9911796707
Advanced Search 
TMI Blog2010 (11) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... evelop and construct multistoried residential flats, flatted factories, shopping complex, schools etc. on the aforesaid land belonging to the DCM. Owing to the magnitude of the project, however, with the mutual consent of DCM and KNA, the appellant-company, M/s. Ansals Properties and Industries Ltd., presently known as M/s. Ansals Properties & Infrastructure Ltd. (for short "ANSALS") was inducted for implementation of the project by an Agreement dated 24th November, 1988 entered into between the DCM, KNA and ANSALS. Subsequently, agreements in modification or supplemental thereto were also entered into between all the three parties. 3. By virtue of the aforesaid Agreement, KNA and ANSALS were to develop and construct for DCM, flats/buildings on the said land and to make provisional bookings and enter into agreements with prospective buyers for sale of the proposed built-up and saleable areas falling to their respective shares under the agreements. Both the KNA and the ANSALS were to develop and construct for the DCM, the project equal to the extent of 50% each and meet all costs and expenses in equal shares. In consideration thereof, both KNA and ANSALS were entitled to a sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts books showing the said amounts to the credit of the said prospective buyers. DCM undertakes with KNA and ANSALS to pay, satisfy and fulfill all the duties, liabilities, obligations, contracts and engagements of KNA and ANSALS against all proceedings, claims, demands, damages and compensation in respect thereof and the amounts towards basic price as aforesaid. DCM has further agreed to pay compensation for annulment of the very rights of KNA and ANSALS to carry on business of completing the project under the Principal Agreement and for being deprived of the potential income which could have arisen from carrying on such business, a sum of Rs. 6.75 crores to KNA, which is inclusive of refund of Security Deposit of Rs. 3.90 crores, and a sum of Rs. 8.25 crores to ANSALS, which is inclusive of refund of Security Deposit of Rs. 4 crores respectively, as under......." 5. It would be apposite at this juncture to note that apart from the aforesaid sum of Rs. 4.25 crores received as compensation by the appellant, which is the subject matter of the present appeal, the appellant earned a surplus of Rs. 2,15,50,721/- (according to the appellant a sum of Rs. 6,40,50,722/- only) from the proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAT‟). The ITAT after hearing both the parties at considerable length and running through the gamut of case law held that it was unable to carve out any amount as towards restrictive covenant. It unequivocally found that the compensation was for loss of future profit and also for the development already undertaken by the assessee, the expenses in relation to each development had been claimed and allowed as „revenue expenditure‟. Thus, the ITAT held that what had been paid was towards the liabilities taken over and for the deprivation of the potential income. Therefore, the entire amount was to be treated as „revenue receipt‟ and chargeable to tax as such. Yet again aggrieved by the order of the revenue authorities, the appellant has preferred the present appeal. 9. It is the case of the appellant that the aforesaid sum of Rs. 4.25 crores constitutes capital receipt in the hands of the appellant which was not chargeable to tax. The said amount was received towards the restrictive covenant, as incorporated in clause 3 of the Agreement, whereby the appellant undertook to restrain from undertaking any similar project in the vicinity of the aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depicted an unequivocal understanding between the parties that the compensation was for annulment of the rights of the appellant to carry on the business of completing the project and for deprivation of the potential income from the project which could have arisen from carrying on such business till the completion of the project. Thus, what was sought to be compensated was the loss of income itself and not the loss of profit earning apparatus. Therefore, according to Ms. Bansal, the amount in question was liable to be considered as a revenue receipt and not as a capital receipt, as claimed by the appellant. In this regard, Ms. Bansal relied upon a number of decisions including the following: - "(i) Parry & Co. Ltd. vs. DCIT, 269 ITR 177 (Mad.) (ii) Matheson Bosanquet Co. Ltd. vs. CIT, 171 ITR 359 (Mad.) (iii) Bishamber Nath Swaroop Narain vs. CIT, 119 ITR 681 (All.) (iv) CIT vs. R.B. Jairam Valji, 35 ITR 48 (SC). (v) Bombay Burmah Trading Corporation Ltd., 81 ITR 777 (Bom.) & (vi) Kettle Well Bullen & Co. Ltd. vs. CIT, 53 ITR 261 (SC)." 13. The question for our consideration, therefore, is whether the amount received by the appellant pursuant to the agreement dated 30t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee accepting the restrictive covenant for a specific period. The Court, therefore, held that a part of the compensation attributable to the restrictive covenant was a capital receipt and hence not assessable to tax. The question whether the compensation paid was severable, was answered as follows: - "21. The next question is whether the compensation paid is severable. If the compensation paid was in respect of two distinct matters, one taking the character of a capital receipt and the other of revenue receipt, we do not see any principle which prevents the apportionment of the income between the two matters. The difficulty in apportionment cannot be a ground for rejecting the claim either of the Revenue or of the assessee. Such an apportionment was sanctioned by courts in Wales v. Tilley [1942] 25 Tax Cas. 136, Carter v. Wadman [1946] 28 Tax Cas. 41 and T.Sadasivam v. Commissioner of Income-tax, Madras[1955] 28 ITR 435(Mad) . In the present case apportionment of the compensation has to be made on a reasonable basis between the loss of the agency in the usual course of business and the restrictive covenant. The manner of such apportionment has perforce to be left to the assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue or that amounts paid to compensate for loss of agency must be regarded as capital loss. 20. On a careful consideration of all the circumstances we agree with the High Court that cancellation of the contract of agency did not effect the profit-making structure of the appellant, nor did it involve a loss of an enduring trading asset; it merely deprived the appellant of a trading avenue, leaving him free to devote his energies after the cancellation to carry on the rest of the business, and to replace the contract lost by a similar contrac.t The compensation paid, therefore, did not represent the price paid for loss of a capital assert. We therefore dismiss the appeals with costs." 