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TMI Blog2009 (1) TMI 767X X X X Extracts X X X X X X X X Extracts X X X X ..... (St.) 1, 2) : "(e) `custodial services', in relation to securities, means safekeeping of securities of a client and providing services incidental thereto, and includes (i) maintaining accounts of securities of a client ; (ii) collecting the benefits or rights accruing to the client in respect of securities ; (iii) keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client ; and (iv) maintaining and reconciling records of the services referred to in sub-clauses (i) to (iii) ;" The SEBI (Custodian of Securities) Regulations, 1996, stipulated, inter alia, the conditions for grant of registration to a custodian. Regulation 7 stipulated that all custodians shall fulfil net worth norm of Rs. 50 crores. The entities which were not fulfilling the net worth norm but were already operating as custodians on the date of notification of the regulation, could be granted a time period upto five years to fulfil the said requirement. The assessee in terms of the said regulation 7 had been granted extension of five years for meeting the requirements by May 15, 2001. The assessee had been pursu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter dated April 24, 2001 was still pursuing with SEBI for extension of further time for fulfilment of net worth criteria. The payment received from DBA for shifting of major clients was therefore compensation for loss of future commission income and thus taxable as income. The Assessing Officer referred to the judgment of the hon'ble High Court of Madras in the case of Chemplant Engineers P. Ltd. v. CIT [1998] 234 ITR 23 and on the judgment of the hon'ble High Court of Allahabad in Exsoldiers' Motor Transport Co. [1963] 47 ITR 213 in which compensation received for loss of income had been held as revenue receipts. Considering the various factors mentioned above and judicial pronouncements, the Assessing Officer assessed the compensation as income of the assessee. In appeal, the Commissioner of Income-tax (Appeals) agreed with the finding of the Assessing Officer that the case of the assessee was covered by the provisions of section 28(ii)(c). He also agreed with the Assessing Officer that the termination of the contract had not affected the trading structure of the assessee and therefore the compensation received was assessable as revenue receipt. Aggrieved by the said decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... custodial services, had not been closed as the assessee even in April 2001 was pursuing with SEBI for grant of further extension. There was only shifting of certain clients by the assessee and the assessee had been paid compensation for loss of income. The method of computation of compensation as given at pages 37 to 41 of the paper book was based on the fees received from the clients and volume of transaction, which showed that the compensation had been paid for loss of income and was therefore taxable as income. The learned Departmental representative referred to the judgment of the hon'ble Supreme Court in case of CIT v. Manna Ramji and Co. [1972] 86 ITR 29 in this context. We have perused the records and considered the rival contentions carefully. The dispute raised in these appeals is regarding taxability of amounts received by the assessee from DBA in connection with the shifting of certain custodial clients of the assessee to the latter. The assessee is in the business of providing various corporate services one of which is custodial service. In respect of custodial services, the assessee had agreements with several clients for providing services such as safe keeping of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsation received was therefore capital receipt and was not taxable. Reference has been made to the judgment of the hon'ble Supreme Court in the case of Kettlewell Bullen and Co. Ltd. [1964] 53 ITR 261. The learned authorised representative has also argued that the assessee was not an agent of the clients in the strict legal sense of the term. He was dealing with the clients on principal to principal basis and therefore the provisions of section 28(ii)(c) were not applicable in respect of compensation received. The answer to the issue raised before us basically requires the understanding of the true nature of the receipt in the hands of the assessee. Normally, what is received for loss of capital or loss of source of income or for transfer of a capital asset is a capital receipt and what is received as a profit in a trading transaction or received for loss of income is taxable as revenue receipt. Whether a particular receipt is a revenue receipt or a capital receipt has always been a vexed issue. Its true nature will depend upon the facts and circumstances of each case. In case of receipts arising from termination of a contract, guidance is available from several judgments includi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements as custodian. There is no provision for any compensation to be paid by clients nor any compensation has been paid as the agreement in this case has not been terminated by the clients. What has happened in this case is that the assessee sensing that the agreement with the clients may come to an end on May 15, 2001 due to non fulfilment of net worth criteria of Rs. 50 crores as per SEBI regulations, the assessee has entered into an agreement with DBA as per which the assessee would surrender its rights in the custodial agreement in respect of selected clients and persuade the client to join the services of DBA. The net worth of the assessee as on March 31, 2001 was only Rs. 8.69 crores. The rights of the assessee in the custodial agreements were not transferable. The assessee however could surrender the rights which thereafter could be given to some other party as per separate agreement with the clients. DBA will not pay any compensation only for surrender of agreement with the clients by the assessee because after surrender by the assessee, the clients are free to join any other service provider. DBA will gain only if the assessee after surrendering the right in the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction price as payment for service arrangement with the selected clients. The net effect of the entire arrangement was that the assessee parted with its rights in the custodial agreement with selected clients in favour of DBA. The right of the assessee in the custodial agreement is, no doubt, an asset to the assessee. But in this case, the asset is not of enduring value because right of the assessee was to come to end shortly on May 15, 2001 due to SEBI regulation. The right of the assessee in the agreement was thus for a limited period of less than a year. The amount received for parting with such an asset which is not of an enduring value would be a revenue receipt like the expenditure incurred on acquiring a trading asset which is not of an enduring value is revenue expenditure. Another way of looking at the problem will be that the asset in this case was going to be consumed within the relevant accounting year itself. The income earning capacity of the asset was limited to a period less than a year. Such an asset cannot be considered as regular source of income. Compensation paid for parting with such an asset cannot therefore be called a payment for loss of source of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o other clients which is clear from the fact that the assessee had received total amount of Rs. 58.27 lakhs in the assessment year 2001-02 and amount of Rs. 59.52 lakhs in the assessment year 2002-03 from custodial services to other clients. The assessee may have stopped custodial services subsequently due to operation of law, but the payment received by the assessee in the two years from DBA were not for stopping custodial services. Moreover the assessee had a composite business of several activities and continued to carry on other activities. The assessee could also restart custodial services as and when it achieved the net worth criteria. Thus, considering the entirety of facts and circumstances, in our view, the amounts received by the assessee for parting with its rights in custodial agreements and for ensuring that they enter into agreements with DBA are taxable revenue receipts. Before parting, we have to deal with the judgments relied upon by the learned authorised representative for the assessee. The learned authorised representative has referred to the judgment of the hon'ble Supreme Court in case of Kettlewell Bullen and Co. Ltd. [1964] 53 ITR 261 which has been reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering the right in the agency which was an asset of enduring value so that the corresponding right may arise in favour of Mugneeram Bangur and Co. Though the agency was not transferable, the entire arrangement had the effect of transfer of the managing agency held by the assessee in favour of Mugneeram Bangur and Co. In other words, it was a payment for parting with an asset of enduring value. Accordingly it was held that the same was not of the nature of revenue receipt. The case of the assessee is different as the right of the assessee in the custodial agreement was not of an enduring value as pointed out earlier. The other judgments cited by the learned authorised representative for the assessee are also distinguishable. In the case of Oberoi Hotel Pvt. Ltd. v. CIT [1999] 236 ITR 903 (SC), the assessee was in the business of operating and managing hotels. In respect of one such hotel, i.e., Hotel Oberoi Imperial, the assessee had operating and managing agency for ten years which could be renewed for two further periods of ten years each. The assessee had right to purchase the hotel in case the owner decided to transfer the same. The assessee surrendered its rights in favour o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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