ITA No.183/2008 Page 1 of 31 UNREPORTED * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA No.183/2008 M/S. ANSAL PROPERTIES & INDUSTRIES LTD. PRESENTLY KNOWN AS (M/S. ANSAL PROPERTIES & INFRASTRUCTURE LTD.) ..... Appellant Through: Mr. Satyen Sethi and Mr. Johnson Bara, Advocates. versus COMMISSIONER OF INCOME TAX (CENTRAL-I) .... Respondents Through: Ms. Prem Lata Bansal with Ms. Anshul Sharma and Mr. Paras Chaudhry, Advocates. % Date of Reserve : September 28, 2010 Date of Decision : November 19, 2010 CORAM: HON’BLE MR. JUSTICE A.K. SIKRI HON'BLE MS. JUSTICE REVA KHETRAPAL 1. Whether reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporter or not? 3. Whether judgment should be reported in Digest? ITA No.183/2008 Page 2 of 31 : REVA KHETRAPAL, J. 1. In this appeal the appellant seeks to assail the order of the Income Tax Appellate Tribunal dated 3rd August, 2007 whereby the Tribunal held that the amount of ` 4.25 crores received by the appellant from the Delhi Cloth & General Mills Co. Ltd. (briefly “DCM”) in terms of the Agreement dated 30th October, 2000 was not a capital receipt but a revenue receipt. 2. The facts may be briefly delineated as follows: - M/s. DCM and Kailash Nath & Associates (briefly KNA) entered into a Collaboration Agreement dated 17th July, 1986 inter alia with respect to the development of 66.53 acres of land owned by DCM situated at Bara Hindu Rao, New Rohtak Road, Delhi. Under this Agreement, the KNA was to develop and construct multistoried residential flats, flatted factories, shopping complex, schools etc. on the aforesaid land belonging to the DCM. Owing to the magnitude of the project, however, with the mutual consent of DCM and KNA, the appellant-company, M/s. Ansals Properties and Industries Ltd., presently known as M/s. Ansals Properties & Infrastructure Ltd. (for ITA No.183/2008 Page 3 of 31 short “ANSALS”) was inducted for implementation of the project by an Agreement dated 24th November, 1988 entered into between the DCM, KNA and ANSALS. Subsequently, agreements in modification or supplemental thereto were also entered into between all the three parties. 3. By virtue of the aforesaid Agreement, KNA and ANSALS were to develop and construct for DCM, flats/buildings on the said land and to make provisional bookings and enter into agreements with prospective buyers for sale of the proposed built-up and saleable areas falling to their respective shares under the agreements. Both the KNA and the ANSALS were to develop and construct for the DCM, the project equal to the extent of 50% each and meet all costs and expenses in equal shares. In consideration thereof, both KNA and ANSALS were entitled to a specified percentage of the residential complex and other saleable areas. It was also specifically agreed that subject to the terms of the agreement, KNA and ANSALS shall have right to enter into contracts to book and sell their respective areas. ITA No.183/2008 Page 4 of 31 4. By a notice dated 24th June, 1998, DCM unilaterally terminated the agreement dated 24th November, 1988 with KNA and the appellant. This led to disputes between the parties. A number of legal proceedings challenging the termination of the Agreement dated 24th November, 1988 were filed including the proceedings under the Arbitration and Conciliation Act, 1996. On 30th October, 2000, however, a settlement agreement was entered into amongst the parties. Clauses 2 and 3 of the said agreement which are apposite to the present controversy are reproduced herein: - “2. That KNA and ANSALS have agreed to abandon/cessation of all their rights, claims, interests and activities whatsoever there might have been under the Principal Agreement, which stands annulled, in relation to the 66.53 acres of land owned by DCM at Bara Hindu Rao, Rohtak Road and Kishan Ganj, New Rohtak Road, Delhi, or construction already raised or to be raised thereon. DCM has agreed to acquire all such rights, claims, interests etc. of KNA and ANSALS. DCM shall hereafter take over from KNA and ANSALS the construction of flatted factory complex and residential group housing complex on the said land hitherto carried on by KNA and ANSALS under the annulled Principal Agreement, and all the assets, excluding Security Deposit, relating to the Project including any construction carried out at the ITA No.183/2008 Page 5 of 31 Project site respectively belonging to KNA and ANSALS. KNA and ANSALS have further agreed that they shall not undertake without prior written consent of DCM similar project in the vicinity of the project for a period of three years from the date of signing of this agreement. 