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TMI Blog2001 (2) TMI 270X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses of Rs. 69,11,307. We will first take up assessee's main grievance which is against addition of Rs. 1,27,78,112 as income from other sources. 3. In order to properly appreciate the legal controversy requiring our adjudication, it is necessary to take a careful look at the developments leading to this appeal before us. The facts culled out from documents before us are that the assessee-company held 1,22,869 shares of face value of pound 1 each in M/s RG Shaw Co. Ltd. (hereinafter referred to as RGS) - a company incorporated under the laws of United Kingdom. RGS and the assessee-company had some common directors and there were cross holdings in the sense that RGS ilso held about 38 per, cent of shares in the assessee-company. In the accounting year 1971, relevant to the assessment year 1972-73, assessee-company was induced by some common directors in RGS to sell its entire holdings in the RGS. Apparently persuaded by this advice and after obtaining necessary approval of the Reserve Bank of India, the assessee-company sold its entire holdings in RGS which, through a series of transactions, ultimately found their way to Sime Derby Holdings Limited (hereinafter referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the two common directors at the time of sale transactions in question were guilty of breach of fiduciary duty towards the assessee-company. It is this amount of pound 8,50,000 which has been taxed by the revenue authorities in the present year as 'income from other sources' and aggrieved by which the assessee is in appeal before us. However, before we come to the core issue about taxability of this amount, it is necessary to complete narration of material facts. 4. On receipt of the above-mentioned amount of pound 8,50,000, which worked out to Indian Rs. 1,27,78,112, it was directly credited to a special reserve under 'Reserves and Surplus'. Though the receipt was not offered for taxation, the income-tax return filed by the assessee had a suitable disclosure about the facts of having received this sum as compensation, as also about the assessee's stand that this receipt is not taxable in nature. During the subsequent proceedings before the Assessing Officer, it was submitted by the assessee that since this amount represented compensation received by the assessee on account of breach of fiduciary duty of the two common directors of the assessee in not keeping the assessee info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital asset, obtained by way of out of court settlement by the appellant in lieu of withdrawing the suit threatened to be filed for a criminal breach of trust on the part of some common directors who committed breach of fiduciary duty. The learned CIT (Appeals) then rejected the contention of the assessee that the receipt in question is a capital receipt and observed that, 'the compensation received can neither be a part of sale consideration of shares ..... nor in any way be a receipt relating to sale of shares so as to be a capital receipt'. Coming to the question as to whether this receipt can be considered as income or not, the learned CIT (Appeals) observed various judicial decisions have favoured the view that income is a word of broad connotations and should be given its natural and grammatical meaning. Leaning on Hon'ble Supreme Court's judgment in the case of Navinchandra Mafatlal v. CIT [1954] 26 ITR 758, in which dictionary meaning of income is said to be given as 'it is a thing that comes in', the CIT (Appeals) observed that 'in the present case the amount of Rs. 1,27,78,112 definitely comes in to the appellant' and that 'it is a gain which the appellant has realised and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ummarise pleadings before us. Shri R.N. Bajoria, learned Senior Advocate for the assessee, submitted that Assessing Officer was correct in observing that primary thing to be decided was 'whether the receipt was income or not - the choice of head under which it is to be taxed is a subsequent requirement' but the learned Assessing Officer did not proceed to the next logical step ie., objectively determining whether or not receipt in question was a revenue receipt and as such actually capable for crossing this first bridge. Instead of carrying out this exercise, the learned Assessing Officer has merely observed that the expression 'income' is wide and vague in its scope, that it's a word of elastic import and that it includes whatever is 'income' in natural or ordinary sense. It gives an impression as if anything, which is receipt by the assessee and which, in Assessing Officer's unquestioned wisdom, can be treated as 'income', falls within the definition of income. The learned senior counsel then assailed CIT (Appeal)'s findings that since the receipt in question was not in connection with the sale of shares but to 'save the international reputation