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2008 (1) TMI 435 - AT - Income TaxChargeability of receipts - Deemed income u/s 2(24) or Not - Nature of the receipt ''Capital or Revenue''- Payment to facilitate orderly transfer of DTTIs clients, files etc., to the DHS firm to be reconstituted - HELD THAT - 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'. It will take in voluntary and gratuitous payments, which are connected or linked with the office, vocation or occupation. The assessee received the payment to facilitate orderly transfer of DTTIs clients, files etc., to the DHS firm to be reconstituted. The same was measured in form of three times of net profit that the assessee will realize in connection with DTTI referred international work, i.e., the profit from that portion of work which is recurring and will be lost due to the withdrawal from DTTI. After the cessation of the association between the assessee and DTTI, it may be a case that DTTI will not refer its clients to the assessee but the assessee continues and is not prohibited from carrying on the profession of accountancy. The clients of the assessee remain with it and are not to be transferred to DTTI or its associate office in India namely DHS. The effect of new arrangement is that DTTI will not refer the clients and to facilitate the transfer of all referred clients, the assessee was compensated for probable loss in the form of non-receipt of the professional fees. Thus all these things put together will be part of the profession. Accordingly, it can be said that, though voluntarily, the payment came to the assessee in the course of carrying on the profession of accountancy. Such voluntary payments, which are connected with profession, will constitute income chargeable to tax. The payment has origin in the profession carried on which itself is a definite source of income and hence chargeable to tax. Serving the clients referred by DTTI cannot be considered as separate, distinct and definite source of income de hors the existing profession carried on. Each client if served does not become a separate and identifiable or distinct profession so as to say that if some of the clients cease, the receipt from them will be considered as capital. This fine distinction has always been upheld by various case laws cited by both the parties. In view of the above facts, we hold that the amount received by the assessee is arising in the course of carrying on profession and hence chargeable to tax as revenue receipt. We accordingly reverse the order of the learned CIT(A) and restore that of the Assessing Officer. In the result, the appeal is allowed.
Issues Involved:
1. Whether the amount of Rs. 1,15,70,000 received by the assessee is a capital receipt or a revenue receipt chargeable to tax. Analysis of the Judgment: 1. Nature of Receipt (Capital vs. Revenue): - Facts and Background: The assessee, a firm of chartered accountants, received Rs. 1,15,70,000 from Deloitte Touche Tohmatu International (DTTI). The amount was shown in the capital account of the partners and claimed as a capital receipt, not taxable. The Assessing Officer (AO) treated it as a revenue receipt. - Agreements and Clauses: The firm had a concurrent membership agreement with DTTI and was later asked to withdraw due to reorganization. The payment was made to compensate for the loss of future professional earnings from the DHS/DTTI connection. - Assessee's Arguments: The assessee argued that the payment was for the sterilization of future professional earnings, destruction of a profit-making apparatus, and thus a capital receipt. They cited various case laws to support their claim. - Assessing Officer's View: The AO held that the payment was for future profits the assessee would have earned, thus a revenue receipt. The AO relied on several case laws to support this view. 2. Commissioner of Income-tax (Appeals) Decision: - The Commissioner of Income-tax (Appeals) sided with the assessee, holding that the amount received was a capital receipt and not taxable, based on the totality of the facts and circumstances and relevant case laws. 3. Tribunal's Consideration: - Revenue's Appeal: The Revenue appealed against the Commissioner's decision. - Hearing and Arguments: Both parties presented detailed arguments. The Revenue argued that the payment was in the course of carrying on the profession and thus taxable. The assessee reiterated that the payment was for the loss of a profit-making apparatus, thus a capital receipt. - Case Laws Discussed: The Tribunal considered various case laws cited by both parties, including decisions from the Supreme Court and High Courts, which provided principles on distinguishing between capital and revenue receipts. 4. Tribunal's Conclusion: - Nature of the Payment: The Tribunal concluded that the payment was received in the course of carrying on the profession of accountancy. The arrangement with DTTI was part of the profession, and the cessation of this arrangement did not prohibit the assessee from continuing its profession. - Character of Income: The payment was connected with the profession and had its origin in the professional activities, thus constituting income. The Tribunal held that serving clients referred by DTTI was not a separate and distinct source of income but part of the existing profession. - Taxability: The amount received was held to be a revenue receipt chargeable to tax. 5. Decision: - The Tribunal reversed the order of the Commissioner of Income-tax (Appeals) and restored the AO's decision, treating the amount as a revenue receipt and thus taxable. Outcome: - The appeal by the Revenue was allowed, and the amount of Rs. 1,15,70,000 received by the assessee was held to be a revenue receipt chargeable to tax.
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