3. That in consideration of the above, DCM has agreed to take over all the liabilities/obligations of both KNA and ANSALS respectively under the provisional bookings made and/or arrangements/agreements entered into by them with their respective prospective buyers, as per particulars in the Annexures „C‟ and „D‟ hereto, including the amounts towards basic price and which amounts on the execution hereof stand transferred to the books of accounts of DCM and DCM is now in its books showing the said amounts to the credit of the said prospective buyers. DCM undertakes with KNA and ANSALS to pay, satisfy and fulfill all the duties, liabilities, obligations, contracts and engagements of KNA and ANSALS against all proceedings, claims, demands, damages and compensation in respect thereof and the amounts towards basic price as aforesaid. DCM has further agreed to pay compensation for annulment of the very rights of KNA and ANSALS to carry on business of completing the project under the Principal Agreement and for being deprived of the potential income which could have arisen from carrying on such business, a sum of ` 6.75 crores to KNA, which is inclusive of refund of ITA No.183/2008 Page 6 of 31 Security Deposit of ` 3.90 crores, and a sum of ` 8.25 crores to ANSALS, which is inclusive of refund of Security Deposit of ` 4 crores respectively, as under…….” 5. It would be apposite at this juncture to note that apart from the aforesaid sum of ` 4.25 crores received as compensation by the appellant, which is the subject matter of the present appeal, the appellant earned a surplus of ` 2,15,50,721/- (according to the appellant a sum of ` 6,40,50,722/- only) from the project on its termination which has been separately assessed to tax in the assessment year 2001-02 and is not the subject matter of any dispute. 5. For the assessment year in question, that is, the assessment year 2001-02, the return declaring income of ` 9,40,86,340/- was filed by the appellant on 31st October, 2001. In computing the taxable income, the amount of ` 4.25 crores received from DCM under the Agreement dated 30th October, 2000 was, however, not claimed as a „capital receipt‟. The said amount was credited to the profit and loss account under the head “other income”. During the course of assessment proceedings, the appellant by a letter dated 24th ITA No.183/2008 Page 7 of 31 September, 2003 claimed that the said sum of ` 4.25 crores was a „capital receipt‟. 6. The Assessing Officer in computing the assessment at ` 25,87,98,377/- did not consider the above claim of the appellant and in the assessment order dated 26th March, 2004, this issue was not discussed and as a matter of fact, was not referred to at all. 7. Being aggrieved by the order of the Assessing Officer, the appellant preferred an appeal before the Commissioner of Income tax (Appeals) [for short „CIT (A)‟] . The CIT(A) by his order dated 18th June, 2004, after considering the claim of the appellant held that the amount of ` 4.25 crores was not in the nature of a trading receipt, held as follows: - “8.1 From the copy of settlement agreement filed with the written submission, it is seen that the appellant had agreed that they shall not undertake, without prior written consent of DCM, similar project in the vicinity of the project for a period of three years from the date of signing of this agreement. It has not been clarified as to what will constitute a similar project and which are will be treated as “in the vicinity of the project”. Moreover, it was not a absolute prohibition as with the consent of DCM any project could be undertaken. Therefore, the ITA No.183/2008 Page 8 of 31 claim of the appellant that the cessation agreement was not in the nature of trading transaction, but was the one by which the appellant had parted with or extinguished one of its important sources of income either fully or partly, is not acceptable. In view of the above, this ground of the appeal is dismissed.” 