of Sime Derby Holding and to preve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corpn. Ltd. [1986] 161 ITR 386. The learned counsel, in support of the submissions that the receipt in question is a capital receipt in nature, also placed his reliance on the judgment of Hon'ble Calcutta High Court in the case of CIT v. Ashoka Mktg. Ltd. [1987] 164 ITR 664, judgment of Hon'ble Andhra Pradesh High Court in the case of CIT v. Barium Chemicals Ltd. [1987] 168 ITR 164 and judgment of Hon'ble Madras High Court in the case of CIT v. Seshasayee Bros. (P.) Ltd. [1996] 222 ITR 818. Regarding Gulab Chand's case referred to by the learned CIT(A), our attention was invited to the fact that Hon'ble jurisdictional High Court has, in the recent case of CIT v. B.K. Roy (P.) Ltd. [2001] 248 ITR 245 (Cal.) dissented from the views expressed by the Hon'ble Allahabad High Court in that case. In the backdrop of these submissions, we were urged to quash the impugned addition made by the Assessing Officer and to hold that the CIT(A) erred in law, and on facts, in sustaining the same. On the other hand, Shri D.K. Ghosh, distinguished Departmental Representative strongly supported the orders of the authorities below. It was submitted that determination of the nature of receipt, ie., whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Departmental Representative. We have also carefully perused the orders of the authorities below, as well as paper book filed by the assessee, and have deliberated upon the authorities cited at the bar. We find that, as far as assessee's first grievance is concerned, the neatly identified issue for our adjudication is whether the receipt of f 8,50,000 from Sime Derby Holdings Limited can be described to be in the nature of income and be thereby assessed to tax in the hands of the assessee company. 7. We will first take up the revenue's stand that, for the purpose of a receipt being classified as 'casual income' within meanings of section 10(3), 'it is immaterial whether the receipt is capital or revenue in nature'. This view is said to be fortified by the judgment of Hon'ble Allahabad High Court in Gulab Chand's case. Hon'ble Allahabad High Court, in this case, were dealing with a situation wherein assessee had received a sum of Rs. 55,000 by way of consideration for surrender of tenancy rights and the law, as then in force, did not specifically provide for treating such an amount as exigible for capital gains tax. It was in this context that Their Lordships of Hon'ble A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to uphold CIT(A)'s reliance on the same. We are of the considered view that the provisions of section 10(3), being non-charging provisions, cannot be pressed to service by the revenue to support their stand that, notwithstanding the nature of receipt i.e. capital or revenue, a casual and non recurring receipt is taxable save to the extent of being exempt under section 10(3) of the Income-tax Act. Section 10 merely enumerates incomes which are exempt from tax but, in the process, it cannot broaden the connotations of the expression 'income' itself. If a receipt is not in the nature of income, there cannot be an occasion to examine whether or not it will qualify to be exempt under one of the categories covered by section 10, but then if we have to approve the stand of the revenue in this regard, we have to hold that the provisions of section 10(3) will eventually determine as to what constitutes 'income' in the first place. We feel that such an approach is putting the cart before the horse. In the light of these discussions, we reject revenue's stand that irrespective of the nature of receipt, i.e. whether or not it is a capital receipt or revenue receipt, this receipt can be br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot influence the character of receipt in the hands of the assessee-company. We agree with the learned counsel that it cannot be the case of the tax authorities that the assessee-company makes its living out of saving reputation of other companies or by preventing publication of embarrassing details about other companies and, therefore, considerations of payment by Sime Derby Holding Limited cannot have anything to do with receipt being held to be revenue in nature. In this view of the matter, we hold that learned CIT(A)'s aforesaid observations are based on the considerations which are not germane to the context, and, accordingly, we are not persuaded to fall in line with the same. 10. The next things to be examined by us is revenue's reliance on Hon'ble Supreme Court's judgment in Emil Webber's case . There can hardly be any doubt about the proposition, as reiterated by the Hon'ble Supreme Court in this case, that anything which can be properly described as income is taxable under the Income-tax Act unless, of course, it is exempted under one or the other provisions of the Act. However, it cannot be overlooked that any receipt being described as income cannot be at the