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TMI Blog2007 (8) TMI 383X X X X Extracts X X X X X X X X Extracts X X X X ..... g. 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellant : H. Mitter For the Respondent : K. C. Jain ORDER Deepak R. Shah, Accountant Member 1. This appeal by the assessee is directed against the order of the learned Commissioner of Income-tax (Appeals)-I, New Delhi, dated 18-6-2004. 2. The appellant is an experienced and reputed developer engaged in the business of construction of multi-storied buildings, commercial as well as residential etc. 3. The first ground of appeal is against the denial of deduction of Rs. 7,29,656/- on account of write-off of 10 per cent of share issue expenses incurred during the assessment year 1993-94. At the time of hearing this ground was not pressed. For want of prosecution, this ground is dismissed. 4. The next ground of appeal is against treatment of a sum of Rs. 4.25 crores received as compensation from Delhi Cloth General Mills Co. Ltd. pursuant to a settlement agreement entered into between the assessee herein and DCM Ltd. and Kailashnath Associates. It is the claim of the assessee that the sum of Rs. 4.25 crores is capital receipt not chargeable to tax whereas the Assessing Officer has held the same as revenue receipt chargeable to tax. In the return of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counter claims. In terms of the settlement, KNA and Ansals agreed to abandon/cessation of all their rights, claims, interests and activities whatsoever there might have been under the principal agreement, which stands annulled, in relation to the 66.53 acres of land owned by DCM at Bara Hindu Rao, Rohtak Road and Kishanganj, New Rohtak Road, Delhi, or construction already raised or to be raised thereon. DCM has agreed to acquire all such rights, claims, interests etc., of KNA and Ansals. DCM shall hereafter take over from KNA and Ansals the construction of flatted factory complex and residential group housing complex on the said land hitherto carried on by KNA and Ansals under the annulled principal agreement, and all the assets, excluding security deposit, relating to the project including any construction carried out at the project site respectively belonging to KNA and Ansals. KNA and Ansals have further agreed that they shall not undertake without prior written consent of DCM similar project in the vicinity of the project for a period of three years from the date of signing of this agreement. In consideration of the above, DCM has agreed to take over all the liabilities/oblig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of the term vicinity has been described in the Concise Dictionary as 1. a surrounding district, 2. nearness or closeness of place or relationship. Similarly, in Websters New Twentieth Century Dictionary (Unabridged), the word vicinity includes surrounding region. It is submitted that the appellant did not undertake any project of a similar nature within a radius of even more than five kilometers. In a real estate business, a developer can take up projects at different locations in specified area. Since DCM was developing project in or near Bara Hindu Rao, New Rohtak Road, area, it would have been adversely affected had Ansals taken up any other similar project in that or surrounding area. DCM would not have been affected by Ansals taking up similar projects at Greater Kailash,South Extension., Gurgaon, Noida etc. It was for this reason that the agreement only refrained Ansals from not to take up any similar project in the vicinity where DCM project proposed to come up. In the context of the business which the appellant was carrying on as also the purpose for which DCM insisted on and imposed the restrictive covenant, it cannot be said that since Ansals was free to undertake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt, the taxability of this consideration will remain unaffected i.e., the same will not be taxable under the head Capital gains only up to assessment year 1997-98 and will become taxable from the assessment year 1998-99 and subsequent year. What is important to note is that curtailment need not be complete. Consideration for even part curtailment of right, it was clarified would be capital receipt. Hon ble Delhi High Court in the case of CIT v. Milk Food Ltd. [2006] 280 ITR 331, settled the issue by holding that once Board has issued instructions that receipts on account of restrictive covenant were not liable to tax, revenue was not entitled to raise a contention to the contrary. Prior to insertion of section 28(va) with effect from 1-4-2003, non-compete fee received by assessee on account of restrictive covenant was not taxable under the Act. Finance Act, 2002, with effect from 1-4-2003 has inserted clause (va) to provide that following receipt (income) shall be chargeable under the head Profits and gains of business : (Va) any sum, whether received or receivable, in cash or kind, under an agreement for- (a) not carrying out any activity in relation to any business; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business interest of the payer. Since DCM had no experience in business of real estate development, therefore, it was all the more required to refrain Ansals from undertaking similar project in vicinity of the area where DCM project was proposed to come up. He accordingly pleaded that the sum of Rs. 4.25 crores under consideration constituted a capital receipt and not revenue receipt. 8. The learned DR Shri K.C. Jain on the other hand, strongly relied upon the appellate order. He further submitted that from the agreement it is clear that the amount was paid to abandon all the rights, claims, interest etc., in relation to development of the property owned by DCM. The construction already raised or to be raised is transferred to DCM. The expenses incurred by the assessee in partial development is claimed as expense. The deposit received from prospective buyers is also retained by the assessee. There is clear understanding that the compensation is for annulment of the rights of Ansals to carryon the business of completing the project and for depriving the potential income, which could have arisen from carrying on such business, the amount is paid. Thus what is compensated is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake 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. Income under the Act connotes a periodical monetary return coming in with some sort of regularity or definite source. The source is not necessarily one, which is accepted to be continuously productive but it must be one whose object is the production of a definite return. At the same time, it cannot be said that the receipt, which is not periodical or which is not regulated but of one time receipt, cannot be considered as income. The source need not be continuously productive and it is sufficient if the income is flowing from some exercise or operation by the appellant and in ordinary parlance, which can be considered as income. To constitute income, the receipt need not necessarily have their origin in business activity or investment or under an enforceable obligation. The conclusion in construing the word income , one has to ask whether having regard to all the circumstances surrounding the particular payment and receipt in question, what is relevant is of the character of income according to the ordinary meaning of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the question whether a receipt is capital or income, it is not possible to lay down any single test as infallible or any single criterion as decisive. The question must ultimately depend on the facts of the particular case and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. That, however, is not to say that the question is one of fact, for these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts. When