8. The appellant preferred a second appeal before the Income-Tax Appellate Tribunal (for short „ITAT‟). The ITAT after hearing both the parties at considerable length and running through the gamut of case law held that it was unable to carve out any amount as towards restrictive covenant. It unequivocally found that the compensation was for loss of future profit and also for the development already undertaken by the assessee, the expenses in relation to each development had been claimed and allowed as „revenue expenditure‟. Thus, the ITAT held that what had been paid was towards the liabilities taken over and for the deprivation of the potential income. Therefore, the entire amount was to be treated as „revenue receipt‟ and chargeable to tax as such. Yet again aggrieved by the order of the revenue authorities, the appellant has preferred the present appeal. ITA No.183/2008 Page 9 of 31 9. It is the case of the appellant that the aforesaid sum of ` 4.25 crores constitutes capital receipt in the hands of the appellant which was not chargeable to tax. The said amount was received towards the restrictive covenant, as incorporated in clause 3 of the Agreement, whereby the appellant undertook to restrain from undertaking any similar project in the vicinity of the aforesaid project for a period of three years from the date of the signing of the agreement. In respect of this proposition, the learned counsel for the appellant has relied upon a number of precedents including the following: - “(i) CIT vs. Best & Co. 60 ITR 11. (ii) Gillanders Arbuthnot & Co. Ltd., 53 ITR 283 (SC) (iii) Hari Kailash & Co. vs. CIT, 22 ITR 195 (All.) (iv) Gomti Credits (P) Ltd. vs. DCIT, 100 TTJ (Del) 1132; (v) CIT vs. Wazir Sultan 36 ITR 175.” 10. We shall presently advert to the aforesaid decisions but before we do so, we may reproduce instructions - F.No.225/83/99-ITA-II dated 17th March, 1999 issued by the Board which are heavily relied upon by the learned counsel for the appellant: - ITA No.183/2008 Page 10 of 31 “Where the capital asset transferred is in the nature of a right to manufacture, produce or process an article or thing recourse to section 55(2) can be made only from assessment year 1998-99 in respect of consideration received for the transfer thereof which includes extinguishments or curtailment of such right. In this connection, attention is invited to clause 19 of the Memorandum explaining the provisions of the Finance Bill 1997, wherein it has been pointed out that consideration received on extinguishments of such a right is in the nature of capital receipt and is not liable to tax under the head “Capital Gains” upto assessment year 1997-98. It is clarified that even where such transfer, extinguishments or curtailment of such a right is complete or in part, the taxability of this consideration will remain un-affected i.e. the same will not be taxable under the head capital gains only upto assessment year 1997-98 and will become taxable from the assessment year 1998-99 and subsequent year.” 11. The learned counsel for the appellant, Mr. Satyen Sethi, in the above context relied upon the judgment of this Court in the case of Commissioner of Income tax vs. Milk Food Ltd. (2006)280 ITR 331 (Delhi). He contended that this Court had settled this issue by holding that once the Board has issued instructions that receipts on account of restrictive covenant were not liable to tax, the Revenue was not entitled to raise a contention to the contrary. ITA No.183/2008 Page 11 of 31 12. Ms. Prem Lata Bansal, the learned counsel for the Department sought to counter the contentions of the learned counsel for the appellant by urging that the Settlement Agreement dated 30th October, 2000 clearly depicted an unequivocal understanding between the parties that the compensation was for annulment of the rights of the appellant to carry on the business of completing the project and for deprivation of the potential income from the project which could have arisen from carrying on such business till the completion of the project. Thus, what was sought to be compensated was the loss of income itself and not the loss of profit earning apparatus. Therefore, according to Ms. Bansal, the amount in question was liable to be considered as a revenue receipt and not as a capital receipt, as claimed by the appellant. In this regard, Ms. Bansal relied upon a number of decisions including the following: - “(i) Parry & Co. Ltd. vs. DCIT, 269 ITR 177 (Mad.) (ii) Matheson Bosanquet Co. Ltd. vs. CIT, 171 ITR 359 (Mad.) (iii) Bishamber Nath Swaroop Narain vs. CIT, 119 ITR 681 (All.) (iv) CIT vs. R.B. Jairam Valji, 35 ITR 48 (SC). ITA No.183/2008 Page 12 of 31 (v) Bombay Burmah Trading Corporation Ltd., 81 ITR 777 (Bom.) & (vi) Kettle Well Bullen & Co. Ltd. vs. CIT, 53 ITR 261 (SC).” 