unfett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue receipt. In this view of the matter, and considering that primary issue before us is to examine true nature of receipt, we see no help to revenue's case even by this Supreme Court judgment. Similarly, there are other judgments relied upon by the revenue, which only deal with the scope of expression 'income' but do not touch upon the question of capital receipts being outside the ambit of income. These judgments also, for the same reasons, cannot be of any assistance to revenue's case. 12. We find that, as observed by Hon'ble Supreme Court in the case of Dr. K. George Thomas 'the burden is on the revenue to establish that the receipt is of a revenue nature' though 'once the a receipt is found to be of revenue character, whether it comes under exemption or not, it is for the assessee to establish'. No doubt that the Income-tax Act imposes a general liability to tax upon all income, but it does not provide that whatever is received by a person must be regarded as income liable to tax. In all cases in which a receipt is sought to be taxed as income, the burden lies upon the department to prove that it is within the taxing provisions. However, where a receipt is proved to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in accord with the findings of the Tribunal that the amount of Rs. 1 lakh is not in the nature of capital gain or in the nature of the revenue receipt. There is no transfer in relation to a capital asset within the meanings of section 2(47) of the Income-tax Act, 1961 and the amount of Rs. 1 lakh also does not confirm to the concept of a capital asset. . . ." The Hon'ble High Court then formed a view that on the facts and in the circumstances of the case, the Tribunal was right in holding that sum of Rs. 1 lakh received by the assessee is neither a revenue receipt nor a capital gain. In relying upon this judgment, we are only concerned with the proposition that a receipt which is neither a capital gain nor a revenue receipt will be outside the ambit of income chargeable to tax. We can also safely infer that merely because a receipt is not a capital gain chargeable to tax, it would not mean that such a receipt is revenue receipt in nature. 14. We now come to Hon'ble Madras High Court's judgment in the case of Seshasayee Bros. (P.) Ltd. Their Lordships of Hon'ble Madras High Court, after elaborately surveying the legal precedents on the characteristics of capital receipts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definitely 'referable' to shares which were held as investments by the assessee. The fact that this compensation was not taxable as capital gains, in the year in which transfer of related shares took place, cannot alter the basic character of receipt. We also find that in view of Bombay Burmah Trading Corpn. Ltd.'s case, it is evident that "when injury is inflicted on capital asset of the trading, making, so to speak, a hole in them, the compensation recovered is meant to fill that hole and is a capital receipt.'. As injury was inflicted on realisable value of shares which were held as investments by the assessee-company, applying the test laid down in Bombay Burmah Trading Corpn. Ltd's case we can only deduce that this compensation is a capital receipt in nature. In any event, the revenue has not effectively discharged its onus of demonstrating that the impugned receipt is a revenue receipt. Keeping in view all these factors and entirety of this case, we are unable to uphold taxability of this receipt. We, therefore, direct the Assessing Officer to delete the addition of Rs. 1,27,78,112, on account of receipt of compensation from Sime Derby Holdings Limited. The appellant, thus, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired to be deducted from gross dividends, for the purpose of allowing deduction under section 80M of the Income-tax Act. The learned counsel for the assessee, on the other hand, referred to Hon'ble Calcutta High Court's judgment in the case of CIT v. United Collieries Ltd. [1993] 203 ITR 857 and submitted that the special deduction under section 80M is allowable only on the net dividend which is arrived at after taking into account the expenditure, if any, incurred for the purpose of earning such dividend. It was submitted that only the actual expenditure incurred by the assessee in earning dividend income can be deducted and that there is no scope for any estimate of expenditure being made and no notional expenditure can be allocated for the purpose of earning such income unless the facts of a particular case warrant such allocation. The learned counsel submitted that since the deduction is made on estimate basis, the same has been rightly deleted by the first appellate authority. 21. Having considered the rival submissions and deliberated upon the judicial precedents on the issue before us, we are of the considered view that the deduction of expenditure incurred in earning di ..... 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