DCIT Vs Rishabh Infrastructure Pvt. Ltd. (ITAT Raipur)
Conclusion: Compensation received by assessee on closure of business activity was for sterilization of the profit making apparatus of assessee-company; therefore, the same was capital receipt.
Held: In the case of Karam Chand Thapar & Brokers (P) Ltd. Vs. CIT reported in 80 167 it was held that where, on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor 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 present case, assessee had entered into MOU with LIPL for undertaking the infrastructure development activity of construction of Railway Track & Siding on behalf of LIPL and acquired a part of the lands (including some development works) required for the said railway track and siding which were subsequently transferred to LIPL. Due to some constraints, the balance works assigned to assessee as per the scope of work as stipulated in the aforesaid MOU were not got executed by LIPL and another MOU was executed in pursuance of the earlier MOU in which compensation had been determined by LIPL for the same. AO treating the aforesaid compensation as revenue receipt was not justified as during the course of appeal proceedings, assessee had filed a certificate issued by LIPL where in they had certified that the compensation had been determined and paid by them for stalling the execution of the agreed work as above in terms of the earlier MOU. The above clarification issued by LIPL clearly showed that the compensation received by assessee was for sterilization of the profit making apparatus of assessee-company; therefore, the same was capital receipt.
FULL TEXT OF THE ITAT JUDGMENT
This appeal filed by the revenue is directed against the order dated 06.06.2014 of the CIT(A), Raipur (CG) relating to A. Y. 2011-12.
2. Facts of the case, in brief, are that the assessee is a company and filed its return of income on 24.09.2011 declaring total income of Rs.23,33,570/-. During the year under consideration, the assessee derived income from interest chargeable under the head “Income from Profit & Gains of Business”. The accounts of its business were audited as required u/s 44AB of the I.T. Act, 1961. During the course of scrutiny proceeding, the AO noticed that an amount of Rs.3,01,47, 107/- is credited to the head “Reserve and Surplus” with a narration capital receipt received. On being questioned by the Assessing Officer, it was explained that the assessee company had entered into a Memorandum of Understanding (MOU) with another company namely “Lafarge India Pvt. Ltd” (LIPL in short) on 19.11.2001. Due to reasons beyond its control, only work relating to acquiring of land, that to partly, could be undertaken by it and other activities as defined in the MOU could not be carried out. Subsequently, disputes arose between both the parties and they entered in to a MOU executed on 31.01.2009, wherein compensation was determined for termination of earlier MOU dated 19.11.2001 on fulfillment of certain terms of the MOU dated 31.01.2009 for which a sum of Rs.3,01,47,107/- was received by the assessee company during the assessment year under consideration. It was finally contended that the aforesaid compensation was determined and received on closure/ termination of its business activity resulting in to “loss of source of income” impairing its profit making structure or sterilization of profit making apparatus, therefore, the assessee company treated the same as “Capital receipt” not chargeable to tax and accordingly has shown the same under the head ‘Reserve and Surplus’. In support of this claim, the assessee placed reliance on following citations :-
