1. This appeal by the assessee is directed against the order of the learned Commissioner of Income-tax (Appeals)-I, New Delhi, dated 18.6.2004.
2. The appellant is an experienced and reputed developer engaged in the business of construction of multi storied buildings, commercial as well as residential etc 3. The first ground of appeal is against the denial of deduction of Rs. 7,29,656/- on account of write-off of 10% of share issue expenses incurred during the assessment year 1993-94. At the time of hearing this ground was not pressed. For want of prosecution, this ground is dismissed 4. The next ground of appeal is against treatment of a sum of Rs. 4.25 crores received as compensation from Delhi Cloth & General Mills Co Ltd. pursuant to a settlement agreement entered into between the assessee herein and DCM Ltd. and Kailashnath Associates. It is the claim of the assessee that the sum of Rs. 4 25 crores is capital receipt not chargeable to tax whereas the Assessing Officer has held the same as revenue receipt chargeable to tax. In the return of income, the amount was not claimed as capital receipt. However, claim was made in the assessment proceedings to exclude the same from the taxable income. The Assessing Officer did not consider the request and no discussion in this regard is found in the assessment order.
5. Before the learned Commissioner it was contended that the amount received is not to carry on similar project in the vicinity of the project abandoned. This being a restrictive covenant to carry on trade, should be treated as capital receipt. The learned Commissioner held that it was not an absolute prohibition as with the consent of DCM any project could be undertaken. Therefore, the claim of the appellant that cessation agreement was not in the nature of trading transaction but was the one by which the appellant had parted with or extinguished one of its important source of income is not acceptable.
DCM owned 66.53 acres of land in Bara Hindu Rao, New Rohtak Road, Krishanganj, Delhi. An agreement dated 17.7.86 was entered into between DCM and Kailash Nath & Associates (KNA), whereby KNA was to develop and construct multi-storied residential flats, flatted factories, shopping complex, schools etc. on a vast area of 66.53 acres of land belonging to DCM. Pursuant to understanding between DCM and KNA to bring in Ansal Properties and Industries Ltd. (Ansals/Appellant) as Associate Developer, an agreement dated 24.11.88 was entered into between DCM, KNA and Ansals. In terms of this agreement, both KNA and Ansals were to develop and construct for DCM the project equally to the extent of 50% each and meet all costs and expenses in equal share. In consideration, both KNA and Ansals were entitled to specified percentage of residential complex and other saleable area. It was specifically agreed that subject to the terms of the agreement, KNA and Ansals shall have right to enter into contracts to book and sell their respective areas. By notice dated 24.6.1998, DCM unilaterally terminated the agreement entered into with KNA and Ansals. Termination of the agreement led to disputes amongst the parties. Number of legal proceedings challenging the termination of agreement dated 24.11.1988 were filed. A settlement agreement dated 30.10.2000 was entered into between DCM, KNA and Ansals, whereby the parties resolved their disputes, differences, claims and counter claims. In terms of the settlement, KNA and Ansal agreed to abandon/cessation of all their rights, claims, interests and activities whatsoever there might have been under the Principal Agreement, which stands annulled, in relation to the 66.53 acres of land owned by DCM at Bara Hindu Rao, Rohtak Road and Kishan Ganj, New Rohtak Road, Delhi, or construction already raised or to be raised thereon. DCM has agreed to acquire all such rights, claims, interests etc. of KNA and Ansals. DCM shall hereafter take over from KNA and Ansals the construction of flatted factory complex and residential group housing complex on the said land hitherto carried on by KNA and Ansals under the annulled Principal Agreement, and all the assets, excluding security deposit, relating to the Project including any construction carried out at the Project site respectively belonging to KNA and Ansals. KNA and Ansals have further agreed that they shall not undertake without prior written consent of DCM similar project in the vicinity of the project for a period of three years from the date of signing of this agreement. In consideration of the above, DCM has agreed to take over all the liabilities/obligations of both KNA and Ansals respectively under the provisional bookings made and/or arrangements/agreements entered into by them with their respective prospective buyers, as per particulars in the Annexures C' and D' to Settlement Agreement, including the amounts towards basic price and which amounts on the execution of stand transferred to the books of accounts of DCM and DCM is now in its 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 in relation to their respective prospective buyers as under the said provisional bookings/agreements/arrangements made with them and to indemnify 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.
