation to such development have been claimed and allowed as revenue expenditure. Thus what is paid is almost towards liabilities taken over and for deprivation of the potential income. Thus the entire amount is to be treated as revenue receipt and chargeable to tax as such - In the result, the appeal is dismissed.

Summary

Issues Involved:
1. Denial of deduction of Rs. 7,29,656/- on account of write-off of share issue expenses.
2. Treatment of Rs. 4.25 crores received as compensation from Delhi Cloth & General Mills Co. Ltd. (DCM) as capital receipt or revenue receipt.

Issue-wise Detailed Analysis:

1. Denial of Deduction of Rs. 7,29,656/- on Account of Write-off of Share Issue Expenses:
The first ground of appeal concerns the denial of deduction of Rs. 7,29,656/- for the write-off of 10% of share issue expenses incurred during the assessment year 1993-94. The appellant did not press this ground during the hearing. Consequently, due to want of prosecution, this ground was dismissed.

2. Treatment of Rs. 4.25 Crores Received as Compensation from DCM:
The primary issue in this appeal is whether the sum of Rs. 4.25 crores received as compensation from DCM should be treated as a capital receipt not chargeable to tax or as a revenue receipt chargeable to tax.

Facts and Arguments:
- The appellant, a reputed developer, entered into an agreement with DCM and Kailash Nath & Associates (KNA) to develop a project on 66.53 acres of land owned by DCM.
- The agreement was terminated unilaterally by DCM, leading to disputes and a subsequent settlement agreement.
- Under the settlement, the appellant received Rs. 4.25 crores as compensation for abandoning all rights, claims, and interests in the project.
- The appellant claimed this amount as a capital receipt, arguing it was compensation for a restrictive covenant that prevented them from undertaking similar projects in the vicinity for three years.
- The Assessing Officer and the learned Commissioner of Income-tax (Appeals) treated the amount as a revenue receipt, arguing it was compensation for loss of income, not loss of a profit-earning apparatus.

Legal Analysis:
- The Tribunal examined various case laws to determine whether the compensation was a capital or revenue receipt.
- It was noted that compensation for termination of a contract in the ordinary course of business is generally treated as a revenue receipt.
- The Tribunal emphasized that the compensation was for the loss of future profit and the development already undertaken by the appellant, which aligns with the nature of a revenue receipt.
- The restrictive covenant preventing the appellant from undertaking similar projects in the vicinity was not deemed significant enough to classify the compensation as a capital receipt. The restriction was limited to three years and did not entirely prohibit the appellant from undertaking similar projects elsewhere.
- The Tribunal concluded that the compensation was for the loss of future profit and the development already undertaken, making it a revenue receipt chargeable to tax.

Conclusion:
The Tribunal upheld the decision of the learned Commissioner of Income-tax (Appeals) and the Assessing Officer, concluding that the sum of Rs. 4.25 crores received as compensation from DCM was a revenue receipt and chargeable to tax. The appeal was dismissed in its entirety.