2013 (1) TMI 681 - HC - Income Tax

Amount received from DTTI in terms of release agreement - capital receipt or revenue receipt - assessee a firm of chartered accountants entered into understanding with Chartered Accounts of Calcutta referred to them by Deliotte Haskins & Sells (DHS)part of the chartered accountants firm by name Deliotte Touche Tohmatsu International (DTTI), based in USA - release agreement entered into on 14.11.1996 under which the assessee firm was to no longer represent DHS in India & thereafter DHS would not refer any work to the assessee-firm - Held that - As decided in Kettlewell Bullen & Co. Ltd. v. CIT 1964 (5) TMI 4 - SUPREME COURT where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue & where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee s income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. Also see Oberoi Hotel Pvt. Ltd. Versus Commissioner of Income-Tax 1999 (3) TMI 2 - SUPREME COURT CIT v. Best & Co. (P) Ltd case 1965 (11) TMI 23 - SUPREME COURT as relied upon by revenue will not apply here as the facts of the case are not in pari materia with it the assessee in Best & Co, case had innumerable agencies in different lines and it only gave up one of them and continued to do business without any apparent mishap and that the correspondence showed that the assessee gave up the agency without any protest presumably because such termination of agencies was part of the normal course of its business . Thus answer the substantial question of law by holding that the amount of ₹ 1,15,70,000/- received by the assessee in terms of the release agreement dated 14.11.1996 represents a capital receipt, not assessable to income tax. The appeal of the assessee is allowed - against revenue.

Summary

Issues:
1. Determination of whether the amount received by the appellant from DTTI in terms of a release agreement is a capital receipt or revenue receipt.

Analysis:
1. The appellant, a firm of chartered accountants, received compensation of Rs.1,15,70,000 from DTTI due to the termination of their services agreement. The key question was whether this receipt should be considered as capital or professional income.
2. The assessing officer initially treated the receipt as part of the professional income, but the CIT (Appeals) reversed this decision. However, the Tribunal sided with the assessing officer, leading to the appeal by the assessee.
3. The appellant argued that the compensation was for the sterilization of a source of income, emphasizing that it represented a loss of a capital asset rather than professional income.
4. The High Court referred to the case law, particularly the Kettlewell Bullen & Co. Ltd. case, to distinguish between compensation for loss of trading operations and solatium for the loss of office. It was concluded that the compensation received for the loss of an enduring value asset should be considered a capital receipt.
5. The judgment in Oberoi Hotel Pvt. Ltd. v. CIT was also cited, highlighting that compensation for the loss of office or agency is generally a capital receipt. The High Court emphasized that the termination of the arrangement with DTTI impaired the profit-making structure of the assessee-firm, making the compensation a substitute for the lost source of income.
6. The revenue cited the CIT v. Best & Co. (P) Ltd. case, but the High Court found the facts of the present case more aligned with the Kettlewell Bullen & Co. Ltd. case. Therefore, it was held that the amount received by the appellant was a capital receipt not subject to income tax.

In conclusion, the High Court held that the compensation received by the appellant from DTTI was a capital receipt, not assessable to income tax. The appeal of the assessee was allowed with no order as to costs.