Thus apart from a sum of Rs. 4.25 crores received as compensation which is the subject matter of the present appeal, the appellant earned a surplus of Rs. 2,15,50,721/- from the project on its termination which has been separately assessed to tax and is not the subject matter of any dispute.
7. The learned Counsel for the assessee Shri H. Mitter submitted that the principal objection of the CIT(A) that there was no absolute prohibition to undertake any project inasmuch as a similar project could still be taken with the written consent of DCM was frivolous and irrelevant. There was no condition imposing any obligation on DCM to grant written consent. The term similar project' was also unambiguous and it meant any project involving construction of residential complex, flatted factories etc. as described in the agreement. The term vicinity as understood by the parties was at least a radius of five kilometers of Bara Hindu Rao, which in itself is a vast area. The meaning of the term Vicinity' has been described in the concise dictionary as 1. a surrounding district, 2, nearness or closeness of place or relationship. Similarly, in Websters, New Twentieth Century Dictionary (Unabridged), the word 'vicinity' includes surrounding region. It may be submitted that the appellant did not undertake any project of a similar nature within a radius of even more than five kilometers. In a real estate business, a developer can take up projects at different locations in specified area. Since DCM was developing project in or near Bara Hindu Rao, New Rohtak Road, Area, it would have been adversely affected had Ansals taken up any other similar project in that or surrounding area. DCM would not have been affected by Ansal's taking up similar projects at Greater Kailash, South Extension, Gurgaon, Noida etc. It was for this reason that the agreement only refrained Ansals from not to take up any similar project in the vicinity where DCM Project proposed to come up. In the context of the business which the appellant was carrying on as also the purpose for which DCM insisted on and imposed the restrictive covenant, it cannot be said that since Ansal's was free top undertake projects in other areas, therefore, the consideration was not towards refraining from undertaking business activity. The restrictive covenant has another limb i.e. that Ansal's shall not take similar project. This again was necessitated on account of nature of business. Had Ansals developed a theatre, shopping mall, educational institute etc. in Bara Hindu Rao area, the same would have not adversely affected DCM's project.
Therefore, the expression similar project' was used so that Ansals may be able to construct/develop other projects having no adverse affect on business interest of DCM.He accordingly pleaded that the amount received being towards restrictive convenience whereby the appellant undertook to restrain from undertaking any similar project in the vicinity of the aforesaid project for a period of three years, the amount received should be treated as capital receipt and hence not chargeable to tax. For this purpose, he relied upon the following decisions:Gomti Credits (P) Ltd. v. DCIT He further submitted that by Finance Act 1997, it has been provided that w.e.f. 1.4.1988, cost of acquisition in case of transfer of a right to manufacture/produce or process any article or thing shall be nil. In instruction F.No. 225/83/99-ITA-II dated 17.3.1999, Board explaining the issue as under: Where the capital asset transferred is in the nature of a right to manufacture, produce or process an article or thing recourse to Section 55(2) can be made only from assessment year 1998-99 in respect of consideration received for the transfer thereof which includes extinguishment or curtailment of such right. In this connection, attention is invited to Clause 19 of the Memorandum explaining the provisions of the Finance Bill 1997, wherein it has been pointed out that consideration received on extinguishment of such a right is in the nature of capital receipt and is not liable tot ax under the head "Capital Gains" upto assessment year 1997-98.
It is clarified that even where such transfer, extinguishment or curtailment of such a right is complete or in part, the taxability of this consideration will remain un-affected i.e. the same will not be taxable under the head capital gains only upto assessment year 1997-98 and will become taxable from the assessment year 1998-99 and subsequent year.
What is important to note is that curtailment need not be complete.
Consideration for even part curtailment of right, it was clarified would be capital receipt. Hon'ble Delhi High Court in the case of CIT v. Milk Food Ltd. 280 ITR 331, settled the issue by holding that once Board has issued instructions that receipts on account of restrictive covenant were not liable to tax, revenue was not entitled to raise a contention to the contrary. Prior to insertion of Section 28(va) w.e.f.
1.4.2003, non compete fee received by assessee on account of restrictive covenant was not taxable under the Act. Finance Act 2002, w.e.f. 1.4.2003 has inserted Clause (Va) to provide that following receipt (income) shall be chargeable under the head profits and gains of business: (Va) any sum, whether received or receivable, in cash or kind, under an agreement for: (b) not sharing any know-how, patent, copy right, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services.
