9911796707
TMI Blog2008 (1) TMI 435X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... four firms nominated three to four partners to DHS to represent the firms. 5. By virtue of an agreement dated January 1, 1978, between Deloitte Haskins Sells International and Gupta Choudhary Ghosh, Calcutta, the partners of Gupta Choudhary Ghosh were allowed to practice in the name of Deloitte Haskins Sells in India. Accordingly, partners of Gupta Choudhary Ghosh formed a partnership in the name of Deloitte Haskins Sells in India (DHS). Consequent upon the merger of practices of DH S and Touche Ross International, a regional meeting of Deloitte Ross and Tohmatsu (DRT) International was held on April 5, 1990, in Hong Kong where the representatives of DRT International, DHS and TR firms in India were present. At the said meeting, DRT International representatives proposed the merger of DHS and TR firms in India in keeping with the international trend. In view of the fact that the Indian laws permitted formation of a firm with not more than twenty partners, total merger was not considered feasible. In the circumstances, an umberalla firm was formed with the representative partners of DHS and TR firms. It was decided that the respective firms joining the umberalla fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctice only in the name of DHS. It has been submitted by the assessee that as this arrangement was time consuming, DTTI, in the mean-time, decided to grant concurrent membership to the four constituent firms of DHS. Accordingly concurrent membership agreement dated September 1, 1992, was executed between KA and DTTI wherein KA was formally admitted as a member firm of DTTI. 11. Regarding reasons for withdrawal from the concurrent membership of DTTI, it has been submitted by the assessee that DTTI was keen that the four constituent firms of DHS and two of TR firms should merge and form one national firm. The said merger required losing national identity for the firms and transfer of national clients to DHS. Also, M/s. CC Choksi Co. insisted on taking over DHS practice in India. As this was not acceptable to KA, the assessee contended that DTTI asked KA to withdraw from the membership of DHS/DTTI and agreed to pay compensation to KA. 12. In the course of assessment the assessee was asked to substantiate its claim as to why the amount is to be treated as capital receipt. The assessee filed copies of relevant agreement with DTTI. It is necessary to examine the relevant clauses o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause 6 Compensation on withdrawal Your firm will not be obliged to make a compensation payment to the firm (under section 6 of the firm' s supplemental agreement) in the event of your firm' s departure from the firm as a result of the failure to complete the merger with the counterpart firms or as a result of executive committee decision. 6. Clause 7 Term-(c) Membership in the firm of the firms not selected shall terminate, notwithstanding any contrary provisions of the articles and supplemental agreement of the firm, automatically and without any hearing or further action, effective on the date of the firm' s notice to the firms that have not been selected. Their respective memberships in DH+SI and TRI shall similarly terminate. The firm remaining in the Verein shall complete the remaining items of the normal Verein documentation. The firm is pleased to welcome your firm to membership and hopes that your merger with the counterpart firms will soon be completed successfully. 14. The relevant clauses of the agreement and release document dated November 14, 1996 are extracted hereunder : 1. Clause 2 Whereas the parties hereto have entered into that certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enders, releases, assigns and transfers to DTTI as on the withdrawal date, all rights, title and inter est or claim of right, title and interest, if any in and to the DTTI names. . . 15. On the basis of the above agreements the assessee contended : The payment clearly represents compensation for the sterilization of future professional earnings from DHS/DTTI connection. The compensation was made to recompense KA in regard to the destruction of a substantial part of its profit-making apparatus built brick by brick by KA by its extensive and sustained efforts occasioned by its forced withdrawal from the concurrent membership of DTTI as a result of DTTI' s reorganization in India and withdrawal of its nominees as partner from DHS. The withdrawals of KA from DHS/DTTI has resulted in substantial impairment to the profit-making apparatus of KA. It has resulted in reduction in staff and substantial loss of future earnings. The arrangement between KA and DHS/DTTI constituted a separate and identifiable source of income and accordingly a profit earning apparatus of its own or by itself. The fact that this source completely dried up with effect from November 29, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the assessee and DTTI was nothing different from other contracts. The Assessing Officer also held that the assessee had made sustained efforts for promoting DTTI and has provided valued services to DTTI' s referred clients and was instrumental in building a substantial DHS practice in Delhi. This fact has been acknowledged in clause 5 of the agreement dated November 14, 1996. By virtue of this agreement the assessee became entitled to payment specified hereafter and that to compensate the assessee for the consequent loss and prejudice, the DTTI agreed to pay US$ 3.25 lakhs. The Assessing Officer also held that though after the exclusion of the assessee from DTTI membership there was no reference of the clients by DTTI, yet the assessee was not prohibited from practicing the profession of accountancy. Thus there was no restrictive covenant to carry on the profession. Thus there was no cessation of business. The compensation paid as per the agreement and release deed was for profits which the assessee would have earned in future in the carrying on work with DTTI. Thus it can be said that the assessee has parted with the fruits of the tree and not the tree itself. Every clie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is cryptic, non-speaking and without consideration of rival contentions. Accordingly, it was proposed that the matter should be restored back to the Commissioner (Appeals) to decide the issue by passing a speaking order. However, this was objected by learned counsel for the assessee by submitting that fresh submissions will be made and the matter may be decided by this Tribunal without being guided by the finding of the Commissioner (Appeals) and to be decided afresh on the facts of the present case. Accordingly the matter was heard at length. 