In The ITAT Delhi Bench D
Ansal Properties & Industries Ltd.
v.
Deputy Commissioner of Income-tax, Central Circle-20, New
Delhi
P.N. PARASHAR, JUDICIAL MEMBER
AND DEEPAK R. SHAH, ACCOUNTANT MEMBER
IT APPEAL NO. 3518 (DELHI) OF 2004
Assessment year : 2001-02
August 3, 2007
Section 28(i) read with section 2(24) of the Income-tax Act, 1961 -
Business income - Chargeable as - Assessment year 2001-02 - Whether once it is
found that a contract was entered into in 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 - Held, yes - 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 therefor, whether
receipt is a capital receipt or a revenue receipt would depend upon whether it
is compensation for injury inflicted on capital asset or on stock-in-trade - Held,
yes - Whether where compensation is recovered for an injury inflicted on a
mans trading so to speak, a hole in his profits compensation would go to fill
hole and would be a trading receipt - Held, yes
One D owned 66.53 acres of land in Bara Hindu Rao, New Rohtak Road, Kishanganj, New Delhi. An agreement dated 17-7-1986 was entered into between D and one K, whereby K was to develop and construct multistoried residential flats, flatted factories, shopping complex, schools, etc., on a vast area of 66.53 acres of land belonging to D. Pursuant to understanding between D and K to bring in the assessee as associate developer, an agreement dated 24-11-1988 was entered into amongst D, K and the assessee. In terms of this agreement, both K and the assessee were to develop and construct for D the project equally and meet all costs and expenses in equal share. In consideration, both K and the assessee were entitled to specified percentage of residential complex and other saleable area. It was specifically agreed that subject to the terms of the agreement, K and the assessee shall have right to enter into contracts to book and sell their respective areas. Subsequently D, by notice dated 24-6-1998 unilaterally terminated the agreement entered into with K and the assessee. Therefore, number of legal proceedings were filed. However, a settlement agreement dated 30-10-2000 was entered into amongst D, K and the assessee; whereby the parties resolved their disputes, differences, claims and counter claims. In terms of the settlement agreement between the assessee and D, the assessee received an amount of Rs. 4.25 crores from D, whereby the assessee agreed to abandon / cease all its rights, claims, etc. that accrued in its favour under the principal agreement in relation to development of 66.53 acres of land owned by D at Bara Hindu Rao, Rohtak Road, New Delhi. The construction already raised thereon now was acquired by D. Further the liability of the assessee towards provisional booking made by the assessee was also taken over by D. The assessee also agreed that it would not undertake without prior written consent of D similar project in the vicinity of the project for a period of three years from the date of signing of this agreement. The assessee claimed that the sum of Rs.4.25 received from D was a capital receipt not chargeable to tax. The Assessing Officer treated the receipt in question as revenue receipt and taxed the same in the hands of the assessee.
On appeal, the Commissioner (Appeals) upheld the impugned order.
On second appeal:
HELD
All receipts by the assessee would not necessarily be deemed to be the income for the purpose of the Income-tax Act and the question whether any particular receipt is income or not would depend on the nature of the receipt and the true scope and effect of the relevant taxing provision. The definition of income in section 2(24) is an inclusive definition. The scheme of section 2(24) read with sections 4 and 10, seems to be that the word income would take in any monetary return coming in. It would take in voluntary and gratuitous payments, which are connected or linked with the office, vocation or occupation. Further, 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. [Para 9]
The Supreme Court in the case of CIT v. Rai Bahadur Jairam Valje [1959] 35 ITR 48 has held that 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. The Supreme Court has further held that 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 therefor, whether the receipt is a capital receipt or a revenue receipt would depend upon whether it is compensation for injury inflicted on capital asset or on stock-in-trade. Further the Bombay High Court in the case of Bombay Burmah Trading Corpn. Ltd. v. CIT [1971] 81 ITR 777 has held that where compensation is recovered for an injury inflicted on a mans trading, so to speak, a hole in his profits, the compensation would go to fill the hole 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. [Para 10]
In the instant case, in the agreement between the assessee and D, the assessee received an amount of Rs. 4.25 crores from D, whereby the assessee agreed to abandon/cease all its rights, claims etc. that accrued in its favour under the principal agreement in relation to development of 66.53 acres of land owned by D at Bara Hindu Rao, Rohtak Road, New Delhi. The construction already raised thereon now was acquired by D. 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 also taken over by D. Thus, the compensation was paid to the assessee for termination of the contract in the ordinary course of business. Thus, there was no loss to the profit making apparatus rather it was 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 stood quantified by way of compensation for loss of such future profit. Thus the amount received was in the course of business. Such a contract was part of the business itself and any receipt on account of such contract being terminated would only be a trading receipt. Therefore, the payment having been made in settlement of right under a trading contract was trading receipt and was assessable as revenue receipt. The assessee had placed much reliance on the terms of the agreement; whereby it 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. The compensation was for the loss of future profit that the assessee 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 was only not to undertake without prior written consent of D similar project in the vicinity of the project for a period of three years. With the approval of D similar projects could be undertaken. The restriction was only not to undertake similar project. 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 was prohibited was not to undertake similar project anywhere or in and around Delhi. This clause had limited significance as only to save the interest of D 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 was not taken away. Therefore, the receipt was revenue in nature and chargeable to tax as such. [Para 11]
There was no merit in the contention of the assessee that even if the amount was 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. 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 had been claimed and allowed as revenue expenditure. Thus what was paid was almost towards liabilities taken over and for deprivation of the potential income. There was no mention in the agreement that the amount was paid towards restrictive covenant. Thus the entire amount constituted revenue receipt and was chargeable to tax as such. [Paras 12 and 13]