The definition does not require total prohibition of carrying on the business but refers to any activity relating to business. The legal position that emerges from the decisions of Courts/Tribunal, instruction of the Board and amendment of provisions of Income-tax Act is that: (a) Prima facie compensation/consideration for agreeing to refrain from carrying on competitive business is a capital receipt.
(b) Restrictive covenant need not be forever. Even if the non-compete agreement is for specified period, still the consideration would remain to be a capital receipt. In Best & Co.'s case, duration of restrictive covenant was five years.
(c) It is also the law that assessee should completely close all its activities during the period of restriction.
In Best & Co.'s case, assessee was carrying on innumerable businesses and restrictive covenant was in respect of one agency. Thus, source of its business income had not completely dried up.
Board in Instruction dated 7.3.1999 clarified that curtailment of a right to manufacture, produce or process any article or thing need not be complete, Even part curtailment would meet the requirement of law.
Even in Section 28(Va), the words used are "not carrying out any activity in relation to any business" Thus it is not the requirement of Section 28(Va) is that sum received or receivable should be for not carrying on business as such.
Applying the aforesaid principles, it is submitted that agreement with DCM was clear and without any ambiguity. Restrictive covenant that - Ansals shall not undertake any similar project in the vicinity of DCM project was at the instance and insistence of DCM.It is undisputed that Ansals (appellant) by virtue of being in the business of real estate development has valuable experience and expertise in developing project akin to the one undertaken by DCM.Ansal's experience, expertise and reputation was the only reason which promoted DCM to insist on restrictive covenant. Consideration for refraining from carrying on certain activity is paid in recognition of potential of the person (payee) to adversely affect the business interest of the payer. Since DCM had no experience in business of real estate development, therefore, it was all the more required to refrain Ansal's from undertaking similar project in vicinity of the area where DCM project was proposed to come up.
He accordingly pleaded that the sum of Rs. 4.25 crores under consideration constituted a capital receipt and not revenue receipt.
8. The learned DR Shri K.C. Jain on the other hand, strongly relied upon the appellate order. He further submitted that from the agreement it is clear that the amount was paid to abandon all the rights, claims, interest. etc. in relation to development of the property owned by DCM.The construction already raised or to be raised is transferred to DCM.The expenses incurred by the assessee in partial development is claimed as expense. The deposit received from prospective buyers is also retained by the assessee. There is clear understanding that the compensation is for annulment of the rights of Ansal to carry on the business of completing the project and for depriving the potential income, which could have arisen from carrying on such business, the amount is paid. Thus what is compensate is the loss of income itself and not the loss of profit earning apparatus. In the case of former it will be revenue receipt and in the case of later it will be capital receipt.CIT v. R.B. Jairam Valji 9. We have carefully considered the rival submissions and various case laws on the subject. The issue to be decided is whether the amount received pursuant to the agreement dated 30th October 2000 between DCM and the appellant is to be treated as capital receipt or revenue receipt.
All receipts by assessee would not necessarily be deemed to be the income for the purpose of income-tax Act and the question whether any particular receipt is income or not will depend on the nature of the receipt and the true scope and effect of the relevant taxing provision.
It is for the revenue to prove that the receipt is chargeable to tax under the provision of Income-tax Act. Once it is shown that the receipt is income under the Income-tax Act, it is for the assessee to prove that the same is either exempt or the assessee is eligible for deduction of the same, The definition of 'income' in Section 2(24) is an inclusive definition.
It adds several artificial categories to the concept of income but on that account the expression 'income' does not lose its natural connotation. Anything which can properly be described as income is taxable under the Act unless of course it is exempted under one or the other provisions of the Act. Even if a receipt does not fall within the ambit of any of the sub-clauses in Section 2(24), it may still be income if it partakes of the nature of the income. The idea behind providing inclusive definition in Section 2(24) is not to limit its meaning but to widen its net. The word 'income' is of widest amplitude, and it must be given its natural and grammatical meaning. The scheme of Section 2(24) read with Sections 4 and 10, seems to be that given its ordinary natural meaning the word 'income' will take in any monetary return 'coming in'. It will take in voluntary and gratuitous payments, which are connected or linked with the office, vocation or occupation, Income under the Act connotes a periodical 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. The word "income" is of elastic import and it is extended meaning are not controlled or limited by the use of the words "profit and gains". The diverse forms which income may assume cannot exhaustively be enumerated and so in each case the decision of the question as to whether any number of receipt is income or not must depend upon the nature of the receipt and the scope of relevant taxing provision.