13. The question for our consideration, therefore, is whether the amount received by the appellant pursuant to the agreement dated 30th October, 2000, between the DCM and the appellant is to be treated as a capital receipt or a revenue receipt. 14. It is trite that the question whether any particular receipt is income or not will depend on the nature of the receipt and the true scope and effect of the relevant taxing provisions. It is also trite that it is for the Revenue to prove that the receipt is chargeable to tax under the provisions of the Income-tax Act, but once it is shown that the receipt is income under the Act, it is for the assessee to prove that the same is either exempt or that the assessee is eligible for deduction of the same. It is also well-known that the definition of „income‟ in Section 2(24) of the Income Tax Act is an inclusive definition. It is a term of elastic import not confined by the use of the words “profits and gains”. So in each case, the decision of the question as to ITA No.183/2008 Page 13 of 31 whether any receipt is income or not must depend entirely upon the nature of the receipt and the scope of the relevant taxing provision. 15. The question of burden to prove is, therefore, of some importance. In Commissioner of Income Tax vs. Chari and Chari Ltd. (1965) 57 ITR 400, 407 (SC), the Supreme Court observed: - “…………..it must in the first instance be observed that it is for the Revenue to establish that a particular receipt is income liable to tax………..” 16. The same three-Judge Bench in the case of Commissioner of Income Tax, Madras vs. Best & Co. Private Ltd., (1966) LX ITR 11, 18 clarified that in its earlier judgment in Chari and Chari Ltd. (supra), it did not lay down that the burden to establish that an income was taxable was on the Revenue was immutable in the sense that it never shifted to the assessee. The expression “in the first instance” clearly indicated that the onus was a shifting one. It said : - “While the Income tax authorities have to gather the relevant material to establish that the compensation given for the loss of agency was a taxable income, adverse inference could be drawn against the assessee if he had suppressed ITA No.183/2008 Page 14 of 31 documents and evidence, which were exclusively within his knowledge and keeping.” 17. On facts, the Court, however, held that the compensation agreed to be paid to the respondent by its Principal, M/s. Imperial Chemical Industries (Exports) Ltd., Glasgow, was not only in lieu of giving up of the agency but also for the assessee accepting the restrictive covenant for a specific period. The Court, therefore, held that a part of the compensation attributable to the restrictive covenant was a capital receipt and hence not assessable to tax. The question whether the compensation paid was severable, was answered as follows: - “21. The next question is whether the compensation paid is severable. If the compensation paid was in respect of two distinct matters, one taking the character of a capital receipt and the other of revenue receipt, we do not see any principle which prevents the apportionment of the income between the two matters. The difficulty in apportionment cannot be a ground for rejecting the claim either of the Revenue or of the assessee. Such an apportionment was sanctioned by courts in Wales v. Tilley [1942] 25 Tax Cas. 136, Carter v. Wadman [1946] 28 Tax Cas. 41 and T. ITA No.183/2008 Page 15 of 31 Sadasivam v. Commissioner of Income-tax, Madras [1955] 28 ITR 435(Mad) . In the present case apportionment of the compensation has to be made on a reasonable basis between the loss of the agency in the usual course of business and the restrictive covenant. The manner of such apportionment has perforce to be left to the assessing authorities.” 