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DATE: November 21, 2019 (Date of pronouncement)
DATE: December 7, 2019 (Date of publication)
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S. 4/ 56: Amount received by assessee for relinquishing secretaryship of educational society cannot be treated as a capital receipt. The question of the principle of capital asset being invoked does not arise. The receipt is assessable as income from other sources. It may have been a different matter if it was a case of life time appointment of the assessee as Secretary of the concerned Institution but no such evidence was produced by the assessee (CIT vs. Ramachandra Rao 330 ITR 0322 affirmed)

The substance of the admission is that the appellant was holding the post of Secretary of the Institution [Paramahamsa Foundation (R) Trust] until 1996 but he left the institution after new members were elected as the managing committee. That being the case, the question of appellant invoking the principle of capital asset does not arise. It may have been a different matter if it was a case of life time appointment of the appellant as Secretary of the concerned Institution. No such evidence was produced by the appellant before the assessing officer or before us

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DATE: July 9, 2019 (Date of pronouncement)
DATE: July 20, 2019 (Date of publication)
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S. 4: The primary liability and onus is on the Dept to prove that a certain receipt is liable to be taxed. Deposits collected by a finance company are capital receipts and not revenue receipts. The fact that the deposits are credited to the profit and loss account is irrelevant. The true nature of the receipts have to be seen and not the entry in the books of account (All imp judgements referred).

It is the true nature and quality of the receipt and not the head under which it is entered in the account books that would prove decisive. If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt. It has been held by the Supreme court that the primary liability and onus is on the Department to prove that a certain receipt is liable to be taxed

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DATE: May 29, 2019 (Date of pronouncement)
DATE: July 6, 2019 (Date of publication)
AY: 2012-13
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Capital vs. Revenue Receipt: Damages received for breach of development agreement are capital in nature & not chargeable to tax. The only right that accrues to the assessee who complains of breach is right to file a suit for recovery of damages from the defaulting party. A breach of contract does not give rise to any debt. A right to recover damages is not assignable because it is not a chose-in-action. Such a mere 'right to sue' is neither a capital asset u/s 2(14) nor is it capable of being transferred & is therefore not chargeable under u/s 45 of the Act (All imp judgements referred)

Despite the definition of the expression capital asset in the widest possible terms in section 2(14), a right to a capital asset must fall within the expression ‘property of any kind’ and must not fall within the exceptions. Section 6 of the Transfer of Property Act which uses the expression ‘property of any kind’ in the context of transferability makes an exception in the case of mere right to sue. The decisions there under make it abundantly clear that the right to sue for damages is not an actionable claim. It cannot be assigned and its transfer is opposed to public policy. As such it will not be quite correct to say that such a right constituted capital asset which in turn has to be an interest in ‘property of any kind.’

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DATE: February 8, 2019 (Date of pronouncement)
DATE: March 23, 2019 (Date of publication)
AY: 2013-14
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CITATION:
Non-taxable capital receipt vs. Business Profits: Test of human probabilities has to be applied to decide whether what is apparent is real. Tax authorities are not required to put on blinkers while looking at documents. They are entitled to look into the surrounding circumstances to find out the reality. The agreement has to make commercial sense. The plea that "coining of concept" is a valuable right worth Rs. 10 cr is too naive & beyond human probabilities to merit judicial acceptance

“Coining of” the concept was in the course of the employment of the assessee, and, therefore, the plea that it belonged to the assessee, in his individual capacity, is too naïve to meet any judicial approval. In any case, there is no material on record to demonstrate that this coining of concept is such a valuable asset that it could fetch Rs 10 crores of consideration on a standalone basis, and, if that was so, it is simply beyond the human probabilities that such a valuable right could be given to someone for 7 years for commercial exploitation and development, with no strings attached, and without even finalizing as to how the fruits of such commercial exploitation will be shared by that person with the owner of this concept.

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DATE: October 23, 2018 (Date of pronouncement)
DATE: November 13, 2018 (Date of publication)
AY: 2011-12
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CITATION:
S. 4: Law on whether compensation received on closure/ termination of business activity resulting in loss of source of income, impairing its profit making structure or sterilization of profit making apparatus can be assessed as a revenue receipt or it is a capital receipt which is not chargeable to tax explained after referring to important judgements on the subject

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.