Hon'ble Bombay High Court in the case of H. H. Maharani Shri Vijaykuverba Saheeb of Morvi v. CIT 49 ITR 594 held thus: There is no doubt that under the Indian Income-tax Act even payments, which are voluntarily made may constitute "income" of the person receiving them. It is not necessary that in order that the payments may constitute "income", they must proceed from a legal source : in that if the payments are not made the enforcement of the payments could be sought by the payee in a court of law. It does not, however, mean that every voluntary payment will constitute "income". Thus, voluntary and gratuitous payments, which are connected with the office, profession, vocation or occupation may constitute "income" although if the payments were not made the enforcement thereof cannot be insisted upon. These payments constitute "income" because they are referable to a definite source, which is the office, profession, vocation or occupation. It could, therefore, be said that such a voluntary payment is taxable as having an origin in the office, profession or vocation of the payee, which constitutes a definite source for the income. What is taxed under the Indian Income-tax Act is income from every source (barring the exceptions provided in the Act itself) and even a voluntary payment, which can be regarded as having an origin, which a practical man can regard as a real source of income, will fall in the category of "income", which is taxable under the Act. Where, however, a voluntary payment is made entirely without consideration and is not traceable to any source, which a practical man may regard as real source of his income, but depends entirely on the whim of the donor, cannot fall in the category of "income".
In the case of R.B. Jairam Valji (supra), the Hon'ble Supreme court held that 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 difference between a payment made as compensation for the termination of an agency contract and an amount paid as Solatium for the cancellation of a contract entered into by a businessman in the ordinary course of business. In any agency contract the actual business consists in the dealings between the principal and his customers, and the work of the agent is only to bring about the business. What he does is not the business itself but something which is intimately and directly linked up with it. The agency may, therefore, be viewed as the apparatus which leads to the business rather than the business itself.
Considered in this light the agency right can be held to be a nature of a capital asset invested in business. But this cannot be said of a contract entered into in the ordinary course of business. Such a contract is part of the business itself, not anything outside it as is the agency, and any receipt on account of such a contract can only be a trading receipt. Because compensation paid on the cancellation of a trading contract differs in character from compensation paid for the cancellation of an agency contract, it should not be understood that the later must always, and as a matter of law, be held to be a capital receipt. An agency contract which has the character of a capital asset in the hands of one person may assume the character of a capital asset in the hands of one person may assume the character of a trading receipt in the hands of another as, for example, when the agent is found to make a trade acquiring agencies and dealing with them.
Therefore, when the question arises whether the payment of compensation for the termination of an agency is a capital or a revenue receipt, it would have to be considered whether the agency was in the nature of a capital asset in the hands of the agent, or whether it was only part of his stock-in-trade.
Generally, payments made in settlement of rights under a trading contract are trading receipts and are assessable to revenue. But where a person who is carrying on business is prevented from doing so by external authority in exercise of a paramount power and is awarded compensation therefore, whether the receipt is a capital receipt or a revenue receipt will depend upon whether it is compensation for injury inflicted on a capital asset or on stock-in-trade.
In the case of Vazir Sultan & Sons (supra) it has been held by the Hon'ble Supreme Court that in considering whether compensation paid to an agent on the cancellation of his agency is a capital receipt or a revenue receipt, the first question to be considered is ether 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 receipt; 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.
The Hon'ble Supreme Court in the case of Gillanders Arbuthnot & Co.
Ltd. (supra) held - that, 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 therefore did not represent the price paid for the loss of a capital asset: they were of the nature of income. There is no immutable principle that compensation received on cancellation of an agency must always be regarded as capital Compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of the agency terminated, or for loss of goodwill, is prima facie of the nature of a capital receipt.
In the case of Best & Co. Pvt. Ltd. (supra), the Hon'ble Supreme Court has held that (i) that the compensation agreed to be paid was not only in lieu of the loss of the agency but also for the respondent accepting a restrictive covenant for a specified period; (ii) That the restrictive covenant was an independent obligation which came into operation only when the agency was terminated and that part of the compensation which was attributable to the restrictive covenant was a capital receipt and hence not taxable.Gillanders Arbuthnot and Co.