21. The learned Commissioner Shri Jain gave brief background of the facts of the case. Summary of the submission is that the assessee partnership firm M/s. Khanna and Annadhanam is a practising chartered accountants firm since last 50 years. The assessee-firm joined Deloitte Touche Tohmatu International (DTTI) as member on September 9, 1992. DTTI is an international conglomeration of member firms throughout the globe. DTTI had not any direct presence in its own name but through one of its constituent member firm namely Deloitte Haskins Sells (DHS). DHS has four partners namely M/s. Khanna Annadhanam for North, M/s. Fraser Ross for S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest are being fulfilled and there after member constituent itself or governing body by giving a notice in prescribed format within a prescribed time limit can opt for exit route also. The same was done by the assessee M/s. Khanna Annadhanam also. 3. The assessee M/s. Khanna Annadhanam entered into a professional venture with the abovementioned multinational professional con glomerate and continued till their professional interest were being fulfilled, and opted for exit route when a situation arose which was not in their favour and that is why this arrangement came to an end. 4. The assessee received compensation amounting to Rs. 1,15,70,000 based on a formula which derives figure based on past years figures of professional receipts and profit element involved therein. Certainly it' s a replacement of professional receipts/surplus which the assessee firm ought to have received and they have waived in favour of conglomerate. 5. Without prejudice to the above, section 28(ii)(c) squarely covers this type of transaction which states as under : ' Any person, by whatever name called, holding an agency in India for any part of the activities relat ing to the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer as well as the learned Commissioner of Income-tax (Appeals). The DTTI itself does not practice as a chartered accountant firm. It is more like a federation constituted by principal firms practicing in various countries of the world including India. This is the usual pattern followed by other big accounting firms world over. DHS is a firm of chartered accountants duly registered with the Institute of Chartered Accountants of India. DHS is a permanent member of DTTI. By arrangement between four Indian concurrent member firms of DTTI, they joined together to form a single partnership firm in the name of DHS wherein three of the existing partners of KA were nominated as the partners of DHS. All the foreign clients referred by various DTTI member firms were serviced by DHS which collected the fee from them for the services rendered. However, since DHS did not have any infrastructure of its own, the services were provided by four Indian firms and out of the gross fees collected by DHS almost 80 to 90 per cent. was paid to the respective firms who were providing the actual services. In a way the assessee herein had two distinct sources of income i.e., (1) from its own clients service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gument, he relied upon the decision of the hon' ble Supreme Court in the case of P. H. Divecha v. CIT [1963] 48 ITR 222. The above position is supported by the factual position in the present case being the decline in profit of the assessee and no income from this particular source has been received/earned by the assessee after its exit from the current membership of DTTI. It is the case of the assessee that this voluntary receipt is not taxable in view of the following case laws : (i) CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148 (SC) ; (ii) CIT v. Vazir Sultan and Sons [1959] 36 ITR 175 (SC) ; (iii) Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261 (SC) ; (iv) CIT v. Best and Co. P. Ltd. [1966] 60 ITR 11 (SC) ; (v) Karam Chand Thapar and Bros. P. Ltd. v. CIT [1971] 80 ITR 167 (SC) ; (vi) Bombay Burmah Trading Corporation Ltd. v. CIT [1971] 81 ITR 777 (Bom) affirmed in [1986] 161 ITR 386 (SC) ; (vii) CIT v. Prabhu Dayal [1971] 82 ITR 804 (SC) ; (viii) CIT v. Barium Chemicals Ltd. [1987] 168 ITR 164 (AP) ; and (ix) Oberoi Hotel P. Ltd. v. CIT [1999] 236 ITR 903 (SC). 29. Shri Sharma also sought to distinguish the Tribunal judgments relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 31, 1995, and that this will be the effective date of your withdrawal from DTTI. However, we recognize that there might be an exceptional matter(s) which could take somewhat longer to wrap up. Please supply us with a list (including status) of all active referred-in matters as soon as possible (please, not later than May 7, 1995) so that we can work together to create a time line for transition. This list should be updated from time to time to show new and terminated activity. To ensure the least possible disruption to our clients, we would hope that the transition of client matters can be achieved through the cooperation of Khanna partners and the receiving DTTI entity as suggested on Friday by Mr. Balasubramanian. We appreciate his suggestion in this regard. 3. We understand that you have two personnel currently in the United States participating in the SCDP program. It is your choice whether or not they complete the program. In addition, if you or they feel it best that they seek positions outside of Khanna, we will be willing to explore for them other DTTI opportunities in India. In addition, we will be willing to assist in placing any staff which becomes excess as a resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments, which are connected or linked with the office, vocation or occupation. 34. Income under the Act connotes a periodical a 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 that word in the common language or whether it is merely a casual receipt. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 148 (SC), the hon' ble Supreme Court held (headnote of 35 ITR) : In the determination 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 a difference between a payment made as compensation for the termination of an agency contract and an amount paid as solatium ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agency is a capital receipt or a revenue receipt, the first question to be considered is whether the 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 receipts ; 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. (emphasis supplied) 39. The hon'ble Supreme Court in the case of Gillanders Arbuthnot and Co. Ltd. [1964] 53 ITR 283 held (headnote of 53 ITR) : 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 there fore did not represent the price paid for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and what was the total income they were yielding? If one of them was given up, what was the average income of the agency lost? What was its proportion in relation to the total income of the company? What was the impact of giving it up on the structure 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. 41. The Supreme Court did not lay down in CIT v. Chari and Chari Ltd. [1965] 57 ITR 400 that the burden on the Revenue to establish that an income as taxable was immutable in the sense that it never shifted to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit of by parting with it and letting it change masters. Circulating capital is capital which is turned over, and in the process of being turned over, yields profits or loss. What is capital asset in the hand of one person may be a trading asset in the hands of another. The determining factor is the nature of the trade in which the asset is employed. Compensation received for immobilization, 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 agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid a certain amount for the years 1951, 1952 and 1953 as commission and a further sum of Rs. 70,000, by way of compensation for the termination of the agreement between him and the company as from January 1, 1954. That compensation was received by the assessee on June 11, 1954. The question was whether the sum of Rs. 70,000 was a capital receipt in the hands of the assessee. The assessee was not engaged either in the business of discovering kankar or any mineral or in the business of bringing about agreements between parties. There was no evidence to show that he was a businessman. Held, that none of the activities of the assessee could be considered to be a business activity. The assessee acquired an income-yielding asset as a result of his activities but the compromise decree destroyed that asset and in its place he was given Rs. 70,000 as compensation. This payment was neither in respect of the services rendered by him in the past nor towards the accumulated commission due to him. It was paid as compensation to him because he gave up his right to get commission in future to which he was entitled under the agreement. It was a price paid for surrendering a valuable right which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit-earning source, such receipt, not being in the ordinary course of the assessee' s business, is a capital receipt. The assessee entered into an agreement with an English company in October, 1961, according to which the English company was required to erect a barium chemical plant for the assessee for producing certain barium salts. The consideration fixed for the erection of the plant was 1,84,500. The work was to be commenced within four months and completed within 9 to 12 months from the issue of the letter of credit. The English company had agreed to ensure a certain quality of barium salts and also guaranteed certain quantity of pro duction per annum. As differences arose between the assessee and the English company, a supplementary agreement was concluded on August 3, 1963, under which the English company agreed to take up complete responsibility for the plant and machinery supplied and they were prepared to give necessary guarantee. The erection of the plant continued till the middle of 1964. During the trial runs, it was noticed that the plant and machinery was completely defective and did not conform to the agreed specifications and designs. After the defect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sate the assessee for not fulfilling the terms of the contract. Hence, the sum of Rs. 47,20,939 received by the assessee during the assessment year 1968-69 constituted in its entirety a capital receipt and was not assessable; (ii) that none of the ingredients mentioned in section 2(47) of the Income-tax Act, 1961, was present in the transaction in question. There was neither sale nor exchange nor relinquishment of any rights in respect of the amount of Rs. 47,20,939 received by the assessee from the English company. That amount was paid by the English company as damages for their failure to fulfil their obligations under the agreements concluded with the assessee. The amount could not, therefore, be brought to tax as capital gains under section 45; and (iii) That when the damages received by the assessee were held to be capital receipts, it necessarily followed that the amounts of Rs. 50,000 and Rs. 42,212 paid for the purpose of investigation into the defects and for advice to rectify the defects were also capital expenditure. The amounts were not deductible. 48. In the case of Matheson Bosanquet Co. Ltd. v. CIT [1988] 171 ITR 359 (Mad) it has been held as under (headnot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed its commission income correctly 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. 50. In the case of Blue Star Ltd. v. CIT [1996] 217 ITR 514 (Bom), the headnote 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 substa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the business. Even with the termination of the agreement, the assessee was left free to carry on 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. (emphasis supplied) 51. The hon'ble Delhi High Court in the case of CIT v. Manoranjan Pictures Corporation P. Ltd. [1997] 228 ITR 202 held thus (headnote of 228 ITR) : 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 assessee firm is an old established firm and in the course of carrying on of such profession, entered into an agreement for concurrent membership of DTTI in 1992. Since this arrangement was no more agreeable, this arrangement came to an end in a way it can be said that the arrangement or cessation of the arrangement is in the course of carrying on the profession as such. The arrangement with DTTI and because of such association if any professional income is generated, it cannot be considered as a separate or distinguished profession de hors or unconnected with existing profession. 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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