18. In Gillanders Arbuthnot and Co. Ltd. vs. The Commissioner of Income-tax, Calcutta, (1964) 53 ITR 283 (SC) the facts of the case were somewhat akin to the facts in the case of Best & Co. Pvt. Ltd. (supra). The agency was terminated and by way of compensation, the Imperial Chemical Industries (Exports) Ltd. paid for the first three years after the termination of the tenancy 2/5ths of the commission accrued on its sales in the territory of the appellant‟s agencies computed at the rates at which the appellant had formerly been paid and in addition in the third year full commission for the sale affected in that year at the same rates. The Imperial Chemical Industries (Exports) Ltd. had intended to take a formal undertaking from the appellant to refrain from selling or accepting any agency for explosives or other competitive commodities, but no such agreement ITA No.183/2008 Page 16 of 31 in writing was taken or insisted upon. The question arose whether the amounts received by the appellant for those three years were of the nature of „capital‟ or „revenue receipt‟. A three-Judge Bench of the Supreme Court held that the amounts paid were of the nature of income and, therefore, assessable to tax on the following reasoning: - “The appellant was conducting business as selling or distributing agent of numerous principals……….It may reasonably be held, having regard to the vast array of business done by the appellant as agents, that the acquisition of agencies was in the normal course of business and determination of individual agencies, a normal incident, not affecting or impairing the trading structure of the appellant. The appellant was compensated by payment to it, the loss of profit it suffered by the cancellation of its agency, leaving it free to conduct its remaining business.” It further held :- 19. There is, in our judgment, no immutable principle that compensation received on cancellation of an agency must always be regarded as capital. In each case the question has to be determined in the light of the attendant circumstances. In the judgment in Kettlewall Bullen and Co.‟s case [1964] 53 ITR 261 (SC) we have explained that the judgment of the Judicial Committee in the Commissioner of Income-tax v. Shaw Wallace and Co. L.R. 59 IndAp 206 was not intended to, and did not lay ITA No.183/2008 Page 17 of 31 down that in every case, cancellation of an agency resulted in loss of a source of revenue or that amounts paid to compensate for loss of agency must be regarded as capital loss. 20. On a careful consideration of all the circumstances we agree with the High Court that cancellation of the contract of agency did not effect the profit-making structure of the appellant, nor did it involve a loss of an enduring trading asset; it merely deprived the appellant of a trading avenue, leaving him free to devote his energies after the cancellation to carry on the rest of the business, and to replace the contract lost by a similar contrac.t The compensation paid, therefore, did not represent the price paid for loss of a capital assert. We therefore dismiss the appeals with costs.” 19. In the case of Commissioner of Income-tax vs. Chari and Chari Ltd. (supra), the same principles were reiterated and re- emphasized, but on the facts of the case, the Supreme Court came to the conclusion that the compensation paid for the loss of agency was a capital asset in view of the fact that there was no evidence to show that by reason of extinction of the managing agency any enduring asset was lost to the respondent (Chari and Chari Ltd.), or its trading organization was adversely affected. It was held that the receipt is „revenue‟ and not „capital‟ in nature for the reason that even after the ITA No.183/2008 Page 18 of 31 surrender of one of the agencies, the company carried on its business as before within the framework of the business, it being a necessary incident of business that the existing agencies may be terminated and fresh agencies may be taken. 20. In Kettlewell Bullen and Co. vs. Commissioner of Income- tax, Calcutta (1964) 53 ITR 261, the Supreme Court after analysis of a large number of cases falling on the two sides of the dividing line came to the conclusion that a satisfactory measure of consistency in principle is disclosed therefrom and laid down the following test:- “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. ITA No.183/2008 Page 19 of 31 41. 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, therefore, unable to agree with the High Court that the amount received by the appellant was in the nature of a revenue receipt." 21. In Commissioner of Income-tax vs. Rai Bahadur Jairam Valji [(1959) Supp. 1 S.C.R. 110, 113], it was laid down as follows: - "The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible