Kalpesh Classes

Loss of source of income

B. K. Kotru vs. Commissioner of Income-tax (Bombay High Court) The assessee was in​​ service with S as an industrial officer. He expressed his desire to leave the service and sought waiver of six months’ notice period by accepting his resignation with effect from May 25. Resignation became effective from that date. The assessee was offered​​ employment by competitors of S like W. In order to prevent the assessee from accepting such offer, S offered an additional amount of Rs. 96,000 to the assessee on his agreeing not to accept similar job in any other competing organisation for a minimum period of two years

The receipt of Rs. 96,000 could not be linked with salary, perquisites or profit in​​ lieu of salary. The receipt of this amount was after cessation of the employer and employee relationship. This receipt could only be a capital receipt.

Anti-compete fee

Saraf Chemicals Ltd. (Income-tax Appellate Tribunal--Mumbai) Anti-compete fee for​​ non-competition for a specified number of years has been treated as capital receipt in the hands of the recipient, till it was made taxable under section 28(va) from April 1, 2003. The issue whether it would be deductible as revenue expenditure in the hands of the payer had come up before the Tribunal in Deputy CIT v. Saraf Chemicals Ltd. [2006] 287 ITR (AT) 124 (Mum).​​ It was held that the payment is for elimination of competition, which would mean acquisition of monopoly rights. Such payment would be capital expenditure as was found in Assam Bengal Cement Co. Ltd. [1955] 27 ITR 34 (SC).​​ Such advantage obtained by the payment is not in the revenue field, so as to require application of the decision in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC). This decision of the Tribunal reviewed the case law on the subject, when it came to the conclusion, that it is capital expenditure in the facts of the case.

Retirement of partner

Nijrang Specific Family Trust (Gujarat High Court) An amount received as compensation for goodwill of a business, which was carried on by the assessee trust as a proprietor and later in partnership, on retirement from partnership, was sought to be treated as the assessee’s income from business.​​ Since there is no business after retirement, such compensation cannot partake of the character of business but only as income from “Other sources” as held by the High Court in CIT v. Nijrang Specific Family Trust ​​ [2006] 287 ITR 148 (Guj) after an elaborate discussion of the case law on the subject more specifically following the Supreme Court decision in Universal Plast Ltd. v. CIT [1999] 237 ITR 454, which has set out the following guidelines (page 151) :​​ 

“(1) no precise test can be laid down to ascertain whether income (referred to by whatever​​ nomenclature, lease, amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head ‘Profits and gains of business or profession’ ;

(2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out ;

(3) where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same ;

(4) if only a few of the business assets are let out temporarily, while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets otherwise than employing them for his own use for making profit for that business ; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets”.

Incentive to dealers

250 ITR 0667- ​​ BOEING VS. COMMISSIONER OF INCOME-TAX (MADRAS HIGH COURT)​​ Where a dealer gets an incentive from manufacturer as incentive for additional effort, such gift being a benefit convertible into money, will it be business income taxable under the law? It was this issue which arose in​​ Boeing v. CIT [2001] 250 ITR 667 (Mad), where it was answered that the income in kind, which was an Ambassador car in this case, was clearly income from business received as an incentive by way of additional reward for services. In the present case, the assessee was carrying on business and the profits and gains were subjected to tax.​​ The amount was received from a manufacturer by way of incentive for achieving the target. The receipt was clearly a trading receipt.​​ 

Business gifts

G.S.R. KRISHNAMURTHY (MAD)​​ The assessee was a film artiste. The Assessee’s children received gifts from producers. Since there was ordinarily no reason why producers should have given gifts to the actor’s children, the Assessing Officer assumed that these gifts were actually additional remuneration paid to the actor for his services over and above what was stipulated in the agreements. It would appear that this was a prima facie inference, which could have reasonably been drawn by the Assessing Officer. The assessee’s case was that​​ the assessee had accounted for the amount receivable by him as per contracts between himself and the producers. Gifts were given by cheques to the donees and gift-tax had been paid by the donors (producers), who had made the gifts. They have not claimed it​​ as their cost of production, which they should have otherwise done. The Income-tax Department also did not question the gift, when they had made gift-tax assessments on the donors. It is in this context that the Tribunal found that the taxation of this amount in the hands of the assessee could not be justified. This case illustrates the principle that what is apparent is real. But in such cases, the burden of proof is on the Revenue to show that what is apparent is not real on investigation as by examining​​ the producers and the assessee himself, as to the circumstances in which the gifts were given to the children. Mere disbelief on the part of the Revenue as in this case, without any effort even without making the gift-tax assessments protective and by not​​ making any enquiry in the assessments of the producers or by calling them as witnesses, was bound to fail. The Revenue has the duty to enquire into such cases and come to a right conclusion. Making an addition without such enquiry is probably a glaring instance of breach of such duty, since the prima facie inference in this case was a pointer to the need for such enquiry.​​ 

Letting of premises to sister concern

DINERS BUSINESS SERVICES PVT. LTD. (BOM)​​ The assessee had let out a portion of its commercial premises in Bombay and Hyderabad to its sister concern for which the assessee received non-interest bearing security deposit of Rs. 48,51,000 for the Bombay property and Rs. 4,50,000 for the Hyderabad property. The assessee also received annual rent for both​​ the properties from the concern. The Assessing Officer held that the arrangement was a collusive arrangement between the two sister concerns and that the assessee had received lesser rent vis-a-vis the market rent from the concern. Consequently, the Assessing Officer held that 60 per cent. of the amount should be taxed as value of the benefit which accrued to the assessee. Accordingly, the Assessing Officer made an addition to the income of the assessee on this ground under section 28(iv). ​​ Held that the market rent determined by the Assessing Officer was arbitrary and found that the Assessing Officer had determined the market rent without discounting the amenities and facilities which existed in so-called comparable premises. Thus officer was not justified​​ in making the addition under section 28(iv).​​ 

Loan waiver

The Madras High Court in Iskraemeco Regent Ltd. v. CIT [2011] 196 Taxman 103 held that all receipts are not income and further in regard to the remission of loans, it held that the same cannot be​​ subjected to tax by invoking provisions of section 28(iv) read with section 41(1) of the Act. In this case the assessee obtained the loan for the purpose of investing in its capital assets. Every receipt in connection with the business cannot be said to be a trading receipt.