19. In the case of Commissioner of Income-tax vs. Chari and Chari Ltd. (supra), the same principles were reiterated and re-emphasized, but on the facts of the case, the Supreme Court came to the conclusion that the compensation paid for the loss of agency was a capital asset in view of the fact that there was no evidence to show that by reason of extinction of the managing agency any enduring asset was lost to the respondent (Chari and Chari Ltd.), or its trading organization was adversely affe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which 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. Vide, Van Den Berghs Ltd. v. Clark (1935) 3 I.T.R. 17. That, however is not to say that the question is one of fact, for as observed in Davies (H.M. Inspector of Taxes v. Shell Company of China Ltd., (1952) 22 I.T.R. (Suppl.) 1 'these questions between capital and income, trading profit or no trading profit, are question which, though they may depend no doubt to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts'." 22. The question that arose in the aforesaid case related to a sum of Rs. 2,50,000/- received by the assessee as damages/compensation for the premature termination of a contract. The High Court on a reference under Section 66(1) of the Income Tax Act had held that the sum was a capital receipt in the hands of the assessee and as such not lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioners of Inland Revenue applies to this category of cases. There, the assesses was carrying on business in the manufacture of fireclay goods and had, for the performance of that business, acquired a fireclay field on lease. The Caledonian Railway which passed over the field prohibited the assesses from excavating the field within a certain distance of the rails, and paid compensation therefore in accordance with the provisions of a statute. It was held by the House of Lords that this was a capital receipt and was not taxable on the ground that the compensation was really the price paid 'for sterilising the asset from which otherwise profit might have been obtained.' That is to say, the fireclay field was a capital asset which was to be utilised for the carrying on of the business of manufacturing fireclay goods and when the assesses was prohibited from exploiting the field, it was an injury inflicted on his capitalasset. Where, however, the compensation is referable to injury inflicted on the stock-in-trade, it would be a revenue receipt (Vide Commissioner of Inland Revenue v. Newcastle Breweries Ltd.")." 23. This Court, in the case of Commissioner of Income-tax vs. Manoranjon P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 8.25 crores, as is clear from a cumulative reading of clauses 2 and 3 of the Agreement, was paid as compensation for the termination of the Agreement to carry on the business of completing the project under the "Principal Agreement" and "for being deprived of the potential income which could have arisen from carrying on such business." The intention of the parties, it is settled law, is conveyed by the terms of the Agreement. In the absence of any ambiguity in the Agreement, in our opinion, the Tribunal was fully justified in construing the intention of the parties, as aforesaid. 27. We are buttressed in coming to the aforesaid conclusion by the fact that it is a matter of record that even in respect of the abandoned project, the appellant had earned a profit of Rs. 6,40,50,722/-. This apart, under Clause 2 of the Settlement Agreement, the DCM had agreed to take over all the liabilities/obligations of KNA and ANSALS under the provisional bookings made by them or the agreements entered into by them with their respective prospective buyers (as per the particulars in the annexures C and D of the Agreement) including the amount towards the basic price which henceforth were to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore by way of affording a safety valve to DCM. 30. The learned counsel for the appellant has sought to draw strength from the decision rendered by the Supreme Court in the case of Best & Co. Pvt. Ltd. (supra) where the duration of the restrictive covenant was five years. Yet, it was viewed by the Supreme Court as an independent obligation which came into operation on the termination of the agency and hence not taxable as a revenue receipt. We may note that there is a marked difference in the facts of the said case when placed in juxtaposition to the facts of the instant case. That conclusion was drawn by the Supreme Court on the basis that the restrictive covenant in the said case was a condition for the payment of compensation as evidenced from the documentary evidence on record, where the following condition had been specifically inserted:- "As a condition of our paying compensation on the basis outlined above, we would request you to be good enough to give us a formal undertaking to refrain from selling or accepting any agency for explosives or other commodities competitive with those covered by the agency agreement now being terminated." 31. In the aforesaid back ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
