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February, 01st 2013
%                                      Judgment delivered on: 29.01.2013

+       ITA No.1286/2008

        KHANNA AND ANNADHANAM                                  .......Appellant


        COMMISSIONER OF INCOME TAX                             .......Respondent
Advocates who appeared in this case:
For the Appellant            : Mr Ajay Vohra, Ms Kavita Jha and Mr Somnath
                               Shukla, Advocates.
For the Respondent           : Mr Sanjeev Sabharwal, Sr. Standing Counsel with Mr
                               Puneet Gupta, Jr Standing Counsel.




1.      This is an appeal filed by the assessee under section 260A of the

Income Tax Act, 1961. On 08.09.2010, the appeal was admitted and the

following substantial question of law was framed for decision: -

        "Whether the amount of `1,15,70,000/- received by the
        appellant from DTTI in terms of release agreement with
        DTTI is capital receipt or revenue receipt?"

2.      The assessee is a firm of chartered accountants. From the year

ITA No.1286 /2008                                                     Page 1 of 9
1983, under an informal understanding it was getting referred work from

M/s Gupta Chaudhary & Ghose, Chartered Accounts of Calcutta who

were doing the work in Calcutta which was referred to them by Deliotte

Haskins & Sells (,,DHS), a firm of chartered accounts based outside

India. The understanding between the assessee-firm and the chartered

accountants firm in Calcutta was limited to the work in Delhi and

surrounding areas only. It may also be added that DHS was part of the

chartered accountants firm by name "Deliotte Touche Tohmatsu

International", based in USA. The informal understanding between the

assessee and DHS was formalised on 14.08.1992 by an agreement

between them. In 1996, it transpired that DHS wanted another firm of

chartered accountants by name C.C. Chokshi & Co., of Bombay to

represent its work in India. Accordingly an agreement was entered into

on 14.11.1996 which was called a release agreement, under which the

assessee firm was to no longer represent DHS in India; thereafter DHS

would not refer any work to the assessee-firm. In consideration of the

termination of the services of the assessee-firm, a compensation of US$

325000 amounting to Indian `1,15,70,000/- was paid by DHS to the

assessee-firm. This amount was received in the previous year relevant to

ITA No.1286 /2008                                             Page 2 of 9
the assessment year 1997-98 and the short question before us is whether

the receipt was capital in nature or was professional income.

3.      The assessing officer took the view that the receipt was taxable as

part of the professional income of the assessee-firm; his decision was

reversed by the CIT (Appeals) and on further appeal by the revenue, the

Tribunal agreed with the assessing officer. Hence, the present appeal by

the assessee.

4.      The contention put forward on behalf of the assessee is that the

amount represents compensation for the sterilisation of a source of

income, namely referred work from DHS through the Calcutta firm of

chartered accountants and where an amount is received for loss of a

source of income it would represent capital receipt. It was contended that

the amount did not represent professional income. It is emphasised that

for 13 years (1983-1996) the assessee-firm was carrying out the referred

work which was quite lucrative and the arrangement with DHS through

the Calcutta firm constituted the source and once that source got

terminated, the compensation received can only be capital in nature.

5.      We think that there is a good deal of force in the contention of the

ITA No.1286 /2008                                                 Page 3 of 9
assessee. In Kettlewell Bullen & Co. Ltd. v. CIT: (1964) 53 ITR 261 the

Supreme court drew a distinction between the compensation received for

injury to trading operations arising from breach of contract or from the

exercise of sovereign rights and compensation received as solatium for

loss of office. It was held that the compensation received for loss of an

asset of enduring value would be regarded as capital. After a review of

the entire case law on the subject, it was ultimately held as follows: -

        "On an analysis of these cases which fall on two sides of the
        dividing line, a satisfactory measure of consistency in
        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 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, on a review of all the circumstances, we
        have no doubt that what the assessee was paid was to
        compensate him for loss of a capital asset. It matters little
        whether the assessee did continue after the determination of
        its agency with the Fort William Jute Co. Ltd. to conduct the
        remaining agencies. The transaction was not in the nature
        of a trading transaction, but was one in which the assessee
        parted with an asset of an enduring value. We are,

ITA No.1286 /2008                                                  Page 4 of 9
        therefore, unable to agree with the High Court that the
        amount received by the appellant was in the nature of a
        revenue receipt."

6.      The ratio of the above judgment applies to the present case. The

Tribunal seems to have been troubled by the fact that despite the

termination arrangement with DHS the assessee did not cease to carry on

the profession. This aspect of the matter has also been answered by the

Supreme Court in the above judgment and it has been held that the fact

that the assessee continued its business or its usual operations even after

termination of the agencies was of no consequence. What appears to be

the ratio of the judgment is that if the receipt represents compensation for

the loss of a source of income, it would be capital and it matters little that

the assessee continues to be in receipt of income from its other similar


7.      We may refer to one more judgment of the Supreme Court which is

reported as Oberoi Hotel Pvt. Ltd. v. CIT: (1999) 236 ITR 903. There

the assessee was operating, managing and administering several hotels

across the globe such as Cairo, Colombo, Kathmandu, Singapore, etc. Its

agreement with Hotel Oberoi Imperial, Singapore, which it was operating

ITA No.1286 /2008                                                  Page 5 of 9
from 02.11.1970 was terminated and the assessee received a sum of

`29,47,500/- from the receiver of the Singapore Hotel. The Supreme

Court held that the amount was received because the assessee had given

up its right to purchase or operate the property and thus it was a loss of a

source of income. The receipt was accordingly held to be capital in

nature. It was observed, after a review of the earlier cases, that ordinarily

compensation for loss of office or agency is to be regarded as a capital

receipt and the only exception where the payment received for

termination of an agency agreement could be treated as revenue was

where the agency was one of many which the assessee held and its

termination did not impair the profit-making structure of the assessee, but

was within the framework of the business, it being a necessary incident of

the business that existing agencies may be terminated and fresh agencies

may be taken. It is somewhat difficult to conceive of a professional firm

of chartered accountants entering into such arrangements with

international firms of chartered accountants, as the assessee in the present

case had done, with the same frequency and regularity with which

companies carrying on business take agencies, simultaneously running

the risk of such agencies being terminated with the strong possibility of

ITA No.1286 /2008                                                 Page 6 of 9
fresh agencies being taken. In a firm of chartered accountants there could

be separate sources of professional income such as tax work, audit work,

certification work, opinion work as also referred work.        Under the

arrangement with DHS there was a regular inflow of referred work from

DHS through the Calcutta firm in respect of clients based in Delhi and

nearby areas. There is no evidence that the assessee-firm had entered into

similar arrangements with other international firms of chartered

accountants. The arrangement with DHS was in vogue for a fairly long

period of time -13 years- and had acquired a kind of permanency as a

source of income. When that source was unexpectedly terminated, it

amounted to the impairment of the profit-making structure or apparatus of

the assessee-firm. It is for that loss of the source of income that the

compensation was calculated and paid to the assessee. The compensation

was thus a substitute for the source. In our opinion, the Tribunal was

wrong in treating the receipt as being revenue in nature.

8.      On behalf of the revenue our attention was drawn to another

judgment of the Supreme Court in CIT v. Best & Co. (P) Ltd.: (1966) 60

ITR 11. This judgment was rendered by the same bench which had

earlier rendered the judgment in Kettlewell Bullen & Co. Ltd. (supra).

ITA No.1286 /2008                                               Page 7 of 9
The decision was however in favour of the revenue. The earlier judgment

in Kettlewell Bullen & Co. Ltd. (supra) was referred to in the judgment

but the Supreme Court observed that the application of the principle laid

down in Kettlewell Bullen & Co. Ltd. (supra) must depend on the facts of

each case. Their Lordships distinguished the facts and held that in the

case of Best & Co. (supra) the assessee had innumerable agencies in

different lines and it only gave up one of them and continued to do

business without any apparent mishap and that the correspondence

showed that the assessee gave up the agency without any protest

"presumably because such termination of agencies was part of the normal

course of its business". It was on account of this distinction that the

ultimate decision went in favour of the revenue. The facts of the case

before us, as noted earlier, are not in pari materia with those in Best &

Co. (P) Ltd. (supra). In our view the facts are more akin to the case of

Kettlewell Bullen & Co. Ltd. (supra) and, therefore, the ratio laid down

in that case is more appropriate to be applied to the present case.

9.      In the result we answer the substantial question of law by holding

that the amount of `1,15,70,000/- received by the assessee in terms of the

release agreement dated 14.11.1996 represents a capital receipt, not

ITA No.1286 /2008                                                 Page 8 of 9
assessable to income tax. The appeal of the assessee is allowed with no

order as to costs.

                                                     R.V.EASWAR, J

                                      BADAR DURREZ AHMED, J
JANUARY 29, 2013

ITA No.1286 /2008                                            Page 9 of 9
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