Ltd. v. Commissioner of Income-tax followed.) (iii) That, on the facts, that part of the compensation received towards loss of the agency was a revenue receipt, as the loss of the agency was only a normal trading loss.
Gillanders Arbuthnot and Co. Ltd. v. CIT relied on) (iv) That, if compensation was paid in respect of two distinct matters, one taking the character of a capital receipt and the other of a revenue receipt, there was no principle which prevented its apportionment between the two matters. Difficulty in apportionment was not a ground for rejecting the claim either of the revenue or of the assessee. Therefore, apportionment had to be made of the compensation in this case on a reasonable basis between the loss of the agency in the usual course of business and the restrictive covenant.
Whether compensation received by an assessee for loss of agency is a capital or a revenue receipt depends upon the circumstances of each case. But before coming to the conclusion one way or the other, many questions have to be asked and answered: What was the scope of the earning apparatus or structure, from physical, financial, commercial and administrative standpoints? If it was a business of taking agencies, how many agencies had it, what was their nature and variety, how ere they acquired, how were one or some of them lost 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 impart 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.
The Supreme Court did not lay down in CIT v. Chari & Chari Ltd. that the burden on the revenue to establish that an income was taxable was immutable in the sense that it never shifted to the assessee. When sufficient evidence, either direct or circumstantial, in respect of its contention was disclosed by the revenue, an adverse inference could be drawn against the assessee if he failed to put before the department material which was in his exclusive possession. While the income-tax authorities have to gather the relevant material to establish that the compensation given for the loss of agency was a taxable income, adverse inference could be drawn against the assessee if he had suppressed documents and evidence, which were exclusively within his knowledge or keeping.
In the case of Kettle Well Bullen & Co. Ltd. (supra), it has been held by the Hon'ble Supreme Court that on the facts, that the arrangement with Mugneeram Bangui and co. was not in the nature of a trading transaction, but was one in which the appellant parted with an asset of an enduring value. What the assessee was paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of a revenue receipt. It mattered little that the appellant did continue to conduct the remaining managing agencies after the determination of its agency with the Fort William Jute Co. It cannot be said as general rule what is determinative of the nature of a receipt on the cancellation of a contract of agency or office is extinction or compulsory cessation of the agency or office. Where payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business or deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue; where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt.
In the case of Bombay Burmah Trading Corporation Ltd. (supra), the Hon'ble Bombay High Court held - Fixed capital is what the owner turns to profit by keeping it in his own possession; circulating capital is what he makes profit 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 profit or loss. What is capital asset in the hands 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 hold 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 agreement relates to the structure of an assessee's profit-making apparatus and affects the conduct of the business, the money received for the cancellation or variation of such an agreement would be capital receipt. The question is a question of fact and must be decided by ascertaining the true nature and object of the transaction made between the parties.
In the case of Mathenson Bosanquet Co. Ltd. v. CIT 171 ITR 359 (Mad.) it has been held as under: The assessee entered into an agreement with a foreign company owning estates in India under which the assessee was appointed as the sole agent of the foreign company in India in regard to the management of the estates for a stated remuneration payable in respect of each financial year. The agency was, however, terminated by the foreign company in 1970-71 and it was agreed that the Indian company would be paid a sum of Rs. 3,40,000 as and by way of compensation, the payment to be made in three instalments. Apart from the said compensation, the assessee was also paid a sum of Rs. 40,000 as consultation fee.
The Income-tax Officer in the assessment of the company for the assessment year 1971-72, during which the entire money was paid, included the amount of Rs. 3,40,000 for assessment under Section 28(ii)(b) of the Income-tax Act, 1961, rejecting the claim of the assessee that it was a capital receipt. The Appellate Assistant Commissioner, however, took the view that the provisions of Section 28(ii)(c) would apply and not Section 28{ii)(b) and consequently confirmed the assessment. The Tribunal, however, held that both the Sub-clauses (b) and (c) of Section 28 (ii) would apply and accordingly confirmed the assessment. On a reference ; Held, that as the definition of "person" found in Section 2(31) of the Income-tax Act, 1961, included a company, the amount in question jell under Sub-clause (c) of Section 28 (ii) and it was not necessary to consider whether Sub-clause (b) of Section 28 (ii) would apply or not. The Tribunal was right in its conclusion that the amount of Rs. 3,40,000 could not be regarded as a capital receipt but was income liable to tax.
