Whether On The Facts And In The Circumstances Ofthe Case, The Appellate Tribunal Was Right Indismissing The Department Appeal Observing That Thefinance Act, 200 v. Ttk Healthcare Ltd.] Wherein The Hon'bledivision Bench Held Against The Revenue And In Favour Of Theassessee, As Follows

THE HON'BLE MR. JUSTICE M.DURAISWAMYAND THE HON'BLE MRS.JUSTICE T.V.THAMILSELVI The Commissioner of Income Tax - IV121, N.H. Road, Chennai – 600 034.... AppellantVs. M.Ranjan Rao... Respondent Appeal preferred under Section 260A of the Income Tax Act,1961, against the order of the Income Tax Appellate Tribunal,Madras, "B" Bench, dated 31.10.2012 in I.T.A.No.1582/Mds/2012for the assessment year 2002-03. against order of the Commissioner of Income Tax(Appeals),Chennai -34, dated 23/05/2012 made in ITA.No.93/11-12 Assessmentyear 2002-03 as against order of the Commissioner of Income Tax(Appeals)-VI, Chennai -34, dated 31/03/2008 made in ITA.No.136/07-08 inAssessment year 2002-03. For Appellant : Mr.M.Swaminathan, Senior Standing Counsel assisted by Ms.V.Pushpa, Standing Counsel For Respondent : Mr.M.Kaushik for Mr.S.Sridhar JUDGMENT (Judgment was delivered by M.DURAISWAMY, J.) Challenging the order passed in I.T.A.No.1582/Mds/2012 inrespect of the assessment year 2002-03 on the file of the IncomeTax Appellate Tribunal, Chennai, "B" Bench, the Revenue hasfiled the above appeal. 2.The above appeal was admitted on the following substantialquestions of law:“1)Whether on the facts and in the circumstancesof the case, the Appellate Tribunal was right in https://hcservices.ecourts.gov.in/hcservices/ allowing compensation received for refraining fromcarrying on competitive business was a capital receiptand not taxable during the assessment year 2002-03? 2)Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal was right indismissing the Department Appeal observing that theFinance Act, 2002 brought to tax the capital receiptsunder Section 28 (va) with effect from 01.04.2003? 3)Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal was right in followingthe decision of the Apex Court in the case ofM/s.Guffic Chem reported in 332 ITR 602 which is notapplicable to the facts of the present case, as anomenclature of the receipt itself is disputed as towhether it was a non-compete fees?” 3.When the appeal is taken up for hearing, Mr.M.Swaminathan,learned senior standing counsel appearing for the appellant –Revenue fairly submitted that the questions of law involved inthe present appeal is covered by the decision of the DivisionBench of this Court in 385 ITR 326 (Madras) [Commissioner ofIncome Tax, Chennai Vs. TTK Healthcare Ltd.] wherein the Hon'bleDivision Bench held against the Revenue and in favour of theassessee, as follows: “... 6. The question, therefore, that requires to beanswered is whether this receipt of money by theassessee is liable to be treated as a capital receiptor revenue receipt. It is not in doubt that, for therelevant assessment year, if the income is to betreated as capital receipt, it cannot suffer theincidence of taxation, whereas, if it were to betreated as a revenue receipt, the order of assessmentas affirmed by the CIT(A) has to be upheld. 7. It will be appropriate to notice as to how thisvery question has been answered by the Supreme Court inOberoi Hotel (P) Ltd vs. CIT [1999] 236 ITR 903/103Taxman 236 Paragraphs 3 to 7 of the judgment read asunder: "3. The question whether the receipt is capital orrevenue is to be determined by drawing theconclusion of law ultimately from the facts of theparticular case and it is not possible to lay downany single test as infallible or any singlecriterion as decisive. This Court in the case ofKaram Chand Thapar & Bros. P. Ltd. v. Commissionerof Income Tax (Central, Calcutta: [1971] 80 ITR 167(SC) discussed and held that in Commissioner ofIncome Tax v. Chari and Chari Ltd : [1965] 57 ITR 7. It will be appropriate to notice as to how thisvery question has been answered by the Supreme Court inOberoi Hotel (P) Ltd vs. CIT [1999] 236 ITR 903/103Taxman 236 Paragraphs 3 to 7 of the judgment read asunder: "3. The question whether the receipt is capital orrevenue is to be determined by drawing theconclusion of law ultimately from the facts of theparticular case and it is not possible to lay downany single test as infallible or any singlecriterion as decisive. This Court in the case ofKaram Chand Thapar & Bros. P. Ltd. v. Commissionerof Income Tax (Central, Calcutta: [1971] 80 ITR 167(SC) discussed and held that in Commissioner ofIncome Tax v. Chari and Chari Ltd : [1965] 57 ITR 400(SC), it was held that ordinarily compensationfor loss of an office or agency is regarded ascapital receipt, but this rule is subject to anexception that payment received even for terminationof agency agreement would be revenue and not capitalin the case where the agency was one of many whichthe assessee held and its termination did not impairthe profit making structure of the assessee, but waswithin the framework of the business, it being anecessary incident of the business that existingagencies may be terminated and fresh agencies may betaken. Thereafter the Court held that it wasdifficult to lay down a precise principle ofuniversal application but various workable ruleshave been evolved for guidance. 