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DATE: September 17, 2018 (Date of pronouncement)
DATE: September 29, 2018 (Date of publication)
AY: 2008-09
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S. 2(14)/ 28(va): The "right to sue" which arises on breach of a development agreement is a "personal right" and not a "capital asset" which can be transferred. Consequently, the damages received for relinquishment of the "right to sue" is a non-taxable capital receipt (all judgements considered)

A development agreement was executed which enabled the assessee to utilize the land for construction and for sharing of profits. This right/advantage accrued to the assessee was sought to be taken away from the assessee by way of sale of land. The prospective purchaser as well as the defaulting party (owner) perceived threat of filing suit by developer and consequently paid damages/ compensation to shun the possible legal battle. The intrinsic point with respect to accrual of ‘right to sue’ has to be seen in the light of overriding circumstances as to how the parties have perceived the presence of looming legal battle from their point of view. I t is an admitted position that the defaulting party has made the assessee a confirming party in the sale by virtue of such development agreement and a compensation was paid to avoid litigation. This amply shows the existence of ‘right to sue’ in the perception of the defaulting party.

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DATE: April 24, 2018 (Date of pronouncement)
DATE: April 26, 2018 (Date of publication)
AY: 1999-00
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CITATION:
Bifurcation of lease rentals into interest and loan recovery: An assessee can only be taxed on "real income". The bifurcation of lease rental is not an artificial calculation. Lease equalization is an essential step in the accounting process to ensure that real income from the transaction in the form of revenue receipts only is captured for the purposes of income tax. The Guidance Note issued by the ICAI carries great weight. The method of accounting prescribed in such a Guidance Note, in order to compute real income and offering the same for taxation, cannot be disregarded by the AO unless such action falls within the scope and ambit of S. 145(3) of the IT Act

The method of accounting followed, as derived from the ICAI’s Guidance Note, is a valid method of capturing real income based on the substance of finance lease transaction. The rule of substance over form is a fundamental principle of accounting, and is in fact, incorporated in the ICAI’s Accounting Standards on Disclosure of Accounting Policies being accounting standards which is a kind of guidelines for accounting periods starting from 01.04.1991. It is a cardinal principle of law that the difference between capital recovery and interest or finance income is essential for accounting for such a transaction with reference to its substance. If the same was not carried out, the Respondent would be assessed for income tax not merely on revenue receipts but also on non-revenue items which is completely contrary to the principles of the IT Act and to its Scheme and spirit

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DATE: December 7, 2017 (Date of pronouncement)
DATE: December 15, 2017 (Date of publication)
AY: -
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CITATION:
Taxability of subsidies: A subsidy granted by the Govt to achieve the objects of acceleration of industrial development and generation of employment is capital in nature and not revenue. The fact that the incentives are not available unless and until commercial production has started, and that the incentives are not given to the assessee expressly for the purpose of purchasing capital assets or for the purpose of purchasing machinery is irrelevant. The object has to be seen and not the form in which it is granted

The aforesaid object is clear and unequivocal. The object of the grant of the subsidy was in order that persons come forward to construct Multiplex Theatre Complexes, the idea being that exemption from entertainment duty for a period of three years and partial remission for a period of two years should go towards helping the industry to set up such highly capital intensive entertainment centers. This being the case, it is difficult to accept Mr. Narasimha’s argument that it is only the immediate object and not the larger object which must be kept in mind in that the subsidy scheme kicks in only post construction, that is when cinema tickets are actually sold

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DATE: November 20, 2017 (Date of pronouncement)
DATE: December 15, 2017 (Date of publication)
AY: -
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CITATION:
Taxability of subsidies: Supreme Court stays judgement of the Delhi High Court in CIT vs. Bhushan Steels And Strips which held that if the recipient has the flexibility of using it for any purpose and is not confined to using it for capital purposes, the subsidy is revenue in nature and is taxable as profits

Taxability of subsidies: Supreme Court stays judgement of the Delhi High Court in CIT vs. Bhushan Steels And Strips Ltd which held that if the recipient has the flexibility of using it for any purpose and is not confined to using it for capital purposes, the subsidy is revenue in nature and is taxable as profits

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DATE: November 29, 2017 (Date of pronouncement)
DATE: December 7, 2017 (Date of publication)
AY: -
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CITATION:
Taxability of mesne profits: High Court's approach of dismissing the Dept's appeal only because the Tribunal relied on Narang Overseas 111 ITD 1 (Mum) (SB) and the appeal against which had been dismissed for non-removal of defects is not correct. The High Court ought to decide the question on merits

High Court has dismissed the appeal preferred by the appellant herein only on the ground that the decision relied upon by the Tribunal i.e. in the case of Narang Overseas Pvt. Ltd. v. ACIT, Mumbai – (2008) 111 ITD 1 (Mum) (SB)], the appeal was preferred before the High Court and for non-removal of the defects the appeal has been dismissed. We are of the considered opinion that this was not a correct approach of the High Court for the simple reason that merely because one authority has followed its own decision in another case and that matter in appeal has been dismissed on technical grounds still the High Court has to decide the question on merits

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