2015 (12) TMI 1290 - HC - Income Tax

Compensation received from the German publisher - Honorarium receipt - Character of the receipt in the hands of the Assessee - whether a capital receipt not chargeable to tax under Income Tax Act? - Held that - Certain facts of the present case are not disputed by the Revenue. First, that the Assessee was a journalist by profession and was appointed as the foreign correspondent in India of a German news magazine Der Spiegel. The second is that the German publisher was paying a lumpsum amount upon termination as sign off compensation for performance of authorship/professional services for a continuous period of 23 years . Thirdly, the letter written by the publisher acknowledges that the compensation was being paid Due to the loss of his work place and in consideration of his long time association . These factors have a bearing on the character of the receipt in the hands of the Assessee. Indeed this was compensation for loss of an income-generating asset. The Court concurs with the conclusion of the CIT (A) that the sum paid to the Assessee was to compensate for the abrupt loss of source of income and that the termination of contract had fatally injured the appellant s only source of income for the last 20 years. The mere fact that the Assessee was free to earn through other sources would not make a difference to this position. Recently this court in Khanna and Annadhanam v. Commissioner of Income Tax 2013 (1) TMI 681 - DELHI HIGH COURT was considering the nature of a receipt in the hands of the Assessee, a firm of Chartered Accountants for the termination of an arrangement by which it was receiving referral work from abroad. After discussing the decisions of the Supreme Court in Kettlewell Bullen and Co. Ltd. (supra) and Oberoi Hotel Pvt. Ltd. v. CIT 1999 (3) TMI 2 - SUPREME Court wherein held as that if the receipt represents compensation for the loss of a source of income, it would be capital and it matters little that the assessee continues to be in receipt of income from its other similar operations. - Decided in favour of the Assessee

Summary

Issues:
1. Characterization of compensation received by the Assessee from the German publisher as revenue or capital receipt for tax purposes.

Analysis:

Issue 1: Characterization of compensation as revenue or capital receipt
The case involved determining the nature of compensation received by the Assessee from a German news magazine, Der Spiegel, upon termination of the contract. The Assessee, a journalist, received compensation of DM 3,00,000 for the loss of work space and long-time association. Initially claimed as a revenue receipt, it was later revised as a capital receipt. The Assessing Officer (AO) held it to be a revenue receipt, emphasizing that the termination did not affect the Assessee's future authorship rights. However, the Commissioner of Income Tax (Appeals) (CIT(A)) ruled in favor of the Assessee, stating that the compensation was an ex-gratia payment for the loss of a capital asset, i.e., the contract with Der Spiegel. The ITAT confirmed the CIT(A)'s decision. The High Court concurred with the CIT(A) and cited precedents to support the view that compensation for the loss of a source of income constitutes a capital receipt, regardless of the Assessee's ability to earn from other sources. Notably, the court cited a case involving the termination of a referral work arrangement for a firm of Chartered Accountants, where compensation was deemed capital in nature. Consequently, the court held in favor of the Assessee, concluding that the compensation was a capital receipt not chargeable to tax under the Income Tax Act.

This detailed analysis provides a comprehensive overview of the issues involved in the legal judgment, the arguments presented by the parties, and the court's reasoning leading to the final decision.