In the case of Bishambhar Nath Swaroop Narain v. CIT 119 ITR 681 (All) the Hon'ble Allahabad High Court held as under: Held, that the termination of the agreement took place on August 31, 1958, that the compensation related to the period from April, 1957, to August 31, 1958, that credit notes for commission had been assessed on accrual basis and that in regard to this source of income the assessee was following the mercantile system of accountancy and the same was accepted by the department also.
Therefore, when subsequently the entire amount was received, the department could not tax it on the cash basis in the year of receipt. If the assessee had not returned 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 IT. Act, 1961.
In the case of Blue Star Ltd. v. CIT 217 ITR 514 (Bom.), the Head Note 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 substance is the source of income, termination of the contract being a normal incident of the business, and such cancellation leaving the recipient of the amount free to carry on his trade, the receipt is revenue. However, where by cancellation of agency the trading structure of the assessee is impaired or such cancellation results in the loss of what may be regarded as the source of the assessee's income, payment made to compensate for such cancellation of agency is normally a capital receipt.
During the accounting year relevant to the assessment year 1977-78, the assessee was engaged in manufacture of air-conditioning products and was undertaking job contracts in air-conditioning. The assessee was also trading in electronics and engineering goods and was also exporting its products. On June 10, 1973, the assessee entered into an agreement with a foreign trade enterprise, BME, under which the assessee was appointed as the agent of BME for marketing and selling their products in India. The said agreement stated that it was, in the first instance, valid up to 31-12-1976, and thereafter it was to be considered as automatically renewed for one calendar year at a time unless one or the other party thereto gave notice of its wish to terminate the same. By a letter dated 4-6-1976, BME intimated to the assessee that BME was agreeable to extension of the agreement for a further period of one year and accordingly the said agreement stood renewed up to 10-6-1977. But, in the meanwhile, the Government of India sponsored a company C and on 6-10-1976, BME wrote a letter to the assessee stating that since a lot of technical know-how and organization potentialities were needed to handle the date process plan made by BME, the assessee might assign its rights under the said agreement to C which was specializing in the particular line.
BME agreed to pay to the assessee a lump sum as consideration for the assessee assigning its rights in favour of C. The agreement between the assessee and BME stood terminated on a payment of Rs. 5 lakhs. The Income-tax-Officer held that the amount was assessable and this was upheld by the Tribunal. On a reference: Held, that the agency agreement was entered into by the assessee in the normal course within the framework of the normal business of the assessee and the termination thereof could be treated as a normal incident 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.CIT v. Manoranjan Pictures Corporation (P.) Ltd. 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 taking the help of another, compensation received for relinquishing a right in such a venture would be a revenue receipt.
Hon'ble Madras High Court in the case of Parry & Co. Ltd. v. Dy. CIT, 269 ITR 177 (Mad.) held thus: The Tribunal took note of the fact that when the compensation was determined the parties concerned must have definitely considered the very old agency which the assessee had lost and came to the conclusion that a substantial portion of the compensation became payable on account of the loss to the assessee of a lucrative agency. The Tribunal rightly pointed out that for a proper understanding of the intentions of the parties concerned, it was necessary to read the agreement as a whole and that in understanding the nature of the payment Clause 1 to the premature termination of the selling agency could not be ignored.
The Tribunal rightly did not accept the plea that as the agencies continued only for a limited period on an ad hoc basis the assessee ceased to have any right to compensation on termination. It was rightly held by the Tribunal that the parties viewed it as a case of premature termination of selling agency for which the assessee was required to be compensated. The Tribunal fixed twenty per cent of the total compensation amount as attributable to the restrictive covenant and obligations, taking note of the fact that the restrictive covenants were in force for a short period of two years.
The Tribunal was right in its finding that out of the sum of Rs. 25 lakhs received by the assessee during the year 1988-89 and again Rs. 15 lakhs during the year 1989-90 only a sum of Rs. 5 lakhs was a capital receipt and not liable to tax as income under Section 28(ii)(c) of the Income-tax Act, 1961.
11. Applying the principle laid down above by us as well as by the various High Courts extracted herein above, we now examine the facts of the present case before us.
As noted in the agreement between the assessee and the DCM, the assessee received an amount of Rs. 4.25 crores whereby the assessee agreed to abandon/cease all their rights, claims etc. that accrued in their favour under the principal agreement in relation to development of 66.53 acres of land owned by DCM at Bara Hindu Rao, Rohtak Road, New Delhi. The construction already raised thereon now stands acquired by DCM. The amount was thus paid for rights to develop the said land, the development had already undertaken by the assessee and for being deprived of the potential income which could have arisen from carrying on the said development business generally. The liability of the assessee towards provisional booking made by the assessee was taken over by DCM. Thus the compensation to put in words of the Hon'ble Supreme Court in the case of R.B. Jairam Valji, 35 ITR 148 is compensation received for termination of the contract which was entered into in the ordinary course of business and hence revenue receipt chargeable to tax. The compensation was paid for termination of the contract in the ordinary course of business. Thus there is no loss to the profit making apparatus rather it is compensation for loss of profit itself. Whatever was the right of the assessee pursuant to the principal agreement to develop land which was to yield certain profit now stands quantified by way of compensation for loss of such future profit. Thus the amount received is in the course of business. Such a contract is part of the business itself and any receipt on account of such contract being terminated can only be a trading receipt. The payment having been made in settlement of right under a trading contract are trading receipts and are assessable as revenue receipt.
12. Much reliance is placed on the terms of the contract whereby the assessee was prevented to carry on similar project in the vicinity of project for a period of three years so as to hold the receipt as capital receipt. We are unable to agree. The compensation is for the loss of future profit that it would have earned had the contract not been cancelled. The contract was entered into in the ordinary course of business which would have given the assessee certain profit by way of development of the property. The restrictive clause is only not to undertake without prior written consent of DCM similar project in the vicinity of the project for a period of three years. It is to be noted that with the approval of DCM, similar projects can be undertaken. The restriction is only not to undertake similar project. It is understood that the existing project was on a huge land of 66.5 acres and that too in the heart of New Delhi wherein such a huge land is not available for development. Further what is prohibited is not to undertake similar project anywhere or in and around Delhi. This clause has limited significance as only to save the interest of DCM who was to develop the property as absolute owner. However, by such restriction the assessee was not to go out of business or its profit making apparatus is not taken away. Based on the principles laid down by us as well as by various courts, we find that the receipt is revenue in nature and chargeable to tax as such. Accordingly ground No. 2 is to be dismissed.
13. In ground No. 3 it is contended that even if the amount is not treated as capital receipt in its entirety, atleast part of the compensation attributable to the restriction covenant should have been excluded as capital receipt.
14. After hearing both the parties, we are unable to carved out any amount as towards restrictive covenant. The compensation was for the loss of future profit and also for the development already undertaken by the assessee. The expenses in relation to such development have been claimed and allowed as revenue expenditure. Thus what is paid is almost towards liabilities taken over and for deprivation of the potential income. There is no mention in the agreement that the amount is paid towards restrictive covenant as is evident from the following: 2. That KNA and Ansal agreed to abandon/cessation of all their rights, claims, interests and activities whatsoever there might have been under the Principal Agreement, which stands annulled, in relation to the 66.53 acres of land owned by DCM at Bara Hindu Rao, Rohtak Road and Kishan Ganj, New Rohtak Road, Delhi, or construction already raised or to be raised thereon. DCM has agreed to acquire all such rights, claims, interests etc. of KNA and Ansals. DCM shall hereafter take over from KNA and Ansals the construction of flatted factory complex and residential group housing complex on the said land hitherto carried on by KNA and Ansals under the annulled Principal Agreement, and all the assets, excluding security deposit, relating to the Project including any construction carried out at the Project site respectively belonging to KNA and Ansals. KNA and Ansals have further agreed that they shall not undertake without prior written consent of DCM similar project in the vicinity of the project for a period of three years from the date of signing of this agreement.
3. In consideration of the above, DCM has agreed to take over all the liabilities/obligations of both KNA and Ansals respectively under the provisional bookings made and/or arrangements/agreements entered into by them with their respective prospective buyers, as per particulars in the Annexures 'C' and 'D' to Settlement Agreement, including the amounts towards basic price and which amounts on the execution of stand transferred to the books of accounts of DCM and DCM is now in its 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 in relation to their respective prospective buyers as under the said provisional bookings/agreements/arrangements made with them and to indemnify 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.
Thus the entire amount is to be treated as revenue receipt and chargeable to tax as such.