Income Tax Appellate Tribunal - Pune
Datar & Co. vs Income Tax Officer on 25 June, 1999
Equivalent citations: (2000)67TTJ(PUNE)546
ORDER
K. C. Singhal, J.M. The only issue arising out of this appeal is whether the compensation received by the assessee as termination of lease agreement was capital receipt or revenue receipt chargeable to tax.
2. The brief facts of the case are these. As per the assessment order, the assessee-firm was deriving income from house property and income from business. The assessee was owner of a bungalow in Kalyaninagar, Pune, which was let out to M/s Vulcan Laval Ltd., by an agreement dated 9-5-1985, for a period of five years on monthly rent of Rs. 4,000 p.m. The said agreement was terminated by the lessee vide his letter dated 25-1-1987, effective from 30-9-1998. This letter further provides that assessee would be entitled to the compensation of Rs. 1,00,000, The agreement specifies the rent at Rs. 4,000 p.m. It appears from the letter dated 25-1-1987, that assessee was also entitled to the sum of Rs. 1,000 p.m. for use for the servant quarters, Rs. 750 p.m. for the use of garrage and Rs, 1,750 for the use of fixture and fittings. Thus, the total rent was Rs. 7,500 p.m. This agreement was effective from 1-6-1985. The amount of compensation of Rs. 1,00,000 was received by the assessee during the year under consideration and the same was credited directly to the partners accounts and the sum was not offered for taxation, This fact was noticed by the assessing officer in the course of the assessment proceedings and held the same as business income without having any reasons. On appeal, the Commissioner (Appeals) was of the view that the compensation was in the nature of revenue receipt. In coming to this conclusion, he relied on the decision of Punjab & Haryana High Court in the case of CIT v. Motor & General Finance Ltd. (1967) 63 ITR 394 (P&H), of Calcutta High Court in the case of Cossim Bazar Raj Wards Estate v. CIT (1946) 14 ITR 377 (Cal) and the decision of Supreme Court in the case of CIT v. Gangadhar Bhaijnath 1972 CTR (SC) 310 , (1972) 86 ITR 19 (SC). It was further held by him that such compensation was assessable as business income since letting out of the property was one of the businesses of the assessee. Alternatively, it was held to be assessable under the head 'income from other sources'. Aggrieved by this order, the assessee is in appeal before the Tribunal.
3. The learned counsel for the assessee Mr. Pathak submitted before us that it was not the business of the assessee to let out the properties. For the first time, has let out the bungalow owned by it. Therefore, question of business income ad did not arise. In view of this factual position, it was contended by him that if the compensation could not be considered as business receipt, then, it should be considered as capital receipt. In support of his contention, he relied on the Bombay High Court decision in the case of CIT v. Kantlal Shah & Anr. (1979) 118 ITR 64 7 (Bom). Alternatively, it was contended by him that even assuming that it was a revenue receipt, it would fall under the head "income from house property". According to him, it is only the annual value of the house property which can be taxed under the head "income from house property".
Therefore, on this reason also, the compensation received by the assessee cannot be charged to tax. In support of this contention, he relied on the decision of Bombay High Court in the case of CIT v. Smt. T.P. Sidhwa (1981) 21 CTR (Bom) 146: (1982) 133 ITR 840 (Bom).
4. On the other hand, the learned departmental Representative has supported the order of the Commissioner (Appeals) by contending that the compensation was given for the loss of future income and there was no injury to the capital asset i.e., property let out by the assessee. According to him, the source of income was not dried Hence, such compensation could not be considered as capital receipt. In support of his contention, he relied on the decision of Supreme Court in the case of CIT v. Rai Bahadur Jairam Valli (1959) 35 1M 148 (SC) and the decision of Karnataka High Court in the case of Movie Distributors v. CIT (1991) 93 CTR (Kar) 173 : (1991) 189 ITR 559 (Kar). He also referred to the Commentry of Kanga and Palkhiwalla in this regard.
5. Rival submissions of the parties, the case law referred to and the material produced before us have been considered carefully. At the outset, we are unable to accept the broad proposition of Mr. Pathak that if the receipt is not the business income, then it should be considered as capital receipt. In our opinion, the real question should be whether a particular receipt is a revenue receipt or capital receipt. If it is capital receipt, then question of taxing the same does not arise. If it ii revenue receipt, then, the question of head, under which it can be assessed would arise. A receipt may not be assessable under the head "income from business or profession", but may be assessable under other heads. Normally, such disputes have arisen between the department and the assessees carrying on business or profession. That is why the question which was normally referred to the court for its opinion was whether a particular receipt was business income or capital receipt. It was in this context that Courts had given their opinion. If such opinions are given by the Courts that does not mean that if a receipt is not a business income, it should always be considered as a capital receipt. The decision of the court has to be considered in the context in which it was decided.