4. Applying the aforesaid test laid down by thisCourt in the present case, in our view the Tribunalwas right in arriving at a conclusion that it was acapital receipt. Reason is that as provided inArticle XVIII of the First Agreement assessee washaving an option or right or lien, if owner desiredto transfer the hotel or lease or part of the hotelto any other person, the same was required to beoffered first to the assessee (operator) or itsnominee. This right to exercise its option was givenup by a Supplementary Agreement which was executedin September, 1975 between the Receiver andassessee. It was agreed that Receiver would be atliberty to sell or otherwise dispose of the saidproperty at such price and on such terms as he maydeem fit and was not under any obligation requiringthe purchaser thereof to enter into any agreementwith the operator (assessee) for the purpose ofoperating and managing the hotel or otherwise and inits return, agreed consideration was as stated abovein Clause X. On the basis of the said agreement theassessee has received the amount in question. Theamount was received because the assessee had givenup its right to purchase and or to operate theproperty. Further it is loss of source of income tothe assessee and that right is determined forconsideration. Obviously therefore, it is a capitalreceipt and not a revenue receipt. 5. Learned Counsel for the Revenue relied upon thedecision in the case of Commissioner of Income Taxv. Rai Bahadur Jairam Valji and Ors. : [1959] 35 ITR148 (SC) and submitted that assessee had thebusiness of running the hotels in various countriesand the amount which is received by him is for the termination of first contract which was executed in1970 and, therefore, it should be considered hisrevenue receipt. In that case the Court was dealingwith a trading contract and held that compensationpaid in respect of the rights arising under thetrading contract would be a revenue receipt and mustbe referred to the profits which would be made incarrying out of contract. The Court has alsoobserved : "Whether a payment of compensation or termination ofan agency is a capital or revenue receipt, it wouldhave to be considered whether the agency was in thenature of capital asset in the hands of theassessee, or whether it was only part of his stock-in-trade." ' termination of first contract which was executed in1970 and, therefore, it should be considered hisrevenue receipt. In that case the Court was dealingwith a trading contract and held that compensationpaid in respect of the rights arising under thetrading contract would be a revenue receipt and mustbe referred to the profits which would be made incarrying out of contract. The Court has alsoobserved : "Whether a payment of compensation or termination ofan agency is a capital or revenue receipt, it wouldhave to be considered whether the agency was in thenature of capital asset in the hands of theassessee, or whether it was only part of his stock-in-trade." ' 6. The aforesaid judgment was considered in the caseof Kettlewell Sullen & Co. Ltd. v. Commissioner ofIncome Tax, Calcutta: [1964] 53 ITR 261(SC), whereinthe Court has held as under : "Whether a particular receipt is capital or incomefrom business, has frequently engaged the attentionof the courts. It may be broadly stated that what isreceived for loss of capital is a capital receipt;what is received as profit in a trading transactionis taxable income. But the difficulty arises inascertaining whether what is received in a givencase is compensation for loss of a source of income,or profit in a trading transaction." After considering various decisions it was furtherheld as under: "These cases illustrate the principle thatcompensation for injury to trading operations,arising from breach of contract or in consequence ofexercise of sovereign rights, is revenue. Thesecases must, however, be distinguished from anotherclass of cases where compensation is paid as asolatium for loss of office. Such compensation maybe regarded as capital or revenue; it would beregarded as capital, if it is for loss of an assetof enduring value to the assessee, but not wherepayment is received in settlement of loss in atrading transaction." After analysing number of cases, the Court observedthat following satisfactory measure of consistencyin the principle is disclosed :"Where on a consideration of the circumstances,payment is made to compensate a person for cancellation of a contract which does not affect thetrading structure of his business, nor deprive himof what in substance is his source of income,termination of the contract being a normal incidentof the business, and such cancellation leave himfree to carry on his trade (freed from the contractterminated) the receipt is revenue : Where by thecancellation of an agency the trading structure ofthe assessee is impaired, or such cancellationresults in loss of what may be regarded as thesource of the assessee's income, the payment made tocompensate for cancellation of the agency agreementis normally a capital receipt." 7. The aforesaid principle is relied upon in thecase of Karam Chand Thapar and Bros's case (supra).Considering the aforesaid principles laid down asper Article XVIII of the Principal Agreement, theamount received by the assessee is for theconsideration for giving up his right to purchaseand or to operate the property or for getting it onlease before it is transferred or let out to otherpersons. It is not for settlement of rights undertrading contract, but the injury is inflicted on thecapital asset of the assessee and giving up thecontractual right on the basis of PrincipalAgreement has resulted in loss of source ofassessee's income." 7. The aforesaid principle is relied upon in thecase of Karam Chand Thapar and Bros's case (supra).Considering the aforesaid principles laid down asper Article XVIII of the Principal Agreement, theamount received by the assessee is for theconsideration for giving up his right to purchaseand or to operate the property or for getting it onlease before it is transferred or let out to otherpersons. It is not for settlement of rights undertrading contract, but the injury is inflicted on thecapital asset of the assessee and giving up thecontractual right on the basis of PrincipalAgreement has resulted in loss of source ofassessee's income." 8.Thus, starting from CIT Vs. Rai Bahadur JairamValji's, [1959] 35 ITR 148 (SC) case, Kettlewell Bullen& Co Ltd Vs. CIT [1964] 53 ITR 261 (SC) case, KaramChand Thapar & Bros (P.) Ltd. Vs. CIT [1971] 80 ITR 167(SC) case, the underlying principle spelt-out was toascertain from the facts and circumstances of the caseas to whether the injury is inflicted on the capitalasset of the assessee resulting in loss of a source ofassessees income or not. The Supreme Court inGillanders Arbuthnot & Co. Ltd vs. CIT [1964] 53 ITR283 has brought out a dichotomy between receipt ofcompensation by an assessee for loss of agency andreceipt of compensation attributable to thenegative/restrictive covenant. If the compensation isreceived for the loss of agency, it is to be treated asa revenue receipt whereas, if the compensation isattributable to a negative/ restrictive covenant, then,it would amount to a capital receipt. The Supreme Courtin Guffic Chem (P.) Ltd. Vs. CIT [2011] 332 ITR 602/198Taxman 78/10 taxmann.com 105 examined this veryquestion and in its paragraph 7 held that compensationreceived for refraining from carrying on competitive business was a capital receipt and that paymentreceived as non-competitive fee under a negativecontract was always treated as a capital receipt tillthe assessment year 2003-2004, i.e. till theintroduction of Section 28 (va) by way of an amendmentto the Act with effect from 01.04.2003.” 4.Mr.M.Kaushik, learned counsel appearing for the respondent– assessee submitted that in view of the judgment of the Hon'bleDivision Bench of this Court made in 385 ITR 326 (Madras)[Commissioner of Income Tax, Chennai Vs. TTK Healthcare Ltd.],cited supra, the appeal may be dismissed. 5.In view of the submission made by the learned counsel oneither side, since the substantial questions of law that areraised in the present appeal are covered by the decision of theHon'ble Division Bench of this Court 385 ITR 326 (Madras)[Commissioner of Income Tax, Chennai Vs. TTK Healthcare Ltd.],cited supra, we decide the substantial questions of law raisedin the present appeal against the Revenue and in favour of theassessee. The appeal is liable to be dismissed. Accordingly, theTax Case Appeal is dismissed. No costs. Sd/- Assistant Registrar(CS VII) //True Copy// Sub Assistant Registrar To 1.The Income Tax Appellate Tribunal, Chennai, "B" Bench. 2.The Commissioner of Income Tax(Appeals), Chennai -34. 3.The Commissioner of Income Tax(Appeals)-VI, Chennai -34. AKM/29.04.21/6P-5C/