9911796707
TMI Blog2000 (3) TMI 168X X X X Extracts X X X X X X X X Extracts X X X X ..... f W.I.E.L. paid by U.B. Group companies - Rs. 175 lakhs. In the course of assessment proceedings the assessee also approached the D.C.I.T., Range-VIII, Calcutta seeking directions in terms of section 144A of the I.T. Act. In response to that, the said DCIT vide his order dated 26-3-1992 gave the directions, in accordance with the said directions the ACIT completed the assessment of the assessee on a total income of Rs. 1,82,62,014 after including therein the said sum of Rs. 175 lakhs as the assessee's income under section 10(3) of the I.T. Act. The brief history of the case is the following : 2.2 That the assessee promoted a partnership firm called M/s. Western India Erectors Pvt. Ltd. in 1963 for undertaking contracts for the execution of heavy electrical and mechanical construction work and the firm grew to a substantial size, later on another company known as Western India Erectors Pvt. Ltd. was promoted in 1970 and most of the contracts were taken over by this company, but the firm also continued. Later on, this company was converted into a limited company. Most of the shares of the company were held by the assessee and his close relatives. The company grew in size and statur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was free from W.I.E.L. Therefore, the assessee and U.B.L. entered into another agreement and by that agreement the assessee undertook not to engage himself directly or indirectly for a period of five years from the date of the agreement in any, activity, industrial, commercial or otherwise which in any manner competes or conflicts with the existing business and activity of W.I.E.L. In consideration of such undertaking the U.B.L. agreed to pay to the assessee a sum of Rs. 175 lakhs which was duly paid by U.B.L. and its associate companies. It was the background that the assessee had received the aforesaid sum of Rs. 175 lakhs. The Assessing Officer considered this amount of Rs. 175 lakhs as consideration for having arranged deal of transferring the control of W.I.E.L. to U.B.L. In his view this receipt was, therefore, purely casual and non-recurring in nature. The Assessing Officer observed in his order that there were following reasons for bringing the amount of Rs. 175 lakhs to tax treating that as casual and non-recurring receipts which are narrated as below : (i) The assessee was always free to pursue any business of his choice after he chose to retire from the company. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) to clause (3) of section 10 expressly excludes "capital gains chargeable under the provisions of section 45" from the ambit of the said clause." On the basis of the above judgment, the Assessing Officer observed that it was certainly a receipt of casual and non-recurring nature and it cannot be considered as capital gain. As per his view, it is not enough that it was a capital receipt but receipt must be chargeable under section 45. He relied on the order of the Hon'ble Supreme Court in the case of CIT v. B. C Srinivasa Setty [1981] 128 ITR 294 wherein it was held that--- "where the cost of acquisition of an asset is nil, the capital gain is not chargeable to tax." On this reasoning the Assessing Officer mentioned in his order that even if the said receipt was a capital gain, that was not a capital gain chargeable under the provisions of section 45 for the simple reason that there was no cost of acquisition. According to the Assessing Officer, every receipt will be synonymous with income unless specifically excluded in the Act and any capital receipt without a cost of acquisition is to be taken casual and non-recurring receipt. In this regard he relied on the judgment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee. The counsel of the assessee further relied on the decision of the Madras High Court in the case of CIT v. G.R. Karthikeyan [1980] 124 ITR 85 wherein it was held that the provision of section 10(3) which is an exemption provision cannot be applied to fasten liability to tax. Various other co-decisions were also referred to by the counsel of the assessee before the authorities below. A few of them are following : (i) Gillanders Arbuthnot Co. Ltd v. CIT [1962] 46 ITR 847 where in the Hon'ble jurisdictional High Court, Calcutta held as follows : "There is no dispute in this case and in view of the authorities, there is little room for it that if compensation is paid to an agent on consideration of an undertaking not to engage any rival business, the same would be treated as capital receipt not liable to income-tax." In the aforesaid case which has also gone to the Supreme Court and the decision was Gillanders Arbuthnot Co. Ltd. v. CIT [1964] 53 ITR 283 wherein it was held that --- "Compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of terminated agency is prima facie of the nature of a capital rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efinition of income appearing in section 2(24) of the Act. There was no provision under the Income-tax Act which deemed such receipts as of income nature. Such receipts could also not be considered as income under the general law and accordingly, the CIT(A) held the amount as capital receipt not falling within the definition of income and as such was not liable to tax. The CIT(A) further observed in his impugned order that the Assessing Officer invoked the provisions of section 10(3) of the Act and held that the said receipt was casual and non-recurring receipt and so was includible in the total income subject to exemption of Rs. 5,000 under section 10(3) of the I.T. Act. The CIT(A) further mentioned in his order that the C.B.D.T. vide its Circular No. 158 dated 27-12-1974 has clarified that the amended provisions of section 10(3) will apply only where the receipts of casual and non-recurring nature can properly be characterised as income either in its general connotation or within the extended meaning given to the term by the Income-tax Act. The term "casual" has not been defined in the Act and as held in CIT v. Moti Chand Khajanchi [1988] 171 ITR 280 (Raj.) the word "casual" is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Being aggrieved, the department is in appeal before us and the Ld. D.R. submitted that the Assessing Officer rightly held receipt as casual in nature by following the decision of the Allahabad High Court in the case of Gulab Chand . He also argued that the CIT(A) has not given any reason why the amount of Rs. 175 lakhs received by the assessee does not fall in the definition of income appearing in section 2(24) of the I.T. Act although in the department's view the said receipt of Rs. 175 lakhs by the assessee has all the qualities of income. Therefore, it should not be treated as capital receipt but as revenue receipt. The Ld. D.R. further drew our attention towards the definition of income under section 2(24)(i) and accordingly he emphasised that income includes profits and gains, but the expression is more a matter of words than of substance. The word "income" is an expression of elastic ambit and courts when describing income have almost always qualified their description by saying that it is not exhaustive. He further submitted that the income is a more general term than "profits" or "gains". The word "income' is not limited by the words 'profits' and "gains". A receipt ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rning apparatus but not total destruction/sterilisation of his asset i.e. his skill and knowledge in the business and the receipt is not a casual or windfall income to the assessee because this has close link with his past knowledge and experience, only because of his experience and knowledge which the present company i.e. WIEL wants to utilise for earning its profit, assessee is getting the impugned sum of Rs. 175 lakhs and he cannot escape by saying that it was his windfall income. The Ld. D.R. further submitted that the CIT has also concluded that such receipts cannot be considered as income under general law, it is wondered as to how the Ld. CIT(A) can bring in concept of general law while deciding the nature of receipt under the Income-tax Act when the Income-tax Act alone is sufficient to decide the nature of the receipt. Therefore, it appears that the CIT(A)'s reference to general law is unwarranted and redundant and no reason of whatsoever nature has been given by the CIT(A) in treating the receipts as capital receipts. The Ld. DR. prayed that considering the facts and circumstances, the impugned receipt of Rs. 175 lakhs may be treated as revenue in nature and it should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, according to the A.R., it is admitted by the D.R. that the assessee had considerable knowledge, experience and skill in business of construction and fabrication job and such knowledge and experience is a capital asset which when applied or exploited can earn income to the assessee. The Ld.A.R. further reiterated that the assessee has entered into restrictive covenant with the purchaser of shares of WIEL and in consideration of such restrictive covenant or no competition the assessee has received Rs. 175 lakhs from UBL who purchased the share. WIEL was an independent entity which continues to remain in business. The assessee has acted upon the agreement to the hilt and has not undertaken any such forbidden activity directly or indirectly. Thus, under the said agreement the assessee has agreed not to utilise or exploit directly or indirectly his capital asset viz. knowledge, skill and experience. The source of assessee's income stood sterilised under the agreement or in other words the assessee relinquished his fundamental right to carry on business of fabrication and construction and to utilise his knowledge and skill for earning future income in consideration of receipt of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omplete or in part the taxability of the consideration will remain unaffected i.e. the same will not be taxable under the head capital gains being a. capital receipt is taxable under the head capital gain, it falls outside the definition of income appearing in section 2(24) of the Act. In support of his argument, the ld. A.R. also relied on the following cases : (1) K.S.S. Mani v. ITO [1995] 54 ITD 76 (Mad.), wherein it was held that --- "Whether compensation received by an assessee was nothing but capital receipt for loss of profit earning source and not loss of profits as such and lower authorities were wrong in holding that compensation fell within the mischief of section 17(3) as profit in lieu of salary." (2) Asstt. CIT v. Arabinda Roy [1992] 41 ITD 574 (Cal.) where in it was held that--- "the amount received by the assessee by cheque on compassionate ground as the assessee had to give up a lucrative post prematurely the payments so received by the assessee does not fall within the ambit of section 17(3)(ii) as profit in lieu of salary." It was further held in this case--- "a mere receipt which does not possess attributes of an income cannot be taxed." (3) M.N. K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich occurs quite accidentally or fortuitously. It comes without stipulation, contract, calculation or design. It is anticipated and unforeseen. And it is to be seen that unless the receipt satisfies the casual test of being of a casual and non-recurring nature, it cannot fall within the provisions of section 10(3). In this case the amount was received by the assessee in consideration of his agreeing and undertaking not to engage himself directly or indirectly in any activity, industrial, commercial or otherwise which in any manner competes or conflicts with the existing business and activity of WIEL (taken over by UBL) for a period of five years from the date of agreement. This was, thus, a restrictive covenant between the assessee and the UBL (who acquired controlling interest in WIEL,). This receipt of a sum of Rs. 175 lakhs, thus, was capital in nature and not liable to income-tax as per ratio of the case reported at Gillanders Arbuthnot Co. Ltd. (Cal.) 46 ITR 847 . The facts of the instant case are also squarely covered by the decision of the ITAT, Mumbai, D-Bench. In the case of M.N. Karani wherein it was held that the amount received by the assessee against the restrictive ..... X X X X Extracts X X X X X X X X Extracts X X X X
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