6. Therefore, now the first question to be considered is whether the compensation received by the assessee was capital receipt or revenue receipt chargeable to tax. Various tests have been laid down by the Courts from time to time to determine whether a receipt is capital or revenue in nature, but none of the tests is infallible and the issue has to be decided on the facts of each case. Reference can be made to the decision of Supreme Court in the case of CIT v. Raj Bahadur Jairam Valji (supra). The compensation is normally paid for the injury inflicted either to the capital asset or to the source of income or to the future income which may be received by the assessee. When it is received for the injury caused to the capital asset or to the source of income itself, it has been held to be a capital receipt. Reference may be made to the decision of Supreme Court in the case of CIT v. Bombay Burma Trading Corpn. (1986) 58 CTR (SC) 144 .. (1987) 161 ITR 386 (SC). However, when the injury is caused to the future profits without effecting the asset from which the income is derived, then, it has been held to be a revenue receipt-CIT v. Manna Ramli & Co. 1973 CTR (SC) 201 : (1972) 86 1TR 29 (SC).
7. In the present case, the assessee was deriving income by letting out of the building. According to the terms of the agreement, the rent was fixed for Rs. 4,000 p.m. (cl. 1).However, it appears from the letter of the company dated 25-1-1987 that assessee was entitled to Rs. 1,000 p.m. for servants quarters, Rs. 1,750 p.m. for service charges for use of furniture and fittings and Rs. 750 p.m. for use of garrage. Thus, that total rent was Rs. 7,500 p.m. The duration of the agreement was for 5 years effective from 1-6-1985 (cl. II). Clause VI provided that agreement did not create the relationship of landlord and tenant. It is pertinent to note that there was no clause in the agreement for termination of the agreement or for any compensation in the event of such termination. So, it is implied that neither of the party had any contractual rights of compensation in the event of termination of the agreement. The letter of the tenant shows that agreement was to terminate on 30-9-1988. The period of the agreement was to expire on 31-5-1990. So by the termination of the agreement, there was loss of future rents for 20 months in the sense that assessee might not be able to let out the building to others. The rent for 20 months amounted to Rs. 1,50,000. The parties agreed to compensation of Rs. 1,00,000. In our opinion, such compensation was nothing but the discounted value of the. future rent of the unexpired period of the agreement, keeping in view the element of interest without effecting any injury to the asset or the source of the income. The assessee was free to let out the said building to any party. In view of these facts and the legal position stated above, we are of the opinion that the receipt by way of compensation was revenue receipt.
8. The decision of the Bombay High Court in the case of CIT v. KantiIal Shah (supra), relied upon by the counsel for the assessee is distinguishable on facts. In that case, the assessee had entered into as agreement to finance a company against which he was entitled to 25 per cent of the profits of the business carried on by that company. It was not a normal agreement of the lending of the money on interest. It was because of the peculiar terms of the agreement that it was considered as a capital asset. It was noticed by the court that a sum of Rs. 1,00,000 was only advanced by the assessee to that company while the share of profits to the assessee was to the extent of Rs. 45,243 for the first year itself and Rs. 38,801 in the subsequent year. In view of such huge profits, the borrower company thought it fit to cancel the agreement and get rid of the future liability by paying compensation of Rs. 50,000. Thus, it was the sterilization of source of income. In view of these peculiar facts, the compensation paid to the assessee was held to be a capital receipt as is apparent from the observations of the High Court at p 656 "it still possess the unusual feature that the assessee is entitled under the same to 25 per cent of the profits earned by the firm of Netsons, which resulted in her securing profits of Rs. 45,243 in the first year as against the application to advance a loan upto the limit of Rs. 1,00,000 only. This arrangement also then could be recorded as one which is extremely beneficial to the assessee and onerous for the firm Netscins Manufacturing Co." But, in the present case, the agreement was a simple. agreement of lease incidental to the activity of letting out the property. The source of income in the present case is the building and not the agreement, but in the case before the Bombay High Court, the source of profits was the agreement itself because of peculiar terms which were dried up on the termination of the agreement. Therefore, in our opinion, the said judgment of the Bombay High Court cannot be applied to the facts of the present case.
9. However, we find sufficient force in the alternate contention of the learned counsel for the assessee. It is well settled legal position that income of the assessee has to be computed under various heads specified in Chapter-IV. If any receipt does not fall under any specific head, then it has to be assessed under the residuary head "income from other sources", but if any receipt falls under a specific head, but the same cannot be computed under that head, then it cannot be assessed as income of the assessee under any other head and would escape the taxation. This principle has been laid down by the apex court in the case of Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT (1966) 61 ITR 428 (SC) and was applied by the Bombay High Court in the case of T.P. Sidhwa (supra). In the present case, the compensation arises out of the agreement of letting out immovable property and therefore, assumes the nature of the income from house property. Therefore, in our opinion, such receipt would fall under the head "income from house property". However, it is only annual value which can be assessed under the head "income from house property". Any other receipt other than the annual value cannot be computed as income under this head. Therefore, following the decision of the Bombay High Court in the case of T.P. Sidhwa (supra) and the decision of Supreme Court in the case of N.A. Mody (supra), it is held that the compensation received by the assessee cannot be taxed.
10. In view of the above discussion, we set aside the order of the Commissioner (Appeals) and delete the addition sustained by him. The appeal of the assessee is, therefore, allowed.