once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period. There is difference between a payment made as compensation for the termination of an agency contract and an amount paid as Solatium for the cancellation of a contract entered into by a businessman in the ordinary course of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agency agreement in question was a capital asset of the assessee s business and constituted its profits-making apparatus and was in the nature of its fixed capital or it was a trading asset or circulating capital or stock-in-trade of its business. If it was the former compensation received would be a capital receipt; if the agency was entered into by the assessee in the ordinary course of his business and for the purpose of carrying on that business it would fall into the latter category and the compensation received would be a revenue receipt. The Hon ble Supreme Court in the case of Gillanders Arbuthnot Co. Ltd. held that, having regard to the vast array of business done by the appellant as agents, the acquisition of agencies was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. The amounts received by the appellant for the cancellation of the explosives agency therefore did not represent the price paid for the loss of a capital asset: they were of the nature of income. There is no immutable principle that compensation received on cancellation of an agency must always be regarded a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the entire business? Did it amount to a loss of an enduring asset causing an unabsorbed shock dislocating the entire or a part of the earning apparatus or structure? Or, was the loss an ordinary incident in the course of the business? But these questions can only be answered satisfactorily if the relevant material is available to the income-tax authorities. The evidence of witnesses in charge of the business, the relevant accounts and balance-sheets of the assessee before and after the loss, other evidence disclosing the previous history of the total business and the relative importance of the agency lost and the present position of the business after the loss of the said agency have to be scrutinized by the department. The Supreme Court did not lay down in CIT v. Chari Chari Ltd. [1965] 57 ITR 400 that the burden on the revenue to establish that an income was taxable was immutable in the sense that it never shifted to the assessee. When sufficient evidence, either direct or circumstantial. in respect of its contention was disclosed by the revenue, an adverse inference could be drawn against the assessee if he failed to put before the department material which was in his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mobilization, sterilization, destruction or loss, total or partial, of a capital asset would be capital receipt. Where, compensation is recovered for an injury inflicted on a man s trading, so to speak, a hole in his profits, the compensation would go to fill the hole and would be a trading receipt. On the other hand, where the injury is inflicted on the capital assets of the trade, making, so to speak, a hole in them, the compensation recovered is meant to be used to fill that hole and is a capital receipt. Cases of termination resulting in loss of employment or cessation of business must be distinguished from cases of cancellation of contracts which are of a trading nature or are entered into in the course of business. If a sum represents profits in a new form, then that is income. But, where the agreement relates to the structure of an assessee s profit-making apparatus and affects the conduct of the business, the money received for the cancellation or variation of such an agreement would be capital receipt. The question is a question of fact and must be decided by ascertaining the true nature and object of the transaction made between the parties. In the case of Matheson Bos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrectly on accrual basis, the remedy lay elsewhere. Therefore, the Tribunal was not justified in holding that the amount of Rs. 71,010/- was a revenue receipt taxable as the income of the assessee for the assessment year 1970-71: Held further, that the sum of Rs. 71,010/- was paid to the assessee as damages for loss of commission which it would have earned if the jute mill company had worked according to the agreement. It was not a case of premature termination of the managing agency business but it was a case of breach of contract between the assessee and the jute mill company and it was a revenue receipt liable to tax under section 28(ii) of the Income-tax Act, 1961. In the case of Blue Star Ltd. v. CIT [1996] 217 ITR 514 (Bom.), the Head Note read as under:- The question whether a particular income arising from termination of a contract is a capital receipt or revenue receipt is a difficult question to answer. Where, on a consideration of the circumstances, a payment is made to compensate a person for cancellation of a contract, which does not affect the trading structure of the recipient s business nor deprive the recipient of what in substance is the source of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement, the assessee was left free to carryon its normal trading activities. By cancellation of the agency, the trading structure of the assessee was not impaired. The compensation amount of Rs. 5 lakhs received by the assessee was not in the nature of a capital receipt. It was in the nature of a revenue receipt. Hon ble Delhi High Court in the case of CIT v. Manoranjan Pictures Corpn. (P.) Ltd. [1997] 228 ITR 202 held thus:- It is not possible to lay down any single or exhaustive test, as infallible or any single criterion as decisive, for determination of the question whether a receipt is capital or revenue in nature. Broadly stated, to determine the character of a receipt what has to be seen is whether the venture in which an assessee is giving up its rights was by itself the profit-earning apparatus and such an action would disrupt the entire profit earning structure of the assessee. If that be so, anything received would partake of the character of a capital receipt. But, where, however, the venture is only for the purpose of carrying on the existing business by taking the help of another, compensation received for relinquishing a right in such a venture would be a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come 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 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. 12. Much ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and activities whatsoever there might have been under the Principal Agreement, which stands annulled, in relation to the 66.53 acres of land owned by DCM at Bara Hindu Rao, Rohtak Road and Kishan Ganj, New Rohtak Road, Delhi, or construction already raised or to be raised thereon. DCM has agreed to acquire all such rights, claims, interests etc. of KNA and Ansals. DCM shall hereafter take over from KNA and Ansals the construction of flatted factory complex and residential group housing complex on the said land hitherto carried on by KNA and Ansals under the annulled Principal Agreement, and all the assets, excluding security deposit, relating to the Project including any construction carried out at the Project site respectively belonging to KNA and Ansals. KNA and Ansals have further agreed that they shall not undertake without prior written consent of DCM similar project in the vicinity of the project for a period of three years from the date of signing of this agreement. 3. In consideration of the above, DCM has agreed to take over all the liabilities/obligations of both KNA and Ansals respectively under the provisional bookings made and/or arrangements/agreements entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X
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