The argument that since the payee has already paid due tax on the income, s. 40(a)(ia) cannot be invoked is not correct. The law in Hindustan Coca Cola Beverage 293 ITR 226 (SC) that if the payee is assessed, the tax cannot be recovered from the payer was in the context of s.201 and pursuant to Circular No.275/201/95-IT dated 29-1-1997. In the absence of such circular in case of disallowance u/s 40(a)(ia), the principle laid down cannot be adopted for s. 40(a)(ia). As regards the principle that the department had accepted the position in the past, the defense is available for AY 2007-08 but not for AY 2008-09

S. 194H defines the expression “commission or brokerage” to include any payment received by a person acting on behalf of another person for services rendered or for any services in the course of buying or selling of goods …. Applying the principle of noscitur a sociis & ejusdem generis, the expression “commission” has to take its colour from the expression “brokerage”. As the expression “brokerage”, in common parlance and in law, means ‘fees or commission given to or charged by a broker’, the expression ‘commission’ must be confined to a payment made to agents etc for effecting sales and carrying out business transactions and cannot extend to payments which are for services rendered or products offered on a principal to principal basis. A principal-agent relationship is a sine qua non for invoking the provisions of s. 194 H. As there is no principal agent relationship between a bank issuing the bank guarantee and the assessee, the payment, though termed “commission”, is not covered by s. 194H (SRL Ranbaxy Ltd vs ACIT referred)

In principle, though the scope of “income” in s. 2(24) is very wide, a capital receipt is not chargeable to tax as income unless there is a specific provision to that effect. As the residential flat owned by the assessee in the society’s building was a capital asset in the hands of the assessee, the compensation was a capital receipt. The department’s argument that the cash compensation was a “share in profits earned by the developer” is not acceptable because it proceeds on the fallacy that the nature of payment in the hands of the payer determines the nature in the hands of the recipient. However, as the said receipt reduced the cost of acquisition of the new flat, it had to be taken into when computing the gains from a transfer thereof in the future